When I started my pre-MBA internship in investment banking this summer, the firm was abuzz with news on Ethereum. I was in the same predicament that you likely now are in, wondering “What is Ethereum?” I quickly found out that Ethereum is a form of blockchain, similar to Bitcoin but with some key differences – mainly its purpose. While Bitcoin’s main use to-date has been as a digital currency, Ethereum technology was built to serve as a means to execute smart contracts.
After getting this background information, I quickly pulled up the article forwarded to me that was creating all the buzz. A number of high powered corporations including JPMorgan Chase, Microsoft, and Intel had been announced as members of a collective initiative called the Enterprise Ethereum Alliance (EEA) focused on developing the technology for business applications1. I was surprised to also find British Petroleum (BP) on the list of companies2. Coming from the oil and gas industry, I wanted to know why BP would be delving into technology development that seemed to be more suited to high tech firms.
Blockchain’s Business Impact
The simple answer is that blockchain technology offers huge potential for businesses to streamline everyday transactions through the use of smart contracts. Before proceeding, let’s ensure we get some key terms down.
- Blockchain: “A shared, tamperproof, peer-to-peer digital ledger that enables a single, global version of transaction truth.” 3
- Smart Contract: “A digitally signed, computable agreement between two or more parties. A virtual third party—a software agent—can execute and enforce at least some of the terms of such agreements.” 4
In layman’s terms, blockchain-based smart contracts supply not only security and speed, but also allow for cost reduction through the elimination of intermediaries in the process.5 This translates to transactions that used to take days with the help of human intervention being completed by computers in a matter minutes and at a fraction of the cost. 6
While the past three decades have brought digital technologies that have disrupted the business world including the web, cloud computing, and crowd sourcing; it is clear to see why some forecast that blockchain is the next step in digital evolution of business.7
Blockchain in Oil & Gas
With the recent drop in oil prices of over 50 percent in the last several years, oil and gas companies are scrambling to find ways to improve operations and reduce costs. BP’s entry into the EEA is no different, as they seek to capitalize on potential efficiency gains from blockchain technology. David Eyton, head of technology for BP, recently stated that “There are uses for blockchain that could give us a competitive advantage. Blockchain can be much more efficient in terms of speed and verification of transactions.” 8
BP’s initial focus on the technology has been to make the oil and gas supply chain more efficient. 9 Marco Dunand, CEO of Swiss trading giant Mercuria commented on the current process by stating, “It is a pre-archaic process. So introducing blockchain will allow to pass title from buyer to shipper to seller without going through massive paperwork.” 10
BP has teamed up with Shell, Statoil, and others to create a commodities trading platform based on blockchain technology which they expect to launch by the end of 2018.11 The consortium released a statement commenting that “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.” 12
While the potential is clear for the blockchain technology to improve the oil and gas supply chain, there are still many road blocks to the application of the technology being realized. As with any new technology, adoption follows an S-curve pattern, at which we are in the very beginning stages.
BP needs to work with other companies in the space to help develop the rules and regulations that will govern the marketplace for oil and gas trading on smart contracts.13 Once developed, they have to get regulators on board that these safe guards are in compliance with financial crime regulations, such as Know Your Customer procedures and Anti-Money Laundering rules.14 Additionally, they will have to ensure some means of tracking tax implications of these largely anonymous transactions to comply with IRS and other governmental tax laws.15
There will be no overnight solution. Significant investment will be involved in overcoming these hurdles and creating a commercially viable technology. Meanwhile, competing but less advanced offerings, including as software-as-as-service, may slow adoption of more disruptive innovation. 16
One Question Remains
Only time will tell whether BP’s investment will pay off. Did they invest in blockchain technology too early, or will their first-mover advantage translate into a sustainable competitive advantage well into the future?
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1 Anna Irrera, “JPMorgan, Microsoft, BP, UBS, Credit Suisse, Intel, and more are forming a new blockchain alliance”, Reuters, February 28, 2017, http://www.businessinsider.com/r-jpmorgan-microsoft-intel-and-others-form-new-blockchain-alliance-2017-2, accessed November 2017
3 Alan Morrison, “Blockchain and smart contract automation: an introduction and forecast”, PWC, March 20, 2016, http://usblogs.pwc.com/emerging-technology/blockchain-and-smart-contract-automation-an-introduction-and-forecast/, accessed November 2017
5 Alan Morrison, “Blockchains defined”, PWC, March 19, 2016, http://usblogs.pwc.com/emerging-technology/blockchains-defined/, accessed November 2017
6 Alan Morrison, “How smart contracts automate digital business”, PWC, March 22, 2016, http://usblogs.pwc.com/emerging-technology/how-smart-contracts-automate-digital-business/, accessed November 2017
7 Alan Morrison, “Blockchain and smart contract automation”
8 Andrew Ward, “BP Tries Out Blockchain For Energy Trading”, Oil and Gas Investor, October 3, 2017, https://www.oilandgasinvestor.com/bp-tries-out-blockchain-energy-trading-1660996#p=full, accessed November 2017
9 “BP, Shell lead plan for blockchain-based platform for energy trading”, Reuters, November 6, 2017, https://www.reuters.com/article/us-energy-blockchain/bp-shell-lead-plan-for-blockchain-based-platform-for-energy-trading-idUSKBN1D612I, accessed November 2017
10 “Blockchain Tech Could Disrupt The Oil Industry”, August 19, 2017, https://oilprice.com/Energy/Energy-General/Blockchain-Tech-Could-Disrupt-The-Oil-Industry.html, accessed November 2017
11 “BP, Shell lead plan for blockchain-based platform for energy trading”
13 Shane Randolf et al., “Blockchain technology – the hype and the hope”, Oil and Gas Financial Journal, August 14, 2017, http://www.ogfj.com/articles/print/volume-14/issue-8/features/blockchain-technology-the-hype-and-the-hope.html, accessed November 2017
16 Alan Morrison, “Blockchain and smart contract automation”