Blockchain's Future In Oil and Gas: Transformative Or Transient?
Legal News & Analysis - Asia Pacific - Regulatory & Compliance - Cybersecurity
24 July, 2017
Beyond distributed ledger technology in energy and resources
Important advances in technology rarely come with a full embrace at the start. Ground-breaking ideas can yield as many doubters as disciples. It takes time, experience, growth, and eventual acceptance to turn an idea into reality. Will that be the case with blockchain? Careful analysis monitoring of evolving trends will tell if blockchain's future in oil and gas is transformative or transient.
Transparency and compliance
Blockchain technology, by design, should translate to greater transparency and efficiency. The sharing of digital blockchain information as required in joint operating agreements could lessen, if not eliminate, the need for reconciliations between companies and for data hubs controlled by third parties.
When it comes to regulatory oversight, blockchain technology can potentially improve compliance within three reporting frameworks—the Dodd-Frank Act, the Extractive Industry Transparency Initiative, and European Union directives—through increased transparency and better reporting streams. Employing blockchain-enabled data sharing under MIT's proposed Trust:Data framework could dramatically reduce compliance costs and increase speed.
The more complicated question is this: Can it provide the level of transparency necessary to achieve success while ensuring more efficient data and systemic security? It holds great potential, but risk-averse industries might react cautiously to systems built on rewiring a strategic operation.
Cyber threats and security
Smart sensors can provide critical information, such as real-time conditions for an undersea oil field operation, but are currently among the most insecure areas of a company's network. And the industrial espionage potential of a competitor gaining access to this information is substantial.
Even the nominally central areas of a company's network—its core IT functions—are vulnerable to hacking, as many have discovered over the past few years. Biometrics may help "harden" access control, but where should the biometric file be stored?
Where the company secures sensitive information about top company officials?
That's where new solutions built on blockchain technology come in. MIT Enigma, for instance, was designed to be more secure than existing solutions in storing sensitive data, such as biometric identity (a user's password) in an encrypted form in tiny fragments, while continuing to allow the data to be useful even when encrypted and broken into fragments.
Storing data in fragments at multiple sites, rather than concentrating it in one place, also raises the prospect of enhanced data
security even without a fully encrypted system.
As an example of how technology responds to evolving enterprise needs, developers in the financial technology space are bringing code to data in what is known as the Open Algorithms, or OPAL project, which is also part of MIT Trust::Data.
Rather than depositing key information in one centralized location, the operational codes are going to the source. Some experts believe this protects against placement of vital data in a singular location, which can be an invitation to hackers and increase fears of external breaches. It applies another coat of security to key company data.
High-volume trading/third-party impacts
The flip side of the anti-corruption/transparency coin is data protection—how can new technology ensure that critical information remains safe?
Inefficiency isn't unusual along the trade process. It occurs far too often. These points of resistance are spotlighted where IT systems must network with an outside system or systems. The complexity inherent in the system slows the exchange of critical data, which is the last thing an energy trader wants.
Blockchain-enabled applications can address other issues that need to be reviewed, including the removal or reduction of brokers' fees; reduction in fraud, error, and otherwise compromised transactions; and limiting credit risk and transacting capital requirements.
High volume is not just about trading. How do users ensure the information is getting into the hands of the right people? What is the impact on third-party validation?
More to explore
In oil and gas, questions around blockchain remain. Will regulators take a dim view of distributed technology and view the associated partnerships and agreements as collusion? And who will be the first out of the blocks, the first mover able to set the agenda and drive the format? Answers to these and other questions will determine whether the technology is fleeting or future-ready for oil and gas companies.
A Chinese law firm and a member of the Deloitte Legal global network, we are well positioned to provide integrated solutions to address your business and legal issues within and outside China. "Deloitte Legal" means the global network of legal practices which are affiliated with Deloitte Touche Tohmatsu Limited member firms. Shanghai Qin Li Law Firm, a licensed Chinese law firm, is the China member of that global network.
For further information, please contact:
Weiheng Jia, Partner, Qin Li Law Firm, a Chinese law firm and a member of the Deloitte Legal global network.
Mark Schroeder, Qin Li Law Firm, a Chinese law firm and a member of the Deloitte Legal global network.