As the hype around blockchain subsides and actual applications come to light, the technology is beginning to change the face of a huge industry: crude oil and gas trading. This could be just the start of a lot more wide-scale adoption in oil and gas.
Earlier this month, Total and Chevron joined Shell, BP, Equinor, Mercuria, and Gunvor as shareholders of Vakt, a post-trade processing platform grounded in blockchain and aiming to eliminate the substantial fuss and paperwork around oil trades to reduce transaction times and costs. The platform’s owners claim it can drive efficiency and trade finance savings of as much as 30-40%.
Without context, these percentages don’t mean a whole lot. But when you know that the average trade finance transaction for a commodity cargo could involve as many as 36 different original documents plus 240 copies from 27 different parties, according to this overview of blockchain in commodity trading, it puts commodity trading—oil trading—in a different light that shines bright on blockchain.
Vakt is not the only oil trading platform that uses the distributed ledger technology behind bitcoin. Komgo came into existence earlier than Vakt, set up by a group of banks, covering all commodities. The latest arrival is PermianChain Technologies’ blockchain platform that doesn’t even handle actual physical transactions: it will handle trades of potential, undeveloped oil and gas resources.
Let’s focus on Vakt, however, since it involves a lot of oil heavyweights, all of whom are apparently living up to the promise that “This time it will be different” and strict cost control will continue. The difference with previous promises following oil price collapses was supermajors did not have the technological capabilities to live up to them. Now, it seems, they do, so I asked three people familiar with blockchain technology and digital tech in the oil industry about the real benefits to be reaped and, of course, the risks.
The immediate benefits for post-trade processing are clear enough. Companies such as Total, Chevron, BP, and Shell, along with two of the world’s largest commodity traders would not have thrown their weight—and money—behind a project if it would not deliver on the promise for lower costs. But can these benefits extend beyond trade processing?
“Absolutely,” according to Brian Walker, principal of the CAP Group Cybersecurity. Related: BP: Renewables To Become Largest Source Of Power By 2040
“The energy industry is a complex ecosystem of joint ventures with accountants on all sides of every well, many gas plants, etc. So creating an authoritative record would eliminate tremendous amounts of “checkers-checking-checkers” activity that is required today.”
That’s not all, either. According to Duncan Greatwood, CEO of Xage Security, blockchian adoption can extend into virtually every stage of oil and gas production and refining.
“For instance, a blockchain-protected fabric can underpin access control and identity management in highly distributed environments such as oil and gas fields, serving to tamperproof cybersecurity enforcement while avoiding the single points of security failure found in more centralized architectures,” he told me.
Refineries, for their part, could utilize the technology to share information with suppliers in a more secure manner, enhancing data integrity and authenticity.
Blockchain can also enhance the integrity of data around oil shipments, says former Aramco security team leader and CEO of security firm HypaSec Chris Kubecka. With blockchain, one can track and verify the origin of an oil cargo, which has relevance for the quality of cargoes and other considerations such as avoidance of smuggled Islamic State oil cargoes.
In a more general but crucial sense, blockchain is all about security. In fact, from a certain perspective, Vakt could be interpreted as a test drive of the technology before adopting it for other processes, in addition to being a cost-cutting tool.
The oil and gas industry started out slow with the adoption of digital technology but it quickly picked up the pace as the push to keep costs low and returns high persisted. However, with digital technology come cybersecurity risks and, according to the experts interviewed by Oilprice, blockchain can help with that.
“The distributed systems common in the oil and gas industry need decentralized security, removing a single point of failure to ensure that in the event that a few devices are hacked, the rest of the network is not compromised,” Xage’s Greatwood said.
The theme of decentralizing cybersecurity to reduce risk features heavily on the cybersecurity agenda regardless of industry but when we’re dealing with oil and gas, we’re dealing with critical infrastructure, and security acquires additional importance. In this context, anything that promises this greater security through decentralization deserves attention, and blockchain is pretty much the poster tech for decentralization and security. Related: Russian Energy Minister: We Avoided $25 Oil With OPEC Deal
However, be that as it may, blockchain is also hackable. Despite numerous assurances from blockchain evangelists and enthusiasts that the distributed ledger cannot be hacked, it was. The Ethereum Classic hack stained the unhackable image of blockchain, with cybercriminals succeeding at something hitherto considered impossible: they rewrote the actual ledger of transactions in Coinbase, a cryptocurrency exchange, and stole $460,000.
At this point, one would think all the supermajors in Vakt would have gotten worried were it not for the fact that not all blockchains are equal.
The Ethereum Classic hack was made possible because the hacker was able to connect to the Ethereum Classic blockchain with more than 51% of the available compute. While this (a "51%" attack) is always a risk for smaller public blockchains, for larger blockchains it can be ruinously expensive to implement, and very hard to hide the origin of the attack, due to the amount of compute power involved,” Xage’s Greatwood explains.
What’s more, according to Greatwood, there are many proprietary blockchains that simply ban new nodes from joining them, effectively eliminating the risk of a 51% attack. In other words, hacking a blockchain is still impossible for the right kind of blockchain. For now.
“Anything given enough time and computing power, is hackable,” says Chris Kubecka. “If the algorithm itself is more difficult to hack, then underlying systems or application components might not be.”
The “Anything that can be hacked will be hacked” adage is a valid one, which means the danger is there, however far in the future. For now, though, this danger is only a potential for proprietary blockchains of the sort Vakt is built on.
It seems, then, that Vakt is the latest indication of something many industry observers considered impossible: Big Oil getting out of its cyclical behavior following the cycles in oil fundamentals. Despite a marked and stable improvement in benchmark prices, the supermajors are still spending carefully and looking to boost efficiencies—such as cutting out a lot of middlemen along the oil trade transaction chain thanks to blockchain—and lower costs. That’s a strong bullish factor for these companies, comparable with their growing presence in renewable energy.
By Irina Slav for Oilprice.com
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