Blockchain in action: Making oil flow more easily

Welcome to the ninth article in PYMNTS’ Blockchain in Action series.

At least most people know that blockchain is the technology on which bitcoin and other cryptocurrencies are built, but a digital ledger that time stamps and orders transactions in an easily traceable and immutable way has many more uses.

See also: Crypto Basics Series: What is a blockchain and how does it work?

In this Blockchain in Action Series article, we’ll look at how the oil and gas industry tracks shipments, pays contractors, and tracks sustainable fuel purchases using blockchain.

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It’s quite popular to disparage the oil and gas industry, but when it doesn’t work effectively, it can cause potentially huge disruptions, as Germany and a number of other EU countries are discovering after Russia cut them off.

While blockchain won’t solve the geopolitical crises arising from Russia’s invasion of Ukraine, it can make other parts of industry easier, faster and cheaper by tracking supplies on an immutable blockchain and automating payments with smart contracts. Here’s a look at a few ways the oil and gas industry has made digital ledgers work for it.

One of the biggest ways blockchain can be made to work for almost any industry is to improve logistics and supply chain management – bringing all manufacturers, sellers, buyers, middlemen, transporters and even regulators together in a single digital ledger that cannot be changed when the information is added to it.

This allows people up and down the supply chain to see only what they need to do their jobs, and this works just as well for crude oil as it does for vegetable oil.

Management of payments

Last year, the Blockchain of Energy consortium – whose members include Chevron and ExxonMobil – launched a project that saw oil company Equinor partner with blockchain provider Data Gumbo to use Internet of Things (IoT) sensors to automate end-to-end tracking of petroleum supplies across of customers, suppliers and suppliers.

The project was able to bring the “23 manual touches that take place between all major oil and gas companies in the supply chain … down to four,” Rebecca Hofmann, president and CEO of Blockchain for Energy, told Cointelegraph. “Connected IoT sensors collect the data, which is then written to a blockchain ledger for validation. These invoices are then approved by smart contracts, which create invoices for automatic payments.”

Data Gumbo CEO Andrew Bruce said smart contracts were a significant part of the millions in savings the program generated.

They can be “programmed to trigger payments to a contractor when a sensor indicates a certain milestone has been reached, such as when a drill bit has reached a certain depth,” he said. It dramatically reduced the time it took to make and receive payments.

In a July 19 interview ahead of the Energy Conference Network’s 6th Annual Blockchain Oil & Gas Conference in September, Douglas Heintzman, chief catalyst of the Blockchain Research Institute, said that “the biggest opportunity is an evolution to a little more decentralized measurement and decision- manufacturing process.”

For example, he said, many of the people in the field involved in producing transportation and refining of oil and gas products are local independent contractors.

“They are spread out in remote locations and perform construction, inspection and maintenance services,” Heintzman said. “They claim that the work was done correctly, on time and according to the regulations that are in place, and the question is: How do you validate all of this?”

The current system is to withhold payments until an inspector “runs around and checks the work, which is very expensive and can be time-consuming,” Heintzman said. “At the same time, even if someone did the job properly, they don’t get paid immediately and as a result can have cash flow problems.”

With a blockchain-based system, smart contracts can make payments automatically when triggered by IoT sensors—like that drill bit, or other third parties that are easier to dispatch than a corporate inspector.

“It’s kind of like taking the validation process and spreading it out to other people who happened to interact with these systems,” he said. “Validation and payment should be able to happen much faster and much more cost-effectively.”

There are other areas of industry that are interested in the technology — carbon footprint tracking is the obvious one — but like any other industry, there is a “huge amount of dysfunction in the supply chain.”

In the oil and gas business, it’s a problem beyond the bottom line, Heintzman said. “If there is some kind of deficiency that affects the processing or transport of energy, the consequences can be very significant.”

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