BP: Blockchain Petroleum?
British Petroleum (BP) is currently developing blockchain technology that will enable efficiencies in the oil and gas supply chain.
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”
Student comments on BP: Blockchain Petroleum?
Great write-up. I can definitely see how blockchain can provide a huge value-add to the Oil & Gas industry given how global and complex it is. I’m sure that the recent challenging oil price environment has made operators more interested in hearing out the economic case for it.
Two main questions come to mind for me:
1. Parastatal Collaboration: You mentioned how BP has been teaming with Shell and Statoil to build momentum around this, but I wonder if pursuing partnership with Saudi Aramco and other OPEC suppliers as well as Russia would be an attractive path here. Given how much these parastatals dominate energy trading in their respective regions, it seems like that could be a way to speed up diffusion. On the flipside, I don’t know if there would be willingness from Aramco/Opec/Russia for that kind of collaboration and for blockchain generally.
2. Increased Oil Price Volatility: I wonder how the increased transparency from blockchain would affect how quickly the market absorbs supply/demand information and incorporates that into oil price, and if so whether it would make a meaningful or marginal impact on the industry.
It has been amazing to follow the hype and enthusiasm that is growing in the market around blockchain; and this example is no exception.
It is great to see that other oil and gas companies are investing in the technology alongside BP; as the technology reaches maturity BP will need transaction counter-parties to fully utilize the technology. Being first mover is important, because it gives BP the power to shape the industry adopted technology. But BP should be careful to ensure that the technology they back ultimately becomes the industry standard.
I strongly agree on the huge potential that lies ahead and it is interesting indeed to see how “traditional” companies decided to be early adopters of such a disruptive technology. Clearly, the new (and less favorable) commercial landscape played a major role on speeding up such process, but I am still skeptical if transitioning contracts into blockchain will have any real impact on Oil & Gas companies’ bottom lines.
In addition to that, looking deeper into the main challenges ahead, I believe that regulation tends to be the major roadblock to be overcome. As highlighted in the article, companies will need to invest a lot of time and money into adjusting current regulations to be able to benefit from the new technology and, considering all the lobbying that exists on Oil & Gas industry, we should expect the disintermediated companies to fight fiercely against any change. On that sense, and building now on top of Mr. DGessese’s comment, leveraging partnerships with parastatals would not only speed up diffusion, but could also greatly facilitate the deployment of the regulatory adjustments that are needed. Those parastatals hold huge influence over governments and, consequently, over regulating authorities becoming, therefore, great allies to the Blockchain Petroleum initiative.
I was deeply impressed by BP because although it operations in a traditional industry, it is making great efforts to try and apply new technology to optimize operations.
Some of the benefits of blockchain I can think about are:
1) Cost reduction: because it is de-centralized, cost is minimized and is shared equally among all players
2) Transparency: Except for the transaction details, all other data in the system is open. The information-sharing is highly efficient.
3) Stability & safety: because data is permanently saved and can’t be overwritten, it is very reliable and stable.
But some challenges I can think about are:
1) No privacy: because of transparency, there is no privacy in the network. It is extremely difficult for any entity to hide information.
2) Capacity: since data is permanently stored in the network, would the system gradually slow down because it cannot process that much information? It will explode in the end!
3) Systematic error: if there is any deficiency in the technology and someone hacks, the entire system would collapse.
Thanks Andrew, I’ve been quite skeptical about the adoption of blockchain at a massive scale but this article went a long way to convince me there could be a feasible solution if major players align behind it. My biggest concern is something you highlighted regarding the anonymous nature of transactions, and implied “self-reporting” for tax purposes. One of the biggest AML concerns has been oil & gas derived revenues getting monetized, given everything from Somali pirates acquiring oil & chemicals ships, to military groups taking over oil assets in recent armed conflicts. The tax part if specially troublesome as it would be in both counterparties’ interest to just have these decentralized ledgers, and only disclose a fraction of actual deals to evade taxes. Let’s see how regulation deals with these issues.
Great article – love examples of oil & gas companies implementing new technologies and leading the charge.
My main concern (or watch out) for BP is the cost of being an early adopter. In a commodities industry, there is always a danger to being the first mover, as you often are a price taker, so you must believe implementing this technology first will give you significantly reduced costs vs your peers. Along these lines, I am unsure that some of the “fast followers” in the industry won’t be able to gain the same cost savings at a lower cost of implementation. BP should try and lock in some of the IP they are sure to develop to be sure to hold onto their competitive position in this space.
Thank you! This article is really in the area of my interest. Coming from a commodities trading background, I realized a large number of paper works that need to be done for a single trade transaction. The root cause of all this is due to the “Trust” issue among different parties participating in the trade chain. Therefore, I’m a strong believer that the ‘smart contract’ is the solution to all this reductant and time-consuming work. Your article has provided me with new perspectives, especially when you mentioned ‘software-as-a-service’ as one of the applications of the blockchain in solving this. I’m wondering how this would play out in this future.
Great article! I have never imagined such conventional players prepare for new platforms based on bitcoin. For the last couple of years, the oil and gas industry has been challenged, sometimes even distrupted, by renewables, shale oil and even digitalization. I am so excited that old firms have learned and internalized new technology, initiating a counterattack. Adopting blockchain system is a great example.
I hope BP adopts the technology in a broad way. Even if this is an initial stage, BP seems to focus too much on efficiency. Regarding the fundamental foundation of bitcoin and etherium is decentralization, BP could open their value chains to increase participants. Partnership with other oil giants is a giant leap. They also make individuals, gas stations and even shipping companies participate in the platform. It will require not only transparency but also, to some extent, sacrifices of BP’s values.
Thank you Andrew! I do see block chain will be the future of transaction platform with its efficiency and cost competitiveness. Regarding your question on whether the first mover will gain advantage and/or have a sustainable competitiveness, I would say it’s again a competition of platform/ecosystem as we’ve seen for Apple vs Android or WiFi vs WiMax – which ever alliance establishes the industry norm will win. It will require not only to build a reliable platform function, but more importantly (as you pointed out), how to maximize ecosystem participants while insuring the legal compliance. Some examples would be to have 0 transaction fee for platform members, or to have higher flexibility (e.g. open-source community concept) to invite give controlling power to members as well. With ensuring alliance growth as the first priority, BP itself can benefit from shifting suitable transactions to the platform earlier. Excited to see the future to come!
Great article! It’s encouraging to see large corporations (not just start-ups) starting to make investments in blockchain technologies. In the long-run, I wonder how much of the benefits of such investments will accrue to the early adopters vs. the industry as a whole. Becuase blockchain is a distributed ledger system, various parties need to participate in order for the system to work as designed. I could imagine a scenario where BP pushes the adoption of blockchain across the oil & gas industry, but this does not provide a competitive advantage for BP in the long-run. Are there ways for BP to implement this system to capture more of the positive externalities blockchain tech offers?