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Energy companies enter blockchain technology: opinion
Andrea Morin
Growing concerns about the management of greenhouse gas emissions have become critical in the oil and gas industry, fueled by shareholders, insurers, government regulators and the general public. All want to see emissions managed transparently and responsibly.
This has recently manifested itself in the recent amendments to the Greenhouse Gas Reporting Program as part of the Inflation Reduction Act. It seeks to reduce methane emissions by using financial incentives, imposing fees on super emitters, and introducing reporting standards. Such monitoring is critical because we cannot manage what is not measured.
Innovation comes into play in the form of blockchain.
Devon Energy and Chesapeake Energy, both Oklahoma City-based energy companies, said they have joined Exxon Mobil, ConocoPhillips, Chevron and many others in Blockchain for Energy, a nonprofit consortium of leading energy companies dedicated to leveraging blockchain to improve transparency and efficiency. Likewise, Williams recently announced has partnered with Context Labs to provide a blockchain solution for sustainable and responsible natural gas production.
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So what makes blockchain such an attractive solution to overcome the obstacles to transparency and accountability of emissions?
The answer lies in two of the main characteristics of blockchain: decentralization and immutability.
Data stored on a blockchain is inherently transparent, allowing stakeholders to observe emissions reports at any time. Meanwhile, encryption provides observers with assurance that blockchain data has never been altered and will never be altered. Additionally, smart contracts built on these blockchains could provide additional benefits, such as traceable carbon credits and reduced greenwashing.
Using blockchain for emissions data has the potential to provide significant benefits to stakeholders and the industry. However, stakeholders should still be aware of the limitations of blockchain; it is not a panacea for accountability and transparency. Two of the biggest limitations are data accuracy and blockchain governance.
First, while data on the blockchain is cryptographically guaranteed to be consistent, it offers no proof of authenticity. Emissions data, collected from a variety of sensors, vehicles, and satellites, is collected beyond the scope of the blockchain. The data is then cleaned, processed, and packaged into a format that is compliant with blockchain storage. Then the data is uploaded via a decentralized process, and the benefits of blockchain are realized.
Therefore, the emissions data ultimately observed on a blockchain is the result of a centralized process performed “off-chain,” requiring stakeholders to maintain trust that the producer is accurately recording emissions.
Second, while a company’s board of directors has a legal and ethical obligation to govern responsibly, blockchains inherently have no such governance. Rather, blockchains are designed to be governed by all stakeholders, even those who wish to do harm.
This is not a flaw in blockchain technology, but a necessary feature, as any high-privileged participant is antithetical to decentralization. Unfortunately, this has led to blockchains and the related ecosystem becoming a hotbed of crime and manipulation.
Costly cyberattacks, such as the $308 million hack of Japanese DMM Bitcoin exchange on May 31, are commonplace. Therefore, if an emissions stakeholder or reporter were to fall victim to a blockchain-based cybercrime, it is unclear how the damage could be undone or who would have the power to do so.
Oil and gas companies and stakeholders face a tough decision. By adopting blockchain technology, organizations are providing the long-desired, and now legally mandated, transparency into emissions. Other potential benefits include tradable assets, improved traceability, and digitally enforced contracts.
On the other hand, blockchains have proven to be unwieldy and prone to crime, exposing organizations and participants to costly scams and manipulation.
As this frontier is explored and these questions are pondered, it is critical that the limitations and risks of blockchain technology are well understood. Companies and their boards must take these possibilities into account if they decide that blockchain is truly an improvement over existing processes.
Andrew Morin is a research associate professor in the School of Cyber Studies at the University of Tulsa. He is also an Energy Fellow at the Center for Energy Studies.
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