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Feature: Russia gearing up for wider use of blockchain in energy sector

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Feature: Russia gearing up for wider use of blockchain in energy sector


Pilots focus on logistics; trading 2-3 years away

Could cut operational oil, gas costs by up to 5%

Other new tech could bring even bigger savings

The Russian energy sector is hoping that new legislation is adopted this year to facilitate the use of blockchain technology, which could cut producers' operational costs by 3-5%.

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While there are already some successful pilot projects involving blockchain in logistics, introducing blockchain to trading is contingent on new legislation that will cover Russia's digital economy and may be passed later this year.

Related podcast: EU, Russian regulators favor blockchain efficiency in energy projects

Security is also likely to play a role in a country that is heavily dependent on producing and exporting hydrocarbons, and assigns strategic importance to many energy projects.

The use of blockchain is not expected to be affected by sanctions, unlike some other technology used in the energy sector, due to its open-source nature, and the specifics of existing technology sanctions. Blockchain's impact may be eclipsed, however, by other innovations, such as Big Data, the internet of things and smart wells, which companies are also evaluating for cost savings.


The Russian energy ministry said there are many pilot projects introducing blockchain to Russia's energy sector in the development and discussion stage, which could have a "potentially significant" impact on optimizing oil and gas companies' costs.

Experts' estimates on potential cost savings vary, but some, including Artem Malov, senior analyst at the Skolovo business school's energy center, think they could be single-digit.

"According to various estimates, utilization of blockchain technology may reduce operational costs by 3-5%," he said.

Others say that while projects remain on a small scale, it is difficult to accurately gauge how big savings may be.

Russia's fourth largest crude producer Gazprom Neft has already tested blockchain in its logistics processes. Combining blockchain with other technology, it tracked the shipment of valves from Veliky Novgorod to Murmansk and delivery of other equipment to its Prirazlomnoye platform in the Pechora Sea, it said in February.

"The successful implementation of the pilot project confirmed the possibility of using blockchain technology in supply chain management. Gazprom Neft is considering options to further use blockchain and utilize experience already gained," the company said.

Many companies have yet to start testing blockchain in their operations, or release details of their plans, however. A spokesman for state-owned oil pipeline operator Transneft said that the company is not currently using, or planning to use, blockchain.

On the security aspect, Malov said that this remains a key concern and that before introducing blockchain companies will need to be satisfied that including blockchain-based systems, in contracts for example, are100% reliable and tested.

"We need to remember that everything that gets in the network may be attacked, therefore the risks associated with cyber-security are very serious," he added.


Blockchain's introduction to trading is likely to take longer, although the technology could have a similarly impressive impact on efficiency. Darya Kozlova, a senior consultant with Vygon Consulting, estimated that it could reduce time spent on transactions by almost a third, and increase the availability and reliability of information.

"This will reduce both costs and risks for hydrocarbons traders and create fairer quotes for each grade of oil," she said.

Russia's St Petersburg International Mercantile Exchange (Spimex) declined to comment on how and when it may look into introducing blockchain technology, but experts see it as at least two years away.

"It's possible in 2-3 years, but not before the infrastructure is ready and there is a liberalization of clearing services," Malov said.

The energy ministry added that it will depend on "how quickly Spimex launches a pilot certifying transactions based on blockchain".


Analysts do not expect Western sanctions to hinder blockchain's implementation in Russia because existing technology sanctions specifically target equipment used in offshore Arctic, deepwater and hard-to-extract oil reserves. The open-source nature of blockchain technology also protects it from potential future restrictions.

"This means that the technology is available to everyone on the planet who has access to Github and other open source sites. Therefore Western sanctions do not prevent the introduction of blockchain in Russia," Kozlova said.

There is a chance blockchain's impact will be eclipsed by other technology that may have a bigger impact on costs and efficiency in the Russian sector, however.

Kozlova said that other innovations will have a much bigger impact on the industry, naming Big Data, the internet of things, advances in 3D modelling of deposits, and digital replicas. She cited Tatneft's use of "intelligent fields" at its Romashkinskoye field as leading to cost reductions at a certain stage of almost 30%.

Rosneft and Lukoil are using digital replica technology to test well operations and enhanced oil recovery. Gazprom Neft is using this technology at its Moscow refinery, "which allows the company to monitor the condition of the plant, reduce the duration of repairs and downtime, as well as optimize costs," Kozlova said.

The energy ministry said it is also looking into other new technology.

"Currently the energy ministry is supporting a number of innovative projects: the creation of technology for the hydro-conversion of heavy oil, creation of domestic technology and high-tech equipment to develop the Bazhenov formation, digital substations and many others," the ministry said.

--Rosemary Griffin,
--Edited by Alisdair Bowles,