{"id":25177,"date":"2017-11-15T19:22:15","date_gmt":"2017-11-16T00:22:15","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/blockchain-to-transform-energy-commodity-trading-industry\/"},"modified":"2017-11-15T19:22:49","modified_gmt":"2017-11-16T00:22:49","slug":"blockchain-to-transform-energy-commodity-trading-industry","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/blockchain-to-transform-energy-commodity-trading-industry\/","title":{"rendered":"Blockchain to Transform Energy Commodity Trading Industry?"},"content":{"rendered":"

Can energy and commodity trade companies capitalize on the new technology \u201cSmart Contract\u201d powered by Blockchain to help them streamline their business operations and achieve cost saving?<\/p>\n

The commodity trading industry has been behind other industries to adopt and capitalize on technologies to improve its productivity and efficiency [2]. With prior experience working in energy commodity trading industry, I witnessed first-hand the inefficiency in handling trading transactions, including the number of counterparties, the number of documents, and the lead time, and observed many rooms for improvement. The Figure A<\/strong> below showed the dynamic and complexity of the current energy and commodity transaction.<\/p>\n

Figure A <\/strong>– Energy and commodity transaction life cycle.<\/p>\n

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Source: EY, \u201cOverview of Blockchain for Energy and Commodity Trading\u201d<\/p>\n

However, with the megatrend of \u201cDigitalization\u201d of supply chain and the advent of new technology called the \u201cSmart contract\u201d, is this really a game-changing technology or just another buzz word to keep the industry excited?<\/p>\n

What is Smart Contract?<\/u><\/strong><\/p>\n

Smart contracts are one application of Blockchain technology. It allows the possibility of automatically executing pre-defined code once a set of pre-specified conditions are met [5]. For example, smart contracts will enable the ability to automatically execute the terms in the commodity trade contracts once the conditions, such as the successful delivery of goods, are satisfied. The key features of smart contracts include transparency, trust, efficiency, and control and security [1].<\/p>\n

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The Degree of Disruption<\/u><\/strong><\/p>\n

To what extent does the level of disruption a smart contract bring to the industry? Let us look at the issuing of letter of credit (L\/C) which traditionally can take up to a month to complete. In 2015, there were more than 4.5 million letters of credit issued globally, accounting for over $2 trillion dollars [2]. With the use of smart contract, energy and commodity companies will be able to not only save cost by simplifying processes or reducing paperwork but also improve transparency, control, and security throughout the supply chain.<\/p>\n

One of the largest commodity trading firm, Mercuria, has estimated it could reduce its cost by 30 percent by using the technology. With such a huge volume of trade, a slight reduction in cost could mean billions of dollars saved for every party across the supply chain [2].<\/p>\n

Industry Short- to Medium-term Responses<\/u><\/strong><\/p>\n

Right now, the smart contracts have not been fully integrated into the industry business process yet. There are certain conditions that must be tested for a blockchain-based application to provide the most value, including the number of parties in the ecosystem, the extent of trust issues, and the extent of transparency issues.<\/p>\n

However, there has been a number of promising pilot projects of smart contract that have been carried out by several parties within the energy and commodity trading industries. For example, a global commodity trader joined with a bank and a technology partner to developer a commodity trade finance platform (utilizing smart contract feature) to facilitate US crude oil transactions. Many more of this partnership are happening around the globe [3].<\/p>\n

In late March 2017, Natixis (financial service), IBM, and Trafigura (leading commodity trading firm) have worked together to introduce the blockchain solution in commodity trade finance for US crude oil transaction. This initiative is referred as the effort to modernize trading in the global crude oil trading industry, which is previously dominated by manual and paper processes. A more medium-term is their expansion plan to allow all parties in the supply chain to participate and enter data directly into the blockchain application [4].<\/p>\n

What more can be done?<\/u><\/strong><\/p>\n

It seems so that the many companies in the commodity trading space are in the phase of piloting the projects so see the practicality of the smart contract application. To some extent, I agree with this short-term oriented approach. However, I would add the following actions to plan further into the future.<\/p>\n