March 2020 /// Vol 241 No. 3)
Why you can’t afford not to use blockchain in commodity transportation
Commodities production and transportation is a complex chain of events that involves multiple parties, volume measurements and transactions for each unit moved. In oil & gas, crude oil and its derivatives, water and other natural resources like sand and natural gas, are critical components to the production of energy. Each resource must be moved to and from the site of production, typically in poor conditions over risky or remote roads. In U.S. operations alone, the produced water market is worth an estimated $33.6 billion.
One of the biggest costs, and consequent inefficiencies, associated with the production of oil is that of produced water: a segment that includes the collection, haulage, transfer, disposal and storage of extracted water to saltwater disposal wells (SWDs) or recycling facilities. For a single barrel of produced oil, an average of one to seven barrels of water are produced contingent on the technology and regional infrastructure on-site. Today, contracted companies are used to transport produced water from wellheads to disposal areas either by pipe or truck. Depending on supply, demand and location, transportation costs can range between $1.00 to $6.00 per barrel per hour of transport time.
As is, there is no organized water market online or offline and without a standardized system or regulated data reporting practices, expenses for this aspect of industry are notoriously difficult to calculate. Attributes including water quality, volume, geographic region of extraction and lack of piping infrastructure can additionally exacerbate the unpredictability of costs; especially when spread across multiple service providers using disjointed systems.
Water haulage is a microcosm of commodities haulage. As economic tradewinds, a worldwide pandemic, politics and other factors forge uncertain conditions for oil & gas in 2020, now more than ever it’s integral to streamline operations and reduce cash burn. Blockchain is the transformative technology necessary to make this happen.
Blockchain Powers New Potential
Blockchain and smart contracts are uniquely suited to improve the economics of the produced water market. Smart contracts can consume field data from dozens or even hundreds of companies regardless of data systems in use by using standard APIs. With blockchain powering smart contracts, haulage and piping volumes can be measured at agreed points and payments calculated as the events occur based on contract pricing. Then, these payments can be calculated and rolled up for management as they happen, not weeks later.
Blockchain guarantees that all parties have the exact same immutable record for transactions, from source data and pricing to final payments. This means that operators only pay for exactly what is delivered or hauled and contractors are paid according to contract terms rather than 90-150 days after service delivery.
With water expenses in the near term set to increase — Reuters noted that in the Permian Basin, water bills hit $14 billion and rising, earning the nickname as private equity’s new black gold. Across the shale plays, water infrastructure companies are implementing technology that enables undisputed, certified water quality trails, from inlet to outlet offering both insight and new commercial opportunities.
Bloomberg reports that the Permian requires $9 billion in additional SWDs to dispose of water over the next decade. Blockchain can create a history of water from origin to an eventual reuse situation where multiple streams of produced water have been co-mingled, treated and supplied back to multiple operators for frack water. The capability to ascertain and track provenance in a convoluted resource like water means that with blockchain technology, the future is ripe for a market and thus profit. It may also enable a huge reduction in the number of SWDs required due to finally enabling cross-operator water re-use.
Real-Time Data for Transparency, Accuracy and Visibility
The costs of logistics for water haulage and disposal are also predicted to rise. Last year, 60% of overall spending went to haulage and disposal expenses. As costs escalate, blockchain will shape the future economics of the basins by addressing challenges including contract spend management and fraud reduction.
One central issue in water haulage is that of mismatched volume measurements. Often volume readings are taken by operators at wells, then again by truckers, and then once more at the SWD or recycling facility. These measurements regularly contradict one another and/or are rife with inaccuracies or even fraud accounting for up to several billions in unreconciled spending every year. Current invoicing and reconciliation processes are performed manually and rely on siloed, self-reported data across contracted parties.
By implementing blockchain to synchronize Industrial Internet of Things (IIoT) data captured from field and performance measurements and generate consensus on a record of truth, companies can garner data transparency, accuracy and operational visibility to reduce contract leakage and enable healthier financial management.
Moving to Automated Smart Contracts
Beyond increasing timeliness and efficiency through providing transparency, blockchain can power smart contracts to automate payments, eliminating disputes and long days sales outstanding (DSOs). By using field data including two-way and three-way ticket matching, reconciled barrel numbers and flow meter readings, water haulage counterparties can agree to terms and tolerances up front, then use IIoT data to ensure obligations are met to automate invoicing and payments processes. This means that trucking and transport companies can get paid on time, greatly lowering their working capital costs and potentially reducing invoice factoring by smaller providers.
Automated smart contracts ensure that vendors are paid at speed and buyers pay only for the actual volumes delivered. With declining oil prices driving the need to capitalize as much as possible on thinner margins, blockchain technology offers those in commodities haulage and elsewhere in energy the opportunity to capture value, streamline operations and reduce costs to drive significant operational savings. With projections anticipating blockchain can generate approximately $3.7 billion in cost savings for the oil & gas water business, that’s a number that is simply too big to ignore.