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Blockchain’s pivotal role in de-risking transactions in the energy sector

Managing Directors Michael Miller and Tom McNulty discuss how blockchain is enabling greater accuracy and risk deduction during transactions in the energy industry.

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While blockchain is com­mon­ly asso­ci­at­ed with Web 3 tech­nolo­gies like cryp­tocur­ren­cy, indus­tries out­side of the tech indus­try can and are tak­ing advan­tage of the ben­e­fits that blockchain offers. With­in our own firm, we’re see­ing increased inter­est and invest­ment in busi­ness­es that apply patent-pend­ing blockchain tech­nol­o­gy for use with com­modi­ties trans­ac­tions. Out of all the pos­si­ble sec­tors, we antic­i­pate that the wide­spread intro­duc­tion of blockchain with­in the ener­gy indus­try may make the great­est impact.

The ener­gy sec­tor is famous­ly risk-averse and resis­tant to chang­ing its well-estab­lished sys­tems and process­es. How­ev­er, blockchain enables greater speed, accu­ra­cy, and risk reduc­tion dur­ing trans­ac­tions and set­tle­ments — with no com­pro­mise when it comes to secu­ri­ty. Tech­nol­o­gy com­pa­nies design­ing blockchain solu­tions for the ener­gy indus­try are doing so with the industry’s risk aver­sion and lega­cy sys­tem invest­ment in mind; offer­ing incre­men­tal blockchain solu­tions which can plug into lega­cy sys­tems and work in par­al­lel or incre­men­tal­ly with them, allow­ing com­pa­nies to ease into Web 3. Look­ing ahead, we expect to see some ear­ly adopters begin to use blockchain before it becomes much more com­mon­ly employed with­in the ener­gy sec­tor, ulti­mate­ly becom­ing ubiq­ui­tous due to its abil­i­ty to elim­i­nate errors and to effi­cient­ly accel­er­ate settlements.

The rise of blockchain

Though it was ini­tial­ly used to sup­port Bit­coin, at its core, blockchain is a shared and dis­trib­uted ledger that both par­ties in a trans­ac­tion use, rather than each indi­vid­ual par­ty main­tain­ing, record­ing, and set­tling in their own respec­tive ledgers. Any­thing added to the shared ledger must first be val­i­dat­ed by all par­tic­i­pants to ensure its accu­ra­cy, and all record­ed entries are per­ma­nent. This means there can be no tam­per­ing with or edit­ing of a trans­ac­tion unless a new record­ed trans­ac­tion is entered. The record-keep­ing is com­plete­ly open to all par­ties, who can view all aspects of a trans­ac­tion, includ­ing all changes to it. Dis­trib­uted ledger tech­nol­o­gy is soft­ware that is sim­ply a log­i­cal evo­lu­tion from paper/​pencil account­ing to spread­sheets to cloud-based account­ing soft­ware; and now dis­trib­uted ledgers.

Blockchain/​distributed ledger tech­nol­o­gy improves effi­cien­cies by elim­i­nat­ing the need for inter­me­di­aries to facil­i­tate a trans­ac­tion and the need for each par­tic­i­pant to record and track trans­ac­tions with­in its unique ledger. For ener­gy com­pa­nies, this greater accu­ra­cy and speed, low­er risk, and improved account­abil­i­ty means that trans­ac­tions can be set­tled in mere min­utes instead of days or weeks — or even months. Giv­en the large scale and com­plex­i­ty of ener­gy com­mod­i­ty trans­ac­tions, these advan­tages are valuable.

Blockchain ensures greater trans­ac­tion accu­ra­cy and speed

The ener­gy indus­try relies upon decades-old con­ven­tions for pay­ment, and trans­ac­tions can take weeks to set­tle between the deliv­ery of phys­i­cal com­modi­ties and pay­ment. By con­trast, by employ­ing smart con­tracts” agreed to by trans­ac­tion par­ties, blockchain can accu­rate­ly com­plete up to 100,000 trans­ac­tions per sec­ond, which rev­o­lu­tion­izes how ener­gy com­pa­nies can set­tle pay­ments, as well as reduc­ing human inter­ven­tion, error and cost. The ledger must bal­ance in real time for each trans­ac­tion, rather than clear­ing indi­vid­ual accounts; this great­ly reduces the risk of account­ing errors, in addi­tion to short­en­ing the set­tle­ment cycle. Should any adjust­ments need to be made, it is record­ed as a sep­a­rate unique trans­ac­tion on the shared ledger for all par­ties to see. 

Accel­er­at­ed set­tle­ment through blockchain low­ers set­tle­ment risk

Long set­tle­ment and invoice cycles cre­ate high lev­els of unse­cured cred­it expo­sure and oper­a­tional risk should the coun­ter­par­ty default. With mon­ey tied to a pend­ing trans­ac­tion for weeks or months, com­pa­nies find that sig­nif­i­cant vol­umes of cap­i­tal are unavail­able to oth­er parts of the busi­ness, where it could be used to pay div­i­dends, or pay down debt, or to invest in new ener­gy busi­ness­es. By accel­er­at­ing the trans­ac­tion cycle, blockchain can help de-risk trans­ac­tions — elim­i­nat­ing the like­li­hood of a coun­ter­par­ty default­ing by the time pay­ment comes due — and free up cap­i­tal that was pre­vi­ous­ly tied up.

Blockchain affords greater account­abil­i­ty through­out the transaction

Because blockchain is a shared ledger, it enables greater trans­paren­cy and ulti­mate­ly account­abil­i­ty through­out the ener­gy val­ue chain, a ben­e­fit that is of par­tic­u­lar inter­est should Scope 3 emis­sions need to be quan­ti­fied. As an open, shared, and accu­rate ledger, blockchain pro­vides com­pa­nies the abil­i­ty to trace car­bon diox­ide, methane, sul­fur diox­ide, and oth­er emis­sions all the way back to the well­head. This due dili­gence can be com­plet­ed by sim­ply ref­er­enc­ing the ledger, rather than under­tak­ing a slow­er and more dif­fi­cult man­u­al due dili­gence process. A buy­er of a lithi­um-ion bat­tery, for instance, would be able to trace emis­sions all the way back to the ori­gin of the sup­ply chain for each com­mod­i­ty used with­in it. 

Blockchain’s future for the ener­gy industry

The inter­est in blockchain has extend­ed beyond just ven­ture cap­i­tal firms or the tech indus­try, with blockchain becom­ing a pop­u­lar tar­get for invest­ment on a broad scale across a range of indus­tries. For those in the ener­gy indus­try, it would be ben­e­fi­cial to begin ramp­ing up their explo­ration of blockchain tech­nolo­gies to ulti­mate­ly cap­i­tal­ize on its greater accu­ra­cy, speed, and risk reduc­tion ben­e­fits. Tak­ing steps now may also set com­pa­nies up for suc­cess in the future, should greater account­abil­i­ty and trac­ing be required for Scope 3 mis­sions or oth­er future envi­ron­men­tal regulations.

Meet Our Authors

Bio photo michael miller

Michael Miller

Managing Director

Mr. Miller brings over 30 years’ experience and is part of the firm’s leadership team.

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Tom McNul­ty

Managing Director

Mr. McNulty brings over 25 years of working across the entire commodity and energy value chain.

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