Oil Industry: Tokenization and Blockchain to Massively Reduce Operational Expenses

The cost of operating a well to produce oil as one can imagine is not cheap and carries tremendous risk. Looking at the average operational cost across the industry is not a valid measure as it highly correlates to the size of the company. However, looking at operational expenses as a percentage of revenue, or operating expense margin, paints a more credibly picture. Currently based on estimates in 2017, operating expense margins are usually around 33% with small decreases as business scale up. With estimated revenue in the space of $60 billion per company this comes out to about $19.5 billion per company. The overall average operating expense margin however varies can vary from 85% to 12.4% depending on the sector you are looking at, with drilling carrying the highest percentage and refining/marketing carrying the lowest.

Let’s take a deeper dive at the drilling sector in the Oil business. With such a high operating expense margin, efficiency is of upmost importance. Any delays can carry significant burden to the overall bottom line. This is where the blockchain and crypto can really help revolutionize the oil industry and cut down on inefficiencies caused by traditional direct investments. Cutting down transaction time for investments from months in traditional direct investment to minutes with smart contracts and blockchain will bring cash faster to help pinpoint and alleviate expensive delays that occur throughout the industry. Even a 1% increase in efficiencies and a 1% decrease in operating expense margin could translate to ~200 million in savings per company based on estimates above.

The oil industry is filled with multiple suppliers operating all over the world. Currently each supplier’s ledgers operate in adherence to their own policies and global compliance needs. This makes business transactions very inefficient and expensive as each supplier have no trust in the network and maintain their own records and reconciliation processes. This creates duplicate transactions, incorrect entries leading to disputes, third party audits, fraud, legal action, etc.

All these issues lead to a higher operational expense margin in every sector of the oil industry because they are all interwoven with one another. Payroll expenses can be reduced across the board if business transactions can be automated and streamlined on the blockchain. The risk of fraud and potential cost of legal and third party audits will also be significantly reduced as blockchain and smart contracts will create an environment where parties can truly trust one another. Whether you are exploring and finding the oil, drilling for the oil, providing the equipment to drill, refining the oil, or transporting the oil to where it needs to go, being able to do business and keep the flow of cash efficient and cheap while minimizing risk will help everyone’s increase their overall profits.

— by Michael C. Creadon