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With Vakt investment, five of the biggest energy companies bet on blockchain

The oil and gas industry is embracing blockchain technology for everything from tracking products to financing sales

With the announcement on Jan. 16 that three major oil and gas firms including Chevron, Total, and Reliance Industries have joined Vakt, the energy-industry enterprise blockchain company now has five of the 10 largest oil firms by market capitalization on board.

Vakt focuses on commodity post-trade processing, which is the process of verifying and if necessary correcting the details of a transaction. Other shareholders are energy firms BP, Shell, and Equinor; commodity trading companies Koch Supply & Trading, Guvnor, and Mercuria Energy Group, and the major banks ABN Amro, ING, and Société Générale, Vakt is built on JPMorgan’s Quorum platform, an Ethereum-based private enterprise blockchain. Last summer Vakt joined the Enterprise Ethereum Alliance.

Vakt seeks to vastly speed up the processing of deals from trade entry to final settlement by eliminating the need for reconciliation and other paper-based processing steps, the company said in a statement. In November 2018, Vakt launched its service in a single market, the North Sea’s BFOET crude oil. It’s goal is to work with all physically traded energy commodities.

“We are pleased to be involved with Vakt’s blockchain-enabled platform that paves the way for migration to a digital ecosystem, transforming the manner in which energy trades are executed,” said P.M.S. Prasad, executive director of Reliance Industries, one of the largest companies in India, in a statement. “Vakt’s platform will help lead the transition away from traditional systems involving manual exchange of information between participants to an integrated platform thereby enhancing transparency, data security and capturing efficiencies.”

Decentralizing and shrinking the supply chain

Vakt is not the only way the energy industry has embraced blockchain technology. Other firms are seeking to use blockchain for supply chain management, tracing oil from the well to the consumer, providing certification for renewable energy resources, and cost savings. But there are even bigger aspirations for blockchain in the energy industry over the long term.

According to a PricewaterhouseCoopers report, “Blockchain—An Opportunity for Energy Producers and Consumers?” the consulting firm believes that the distributed ledger technology underlying blockchain has the potential to enable a decentralized electricity supply system that reduces middlemen—and thus costs.

“It may be possible to radically simplify today’s multi-tiered system, in which power producers, transmission system operators, distribution system operators and suppliers transact on various levels, by directly linking producers with consumers,” the report noted.

That said, like Vakt, other companies’ uses of blockchain technology in the energy industry are still in the experimental phase.

On Dec. 9, 2018, the Abu Dhabi National Oil Company (ADNOC) announced that it had partnered with IBM Blockchain to create an enterprise blockchain-based platform designed to track and validate transactions between its various operating companies, cut transaction times, increase efficiency, and improve the reliability of production data for oil, gas and other products.

Calling the pilot project a “massive leap forward,” Zahid Habib, vice president of chemicals and petroleum solutions for IBM, said the platform will allow ADNOC to track “every molecule of oil, and its value, from well to customer.”

Abdul Nasser Al Mughairbi, ADNOC’s digital unit manager, added that blockchain is a “game-changer,” saying, “it will substantially reduce our operating costs by eliminating time-consuming and labor-intensive processes, strengthen the marketing and trading of our products, and create long-term sustainable value.”

Going green

Renewable energy is the fastest growing segment of the energy business, expected to reach nearly $2.2 trillion globally by 2025, according to Allied Market Research. And like anything else sold as environmentally friendly, proving that the product you’re selling really meets those standards is a necessary but time- and money-consuming process.

So just like French supermarket chain Carrefour is using blockchain to prove that the chickens it sells really are free-range and GMO-free, the global clean energy producer Iberdrola announced on Jan. 14 that it has just completed a test of a new blockchain platform that proves to customers that they are receiving 100 percent renewable energy.

To supply a Spanish customer, Kutxabank, Iberdrola worked with the Energy Web Foundation’s open-source blockchain platform designed for the regulatory, operational, and market needs of the energy industry. According to Iberdrola, Kutxabank “was able to track, in real time, the origin of the energy supplied by Iberdrola from the generation asset to the point of consumption.”

Energy was generated at windfarms in the Bilbao and Castile-La Mancha regions, and at a hydroelectric facility in Galicia, and supplied to Kutxabank’s facilities in the Basque Country and Cordoba. Aside from cutting out intermediaries, the transparency and security provided by the blockchain platform “is a crucial catalyst in the process of decarbonising the economy… [and] incentivizes the production and consumption of 100 percent renewable energy,” said Iberdrola. “Guaranteeing the renewable origin of energy is critical for long-term power purchase agreements associated with the growth of the corporate green energy market.”

For Kutxabank, the use of new technology like blockchain is “a powerful ally when it comes to improving knowledge about the source of the energy we consume as we aspire to become completely renewable in the near future,” the company said in a statement. The bank has since entered into a long-term agreement to purchase solar power from a massive facility Iberdrola is building in the Extremadura region West of Madrid.

Nor is this the only example of blockchain being used to certify green energy production and purchases. In October 2018, Singapore-based energy producer SP Group launched a blockchain-powered renewable energy certificate (REC) marketplace for the Asia-Pacific region aimed at improving the security, integrity, and traceability of RECs.

“As Southeast Asia’s largest bank, we recognise the leadership role we can play in promoting sustainable development, including supporting innovations in renewable energy,” said Mike Power, COO of technology and operations for Singapore’s DBS Bank, an REC purchaser, in a statement. “SP Group’s blockchain REC platform will make it more economically effective for organizations and will catalyse the transition towards a low carbon economy.”

And in December 2018, Madrid-based renewable power provider Acciona Energía announced a blockchain-based pilot project to allow four Portuguese customers to trace renewable energy provided by five wind and hydroelectric power production facilities in Spain. Acciona worked with FlexiDAO, a startup focused on using blockchain to trace and certify the origin of green energy, to create the Greenchain platform.

The test demonstrated that “the traceability of renewable energy is now a viable proposition that generates real value for the consumer,” said Simone Accornero, co-founder and CEO of FlexiDAO, is a statement.

A part of the puzzle

Many of the same firms involved in the Vakt consortium, including Shell, ING, and Koch Supply & Trading, are also involved in a larger blockchain project, komgo, aimed at digitising trade and financing of commodities, the firm said in a release on Jan. 9. After an initial pair of tests using energy and soft commodities on ING bank’s existing Easy Trading Connect platform, komgo’s 15 backers partnered with Brooklyn-based Ethereum blockchain technology firm ConsenSys to build a more robust, bespoke system, according to ABN Amro bank.

komgo will initially focus on two specific financial products, letters of credit and know your customer (KYC) processes. The first test was a letter of credit produced in real time by Société Générale to finance the purchase of North Sea crude oil for commodity trading firm Mercuria Energy Group, both Vakt consortium members. Vakt has partnered with komgo. Other komgo shareholder companies include finance providers Citi, BNP Parabas, Credit Agricole Group, Macquarie Group, MUFG, Natixis, and Rabobank; independent trader Guvnor; and inspection and certification firm SGS.

The letter of credit platform is in use, and the KYC offering should launch in mid-January, komgo said.

“We believe that komgo will offer significant improvements in terms of user experience and turnaround times, all of which are important when servicing the commodity trading industry,” said Kris van Broekhoven, global head of commodity trade finance at Citi, a komgo founder. “It will also reduce risk and bring elements of trust and security to the marketplace. It is entirely possible that the efficiencies brought by komgo will allow us to do business that we are not seeking to do today. But the prime objective is to better service the clients we already work with.”

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Leo Jakobson, Modern Consensus editor-in-chief, is a New York-based journalist who has traveled the world writing about incentive travel. He has also covered consumer and employee engagement, small business, the East Coast side of the Internet boom and bust, and New York City crime, nightlife, and politics. Disclosure: Jakobson has put some 401k money into Grayscale Bitcoin Trust.