Application of Blockchain Technology to the Energy Industry

February 13, 2018

Perhaps no topic has caused as much excitement in recent months as the various and widespread applications of blockchain technology, most commonly distilled for popular consumption in the form of bitcoin and similar digital currencies. And although there has been an ongoing and hearty debate over the merits of bitcoin and other specific applications of the blockchain technology, everyone seems to be in agreement regarding the revolutionary potential and even inevitability of the basic technology, which promises significant improvements in efficiency, privacy, and security across almost every sector and industry.[1]

As a very basic overview and introduction to the technology, blockchain is a distributed ledger or database.[2] Instead of being in a central location, data is distributed across various nodes or computers as part of a peer-to-peer network.[3] Information in the form of transactions is added in an open, distributed chain, making it both more secure and more transparent.[4] This decentralized process also reduces expensive reliance on intermediaries that is typical of more traditional transaction processes.[5]

As indicated by the ubiquity of bitcoin, digital currencies are the most familiar applications of blockchain and the ones receiving the bulk of media coverage. Blockchain’s impact, however, promises to reach well beyond finance and banking, touching even the energy and utilities industries, though that impact has been fairly limited and slow to develop thus far.[6] The advantages to these industries of adopting blockchain technology are substantial. First, blockchain would provide greater transparency in record-keeping, which would assist in a variety of regulatory-compliance matters, including the Dodd-Frank Act, the Extractive Industries Transparency Initiative, and European Union directives.[7] Second, the distributed nature of blockchain also enhances the security of the data being transferred, especially from the critical yet vulnerable and more widely dispersed smart sensors, because there is no centralized location for malicious parties to target, and such parties would have to compromise a far greater number of sites.[8] Third, blockchain allows for the creation of aptly named “smart” contracts, which automate a variety of processes associated with typical energy transactions.[9]

A side effect of these changes is that overall efficiency is significantly improved, in terms of both labor and time, as otherwise labor-intensive and time-intensive processes are automated, while duplicative safeguards can sometimes be eliminated or minimized.[10] As an example, consider the typical bilateral commodity transaction, which involves verification, compliance monitoring, and numerous validations as well as the use of a variety of brokers, pricing agents, and other third parties; and these transactions can take in excess of two months from the date of delivery to settle.[11] With blockchain, everything is transferred to a peer-to-peer network, eliminating the expense of third parties and allowing the transaction to be completed much more quickly and with fewer exchanges required of the parties, while security is enhanced by the transparency and extensive documentation inherent in the technology.[12] Of course, this elimination of transaction costs allows for a more efficient allocation of resources to a company’s core operations.

Limited adoption of blockchain technology is already underway, with significant energy companies BP and Eni executing blockchain transactions in their trading operations.[13] This broader use followed a successful trial period in which a significant error was detected thanks to the distributed ledger.[14] Additionally, Mercuria, a trading house, and ING and Société Générale, both banks, tested blockchain on a trade in early 2017.[15] Looking at the longer-term horizon, Enerchain is a blockchain application designed specifically for energy trading that has already attracted interest from 30 European companies.[16]

So, while the price of bitcoin and similar so-called cryptocurrencies continue to fluctuate wildly and as their feasibility as global alternatives to national currencies continues to be met with derision or opposition from those at the center of the broader financial apparatus,[17] the underlying technology’s future is bright and secure, and this extends to the energy sector. Blockchain is here to stay, and it has found a home in the oil-and-gas industry, which should be welcome news in the face of continuing pricing challenges.

[1] See Don Tapscott, How blockchains could change the world, McKinsey (May 2016), https://www.mckinsey.com/industries/high-tech/our-insights/how-blockchains-could-change-the-world.

[2] Pierre Mawet and Michael Insogna, Unlocking the potential of blockchain in oil and gas supply chains, Accenture (Nov. 21, 2016), https://www.accenture.com/us-en/blogs/blogs-unlocking-potential-blockchain-oil-gas-supply-chains.

[3] Id.

[4] Id.

[5] Tapscott, supra note 1.

[6] Mark Koeppen, David Shrier, and Morgan Bazilian, Is Blockchain’s Future in Oil and Gas Transformative or Transient?, Deloitte, (2017), https://www2.deloitte.com/content/dam/Deloitte/us/Documents/process-and-operations/us-cons-blockchain-future-oil-gas.pdf.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Talib Dhanji, Blockchain: Where oil and gas traders dare to tread, LinkedIn (Sept. 11, 2017), https://www.linkedin.com/pulse/blockchain-where-oil-gas-traders-dare-tread-talib-dhanji?published=t.

[12] Id.

[13] BP, Eni deepen blockchain trading in European gas, Reuters, https://www.reuters.com/article/us-bp-eni-blockchain/bp-eni-deepen-blockchain-trading-in-european-gas-idUSKBN18W1N2.

[14] Id.

[15] Dhanji, supra note 11.

[16] Id.

[17] Frank Chaparro, We asked cryptocurrency experts to respond to Jamie Dimon’s bitcoin bashings — here’s what they said, Business Insider (Oct. 18, 2017, 4:24 PM) http://www.businessinsider.com/cryptocurrency-experts-on-dimons-critiques-of-bitcoin-2017-10?r=UK&IR=T.

About

Sean Doyle is a third-year law student at The University of Texas School of Law. He graduated from Washington and Lee University in 2012 with a B.A. in Economics and Politics. He will be joining Milbank, Tweed, Hadley & McCloy in New York City following graduation.