In the world of growing oil demand, lower oil prices, and increased digitalization, oil traders and oil firms continue to push for efficiency gains—the favorite buzzword during the downturn. Energy firms have slashed costs in the upstream and continue to seek cost cuts wherever and whenever possible, while commodity traders look for higher profit margins in the constantly growing seaborne oil trade that is worth billions of dollars a day.
The digital revolution and the drive for increased efficiency have pushed big oil buyers, sellers, and traders to start adopting new technologies in the business that has been very much dependent—for more than a hundred years—on paper bills of lading and the actual exchange of physical paper documents that travel around the world with the oil tankers.
Now, some of the biggest oil firms, oil trading houses, and banks have started using blockchain—the technology best known for the system underpinning cryptocurrencies such as Bitcoin.
The seaborne oil trade is worth US$2.7 billion per day, and oil tankers supply nearly half of the oil that the world consumes each day, according to Bloomberg estimates. The paper bill of lading that verifies ownership of the commodity has been and still is the most important part of the oil trade transaction.
Now banks, oil traders, and energy companies are embracing digitalization and have started using blockchain to verify ownership, which promises to boost profit margins by making the transactions faster.
Blockchain enables direct processing and recording of transactions between parties online, without the need to have a third party as an intermediary, such as a power supplier, a bank, or a public authority. Each party in a blockchain has access to the complete history and database, and no single party controls the data. The blockchain—a shared online ledger—cuts hours from document verification and retrieval, boosting efficiency and saving on costs.
Some of the biggest oil firms, traders, and banks are creating a blockchain-based digital platform to modernize post-transaction management of physical energy commodities trading.
Oil majors BP, Shell, and Statoil, trading houses Gunvor, Koch Supply & Trading, and Mercuria, as well as banks ABN Amro, ING, and Societe Generale, want to use the platform “to move away from traditional and cumbersome paper contracts and operations documentation to secure, smart contracts and authenticated transfers of electronic documents. The platform aims to reduce administrative operational risks and costs of physical energy trading, and improve the reliability and efficiency of back-end trading operations for all supply chain users, while also opening the door to innovative funding and financing solutions.”
Currently, “The way we do our title transfers and post trade execution is very heavy on paperwork,” Alistair Cross, global head of operations at Mercuria Energy Group, told Bloomberg. “And the paperwork hasn’t really evolved over the last couple of hundred years.”
While participants say that blockchain oil trade will bring more efficiency and security as well as higher profit margins, some of the costs that would be saved will come with fewer labor costs, because the first to go could be back-office employees who are verifying and tracing paper documents in those transactions.
“Clearly, these jobs will be affected,” Anthony van Vliet, ING Groep’s global head of trade commodity finance, told Bloomberg. “If ultimately there are savings, it will mean you could do the same work with less people,” van Vliet noted.
Commodity traders and banks continue to test the possibilities of using blockchain in their trades. After the oil trade, blockchain made its debut in the agricultural commodity trade last month in a first blockchain-enabled transaction in which Louis Dreyfus Company sold a soybean cargo that was going from the U.S. to China, with the help of banks ING, Societe Generale, and ABN Amro.
The efficiency gain (and ultimately, the lower costs) is the underlying theme in all those technology-enabled oil and other commodity trades.
Yet, hurdles remain on the road toward en-masse adoption of blockchain technology in the oil trade. The initial investment that companies need to pour into the technology, or concern over putting oil tanker trade data online are some of those obstacles. The legal status of the e-bill of lading that is not yet viewed the same as the physical paper bill of lading is another hurdle.
“There’s no case law,” ING’s van Vliet told Bloomberg.
Despite current barriers, oil traders and oil firms look to boost profits and lower costs, and are venturing into another branch of the Fourth Industrial Revolution to transform the century-old oil trade underpinned by physical paper.
By Tsvetana Paraskova for Oilprice.com