Blockchain Technology Pushing the Barrier for Distributed Energy Generation in Oil and Gas

Of late, one technology that is set to transform the oil and gas sector is inevitably “Blockchain”, and the blockchain revolution is starting right here and right now.  The big task ahead for the oil and gas sector is how swiftly and successfully it can move to take advantage of the many foreseen opportunities that blockchain will bring.  For oil and gas value chain, data has gone from an asset to an unutilized overstock.  Operators and end users are diving down in data and urgently need a way to control and authenticate resourceful information.  Blockchain has tremendous potential to reduce the risk of fraud, error, and invalid transactions in energy trading, make financial transactions more efficient, facilitate regulatory reporting requirements, and enable interoperability as claimed and proven.  However, digital insecurities will be prevailing there in the future as “hurdles find their own way to hinder the development” – as the world knows it.

Blockchain is Critical in Unlocking the Efficiency Potential of Distributed Energy Generation 

Blockchain will have huge benefits for oil and gas exploration and production, from scheduling equipment maintenance to managing exploration acreage records, blockchain offers a single, unalterable record of transactions and documentation between numerous parties.  Distributed ledgers will also create more efficient and transparent downstream activities, such as exchanging products, secondary distribution delivery documentation, demurrage, and claims management.  In the midstream distribution value chain, it will revolutionize joint ventures, risk management, contracting, and regulatory compliance. 

The possibilities of blockchain in oil and gas have few limits, and the industry is yet to see more than a glimpse of its full capabilities.  The energy sector is seen as the next frontier for blockchain development outside the financial sector, where the distributed ledger technology has had its biggest impact to date.

Blockchain is critical to unlocking the efficiency potential of distributed energy generation and disintermediating the public and private utility companies.  So too does blockchain open-up efficient fundraising through initial coin offerings (ICO).  More than 1,500 ICOs have taken place in the energy space over the last couple of years.  Admittedly, a disproportionate number of these token offerings have been electricity or renewables-focused, but the number of token offerings in the traditionally technologically phobic oil and gas sector is now rising.

Smart contracts

Smart contracts, which are essentially computer code stored on blockchain that can execute actions under specified circumstances, should give oil and gas executives greater interest to improve their supply chain and finance activities.  Smart contracts enable counter-parties to automate transaction tasks that are typically performed manually and that require the involvement of third-party intermediaries.  Smart contract technology can result in processes that are faster and more accurate and cost efficient.  Also, the parties to a smart contract agree to be bound by the rules and determinations of the underlying code, which in theory should lead to fewer contract disputes.

Tracking assets

Operations and maintenance and quality control personnel also have a real need to track exactly where asset components come from.  Blockchain has the capability to help track all related components and assets, and to share records among business partners.  It provides a framework for registering contractors, tracking performance and reliability.  A blockchain could be used, for example, to track which suppliers produced the components and subcomponents for a blowout preventer.  If a certain component breaks down, the operator could consult data in the chain to determine when, where and by which company the component was produced.  Manufacturers might examine the data to see if maintenance—frequently outsourced—was performed as recommended.

Operational Efficiency

Using blockchain, the operational performance of a critical asset or equipment can be tracked based not only on the cost of the equipment but also the cost of all aspects of the performance lifecycle, including maintenance, operating costs, uptime and downtime.  Once a service-level agreement has been determined and coded in the system, sensors could communicate to the blockchain, and performance factors would determine payment amounts (including bonuses or penalties).  It can also play a role in grid management.  The combination of smart devices and blockchains will allow the grid to self-regulate by automatically triggering actions, such as curtailment, redispatch, demand-side management, and production/storage from batteries.

Going forward, it is realized that even though some of the technological best practices have certainly trickled through the energy industry, there is always still scope for further improvement.  Using blockchain, the oil and gas industry can see reductions in cost of managing complex financial agreements, royalties and payments, improvement in transparency through their supply chain, reduction in trade finance costs, and ultimately greater responsiveness to the changing market conditions.

ARC welcomes the opportunity to speak with technology suppliers and users alike about your activities, thoughts, perspectives and questions on this exciting area.  For further discussion or to provide feedback on this, please contact the author Jyoti Prakash at jprakash@arcweb.com.

Keywords: Blockchain Technology, Oil and Gas, Distributed Ledger Technology, Smart Contracts, Distributed Energy Generation, Assets Tracking