Blockchain Use Cases and Benefits for Upstream Oil & Gas
Everything from mineral rights to identity — how can blockchain technology help improve oil and gas industry upstream enterprises.
By Everett Muzzy, ConsenSys
This is the fifth 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 Upstream 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 the drop of resource is making its way from its reservoir underground to its final destination — a car, a house, etc.
The upstream segment is regarded as one of the most complex and technology-heavy portions of the oil and gas industry. Also known as Exploration and Production (E&P), upstream O&G consists of the high-risk search for natural resources and their extraction from their reservoirs. This process often requires wells to be drilled hundreds of miles offshore, in geopolitically-unstable regions, and in highly-regulated jurisdictions. Though these wells may be primarily operated by behemoth energy companies, the actual extraction and production of resources requires anywhere from 30–40, or more, separate companies. These companies all operate under different deliverables, performance metrics, and contract details. The coordination, payment reconciliation, and performance attestation across these dozens of companies is consistently a point of friction for energy companies and leads to inefficiencies that cost time and affect the bottom line.
The upstream oil and gas segment is dominated by four key stakeholders: Majors, NOCs, Independents, and Oilfield Services. “Majors” are the large, well-known oil and gas companies that oversee, or own, much of the activity on oilfields and wells. These companies are often involved in all “streams” of the oil and gas process. NOCs — or National Oil Companies — are energy companies owned and managed by governments around the world. Independents are companies that operate within each segment of the O&G industry. They do not operate in other segments, and in the upstream segment are often companies providing concentrated E&P skills for oilfields and natural gas reservoirs. Oilfield Services are companies that provide highly-specialized equipment, support, and skills needed for all stages of E&P on an oilfield or well. Typically, oilfield services companies do not own the resources withdrawn from the ground, and there can be dozens of services companies operating to maximize resource extraction from a single well.
Given the size and complexity of the upstream oil and gas segment, let’s explore some specific use cases where the application of blockchain technology can increase efficiency, reduce waste, augment profit, and/or improve data management. We will discuss four overarching use cases — Reconciliation, Performance Based Contracts, Land Rights, and Supply Chain — as well as more specific examples within each.
Reconciliation Use Cases for Upstream Oil & Gas
Today, reconciliation between companies is a slow, laborious, and manual process. The number of companies involved in the E&P of a single drop of resource means an extraordinary amount of disparate data, project attestation, accountability, and definitions of “complete.” For some of the specific use cases below, we see how blockchain technology can alleviate these issues:
Identity & Certification on the Blockchain
Majors and NOCs rely on oilfield services to complete some of the more specialized tasks in well creation, maintenance, and operation. The workers who perform these tasks must have specific certifications for legal, safety, and regulatory purposes. With the integration of a federated identity construct on the blockchain — i.e. an identity associated specifically with one’s company through a hierarchy of sub-contractors — all oilfield services can collectively manage the certifications of their employees.
What does this mean? Currently, it can take 45 days to prove that a well or rig was staffed in the appropriate order and with the appropriately-certified individuals. Data must be drawn from dozens of companies, worker identity affirmed, certification identity affirmed, and sequence affirmed. On a shared, blockchain-based system, one’s identity and related certifications are automatically recorded when s/he boards the rig, and the sequence of workers is transparent and immutable to all who have data access.
Currently, identity management is a source of many reconciliation issues for companies. The inability of companies to easily prove that worker A has the proper, up-to-date certifications and that worker A inspected the well before worker B is a source of tremendous liability. Many companies do not know and cannot prove what “happened” on their own oilfield for up to 45 days after an incident because of the difficulty in managing worker identity. With a federated identity construct, companies will be able to reduce the amount of time required to reconcile facts and affirm certification.
Field Capture Errors
Field personnel make errors when entering data on oilfield tickets. Often alphanumeric, these codes are crucial for inter-party communication, data tracking, and maintenance records. Moreover, when back offices are processing these paper tickets, they too may be prone to human error and mistype this information. On average, error rates hover around 25–30%. Altogether, this human error leads to a tremendous number amount of reconciliation efforts that cost time and money. AFE#, PO# or WBS# are examples of coding gone wrong, which often are the culprits in these instances. Even the UWI (unique well ID) changes are not tracked uniformly across companies on the same well, leading to problems in back office reconciliations.
Blockchain technology can’t entirely protect from human error; someone can still enter an alphanumeric number incorrectly into a blockchain platform. However, the records of these errors is a lot clearer with the overall data transparency provided by the technology. This means reconciliation efforts are easier, less expensive, and less labor intensive.
Data Sanitation
Many of the issues above relate back to general inability to effectively collect, record, and coordinate data on an oilfield or well and between all involved stakeholders. The data obfuscation that results is detrimental to companies and workers from a liability and financial perspective. Oftentimes, data is haphazardly collected and then organized and analyzed in multiple systems after the fact — a “double work” situation. Blockchain technology enables data sanitation by providing a single repository of all information, access to which can be determined and managed by the consortium of stakeholders with access to the platform. The application of smart contracts can automatically structure that data into a digestible format, removing the need for manual re-organization.
Financial Reconciliation
As a consequence of many of the issues discussed above, oilfield services companies are often not compensated for weeks or months after completing their tasks, often because of the difficulting in proving they did so. Because so many services companies rely on the performance of a separate team or individual, in order for one company to be compensated, the preceding companies must all prove they completed their tasks in order as well. This causes tremendous backlog in the reconciliation process, making staggering amounts of money liable as companies wait for compensation. With a shared, accessible ledger that collects and structures data, manages identity, and ensures transparency, the financial reconciliation process can be cut down from months to a matter of days.
Performance-Based Contracts
Performance-based Contracts (PBC) are contracts that are decided upon, executed, and compensated against, based on the completion of a task. Today, PBCs are challenging for two main reasons. First, it is difficult for groups to “attest” to their work being done in order to fulfill the contract. Second, it is difficult for majors and NOCs to align short- and long-term goals among the various oilfield services needed during the lifecycle of a well. Collectively, everyone involved on an oilfield has the long-term goal of maximizing resource output from the ground. Individual companies and groups, however, have more immediate goals that relate to their separate contracts. When incentives are misaligned, inefficiencies emerge, safety is compromised, and profit is affected. Blockchain-based PBCs are an opportunity to align short- and long-term goals among all stakeholders to support a more profitable, safer, and more efficient well.
PBCs work through a series of smart contracts — i.e. legally enforceable blockchain-based contracts. When a certain group has completed their immediate task on the well, they “attest” to the work being completed. This attestation can take the form of a stake of something — money, % of profit, contract exclusivity — against the claim that the task was completed. The next group would then affirm the task was completed, thus returning that stake to the original company. Should the second group claim that the task was not complete, the companies could dissent and take legal action or collaborate and seek solutions to maximize the performance they are aligned to.
Well & Equipment Identification
Applying agile methodologies to drilling has been the holy grail for upstream. The well that’s planned and recorded is not always the well that’s drilled. In other words, as a well is drilled, identifying information sometimes changes. Later on, this leads to confusion as previous records are not updated with the final well identification information (UWI), meaning it is not always clear what well has received what work. With the integration of PBCs, there is a clear trail of work attached to each well, allowing oilfield services to continue with production without having to stop to confirm previous work. Additionally having all parties drawing the UWI and other identifier information from the blockchain with its complete audit history, would eliminate one of the most common sources of errors.
Well & Equipment Maintenance
Hand-in-hand with the benefits of PBCs in well identification, equipment maintenance and management can be improved with a clear record of work attestation. Equipment history, maintenance records, and even performance records can all be managed and affirmed through a blockchain-based system. A transparent, organized view into PBCs associated with work performed on different wells would allow majors and oilfield services companies alike to understand the overall health of the oilfield, optimizing speed of operations with equipment utilization rates and long term recovery rates
Waste Management & Recycling
Currently, there is little economic incentive for oil and gas companies to recycle or reuse certain products necessary for oilfield operation. We will use the example of sand. Sand is cheap, and is ordered in excess of what’s required with rare attempts to reuse what’s leftover on another well or oilfield. The beauty of organizing an entire oilfield onto a blockchain platform, however, is the low technological barrier to entry of adding more elements and functionalities onto the system. In the same way that well information is tracked, therefore, companies can easily track the amount and location of correlated products.
What is the incentive to do this, however? Today, waste management is not measured as part of a company’s performance. With PBCs, we can code waste management and resource optimization into daily operations. The optimization of waste products, therefore, becomes aligned with other economic incentives and promotes recycling.
Land Rights on the Blockchain
Land rights, royalties, and division interests are a huge part of the upstream oil and gas segment. Before excavating or drilling, companies must determine who exactly has ownership over the land — and the minerals underneath — in order to receive permission and direct payments. State to state, city to city, and district to district, ownership and rights are managed and recorded differently. The process of determining land rights requires laborious, extremely manual work in courthouses and record offices all over the country, flipping through tomes of deeds, wills, and land sales. Lost, misplaced, and duplicated records are common, and require complex legal processes to bypass.
Tracking land rights and ownership on a blockchain platform is one of the most highly-visible use cases of blockchain technology in general. For oil and gas companies, blockchain-based rights records would provide a single, clear, immutable record of who owns what land and what minerals. Since records are collected and maintained by governments, this use case of blockchain technology would also require the involvement of many different government offices. Oil and gas companies, however, can apply this use case internally, without government involvement. If one company is selling the rights — or part of the rights — to land with oil fields, reservoirs, etc., it can record that sale on the same blockchain system. Within the network of oil and gas companies, therefore, there could exist a clear record of intra-company land and mineral right transactions.
Supply Chain Transparency
The supply chain implications for blockchain technology are especially valuable for majors and NOCs. These companies are often involved in all stages of oil and gas production — upstream, midstream, and downstream. Currently, data within these segments is fractured, and data transparency between these segments and between operations and commercial aspects of each can be almost impossible to provide. With the integration of a shared system within and across segments, however, companies now have radical transparency into their entire supply chain — from the extraction of a single drop of oil in a reservoir to its eventual destination in a consumer car. Instead of being siloed within segments, data can be studied and managed at all stages.
Wellbores
Wellbores are crucial to study the health and performance of a well. However, they are expensive to perform — a well must be shut down entirely for bore sample to be taken. Currently, the information from wellbores is managed in emails and in spreadsheets, putting it at risk of human error and mismanagement. By the time a company requests upstream wellbore information, the data can be scattered, unclear, and untrustworthy. By recording wellbore information on the blockchain, it can be assured that information remains secure and uncompromised. At any stage in the oil and gas industry, that information can be accessed easily and with confidence. Physical location and custody details of the bores can be accurately pinpointed and tracked.
Field Tickets
Trucking for water, crude, or condensates in the production phase or for sand, fracking materials, equipment, and supplies during the drilling phase are excellent examples of the convergence of IoTs (devices like tank gauges, flow meters, or other sensors collectively called the Internet of Things) with blockchain. Leveraging these technologies can provide immediate ROI and relief on the back office operations, as well as resource optimization and waste reduction. Devices can trigger alerts and orders for dispatchers to send assets in a highly optimized manner. These use cases are proving popular; companies are beginning to engage with emerging technologies to digitize oilfield transactions and with operational and legal confidence.
Conclusion
The upstream 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, upstream requires the involvement of dozens of stakeholders, all of whom rely off the data of others. This sort of wide-scale, multi-party coordination is what blockchain technology succeeds so well at optimizing. In the next post, we will apply the same use case analysis to the downstream 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.
