For a considerable period of time, oil and gas companies in India have been embracing digitalisation. To this end, Indian Oil Corporation Limited (IOCL) has undertaken more than 180 digital initiatives in the past three to four years. One such initiative is implementing blockchain technology, which is basically a centralised and distributed ledger that records transactions in a secure and transparent manner. It is a series of blocks connected to each other through cryptographic algorithms, forming a chain of information that cannot be altered or deleted. Globally, blockchain has found diverse use cases and applications across industries, such as data integrity, traceability, freight management, regulatory compliance, deal validation, international remittance, trade finance and market instruments.
Blockchain system overview
Blockchain transactions follow a rigorous process. A transaction is first requested and authenticated. Then, a block representing that transaction is created. The block is sent to every node (that is, participant) in the network. The nodes then validate the transaction and rewards are received for “proof of work”, typically in cryptocurrency. Afterwards, the block is added to the existing blockchain, and the update is distributed across the network. The block must be validated by the majority of the network consensus (51 per cent) before it can be added to the blockchain. Consensus algorithms are used to verify the authenticity of information, including proof of capacity, proof of authority, proof of work, proof of elapsed time and proof of stake.
The backbone of a blockchain system is a ledger, or a digital record of transactions distributed across a network of computers. Each node in the network has a copy of the ledger, which is constantly updated in real time as new transactions are added to the network. This creates a chain of blocks that cannot be modified or deleted without the consensus of the network.
A unique identifier, known as a hash, is generated using cryptographic algorithms and serves as a digital fingerprint of the transaction. Any attempt to modify or delete a transaction on the ledger would result in a change in the hash of that transaction, alerting all the nodes in the network to the attempted tampering. In the process, proof of the algorithms and the authenticity of the transaction are ensured. Hash linkages ensure that a hacker would need to change the block containing a record as well as those linked to it to avoid detection. Moreover, cryptography-enabled tokenisation of different blocks ensures verification of digital identity in a blockchain.
Types of blockchain
Public blockchain: In a public blockchain, anyone is free to join and participate in the core activities of the blockchain network. Bitcoin is an example.
Consortium blockchain: Consortium blockchains are permissioned blockchains governed by a group of organisations, rather than one entity, as in the case of private blockchain. For example, the Indian Bank Blockchain Infrastructure Company has been formed with 15 participating banks.
Private blockchain: A private blockchain allows only selected entry of verified participants; the operator has the rights to override, edit or delete necessary entries on the blockchain. A “group within companies” or “group between companies” is an example. Global trade, financial series, supply chain management, retail, healthcare, insurance, etc. are major use cases for private blockchain.
Hybrid blockchain: It is a unique type of blockchain technology that amalgamates components of both public and private blockchain.
Use cases for blockchain in the oil and gas sector
Supply chain management: Blockchain can be used to validate and manage the supply chain of oil and gas products. With this, supply chain participants can track the movement of products from the point of origin to the point of consumption. For example, companies can use blockchain to verify the authenticity of crude oil or natural gas, ensuring that the products are genuine. IOCL has applied blockchain to lubricant packages to check their authenticity.
Asset tracking: By using blockchain, companies can track the location, ownership and maintenance history of assets such as pipelines, drilling equipment and storage tanks. This can help companies reduce the risk of theft and fraud, and ensure that their assets are properly maintained.
Smart contracts: Smart contracts can be used to automate contractual agreements between parties in the oil and gas sector. A smart contract would automatically trigger payment when certain conditions are met, such as the completion of a drilling operation. It can be used, for instance, to automate the payment process between an oil rig operator and a drilling company.
Energy trading: Blockchain can also be used to create a peer-to-peer energy trading platform. This can help reduce costs and increase transparency in the energy market.
Environmental compliance: Through blockchain, companies can track their environmental impact and ensure that they are complying with regulations. This can help reduce the risk of fines and penalties for non-compliance. The oil and gas sector has a pollution control board, which tracks different environmental parameters on a regular basis at refineries and other locations. Moreover, exchanging relevant data can be beneficial for creating carbon credits as well.
Key challenges
Blockchain technology is complex and requires specialised knowledge and expertise to implement effectively. Many utilities in the oil and gas sector rely on legacy systems that may not be compatible with this technology. Implementation of blockchain is expensive, compared to competing solutions. Scalability of the technology and its high energy consumption are further issues, as a blockchain transaction may require a huge amount of computing power, depending on the type of proof of work required.
While blockchain technology is inherently secure, there are some concerns regarding data privacy and security, particularly with sensitive tasks such as supply chain and asset management. As the sector is heavily regulated, there are concerns that blockchain implementation may create new regulatory challenges.
The way forward
According to industry reports, investments in the global blockchain market will reach $40 billion by 2025, driven primarily by the banking, financial services, insurance and energy sectors. Going forward, the integration of information technology (IT) and operational technology will be necessary. IT data can be analysed through platforms such as Data Lake software and robotic process automation systems.
The success of implementing blockchain in the oil and gas sector depends on widespread adoption and interoperability across different systems and organisations. This will require collaboration and coordination across the industry.
Based on a presentation by Suresh Nambiar, Chief General Manager, Strategic Information Systems, IOCL, at a recent India Infrastructure conference