Government agency seeks blockchain solution to strengthen oil trading

The U.S. Government would like to use the principles of blockchain to track crude oil from spigot to importation, and the U.S. Customs and Border Protection (CBP) is looking for pipeline companies interested in testing this project this year.

The concept of using blockchain to track oil has been completed with a few major owners in line to test the system. The CBP is looking for additional interested parties to participate in the proof of concept.

The U.S. CBP is the biggest government law enforcement agency of the United States Department of Homeland Security.

Technical development will potentially begin toward the fiscal year end of 2019, said Vincent Annunziato, Director, ACE Business Office for U.S. CBP.

This pipeline project would allow companies to properly apply NAFTA/CAFTA regulations to oil and oil products.

Once this is established, these same tests may be applicable to other like commodities, Annunziato said.

The Customs and Border Protection Office believes by tracking oil this way it could save companies millions of dollars as the correct qualities are traded, by leveraging sensor readings and offering better transparency between all parties.

The program would allow the oil to be measured by API gravity, diluent factor, viscosity and additives.

Oil pipelines work similarly to private railroads, in the sense that oil products must apply to be admitted into a given pipeline to enter the U.S. The process is done manually and tracked by paper, and extremely complex.

The blockchain pipeline project would enhance the market’s ability to import/export the quality of oil and other commodities they require or want to sell, as well as apply appropriate duties to oil under current trade regulations.

The technology will track the quality of the oil, the type of oil, and its country of origin.

“Blockchain can track crude oil as it enters various pipelines through meter readings and will then assure the importer whether or not NAFTA can be applied,” Annunziato said. “Blockchain will help make visible very manual processes that could unlock facilitation and confidence in the importation community.”

A blockchain essentially functions as a distributed ledger that records transactions in a verifiable and permanent way. Blockchain records are transparent to all who have access to the network (though specific documents in those records, such as certificates of origin, are not) but are decentralized across that network, making them virtually incorruptible.

This security has made blockchain a promising technology for recording a wide range of activities, including customs and trade-related transactions. Companies and organizations around the world are testing how blockchain may aid international trade flows, including tracking cargo containers, transferring shipping documents, and confirming cross-border payments.

Free Trade Agreement

The CBP has already created a free trade agreement proof of concept in blockchain and tested it against its existing system.

“We were able to find certain efficiencies,” Annunziato said. “Your importer, broker, and manufacturer are there at the same time so when your information is coming in, it is informing everyone.”

“The interesting thing is when you put all that data together, the operator has no idea they are on blockchain and they never should,” Annunziato added.

Interoperability was one of the largest accomplishments of the first NAFTA POC.

Interoperability is the ability of computer systems or software to exchange and make use of information.

“This is a bit different than open source. A software program can go on to any open source,” Annunziato said.

“Interoperability means it can go on to any blockchain software and work.

The Interoperability specifications are something that DHS and their contractors have been working on for about 4-to-5 years now.

“It’s a translation piece that sits in the middle and it can take data from any one of those software programs and message back using existing protocol.”

The interoperability piece is important because the amount of customization it takes to get from one Blockchain program to another, which all gets eradicated in this scenario, saving money in the long run.

How Blockchain Works

A blockchain is a growing list of records, called blocks, which are linked using cryptography.
Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data, generally represented as a merkle tree root hash.

By design, a blockchain is resistant to modification of the data. It is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.

For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for inter-node communication and validating new blocks.

Once recorded, the data in any given block cannot be altered retroactively without alteration of all subsequent blocks, which requires consensus of the network majority.

Blockchain Example

Most energy and chemical goods are sold using a trusted source such as a bank or hedge fund. But blockchain allows buyers and sellers to connect directly, removing the need for the third party.

Blockchain provides a decentralized database, or “digital ledger”, of transactions that everyone on the network can see. This network is essentially a chain of computers that must all approve an exchange before it can be verified and recorded.

Why Blockchain?

Traveling around the U.S. explaining what blockchain is and how it works, Annunziato often uses the Dropbox analogy to simplify the definition.

When someone puts a document in Dropbox, a group of people with assigned access can all get it at once, like what Blockchain does. Once people have the Blockchain access, it informs everyone on the Blockchain, the data is available.

“It’s actually the opposite of what we are used to today where we build a database, and everything is dumped into it. With blockchain, we have a transactional system that can reach out to areas we have not gotten to today,” Annunziato said. “In fact, it is one of the safest ways to trade data over the internet. That is key.”

“If you are building a self-contained system, you probably don’t need Blockchain. If you are building something to get you out to something you haven’t had before, that is really where blockchain starts to become very useful,” Annunziato added.

By Heather McGuire Doyle