A consortium of energy firms that includes Royal Dutch Shell and BP has been formed with a view to developing a digital platform based on blockchain to be used in trading energy commodities. The platform is expected to be unveiled before the end of next year. Besides BP and Shell, other consortium members include financial firms such as Societe Generale, ING and ABN Amro, trading houses such as Mercuria, Koch Supply & Trading and Gunvor as well Statoil.
Blockchain technology, which initially gained prominence as the architecture that underpins the bitcoin cryptocurrency, makes use of a shared database capable of updating itself in real-time. This technology also processes and settles transactions using computer algorithms in minutes without requiring verification from third parties.
One of the most vocal advocates for using blockchain technology in oil trading as it would also cut costs is Mercuria.
“Ideally, it would help to eliminate any confusion over ownership of a cargo and potentially help to make managing risk more exact if there are accurate timestamps to each part of the trade,” Edward Bell, a commodities analyst Emirates NBD PJSC, a lender based in Dubai, said.
According to Bell there have been similar efforts in the past but they didn’t take off. The latest effort however stands higher chances of success since it is not being spearhead by an independent party but rather the various players in the sector. Per a statement from the consortium the venture will seek regulatory approvals and if it gets the go-ahead will operate as an independent firm.
The announcement of the consortium comes amidst an improvement in the fortunes of the oil industry following the increase in oil prices. Crude prices had collapsed in mid-2014 as a result of a strong dollar, low demand and a boom in shake production in the United States which led to excess supply. Recently however OPEC has initiated measures aimed at cutting output and draining excess reserves.
As a result of the change in fortunes both BP and Royal Dutch Shell have benefited. A little over a week ago for instance BP released a quarterly financial report the beat estimates from Wall Street. While consensus estimates were expecting a net profit of $1.588 billion BP managed to generate $1.865 billion instead.
At the same time the British oil major disclosed that it would roll out a share buyback program in the course of the three months. This is with a view of dampening the impact of the company’s scrip dividend program.