Oil and gas is one of the world’s most complex sectors. It has extensive supply lines that criss-cross borders and jurisdictions, it pulls in expertise from an exceptional range of disciplines including geology, chemistry, mathematics, technology, trading, marketing and logistics, and virtually every industry in the world relies on its products.
There are very few industries in the world that are as large or as complex as natural resources. The levels of paperwork involved in a contract for a barrel of oil or volume of gas are significant, and hold-ups at any stage of the process have knock-on effects all the way up and down the supply chain. This is why most sections of the industry keep extensive storage facilities: no matter what happens, there will always be a consistency of supply.
Size and complexity also explain why the industry tends to be resistant to major change. The way that the oil and gas sector has developed over the best part of a century, and most of what it does, it does for a reason, even if those reasons are sometimes opaque to anyone looking in from outside. Any changes to the system need to be implemented carefully and take into account the needs of all parts of the value chain, because any disruptions in the supply chain could have serious ramifications far beyond the oil and gas sector.
The problem is that this complexity adds cost to the oil and gas sector, which is unwelcome at a time when investors, governments and consumers are starting to have the option to support increasingly viable alternatives.
The good news is that smart contracts, also known as tokenisation, potentially offer an opportunity to reduce complexity and bureaucracy and enhance transparency and speed across the natural resources sector. This poses an opportunity to significantly bring down costs.
Given the challenges that 2020 delivered, I’d argue that this makes tokenisation worth investigating.
Reduced complexity and bureaucracy
To put it simply, tokenisation creates the possibility of having a universal paperwork structure that is associated with an oil or gas contract. A token could be created at the point that an oil or gas deposit was proven and stay with it right the way through to the point that the processed product was delivered to the pump or plug. There are hundreds of processes that need to be completed to get from discovery to delivery, but using a tokenised smart contract on the blockchain reduces the risk that the process would be slowed down by the bureaucracy.
Applying a blockchain to oil and gas would make it far easier to both spot where wastage is happening and work out a remedy. A certain amount of waste is inevitable, but the natural resources sector is under pressure to control costs. Moving to a system that accurately tracks product and highlights opportunities to reduce waste would improve yields and combat some of the negative perceptions of the industry.
Increased speed and transparency
A tokenised platform could be set up to give permissioned access to the right people at the right point in the process. This would enable more activities to run concurrently than is currently the case, making the whole supply chain faster, more efficient and more responsive. It would also make it easier for regulators and investors to understand a project and ensure that communities were getting what they are due.
There are several ways that a tokenised approach enhances oil and gas trading in real terms.
Primarily, it would create a trustworthy primary market for issuing natural asset security tokens. This would augment the natural resources investment environment and attract sustainable private capital without adding to back-office costs. Investors of all sizes could find projects that they wanted to support and hold or trade tokens according to their investment strategies. This would help oil and gas firms have a more direct relationship with their investors and understand the best strategies to keep projects moving forwards.
Tokens would offer a more efficient natural resource trading environment, with near real-time blockchain-enabled tracking system and improved digital currency payment mechanism. Everyone involved in a process could trade contracts in a virtually live environment and different parts of the supply chain would be able to see what is available and flex their capacity as required. Given the challenges that Covid-19 created, anything that brings more flexibility into the supply chain is likely to be welcome.
It would be impossible to create a just-in-time supply chain for the oil and gas sector, but transparency of tokenising would reduce the need to have extensive asset storage in terminals, tanks, and warehouses. It would also be easier to ensure that natural resources were blended to customer specifications and ensure that deliveries were made to the right places at the right times.
Tokenising an oil or gas contract could be achieved without a significant investment in either technology or back-office processing. The blockchain already exists and could be implemented at low cost to enhance efficiency across the entire supply chain. This is why I’d suggest that this is the right time for the energy sector to embrace tokenisation.
