Blockchain Use Cases for Midstream Oil & Gas
Quality tracking, environmental protection, safety compliance, and more — midstream oil and gas has a lot to benefit from blockchain technology.
By Everett Muzzy, ConsenSys
This is the seventh 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:
1. The History of Disruption in the Energy Industry
2. A Recent History of Innovation
3. The Past, Present, and Future of Sharing
4. Blockchain Technology and the Oil & Gas Industry
5. Blockchain Use Cases & Benefits for Upstream Oil & Gas
6. Blockchain Use Cases & Benefits for Downstream Oil & Gas
7. Blockchain Use Cases & Benefits for Midstream Oil & Gas
8. The Biggest Challenge to Enterprise Ethereum Isn’t Tech
9. Ondiflo: Blockchain for Oil and Gas
10. Ondiflo: A Roadmap for the Future
The Ondiflo Blockchain platform has processed over 10,144 water hauls as of the morning of July…
What is Midstream Oil & Gas
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.
Midstream oil and gas is the vital segment that links upstream exploration & production and downstream refinement to the end consumers. After crude oil or gas is extracted from a well, it must be transported to refineries for final production. Anything relating to the transportation and storage of crude oil, refined products, and natural gas during this step falls into the midstream segment.
Midstream oil & gas is considered a low risk portion of oil and gas. It does not incur the same capital risk of upstream — i.e. if a drilled well ends up dry — or the market volatility of downstream — i.e. if prices of gas skyrocket. Part of its low risk stems from how highly regulated midstream oil and gas is, mostly because of the environmental implications of improper storage or transportation. Traveling by rail, ship, or pipeline, crude oil or products passes across national, state, local, and municipal borders, requiring a sleuth of interconnected regulatory approvals for the successful movement of a single drop of product.
With such a highly-regulated and environmentally-precarious industry, midstream oil and gas has a lot to benefit from the data transparency of blockchain technology. Let’s explore more some key use cases in the midstream segment.
Multi-Transportation Product Tracking
The midstream oil and gas segment operates more like a utility business in nature — i.e. it is asset heavy and highly regulated. The “asset heavy” quality of midstream is what makes blockchain technology so applicable in regards to supply chain tracking and transparency. Crude oil and natural gas is most often transported in the midstream segment by rail, cargo ship, and — most frequently — huge networks of interstate pipelines.
Tracking the flow of assets from well to refinery across a sprawling network of cargo routes, rail routes, and pipeline infrastructure is of paramount importance to oil and gas stakeholders. For safety, environmental, and refinement purposes, companies should be able to have a full view into the health of crude oil transportation. Currently, proprietary regulations and information silos obfuscate information from stakeholders, requiring intensive, manual effort to track down reliable data about a certain time and place.
An example we can all relate to is the finished gasoline that fuels our vehicles. The blends of refined gasoline and ethanol are finalized to specifications such as octane by the R+M/2 method at the terminals of midstream operators. Quality certificates are obtained post-blending with reformates or alkylates to certify the blend products meet state and federal standards. With a shared blockchain database accessible to all stakeholders, both midstream-specific companies and major, multi-segment players would have improved visibility into the status and location of their assets. This real-time data capability is crucial for the maintenance of such a large network of oil transportation methods.
Industrial Infrastructure Maintenance
Midstream oil and gas is dependent on intense industrial infrastructure. In particular, railroads and pipeline networks. These transportation networks cross state and national lines, are subject to a variety of safety, environmental, and corporate regulations. Moreover, these networks are often managed and overseen by a complex relationship between public and private entities.
The industrial size and complexity of the midstream transportation infrastructure is currently beleaguered with maintenance documentation. All sections of a railroad or a pipeline must be examined and affirmed by a company, transmitted to the appropriate public and private parties, confirmed by those parties, and then recorded for future reference. As we’ve seen with many of the processes in legacy oil and gas (and enterprise in general), this process is currently manual, often performed over email, and confined to the proprietary systems of just a few.
Take an example of a 1000 mile stretch of a pipeline system. If a single sub-contractor can economically service, on average, an 100 mile stretch, ten separate subcontractors must coordinate their personnel and equipment over a very large geographic stretch. Translated into the reality of over 500,000 miles of pipeline, over 1400 storage terminals, and 115 rail terminals — the scale of that coordination becomes colossal.
With the number of stakeholders involved in the maintenance and regulation of these infrastructures, data transparency and real-time transmission is crucial to daily operations. The ability of any involved company or regulatory body to confirm that a section of pipeline or railroad has been checked by the appropriate bodies, for the appropriate certifications, and at the appropriate intervals of time can hold up production and damage profitability. Tracking down information can take days and hold up the transportation of oil and gas through a certain section of pipeline, for instance. Certification and maintenance records placed on a shared ledger would help alleviate many of these pain points.
Hazardous Location Equipment Testing
Part of the regulatory oversight of midstream oil and gas is due to the safety implications of a mishandled portion of the infrastructure. Natural gas, in particular, poses a safety risk. As natural gas cannot be store effectively above ground, it must be stored in underground reservoirs. Gas leakages from these reservoirs can endanger the health of workers and nearby residents and cause fire or explosion concerns depending on the type and concentration of gas.
Many of these natural reservoirs are legacy and have been under use for decades. Recent major health incidents of natural gas leaks have raised concerns about the safety of the thousands of others across the country. The equipment in place to monitor reservoirs is legacy as well, and maintenance records are manually recorded and stored. The lack of real-time or easily-accessible information into the recent history of these reservoirs means that equipment failure — and the ensuing health disasters — are more difficult to predict and prevent. Only with visible records and real-time data can companies keep on top of equipment performance and issues to ensure no future health crises occur.
Environmental Disaster Response & Mitigation
Hand in hand with the health consequences of poorly-managed midstream equipment are the environmental consequences of major disasters. These events are unfortunately not uncommon in the midstream segment, and can have tremendous negative implications for the ecosystem and economy of the region in which the leak occurs. As discussed in the section above, part of disaster mitigation requires real-time maintenance and equipment records — both of which can be provided by blockchain technology.
However, in the event of a disaster, blockchain technology can also support planning, response, and recovery efforts.
Planning & Response: Smart contract alerts can be implemented to ensure that if — for example — a pipeline bursts, certain equipment shut down or activated. Also, these contracts can ensure other stakeholders and regulators are notified, relevant data is pulled and shared, and inform any workers, residents, or authorities of the event.
Some of these planning and response methods (i.e. shutting down equipment and notifying regulators) is already automated with today’s legacy technology. It is the ability to pull and share relevant data instantaneously, however, that gives a blockchain-based response plan more utility. With immediate, real-time data shared to all relevant parties, regulators and companies would instantaneously know which equipment failed, which company most recently examined that equipment, what the rate of oil loss is, any unique regional environmental factors (i.e. an endangered animal, a nearby housing complex), specific regional disaster response guidelines, and much, much more. The ability for this kind of real-time, immediate data gathering and sharing means that companies and regulators can spend less time trying to figure out what happened and immediately respond to mitigate the environmental impact.
Recovery: The recovery of a midstream oil and gas spill can be a long, laborious, and legally-complex process. Occasionally, recovery efforts can be stymied by internal arguments over liability and cleanup costs. Delays in disaster response have severe implications for the environmental health of the region, its wildlife, and its residents. With a robust data set already tracked and recorded on a shared blockchain, arguments over liability can be much expedited. Fault for a pipeline failure can be more accurately and quickly identified, certified workers can be located for cleanup, and the progress of cleanup can be more accurately tracked. Rapid response to an oil spill means that cleanup efforts are not always effectively recorded, meaning the effectiveness can be understated (or overstated). With a clear idea of how much oil was lost, and a clear idea of how much oil is cleaned up, environmental authorities can better guide and enforce oil and gas companies to respond.
Quality Bank Reconciliation
When companies send crude or refined products into a pipeline system, there is an average pipeline quality — i.e. the overall condition of all the products that flow through that line. Each batch, however, enters the pipe network with its own individual quality that may be better or worse than the average. Companies that provide better quality product should be compensated by companies providing worse quality product for the negative economic impact of diluting their assets. “Quality Banks” are established to compensate and charge companies whose products commingle in pipelines, specifically measuring “gravity” and “sulfur” parameters.
Reasonably so, midstream companies are highly sensitive to quality banks. Companies with higher quality product want to ensure they are appropriately compensated, and companies with lower quality product want to protect against being overrun by superior-quality companies and forced to overpay. 100% clear, accessible, traceable, tamper-proof, and immutable data is the only solution to quality bank concerns in midstream. As discussed through this article, current legacy data systems do not provide the permission, security, or (selective) transparency required to coordinate between, for example, a quality bank, a superior-product company, and an inferior-product company.
With a blockchain-based data system among these stakeholders, quality banks can keep a clear record of the pipeline quality average, the quality of incoming product, and the consequent compensation required. Importantly, the integration of smart contracts allow for this compensation to occur real time as product flows through the pipeline, saving a tremendous amount of back-office reconciliation costs that occurs today when quality banks have to aggregate data from many previous weeks and deliver one lump compensation decision.
Leveraging Shared Resources
At the end of the day, midstream oil and gas is a segment full of shared resources. Pipelines are shared, railroads are shared, contract maintenance companies are shared, and assets themselves are shared. The amount of sharing today — combined with the number of trade secrets — provides a particularly strong use case for blockchain implementation. A shared ledger of information across all these companies and regulatory bodies ensures everyone has immediate access to the information they need. The security and permission capabilities of blockchain technology means companies can protect themselves from accidentally providing trade secrets or proprietary information. With improved visibility and coordination comes increased efficiency and increased profit, as well as decreased environmental impact and decreased health risks.
Conclusion
The midstream oil and gas segment has a lot to benefit from blockchain technology, from disaster mitigation to infrastructure maintenance and more. Unique among oil and gas processes, midstream includes the management of vast transportation networks and heavy regulation. Heavy regulation and asset intensity means companies must be particularly attuned to mitigating risk, and consequently can uniquely benefit from sharing information with others in the industry. That sort of multi-stakeholder information sharing is what blockchain technology excels at providing, especially as it refers to asset tracking and disaster preparedness. In the next post, we’ll begin exploring in detail specific use cases of blockchain technology in oil and gas as they relate to the examples in the last few posts.
Rana Basu, Ondiflo
To learn more visit our other articles in this series:
1. The History of Disruption in the Energy Industry
2. A Recent History of Innovation
3. The Past, Present, and Future of Sharing
4. Blockchain Technology and the Oil & Gas Industry
5. Blockchain Use Cases & Benefits for Upstream Oil & Gas
6. Blockchain Use Cases & Benefits for Downstream Oil & Gas
7. Blockchain Use Cases & Benefits for Midstream Oil & Gas
8. The Biggest Challenge to Enterprise Ethereum Isn’t Tech
9. Ondiflo: Blockchain for Oil and Gas
10. 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.
