How a smart contract works in oilfield applications

One of the common questions surrounding blockchain is how it will be utilized in the supply chain. Many people assume smart contracts, transparency and quicker payments will be early uses. For Rana Basu, founder and president of Consurgo, that discussion is ongoing on a daily basis.

“As we commercialize it, what blockchain is giving us is a way to sign off on a contract,” he told members attending the recent Blockchain in Transport Alliance (BiTA) meeting in Atlanta. “That fingerprint is the legal validity on the blockchain.”

Consurgo built an oil and gas consortium based in Geneva that includes BP, Shell, Vitol, Glencore, Mercuria, Trafigura, Koch Supply and Trading and three global banks. That consortium joined forces to work on reducing friction in oil logistics. Consurgo is now working to implement emerging technologies such as blockchain into the oilfield logistics sector through an organizational readiness toolkit to enable enterprise adoption.

The company is a collection of energy trading professionals with a focus on hydrocarbon commodity trading risk management and offers solutions to do that.

Basu said that the group’s goal is to link oil producers and crude/water haulers with smart contracts and Internet of Things technology. The end game is to reduce days sales outstanding, he said, adding that smart contracts can create efficiencies through reduced manual checks and improved workflow around bills of lading, tickets and electronic documentation. Blockchain can also improve security of loads and reduce working capital costs through reduced payment times.

In the oilfield, Basu gave an example of a truck leaving the production facility with less or more product than it is supposed to have onboard. A field ticket based on a smart contract is created and checks are generated at each step so when the truck fills up, the data is inputted as to how many gallons are on the truck. The field ticket would then check the tank to ensure it is now short that same number of gallons.

“For that ticket to get made, each person must [input data],” Basu explained.  The blockchain provides the validity of the facts in the process.

Basu said there have been industry challenges to developing this process, including limited existing standards and getting buy-in from companies. Consurgo learned that the IT people were not the right ones to approach and it adjusted its approach to target CEOs. Other challenges have included developing the mode of operation (a public, private or combination blockchain); the capital cost to develop interfacing systems and control processes; legal concerns including what jurisdictions support blockchain and developing master agreements; and security of blockchain key management.

There are also a number of operational challenges Consurgo has run into. These include privacy and confidentiality of data; partial and temporal visibility and invisibility with consensus; the ability to bring transactions “home” to internal systems; legal liabilities resulting from a mismatch between the intent of code and the legal intent; management of keys; pattern recognition and preventive risk management; and how to revert to manual processes in the case of device malfunction or a stolen ID or key.

Assuming both the operation and industry challenges can be met, Basu said the opportunity exists to combine Internet of Things and smart contracts into a productive tool for the supply chain. He identified several benefits of such a union:

• Reduce order to cash time cycles
• Improve driver and truck utilization
• Improve compliance with EPA and DOT regulations
• Improve safety, dispatch and scheduling
• Provide full accountability
• Reduce disputes and reconciliation efforts
• Create new business models and value-chain partnerships

While Basu is working to develop this model for the oilfields industry, it would apply, with some modifications, to any segment of the industry.

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