Blockchain Use Cases for Downstream Oil & Gas
Corruption, environment, supply chain, and more. Downstream oil & gas has a lot to benefit from blockchain technology.
By Everett Muzzy, ConsenSys
This is the sixth in a series of posts by Ondiflo, a blockchain-based ticketing solution platform exploring ways to integrate blockchain technology into the oil and gas industry. Previous posts:
The History of Disruption in the Energy Industry
A Recent History of Innovation
The Past, Present, and Future of Sharing
Blockchain Technology and the Oil & Gas Industry
Blockchain Use Cases & Benefits for Upstream Oil & Gas
Blockchain Use Cases & Benefits for Downstream Oil & Gas
Blockchain Use Cases & Benefits for Midstream Oil & Gas
The Biggest Challenge to Enterprise Ethereum Isn’t Tech
Ondiflo: Blockchain for Oil and Gas
Ondiflo: A Roadmap for the Future
The Ondiflo Blockchain platform has processed over 10,144 water hauls as of the morning of July…
What Does Downstream Oil & Gas Mean?
As explored in previous posts, the oil and gas (O&G) industry is divided into three segments — upstream, midstream, and downstream. These segments refer to the stage at which a drop of resource is making its way from its reservoir underground to its final destination — a car, a house, etc.
The downstream segment is the last of the three segments, comprising of the final stages as crude oil is processed into finished products that make their way to end consumers. Crude oil is comprised of thousands of components (hydrocarbons) all with different boiling points and weights. Heat and pressure are applied to crude oil to separate these compounds and create specialized products. These products are various, including gasoline, jet fuel, asphalt, lubricants, synthetic rubber, plastics, and more. Fuel products for transportation alone account for 65% of global consumption of refined crude oil.
There are two enterprise participants in downstream: Global Integrated Refiners (GIR) and Independents. GIRs are those major corporations who have involvement in all stages of oil and gas extraction, transportation, and refinement (Exxon, BP, Chevron, etc.). Independents are refining companies that often own or operate a number of service stations to sell products to consumers. What sets these stakeholders apart from GIRs is their absence from the exploration & production (upstream) segment. Independents include companies such as Valero and Sunoco.
As a consumer-facing business, downstream O&G is an intensely margin-driven economic model. Their success can be severely impacted by global geopolitical trends that affect crude oil prices. Any optimization to the bottom line is an immediate profit increase for both GIRs and Independents. Blockchain technology, therefore, offers an opportunity for immediate economic benefit for these downstream stakeholders. Let’s explore some downstream use cases:
Downstream Reconciliation
Downstream O&G is a uniquely complex segment. Its complexity is often a function of fragmented distribution networks for refined products and the specialized production, logistics, and marketing processes needed. Whereas upstream oil and gas involves lots of players and fewer products (gas, crude oil), downstream involves both — a large number of players and dozens of possible products with unique supply & demand, transportation requirements, and regulation. The resulting risk is that downstream numbers do not always tally with the information from partners and from within companies themselves, posing a particular risk for GIRs who are expected to have full visibility into their supply chain.
The knowledge that a single company may not have full visibility into its supply chain is concerning from a liability, regulatory, and environmental perspective. The issue rests with how data is collected and recorded. Right now, information often is siloed within the up/mid/downstream segments and segregated between operations and commercial groups within companies. Retrieval and organization of that data can be manual and incomplete. A single database to store data, however, raises security risks and permission risks. There exists no effective data management platform to ensure — for instance — that a GIR has access to all the information from all parties across its supply chain but that a service provider only has access to relevant downstream information for their function. More importantly, there exists no scalable method to ensure that data integrity was not breached by a malicious actor.
On a shared, distributed blockchain ledger created around a consortium of oil and gas stakeholders, data management becomes easier and full supply chain transparency becomes possible. Smart contract integration can ensure data is shared with certain entities when necessary, and permission constructs can ensure certain individuals or groups do not have access to another stakeholder’s proprietary information. At the end of the day, however, the primary benefit lies with the ability of GIRs to achieve “unbroken provenance” — i.e. complete knowledge of supply chain operations. Confidence in data across supply chain would allow companies to automate with greater security, thus saving on the bottom line and improving margin. Take a common example of a truckload of gasoline or diesel picked up off a rack at a terminal and headed to a gas station. The driver is then redirected to a different gas station in a different state. A common change like this could lead to a reconciliation nightmare as various systems for taxes or state fuel reporting have to be updated and matched manually to correct for this change.
Petroleum Products — Quality Control
Today, consumers of refined products trust the quality specifications provided by GIRs and Independents. From gasoline and diesel additives to lubricants, there are a tremendous number of oil and gas products possibly subject to counterfeiting. This would be the worst end of the spectrum — for a company to intentionally change records to sell an inferior (or dangerous) product to a consumer. If forced to provide blockchain-based records of production, transportation, and refinement, companies would find it significantly more difficult to hide or manipulate quality records.
Lubricant products, in particular, post an issue as consumer-facing retail items. Multiple third parties involved in packaging and distribution complicates the supply chain for B2B and B2C lubricants. Each of these retailers and distributors has disparate and disconnected IT systems, resulting in a lack of consistent data collection, digitization, and sharing — all of which could be improved by the integration of a shared, blockchain-based data consortium.
At the end of the downstream segment, the providers who sell refined products to end consumers annually face billions in losses due to counterfeiting. Moreover, these companies suffer serious reputational backlash. Constantly-evolving counterfeit tactics and supply chain obscurity are the two underlying causes for rampant counterfeiting. With supply chain visibility and data security, providers could allow consumers to check the provenance of their products at the PoS to ensure safety, regulatory compliance, and authenticity. This can be partially achieved through the digitization of feedstock supply information and by linking batch numbers for better reverse traceability.
A more likely scenario is for an unintentional production mishap, where a line of products is distributed to customers and a quality issue is discovered. Currently, supply chain obscurity precludes companies from effectively recalling goods. Instead, they are forced to “over”-recall, withdrawing from shelves a huge swatch of goods in the hopes that they will have captured the impacted supply. Barcodes with blockchain-recorded production information can ensure that only the affected batches need to be removed from retail shelves, saving companies money, increasing consumer confidence, and reducing the environmental impact of disposing of perfectly good product.
Automated Payments and Improved Credit
The issue with payment reconciliation is not constrained to the upstream segment. Unique to downstream oil and gas, however, is the speed and capital-intensity of fuel delivery cycles. Whether industrial consumers of jet fuel or individual consumers of heating oil and propane, downstream companies have frequent cycles of sell and buy to maintain supply and demand. The current reconciliation process is hampered by back office inefficiency, manual data entry, and legacy accounting practices. For example jet fuel signed off by the pilot at the wingtip of a jet, delivered by a local trucker for that airport, from a tank owned and operated by a trading company is quite distant, commercially speaking, from the refinery.
Smart contracts allow for instantaneous payments or application of credit of any size, allowing for a more frequent cash flow between parties, reducing lag time and liability. Moreover, smart contracts allow for unique programmability where quantity of products cannot only be factored into payments, but timing and quality as well, where appropriate. This dynamic payment opportunity allows for more accurate compensation for quality products and services. With the speed of the consumption cycle for refined products, securing the approvals on documents such as BoLs or invoices improve the risk mitigation for potential events after consumption and before credit terms.
Corruption & Regulatory Clarity
Corruption opportunities in downstream oil and gas mostly involve the avoidance of environmental and safety regulations that cost companies time and money. Measures like RFS2 (Renewable Fuel Standard) are the US government’s attempt to edge the oil and gas industry towards a more sustainable business model. Regulation also governs employee certifications and safety authorizations that cost time and money to regulate and to administer. Shipment specifications for hazardous materials are mandated and monitored.
All these regulations, however, can be purposefully or accidentally mishandled due to unclear data, high employee churn, or malicious acts. With company information on a blockchain-powered system, however, the management of multiple parties, products, and requirements becomes easier. Supply chain tracking can ensure companies are adhering to environmental caps. Federated identity constructs help companies track employee certification and training. And hazardous material tracking can be validated with data entry onto blockchain technology.
If a company wanted to intentionally bypass regulation in order to save money, they would have to conduct some aspect of business and not record those transactions on their blockchain system. If, industry-wide, companies all agreed to use and trust these blockchain based systems, they could provide data access to regulators when requested. Essentially, instead of proving that all actions were legal, companies would only need to prove that no transactions were not recorded on the shared ledger. Any action on the ledger would be accompanied by immutable records of safety and regulation compliance. The absence of a transaction on the ledger would point to intentional malpractice.
In the past, RINs have been falsified or incorrectly generated, leading to entire chains fo transfers being subject to fines. Blockchain-based contracts could be linked to flow measurements to validate RINs at their sources. When providers are sanctioned for breaches of environmental or safety regulations, the impacts could be better enforced, preventing an operator from reincorporating and continuing its behaviors.
Bunker Fuel Environmental Compliance
Bunker fuel is any fuel burned to power a ship’s engines. Deepsea cargo ships often burn heavy, residual oil left over after gasoline and diesel are burned off. These heavier bunker fuels can emit high levels of sulfur, leading the IMO and other governing bodies around the world to implement sulfur caps for cargo ships. As discussed earlier, the diversity of hydrocarbon products complicates the tracking of refined products.
With greater visibility into product quantity, quality, and transportation, more effective wholesale strategies can be implemented for fleetwide and portwide bunker fuel sales. With more exact distribution, companies can ensure they are allocating to regulatory, environmental standards. Comparing quality inspection reports from the shore tanks or blend tanks to lab reports from the vessels would allow for an end-to-end quality compliance system. Over time, linking this to a blockchain based vessel registry to track mitigation equipment such as scrubbers on vessels and effluent discharges from the scrubbers would allow for fleet-wide offsets while maintaining overall compliance
The bunker fuel application of blockchain technology opens up the doors for greater environmental use cases. Ports around the planet can implement a common protocol for all bunkering operations to be recorded for quantities, quality, and timing and help the maritime industry and its complex aspects like maintenance and insurance.
Multi-Product Supply Chain Tracking
All the products produced in the downstream process come from crude oil. The refinement from a bulk of crude oil into dozens of different products, all meant for dozens of destinations, means clear tracking of supply chain is crucial. Most of the use cases above boil down to this singular, overarching use case: ensuring GIRs know where their refined products go and where the feedstocks come from. A “long” view of supply chain is currently not achievable in today’s data management ecosystem. Visibility is hampered by siloed data and proprietary systems. With greater transparency into where products are going and how they are being used, we can imagine a future with zero carbon impact flights, school buses, and delivery trucks as both the hydrocarbon and its offset are tracked from their birth to their ultimate consumption.
On a shared platform, GIRs would be able to fully understand where and how their crude oil is refined into consumer products and consumed. The ‘blockchain confidence’ will allow combination of the hydrocarbon with carbon offsets, or insurance products or services like fuel delivery and others for new industries and consumer options that can revolutionize how energy is delivered in the downstream segment. It will allow for creative differentiation in a commodity business, to be able to create premium offerings from fungible components. Would you pay a small premium for a provably ‘zero carbon’ plastic toy as you do for ‘organic foods’?
Conclusion
The downstream oil and gas segment has a lot to benefit from blockchain technology, from efficiency to transparency to much more. Unique among oil and gas processes, downstream includes the management of dozens of different products. These products are directed towards different customers, have different environmental regulations, and require various methods of transportation and safety. This sort of wide-scale, multi-product coordination is what blockchain technology succeeds so well at optimizing, especially through the lens of supply chain management. In the next post, we will apply the same use case analysis to the midstream segment to further understand what a blockchain-enabled energy future looks like.
Rana Basu, Ondiflo
To learn more visit our other articles in this series:
The History of Disruption in the Energy Industry
A Recent History of Innovation
The Past, Present, and Future of Sharing
Blockchain Technology and the Oil & Gas Industry
Blockchain Use Cases & Benefits for Upstream Oil & Gas
Blockchain Use Cases & Benefits for Downstream Oil & Gas
Blockchain Use Cases & Benefits for Midstream Oil & Gas
The Biggest Challenge to Enterprise Ethereum Isn’t Tech
Ondiflo: Blockchain for Oil and Gas
Ondiflo: A Roadmap for the Future
The Ondiflo Blockchain platform has processed over 10,144 water hauls as of the morning of July…
Ondiflo is a B2B blockchain-based ticketing solution for the oil and gas industry. The solution creates a verifiable and trusted trail of events and attestations for field services logistics, enabling agreement on facts between counterparties so vendors are paid soon after delivering products and services, leading to even more cost savings and benefits. Ondiflo is working with a group of oil and gas companies to assist in the development of the Ondiflo platform as well as learn and strategize about the further implementation of blockchain technology into O&G. Key-players include Producers, Midstream Companies, Refiners, Distributors, Service Providers, Financial Institutions, and Electronic Data Exchange Providers. Learn more about the Ondiflo group here and email here if you are interested in joining.
