In this series, we’re breaking down how blockchain can impact the complex segments of the oil and gas industry: upstream, midstream, and downstream.
There are three main sectors in the oil and gas industry: upstream, midstream, and downstream. These categories denote where the relevant resource is in the process of traveling from underground reservoirs to its final destination, whether that be in the tank of a car or a gas stove in an apartment. For this initial installment in the series, we’ll explore blockchain’s use in upstream oil and gas.
Possibly the most complex part of the oil and gas industry — and definitely one of the most technology-heavy — upstream oil and gas refers to both the search for natural resources and their extraction. Upstream oil and gas is also known as exploration and production (E&P).While upstream oil and gas is mainly operated by massive energy companies, day-to-day operations, which include the extraction and production of resources, require work from around thirty to forty smaller companies. Because each of these companies adheres to disparate deliverables, performance metrics, payment courses, and contract details, the overseeing energy company often struggles to coordinate, pay, and measure the performance of each of them. The challenges that energy companies face in the management of these smaller businesses cause massive inefficiencies, wasting time and decreasing revenue.
With all of these problems facing energy companies, blockchain is becoming an appealing solution for the revolution of upstream oil and gas.
Read on to discover the 4 ways the upstream oil and gas industry can capitalize on blockchain technology, from achieving supply chain transparency to monitoring contracts.
Achieving Supply Chain Transparency
Every company involved in oil and gas production produces and collects an incredible amount of data — but few of them can effectively share that data with the relevant parties.
Upstream oil and gas data is often created and recorded in silos, leading to a lack of data transparency between key players such as operations and commercial companies. Without clarity into data, businesses simply can’t know how their oil and gas supply chain is performing and where they are experiencing inefficiencies — making it difficult to make informed business decisions.
With a centralized blockchain solution, upstream oil and gas companies can have full transparency into their entire oil and gas supply chain, which makes an astonishing difference with resource management.
For example, during the production phase of oil and gas, in which water, crude, or condensates are needed, new IoT devices like tank monitors and other sensors allow data to flow directly into the blockchain and provide complete visibility into resources. This empowers businesses to know exactly where they are with the oil and gas supply chain and subsequently optimize resources.
Because upstream oil and gas involves so many parties, reconciliation can be a tedious and time-consuming process. The amount of companies involved in the extraction of a single ounce of oil or gas leads to a large amount of disparate data and lack of accountability. Blockchain can remediate many of these problems, including:
Identity and certification. Many workers in oil and gas who have specialized tasks — well creation and maintenance professionals, for example — must have certifications for safety and regulation adherence. With today’s processes, it can take up to 45 days to prove that oil and gas worksites are staffed correctly and legally, since dozens of companies must work together to provide documentation and confirm identities.
But with blockchain, a federated identity construct could be integrated into a business’s blockchain so that all oilfield services can collectively manage the certifications of their employees.
Human errors. Employees often manually enter data on paper oilfield tickets, which can lead to two main errors. During initial recording, field personnel might make a mistake. Additionally, when back office staff processes a ticket, they might mistype information. These errors, which are often recorded at twenty-five to thirty percent, can cause problems with inter-party communication and maintenance records. While blockchain can’t entirely prevent human error, it does reduce the risk and provide greater transparency into the data, making reconciliation efforts much easier, less expensive, and less labor-intensive.
Because of certification problems and human errors, oilfield services companies often experience delayed payment for weeks or even months post-project. A good amount of the time, this is due to the difficulty of proving that their projects were completed. A majority of service companies rely on other companies to be able to complete their tasks, so preceding companies must prove they completed their tasks before the next company can get paid. This creates a huge backlog. However, a blockchain’s shared, real-time ledger provides the transparency businesses need to expedite the financial reconciliation process, cutting it down from months to days.
Tracking Land Rights
Land rights administration consumes a huge amount of effort in the upstream oil and gas industry. Before excavating or drilling for resources, companies have to jump through a slew of hoops, determining who owns the land and what lies beneath the land before they can receive permission to get to work.
Businesses have to navigate local and federal laws, and ownerships and rights are managed differently in each city, state, and country. This makes the process of determining land rights incredibly difficult; it requires hours and hours of manual work in courthouses and offices across the world. Plus, the records are often stored in different places, so that they aren’t easily accessible when needed.
With blockchain, businesses can add a layer of transparency to the land rights record. Oil and gas companies can quickly access land right records, which are displayed in a clear, unchangeable record for easy analysis.
Managing Performance-Based Contracts
Currently, managing performance-based contracts is very challenging for two main reasons. First, it’s difficult for businesses to prove that their work is being completed; without proof that they have finished the agreed-upon work, they can’t complete their contracts. Secondly, it’s difficult for all parties to agree on short- and long-term goals. While all parties have the long-term goal of maximizing the resource output, individual oilfield service companies often have more immediate goals that relate to their separate contracts.
Blockchain-supported, performance-based contracts are comprised of a series of smart contracts that are legally enforceable. When a party completes a task, they “attest” to the work being completed by offering a “stake,” such as money. The next party would then confirm if the task was completed and return the stake if it was.
These blockchain-supported contracts can apply to almost anything and can be automated so that when a task or project is complete, payment is automatically sent. Or, when a task is complete, the platform can trigger other actions and alerts, streamlining the entire process of managing performance-based contracts.
Considering the sheer amount of stakeholders in the upstream oil and gas industry, it is time that businesses adopt a modern, connected solution that provides transparency and a streamlined process. Blockchain technology can help businesses achieve transparency, expedite reconciliation, track land rights, and manage performance-based contracts.
On the next installment of this series, we’ll explore the role blockchain can play in the midstream segment of the oil and gas industry.
Here at Vertrax, we’ve partnered with IBM to bring a blockchain solution to the oil and gas industry. Drop us a line if you’re interested in learning more.