April 2022

Digital Technology

Blockchain and the downstream segment: Increasing efficiency through technology

Oil and gas companies are finding creative ways to look for solutions to new problems in the face of climate change and growing environmental awareness.

Oil and gas companies are finding creative ways to look for solutions to new problems in the face of climate change and growing environmental awareness.¹ These creative solutions are aimed to achieve their profits and investor expectations, while reducing their impact on the environment. As organizations seek out new technologies, blockchain proves to be one that is consistently useful. The use of blockchain technology is transforming the way supply chains are audited, energy markets are designed, waste management is executed and much more.²

Blockchain may not appear to be the intuitive choice for most who seek to accomplish tasks associated with the downstream segment. Unless studied extensively, employing blockchains may be counterintuitive, especially with the headlines about how Bitcoin consumes more energy than a small nation.³ Yet, it is also critical to remember that not all blockchains are crypto or related to Bitcoin. Many companies are implementing this technology internally or by building conglomerate blockchains that use far less energy than external blockchains.^4-6

Blockchain: Why use it and what are the benefits?

When discussing the specific uses for blockchain that companies are utilizing, it is important to define exactly what it is and how it is beneficial. Essentially, it is a network of decentralized systems that store a database. Blockchain as a decentralized system⁷ that provides consistency and immutability, resulting in a firm foundation of trust and certainty that has the potential to revolutionize the world.⁸ Therefore, if two companies were to share a blockchain with data on their mutual supply chain, they would both be confident of having the same data, unaltered in any manner.⁹ The companies will have a permanent record of what has been happening in the supply chain, which they can audit confidently whenever it is needed.

Downstream segment and blockchain

There are a variety of ways that oil and gas companies use blockchain to streamline operations, increase optimization, promote environmental sustainability and reduce their carbon footprint.¹⁰ Blockchains are adaptable to a variety of use cases for everything from compliance tracking across supply chains, managing waste, optimizing pipeline inspections, to paying environmental taxes with smart contracts.^1,2 The following are some examples of blockchain uses relevant to the downstream industry:

1. Regulatory compliance. Environmental compliance is one of the most stringent requirements of the oil and gas industry. It is important for companies to make sure they meet the requirements of regulatory agencies—blockchain is a prime solution for this purpose. Since everything in the supply chain is easily trackable within the company, including suppliers and distribution partners, it is no surprise that many companies find this application very beneficial.

The European Union (EU), for example, requires companies to allow independent verification of certain environmental safety measures in energy-related facilities and make this information publicly available.¹¹ Such measures are easy to implement with blockchain.
The companies can log that safety measures were implemented, the inspectors can record that they have been verified, and anyone with access to the public chain can confirm that these steps were taken. If all these steps are taken in an immutable way, nobody can claim that the data was tampered with; if there is an error, it will be clear where the safety checks went wrong.^12,10 As a result, the environment is protected against volatile incidents, such as gas leaks and oil spills, because these regulations are strictly followed. Blockchain has multiple use cases for compliance management (FIG. 1).

FIG. 1. Possible use cases of blockchain technology for regulatory compliance.¹³

2. Transparency in energy markets. Blockchain can offer an opportunity for sustainable energy beyond merely satisfying regulatory compliance requirements. The energy sector is partnering with some of the world’s largest blockchain players to build platforms for bringing the energy markets to the blockchain. By creating a publicly auditable market, this initiative hopes to make the sources and practices of energy easily visible for consumers, which could lead to better purchasing decisions. The idea is to essentially incentivize companies to become greener by transparently uploading their carbon footprint to the blockchain. By doing so, they can establish a better track record of their initiatives and compare it to that of other energy counterparts.

Blockchain technology is used in data collection, analysis, monitoring and control in the energy industry (FIG.2). Rather than a proof-of-work system, like that of Bitcoin, the chain on which this market is built will utilize the more energy-efficient proof-of-stake consensus system. For instance, Shell Trading has invested in VAKT blockchain solutions, a company providing an Ethereum-based platform, and is working to implement the same blockchain technology in the trade and commodities finance sector.¹⁴

FIG. 2. Energy markets can utilize blockchain for data analysis, monitoring and control.¹⁵

3. Management of wastewater. Another major application of blockchain is in the management of water and wastewater. Petroleum and gas production uses millions of gallons of water, and process water often contains heavy metals and other contaminants. It is imperative that this wastewater is handled carefully to prevent costly environmental damage. Blockchain can be used here to create careful records on how the waste is created, managed and disposed, which will aid in optimizing and auditing the process.¹⁶ If waste is transported for treatment or disposal, keeping track of materials shipped and received at the other end will keep a check on errors or lapses. An open blockchain database allows for easy identification, auditing and fixing of problems. As a result, it is much better for the environment.
4. Expedited reconciliation. Oil and gas firms conduct more than a million transactions every day, with frequent cycles of buying and selling. Inefficiency, human error, accounting and other archaic administrative procedures can undermine the efficiency and effectiveness of these transactions. A major advantage of blockchain is its ability to support smart contracts. Contracts of this kind self-execute the tasks when certain conditions (such as quality and quantity of fuel) are met and automate the payment and collection processes between counterparties, without the need for an intermediary.^1,2,12 These payments are usually instantaneous, thus reducing cost, lag time, errors and liability. A physical verification process is presently used to reconcile all business transactions. Using blockchain technology, all these transactions can be reconciled instantly and automatically through smart contracts.
5. Transportation. Trains or other land transportation are often used to deliver refined products from refineries to their distribution networks. Keeping track of the complex network is very difficult and errors are often introduced because of siloed data, archaic data management systems and reliance on paper transactions. New blockchain-based platforms make it possible to significantly reduce the concerns of supply chain operations.¹⁷ The use of Internet of Things (IoT) sensors that measure temperature, humidity, volume, etc., can virtually eliminate volume losses in products and transmit the information to the blockchain platform so that the product integrity is maintained from start to finish. In conjunction with this, smart contracts can be used, and payments can be released once the products have reached their specified destinations, eliminating the need for additional administrative steps.¹⁸ Smart contracts deployed on blockchain technology can assist in transportation and logistics
   to speed up supply chain operations (FIG. 3).
6. Data management. There are a lot of moving parts in the downstream sector, which encompasses everything from the refinement of products to distributing them. Companies have trouble in managing their data, as it is often incomplete and manual work is needed to complete the process, which automatically leads to errors. Despite a central database that only a few players in the field are using, there are security and other permission concerns, as evidenced by the recent ransomware attack on Colonial Pipeline.²⁰ Blockchain technology provides easy access to all relevant business data, as well as transparency and security through its secure, distributed ledger.²¹ Smart contracts can ensure that data is shared with other parties only when necessary and are less likely to be attacked by hackers due to their integration and permissions.¹²

FIG. 3. Smart contracts deployed on blockchains can assist in supply chain operations.¹⁹

Abu Dhabi National Oil Co. (ADNOC) teamed up with IBM to create a blockchain-based platform that tracks and records both the quantities and financial values of each of its operating companies’ bilateral transactions, streamlining its accounting process as part of its smart growth strategy.⁶ Blockchain solutions can enhance the efficiency of data management by automatically logging all data at each stage (FIG. 4).

FIG. 4. Data management made efficient for downstream processes using blockchain technology.²²

Challenges

Blockchain technology is still a challenging technology to implement in the oil and gas sector despite its many merits. Challenges include:

• Newer technology: A newer technology may be inconvenient for some people since they have become comfortable with their legacy systems. In this sense, the change will have to be gradual and implemented over time.²³
• Scalability: To record millions of transactions daily, it will take massive infrastructure, which comes at a cost. Companies may not be willing to invest in a relatively new technology that has few use cases.^23,24
• Regulation: Blockchain technology has received a lot of attention from governments around the world as a form of innovation that has the potential to pave the way for future developments. However, no official rules or regulations have been established for the technology. ²⁴ Several U.S. states (e.g., Colorado, Ohio and Wyoming) are slowly beginning to open their markets to this technology.²⁵
• Security: Since there are not enough use cases to exploit, there is a possibility of an unexpected security loop. ²³ As a result, it would take some time and effort to test out the system and remove any security threats the organization might face.²⁴

Takeaway

In this evolving industry, efforts are continually made to improve processes and to take environmental considerations into account in the best way possible. Blockchain technology is proving to be an invaluable tool in this regard, as it builds compliance, transparency and allows easy auditing to demonstrate increased efficiency. Companies will benefit from increased insight regarding their supply chains and potential problems and will be able to optimize their processes to be as environmentally friendly as possible. HP 

LITERATURE CITED

1. Anwar, H., “Blockchain in oil and gas industry,” 101 Blockchains, January 7, 2021, online: https://101blockchains.com/blockchain-in-oil-and-gas-industry/
2. Muzzy, E., “Blockchain use cases for downstream oil and gas,” ConsenSys, September 18, 2018, online: https://media.consensys.net/blockchain-use-cases-and-benefits-for-downstream-oil-gas-ac8de9da6dca
3. Digiconomist, “Bitcoin Energy Consumption Index,” Digiconomist, online: https://digiconomist.net/bitcoin-energy-consumption
4. Shell, “Blockchain,” online: https://www.shell.com/energy-and-innovation/digitalisation/digital-technologies/blockchain.html
5. Natixis, “Natixix, IBM and Trafigura introduce first-ever blockchain solution for U.S. crude oil market,” March 28, 2017, online: https://natixis.groupebpce.com/natixis/en/natixis-ibm-and-trafigura-introduce-first-ever-blockchain-solution-for-u-s-crude-oil-market-rep_95395
6.  WorldOil.com, “ADNOC has implemented IBM blockchain technology to streamline daily transactions,” World Oil, December 10, 2018, online: https://www.worldoil.com/news/2018/12/10/adnoc-has-implemented-ibm-blockchain-technology-to-streamline-daily-transactions
7. Black, M., “Blockchain and a decentralized workforce,” Corporate Compliance Insights, June 28, 2018, online: https://www.corporatecomplianceinsights.com/blockchain-decentralized-workforce/
8. Tech4Fresher, “Blockchain technology explained,” January 2, 2021, online: https://tech4fresher.com/blockchain-technology-explained-with-infographics
9. Clark, N. and D. Vaccaro, “Blockchain in oil and gas: Explore use cases and perspectives,” Deloitte, online: https://www2.deloitte.com/us/en/pages/consulting/articles/blockchain-digital-oil-and-gas.html
10. Lu, H, et al., “Blockchain technology in the oil and gas industry: A review of applications, opportunities, challenges and risks,” IEEE, March 2019, online: https://ieeexplore.ieee.org/document/8675726
11. European Commission, “Safety of offshore oil and gas operations directive,” July 2014, online: ec.europa.eu/energy/topics/energy-security/offshore-oil-and-gas-safety/offshore-oil-and-gas-operations-directive_en
12. Lakhanpal, V. and S. Robello, “Implementing blockchain technology in oil and gas industry: A review,” SPE Annual Technical Conference and Exhibition, Dallas, Texas, September 2018.
13. Mire, S., “Blockchain in compliance: 6 possible use cases,” DisruptorDaily.com, December 3, 2018, online: https://www.disruptordaily.com/blockchain-use-cases-compliance/
14. Wang, Q. and M. Su, “Integrating blockchain technology into the energy sector—from theory of blockchain to research and application of energy blockchain,” Computer Science Review, 2020.
15. Scala blockchain, “Blockchain in energy sector,” December 11, 2018, online: medium.com/@scalablockchain/blockchain-in-energy-sector-d18d6a1d3564
16. Shih, J. S. and K. Palmer, “Could blockchain technology improve water, wasterwater and solid waste management in the oil and gas industry?” Resources.org, March 22, 2019, online: www.resources.org/archives/could-blockchain-technology-improve-water-wastewater-and-solid-waste-management-oil-and-gas-industry
17. EnHelix Blockchain, “Blockchain in logistics and supply chain,” online: blockchain.enhelix.com/logistics.php
18. Winnesota, “How blockchain is revolutionizing the world of transportation and logistics,” online: www.winnesota.com/blockchain
19. Isaac Instruments, “How blockchain could affect the transportation industry,” August 28, 2018, online: www.isaacinstruments.com/en/industry/how-blockchain-could-affect-trucking
20. Kerner, S. M., “Colonial Pipeline hack explained: Everything you need to know,” WhatIs.com, July 7, 2021, online: www.whatis.techtarget.com/feature/Colonial-Pipeline-hack-explained-Everything-you-need-to-know
21. Vertrax, “How blockchain can benefit downstream oil and gas,” November 1, 2019, online: https://insights.vertrax.com/blog/blockchain-downstream-oil-and-gas-benefits
22. Iteron, “Blockchain solution (POC) for oil and gas industry and ERP integration,” online: www.iterontech.com/ethereum-developer-oil-and-gas
23. Koteska, B., A. Mishev and E. Karafiloski, “Blockchain implementation quality changes: A literature review,” Sixth Workshop on Software Quality Analysis, Monitoring, Improvement and Applications, September 2017.
24. Iredale, G., “Top 10 blockchain adoption challenges,” 101 Blockchains, August 11, 2021, online: https://101blockchains.com/blockchain-adoption-challenges
25. Dewey, J., “Blockchain and cryptocurrency regulation,” Global Legal Insights, online: https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/usa

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