Recently, BP, Royal Dutch Shell, and Norway based Statoil in conjunction with ABN Amro, Societe Generale, and ING, announced that they had started developing an energy trading platform based on blockchain technology. The venture will also involve Mercuria and Gunvor Koch supply and trading companies. This big oil and big finance collaboration is the latest in a series of moves by leading players in the technology and finance industries to harness the security and transparency offered by blockchain technology.
Why blockchains are big news
In a nutshell, blockchains are continuously updated and growing record. Each block usually contains a hash table linking the present block to its predecessor, a timestamp, and the current transaction details. Due to continuous and sequential timestamps, encryption, and hash table links, blockchains are highly resistant to change and interference. Typically, blockchains are stored in a distributed system similar to the ones used by cryptocurrencies such as bitcoin. The distributed storage creates multiple redundancies since all interested parties can maintain a copy of the transactions. This open ledger approach makes it easy to detect and correct transaction record tampering.
When used as a basis for a distributed ledger trading platform deployment, blockchains are usually maintained by a peer to peer network using a common protocol for new block validation. When any such block has been created, alterations can only happen through the collusion of a majority of network nodes since all subsequent blocks must be uniformly altered. In essence, this is a bit like altering a document produced in quintuplet and distributed to five different parties.
Reasons for creating the new trading platform
Oi,l in particular, and energy trading, in general, is a lucrative and ancient industry by modern standards. As is common in most established industries, dominant players in oil form cartels and promote conservative practices as a way of barring new participants. The practice was first thrust into the limelight by Italian Enrico Mattei who termed the cartel by dominant players in 1950’s the ‘seven sisters‘.
Cartels are formed to further the interests of the players in an industry, and not for the consumers’ or the general public. The initiative by the big oil in conjunction with big finance should be looked at from this perspective. A press release by ING gives an altruistic spin to the motivations behind the ventures. However, I find the claims a bit too selfless to be believable. In my considered opinion, big oil is running scared.
Disruptive innovations have been shaking other industries hitherto considered untouchable or beyond control. One example is the disruption of the global taxi industry by Uber. Another would be how Netflix and iTunes disrupted the entertainment production and distribution networks. BP and Royal Dutch Shell have been playing the markets since their first collaboration in 1932 and I don’t think anything has changed. The old games have just got a new arena.
That having been said, a blockchain based energy trading platform is awesome leadership behavior by market leaders. Energy markets are notorious for opacity, which allows market manipulation on the lifeblood of modern day economies. A case in point is California’s electricity crisis of 2000, at the peak of which 1.5 million people were without electricity. It was caused by only one company (Enron).
Some of the dubious techniques used by Enron’s traders to line the company coffers and pad their own commission were only possible due to the opaque nature of energy trading markets. Some of the issues that a blockchain based trading platform would pre-empt are:
Power laundering: Also called Megawatt laundering due to similarities with money laundering. It involves obfuscation of the actual origin of electricity being supplied so that it can be billed at the highest possible cost. In California, for instance, the market allowed suppliers to charge a premium for power sourced out of the state. Enron traders made locally produced power appear as if it was from outside the state. A blockchain based platform makes such manipulation impossible.
Over-scheduling: Enron traders would routinely book more transmission capacity than they needed and then resell the capacity to other companies at a premium. These costs were eventually borne by the customer. Blockchain-based systems would have made it easy to detect such manipulation.
Energy markets are ancient and established institutions. However, players also have an ancient and incontestable tradition of trying to maximize without regard to ethics or fair play. Since the products in question are critical to modern economies, customers often have to shut up and pay up. As such, the initiative to create a transparent trading platform is laudable.
