Revolutionizing the Oil & Gas industry through Blockchain-Based Bill of Lading
Oil tankers carry more than a million barrels of crude oil every day, and it is essential to establish ownership of the natural resource in order to ensure the containers can be traded. This is crucial, since the daily sale of crude oil worth USD 2.7 billion relies on the attestation of ownership in an ocean-going tanker market supplying almost half of the oil consumed globally. Furthermore, in the past, given the predictability of business cycles, competent management teams could navigate industry challenges and design supply chain strategies focused on cost reduction.
However, in recent times the challenges have become more complex, owing to increased fluctuations in demand and supply, volatile geopolitical climates, and varying government regulations. The growing industry requirement for improved efficiency, greater transparency, and cost savings are driving oil companies to seek technology solutions that can help them leapfrog these challenges.
Equipped with distributed ledger technology and underlying features such as immutability, blockchain has the capability to address many of the existing concerns. At present, stakeholders of oil companies such as producers, suppliers, contractors, subcontractors, refiners, and retailers are all attempting to keep up with the real-time movement of crude oil. However, “the way we do our title transfers and post-trade execution is very heavy on paperwork,” says Alistair Cross, Global Head of Operations, Mercuria Energy. “And the paperwork has not really evolved over the last couple of hundred years.” Blockchain can simplify workflows within oil and gas enterprises, improving operational efficiency in terms of cost, time, and processes.
Understanding Current Processes
Currently, the delivery of goods and the transfer of ownership is done manually through a document called the Bill of Lading. Here, the carrier issues a Bill of Lading and shares the same with the seller. Once the buyer transfers money to the seller, the Bill of Lading is then sent to the bank of the buyer. The bank verifies the document and sends it back to the buyer. The entire process lasts for about five to 10 days for each Bill of Lading, resulting in substantial expenses being incurred towards express courier services. Moreover, the document is susceptible to numerous risks including tampering and misplacement in transit, which can have serious repercussions for the enterprise.
The Blockchain Advantage
Leveraging distributed transaction-ledger databases shared across traditional boundaries, blockchain delivers a ‘single source of truth’ enabling the seamless flow of updated information. The technology also facilitates instant transactions, with improved visibility for stakeholders to track transactions in real time. Once the carrier issues the Bill of Lading and uploads it on the blockchain network, exporters, importers, as well as associated banks and insurers, will be able to view the status instantly. When the importer makes a payment, the exporter digitally signs the transfer of ownership, which generates a real-time notification to the importer. In addition, cumbersome paperwork can be avoided, leading to faster banking and insurance, along with enhanced transparency.
Given the immense potential in this area, major global oil companies, commodity traders, and lenders have collaborated to create a blockchain platform for physical settlement of oil trades. The consortium of organizations tested a new system which tracked the sale of a tanker of crude oil that was sold three times prior to shipment to China National Chemical, and the verification of transactions took only 25 minutes instead of the usual three hours. Speaking on blockchain, Mercuria stated that it will “allow traders and everyone within an energy firm or within a bank to spend more time on the work that really matters”. ING’s Van Vliet pointed out that these use cases are just some of the potential applications that the blockchain could have on the oil and gas industry. “It is important that they be aware of these innovations to understand the true potential this sector can achieve.”
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