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Blockchain ≠ Bitcoin: Demystifying Blockchain’s Business Value in Oil and Gas

Demystifying Blockchain's Business Value

This is part 1 of a 2-part series on blockchain technology.

Blockchain was developed almost a decade ago from the need to provide a cost-effective, secure, and reliable system to conduct financial transactions for Bitcoin. For many people, blockchain is just the technology behind Bitcoin. A Google search for blockchain defines the technology as “a digital ledger in which transactions made in Bitcoin or another cryptocurrency are recorded chronologically and publicly”. However, this disruptive technology has a greater reach than Bitcoin and can alter the way industries conduct business altogether, far beyond finance.

As illustrated in the Figure 1 below, blockchain started as the backbone for Bitcoin. What has emerged is a technology that has breadth far beyond fulfilling the need for driving financial transactions. Blockchain’s real strengths lie in its ability to provide transparency, visibility, security, and reduced redundancies.

FIGURE 1: Understanding the origin of blockchain’s benefits outweigh the original need for recording financial transactions for Bitcoin

In Oil & Gas, blockchain initiatives can impact every facet of the organization, from field operations to back-office functions. Some of the advantages from these solutions include: reduced compliance costs; fewer intermediaries, leading to streamlined processes; real-time updates to operating agreements; as well as improved processes across supply chain, procurement, IT, and corporate finance functions. Blockchain enables faster and more efficient decision-making.

What is blockchain and why private blockchain works for your business?

In simple terms, blockchain is a giant ledger that automatically records every transaction, regardless of location. More specifically defined, blockchain is a shared and distributed ledger that helps record transactions and track assets across a global business network, without the need for a central data repository or intermediary.

Let us highlight the main difference in application of blockchain in a cryptocurrency, like Bitcoin, and blockchain for business operations: public blockchain (permission-less) vs. private blockchain (permissioned).

An important aspect of a cryptocurrency is that it does not need an intermediary for mediation, thus a public network provides a platform for transactions through a peer-to-peer computer network. Transactions are transparent, shared, and run by all participants. On the other hand, a private network provides the opportunity for a business to conduct transactions with known identities.

As Bitcoin is mainly used to conduct transactions amongst a wide range of anonymous users, a permission-less platform works effectively, providing the same rules for all participants. For a business, it is important to use a permissioned platform to regulate network participation, data protection, data consistency, and authorized visibility. The ability to write business rules that self-regulate the transaction recording process helps eliminate intermediaries and therefore, make the process more efficient.

What’s in it for Oil & Gas Industry?

Participants in the Oil & Gas industry track assets and execute complex contracts at extremely high volumes. Blockchain, if done right, can bring a paradigm shift in the way business transactions are recorded, executed and audited. Here are three specific use cases:

Invigorate the supply chain  Oil & Gas is a capital-intensive industry with highly specialized and expensive assets that are geographically dispersed. These factors make both inventory ownership, and accounting across business units and partners, challenging. Constant merger and acquisition activities further compound this challenge.These difficulties create analog gaps, which lead to mismanagement of inventory, as well as frequent business write-offs. A constant circle of reconciliation is required, which involves many business functions – customer service to manage the discrepancy, finance to verify and adjust transactions, operations to validate virtual and physical inventory, and so on. Blockchain has the potential to solve this challenge by allowing inventory to never be accounted twice. For each transaction, ledgers of all parties are simultaneously duplicated, reducing future need for reconciliation and providing real-time tracking of inventory. The data is never deleted from the blockchain, resulting in an impeccable audit trail. These records help ensure there is a time stamp and a responsible party for every action, along with replicated results across all functions, leading to the correct transfer of accountability.

Transact business with confidence and trust  A business transaction brings two, often mistrusting, entities together. For seamless trust to exist in continued business relationships, a third-party can be used to execute these transactions. For example, organizations often engage a financial institution for financial transactions or an audit firm for assurance and compliance.The presence of a third-party creates additional costs and friction within the process. This cycle replicates endlessly in conglomerates, leading to increased paperwork and an even greater need for compliance and financial regulation. In this situation, blockchain offers a promising solution in the form of control and visibility across its network. As a blockchain regulator, a business can control access across the business network, thus driving control of operations. Once invited to the network, each participant has visibility into every transaction through a joint operating agreement, and this visibility can be moderated based on their role within the network. For example, a financial transaction can go through with the right checks without the need for a third-party authorization, and an audit may be conducted with necessary documentation with the right level of access for an auditor.

Ensure data security  While it is important to have visibility into the day-to-day operations, and transparency for anti-corruption and compliance purposes, cybersecurity is vital to safeguard your company’s critical data and protect oneself against cyber-theft and hacking. Oil & Gas operations are highly cost-intensive and require the integration of a wide spectrum of systems and technologies. This integration leads to dependencies on systems to connect and trust each other, and can create points of failures for securing valuable data. At the same time, other emerging technologies like Internet of Things, although highly effective for business growth, can be susceptible to attacks and threats when there is a single source of data. Blockchain provides anonymization, which safeguards the identities of all network participants and ensures that access to the network is limited only to the participants, removing reliance on third parties. Thus, the data is reliable and consistent across the network. Solutions built on blockchain can provide security to this valuable data in real time and can distribute it in parts across multiple locations, removing threats to single sources of data. Most fraud and data security breaches are related to human interaction or data exchange points between systems. By removing all human interaction and having one distributed and shared ledger, the data in these environments are inherently safer, more secure, and auditable.

These are only a few use cases of blockchain for Oil & Gas. Stay tuned for the next part of this blog series where we will dive deeper into ways blockchain is enabling digital transformation and highlight specific use cases for the Retail Industry.

By Ravi Heerwani, Consultant, Enaxis Consulting

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