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How Smart Contracts Can Help Improve Your Oil and Gas Business

Blockchain as a technology has the power to change the way business works. It offers a distributed ledger that makes transactions transparent by recording every action with regard to a specific asset. While it is still anonymous, the basic idea is that if everyone can see a transaction has taken place, there is no need for a centralized system that double checks the accuracy of each transaction. In terms of currency, this removes the bank. In a supply chain, blockchain streamlines the process by eliminating the need for all the checks and balances non-blockchain-powered systems require - but that's not all. Blockchain also makes "Smart Contracts" possible.


What Are Smart Contracts?

"Smart contracts enable counter-parties to automate transaction tasks that are typically performed manually and that require the involvement of third-party intermediaries," says Mark Koeppen, Deloitte Consulting principal. "Smart contract technology can result in processes that are faster and more accurate and cost-efficient. Also, the parties to a smart contract agree to be bound by the rules and determinations of the underlying code, which in theory should lead to fewer contract disputes."

How Are Smart Contracts Related to Blockchain?

Blockchain makes smart contracts possible in a few different ways, but not the ones you might think. It has nothing to do with currency (or at least it doesn't have to). Blockchain and smart contracts are tied together because the only way smart contracts can work without a centralized checks-and-balances system is to rely on the distributed ledger that is blockchain. The Economist explains, "Blockchain is a distributed ledger that maintains a continuously-growing list of every transaction across every network distributed over tens of thousands of computers." When one is updated, they are all updated. There is no such thing as an old version or anything like that.

Putting Smart Contracts Into Perspective

Think of it like this. Contracts are agreements to which all parties involved have signed off. They specify that as long as A and B happen, action C will happen (e.g., you will pay a company XYZ to deliver a shipment. Company XYZ will receive the money after they have transported your items and you have confirmed delivery). Smart contracts work in a similar fashion. As long as everyone agrees to the terms and conditions, action C will happen after action A and action B. The difference is that smart contracts do not require a middleman to ensure that the terms and conditions have been reached. Everything is transparent - and it is automatic. Using our shipment example, you wouldn't have to confirm delivery or write a check. You would simply attach a GPS tracker to the shipment. When it reaches the destination, your payment to company XYZ will be automatically released. The bill is paid, your goods have reached their destination, and you didn't have to do anything other than put the smart contract in action.

How Do Smart Contracts Work in Oil and Gas?


Imagine a truck that leaves one of your production facilities with less product than it should have onboard. "A field ticket based on a smart contract is created and checks are generated at each step so when the truck fills up, the data is inputted as to how many gallons are on the truck," explains Rana Basu, the president and founder of Consurgo. "The field ticket would then check the tank to ensure it is now short that same number of gallons… blockchain provides the validity of the facts in the process."

Within the oil and gas industry, smart contracts just make sense. Assets are going to pass through lots of different hands before reaching their destinations. Tracking these exchanges and automating payment release simplifies matters.
This was a very brief introduction to Smart Contracts and how they could be used. In the future, we will dive deeper into the tech and the possibilities going forward. If you have any questions or comments, please contact us.

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