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Insight: Energy-trading blockchains edge closer to reality, but market remains cautious

Summary:
Is blockchain gaining a foothold in the energy sector? The last two years witnessed a boom in projects around commodities trading and logistics using distributed ledger technology, but the pilots proved slow to move on from proof of concept phases. That might be changing, with two industry-backed blockchain projects in the energy sector now gathering momentum. Vakt, a consortium of energy majors, banks and trading houses, took its blockchain-powered post-trade management system live on November 28, marking a significant commercial launch using the technology. The platform is in a “private” launch phase, with five of the project investors – BP, Equinor, Shell, Gunvor and Mercuria – actively participating and using the system to confirm and manage deals in the North Sea oil market. The other

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Is blockchain gaining a foothold in the energy sector? The last two years witnessed a boom in projects around commodities trading and logistics using distributed ledger technology, but the pilots proved slow to move on from proof of concept phases.

That might be changing, with two industry-backed blockchain projects in the energy sector now gathering momentum.

Vakt, a consortium of energy majors, banks and trading houses, took its blockchain-powered post-trade management system live on November 28, marking a significant commercial launch using the technology.

The platform is in a “private” launch phase, with five of the project investors – BP, Equinor, Shell, Gunvor and Mercuria – actively participating and using the system to confirm and manage deals in the North Sea oil market. The other shareholders are Koch Supply & Trading, ABN Amro, ING and Societe Generale.

The five active users are now running the platform with live data in parallel with legacy systems, interim chief executive John Jimenez told S&P Global Platts at the company’s offices in early December. “It’s not beta testing with dummy data,” he said.

Go deeper: Read our special report: Blockchain for commodities

And while the participants are still running legacy systems, Vakt expects that these will shrink over time as data moves onto the shared ledger. The company is also hoping to quickly move into new markets, with the launch of services around ARA Barges and US oil pipelines covering selected delivery points in 2019.

“In 2019 we’d like to move into another commodity other than oil,” Jimenez said. “We’ve even had companies that are in adjacent industries come and ask if they can use the core of our platform and build apps on top of it.”

Vakt said the platform would deliver increased efficiency, as well as mitigation of cyber risks that emerge from transaction data and confirmations being shared by email or PDF documents that are easy to tamper with. The company also points to smoother access to trade finance and enabling firms to clear trades and gain new lines of credit quickly.

In the coming months, the real test will be whether Vakt is able build critical mass and quickly bring on a significant share of companies trading in its chosen markets.

Power and gas trading

Another high-profile application of blockchain in the commodities sector is the Enerchain project, which also boasts support from a host of energy majors and large utilities such as Engie, Equinor, RWE and Uniper, in this case with a focus on European wholesale power and gas trading.

The project has gone from 23 participants at the start of the proof-of-concept phase to 45 participants today. Functional tests have been carried out with 38 participants for power and gas spot and derivatives trading. But the initiative is now trying to shift to a new organizational model in order to move forward commercially.

Hamburg-based IT service provider Ponton has to date played a central organizing role in Enerchain, driving the platform development and coordinating activities. “If this is driven by a single party it’s a conceptual mismatch with blockchain. The participants would like to continue but only if the project is industry-owned,” Michael Merz, managing director of Ponton, said in an interview with S&P Global Platts.

“[Now it is necessary to] transfer the IP rights from Ponton to the consortium. It needs to be established as a legal entity and Ponton will become a service provider… This is what’s in progress now.”  Merz added that the new entity could be active by the second quarter next year.

Enerchain is trying to break into a tough market, though. Given the liquidity, transparency and ease of access that already exists in wholesale European gas and power markets, it is not clear whether the promise of cutting out the middlemen – brokers and exchanges – will be enough of a draw.

Whether the new blockchain applications are aimed at trade initiation, post-trade management or any other step in the commodities value chain, they will have to win over a fairly skeptical audience. At the S&P Global Platts Digital Commodities Summit in London in mid-November, delegates showed that the initial exuberance around blockchain has been moderated. When asked in a poll when blockchain would be considered mainstream, 77% of respondents said 2025 was the likely time horizon.

A source at an energy major responsible for monitoring blockchain developments said his company did not want to miss out on any breakthrough, but still took a cautious approach.

“If I’m really honest, I think blockchain is a buzzword. I’m not sure the technology is required for any application that’s put forward at the moment.”

He added: “You want this technology to solve a problem and I’m not sure if the problem has really been defined yet.”

What is certain is that blockchain has sparked a timely debate around how to bring greater efficiency, transparency and access to trade in energy commodities. The inquisitive mindset and appetite for improvement that distributed technology has inspired can only be positive for the sector’s development.

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