From Oil & Gas Supply Chain to Blockchain: An Introduction with Practical Application Examples

Prior to becoming an Ethereum developer and inundating myself with knowledge of various blockchain structures, I was working in oil and gas supply chain roles — procurement, finance, quality, manufacturing, strategic sourcing, distribution, etc. I was fortunate to be exposed to different processes and departments across various business units and even across varying geographical regions. My conviction on the improvement implications arising from blockchain comes from my previous experience at the forefront of the business. You can read about my journey learning Ethereum here. Now, given what I know about Ethereum and various private blockchain structures, I’d like to share what I saw in my previous roles in oil and gas supply chain and how blockchain applications can be leveraged to continuously improve supply chain organizations. I assume you have at the very least heard of blockchain and smart contracts. Among all the hype it can be difficult to distill the valuable information, but one of my favorite videos to share is here and good beginners article is here.

Let’s right set the course on what blockchain is first. According to a recently proposed bill to recognize smart signatures as legally binding in Florida,

“Blockchain technology” means distributed ledger technology that uses a distributed, decentralized, shared, and replicated ledger, which may be public or private, permissioned or permissionless, and driven by tokenized crypto-economics or tokenless. The data on the ledger must be immutable, auditable, protected with cryptography, and provide an uncensored truth.”

The debates regarding a more refined technical definition continue on, but here, we are looking from an application perspective, so it is not a bad idea to consider how blockchain is being seen in light of the law. It is a shared transactional ledger. This ledger may be open for everyone to view all information on it, which is currently how Ethereum operates. You can visit EtherScan and view every transaction that is happening. All smart contract bytecode is available for anyone to see, and in most cases, like the infamous Cryptokitties, contract code is available as verified to provide even more visibility since the bytecode is available anyways. Or, a blockchain may be private and require approval of parties to participate — like JP Morgan’s Quorum, which is in fact a soft fork of Ethereum, or IBM’s Hyperledger. These blockchains restrict membership and increase privacy through limiting which party can fully view each transaction.

Moving further in the definition to tokenization, with all the hype around cryptocurrencies, you’ve surely seen that Ethereum is driven by Ether. Note that this does not mean that Ether is vying to become a substitute for any currency, as many see its predecessor Bitcoin. Ether was originally used to raise money for the Ethereum Foundation to build the platform, and it is used as a way to pay for use of the platform to ensure that no one party monopolizes it through something like a Denial of Service Attack as it would cost more to overpower the platform this way than any financial benefit the attacker could derive. Private blockchains most often eliminate the token feature of public blockchains because membership is assumed to be more rigorously validated. In other words, there is not a strong need to entice members through economic incentives (i.e. a token or coin) to behave with integrity.

Next, although there have been some mentions of editable blockchains among different companies, the definition above points to an immutable and auditable source of data. Briefly, let me point out that immutable does not mean that mistake cannot be changed, it simply means that a mistake would be recorded on the blockchain as would its correction. Lastly, blockchains are protected with cryptography, which has an interesting history. If you recall World War II, the Axis powers were using enciphered messages to coordinate their plans. After the war, President Eisenhower credited the interception and cracking of those enciphered messages as a deciding factor in their World War II victory. Perhaps for this reason, it was not until 1996 that commercial encryption moved from the Munitions List to the Commercial Control List, which greatly simplified sharing of private and open source software. As restrictions continued to ease, in 2006, the SHA3 hashing function was presented to the National Institute of Standards & Technology. Three short years later, in 2009, the first block in the Bitcoin blockchain emerged with the help with of the double SHA256 hashing function — a variant of SHA3.

Isn’t it ironic how lessening the control over sharing of information has produced one the most secure platforms on earth today?

Different blockchains do use different cryptographic hashing functions now — for example, Ethereum uses Ethash in mining but SHA3 or keccak256 or may be used in smart contracts. In essence, what cryptography does in each blockchain is secure information by obfuscating it to another representation from which the original information can never be “practically” derived as it would be too computationally intensive. Whether building the blockchain, hashing together a Merkle Tree or signing a transaction, cryptography keeps information in blockchains safe and comparable for verification — meaning you can check that you are following the correct blockchain by checking that the cryptographic hashes match as a hashing functions are deterministic. The longer the blockchain the lesser the probability of attackers unraveling all the cryptographic hashing to break it. This is a very high overview, and it is not required that you fully understand cryptography to see the value in blockchain, if you are willing to take things at face value. If you’d like to see more on cryptography, you can start here.

And what is a smart contract? The short definition is set code is a set of code that is executed on and through a blockchain. One of the easiest examples is the below. I have created a smart contract MyContract to store a number as a global variable mynumber. Don’t worry about the user interface for now, remember code similar to this executes all the time when you click around the web. When I want to run the storeNum(10) function, the blockchain not only verifies this transactions as possible, the blockchain executes it — allowing me to store 10 as mynumber. See how powerful that could be when extrapolated to larger applications? The blockchain isn’t just validating currency transfers here, it is acting as your computer.

Ok, now on to application:

Procurement

One of my first roles out of college, I essentially worked as a buyer for chemical plants in Houston. When I was in the role, the usual method of sending a purchasing order was over email in a .pdf. Occasionally, some back and forth happened in which terms and conditions were exchanged, and then, the order was ultimately confirmed — again, if any confirmation at all, it was received by email. We also maintained our order records on our own internal system as well. Any good buyer knows that the role is far more than placing and confirming purchase orders. It’s keeping up with scheduling, managing delays, finding better spot pricing, and knowing a bit about the product you are buying as well as it’s manufacturing process. However, most all would agree that placing orders is way too much time spent of a buyer’s day for far too little value added.

As time has evolved, I know not all purchase orders are placed through an email. There are systems that allow companies to place their orders on a system that they give their vendors access to see and respond, eliminating emails. Still, taking a look from the other perspective, if you visit a customer service representative and ask how many difference customer order portals they encounter, it is likely to closely mirror the amount of customers they handle in total. In other words, most companies are using different portals for order placement, and while we may replace sending emails for procurement this way, overall, in the industry, we have not eliminated the ultimate overall time spent as it has been shifted to customer service monitoring of multiple customer order tools and portals.

How could blockchain help here? As mentioned above, a blockchain is a shared ledger between parties. Those parties could easily be a customer-supplier relationship. Through the use of smart contracts, purchase orders could be moved to a blockchain. This is another way of eliminating our email problem through a more secure and, potentially with new laws, legal way of sharing information than in traditional portals today. Thinking back to our definitions, Ethereum is public so that presents a challenge — Company A does not want its competitors to see its pricing with Supplier B. However, through the use of private blockchains companies can use restrictions to accomplish the data privacy they need. However, not to gloss over other challenges, much like the problem of multiple difference customer portals — what if different customers decide to use different blockchains? Yes, then unfortunately we are back to the different portals problem. There a famous question, will there be one blockchain to rule them all? (Meaning will there be one blockchain that everyone is using one day.) My answer for that is, in jest, probably not tomorrow but maybe the next day. Private blockchains offer a great solution for the time being, especially in industry use as they align to industry needs much more than public blockchains, but similar to companies choosing between SAP or Oracle, the efficiency of an entire vertical supply chain can suffer as goods weave in and out of different supply chain systems. However, development is not over for most public blockchains, Ethereum has plans to increase scability and privacy in their road map. (Privacy here is not to be confused with Ethereum being a public blockchain. Privacy here is in reference to the privacy of the data and transactions on the Ethereum blockchain. Ethereum being public is in reference to the ability of any party to participate). Being public, driven by game theory , it is within the realm of possibility that if we were to find one blockchain to rule them all, it would make sense that a future economic system may well exist on a public blockchain as for it to work effectively and efficiently, it would be a need to guard against malicious parties participating as we could not validate every player for a private blockchain efficiently or practically. A great potential solution for now is also that which Microsoft Coco provides — a layer that sits on top of Ethereum and increases transaction speed and privacy. A great video, specifically related to procurement is here.

Finance

From Michael Lewis’ Flashboys and other news coming out of Wall Street, we know that if there is any development to be done to improving transactions, fintech will be there. However, from my roles in supply chain, that application is actually far from how I saw blockchain potentially being leveraged in a manufacturing finance environment.

What I remember from my role in finance in a manufacturing plant was the all important shop rate. How much did it actually cost us to run the shop per hour? And how did this translate to the pricing? And more importantly, how does this translate to profit?

Imagine the simple activity of building a table for your friend. You can estimate the wood cost, the tool cost, the training you might need, give yourself an hourly rate and an acceptable profit and determine a price. Now imagine you are building something with thousands of parts, coming from hundreds of suppliers, and it can take up to a year to produce. Oh, and your competitor just underpriced you by 10% and the price of your future raw materials just went up. Here is where most manufacturing lives.

What blockchain can provide is a way to more intimately track what occurs in the manufacturing process that could affect your final cost of goods. Using smart contracts, you can track this information by assigning unique identities to components, subassemblies and final products — this is not like a serial number. A serial number often does not hold any information itself — it is an index, or a way to access other information. You can search the system for information on that serial number, but the serial number itself does not tell you anything. Now imagine a product has an identity, and that identity can be responsive to outside information — adjusting it’s own characteristics, like the initial smart contract above. Let’s say because a machine is down — your product stays on the line two more days that it should have. The identity of this product could reflect the delay in its manufacturing process and adjust pricing (or ideal pricing) accordingly, helping you to understand your real cost. However, with only a serial number or part number tracking through a database, you would likely not know there was any difference in this product without looking for that information deep within the system. This could give us vastly more accurate information as to pricing and costs in a manufacturing environment, and this information could tremendously accelerate a LEAN environment’s efforts in continuous improvement.

Could our current systems be redesigned for us to better understand true cost of each product? Yes, and there are probably some better systems out there than what I saw. However, an additional functionality available that is quite interesting is through a company called Oraclize. Available on public blockchains like Ethereum and Bitcoin (as well as private chains that are a fork of Ethereum), Oraclize allows you to send outside data to smart contracts. These “oracles” are verified through cryptography, so that you ensure that you are getting valid outside data. What could an “oracle” be? Something like the price of oil or the price of your raw material low alloy carbon steels, like chrome moly 4140, might be helpful? What if you could look at what you are paying your supplier versus what the current spot price is and better plan for the next quarter? Think about how much effort is required to pull all of that information together — where do you go to look for market prices? It may be on your company website, but at least in my career, I have not seen this data truly combined within a supply chain system in any other way than through an Excel sheet. Again, it may be out there in other ways, but blockchain also certainly provides a means to this end.

Quality

Six Sigma has been synonymous with outstanding companies for some time, and poor quality can cost companies more than it ever. According to Deming’s 14 points for Total Quality Management , good quality requires trust — trust that your employees will continuously improve, trust that your suppliers will not give you faulty material, trust that everyone will contribute, etc. In quality, if something does go wrong, you need the right information to determine where it went wrong and when — and you need accountability. Although blockchain cannot solve the former problem of actually placing trust in a particular party, it can aide in the latter problem of accountability through information gathering along transactional processes.

The all important root cause analysis and fish bone diagrams are prominent tools in assessing quality issues. But how do we gather that information? Checking back through the record system, interviewing participants, inspections, etc. Focusing in on checking back through the record systems, we often want to find the origination of a problem — did it start with the raw material or happen at the final assembly? If we have the records of several processes kept on the blockchain from raw material to the final delivery, we can more easily trace what happened where. Recall how we talked about sharing purchasing information with our respective suppliers and customers? If we add freight forwarders, customs, and distributors we can nearly trace the whole steps in the chain. This helps to pin point origination of problems. A great example of this is Walmart’s work with IBM to connect the supply chain of their food producers. They shortened their information gathering time on origination of food products from days or weeks to seconds through blockchain integration. This unparalleled speed in information gathering among a vertical supply chain could save lives (and money) if it meant pinpointing the origination of food born illness. Similarly, not unfamiliar to the oil and gas scene, BHP has also completed a blockchain project increasing its traceability of fluid samples.

Manufacturing

I recall one project I was working on, I had to have the machinists enter an extra piece of information on the system after they had finished their parts. Although I was accomplishing what I had been asked to do, the machinists and operators lamented the extra work. It was one piece of information, but I realized I was asking them for one piece of information, management was asking for another piece, quality was asking for something else, and I’m sure HR needed more information too. Unfortunately, the information I was gathering was hardly looked in good times — more of a “nice to have.” Because I worked with such great people, they went along with it, but in the end, the project was pulled and rightly so.

We ask for some much input from those working on the front end. What is really valuable? Research out of books like Freakanomics and The Tipping Point has made us question how much should we be paying attention to these little things. We are asked to track everything. Data is the new oil, but unless we are selling our data, extra data collected has zero value add until we use it to make any sort of improvement to our existing processes. How much are we really paying to get that information? Maybe the real process that we need to LEAN out is collecting that data, too?

Enter: Internet of Things. In a world in which information is gathered rather inputted, production and efficiency can dramatically increase on value add activities along with data collection. A very small percentage of the oil and gas environment has been digitized, and its not for lack of want but of two other factors: cost and security. ROI is based on each individual case, so let’s address security. You do not have to read far to see the hacks that IoT devices have encountered. For example, the Mirai bonet took down several major sites with a Denial of Service Attack through harnessing the power of several IoT devices that it had hacked into. Could you imagine if someone could take down a rig or a manufacturing plant that way? It’s an incredible risk to take.

Now, blockchain is providing a secure communication system through which IoT devices can communicate. One exciting example is self driving cars, one of the biggest barriers to use is not the technology behind actually making the car self driving but the technology securing it. Hackers breaking into the messaging systems of self driving cars would be disastrous. However, with the cryptographic signature of messages and strength of the system, blockchain offers a way for IoT devices to securely communicate (well, much more securely, never say never in cybersecurity). Image if such communication techniques can be applied to IoT devices in the oil and gas field, and if these IoT devices are on the same blockchain as all of your other processes…

At the End of the Day

Blockchain offers many ways to open up the doors of improvement among several different industries and in various roles. Many companies using blockchain will likely not have a core business of blockchain (at least initially), and it will be interesting to see how established companies and entreprenual endeavors shape their own futures with the adoption of new technology. According to the American Standard for Quality, continuous improvement is “the ongoing improvement of products, services or processes through incremental and breakthrough improvements.” You may believe blockchain will be simply incremental or breakthrough, but for me, as a veteran of supply chain roles, I am well aware of the myriad of gems from Peter Drucker, and I have to agree when he emphasizes that, “The best way to predict our future is to create it.”

Questions? Corrections? Please comment below or you can reach me at kscarbrough1@gmail.com.