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Advantages of Blockchain technology in the Petrochemical Sector

Technology is evolving rapidly. It has changed the way in which Businesses function, develop and mutate to increase work efficiency and simplicity. One of the latest developments in technology is Blockchain. Years ago, records were stored in books, then came in computers and changed the storage techniques and now, the world has been hit by the wave of Blockchain technology that will redefine data storage and monetary transactions.

The new ecosystem of blockchain when applied to the Petrochemical sector can be a catalyst for business model and process change across the enterprise. Introducing blockchain technology to the sector and getting rid of the pre-archaic paper work will simplify the trading, data collection and transaction process in this global business field.


What is Blockchain Technology?

A Blockchain is a digitized, decentralized, public ledger used to record and store transaction data. In this electronic registry, information is stored and distributed over the network spots. This helps all the players in the blockchain to keep a record of transactions of data and money. Blockchain is regarded as the most secure form of storing data as it is practically impossible to forge any information on a chain.

Blockchain transactions are immutable. The information is added through cryptography which makes it meddle proof. All the data on any chain can be distributed but cannot be copied or deleted.

Uses of Blockchain

Blockchain technology is primarily used to verify transactions on a ledger. Initially it was only used for cryptocurrency. However now, there are various sectors making used of Blockchain technology like:

  • Finance
  • Health
  • Tourism
  • Government
  • Goods transport
  • Petrochemicals

How does it work?

A block is the ‘current’ part of a ledger which keeps a track of the transactions by every member on the chain. Countless blocks can be connected in a database in a linear and chronological order. When a new transaction or an edit to an existing transaction comes in to a blockchain, generally a majority of the nodes within a blockchain implementation must execute algorithms to evaluate and verify the history of the individual blockchain block that is proposed. If a majority of the nodes come to a consensus that the history and signature is valid, the new block of transactions is accepted into the ledger and a new block is added to the chain of transactions. If a majority does not concede to the addition or modification of the ledger entry, it is denied and not added to the chain.

This distributed consensus model is what allows blockchain to run as a distributed ledger without the need for some central, unifying authority saying what transactions are valid and (perhaps more importantly) which ones are not.1 After all the transactions are completed, a block goes in the permanent database of a blockchain. The ledger holds addresses and balances of every single transaction.

Advantages of Blockchain technology in the Petrochemical Sector
Increased transparency and time saving

Transactions are bulky in the petrochemical sector. This means that during purchase of goods, there are various steps and bills like purchase orders, shippers issue packing lists, sellers submit invoices, and banks release funds among others. All of these documents are wrapped in agreements and contracts which have to be put in order. Also tracking the sales of goods, its delivery and payment is a tedious process.

Using blockchain technology for this process would accelerate the process by cutting down the time that would otherwise be invested in validating documents. Since all the documents are time stamped, it makes it easier for taxation and other authorities to audit them. Transparency of data is at highest level here.

Alleviate fraud risks:

In complex transactions, writing and tracking all the contracts, reports, and bills is an extensive process. Chances of fraud are high too. To mitigate the risk of deceit, blockchain technology is extremely efficient. If data is filed in paper, identity of participants, locations, asset types and other details can be tweaked. But in a blockchain, any information added on a ledger by a member will be permanent and cannot be changed. In case of disputes, a solution can be achieved by simply checking through the ledger rather than having to go through all databases and contracts.

Worldwide payment:

One of the advantages of cryptocurrencies that use the blockchain technology is the low costs associated with cross-border payments. Instant transfer, cutting out the need for intermediaries and the time required for them to validate and clear the funds are other advantages of cryptocurrencies.

Oil and gas is sold in large volumes and as such entail significant value. The frequency of transactions is also high; for example, a 300,000 barrel per day oil refinery will need to source a large crude carrier every week to maintain adequate volumes, and cargos can cost as much as USD 100 million (two million barrels at USD 50 per barrel). Oil companies also need to be aware of where crude is ultimately sourced. Some exporting nations are from time-to- time under sanctions to prevent trade in this commodity.

Using a distributed ledger, digital tokens can be used to represent the asset being transacted. These tokens can be issued by a trusted authority for the needs of the companies or participating parties; for example, if oil and gas companies used a blockchain ledger to buy and sell barrels of oil, transactions could include digital tokens named Brent or WTI. These tokens would represent the underlying asset of a barrel of oil and would remain digitally attached throughout its supply chain journey. By using tokens in a blockchain, payment could be processed more quickly, paperwork such as title transfers would be eliminated, and disputed transactions could be significantly reduced.

It is important to note that the token being exchanged will be subject to gains or losses based on the strength of the underlying fiat (local) currency. If 50 WTI tokens are purchased using US dollars, the value of these tokens are exposed to fluctuations in the US dollar. As the use of cryptocurrencies increases, governments are forming positions on the taxation implications of cryptocurrencies and their exchange for fiat currency.2

Managing records:

Using blockchain technology for record management like property transactions is an excellent use of the technology. Oil and gas companies acquire rights to access land to prospect for exploration, evaluation and production of oil and gas. Multiple steps take place in the land acquisition process and it is difficult to maintain record of each and every step. Chances of fraud in this mostly paper-based records are very high. With the use of blockchain technology, frauds can be avoided.

Records on the ledger create an immutable audit trail of land movement, value, and ownership. This reduces chances of ownership disputes or lost and mismatching titles. Audit of data for the tax authorities also becomes easy as they can track land transactions and other related information in real time.

Logistics management

In the oil and gas industry, the worldwide supply chains comprise of a complex network of suppliers, shippers and contractors. The density of the network requires high level administration to minimise any chance for errors. Also, chances of manipulation of invoice values are high as companies try to avoid additional taxes for the reason that goods are sold and shipped throughout the world.

Here, blockchain technology will mitigate the risk of errors and eradicate opportunities of data alteration of invoice and receipts. Goods can be tracked from source till they reach to the customer. Invoices here are immutable and transparent. This process again helps the authorities to audit data effectively in less time.

The security of data transfer is also beneficial to individuals and companies. Public and private keys allow data to be encrypted and sent to another party, so that only that party can access the encrypted data. In the case of an invoice, party X would encrypt the invoice using party Y’s public key. Party Y can then decrypt the invoice using its own private key. Anyone in the network could see that party X has sent data to party Y, but is unable to decrypt the contents. Additionally, party X can sign the invoice with its private key before sending, and any subsequent alteration of the invoice would invalidate the signature and the fraud would be apparent.

Digital contracts

Oil and Gas contracting can be extensively lengthy and complex. Some agreements go on for years and chances of ambiguity and adjustment in the agreements are high. Here, smart contracts can be used as they are written in code that remove ambiguity of terms and reduces interpretation time for lawyers. Once the criteria of the contract are fulfilled like ownership or payment, the process takes place automatically.

A smart contract can be amended if required and all the versions of the contract will be maintained to back and check. After completion, a final version is saved. Smart contracts saved on a ledger are transparent as all the steps are saved; the data cannot be deleted and is open to all members on the blockchain. This helps to save time and cost of interpreting records and auditing them.

Joint ventures are common in the oil and gas industry and generally require a suite of complex agreements (for example, relating to the sharing of costs or revenues), which could be implemented as smart contracts. Most contracts contain audit clauses giving the parties the right to audit each other to make sure that all parties are complying with the contract. Introducing a blockchain ledger to record joint venture transactions and using smart contracts to define, negotiate, and execute the contractual conditions will provide all involved parties, including the tax authorities, with transparency and consensus on what has occurred.

single audit trail, agreed upon by all participants, will significantly reduce the effort needed to ensure timely tax compliance and reporting, as well as the effort needed by the tax authorities to understand tax positions. The use of smart contracts for transfer pricing profit allocation is another area of potential for simplification, increased transparency, and cost reduction.

Petrochemical companies using Blockchain technology

While the Blockchain technology has already taken over in the banking sector, the Petrochemical industry is catching up with its benefits too. The nature of blockchain technology makes it ideal for any kind of records management activity, including land transactions, sales of oil and gas, service contracts, sourcing contracts that often are complex and multi-jurisdictional, or joint ventures. Since all transactions are managed on a blockchain - which are, by definition, chained together and immutable - the management of a specific operation is verifiable and protective for all involved.

Exploration and Production- Upstream
In the upstream value chain of the oil industry, the blockchain technology is useful in areas related to:
-Design and construction of wells and facilities, especially in the sub processes of well drilling and drilling optimisation areas.

-Tracking equipment history, both maintenance history as well as the history of the equipment's operating conditions

Refinery and Petrochemicals- Downstream
In downstream, most of the work revolves around petrochemical operations and in product and distribution space. The blockchain technology is useful in areas related to:
-Exchange of products: from primary distribution hub to outlets

-Demurrage and claims management

-Smart contracts adoption

Petroteq Energy Inc.

Petroteq Energy Inc. is a Canadian-registered holding company engaged in the development and implementation of its proprietary environmentally friendly heavy oil processing and extraction technologies. The Company is developing through PetroBloq an advanced blockchain solution for the energy industry, with a goal of optimizing petrochemical industry workflow processes.

The company’s innovative PetroBLOQ blockchain platform is a pioneer development in the oil and gas industry, aiming to take the shared economy concept one step further by making a number of industry intermediaries redundant and, consequently, reducing the cost of transactions in supply chain management

Petroteq Energy and First Bitcoin Capital Corp. announced a co-development agreement to create a new supply chain management platform based on blockchain technology that is specifically geared for the oil and gas industry. As part of the agreement, the two companies will share industry experience and financial and technological resources with the intention of developing and operating an enterprise-grade, blockchain-based platform that will enable oil and gas companies globally to conduct transactions.

India and Kazakhstan have discussed deepening cooperation in oil and gas sector. ONGC Videsh Ltd owns a 25 per cent stake in the Satpayev oilfield in the Caspian Sea. The expansion of INSTC by linking it to the Kazakhstan-Turkmenistan-Iran rail link will boost trade between the countries.

Taking the agreement further, First Bitcoin Capital Corp has launched "Petroleum" coin, designed to become a commodity-based utility token employing the Ethereum ERC20 BlockChain protocols with trading symbol "OIL" in order to provide a liquidity and management solution to global petroleum industry participants.

Petroteq also has an agreement with Pemex, the Mexican state-owned petroleum company and one of the world’s top petroleum producers. With over 100,000 employees and extensive vertically integrated operations, Pemex is optimistic that it can benefit from the adoption and integration of a blockchain technology platform to efficiently manage and implement the chain of supply of oil and gas. Petroteq has entered into an agreement with Grupo Pelge, a Mexican corporation, and Pemex’s chosen international liaison, to represent Petroteq’s interests in Latin America. As a result, Pemex has invited Petroteq to register as a service provider, through the Pemex management portal run by Achilles Information, one of the world’s leading global supply chain management companies. Through the Achilles portal, which manages service providers for over a 100 major buyers and over 10,000 suppliers, PetroBLOQ aims to have the ability to offer Pemex and other companies in the oil and gas industry the use of a supply-chain system, once it is fully developed.

Sinochem

In December 2017, Sinochem Group's Internet Group led by SBU of Energy successfully completed the country’s first simulated transaction of blockchain crude oil import business from the Middle East. This is a practical step for the blockchain technology to be applied in China's energy and petrochemical industry.

The data analysis of the effect of this simulated transaction shows that, the two major supports of the application of this technology –the digital bills of lading and the smart contracts, can significantly enhance the execution efficiency of crude oil transactions, optimizing 20% -30% financing costs.

The blockchain technology is characterized by transparency, efficiency, safety and stability. The standardization and platformization of the blockchain technology enabled trade in China's petrochemical industry in the future will help improve the transparency of the transaction business in China's petrochemical industry and enhance the overall risk management level of the industry.

BASF

BASF embarked on a digital transformation journey in 2015 and in December 2017, it entered into a strategic partnership with Dutch start-up company Ahrma Holding B.V. to jointly approach the growing market for smart logistic solutions. With an investment of €5 million in Ahrma shares, BASF is taking an important step towards a more transparent, reliable and efficient supply chain ecosystem.

Ahrma offers a complete, rentable supply chain solution consisting of a pallet coated with BASF’s polyurethane (PU) spray system Elastocoat® C and equipped with an active wireless transponder. Ahrma also offers its transponder as a stand-alone technology for retro-fitting existing assets or entirely new application areas.

First pilot applications of Ahrma’s smart pallet at BASF customers have proven the advantages of the system. The technology provided users complete insights on the position and movement of shipped goods, temperature fluctuations, load state and any possible impact or dropping. Such transparency was then used to improve processes, reduce waste and save costs. But BASF and Ahrma don’t want to stop here. Together, they want to further develop Ahrma’s offering by bringing in complementary strengths of both partners spanning from internal use cases to supporting the enrichment of the technology.

BP, Eni and Wien Energie

In June 2017, BTL announced Successful completion of European energy trading pilot with BP, Eni Trading & Shipping and Wien Energie

The 12 week pilot involved building out an energy trading confirmation solution on BTL’s Interbit platform, which was successful in all 8 test scenarios.

The pilot proved that Interbit can streamline many trading and back office processes across the energy trade lifecycle such as confirmations, actualisations, invoice generation, settlement, audit, reporting and regulatory compliance, allowing enterprises to significantly reduce risk, costs and the threat of cyber-attack, as well as increasing their trading opportunities

BHP Billiton

BHP Billiton revealed that it will use blockchain to record movements of wellbore rock and fluid samples and better secure the real-time data that is generated during delivery. According to BHP geophysicist R Tyler Smith, the new system will enable benefits for its internal efficiency while allowing it to work more effectively with partners.

Smith explained that BHP relies on vendors at nearly every stage in the mining process, contracting with geologists and shipping companies to collect samples and conduct analyses that drive business decisions that occur with parties distributed across continents.

While introducing a new technology to an existing operation may seem risky, Smith said he's confident in the user experience the app will provide.

More broadly, Smith noted that the UK and Australia-based mining firm is distributed globally, and that because of this, he foresees more ways that its internal entities could use blockchain for more enhanced data sharing.

In addition working with ethereum, BHP is also running its own nodes on the InterPlanetary File System (IPFS), a peer-to-peer file sharing protocol that is increasingly being used in conjunction with blockchain systems.

BHP's solution envisions how its existing processes could be replicated on a blockchain as a way to prove benefits of the technology.

Smith said that the use case proves blockchain solutions can achieve decentralized file storage, multi-party data acquisition and immutability, all aspects that he believes will enhance the supply chain.

Under the hood, the blockchain won't be moving between addresses, but rather changing its state, updating data fields by logging in with a standard username and password. While certain elements of the system are the same, he said that overall the platform provides new efficiencies.

Royal Dutch Shell, BP, Statoil- A consortium

In late 2017, a consortium including energy companies BP and Royal Dutch Shell signed to develop a blockchain-based digital platform for energy commodities trading expected to start by end-2018. Other members of the consortium include Norwegian oil firm Statoil, trading houses Gunvor, Koch Supply & Trading, and Mercuria, and banks ABN Amro, ING and Societe Generale.

PDVSA

Petróleos de Venezuela, S.A. (PDVSA) and its subsidiaries is a corporation owned by the Bolivarian Republic of Venezuela and subordinated to the Venezuelan state. PDVSA is strongly committed to the ultimate owner of our oil resources – the Venezuelan people.

The Government of Venezuela formally launched oil-backed cryptocurrency to heave itself out of economic crisis. The world’s first state-backed digital currency called the Petro was on private pre-sale with 38.4 million units on its ledgers.

President Nicolás Maduro, together with Vice President, Tareck El Aissami, announced that in only two days of pre-sale of the Petro, the Venezuelan cryptocurrency, negotiation offers exceed one billion dollars. So far, there are 292,000 purchase intention offers for the Petro, of which 36% were made in dollars, 15% in euros, 18% Ethereum, and 31% in Bitcoin, he said.

He also announced that 133,665 people from different parts of the world interested in buying Petros, have already been contacted, and 950,000 users have visited the official website www.elpetro.gob.ve to learn about the cryptocurrency. "It is a positive monetary, political, psychological, economic phenomenon on the path of the new economy that is being built by diversifying the sources of wealth”, he said.

The cryptocurrency will give the Venezuelan state access to purchases. "We have just closed a negotiation for 350 million dollars exchanged in Petros, to buy supplies for the Venezuelan industry. This is what we’ll do so that investments return to normal and the country achieves the rate of expansion and growth that we need”, he said. Vice President El Aissami said that it is a strong instrument for international trading because customers will also be able to pay in Petros. "That gives our cryptocurrency an important exchange value. Suppliers are eager to receive part of their payment in Petros”, he said.

Countries that bid for the purchase and exchange include: Colombia, Brazil, Japan, China, Palestine, Turkey, Singapore, Qatar, Spain, and St. Vincent and the Grenadines. Youth and communal farms, savings banks will be set up for the mining of other cryptocurrencies, having as a base the Petro, a Venezuelan cryptocurrency backed by 5 billion barrels of certified oil. This measure is part of the Bolivarian Economic Agenda to boost Venezuela’s development.10 Venezuela has the only cryptocurrency in the world launched with the backing of the certified resources of the Orinoco Oil Belt, the largest oil reservoir in the world rescued by Commander Hugo Chávez.

Conclusion

The Petrochemical industry has to evolve with evolving technology. Blockchain technology is surely catching up in this industry as well. Major oil companies are also considering the use of blockchain technology in their business.

To sum up, the benefits of Blockchain technology are:

  • Transparency and Compliance: Blockchain, by design, should enable greater transparency and efficiency. Sharing digital blockchain information in joint-operating agreements could reduce, if not eliminate, the need for reconciliations between companies and for data hubs controlled by third parties. This could completely disrupt the current processes for balloting partners on new projects, performing joint interest billing, and reporting production revenue.
  • Smart Contracts: The sheer size and volume of contracts and transactions necessary to execute capital projects in oil and gas have historically caused significant reconciliation and tracking issues among contractors, subcontractors, and suppliers. They also pose significant challenges in managing logistics for supplies, tracking costs, and deploying inventory. Using blockchain, however, companies could generate cascading purchase orders, change orders, receipts, and other trade-related documentation and data on inventory by following specific codified rules. Drafting agreements that afford new tracking, bookkeeping, and automation methodologies could create a more efficient supply chain, improve capital project spend analytics, and simplify contractual obligations. Simply put, this potentially game-changing technology will provide knowledge of who gets paid how much, as well as insight into who along the chain is performing as explicitly mandated by agreements.
  • Trading and Third-party Impacts: Blockchain technologies are beginning to disrupt and open energy trading markets. Boundaries between asset classes could blur as cash, energy products, and other commodities become digital assets that trade interoperably. Blockchain-enabled applications can also address issues such as reduced brokers' fees; reducing fraud, error and otherwise compromised transactions; and limiting credit risk and transaction capital requirements. By trading physical commodities on a blockchain solution, commodity traders could benefit from increased speed of exchange, improved availability of data, and enhanced reliability and auditability as records are verified in near real-time. Ultimately, this could result in minimizing transaction backlogs and overall costs.
In the oil and gas industry with its global reach, complexity, and dizzying array of national regulations and restrictions, simplifying and improving the paperwork and processes of global product movement is a high priority. With a compelling value proposition, many Petrochemical companies may look to explore, invest in, and collaborate with partners on developing blockchain initiatives.12

Disclaimer

The aim of this report is to provide information about advantages of blockchain technology on the Petrochemical sector. All information presented in the report is for informational use only. The information provided has been gathered from various sources believed to be providing correct information and we have taken due care and caution in compilation of data for this report. This material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and that it should be relied upon, as such Polymerupdate does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.

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Researched and Created by : Krina Shah
Guided by : Hetal Yagnik
Email hetal.yagnik@polymerupdate.com
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