The strongest link. How blockchain technology is redefining the downstream supply chain
The downstream sector is like a jigsaw. Where thousands of processes are required to refine every drop of crude into its finished product, unconnected transactions are like scattered pieces, unclear, at risk of oversight, and unable to add value to the greater business picture.
The solution could lie in a digital database, set to soar to a global market size of US $7.59 billion within the next three years.
Asian Downstream Insights explores the opportunities Blockchain brings to the downstream sector, and how it will connect the sector’s next generation supply chain.
Redirecting blockchain downstream
Blockchain, a distributed ledger technology that allows data to be duplicated and shared across multiple systems in an unchangeable chain, is no newcomer to the technology world. Often used synonymously with Bitcoin – its headline-grabbing financial services trading exchange – the technology is more naturally linked with cryptocurrency than crude to chemicals. In 2016 – the height of the blockchain heyday – a US survey showed nearly 2 in 5 senior oil and gas professionals had little or no knowledge of the technology.
Since then, things have picked up. In 2019, a group of leading operators across the oil and gas market, including American giants like ExxonMobil and Chevron, agreed to form the first industry blockchain consortium. Deloitte recently revealed that 72% of oil and gas executives expect blockchain to interrupt the industry. And as the increasingly competitive market drives digital acceleration, it’s not just interrupting the downstream sector. It’s rewriting the entire business conversation.
Streamlining supply chain
One of the major challenges downstream operators face is in maintaining a streamlined supply chain. Often a network of third party suppliers, auditors and solutions providers are involved, meaning that it is complicated for an operator to maintain full visibility across all segments of its supply chain. Data may be segregated and siloed across different commercial groups, and retrieval and organization can be manual and incomplete.
Integrating this information into a digitised blockchain ledger allows these critical transactions to be shared, with enhanced transparency, security and optimised efficiency. Once a basic infrastructure is established, additional AI capabilities could be added onto the blockchain, allowing for supply chain tracking in real time. This increased visibility can lead to increased profits and reduced spend. Accenture estimates that an oil and gas operator can save more than 5% in transportation costs through the improved accuracy and streamlined operations that blockchain technology can provide.
Smart contracts
Like any business, the downstream supply chain is a series of commercial transactions, where partnerships and joint ventures are common. These transactions also often involve third party audits, and payment service providers, making them harder to monitor, and increasing the security and accuracy risk surface.
Using blockchain based Smart contracts – based on agreed criteria and written in code – will allow shared access to these financial transactions and reduce the reliance on third party audit and legal services. Any amendment of change to the contract will be registered across the chain. And when the contract’s criteria are fulfilled, payment can be automatically transferred.
The end of the downstream supply chain, where refined product meets consumer is the final hurdle in a complex downstream chain. Providers selling refined products to end consumers face billions in losses due to counterfeiting and lack of quality control. The potential financial and reputational backlash on the original oil and gas operator is significant.
Barcodes with blockchain-recorded production information will allow for greater quality control, identifying and removing affected product batches, saving companies money and increasing consumer confidence.
A more transparent digital business
As one of the most heavily regulated industries in the world, blockchain can facilitate downstream operators’ compliance with various protocols. Transactional data stored on a blockchain network provides much-needed transparency for regulatory authorities. And within the plant or refinery itself, it can help track regulated substances, such as hydrocarbons, or navigate employee payroll, certification and HSE authorisations, leading to a safer, more connected, workforce.
As the energy transition turns the spotlight on sustainability, blockchain can also help operators manage their environmental impact. Using blockchain technology, supply chain tracking can help operators ensure they are adhering to the increasing number of environmental standards and regulations.
As major operators such as Shell, BP, Total and Repsol pledge ambitious emissions reduction targets, “Innovation plays a crucial role in meeting this objective”, said Clara Rey Garcia, head of Repsol’s corporate venturing team last year, citing robotization, big data, artificial intelligence and blockchain as key technologies set to disrupt the energy sector.
Making the blockchain business case
Hype, or true agent of change? In a 2017 report, that asked if Blockchain’s future in the oil and gas is “transformative or transient”, Deloitte claimed the “jury is still out”. Three years on, and they seem to be more certain. As blockchain continues to make headway streamlining efficiency across both upstream and downstream, “this is just the tip of the iceberg for the potential of blockchain”, confirms Rebecca Hofmann, Chairman of the Oil and Gas Blockchain Consortium. It comes down to the blockchain business case, and the questions that should steer any innovation decision. Can it help generate higher revenues in a time of economic uncertainty? Can it assist in empowering and connecting the workforce? And can it nurture greater transparency? The evolution of blockchain technology has given downstream operators an affirmative answer. And may have provided a missing link in their business supply chain.
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