Energy majors grab blockchain "multi, multi-billion dollar opportunity"
by Gaurav Sharma
January 23, 2019
Blockchain is being used to optimise performance across all energy sectors where wholesale digitalisation of trading processes, asset management and demand response is now standard. Its adoption by sector operators is clearly visible but will its wide range of possible applications help deliver a leaner industry resulting in reduced costs and a more efficient transition or is everyone jumping on an untested bandwagon for fear of missing out? Gaurav Sharma reports…
Use cases for the deployment of blockchain in the energy sector seem to be growing by the day with practically every segment from natural gas trading to fuel procurement up for grabs. An entire industry, often deemed old fashioned by technologists, now appears smitten by blockchain in its quest for efficiencies in an era of relatively low oil prices and shifting consumer behaviour.
In simple terms, a blockchain is akin to a digitally distributed ledger that can be replicated and spread across many nodes in a peer-to-peer network, thereby minimising the need for oversight and governance of a single ledger. It is the platform underpinning cryptocurrency Bitcoin.
For a sector infamous for copious amounts of paperwork from bills of lading to tender submissions, a tool to securely digitize and save is an enticing one. Energy blockchain streams could be split three-ways: process applications (energy trading, grid management, payments and supply chain solutions), end-user deployment, and component (including service platform) solutions.
While many of the concepts are coming out of North American and Asian markets, unmistakably the UK and Germany are leading the way. London in particular is buzzing, with multiple technology incubation hubs or shared workspaces between Shoreditch and Moorgate – areas conventionally home to start-ups – counting several energy blockchain enthusiasts in their ranks.
It is difficult to pin a figure on the size of the global energy blockchain market. However, a five-year range can be projected in the region of $7 billion to $12 billion by 2024, based on industry forecasts, number of energy blockchain start-ups, implementation projects and confidential conversations. Whether it materializes or not, even a cursory glance at the market would warm up the most sceptical of industry watchers.
Cataloguing movers and shakers
The enthusiasts’ roster includes a veritable who’s-who of the energy business. For instance, London-based trading platform Vakt, created in 2017, includes oil majors BP, Royal Dutch Shell, Equinor, and trading firms Mercuria Energy, Koch and Gunvor. Furthermore, the New Year has started on a positive footing for Vakt having signed on Chevron, Total and Reliance Industries. It is already being used to trade North Sea oil.
To quote Total’s head of trading and shipping Thomas Waymel: “We have felt a need to digitize cargo post-trade processes for some time. We view blockchain as a major step forward towards safer, faster and cheaper logistical operations and are committed to contribute to Vakt’s roll out to various markets.”
Other members of the Vakt consortium include banks ABN Amro, ING and Societe Generale. If you thought streamlining oil trading was the only game in town, think again. Shell made a significant move into blockchain last year premised on “smart-contracts” by bagging a minority stake in Applied Blockchain, another London start-up.
“We did the first product derivative trade on blockchain together with our partner Applied Blockchain.” Ben van Beurden, CEO, Shell
A Shell spokesperson said: “Blockchain applications have huge potential to shake up how we do things in the energy industry from streamlining process, to simplifying how we work with our suppliers and serve our customers. Investing in Applied Blockchain is part of our commitment to use digitalization to create value in our core business and develop new business models.”
Total, Eni, Gazprom, Mercuria, Vattenfall, Petroineos and Freepoint are all part of Canadian group Interbit’s “OneOffice” proposition aimed at facilitating natural gas trading reconciliation through to settlement and delivery of trades using blockchain to bring about “cost savings across the trade life cycle.”
“The energy companies running blockchain pilot projects [are embracing] a fundamental change that is increasingly being demonstrated as viable at a time when concerns about torrents of newly- available data, the mass deployment of sensors, increasing machine-to-machine communication, and rising security threats demand a move from legacy processes and technical debt to a scalable, automatable, and trust-less solution” Interbit, Canada and UK
Elsewhere, ConsenSys and field data management firm Amalto have a blockchain joint venture to develop a platform to facilitate the automation of ticket-based order-to-cash processes in the industry. Abu Dhabi National Oil Company (ADNOC) and IBM have successfully piloted a blockchain-based automated system to integrate oil and gas production across the full value chain.
Completing the spectrum, even sector data and market information aggregator S&P Global Platts is deploying blockchain to “facilitate submissions of weekly oil storage and inventory data”, a move it revealed in the fuel storage hub of Fujairah, United Arab Emirates, last year.
Meanwhile, European utilities including Enel, RWE and Vattenfall are collaborating with Germany’s Ponton on using blockchain to bring peer-to-peer trading to the wholesale energy market via the Enerchain project.
Rival Iberdrola believes blockchain has a vital role to play in “energy resource verification.” In partnership with Kutxabank, the Spanish company is using blockchain technology to “guarantee the energy it supplies to its customers comes from 100% renewable sources.”
A spokesperson said the blockchain pilot will help Iberdrola figure out “which assets will supply energy to a specific point of consumption.”
Demand response and blockchain
Technical University Cluj Napoca investigated the use of decentralised blockchain mechanisms for delivering transparent, secure, reliable, and timely energy flexibility to all the stakeholders involved in the flexibility markets (Distribution System Operators primarily, retailers, aggregators, etc.). They found that “blockchain based distributed demand side management can be used for matching energy demand and production at smart grid level, the demand response signal being followed with high accuracy, while the amount of energy flexibility needed for convergence is reduced”
As the plethora of examples indicates – not a single facet of the energy sphere is considered beyond the scope of emerging blockchain technology. But is it too much, too soon?
A note of caution
While the industry is raving on about the money that is being pumped into blockchain, dialogues on return on investment and security concerns seem to be relatively muted. Much of it narrows down to the fear of losing out, which partially explains incremental sector moves on blockchain since 2015.
Blockchain enthusiasts point to its secure credentials and it helps to get people on the bandwagon. Many say bitcoin’s greatest gift is not the cryptocurrency itself but rather the blockchain technology that underpins it which has become commonplace.
But if bitcoin is blockchain’s poster deployment, then it is a very poor example of implied greater security. Just consider the number of colossal hacks in recent years. Mt Gox, Coincheck, Coinrail and another half dozen examples spring to mind in the last five years alone.
Of course, blockchain’s promising future in the energy industry cannot be negated as a result of events elsewhere but caution is merited, says Deborah Byers, US Industry and Energy Leader at EY. “A secure, distributed digital ledger blockchain might well be, but nothing is 100% hack proof. As a piece of software it always remains susceptible to hacking. That realism should not be discarded.”
Perhaps the reason there hasn’t been a fiasco on the scale of Mt. Gox in the energy sphere is because deployment is in its infancy, and few wish to talk on-record about a possible hack, opting instead to emphasise how blockchain could help eliminate transaction fraud via digital logs, and how energy specific hackathons (events where systems are tested for weaknesses) are becoming commonplace to mitigate risk.
Another issue is while no single party can tamper with a blockchain ledger without the consent of all parties, no one is particularly in charge of keeping it safe either. Yet, the unstoppable energy blockchain train powers on.
If $12 billion really gets pumped into blockchain by energy companies over the next five years, expectations of return on capital should at least be twice that with negligible security breaches to support it. Given that’s a tall order by any benchmark, there will be winners and sinners in equal measure. More to the point, an operational reckoning is on the horizon for better or worse.