An analysis for your MBA in Energy Management
Bitcoin and many other cryptocurrencies are built upon an interesting new technology: the blockchain. Blockchain abandons the notion of single, centralized records of transactions and instead creates many copies of those records, encrypting them and distributing them to all parties on the network. This has security implications, as to tamper with the ledger would necessitate the nearly impossible task of decrypting and altering every instance of the ledger in existence. It also has the potential to streamline transactions, since no middleman is required to oversee exchanges on the network.
For the sensitive oil and gas industry, there's a fair amount of appeal in adopting this type of technology, with leading companies like Shell investing time and resources into exploring potential applications of the blockchain.
Curious about what the introduction of blockchain could do for the oil and gas industry? Here are some of the potential ramifications.
It's no secret that the petroleum industry faces unique challenges in transparency. For instance, product quality can vary, with accordant variations in price, which may lead some suppliers to attempt to pass off inferior product as something better.
To take another example, suppliers may be located in countries experiencing trade sanctions or embargoes, and a barrel of product might exchange possession multiple times between origin and destination, making it difficult to tell if it originated somewhere it shouldn't have. Even with relatively good tracking of these kinds of issues, global daily petroleum consumption is measured in the tens of millions, meaning relatively low error counts can account for a significant amount of money and product.
Perhaps the most significant advantage blockchain may offer is in delivering clarity to transactions carried out in the global petroleum markets. Every barrel of product could be accounted for on the blockchain, with relevant details about quality, origin, and transaction history included in its information. Fraudulent transactions would be impossible to fabricate, just as it would be impossible to hide a transaction, as both would require tampering with every entity on the network.
Additionally, the private identities of entities on the blockchain would be protected, making it difficult for others to know their precise activity. The data could be validated by governments against the entity's blockchain history, if necessary, meaning industry players would not escape oversight.
The result: a tamper-proof, transparent system that nonetheless preserves a level of privacy necessary for businesses to compete as they wish in the global marketplace. For business school graduates working in energy management, this could prove a hugely valuable solution that streamlines efforts and enhances security and decision-making.
Petroleum contracts are often complex, can involve many different entities – including governments – and may be expected to be fulfilled over lengthy timeframes. Given this complexity, it's little wonder that one of the benefits of turning to the blockchain in the oil and gas industry is the potential for adopting "smart contracts."
Smart contracts are essentially programs that run on the blockchain. To create a smart contract, terms are agreed upon by the entities involved, and the contract is then distributed on the blockchain. When the terms of the contract are fulfilled, the agreed-upon payment takes place automatically. For example: Company A agrees to purchase a barrel of oil from Company B and the two create a smart contract. As soon as Company A receives the barrel from Company B, the smart contract validates the transaction and payment is issued automatically. The parameters can be made as complex as the situation demands, ensuring each contract can be tailored to unique needs.
For obvious reasons of fairness and expediency, the automaticity of this model of contract has clear advantages over the old way of relying on each entity upholding their end of the bargain in a timely fashion. Integration with the blockchain could also provide other benefits for contracts in the business, like proper validation of products and greater security. Every contract would be distributed semi-anonymously across the entire network, making them safe from tampering or alteration.
Despite the promise posed by these applications, blockchains and smart contracts are likely a while away, meaning the average executive in a professional MBA program today shouldn't expect them to become an industry-wide consideration just yet. Still, the topic remains ripe for exploration, and a little planning ahead could lead to serious advantages if the blockchain revolution does indeed take over the petroleum industry.
Do you want to build the skills necessary for success in today's petroleum industry?
Complete your MBA in Energy Management at WU Executive Academy!