INSIGHTS FROM AMPHORA
Future-Proofing Oil Through Digitalisation
In our first eBook ‘Agenda 2030’ we summarised what steps were being taken by the oil community to safeguard their future prosperity. The questions asked to our audience were made to a backdrop of an industry experiencing a surplus of all the primary energies – oil, gas and coal.
Just a few months ago the agenda for the mid/long term future of oil was shaped by Greenhouse Gas Emissions. We asked the industry how they would remain profitable in the mid term. Our interviewees would need to reconcile with leaving 65% of recoverable energy reserves unused in order to have any chance of meeting the targets set by the Paris treaty set at two degrees.
This was a mid/long term challenge has since been eclipsed by matters more immediate.
Source: BP Statistical Review 2018
Since Covid we have seen the total collapse of demand for all energy. With a daily surplus of 18 mb/pd globally, pricing is not only historically low, it is geographically chaotic. For example, WTI is in hyper contango where April saw the six month future at an 18 usd/bbl premium to the spot. Or an example where in April, the May trade for WTI for Houston stood at 18.79 USD, significantly lower than inland prices. This is a complete reverse of the norm.
Nor do we see this ‘sloshing’ of a surplus tailing off any time soon. For example, there is anecdotal evidence how unprofitable wells in the US/Canada are not being shut down. We even see absurd situations where a bank will demand the well continues to operate when they have entered Chapter 11 bankruptcy.
Sad to say that such extreme volatility, compounded by locational price disparities never seen before, may become the new normal. At least for a while.
By any measure, Covid has created the compelling event to encourage adoption of a digital pathway in the Oil Industry. Digitalization is the key to innovation, efficiency and transparency : Bringing the disparate players into a uniform ledger would help address some of the chaos.
What contribution is VAKT making to help protect margins of this industry?
VAKT is a multi-sided digital platform providing post-trade services to the physical commodity trading industry. Our goal is to become the digital backbone of all physical commodity markets, allowing transactions to be confirmed on the platform; the details of their logistics to be processed; and settlement to be effected seamlessly and securely on VAKT — both the delivery of the goods and the associated payment.
As such, our main contribution to the industry at this early stage is to help our clients reduce their unit transaction costs. With so much fundamental data now digitised and (almost) freely available, including considerable improvements of cargo tracking in oil trading over the past 3 years for instance, the margins of physical traders have compressed significantly. By comparison, their processes have remained relatively unchanged for the past 30 years; there is therefore considerable scope for a reduction in costs by digitising the whole back-office and operations chain of their business.
Is there a figure, percentage or absolute, that can be placed on digitisation of the supply chain and finance?
This is a difficult question to answer since it actually depends on the definition of digitisation. If digitisation is understood as a transition from handling paper documents to sending emails with electronic versions of these documents attached, the proportion is already very high, probably 70-80% of all trade. The internet is a much more reliable delivery method than the traditional postal service or couriers. There are many countries where customs and banks are actually impediments to that form of digitisation.
Now, if digitisation is defined as capturing in software the business logic of the supply chains’ workflows and allowing multiple value participants — such as traders, brokers, terminal operators, surveyors, shipowners, port agents and trade finance banks — to bring their respective data contributions on a shared ledger, such data being legally binding on all parties concerned, then the percentage of digitised supply chains is extremely low, probably less than 2-3%. In financial services, a distinction should also be made between traditional lending and capital markets, the latter being a lot more advanced in their digitisation journey than the former as they tend to process relatively standard transactions.
Processes have remained relatively unchanged for the past 30 years; there is, therefore, considerable scope for a reduction in costs by digitising the whole back-office and operations chain of their business.
Etienne Amic, CEO of VAKT
Can you see any reason why certain producers opt not to adopt VAKT or any rival provider?
If we already cover their market, there is no rational reason for any forward-looking commodity trader not to adopt VAKT at this stage; but we hear from prospective clients what their concerns are. One of them is the cost of integrating their own systems to VAKT; if that is the case, we are here to assist and lower that cost: it is in their best interest, and ours. Another, which is common to all digital platforms, is the need to have created enough network effect on VAKT to justify the cost of joining.
That is the reason why we were created and are now owned by a consortium of some of the largest oil traders in the world: they bring a critical mass of transactions in the market segments that we launch. We are following the same method of finding early volume with surveyors, terminal operators and trade finance banks.
Does intend VAKT to move their technology into renewable energy in the future?
We are currently configured to serve the oil and refined products trading industry, which is under immense pressure to lower its carbon footprint. By lowering the cost of physical transactions and allowing the optimisation of flows, we can make an immediate contribution to the environment and society. The drawback is that this is a significant but hard-to-quantify contribution.
There is a much more ambitious goal which is within reach of VAKT’s technology right now: calculating in real-time the carbon footprint of hydrocarbon trading, company by company and all over the world at once, using blockchain and machine learning. This is a complex problem, which requires to know which traders bought FOB or CIF (whilst respecting the confidentiality of their commercial operations) and allocate the carbon cost of shipping accordingly. VAKT can do this thanks to our confirmation facility, which is aware of the Incoterms of transactions.
This also requires to know which exact bunker fuel quality is being consumed by the tanker affecting the voyage: this is now also possible by tracking ships carefully with AIS signals and having shipowners volunteer their fuel slate to the VAKT platform. Reaching this ambitious goal would help our clients — the largest oil traders in the world — report and lower their emissions footprint. This is worthy of our time as a company: the oil industry is very /unlikely/ to disappear in the next 20 years and the technology that VAKT is deploying can help it renew its social mandate to operate.