There’s a lot of very excited talk about non-fungible tokens (NFTs). Pieces of unique digital art are commanding exceptional prices, musicians taking innovative approaches to use NFTs as a revenue stream in these difficult times, wine producers are looking at ways of using them to replace age-old bureaucratic processes. This is all very nice for those sectors but there’s no way that an NFT could work in the oil and gas sector, it’s too complicated, too convoluted and too fundamental to the working for the global economy to be distracted by the latest thing to emerge from the tech sector. I’d argue that the energy sector’s nature actually makes it perfect for tokenisation and I’d like to take this opportunity to explain why.
The best place to start would be a brief explanation about NFTs before we explain why it is a perfect fit for the natural resources sector. The easiest way to explain NFTs is probably via a very quick canter through the history of cryptocurrencies.
The process that has led to the creation of crypto started decades ago, but it began to coalesce into its current guise just over a decade ago with the delivery of bitcoin, which is generally accepted to be the first modern cryptocurrency.
A bitcoin is basically a string of computer syntax that gives a person ownership of the individual coin. Ownership is validated by computers all over the world independently and any changes to ownership and value are recorded on what is called a blockchain. This decentralised and transparent structure makes it difficult, time consuming, and prohibitively expensive, to forge a bitcoin, which is part of the reason why, for better or worse, they have very quickly become a globally recognised unit of value with a very active (and vocal) global market.
The development of bitcoin in 2009 was the point where various technologies came together to pretty much become what we currently talk about as cryptocurrencies, but it was six years later when the Ethereum blockchain was developed that tokenisation became possible. Ethereum has its own cryptocurrency, the Ether, but importantly it also has the flexibility to take information about anything onto its blockchain, from art through to wine, potentially via oil and gas contracts. Smart contracts, also known as NFTs, were born.
Fascinating, does it mean anything in the real world?
But so what? From the perspective of the natural resources sector, the blockchain and NFTs are not even a distraction: the business focuses on extracting, refining and delivering oil and gas without needing to pay too much attention to all the fuss. The servers that underpin crypto require energy, so it’s great news that there’s a growing industry with a big appetite for oil and gas but the whys and wherefores are irrelevant.
Except that tokenisation is a massive opportunity to reduce complexity and bureaucracy and enhance transparency and speed. Which means there’s an opportunity to significantly bring down costs. Given the challenges that 2020 delivered, I’d argue that this makes it worth investigating.
Reduced complexity and bureaucracy
There are very few industries in the world that are as large or as complex as natural resources. The levels of paperwork involved in a contract for a barrel of oil or volume of gas are significant, and hold-ups at any stage of the process have knock-on effects all the way up and down the supply chain. This is why most sections of the industry keep extensive storage facilities so that no matter what happens, there will always be a consistency of supply.
Tokenisation creates the possibility of having a universal paperwork structure that was associated with an oil or gas contract. A token could be created at the point that an oil or gas deposit was proven and stay with it right the way through to the point that the processed product was delivered to the pump or plug. There are hundreds of processes that need to be completed to get from discovery to delivery, but using a tokenised smart contract on the blockchain reduces the risk that the process would be slowed down by the bureaucracy.
Applying a blockchain to oil and gas would mean that it would be far easier to both spot where wastage is happening and work out a remedy. A certain amount of waste is inevitable, but the natural resources sector is under pressure from increasingly viable alternatives and investors and consumers are starting to look elsewhere. Moving to a system that far more accurately tracked product and highlighted opportunities to reduce waste could improve yields and help combat some of the negative perceptions of the industry.
Increased speed and transparency
It could be set up in a way that gave permissioned access to the right people at the right point in the process. This would enable several activities to run concurrently, making the whole supply chain faster, more efficient and more responsive. It would also make it easier for regulators and investors to understand a project and ensure that communities got what they are due.
Making an oil or gas contract into an NFT could be achieved without a significant investment in either technology or back-office processing. The blockchain already exists and could be implemented at low cost to enhance efficiency across the entire supply chain, which is why I’d suggest that this is the right time for the energy sector to embrace tokenisation.
PermianChain is a proprietary technology platform that brings together the crypto-mining and oil and gas sectors. Using a permissioned access blockchain, PermianChain makes it possible to utilise stranded and wasted energy resources, unlocking liquidity and transforming the way that oil and gas projects are funded, produced, bought and sold. Established in 2018, PermianChain Technologies is a pioneer member of the Blockchain Research Institute (BRI) and start-up member of the Petroleum Technology Alliance Canada (PTAC).