The future of natural resources: Lessons from the financial services
There are very few industries that have a similar global prominence to oil and gas. In fact, there is probably only one: the financial services. The two industries have a long history of working in tandem, both have intricate, sometimes convoluted working practices and have often been seen as being too complicated for individual regulators to take on.
This has changed somewhat over the last decade for the financial services. A string of regulations enforced by single and supranational jurisdictions have had global ramifications and changed the way that the sector operates. At the same time, there have also been changes as the result of competitive pressure, as individual organisations within the sector have changed working practices as they strive to be as efficient as possible and keep fees low.
The bottom line is that what the financial services sector has achieved would have been inconceivable a decade ago. For individuals, cheques that used to take three days to clear have been replaced by instant bank transfers. Regulators, meanwhile, expect an unprecedented level of transparency and reporting that used to be every six months is increasingly expected to be live.
Talk to someone in the financial services fifteen years ago about straight-through processing (STP) and T+3 (the difference between the transaction date for a stock, bond, exchange traded fund, or mutual fund, and the settlement date), and they would have smiled benignly and said that they were both things that the sector had ambitions to start working towards in the near future. Today, to all intents and purposes, every transaction is processed virtually instantaneously and STP is no longer a topic of debate at industry gatherings. T+3 meanwhile, has basically accelerated into T+1 and very few people bat an eyelid.
These changes have been welcomed by investors as well as regulators, who have taken the opportunity to examine the governance of financial services organisations and ensure that everything is as close to above board as it is possible to be.
On the other side of the street
While this has been taking place, the natural resources sector has remained fairly static from a governance perspective. Oil and gas contracts are traded in much the same way as they have been for the last five decades (with minor concessions to the fall of the fax machine and the rise of emails) while the complexity of the supply chain that runs from exploration and production firms, through refineries and ultimately to retail organisations, has been used as a reason to avoid reforms that could enhance efficiency and create value for investors.
There’s no doubt that the natural resources sector is uniquely complex, with a massive number of organisations, individuals, regulators and investors involved in the process of moving oil and gas around the globe.
There’s no argument that the financial services sector is a very different industry, it is also uniquely complex, and given what it has achieved over the last decade, some, particularly investors and regulators, might be forgiven for suggesting that the natural resources sector could conceivably step up a little.
The problem is that the financial services sector is predominately focused on moving money around the world in the most efficient way possible, meaning that in many ways, bureaucratic efficiency is one of the primary focuses and generators of profit.
For natural resources, the primary focus is on supplying energy and power to consumers, a monumental task for which bureaucratic efficiency tends to be a nice to have rather than a competitive advantage. For oil and gas firms that keep a constant watch on their margins, changing the bureaucratic environment is likely to be a distraction that will increase administrative costs and lead to higher prices for consumers, at least in the short term.
Unchained through the blockchain
The positive news is that the blockchain creates an opportunity to massively enhance administrative efficiency without adding to costs. This can be achieved relatively quickly by creating a live, transparent and tamper resistant administrative structure that covers the entire natural resource supply chain.
In short, it would create a global database that could be viewed and amended by authorised people throughout a project’s lifecycle. This would have three instant advantages:
- It would help organisations see where processes were being slowed down
- It would give investors confidence in an organisation’s efficiency
- It would provide regulators with a quick and comprehensive understanding of where natural resources have come from
What this means is that using the blockchain, natural resources can quickly move to a position of comparable efficiency with the financial services. This could be an important change for oil and gas organisations that were likely to start finding themselves under pressure from regulators even before Covid-19 completely changed the economic outlook.
The financial services have proved that it is possible to vastly enhance administrative structure across a complex, global sector in a way that satisfies the needs of organisations, investors and regulators. The natural resources sector would be wise to show that it is moving to follow voluntarily.
The alternative could be having something forced upon it.
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.