Blockchain is not just about cryptocurrencies. The technology is also used in blockchain platforms to trade in oil and gas – the prime exports of the Persian Gulf countries. Blockchain can also help the renewable energy market infrastructure safer, more resilient and economically effective.
Stage 1: trading on the blockchain
Back in 2018, the World Trade Organization (WTO) published a report titled “The Future of World Trade” that claimed digital technologies will add up to 34% to the growth rate of world trade before 2030, thanks to lower costs and increased productivity.
WTO Director-General Roberto Carvalho de Azevedo, presenting this report, stated that new technologies can completely transform commerce: “The Internet of things, artificial intelligence, 3D printing and blockchain can completely transform the way trading is done and how it is done.”
One of the reasons blockchain technologies will lead to the growth of international trade, according to the report, is that they can help “get rid of unnecessary processes, speed up the declaration and registration procedures and provide transparency.” Also, the use of smart contracts will “allow for the automation of many processes, such as payment of customs duties.”
International trade, including energy trade, was one of the first industries to use blockchain technology. Moreover, this was done even by countries and companies, which themselves were very wary of cryptocurrencies.
The $ 1.8 trillion crude oil trading market simply could not stay away from implementing the blockchain. The first surge of interest in this area was seen in 2017, when the companies Natixis, IBM and Trafigura launched a pilot trading platform for oil sales in the United States. Mercuria tested oil shipments from Africa to China through the European trading platform Easy Trading Connect, created by ING and Societe Generale. The experiment showed a significant increase in the speed of the transaction and a decrease in transaction costs. For traders, efficiency has increased by 33%.
Also in 2017, the British oil and gas corporation BP, together with the Italian oil company Eni and the Austrian Wien Energie, launched an experiment in which they carried out financial transactions on the blockchain simultaneously with traditional trading systems. According to David Ayton, chief technology officer at BP, blockchain has accelerated the execution and verification of transactions in the oil market.
In 2018, the Abu Dhabi National Oil Company (ADNOC) announced a partnership with IBM on a blockchain pilot project for commodity supply chain management. The system made it possible to track oil and gas production, the movement of raw materials from oil wells to end consumers, as well as manage the supply of petroleum products.
However, the most noticeable and effective was the Vakt Global startup, launched at the end of 2018. The blockchain platform created by Vakt for trading in commodities, in particular oil and gas, allows energy transactions to be digitized to increase their speed and reduce the cost. The platform also allows you to replace paper workflows with smart contracts for trade deals.
The consortium behind Vakt Global includes oil and gas companies Shell, BP, Statoil, trading companies Gunvor, Koch Supply & Trading and Mercuria, as well as banks ABN Amro, ING and Societe Generale. The project partners are Deloitte and ThoughtWorks.
The real breakthrough came in January 2020, when the oil company Saudi Aramco acquired$ 5 million worth of stock in Vakt. At the same time, it was announced that Saudi Aramco’s subsidiary Aramco Trading would use the Vakt blockchain platform to increase trading volumes. According to Hans Middleton, managing director of the Saudi Aramco’s European division, Vakt’s blockchain solution simplifies the papers management and settlement and clearing operations that previously had to be done manually. The blockchain also increases the efficiency of interaction with sellers and buyers of oil, since all information is stored in a distributed ledger.
Stage 2: oil and gas tokenization
When the informal leader in the global oil industry, the state-owned Saudi Aramco (the largest and most profitable oil producer in the world), through its subsidiary Saudi Aramco Energy Ventures became a co-owner of Vakt, it was clear that any oil business would sooner or later start using a distributed ledger.
The next level after the transfer of trade transactions to smart contracts on the blockchain is the tokenization of energy resources. Simply put, it is the transformation of oil, gas, electricity and other energy products into digital assets.
This has already been partially implemented: when oil and gas companies use the blockchain to buy and sell barrels of oil, transactions can include digital tokens called Brent or WTI. However, here we are talking about the creation of stablecoins – cryptocurrencies with low exchange rate volatility, backed by commodities.
The first attempts to issue oil-backed tokens have already occurred with projects Oil Stable Token, Texas Oil Crypto Currency and others. But they did not have much success.
However, technology always evolves, so new such tokens will appear soon enough, this time at the initiative of oil and gas giants, backed by their own reserves of hydrocarbon commodities. For oil companies, the issuing of “black gold”-based cryptocurrency is, first of all, a new source of liquidity, secured against all the accompanying risks associated with traditional currency settlements. In addition, using blockchain will help save on transaction and payment processing costs.
On the other hand, the technology for digitizing rights to oil or gas will require significant reorganization of business processes related to its production and accounting, so that they are as transparent and legitimate as possible. And that is both difficult and expensive. The prime beneficiaries here are the investors who will buy tokens backed by oil and gas assets.
They will be able to diversify their portfolios, get the opportunity to participate in management decisions, use links with smart contracts of insurance companies or financial products. At the same time, mining companies will have the opportunity to set a minimum threshold for trading in tokenized assets in order to weed out small investors.
It’s very likely that the first large-scale projects related to the tokenization of oil and gas will appear in the Persian Gulf region. Everything points to it – huge reserves of raw materials, developed infrastructure, as well as the attention paid to blockchain technologies there.