Gunvor, Total performs first physical oil trade confirmation using VAKT blockchain – Ledger Insights

Believe it or not, today physical oil trading contracts use paper contracts. Not actually physical paper, but pdf versions. Blockchain after trading startup VAKT ran an analysis and found that this manual process results in errors in 15% of contracts. Using smart contracts, it has launched an electronic trade confirmation solution, and Gunvor and TotalEnergies are the first to carry out direct transactions.

VAKT is backed by a number of major oil companies, including BP, Chevron, Saudi Aramco, Shell and Total, as well as traders and a handful of banks.

Going back, the norm in oil trading and many other commodities is for traders to sign general terms and conditions. And then a pdf contract for each agreement. This is where the bugs creep in.

Some sectors, particularly those with high transaction volumes, are taking a more electronic approach. They establish a master trade agreement, which specifies most aspects of all transactions between two counterparties. That leaves a few standardized elements to be agreed upon for each deal. These elements use reference data such as oil type or the name of the delivery terminal, each represented by a code.

We do not suggest that traders have to memorize all the codes because it will result in errors. Instead, a deal screen will have drop-down menus of standard items represented by codes in the background. When a transaction is agreed, it is therefore a machine-readable electronic confirmation which mainly consists of amounts and codes. This results in a far lower error rate of close to half a percent of the contracts, according to VAKT. Other sectors, such as ISDA for derivatives, have taken this approach for some time.

Fewer errors mean less reconciliation and lower transaction costs.

VAKT claims it is no easy task. It said a UK natural gas transaction is simple, but a refined oil product has up to 50 fields to confirm, which expands to 135 when you include delivery terms and pricing formulas.

“Confirmations have existed for a long time in the financial markets, in commodity derivatives and in simpler physical commodity markets such as Gas & Power,” said VAKT CEO Etienne Amic. “Being able to confirm waterborne oil trades on VAKT is a major milestone in the digitization of physical commodity markets. Apart from their inherent efficiency, confirmations also create an incentive to normalize the reference data used by industry, which is well under way at VAKT.

All this lays the foundation for future tokenization of oil contracts as well. In preparation for that, VAKT announced in June this year an investment from S&P Global and Argus. In 2021, the company raised nearly $20 million from IHS Markit (now part of S&P Global) and some of its existing investors: Britannic Strategies, Mercuria, Shell and Total.

The financing leaves VAKT in solid financial shape despite large losses. It had revenues of just over $1 million in 2021 and had a loss of $10 million. With net current assets of more than $14 million at the end of 2021, it is financially secure for a while.