Having already demonstrated value to financial services firms, blockchain has wide potential to drive savings in oil and gas (O&G), particularly for companies with heavy transportation spend. Thousands of transactions occur daily by truck, rail, plane and ship, and reconciling shipment invoicing discrepancies against services performed with proper remittances is laborious and costly. The use of blockchain may reduce discrepancies in this process through greater transparency in freight rates, shipment routing and generation of invoices for increased freight payment accuracy.
Blockchain is a distributed database technology that allows secure transmission of information without control by any central authority (Figure 1). Sharing access to a growing chain of appended transactions eliminates costly reconciliations that occur between transportation providers and customers from freight rate management, track-and-trace, invoice calculation and payment remittance, in other words, the Freight Bill Audit and Pay (FBAP) process. Applying a blockchain solution to FBAP could help save O&G organizations millions of dollars since the parties would access the same secured information on a distributed database, reducing the need for audits, third party audit and payment service providers, and lowering the risk of overpayments.
In transportation parlance, the transportation provider is known as the carrier, and the customer is called the shipper. In the FBAP process, thousands of carriers submit freight invoices to the shipper, who is in this case the O&G company. The freight invoice contains not only the price of the freight move, but also ancillary charges, such as fuel surcharges, detention, etc. These additional charges are known as accessorials, and are calculated against the circumstances that arise from the freight shipment, such as the number of miles driven or the amount of idle time the driver incurs.
Once invoices are received by the shipper, audits are usually conducted to match service performed to the service ordered to the received invoice. Because FBAP is not perceived as a core competency for many O&G companies, third party audit and payment service providers are often used to match invoices to bills of lading and freight orders, fund payments, and conduct additional audits. Since many invoices are complex and fall outside of standard processes, exceptions arise, taking time and effort to reconcile. From our experience, we have observed that these third party service providers spend about 25 percent of their time managing exceptions, with one organization averaging 200,000 invoices outstanding due to matching errors. Unresolved discrepancies must then be reconciled by the shipper’s freight bill department, taking additional time and resources. Due to the major effort to match all documents—freight orders, bills of lading and invoices—companies set thresholds for paying disputed amounts, leaving money on the table rather than spending more time to match every invoice exactly. Therefore, companies suffer from multiple fronts in the current FBAP process-outsourcing costs, high exceptions rates, time and effort for reconciliations, and overpayments within thresholds.
How blockchain helps
The use of blockchain technology could alleviate many of the challenges listed above. Figure 2 shows how successive FBAP transactions could be managed. Every shipment transaction adds to a growing, permission-based, shared digital data flow, which serves as the single source of truth between the carrier and shipper. Starting with contracted rates as the first block, the distributed database continues to record events from the freight order to the payment submission. Each block in the diagram below represents how every subsequent transaction appends to the previous record of data on the distributed database.
To calculate the invoice, the origin-destination pair from the freight order is matched to the agreed-upon rate, which is embedded into the blockchain using a smart contract, or business logic. Additional track-and-trace capabilities could also be appended onto the blockchain to provide shipment visibility in real time as well as record the movement to calculate miles driven. Applicable accessorial fees would be automatically calculated using the business logic and inputs from the miles driven, idle time or other circumstances from the shipment. Invoices and remittances are automated and sent on the same chain that began with the contracted rate.
Using this blockchain process, we estimate an O&G company could save at least 5 percent in freight spend through improved invoice accuracy, reduction of overpayments, and disintermediation of third party service providers. For example, a firm with $10 billion in annual revenue, with $600 million of freight spend, could see a reduction of 5 percent in costs, or $30 million in savings through the streamlined processes and visibility blockchain provides.
With the current uptick in completed wells, 2018 would be an opportune time to explore blockchain-enabled solutions, which could boost execution speed, provide real-time visibility, reduce risk of incorrect payments, and enhance accuracy from end to end. With the advancement in blockchain, oil and gas companies could begin to explore its benefits in cost savings and expanded supply chain capabilities.
Contributors: Tricia Agrawal and Matthew Widdowson
How blockchain could help support provenance and asset quality in oil and gas
Unlocking the potential of blockchain in oil and gas supply chains