By Milana Vinn and Laura Blewitt
- Revamping $2.7 billion of trades supplying half of world crude
- Online ledger may mean cutting hundreds of backoffice workers
Every day, dozens of oil tankers — some as long as five football fields — set sail for ports around the world carrying millions of barrels of crude and a piece of paper that generations of sea captains have held as dear as their cargo.
The bill of lading is the document that verifies ownership of a commodity that can be worth more than $122 million per ship. Without it, buyers and sellers who trade $2.7 billion of crude daily are unable to do business in an ocean-going tanker market that supplies almost half of the oil consumed globally. But some of the biggest producers, traders and banks want to do away with the bill-of-lading system, along with other forms of time-consuming record keeping required for every transaction. To trim costs and cope with tighter profit margins, the industry is eyeing the methods used to track and verify cryptocurrencies like Bitcoin using a shared online ledger known as blockchain.
“The way we do our title transfers and post trade execution is very heavy on paperwork,” said Alistair Cross, global head of operations Mercuria Energy Group Ltd. “And the paperwork hasn’t really evolved over the last couple of hundred years.”
The appeal of online ledgers is that transactions are recorded using encryption to ensure security and allowing each deal history to be viewed by the network of users. While most oil traders use digital technology to store their own data, blockchains force buyers and sellers to work from the same record book. That creates more transparency and eliminates the need for much of the documentation going back and forth, as well as the people who handle it.
A consortium — including oil producers BP Plc, Royal Dutch Shell Plc and Statoil ASA, commodity traders Gunvor Group Ltd., Mercuria and Koch Supply & Trading, and lenders ING Groep NV, ABN Amro Bank NV and Societe Generale SA — has been developing a blockchain-based platform for physical oil trades.
They’ve already tested the system with a tanker of crude that was sold three times before the physical shipment reached the final owner, China National Chemical Corp. Verifying the transactions took 25 minutes, down from what is normally three hours, Mercuria said. And the process eliminated the risk of routine errors that take even more time to sort out.
“In our business, you have people managing transactions all over the world,” said Souleïma Baddi, a managing director and deputy head of commodity trade finance in Switzerland for Societe Generale. With a blockchain system,“people will perform their tasks immediately — directly on their phone or on their iPad where they do their job” — rather than relying on others to collect the necessary paperwork, Baddi said.
Back-office workers can spend hours chasing down documents from counterparts needed to settle each contract, where a single error can be caused by a smudge on a written invoice or a date or location was entered incorrectly. With blockchains, many of those workers wouldn’t be needed.
“Clearly, these jobs will be affected,” Anthony van Vliet, ING Groep’s global head of trade commodity finance, said by telephone from Amsterdam. “If ultimately there are savings, it will mean you could do the same work with less people.”
The first to go will be hundreds of middle office professionals in finance, logistics, operations and accounting, said David Shrier, an associate fellow with University of Oxford’s Said Business school and chief executive officer of Distilled Analytics, a behavioral analytics provider for financial services.
Companies are keen to use online ledgers to cut costs, according to Hugh Halford-Thompson, co-founder of BTL Group Ltd., a blockchain technology company that’s signed up Eni Trading and Mercuria to use its service for trading on gas European pipelines.
“I’ve had the conversation — be it with the bank or with energy traders — around, ‘This is the process. Who can we cross out? Who can we pull out of this? What’s no longer needed?’” Halford-Thompson said.
To be sure, any new systems would face hurdles, from costs to adopt the technology to hesitation about putting all that data online. Also, an electronic bill of lading doesn’t yet have the same legal standing as the paper document. “There’s no case law,” ING’s van Vliet said.
Still, paper documents remain susceptible to fraud, so traders are interested in a more secure alternative.
“People have bought and paid for goods off those fraudulent title documents only to discover that what they thought they bought wasn’t there,” Mercuria’s Cross said.
S&P Global Platts, a provider of commodity data and prices, said it seeks to reduce errors and improve security by employing blockchain technology to monitor fuel stockpiles at Furajairah Oil Industry Zone, the Middle East’s biggest hub for refined products. Terminal operators currently tabulate the weekly inventory data manually.
Advocates of online ledgers note that asset custody is disclosed within the blockchain, so it’s clear to everyone who owns what. BTL’s technology for trading European gas doesn’t use a paper bill of lading, and it wasn’t required for the test transaction by the consortium with the oil tanker sent to China.
“It will allow traders and everyone within an energy firm or within a bank to spend more time on the work that really matters,” ING’s Van Vliet said.