The blockchain is an encrypted distributed system technology whereby transactions are recorded in a way that prevents them from being modified or changed without notice. The recording process enables establishing cryptocurrencies used to complete the trading transactions in digital blocks. The application of this technology in the oil markets would enable faster, and more secure digital transactions while avoiding large arrangements of documents, contracts and certificates required for conventional physical trading of commodities, and that will enhance the trading system efficiency. The VAKT system uses the blockchain technology as a new digital platform for physical trade of oil. It includes the contracts, data and documents involving oil producers and traders to share their market data and agree on common terms of reference before they reach a sale. Conventionally, producers and traders have to go through thousands of transactions every year, and with the use of Blockchain-based VAKT platform, it is anticipated that hundreds of millions of dollars a year can be saved by eliminating the paperwork process needed when trading oil in the physical markets.
Despite the many features that the blockchain technology holds, it is left with many issues and challenges to be solved. For instance, the blockchain may lack the monitoring process because it is a decentralized independent system. Furthermore, there remains a major uncertainty about the technology given the fact that the industry has little or even no knowledge about it, in addition to the cybersecurity and energy consumption issues.
Other issues of a major uncertainty of the blockchain technology are its regulation, adoption in the markets, types of digital agreement, standardized digital contracts, and the costs. According to an expert source, “What can accelerate the growth of these platforms is when other services get included such as insurance, logistics, and inspection, starting with the basics and adding more market and more services over time”, said Anothy van Vliet, ING Global Head of Trade & Commodity Finance.
The Conventional application of the blockchain technology in the energy sector has been in the trade of excess electricity to nearby houses at certain times associated mainly with renewable sources of energy. Involving the stakeholders is key to the success of this technology. Currently, the VAKT platform involves major oil producing companies; BP, Chevron, Equinor, Total, Shell, and Reliance, banks; ING, Societe Generale, ABN AMRO, as well as independent traders Gunvor, Koch, and Mercuria. The VAKT platform will be available initially for the North Sea crude oil, and if it proves success, it could be extended to a wide range of other commodities which could move the industry to a new digital era.
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