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    Locke Lord QuickStudy: Blockchain May Transform the Oil and Gas Industry Through Increased Efficiency, Reduced Costs and Improved Security

    Locke Lord Publications

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    Blockchain technology—also referred to as distributed ledger technology—has the potential to impact every sector of the global economy. The oil and gas industry is no exception. While blockchain is still considered a nascent technology, we have already seen the benefits it can have on industries, including increased overall efficiency and productivity, reduce costs, and improve security and compliance issues. Given the complexity and size of the oil and gas industry, it is critical for companies and governments to employ technologies that improve and streamline procedures in order to minimize inefficiency and maximize productivity. Blockchain offers a potential solution.

    Potential to Increase Efficiency

    Blockchain is a decentralized secure network that allows parties to openly transact on a distributed ledger.  Blockchain has the potential to increase efficiency by standardizing regulatory reporting requirements and data formats across multiple organizations. For example, the oil and gas supply chain ecosystem involves a multitude of players, including shippers, suppliers, and customers that require countless administrative checkpoints—often defined by insurmountable paperwork. Blockchain has the ability to minimize the amount of intermediaries and help players move products from one checkpoint to the next.  This enables interoperability and ensures that the overall oil and gas process is performed with integrity and transparency.

    One notable example that illustrates blockchain’s potential to increase efficiency is its impact on the management of land sale records in the context of oil and gas refineries. For instance, like most traditional real estate transactions, the purchase of land entails various issues ranging from ownership disputes to possible contract forgery. These issues become even more paramount and crucial when discussed in the context of natural resources like oil and gas—especially when billions of dollars are on the line. In fact, certain governments have already launched blockchain pilot programs to help with these types of issues. Ghana, for example, recently launched a pilot project with Bitland to record title deeds in the Kumasi region to reduce land ownership fraud.1 Ultimately, the use of blockchain can mitigate the risk of error and allow parties to finalize transactions in a more efficient and transparent manner.

    Reduce Overall Costs

    The oil and gas industry is one of the largest industries in the world. In fact, the oil market itself is bigger than all metal markets combined with over one trillion in market cap.2 Despite this fact, there are significant costs associated with oil and gas drilling. Blockchain has the potential to reduce overall costs by implementing projects that streamline procedures and reduce the number of intermediaries and improve supply chain management. More specifically, blockchain reduces administrative errors, improves invoice accuracy, and limits the need for third-party intermediaries.

    Another potential benefit is the use of an oil-based digital currency. The ability to monetize a commodity like oil and gas will significantly reduce intermediary costs because the need for the intermediation of any single central authority will be eliminated. For example, oil and gas companies with substantial transportation expenditures can reconcile shipment invoices in oil-based digital currency instead of using traditional fiat currencies, which requires third party intermediaries to settle the transaction. In fact, according a recent report, blockchain has the potential to save oil and gas companies at least five percent in freight expenses through improved invoice accuracy, reduction of overpayment and disintermediation of third-party vendors.3  Overall, the use of an oil or gas-based digital currency has the potential to eliminate costs associated with third-party audit and payment service providers, and simultaneously increase efficiency in the process.

    Improve Security and Compliance Issues

    Blockchain also has the potential to ensure that transactions are secure and transparent. The use of blockchain will allow companies to share digital data flow with one another to ensure that information between parties is accurate and readily available on the blockchain. This distributed database of records creates a true history of transactions. Since the oil and gas industry is heavily regulated and subject to comprehensive government and third party audits, a secure and accurate database will ensure compliance. In 2017, Natixis, IBM, and Trafigura launched the first blockchain solution in commodity trade finance for U.S. crude oil transactions.4 The distributed ledger platform—built on the Linux Hyperledger Fabric—helps buyers, sellers, and their respective banks transact on the same ledger, and simultaneously view and share data with one another. In effect, the ledger creates a secure system that allows parties to confirm and validate transactions in real time.

    Conclusion

    As the oil and gas industry continues to grow, the need to implement efficient, cost-effective, and secured systems is crucial. Blockchain offers companies and governments the ability to significantly improve their operations. The blockchain revolution is in its infancy and the oil and gas industry is certainly in a position to take advantage of its innovative capabilities. However, oil and gas companies interested in blockchain technology should also remain mindful of the legal landscape implementing the technology with its current contracts in place.

     

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    1. See African Starups Bet on Blockchain to Tackle Land Fraud here.

    2. See The Oil Market Is Bigger than All Metal markets Combined here.

    3. See Getting to Value with Blockchain in Oil & Gas here.

    4. See Natixis, IBM and Trafigura Introduce First-Ever Blockchain Solution for U.S. Crude Oil Market here.

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