July 2020

Trends and Resources

Business Trends: Application of blockchain technology in the petrochemical industry

The petrochemical industry relies on an extensive supply chain system to bring products and services to competitive markets.

Ezzat, A. A., Pharos University

The petrochemical industry relies on an extensive supply chain system to bring products and services to competitive markets. Each supplier maintains a separate ledger in compliance with its policies and procedures. As a result, most business transactions are inefficient, expensive and vulnerable. Inefficiencies result from the duplication of a single contract by each participant in the supply chain. The time it takes for each participant to record and reconcile transactions can slow down the flow of capital and revenue throughout the entire supply chain.

Therefore, strategy modification is needed in how companies conduct business transactions economically and efficiently. Blockchain technology has been developed to deal with strategy modifications and help companies conduct business transactions and data security economically and efficiently. This study covers the prospects of applying blockchain technology in petrochemical-related industries.

Due to crude oil price volatility, the high cost of upstream industry developments and challenges in the processing industries are forcing hydrocarbon processing industries to reduce costs in an economic and efficient regime. The application of blockchain technology is an approach to conquer these challenges. This approach is based on geographic, political and operational realities, along with the scale of investment required within the industry. Therefore, strategy modification is needed in how upstream and downstream companies conduct business transactions economically and efficiently.

Conversely, petrochemical industries are based on developing technologies with complex configurations. Industrial companies cannot exist in isolation since they rely on extensive supply chain networks, which can connect suppliers, partners, distributers and customers across different geographic locations.

The application of blockchain technology in the petrochemical industry is a system integration approach through engineering, procurement, construction management and other key service supplier relationships. It allows automated business transactions to become more sophisticated, enabling industry networks to evolve into self-governing cognitive business networks economically. The expected outcomes are increases in profitability and improvements in key performance indicators (KPIs).

The concept of blockchain

Essentially, blockchain is a mode to manage transaction processing through transparent rules to construct non-tampering and traceable blockchain data structure. It is an application mode combining computer technologies such as distributed data storage, consensus mechanisms, peer-to-peer transmission, and encryption algorithms.

The biggest innovation of blockchain technology is that transactions are no longer stored in the central database. The system is based on peer-to-peer application, where the computers in each node in the network have equal status—each node has the same network power, and there is no centralized server. All nodes share information through specific protocols. This means that in the blockchain model, transactions can be conducted directly between two parties without third-party intervention, and all transaction data is stored in the distributed blockchain.

Key characteristics of blockchain

Blockchain technology has six main characteristics: decentralization, immutability, transparency, efficiency, security and anonymity.

Decentralization. This feature clarifies that the blockchain-based system is no longer dependent on the central processing node, which realizes the distributed recording, storage, and data updates. The status of each node is the same, and the data blocks are maintained by the nodes with the maintenance function in the entire system.

Immutability. Information cannot be changed after being verified and added to the blockchain.

Transparency. Transparency is the basis for blockchain to be trusted since recorded data and updates are transparent to the nodes of the entire network. Therefore, network-wide nodes, with high transparency, can be used to review and track data records and operations.

Efficiency. The blockchain technology makes the system more transparent by distributing database records to users in the system, making it more efficient in terms of risk and cost.

Security. Since the blockchain-based system has the characteristics of decentralization, the security of the entire system is safe.

Anonymity. In blockchain systems, both parties can make the transaction anonymous because the program rules can automatically determine whether the exchange activities between nodes are valid.

Technology cooperation

The developments of artificial intelligence (AI) and cloud computing are being researched for blockchain technology developments (e.g., AI based on blockchain uses smart contracts, in terms of user equipment authorization, authentication and value exchange, to improve security).

Conversely, the combination of blockchain and cloud computing will effectively reduce the cost of blockchain deployment. In a practical case, blockchain-as-a-service (BaaS), developed by the combination of blockchain and cloud computing, aims to provide users with better blockchain services, such as good resource management tools, customized data analysis and reporting systems.

High-performance blockchain technology

Originally, each blockchain network is a relatively independent network, and data information cannot be interconnected. However, cross-chain technology makes blockchain suitable for industries with complex scenarios, such as the petrochemical industry.

PETROCHEMICAL INDUSTRY BLOCKCHAIN SYSTEM

The petrochemical industry can be divided into three main classes: primary, intermediate and end materials. The primary class covers feedstocks and raw materials.

The intermediate class covers intermediate petrochemical materials (e.g., monomers).

The petrochemical industry includes the following sections:

  • Capital projects
  • Commercial trades/deals and service execution contracts
  • Supply chain, pipeline, logistics, shipping procurement
  • Marketing and related programs
  • Trade in carbon emissions
  • JV data/accounting
  • Transfer pricing
  • Production sharing.

The intermediate products include monomers, resins and compounds, which are directed to processing units to produce finished products. The value chain of the petrochemical industry is summarized in TABLE 1.

Petrochemical industry management system

The management system of petrochemical plants can be classified into three aspects:

  • Reconciliation and paperwork impacts
  • High risk of inefficiency in transactions
  • Third-party management costs.

In addition, petrochemical industry executives need to understand how best to extract value from blockchain technology and develop an adoption strategy. The following criteria should be considered in the application of blockchain technology:

  • Business operations position: Considering the highest-value opportunities
  • Globally accepted standards achievements: Exploring the role of alliances and how profit pools might be redistributed. Consider blockchain as the new business environment and collaboration as the optimal way of working.
  • Business scale’s lines and applied revenue models: Looking for new sources of revenue as business models (e.g., explore how blockchain might extract further value from other technologies, such as the IoT and cloud computing).

Blockchain aspects in the petrochemical industry

Since the petrochemical industry is a multi-link industry, many transactions and contracts are involved in these phases, resulting in reconciliation and tracking work.

Smart contracts. These contracts record terms with computer language instead of legal language. Smart contracts can receive transaction requests from outside of the organization and generate new transactions. The results can be updated, and cannot be forged or tampered with once confirmed. Smart contracts can greatly reduce paperwork, simplify the process and improve efficiency.

The smart contract model comprises the following contents:

  • Input transactions and events
  • Process responses and rules
  • Contract value and status
  • Output transactions and events.

Decision-making and management. Blockchain has important applications in decision-making, such as feedstock selection, refinery/petrochemical integration, maintenance and marketing-related services. The blockchain application will result in the proof of feasibility study results and can provide records that cannot be tampered with, which greatly helps industry control.

Conversely, for management decision-making, blockchain technology leads to efficient data exchange and transmission (e.g., smart contracts can help automated and transparent voting applications, which improves the correctness of decision-making).

Supervision. Many petrochemical products are distributed through various channels such as producers, suppliers and contractors. Blockchain can track production situations and provide transparent evaluation of the process, including asset tracking and equipment lifecycle. This is the main function of blockchain technology—solving petrochemical industry KPI evaluation and supply chain management. TABLE 2 shows a typical system architecture of a petrochemical enterprise structure.

Opportunities and challenges

Due to decentralization and transparency, blockchain technology will bring many opportunities to the petrochemical industry. However, it will also encounter many challenges (TABLE 3). Blockchain technology, a cyber-secure industry concept application—which is an operational concept—could add trust, security and a de-centralization approach to petrochemical plant operation.

Takeaway

Blockchain technology has excellent potential in the petrochemical industry. This study introduced the core theory of blockchain technology, along with the application status, opportunities, challenges and risks within the petrochemical industry.

Blockchain can bring many opportunities, such as reducing transaction costs and increasing transparency. To satisfy market and management needs, while navigating feedstock price volatility and environmental regulations, the industry should follow blockchain technology toward cross-chain and hybrid consensus mechanisms. HP

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