EU Gas Trading in Transition: The Impact of Blockchain
In this second of two articles covering the transition of EU gas trading, Nicholas Newman discusses how natural gas trading in Europe may be on the cusp of a blockchain revolution. You can read the first article here.
Blockchain technology, most commonly associated with trading cryptocurrencies, is a virtual digital and decentralised ledger system which records online transactions in groups known as blocks.
Leading energy companies in wholesale gas trading, reconciliation and settlement are currently testing this technology in parallel with their live trading systems. Hopes are high that use of blockchain will cut administrative processes and costs, as well as eliminating errors when used in tandem with smart contracts.
Catherine Newman, General IT manager at Gazprom Marketing & Trading, told KNect365 Energy that using blockchain in commodity trading “has the potential to provide cross-industry opportunities to improve the speed, security and efficiency of transactions with the company’s counterparties". Her viewpoint is supported by Vattenfall's acting head of trading, Frank van Doorn, who commented that blockchain has "great potential to increase automation and efficiency within our trading operations."
Deloitte’s Blockchain Applications in Energy Trading report (February 2018) describes a future in which energy trading is conducted by robots and smart contracts are made possible by blockchain technology. It envisages a virtual trading floor in which robots carry out purchases of gas on behalf of an industrial client.
To initiate a trade, the robot’s trading algorithms will scan for the level of market demand and search for the best deal, which it then presents to the client. Following client approval, the robot executes the trade, the details of which are recorded and confirmed on the blockchain platform, which makes the contact’s details available to the pipeline shipping the gas.
Since gas flows continuously throughout a month, quarter or a year, physical settlement occurs daily with payment initiated instantly. In sum, all transactions are added to the blockchain and the information is readily available to the seller, buyer, pipeline and bank. Physical title of the gas is also conveyed directly via the blockchain.
Viewed from this perspective, the employment of blockchain technologies in energy trading promises a leap forward in market efficiency. With such potential gains waiting to be captured, consortiums of energy companies, traders and utilities are testing a variety of blockchain market trading technologies provided by, amongst others, the Vancouver based BTL Group, Hamburg sited PONTON GmbH and Vienna based start-up Grid Singularity, to buy and sell energy.
Mini-Case Study: BTL's European Energy Project
BTL Group’s offering, known as Interbit, is a next generation blockchain platform able to operate and interconnect many thousands of secure and private blockchains per server. The BTL Group is testing its Interbit platform with the trading arms of oil and gas supermajors and leading energy traders including Eni Trading & Shipping, Total, Gazprom Marketing & Trading Limited, Mercuria, Vattenfall, Petroineos and Freepointto deliver gas trading reconciliation through to settlement and delivery of trades.
To date trials of Interbit blockchain technology with smart contracts and automatic trade reconciliation processes has yielded significant back-office cost savings. In spring this year, BTL will be working with the project participants to extend blockchain technology beyond trade reconciliation and on to settlement.
Remarking on the benefits of using Interbit blockchain technology in gas energy trading, BTL CEO Domic McCann told KNect365 Energy that “the technology reduced risks, lowered costs and provided better protection against cyber threats. It should enable the automation of many back-office processes such as confirmations, invoice generation, settlement, audit, reporting and regulatory compliance. It should mean that any discrepancies on such issues over prices, volumes and dates are flagged up in real time.”BTL’s second-phase solution has been dubbed OneOffice.
However, there are downsides for energy traders and market incumbents. Blockchain could prove to be a disruptive force by opening up the market to new entrants at the expense of brokers, exchanges, price reporting agencies and clearing houses.
George Paterson, Director at Hexegic - an Oxford- based cyber risk intelligence company - sums up the potential impacts of blockchain thusly: “the adoption of smart contracts, enabled by blockchain technology, will disrupt the energy industry comprehensively, by allowing new actors to enter the market, and removing expensive and partial intermediaries and cartels. This will free-up energy trading.” Furthermore, “the displacement of political interference, and the increased rapidity of secure and immutable records of trades in energy, eventually with little or no human intervention, will reduce the ability of large state actors to manipulate the energy market.”
The aggregate of these developments leads to the conclusion that Europe’s energy trading, after undergoing significant transition, is now on the cusp of potentially revolutionary change brought about by the utilisation of blockchain technology.
