Seven Methods Through Which Blockchain Can Change Oil Trading

By  //  September 6, 2022

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From exploration and production to refining, transportation, distribution and finally, consumption, it can be difficult to trace the origin and route of a barrel of crude oil as it passes through various hands on its way to a consumer’s tank. However, you can check platforms for a smoother oil trading experience with the best trading techniques. Blockchain is aiming to change that in two main ways. 

First, by providing a single shared ledger on which all transactions are recorded in real-time. Second, by enabling each actor (transporter, producer) in the supply chain to interact with one another without the need for a central authority or clearinghouse present throughout the transaction process. As first envisioned by Satoshi Nakamoto, the goal of blockchain was to create a peer-to-peer, decentralized system for transacting value without the need for centralized trust. 

Applied to the global oil and gas trading ecosystem, the benefits of such a system are clear—incredibly complex transactions can be simplified and speeded up using blockchain. By reducing time delays and inter-company costs, manufacturers can quickly get more products to consumers.

In addition to its use in supply chain management, blockchain is poised to revolutionize how oil and gas companies do business. Here are seven methods through which blockchain can change oil trading. 

1. Energy Supply Chains

The journey of a barrel of oil from wellhead to land-fill is a complex technical operation involving fracking, drilling, processing and shipping—all activities under the control of different firms with distinct organizational cultures. In some cases, multiple oil companies have a stake in the same plot of land, each with its proprietary systems for managing all facets of the supply chain.

Each firm has its own corporate identity, technology and rules for doing business. Without a common platform for managers to share information, manage contracts and monitor transactions, the overall efficiency of the process is impaired.

In addition to the financial costs associated with such complexity, it also adds to the environmental footprint of oil production. Each company involved in the physical movement of oil from wellhead to refinery has its method for assessing the process’s overall safety and environmental impact—one that could be in direct conflict with another. Thanks to blockchain, all aspects of energy supply chains can be brought under one comprehensive management framework—ensuring that nothing is standing between a field or refinery and its ultimate consumer.

2. Crude Oil Contracts

In the traditional world of oil trading, physical contracts are signed between companies to lay claim to a specific volume of oil. These agreements involve significant time and expense: a company must hire merchant bankers or brokers to find buyers for their oil agents who have no interest in building long-term relationships with energy companies but instead maximize their transaction cut.

They generally charge around six per cent for shuttling barrels between interested parties. Still, the concept of smart contracts can revolutionize the way oil trading companies sign contracts and remove tampering with these contracts. 

3. An international Trading Infrastructure

Once a deal is struck, numerous forms and checks still need to be finalized before the transfer of ownership can be executed. When the actual barrels are shipped, there is still the matter of pricing. It can be particularly challenging for a less developed country that does not have more prominent oil exporters’ sophisticated international trading infrastructure. However, blockchain can make it easier and less expensive for upstream oil companies to transact with producers in less developed countries.

4. Transportation

The transportation of crude oil is one of the highest costs in the global energy supply chain. It is also one of the most challenging aspects of business responsibility that can be broken down by country, nation, port and even individual ship (loading time, time across ocean etc.), making it difficult for traders to know what they are purchasing and how much they are paying for each barrel.

But blockchain, with its inherent transparency, can provide a complete picture of the life cycle of a barrel of oil and create an avenue for reducing the cost of moving crude through the global market.

5. Payments & Trade Finance

Blockchain enables all parties in a transaction to share access to the same real-time information about shipping manifests and customs documents. This feature alone is expected to reduce transaction error by over 90%.

 In addition to reducing human error, it also provides automatic payments and helps prevent fraudulent activities such as money laundering and counterfeit goods trade. Blockchain in energy trading also facilitates immediate cross-border payments, contributing to overall efficiency across every level of energy trade.

6. Investment & Investment Funds

A significant advantage of blockchain technology is that it allows the creation of several transaction ledgers (called blocks) to be linked and stored on a peer-to-peer network. It, in turn, makes it cheaper, faster and more secure for parties to do business with one another. As such, blockchain promises to revolutionize the way all businesses buy and sell assets, making transactions more straightforward and less costly.

7. Smart Contracts

 A smart contract is similar to an ordinary contract in terms and conditions. Still, it also has several built-in features that allow execution of the agreement even if one or more participants fail to perform.

The transaction between two parties in a conventional oil trading environment would involve multiple written and verbal agreements to standardize and execute a trade; the smart contract can do it all.