NuArca has been busily working to launch our oil and gas royalty tracking business, PipelineDL. At Pipeline DL, we have had the opportunity to investigate several blockchain use cases within the Oil and Gas Industry. As with any highly fragmented industry, having multiple distinct copies of common data has a significant cost overhead which is no longer necessary.
In the Oil and Gas industry, the tracking of mineral rights ownership and the distribution of well proceed payments to those owners - while seemingly simple and straightforward - has many operational resource expenses and direct expenditures. These costs are due to inefficient methods and technologies that can be replaced for a large savings across the industry.
Once a lease is signed and a division order is executed, the agreed-upon royalty interests and acceptable deductions are recorded in multiple places; the operator records the appropriate lease values in their tracking system, and the mineral rights owner might enlist a trust bank or wealth manager (“bank”) to manage and audit their mineral rights who then records the appropriate values in their accounting systems.
Once production begins, each pay period (monthly, or when payment amounts reach a minimum) creates a royalty payment event which is similarly calculated in two or three different places. When the check and check stub reach the mineral rights owner, and potentially their bank, the owner can either trust the Operator to provide them the right amount based on their calculations, or reconcile the amounts against the terms of the original lease. Oftentimes the data comes in paper format so there is an added expense of digitizing the data in order to automate the reconciliation either through scanning or a third-party provider.
This process is inefficient and extremely expensive for oil and gas operators and the banks with MRO customers. With the high degree of fragmentation in the oil industry, this inefficiency multiples quickly and results in extraordinary cost overhead for both the operators and the mineral rights owners. Operators must track hundreds or thousands of individual owners and process payments via individual checks and associated operational expenses. Sometimes the check amount is literally not worth the paper they are printed on, considering the full operational costs of cutting checks with accompanying complex well operating cost disclosures.
Once the payment is received and the mineral rights owner, or their entrusted bank, reconciles the payment amounts, any discrepancies must be investigated through a mineral rights ownership relations process which is time consuming, expensive, and tedious for both parties. This is pure incremental expense for oil and gas operators.
Finally, these discrepancies can end up in disputes and even legal actions which can be costly for all parties.
With the evolution of blockchain technology there is a better way to manage this process and eliminate the overhead associated with mineral rights ownership and royalty payments. By establishing a single truth that is shared by all stakeholders, 60% of the associated costs can be eliminated. Once a Division Order is agreed upon it can be converted into a ‘Smart Division Order’ which records the agreed upon interest percentages and the allowed deduction amounts. From that point forward all production and sales information are recorded to the blockchain where real time calculations of payment amounts are calculated and initiated. These are available directly to the parties involved along with the supporting detail. Thanks to the ability to encrypt data on the chain and utilize privacy constraints such as Hyperledger Fabric side channels, each party can have access to sale and payment information that is only relevant to them. For Operators this will create an opportunity to aggregate payments across multiple owners that are utilizing the same bank to a single payment that the bank then distributes to the appropriate accounts based on the blockchain payment data, saving the operators from cutting individual MRO checks and associated check stub deductions.
Automation and digitization have been around for decades and have likely saved hundreds of millions if not billions of dollars in the oil and gas industry. However, this revolution has mostly been contained within institutions themselves. Through its native single immutable truth and privacy protecting innovations such as side-chains, blockchain technology provides an opportunity for an entire industry to move away from moving data through check stub statements, imports, exports, and SFTP servers. Sharing a single distributed ledger allows operators, banks, and mineral rights owners to increase trust and get rid of the costs of reconciliation across multiple copies of the same information.