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Blockchain: Oil and gas emerges as consulting market

Blockchain opportunities in the oil and gas sector are beginning to surface, attracting the attention of consulting firms and integrators such as Accenture, Deloitte and Quisitive.

Financial services may have taken the lead among vertical markets in adopting distributed ledger technology, but blockchain oil and gas applications may prove worth exploring for consulting and integration firms.

Banks began rethinking their operations in light of blockchain around 2015 as a way to boost the efficiency and shrink the cost of processing financial transactions. The industry's early interest was to some degree defensive: Blockchain's potential to create peer-to-peer value transfer networks could disintermediate banks. At any rate, the financial services industry now spends about $1.7 billion annually on blockchain, according to a report from Greenwich Associates, which noted firms have moved "beyond the proof-of-concept stage."

When it comes to blockchain, oil and gas companies are just beginning to examine the technology's potential. That interest is creating opportunities for consulting companies that can get oil and gas companies up to speed on blockchain and find ways to deploy it. In the near-term, most of those opportunities will be in educating clients on blockchain basics and building prototypes and proof of concepts -- a stage financial firms entered two or three years ago.

Mark Koeppen, principal at Deloitte Consulting, is among the consultants advising oil and gas companies on blockchain. He suggested the technology has strong potential in that sector but faces deployment challenges. In particular, oil and gas companies must find ways to implement the technology as an industry.

Mark Koeppen, principal at Deloitte ConsultingMark Koeppen

"Blockchain clearly is a game-changer in the ecosystem [but] organizations have to come together and form a governance mechanism," Koeppen said. In addition, oil and gas firms will need to absorb some "lessons learned" from financial services firms and other early adopters, he added.

The education and experimentation phase could take a few years before large-scale blockchain oil and gas deployments emerge.

"I would have to say it is probably three to five years out from really scaling," Koeppen said of blockchain's deployment in the oil and gas sector.

blockchain oil and gas
Blockchain can play different roles along the oil and gas supply chain

Finding roles across the supply chain

That task before consulting firms is helping customers find the right spots to deploy blockchain across the various segments of the oil and gas supply chain. The industry is generally divided into three segments: upstream, midstream and downstream. Upstream companies, often referred to as exploration and production companies, locate and extract resources such as crude oil and natural gas. Midstream companies transport and store oil and gas -- pipeline operators, for example. The downstream sector, meanwhile, refines the raw resources into products such as gasoline and markets those products.

I would have to say it is probably three to five years out from really scaling.
Mark Koeppenprincipal, Deloitte Consulting LLP

Koeppen said blockchain has begun to progress among exploration and production companies, both the majors and independent firms.

"Almost every oil company in exploration and production has sought us or others in the blockchain space to talk about it," he said, noting firms ask for help understanding the technology's fundamentals.

In the midstream segment, Quisitive Technology Solutions, a Microsoft solutions provider with offices in Dallas, Denver and Toronto, earlier this year rolled out a proof of concept focusing on custody transfer. Custody transfer takes place at various places along the supply chain, but Quisitive targets the transition when an upstream company transfers oil or gas to a midstream pipeline operator.

A number of factors influence the sale price at the point of transfer, including volume, density and purity. Oil companies, for example, use flow meters to measure the volume of oil being sold. A specific gravity meter is used to determine the weight of the oil -- lighter oil generally commands a higher price. And a centrifuge is used to determine the percentage of oil containing basic sediment and water (BS&W).  A pipeline may require a particular BS&W specification -- impurities can be no more than 0.5 % of the oil volume, for example -- as part of a purchase contract.

Accuracy is critical and even small errors in measurement can result in a party dramatically underpaying or overpaying for a product. Concerns with accuracy and fraud result in oil producers and pipeline operators using their own testing equipment at the point of transfer, said Scotty Perkins, senior vice president of product innovation at Quisitive.

The duplicative equipment adds cost to the transfer process. Perkins said a proving equipment skid can run from $125,000 to $500,000.  Quisitive's proof-of-concept system, presented last month at the Microsoft Technology Center in Oklahoma City, aims to build trust into custody transfers and eliminate the expense of redundant testing. Quisitive's approach employs a single proving skid that a third-party verification entity certifies as properly calibrated. All parties agree to use the skid and the testing results are recorded and stored in the blockchain as a single, tamper-evident source of testing data.

Other blockchain applications

With blockchain, oil and gas companies can also create single data sources that support other functions. Accenture has created a prototype blockchain system that automates how oil and gas companies purchase maintenance, services and materials for well sites. That process is typically a manual chore that "involves written purchase orders and snail mail," an Accenture spokesman said.

The Accenture prototype digitizes the procurement process, using a mobile app for field workers and a web portal for back-office workers.

"Blockchain enables all parties to share the same source of data securely and without needless reconciliations," the spokesman said. "It can speed up the procurement process and reduce costs along the way."

Another benefit is the ability to view updated service records to help anticipate equipment issues, he added.

Commodity trading is another blockchain oil and gas application. Deloitte's Koeppen pointed to a consortium of oil majors, commodity trading companies and banks backing Vakt, a blockchain-based platform for physical oil trading. Companies behind Vakt include BP, Shell and Mercuria, an energy trading firm. Deloitte is consulting with Vakt, based in London, on go-to-market strategy and ecosystem development.

Koeppen said blockchain in the oil and gas sector has been lacking a consortium on the scale of R3, which works with large banks such as HSBC on blockchain. But he said Vakt could be "one big piece" of the governance he believes the industry needs to create a blockchain ecosystem.

"The challenge ... is the complexity of getting organizations to work together," he said.

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