February 16

Why Blockchain Smart Contracts are Beneficial to Oil & Gas

Sherman Roto-Tank

February 16, 2022

Blockchain technology has enormous potential for empowering and protecting companies in the oil & gas industry in this emerging trust economy.

Long-term difficulties in identifying lease operating expenses (LOE) have long been caused by inaccurate field data and elongated payment cycles.

Managing LOE is currently done through paper processes and tickets, which takes an average of 60 to 90 days to go through various approval processes and accounting methods.

Operators lack the clarity or the ability to make insightful or informed decisions when it comes to planning, production, and spending.

Current operating models inhibit efforts to reduce production costs by incorporating inaccurate service estimates, delayed payments, and lengthy reconciliation and dispute processes.

To remain competitive in this market downturn, operators need to take a different approach.

As commodity prices fluctuate, operators need to abandon hefty overhead costs and profitable mindsets in exchange for faster payments, abolishing paper invoices and tickets, and achieving a desired competitive differentiation: real-time LOE.

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What Are Smart Contracts?

Energy industry leaders are relying on smart contracts to drive their business forward. Using automated commercial transactions, major companies as well as their supply chain customers, partners, and vendors enjoy a variety of benefits.

Smart contract networks are capable of saving time, increasing efficiencies, and providing new levels of transparency.

Blockchain technology is used to streamline payments between oil companies and their subcontractors.

In current practice, subcontractors submit invoices up to 60 days after work is completed, and payment can take an additional 120 days. During that time, oil companies and subcontractors often quarrel over work quality or quantity, creating mistrust.

When using blockchain and smart contracts, which operate like Excel spreadsheets, keeping track of work isn't a problem.

From drill pipe measurements to connection times, the system uploads data from meters and other data-collection instruments in the field.

In the blockchain system, each of the measurements becomes a "block." A processing algorithm then runs the blocks, or encrypted data, through the contract's terms. By doing so, a "hash" is created, and if all the hashes match, the oil companies automatically pay their subcontractors.

When a subcontractor can improve the connection time by one minute, for instance, and can prove it with data in the system, they will receive an automatic bonus as per their contract. That payment is now processed automatically within seconds, rather than after 180 days.

In a nutshell, it creates ledgers for the two companies. This locks down the whole system so nobody can alter it. Through blockchain, they can create a trust environment.

Information is made more digestible by this application. Any product or service that can be measured electronically, and use a payment mechanism that is being captured electronically and executed automatically can use blockchain to solve.

What is Blockchain Billing?

The oil and gas industry is highly complex, where millions of barrels of crude oil and cubic meters of natural gas are bought and sold on international markets every day. An enormous volume of trade requires lengthy and complex contracts between the traders.

The cross-border oil & gas transaction parties have actively begun the implementation of Blockchain platforms and smart contract technology to manage such a complex network and facilitate global distribution of oil & gas. The use of smart contracts can significantly reduce paperwork, streamline the process, improve efficiency, and reduce costs.

With smart contracts, transaction requests and events are received from sensors and the smart contract generates new transactions and events by launching the running code logic in advance. Once a smart contract is executed, its results are continuously updated into the blockchain network's secure ledger, and these modifications cannot be altered or forged once they are confirmed.

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Benefits of Smart Contracts

Achieving Real-Time LOE

With blockchain, physical commodity trade time can be shortened, creating a desired competitive difference: real-time LOE:

Physical Commodity Trading

There are many manual steps involved in conducting physical trades of refined products, and the same information must be entered into multiple systems, which require layer upon layer of data reconciliation.

Blockchain technology's distributed ledger capabilities can be used to reduce the amount of time necessary to reconcile price and volume differences among trade participants by making the same data available to everyone at the same time.

Furthermore, the solution can assist in reducing the risks associated with electronic document transmission. By leveraging blockchain technology, oil and gas companies can improve trade accuracy, increase scheduling efficiency, reduce back-office costs (e.g., invoicing and settlements), increase access to trade data, and accelerate working capital management.

Sensor-Driven Invoicing

Processing plant equipment and pipeline sensors enable immediate invoicing as chemicals are used or produced. Invoices can be processed in real-time by combining blockchain technology, processing plant equipment, and pipeline sensors. Sensors are used in this digitalized process to ensure accuracy in billing based on the execution of contracts.

In addition, blockchain technology (with cognitive capabilities) records, tracks, and executes contracts, and identifies fraudulent transactions. After the agreed-upon amount has been produced, a sensor confirms that the contract terms have been fulfilled and, if necessary, the system executes payment.

Enhanced transaction speed, accuracy, and security will benefit oil & gas companies and their customers. Furthermore, sensor-enabled invoicing requires fewer resources and therefore lets employees devote themselves to more value-added activities.

Contract Execution

Blockchain technology may benefit contract execution in situations where the counterparties' trust level is low or where the transaction value or complexity is high. Potential applications include:

  • Complex sourcing (minimizing inconsistencies in transactions)
  • Capital projects (under contract terms)
  • Land transactions (by identifying and preventing fraudulent land transactions)
  • Sales of oil and gas (facilitating large transactions)
  • Joint ventures (improved cost-sharing and revenue-sharing audits)

This can result in a reduction in costs and an increase in productivity. It also eliminates the need for clearinghouses, confirmation processing, and other back-office functions that are associated with risk management and accounting.

Tracking ESG Targets and Practices

Blockchain can also track a company's progress in terms of ESG practices and improvements. To attract investors, companies are increasingly expected to demonstrate how they are reducing their carbon footprint, investing in communities, and incorporating diversity into leadership roles.

Monitoring emissions, fuel efficiency, and hiring practices are some of the ways companies can use the system to keep track of their work. This ledger can be shared with auditors, board members, or shareholders so they can track progress and make sure it aligns with their objectives.

Currently, the blockchain does not only automate the execution of contracts. The technology also provides permanent audits.

How Can Smart Contracts Help Oil and Gas Operators?

By reducing inefficiencies and processing time around contract execution in complex supply chains, GumboNet (by DataGumbo) helps the broader industry achieve streamlined processes and cost savings. The ability to audit ESG at a high-data level gives operators a solid advantage at satisfying shareholders and attracting investors.

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Challenges to Using Blockchain Billing in Oil & Gas

Market Instability

Bitcoin's value plunged from record highs after billionaire Elon Musk announced on Twitter that Tesla Inc would no longer accept bitcoins as payment, citing concerns about "rapidly increasing the use of fossil fuels for mining and transactions". Bitcoin's value decreased over two weeks before it began to recover, and it has since plummeted again as investors have abandoned crypto.

Environmental Impact

Cryptocurrencies are not regarded by some environmental advocates and investors as a long-term solution to the problem of natural gas emission, both because Bitcoin's future is uncertain and because cryptocurrency companies also emit greenhouse gases.

The global Bitcoin industry has generated 60 million tons of CO2 emissions, roughly equal to the exhaust from nine million cars. Bank of America analysts reported in March that the number of tons has risen from two years ago by 40 million tons.

Some industry experts suggest that more durable and long-term solutions should be employed so that the gas can be used for whatever purpose it is intended for.

Experts say that long-term and durable solutions that bring that gas to market and allow it to be used for whatever its highest purpose is are needed. Virtual currency mining largely relies on coal-fired electricity, which produces about twice as much carbon dioxide as natural gas combustion.

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Strategies to Successfully Implement Smart Contract in Oil & Gas Industry

With the deployment of smart contracts and blockchain technology, operators can streamline all of the disparate threads involved in production into one central location, thereby allowing them to view expenses immediately.

Implementing real-time LOE and optimizing costs can be achieved by:

  • Transform manual billing, paper invoices, and human dispute resolution practices into instant, automated payments supported by real-time monitoring; vendors should be treated as strategic partners that support change management and drive improved behavior.
  • Implement blockchain technology as a solution for updating traditional, old-world economic systems that isolate corporate views, increase transaction friction, and store important data in rigid IT infrastructures.
  • Decrease OPEX and CAPEX while improving sales through reduced underpayments by purchasers, faster collection times, and more accurate and transparent payments to royalty partners and working interest partners, resulting in increased returns for operators.
  • Gain operational transparency by participating in the blockchain with shared, immutable records that enable frictionless and certain transactions

It is time to leave the current interpretation of LOE in the past, with its considerable flaws and inaccuracies. Now is the time for operators to observe the future through the windshield. Get started with real-time LOE today.

How Sherman-Tank Can Help

Operator focus on reduced LOE, as well as the search for ESG wins, has created an opportunity for innovation in the areas of chemical handling, storage, automation, and trusted transaction billing platforms.

Through our innovative packaging products and strategic partnerships, Sherman-Tank strives to deliver chemical packaging solutions that elevate the management of your chemical program.

Chemical Handling Innovations:

  • Chemical inert plastic storage tanks
  • Packaging that protects product integrity
  • Components that reduce emissions, increase fill rates, mitigate static, and negate operator exposure

Automation Innovations:

  • Real-time inventory and application rates
  • Reactive automation and rates that adjust to production
  • Smart device controls and reporting

Billing Innovations:

  • Smart contracts and immutable records
  • Touchless transactions with transactional certainty
  • Transactions driven by field IoT data, not one-sided paper tickets
  • Commodity agnostic

Our Partners

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Ready to Start the Conversation?

The opportunity to bring visibility, operational efficiencies and value to chemical distributors using innovations in packaging, sensors, battery life, remote communication and SMART contract billing via a leasing company value proposition has never been better.

Contact Sherman-Tank to learn more about how we can help.

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At Sherman Roto Tank, we understand that your competitive advantage is driven by your ability to adapt to our industry and marketplace changes quickly. That is why we are committed to rapidly delivering innovative chemical packaging solutions allowing you to focus on growing your bottom line.

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