When Diamond Offshore Drilling announced that it will be equipping its offshore drilling rigs with blockchain, the calls started coming.
“I was shocked by the response on the first 4 days,” said Harris Reynolds, manager for research and development for Diamond Offshore. The reaction exceeded anything he had seen in more than 3 decades of product development.
The level of interest was surprising in an industry where customers are normally wary of new things until totally proven. Blockchain for drilling is an industry-first based on technology from outside the oil and gas industry that has never been field-tested, and will be valuable only if it disrupts how things are done.
The last point actually may be a positive. The hope is that blockchain can open the door to significant cost reductions by putting everyone on the same screen. The software created in partnership with a pioneer in that field, Data Gumbo, creates a common view of the plan, predicted costs, progress, and performance of everyone working in an offshore project, among many things.
The Diamond Offshore blockchain service includes
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While a drilling company took the initiative looking for a competitive edge, it was built for use by operating companies that will define how this tool will be used. Diamond is seeking initial users of its blockchain service, which it plans to install on its most advanced drilling rigs by year end and eventually on its entire fleet.
“We are just one part of the spread, a fraction of that,” said Reynolds, adding that the company is trying to speed an advance in the industry, which it expects will become common in a few years.
Blockchain’s claim to fame is the software used to record who owns Bitcoin. The safeguards built into the system create an “immutable ledger” of those who create Bitcoin and the parties involved when the crypto currency changes hands. That makes it possible to track a chain of ownership that can be audited.
In oil and gas, the goal is to use an industrial version of the software to create a common account of things that are tracked now using a variety of tools such as relational databases or spreadsheets. Blockchain descriptions often refer to these as ledgers. The problem is the numbers often vary, reflecting different points of view and different record-keeping systems.
“That is the thing. Their accounting software and my accounting system have got different records of what happened,” said Andrew Bruce, chief executive officer for Data Gumbo. Opportunities are missed because “data is out there but it is on an island,” Reynolds said.
The system creates a constantly updated chain of blocks, which cannot be altered, recording facts on a certain topic. With blockchain, Bruce said, “everybody gets a record and there is no room for dispute.”
The detailed accounts are expected to reveal ways to improve how projects are run. “Optimization takes place when we are able to see the entire picture,” said Remko Hinloopen, director of contracts and marketing for Diamond, who partnered with Reynolds on the project. He said these broad measure will be “eliminating gaps between vendors.”
The benefit can be as simple as two companies seeing that, based on the schedule, they save money by sharing a piece of equipment, such as a support vessel, or by coordinating shipments to reduce logistics costs or ensure that all of the components for a repair arrive when needed.
Diamond’s focus is on the gains that may be spotted when managers can see beyond their narrow piece of the project.
As for how it will actually be used, that will depend on the ingenuity of users and what changes are possible based on how it is implemented. Diamond is offering the software as part of its service to operators who will play a key role in how it will be used.
Others in the industry say the performance numbers in blockchain might facilitate a transition from paying by the day for services to paying for performance.
A recent survey of 30 people involved in drilling by Frost & Sullivan, a consulting firm, found that day rates are still used in 90% of service contracts. It concluded that performance-based contracts could yield 25% savings.
Critics of day rates point out that the flat payment offers no penalty or reward—depending on whether they are a buyer or seller of service—based on the level of productivity. Bruce has said in previous interviews that the sticking point has been finding an agreed upon measure for determining how much is paid.
Blockchain could be used to determine when a load of casing was delivered and to check if the quantity and quality fulfill the contract. The system can make the payment that day to the supplier, if that was in the contract, though a discount may be deducted for not having to wait 90 days for the money.
“There is technology existing today to allow you to go to performance-based contracts in the industry,” said Chirag Rathi, director of oil and gas consulting for Frost & Sullivan, which included blockchain on a list of nine key future drilling technologies.
Lightweight Solution
Diamond’s project to develop blockchain began with two questions: How do we further reduce our operator’s total cost of ownership, and could blockchain help do that?
The partners on the project recalled getting a Monday morning meeting request that began their crash course in blockchain, first to prepare to meet with Diamond’s chief executive officer, Marc Edwards, followed by 6 months of figuring out how it could reduce costs or add value to wells it drills.
“All week we worked on learning what blockchain means,” Reynolds said. Their initial ideas changed significantly as they gained a greater understanding of a tool never used this way before.
Before Bruce founded Data Gumbo he had a long career in drilling equipment. Data Gumbo’s initial business plan did not include blockchain in a business plan aimed at finding ways to slash drilling costs. It turned to blockchain because “it is an elegant, lightweight way of solving the problem,” Bruce said.
The word light is used to try to explain the nature of this system connecting and verifying many computers to create a single view of a project. To update a cliché, the company wants to put everyone on the same screen.
The cloud-based system is light compared with building a relational database holding all the numbers in an enormous repository. Using standard technology to connect isolated databases is expensive and time-consuming within a company, and the challenges are magnified among many companies on a project, Reynolds said.
Blockchain is designed to connect those isolated players, providing a fabric that blankets them with data. They share a view built from select data pulled from the computers of companies on the job.
Bruce said that in blockchain, each transaction is recorded on a block and more are added, creating a chain tracking changes. For a pipe purchase, it can begin with initial design specifications and trace it through bidding purchasing and delivery. The detail can go all the way back to the factory that made it, which could prove useful if an operator continues using the program to manage production as well, which is an option.
The chain of information and events allows “transparency, provenance, and immutability,” Bruce said. That means:
- Everyone will be able to see the information related to their area of responsibility, so a drilling pipe supplier could see the data related to the consumption, cost, and performance related to that part of the job.
- Documents and materials can be tracked through the supply chain. It will be possible to see how a contract evolved and who signed off on it.
- Ledgers of data related to the project create a record that cannot be changed. If something wrong is entered on a ledger, that will be dealt with a new entry correcting the error without deleting the previous entry.
“It is like a bank account. If you need to put in a balancing transaction, you are able to adjust for stuff like that,” Bruce said. “We built in quite a few checks for data accuracy.”
Negotiations Continue
Blockchain can offer a shared view of a project, but buyers and sellers are still going to occasionally have opposing points of view.
In the boom and bust business of oil and gas exploration there is a constant push and pull between buyers and sellers. In a depressed market, buyers will squeeze suppliers for deep discounts. When things are booming, those on the services and supply side have the leverage to drive prices up.
These struggles are contested both on the agreed terms, and the accounting of the services or supplies delivered. Conflicting claims are usually resolved after the project is completed at a reconciliation session.
Blockchain is supposed to eliminate those disputes at the back end, but upfront haggling over prices and terms will continue. “Negotiating contracts is what we do and we will continue to do,” said Hinloopen, whose job includes negotiating those deals.
He sees blockchain inspiring more productive ideas on how companies can reduce waste and work more productively together. The hard part is getting competing parties to do so.
“We have to think differently about doing our business,” Bruce said. That requires cultural change, which is hard, he said.
For instance, it requires the operating company in charge of a project to be open to ideas from others and promote cooperation among the many parties involved. Now, Reynolds said operators will meet one-on-one with companies working on a well, rather than bringing them together.
Insights are only useful if information is shared and ideas are heard. “You get huge improvement when you put data in the hands of guys who can act on it,” said Jose Gutierrez, director of technology and innovation for Transocean, during a recent panel discussion on drilling productivity put on by Frost & Sullivan.
While there are big technical opportunities, like drilling automation, a lot can be gained by changing how projects are run. “The number one thing for innovation is business model innovation,” Gutierrez said.
