Cutting trade costs
Digitizing post-trade processes for commodities could cut costs by up to 40% across operations, accounting, settlements and IT, according to blockchain developers.
Modern commodity trading still relies heavily on manual, cross-checked, paper-based administrative tasks to process individual trades through to settlement and delivery, but that looks set to change with the advent of new IT options, including distributed ledger technologies like blockchain.
“The question of whether blockchain will change the way we do business is already answered for BP,” Iain Lawson, BP’s head of structured products for the Eastern Hemisphere, said at the S&P Global Platts Digital Commodities Summit in Singapore in July 2018.
“There’s a full acceptance in the front office of any trading room in Singapore that blockchain will change not just how we trade, but potentially what we trade and who we trade with,” he said.
BP is a founding partner of London- based consortium Vakt, with other oil majors Equinor and Shell, trading houses Gunvor, Koch and Mercuria, and banks ABN Amro, ING and Societe Generale.
Vakt is developing a blockchain-based platform for post-trade processing that is intended to eliminate paper, improve efficiency and transform trade finance options. It is focusing on oil to start with, looking at North Sea crude, Amsterdam- Rotterdam-Antwerp product barges and US pipeline crude.
The plan is to go live in November 2018 with processing BFOE North Sea crude trades for consortium members, Vakt’s interim CEO John Jimenez told the conference.
It will follow this by expanding to include pioneer users – organizations that are ready to engage in a blockchain service. By the end of first-quarter 2019 it hopes to make the service available to other potential participants.
Vakt’s ambition after these three initial markets is to scale up and enter many other markets, like Singapore, the rest of Asia, the Middle East and US natural gas, Jimenez said.
“The first challenge is to prove that we can do this at enterprise grade and bring it to operation this year,” he said.
Rivals for gas
While Vakt is focusing first on oil, Canadian technology company BTL is developing a post-trade reconciliation service for natural gas called OneOffice, using its Interbit blockchain platform.
BTL is working with Eni Trading and Shipping, Freepoint, Gazprom Marketing & Trading, Mercuria – which is also a partner in Vakt – Petroineos, Total and Vattenfall on a service that could cut back office costs for processing wholesale gas trades by 30-40%.
“We believe there could be even greater cost savings, given the reduction in technical infrastructure that’s required to build and support a blockchain application,” BTL director Brian Hinchcliffe told S&P Global Platts.
The service aims to enable companies to deal with mismatched trades more efficiently. “A trade reconciliation blockchain application can streamline this process by raising disputed trades at the outset and therefore save a huge amount of time, thus enabling faster payment and settlement times, larger trading volumes and an immutable audit trail,” he said.
Blockchain also reduces reliance on backup servers and IT hardware, and provides greater protection against cyber threats, Hinchcliffe said. “In all manner of transactions, it is this immutability and consensus that protects against compromise,” he said. “Any data is kept totally private and secure amongst all the relevant counterparties.”
BTL’s Interbit blockchain platform is designed to allow any application using it to scale to enterprise requirements. As of mid-2018, the trade processing service was still in the testing phase with the initial partner companies. “Any future collaboration is likely to look very different to this current phase as we move towards a production live application,” Hinchcliffe said.