How blockchain solves three oil and gas challenges. Part two: Liquidity
This is the second of three linked articles that look at three of the major challenges that face the oil and gas sector. We went into more detail about those challenges in the first article, which you can read here, but the challenges can be simplified into three words: (1) efficiency, (2) liquidity and (3) bureaucracy. In this second article we are going to focus on liquidity.
In the 1860’s an investment industry designed to solicit funds for the purpose of drilling oil wells began. For the subsequent century and a half, the oil and gas sector has enjoyed a preeminent role in the global economy, revolutionizing how we live and work and helping globalization become a reality. Its position is potentially being challenged however, with renewable technologies improving to the point where they are on the cusp of offering a viable alternative. We cannot expect a radical energy shift in the short term, as most of the renewable sources of energy are reliant on government subsidies and are yet to prove their economics for the private sector, but it certainly seems like a more realistic possibility than it did two decades ago.
As a result, the oil and gas sector is less able to automatically rely on the institutional investment community than it was a decade ago. Projects need to look further afield to secure backing. The oil and gas investment industry of the 1860’s is no longer a viable alternative source of financing. Even the initial public offering (IPO) market for small and mid-cap oil & gas is close to zero.
Blockchain has arrived at just the right time to make this possible.
Alternative sources of liquidity
From a user rather than technical perspective, a blockchain can be seen as an instant digital transaction mechanism that provides a tamper-resistant, global record of activity. As new actions are completed, they are added to the record so that relevant parties can see what is happening, when and understand how the action will have a knock-on effect on a project.
In conjunction with this, blockchain can be used to tokenize a project, associating a value to a product, service or quantity.
In the case of the oil and gas sector, it can be used to tokenize natural resources, giving them a value that makes them tradable. It can also simply tokenize equity rights in select oil and gas campaigns, creating a more liquid primary market for private equity investors.
Because the administration of an oil or gas token can be managed within an exchange system, buyers and sellers could trade oil and gas in a completely new way. This in itself would be very useful to the oil and gas sector because it would make trading faster and more efficient, but it would also open the trading up to new sources of liquidity.
The reason for this is relatively simple. In the past, many projects in the sector have required significant levels of investment, but the high costs and administrative charges associated with the sector have meant that smaller investors have basically been priced out because realistically, involvement is only economically viable at volume.
The automation that is possible in a blockchain-based environment means that the point of economically viable investment is far lower, so projects can offer the opportunity to participate to a far smaller type of investors.
This means that the oil and gas sector can open itself up to new sources of liquidity and will also be making the most of the contribution of existing institutional investment by being able to offer participation at a far lower price.
We will discuss this aspect in more detail in the final article in this series, focusing on how blockchain can circumvent many of the unwieldy bureaucratic practices that have developed over the last century in the oil and gas sector. You can read the final article here.
PermianChain Technologies is a pioneer member of the Blockchain Research Institute. PermianChain is investigating ways to harness the power of blockchain technology, data science and artificial intelligence to digitize, tokenize and monetize proven but undeveloped natural resources, starting with oil and gas. The PermianChain, which already has secured oil and gas reserves to be listed on its platform, intends to unlock liquidity to revolutionise the way that oil and gas reserves are funded, produced, bought and sold on a permissioned-access blockchain. The firm is currently in the process of applying to for its regulated digital securities trading and investment platform.
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