What Blockchain Will Bring to the Petrochemical Industry?

Source:China Energy News - cnenergynews.cn     Author:Wu Li     Date:2019-11-27     

Blockchain technology, commonly known as a distributed shared ledger and database jointly maintained by multiple parties, using cryptography to ensure the security of transmission and access, to achieve data storage consistency, data tamper-proof, and prevention of repudiation. It is also known as Distributed Ledger Technology (DLT), featuring distribution, tamper-resistance, whole-process marking, traceability, collective maintenance, etc. which can lay a foundation for blockchain to create trust. The abundant application scenarios of blockchain are mainly based on that blockchain could solve the problem of information asymmetry and realize the cooperative trust and concerted action among multiple subjects.

This cutting-edge technology which integrates digital economy, industrial change, Internet technology has shown its unprecedented business value and potential in many industries. What changes will it bring to the petrochemical industry?

Build a new generation of infrastructure for petrochemical trading. Redefine the petrochemical industry with digital technology

In the petrochemical industry, blockchain is mainly applied to the field of trade. The industry of petrochemical bulk commodities features massive capital, complicated operations, and low profitability. Specially, massive capital: it is typically capital-intensive because a single transaction may involve tens of millions of dollars or even hundreds of millions of dollars; complicated operations: cumbersome trading execution links and paperwork in the crude oil market consumes substantial human resources; low profitability: cumbersome execution process and full competition result in extremely low gross margin. Statistics in recent years show that the industry’s average gross margin is below 0.5%.

Important players in the petrochemical industry, including oil companies, financial institutions, and large traders have been exploring blockchain applications since 2015. Pilots have proven that the significance of blockchain applications in bulk commodities lies in digital optimization by creating new trading modes, improving efficiency, and unlocking business models, which has been a growing consensus.

This has been proven by Sinochem Group, a pioneer with oil trading background in exploring blockchain technology.

Mr. Yu Yingjiao said that the petrochemical industry is the largest industry in China, accounting for 12.4% of GDP, while the dependence of oil on foreign trade is as high as 70%, and the global trading volume every day is about 13.45 million tons. The industry has entered a growth cycle whose bottleneck is transaction efficiency. “We were wondering if we could build a digital platform or architecture or system to address problems by solving the pain points of users. Upon continuous analysis and comparison of various technologies, blockchain precisely concentrates our needs. It integrates distributed storage, alliance consensus, and encryption to better empower the industry participants.

Then how to determine whether blockchain is suitable for trade scenarios? He mentioned six principles proposed by Ernst & Young Consulting, including the distributed database, multi-party participation, mutual distrust, different laws, permanent record, and stable rules. If four of them are met, blockchain is suitable. The petrochemical energy trade industry meets all of them.

Blockchain changes the traditional model of information verification that relies on central nodes by building a mechanism with integrated algorithms and technology trust. Transaction participants can build a network of asset transactions and value transfer among them without intermediary assistance. By building and executing smart contracts, the network can promote the maintenance and fulfillment of contractual relationships and rules, reduce credit building costs, and foster a good market environment.

“To put it simply, the breakthrough of blockchain in the petrochemical industry is to build a new generation of infrastructure for petrochemical trading and redefine the petrochemical industry with digital technology”, said Mr. Yu Yingjiao.

Improve operational efficiency and make “digital certificate validity” possible

Trading profitability of petrochemical bulk commodities tends to be more competitive and transparent in the market, leading to a lower gross margin. Hence, it is critical to improve the operational efficiency of commodity trading. We must enhance operational efficiency and reduce operational risk to cut down operational costs, shorten capital occupancy time, and increase capital utilization.

In the field of bulk commodities, the application of blockchain technology will empower the entire trading chain and quickly structure all links of information processing. The “digital certificate validity” and “smart contract” will be enabled to record contract signing, payment exchange, B/L circulation, customs supervision and other information in the whole trade process, thus greatly improving the efficiency of all links.

For example, in crude oil trading, from the formulation of purchase contracts to the issuance of credit letters and the prototype verification of end-to-end full-process blockchain application after “three checks at one customs” upon the arrival of crude oil, the procedures including flow data and manual review can be reduced to significantly improve the transaction execution efficiency, transaction execution security and transaction profit space.

“The innovation in blockchain technology has turned inter-industry rivals into partners in an alliance, accelerating the digitalization of trade and greatly improving the overall efficiency of the industry”, observed essDOCS co-founder Mr. Alexander Goulandris, who has nearly a decade of operational experience in driving international paperless trade.

Sinochem Energy has completed three petrochemical trad pilots based on blockchain technology:

In December 2017, the first blockchain crude oil import transaction pilot for crude oil import business from the Middle East to China was completed, and the efficiency of crude oil transaction execution process increased by more than a half; in March 2018, the first blockchain product oil export transaction pilot participated by the government from Quanzhou to Singapore in cooperation with Xiamen Customs was completed; in June 2018, the first blockchain methanol domestic trade pilot was successfully realized and has improved execution efficiency and reduced trade financing costs compared to traditional trading pattern.

These pilots have fully validated that blockchain technology can help industry participants significantly improve transaction efficiency and reduce transaction risk.

Resolve the industry’s key pain points and transform from the Internet of information to the Internet of trust

“Most of the key pain points in the energy and petrochemical industry can return to the issue of trust”, said Mr. Yu Yingjiao.

For avoidance of fraud, the industry has formed a system to verify the transaction, financing and logistics through the transmission of paper documents and manual risk control audit. But with the development of international trade, the time and speed of shipping and delivery has developed far faster than the speed of the B/L circulation of goods between buyers and sellers and banks, making paper documents a bottleneck to improving the efficiency of the industry; emerging transaction modes have also brought challenges to manual verification.

As a distributed ledger, blockchain is linked into a chain by individual blocks. In the traditional bookkeeping system, the right to keep accounts is owned by the central server. In this “ledger”, each node of the chain can record information to constitute a node-to-node bookkeeping system recording all the transactions that have occurred and been recognized by the system. Users can analyze the data from the values of data, the time of occurrence of transactions, and the proof of origin. They can be assured to use the platform because data are distributed and stored in the user’s own server. There is no need to worry about data acquisition by a third party, thus achieving the transformation from the Internet of information to the Internet of trust.

According to Mr. Wu Zhen, Director of the Internet Financial Security Technology Key Laboratory at the National Internet Emergency Center, the core superiority of blockchain technology is to save every piece of information in the system at multiple nodes or even every node in the network. Any node that arbitrarily modifies data will not be recognized, and the entire network thus forms a tight web.

Internationally, the energy and petrochemical industry has established three influential blockchain alliances, with Vakt and Komgo in Europe, OOC in the US, but none in Asia. Sinochem Energy High-tech is committed to building a China-based digital platform uniting industry players including traders, financial institutions, shipping agents, and technology firms to form an Asian blockchain alliance geared to the Asia-Pacific region and the globe. In the future, this plateform will also develop a variety of distributed applications, covering transaction, logistics and financing at all levels.

The global oil trade landscape is amid profound adjustments, thus China’s oil trade industry is embracing a major development opportunity. Blockchain, the Internet of Things, artificial intelligence and other technologies are also developing faster and will be widely used in the petrochemical industry chain. However, Mr. Yu Yingjiao also said that blockchain is still at an early stage of development, and needs to be further developed in terms of security, standards, regulation and other supporting policies and systems.

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