June 2018 Exclusive Story

Disruptive Technology

Blockchain Poised To Transform Industry Transactions

By Kevin Schmidt

HOUSTON–The changes in technology have been amazing, even considering only the past two years. Where vendor discussions in information technology departments used to focus on hardware-related aspects of speed, storage capacity, availability and scalability, the advance of cloud-based solutions seems to have changed the subject altogether. Now oil and gas company IT managers are focusing as much on addressing “disruptive technologies” such as artificial intelligence and machine learning, the Internet of Things, and of course, blockchain technology.

Blockchain is keeping Internet search engines busy with users trying to understand what the hype is all about. Apart from being the focal point of discussion everywhere from Internet forums to the World Economic Forum, what is blockchain and what could it mean to business transactions in an oil and gas industry that has followed a time-honored tradition of paper ticketing and invoicing?

In simple terms, a blockchain is an append-only decentralized ledger that uses cryptography to facilitate digital transactions. Each transaction is a “block,” and once completed, a block becomes part of the chain. New blocks of transaction records can be added to the chain, but information in previous blocks in the chain cannot be edited or changed.

Blockchain technology is most notoriously the not-so-secret sauce enabling Bitcoin and other digital currencies. Yet the reach of the technology–which Bitcoin uses to initiate, track, distribute, secure and encrypt transaction histories into a blockchain of chronological data related to and approved by all network parties to a transaction–extends far beyond the world of cryptocurrency.

Blockchain promises many things for trusted transactions. It is important to note that not all “transactions” are related to monetary payments. A transaction can be any type of information, and trusted transactions are all over the oil and gas industry. Think for a moment of a quick five beneficiaries and it is easy to see that there are many places where this technology could at least help business processes improve, if not overwhelmingly transform them. Off the top of the head, in no order of priority, I can identify:

  • Custody transfer volume auditing;
  • Authority for expenditure approval and balloting partners;
  • Lease and contract creation and ongoing addendums;
  • Revenue pricing and transaction generation; and
  • Supply chain management.

The question becomes whether the solutions are looked at as simple program enhancements that integrate legacy systems to this technology, or if the design of the overall solution must be transformed to at least address the top 20 percent of transactions that drive 80 percent of the efforts in data management.

If the changes are viewed as bolt-on, then the result will be similar to releasing a browser-like interface for a Unix or AS400 solution in the 1990s: just more lipstick on a pig. These solutions satisfied people that real progress was being made toward a Windows® platform. As we see them still operating today, the hyperbole cast into the marketing program ultimately cost the industry that believed it.

Doing It Right

To do blockchain right, the value of the actual cost to implement the technology must be compared to its marginal functionality enhancement. Buzzwords should not drive software sales to the uninitiated. We need to be careful about the way this is implemented. One mistake could cost a lot of lost productivity, time and money. In addition, it could have the ability to weed out the weakest competitors who fail to see the wave before it comes crashing down on them.

The standard is that a blockchain solution must be able to support any integral process where the benefit outweighs the cost of ownership. Implemented correctly, it will provide a vision across the landscape of software solutions that simplifies processing by the sheer mass of the manual entry errors that will be eliminated. The encrypted, secure solution provides network approval of all participants related to a transaction, yet that is part and parcel to the natural design of a revised application.

While the features provide transparency, security and auditing to make things more productive, blockchain also enables the middleman to be cut out and provides for supplier direct-contact transactions. As designed, all involved participants in any transaction must approve changes and a single verifiable “truth” is easily visible to the entirety of the history trail relevant to every block of transactions. Again, a transaction in this discussion includes agreements, contracts, affidavits and decisions as well as financial transactions. The term transaction is expanded as a way to describe these data capture and maintenance events.

Huge advances in productivity will come as systems are built on technology that brings with it an almost complete reduction of data input errors. Volume capture and integrated Internet of things field capture readings will simplify processes and hugely increase productivity. These systems will become smart, and artificial intelligence will enable solutions that can repair, communicate and alter the physical world based on operating conditions and other defined and logically determined parameters.

Since the blockchain has complete transparency to all of the data with the pervious and next values imprinted on the transaction at any stage, its changes, approvals and values all line up chronologically so processing (if not eliminated totally) also should be swifter and less intense. Any interpretation issue will be easily addressed, audits will fly and decisions will become more meaningful because of the key data stored within a comprehensive, factual block of data.

In addition to the productivity argument, there is the added capability of dealing with the parties directly related to the supply chain, and eliminating the middleman. My research has repeatedly uncovered the statement, “Sorry, Amazon.” The ability to interact with the network of involved users beginning with a source supplier handing off to a transportation provider, which notifies and coordinates delivery to field personnel without dependence on additional middlemen, is going to make it a lot more interesting for those leveraging this technology.

Significant Rewards

For companies that use blockchain successfully, the rewards will be significant. They include dramatic improvements in supply chain costs, which will multiply through data processing efficiencies and faster financial reporting. The extra speed will show up in tasks as mundane as preparing 1099 tax reports.

This is a practical observation made for an industry that has reduced costs and streamlined processes to the point where operators have driven breakeven costs to half of what they were only a few years ago, allowing them to generate comfortable returns at lower average commodity prices. They have been able to achieve this by reducing and eliminating inefficiencies, and sharply shrinking input costs.

Software vendors in this market must take steps to follow that leadership even as they are pressed to do more for less, in less time and with greater functionality out of the box. The industry is set to benefit in a big way if the technology is implemented correctly.

It is the hidden things that can get software providers and oil and gas companies alike in trouble. What they don’t know can be far more important than what they do know. The past three and a half years have required investment and faith from software vendors. Faith in understanding the needs of their customers, while understanding the limitations of their products.

When commodity prices were at the bottom of the cycle and industry activity was slowed, software developers should have become busier than ever with speculative development, because that is when they had the time to do it. Investment in slow times helps reward customers for the ongoing support fees they have paid as an investment in their partnership with technology providers. It requires vision to see where the respective technology offerings should be for the next five to 10 years, and to see which things need attention because they cannot keep pace or have become obsolete.

Look to the words the vendors use, but depend on the specific progress to date and the benefits derived. Do not lose out on this opportunity. Do not let it become lipstick on the next pig.

Kevin Schmidt founded Enertia Software in 1985. He holds a B.B.A. in petroleum land management from the University of Texas at Austin.

This story is a complement to the print edition of The American Oil & Gas Reporter. For other great articles about exploration, drilling, completions and production, subscribe.