articles Corporate /en/research-insights/articles/oil-sector-keeps-open-mind-on-blockchain content
Log in to other products

Login to Market Intelligence Platform


Looking for more?

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *

* Required

In this list

Oil Sector Keeps Open Mind on Blockchain

Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Factbox Energy demand impacts to linger in wake of Hurricane Michael

Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Fast-moving Michael destroys gas demand across US Southeast

Oil Sector Keeps Open Mind on Blockchain

Blockchain, the distributed ledger technology which was possibly the hottest tech topic in the energy sector in 2017, has still to prove itself as more than hype in the oil sector.

While electricity companies and grid operators see huge potential in digitalization in general and blockchain in particular to make power stations and grids more efficient, for example, the oil sector is keeping an open mind.

“We are not abandoning technology efficiencies we’re developing on current platforms,” BP’s head of strategy for IST, Mike Leonard, told the S&P Global Platts Digital Commodities Summit in London in November.

“We’re seeing this as complementary…We don’t have all our eggs in blockchain, but nor do we want to avoid the topic or not take part in it,” he said. “But the more we [talk about blockchain within the company, the more] we’re finding new opportunities to explore different areas of our current technology, which is also exciting, so we may find this emerges for BP specifically in different ways than we expect.”

BP is testing the blockchain concept. It signed up in November to a consortium with fellow oil and gas companies Shell and Statoil, trading houses Gunvor, Koch Supply & Trading and Mercuria, plus banks ABN Amro, ING and Societe Generale, to co-develop a blockchain-based digital platform for trading energy commodities. The platform is to be designed and stress-tested by its investors, but run independently.

“This is about reliability and reducing costs. Many of our back office functions appear not to have changed since 1985. We’re after bottom line savings, but also how this can free up resource elsewhere in the business,” Leonard told the summit. The aim is to move away from cumbersome paper contracts to the authenticated transfer of electronic smart documents.

Leonard declined to speculate on when the first cargo of Forties crude was likely to be cleared through this platform, which is planned to be up and running by end-2018.

The consortium’s long-term aim is to migrate all forms of energy transaction data to the blockchain platform. The next step is to address inefficiencies in cash flow, as faster cash and clearing cycles mean more opportunities to do business.

How Blockchain Works

Blockchain emerged in 2008 as the distributed, decentralized digital ledger underpinning cryptocurrency Bitcoin, recording transactions in an immutable way.

In reality it works like this: an individual (or a machine) registers as a member of a blockchain, which can be public, like Bitcoin, or private, for example like a street of householders or a group of traders. The individual/machine receives an online wallet that can be charged up with a digital currency. The individual/machine can then transact with other members registered to the blockchain.

The blockchain’s network of registered computers continually validates the transactions, building blocks of transactions that are then permanently entered in the ledger. Nobody can change the ledger, it is immutable. It is shared with all members at all times – it is not stored in one place, there is full transparency and, if the blockchain is public, anyone on the internet can view it.

Since transactions are cleared instantaneously using the chosen digital currency, there is no settlement risk. Nor is there any paperwork or middleman fees beyond set up and running costs associated with relatively simple computing.

In a key development step for energy, automated code-based processes, known as smart contracts, can interact with and update the database. This application can be used to provide an automated transaction model with no or limited third-party intermediaries, compared with the traditional transaction model involving a provider, network operator and consumer.

Blockchain’s ability to track the flow of electrons on a distributed grid, for example, enables their secure and transparent trade between consumers (or machines) directly. A practical example of this is European utility Innogy and startup’s prototype electric vehicle charging system, Share&Charge, which enables registered users to make micropayments via a smartphone app.

The shipping industry has also started finding ways to make use of the technology to simplify its processes. Container line Maersk, one of the world’s largest shipping companies, is in the process of developing a blockchain initiative with IBM to allow a better flow of information through its systems.

In research from 2014 the companies identified more than 30 personnel and companies— and more than 200 interactions between them—involved in a typical shipment of avocados from Kenya to the Netherlands. Maersk and IBM’s system is designed to guarantee the validity of each transaction while maintaining their privacy.

In short, for energy, for shipping, for agriculture, for all transactional proceedings that lend themselves to digitalization, the technology offers huge potential to cut costs, reduce security risk and eliminate error. And, in the energy sector, the first prototypes are underway—in decentralized networks and in commodity trading.

Trading Projects

Three of BP’s blockchain consortium partners, ING, Societe Generale and Mercuria, carried out a test of a live oil trade between parties with Mercuria at the start of 2017. The successful experiment involved a shipment of African crude, which was sold three times on its way to China, and included traders, banks as well as an agent and an inspector, all performing their role in the transaction directly on the prototype Easy Trading Connect blockchain platform, Mercuria said in February.

And in March, banking group Natixis, IBM and Trafigura pioneered the first blockchain trade for US crude oil. They used a distributed ledger platform, built on the Linux Foundation open source Hyperledger Fabric, which they said was designed to be adopted at scale across the entire crude oil trading industry.

European electricity and gas companies have also tested pilot blockchain trading projects. In June, BP and Italy’s Eni completed a pilot program for processing European gas trades using blockchain technology developed by Canada’s BTL Group. This focused on gas trade confirmations, and the plan is to look at expanding it to other back office processes, including netting and generating invoices.

In May, over 20 European energy trading firms joined forces to develop peer-to-peer blockchain-based trading using Hamburg-based IT company Ponton’s Enerchain framework. In October, E.ON and Enel completed a first power trade using the system.

Agriculture had an even earlier pilot, with a wheat trade in Australia settled through blockchain back in December 2016. The deal was “auto-executed” by a smart contract run by commodity management platform AgriDigital, which also has high hopes of expanding into other commodities.

Critical Mass Challenge

Achieving critical mass is a common theme in all the pilot platform developers, including the energy commodity trading consortium involving BP, Shell and Statoil, which plans to open its platform to all commodities eventually, pending approvals. “It only works if there is widespread adoption,” consortium spokeswoman Carolien van der Giessen told S&P Global Platts in November.

Hugh Halford-Thompson, CIO of the BTL Group working with BP, Eni and others on the platform to automate gas trading processes, agrees. “The challenge is getting a large enough synchronized group to shift volume onto a new settlement standard,” he told the Platts summit. “You need that critical mass to…drive the rest of the industry to move across.”

If commodities traders do move en masse to decentralized blockchain platforms, that could reduce liquidity on established, traditional platforms – like exchanges.

European energy exchange trade body Europex has warned that decentralized platforms are “dangerous” for wholesale electricity and gas markets, for example, arguing that lots of small set-ups could fragment and distort price signals. This would go against the prevailing EU policy to promote strong wholesale price signals, for example.

For now, though, regulators are more interested than concerned.

Blockchain’s impact on traded markets is still too small to need specific rules, according to EU financial authority ESMA, for example. Regulators are following developments, and the approach is pragmatic. “If you see a problem with the regulatory framework, tell your local regulator,” Clemens Wagner-Bruschek from Austrian energy regulator E-Control told the Platts summit.

Regulators are also interested in how blockchain can streamline regulatory requirements, such as post-trade reporting, but data standards would have to be harmonized first to get real benefits. Meanwhile, the EU’s executive body, the European Commission, is spending €500,000 to set up an EU Blockchain Observatory and Forum to monitor and assess blockchain developments across the economy, and whether any EU-level response is needed.

All of which means blockchain will continue to be high profile in 2018, but the critical mass needed for it to transform energy trading, and potentially regulation, is likely to take several years more—if it comes at all.

Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Communications providers are working to restore services in areas impacted by Hurricane Michael, but storm debris, power outages and significant fiber damage are hindering progress in those counties most devastated by the storm.

As of Oct. 14, a number of counties along the Florida Panhandle had more than half of their cell sites down, including Bay County — home of Panama City and Mexico Beach, described as "ground zero" of the storm by U.S. Federal Emergency Management Agency administrator Brock Long — where 66.1% of cell sites were down. Similarly, neighboring Gulf County had 69.6% of cell sites down, according to data from the U.S. Federal Communications Commission.

Based on the amount of damage in the area and ongoing power outages, it could be weeks before services are restored. Long said Oct. 12 that after search and rescue, restoring communications in impacted counties is among FEMA's top priorities.

"You have to be able to communicate to appropriately respond and we are trying to do everything we can to get the private sector vendors, the Verizon [Communications Inc.]'s of the world, to get in to try to get their systems back up and running," he said.

Long added, however, that the process is not easy. "There was a tremendous amount of debris. When you look at the damage in Mexico Beach, that is where the ocean rose potentially 14 feet … and shoved buildings out of the way. When you have that type of damage, it takes time to get in and go through," he said.

Hurricane Michael made landfall Oct. 10 near Mexico Beach as a Category 4 hurricane with 155-mile-per-hour winds.

For its part, Verizon said the "vast majority" of Florida and Georgia service has been restored, with 99% of the company's network in Georgia in service and 97% of its network in Florida. But the company noted there are pockets, particularly near Panama City, where the damage is severe.

"The storm caused unprecedented damage to our fiber, which is essential for our network — including many of our temporary portable assets — to work. Our fiber crews are working around the clock to make repairs, and while they are making good progress, we still have work to do to get the fiber completely repaired," the company said Oct. 14.

Fiber is the connecting component of a network that carries data from point to point. It is necessary for Verizon's permanent and temporary cell sites to be operational. The company noted that while it has multiple fiber paths to carry data, "The severity and intensity of the storm caused damage to all duplicate routes in the Panama City and Panama City Beach area."

In terms of wireline services, the FCC said 291,300 subscribers remain out of service as of Oct. 14, including 205,643 subscribers in Florida. The figures were down from a day earlier, when a total of 337,223 subscribers were without service, including 233,843 in Florida.

The top residential video and broadband provider in Bay County is Comcast Corp., according to MediaCensus data from Kagan, a research group within S&P Global Market Intelligence. Comcast, the largest cable operator in the U.S., said in an Oct. 12 statement that it is working to get Xfinity services back online.

"As power returns … and it becomes safe for our technicians and restoration crews, we will work to repair any damages affecting our network," the company said.

As of Oct. 15, more than 162,000 customers in Florida remained without power, including all 27,275 customers served by Gulf Coast Electric Cooperative. The cooperative said in an Oct. 12 Facebook Inc. post that its distribution system "suffered catastrophic damage"

In Gulf County, the top residential video provider is AT&T Inc.'s satellite video service DIRECTV, according to MediaCensus data, while the top residential broadband provider is Mediacom Communications Corp., the fifth-largest cable operator in the U.S.

Mediacom said Oct. 14 that its recovery efforts are underway but its network in Florida has 14 miles of severely damaged fiber near Walton County, as well as 25 miles of damaged fiber east of Panama City that is obstructing video transmission from Gulf County to Walton County.

"Our current priority remains focusing on repairing damage to our high-speed data transport network and main transmission facilities and repairing downed lines where we have access to the area. We have outages from widespread loss of commercial power along with downed lines, and structural damage throughout our systems," the cable operator said.

Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Houston, Oct. 11 2018 — Hurricane Michael made landfall at the Florida panhandle as a Category 4 hurricane Wednesday with 155 mph winds, quickly destroying demand for power, natural gas and refined oil products. Shut-in oil production rose modestly from Tuesday to over 700,000 b/d, but the storm has stayed east of much of the region's production, which means supply should be back online quickly.

Meanwhile, the severity of the storm has surprised to the upside, which could a mean longer lasting and more severe impact on demand for power, natural gas, refined products and ultimately crude oil.

"We expect the impact on refined products demand to be below that of previous hurricanes in the Gulf Coast such as Harvey in 2017, as the region impacted by Michael has lower population density than Houston ... Nevertheless, the impacts are favoring the high side of our estimates given the sheer severity of the storm," said Claudio Giamberti, Head of Demand and Refining at S&P Global Platts Analytics.

As of 7 pm EDT, the eye of Michael was moving over southwestern Georgia with maximum sustained winds still at 100 mph, according to the National Hurricane Center. The storm is expected to move northeast across the Carolinas before heading back out to sea Friday morning.