When the reclusive, assumed pseudonymous, Satashi Nakamoto mined the first Bitcoin in 2009, those with foresight may have predicted the potential disruption to currency and banking markets but few would have predicted the transformative, and in some cases disruptive, impact it may have in industries as diverse as automotive, shipping and oil & gas. As the impact of Bitcoin and the technology behind it, blockchain, unfolds, it serves as a lesson to the oil & gas industry that innovations come from unexpected places and the companies that win are those who watch, observe and adopt new technologies quickly to get a competitive edge. These are also known by the widely accepted term ‘early adopters’.
Since that first genesis of Bitcoin in 2009, the value of the cryptocurrency has grown exponentially: from $0.07 in July 2010 to over $2900 in June 2017. However, it isn’t just the value of Bitcoin that has grown, and arguably more importantly its legitimacy has also grown. In the early days, Bitcoin was the domain of a small number of highly computer literate, early adopters and, due to its untraceable nature, the preferred currency for the Dark Web’s illicit trade. Today, Bitcoin is heralded as the future of financial trading, with the Financial Times reporting the results of a World Economic Forum survey showing that most experts believe the blockchain technology underpinning Bitcoin will become mainstream by 2025. Some tech start-ups are forgoing IPOs in favour of ICOs, Initial Coin Offerings. Even with voices like that of businessman Mark Cuban questioning the valuation, although not the value, of Bitcoin and competitor cryptocurrencies like Kin and Ether challenging the Bitcoin dominance, the future of Bitcoin, and cryptocurrency in general, looks bright: with one tech investor, Jeremy Liew, recently presenting a claim that Bitcoin has the potential to reach a $500,000 valuation by 2030.
What is blockchain?
There is more to the disruptive reach of Bitcoin than acting as a cryptocurrency. The technology underpinning Bitcoin, blockchain, threatens to disrupt many more industries than financial. Blockchain is a means of sharing digital information while preventing it from being copied or edited. It is often referred to as a distributed ledger, which alludes to what it actually is. Using peer-to-peer networking, blockchain is a decentralised, distributed method of recording data. The record of data, or ledger, is stored across many computers simultaneously. Everyone in the network can access an up-to-date version of the ledger, and in doing so this creates transparency. However, there is no record of the actual transferred data, only a record that the transfer took place. To do this, digital records are collected in blocks, encrypted and then chained together chronologically. The encryption stage is performed by multiple computers and if they all agree on the result of encryption; a digital signature is assigned. The encryption process is irreversible so the data cannot be recovered and it is impossible to change the original data or transaction without altering the digital signature. Not only is fraud near impossible, it is very easy to detect. Furthermore, the distributed nature of the ledger means any attempt to hack the chain requires hackers to take control of every version of the ledger at the exact same time. In this regard, blockchain offers a highly secure means of independently recording and verifying the exchange of data without the involvement of a broker or other third party, and business is starting to take note.
Toyota is reported to have turned to blockchain to expedite the development of a self-driving car. Toyota states the development of safe and reliable driverless vehicles may require “hundreds of billions of miles of human driving data.” By using blockchain, Toyota will attempt to collate driving data from individual vehicle owners and fleet managers. Toyota has also floated the intent to make this data available to drivers, suggesting possible benefits including the facilitation of usage-based insurance and decentralised car share initiatives where the individual car owner can establish contracts with passengers.
Maersk Shipping and IBM have announced a collaboration to develop blockchain technology for the shipping industry. They intend to work with shipping companies, freight forwarders, ports and customs authorities to develop a system digitising the shipping industry supply chain and allow for the real-time exchange and tracking of documentation. By eliminating fraud and errors and increasing the efficiency of transit, Maersk and IBM believe the solution could save the industry billions of dollars.
The Energy Web Foundation, an alliance of energy companies with Shell, Statoil and Centrica amongst its members, aims to “accelerate the commercial deployment of blockchain technology in the energy sector.” Theoretical uses being explored include the assignation of a digital certificate to a megawatt-hour of electricity such that its origin could be guaranteed. This would allow consumers to specify the source, renewable, for example, of energy they consume. Another theoretical use under consideration is the democratisation of the grid whereby the individual, domestic or industrial, energy sources such as solar panels can be connected to and communicate with the grid. This could potentially disrupt the power generation market away from industrial facilities and toward many billions of small-scale generation facilities.
What does all this mean for the oil & gas industry?
One immediate option is to use a blockchain approach to remove the bureaucracy from oil trading. Commodity trader Mercuria was recently quoted by Reuters as estimating the introduction of a blockchain market for Brent within 12 months, bringing a 30% reduction in payment costs. Today, this is still a financial application with no potential for the upstream industry.
However, if we consider the strongest argument against the adoption of the big data revolution in the upstream oil & gas industry, data security we can start to see an application for blockchain. The cryptography and distributed aspects of blockchain mean that it can be applied to sensitive operating data, making it exceptionally secure and near impossible for hackers to access. Another potential is to leverage blockchain’s ability to provide an unalterable, independent recording and verification of data exchanges to bring transparency and efficiency to the transfer of data. This application presents opportunities including: improving the traceability of material data, such as metallurgy analysis, as it is processed through the supply chain; the generation of a fully auditable data trail for entire projects; real time verification of regulatory compliance; enhanced material logistics, similar to those proposed by Maersk and IBM; and the removal of third-party hosted data hubs for joint ownership of assets. There is even the potential to use the distributed nature of blockchain to provide distributed computational power and harness a virtual supercomputer to enhance data analytics.
It is undeniable that blockchain has immense potential for industrial applications and while it is early days companies are starting to adopt novel applications of blockchains. In the lower for longer environment, when projects need to be profitable at $30/bbl, innovation must be embraced. The oil & gas industry cannot afford to be averse to the opportunities for increased efficiency, security and transparency offered by blockchain. By incorporating blockchain innovation into their digital strategy, an operator can bring greater certainty and value to their projects.
Blockchain is just one example of how a disruptive technology taking hold in one industry can yield value in the oil & gas industry. With the prevailing economic climate, companies who learn, innovate and adapt most quickly will succeed. At io, we strive to transform the industry by disrupting traditional ways of working. We have a breadth of experience including all aspects of the oil and gas industry, coupled with experts from other industries, working collaboratively and drawing on best practice wherever it arises. To find out how io can help you learn, adapt and innovate, contact us as email@example.com