Blockchain and smart contracts: how does it work in the oil and gas sector?

Check out our new platform — from the sourceThe modern international circulation of hydrocarbons is becoming more and more autonomous and decentralized. This is facilitated not only by the introduction of such network technologies as smart contracts and blockchain platforms into contractual practice but also by the widespread use of sources of non-governmental regulation (lex petrolea). In the context of the network paradigm of private international law, the classic problem of the conflict of laws is aggravated. We will consider the conflict aspects of the use of smart contracts based on blockchain technology in cross-border oil and gas transactions, taking into account that the use of computer algorithms does not create a new contract, but is only a special form of transaction. Such “automated” transactions in the oil and gas sector, involving multiple jurisdictions, generate uncertainty in their legal regime. In the absence of a full-fledged substantive regulation, as well as in connection with the lex petrolea phenomenon, the collisional method of regulation is in fact dominant. In this article, we discuss the possibility of extending to smart contracts Regulation № 593/2008 of the European Parliament and of the Council of the European Union “On the law applicable to contractual obligations (Rome I),” from which we conclude that the existing regulation is quite applicable to smart contracts that execute cross-border oil and gas transactions. It is another question whether the law, applicable by virtue of the conflict of laws rule, offers a suitable substantive basis. To date, only a few US states have adopted specific legislation on smart contracts. It is predicted that in the future, private international law will not only determine the law applicable to smart contracts but will also become a conductor spreading the positive experience of legal regulation of smart contracts in different countries.I. Blockchain and smart contracts: how it worksin the energy sector?Every day, millions of barrels of oil and cubic meters of gas are bought and sold on international markets. This is preceded by a complex chain of relationships, therefore, in the structure of the hydrocarbon business, it is customary to distinguish three cycles of operations: exploration, development, and production of resources (upstream); handling, storage, transportation by pipelines or by sea vessels (midstream); chemical processing, marketing, sales (downstream). All these operations are formalized by contracts, which are proposed to be called cross-border oil and gas transactions. These are the most common contracts for the sale of crude oil and gas in the oil and gas industry, concession, license, oilfield service agreements, production sharing agreements (PSAs), joint activity agreements (JOAs), etc. As a rule, they contain a foreign element (most often — multi-national entities, location of property abroad, execution of an agreement on the territory of different states), which makes them actually cross-border, opening the door to private international law.As noted by C.O. Garcia-Castrillon, “in practice, for the exploration and development of oil or gas fields, various types of contracts can be used simultaneously, forming a network that reveals the complex nature of the relationship between the parties” (Garcia-Castrillon C.O. Reflections on the Law Applicable to International Oil Contracts // Journal of World Energy Law and Business. 2013). To manage this network and facilitate the international circulation of oil and gas, the parties to cross-border oil and gas transactions have begun to actively implement blockchain platforms and smart contracts**. As a technology that stores and transmits data, the blockchain itself, of course, cannot generate or transport energy resources, but it is favorably distinguished by its focus and applicability to regulating relations.** In November 2019, Chevron, ConocoPhillips, Equinor, ExxonMobil, Hess, Marathon, Noble Energy, Pioneer Natural Resources, Repsol, and Shell established The OOC Oil & Gas Blockchain Consortium.The document is available here** In 2018, Vakt, a consortium of major oil companies, energy trading firms, and banks, launched a blockchain platform to facilitate trade in crude oil and other commodities, successfully completing a paperless trading project and abolishing traditional bills of lading. In the gas market, BTL Interbit uses blockchain and smart contracts to speed up cumbersome contract negotiation processes.The document is available hereFor example, a bill of lading is used for the international sea transportation of oil or liquefied natural gas. Blockchain is intended to replace bills of lading, make the trade and transportation of hydrocarbons “paperless”, and the associated controls less human.In addition, upstream companies are often dependent on oilfield service companies and other contractors, and each project is a nexus for multiple, overlapping, and decentralized supply chains. Many entities are involved in the supply of goods: manufacturers, importers, exporters, forwarders, couriers, import and export terminals, carriers, and banks. Effective supply chain management is critical to success: There are many interdependencies where a supplier’s failure to deliver on time through a chain reaction leads to the disruption of several other deals. Blockchain smart contracts solve this problem as well.In joint venture agreements (JOAs), blockchain can reduce, if not eliminate, the need for negotiation between counterparties, as well as speed up the processing of data controlled by third parties. Smart contracts enable partners to vote on new projects, perform the billing of joint interests, and report co-production revenues. Simply put, this game-changing technology provides insight into who, along the chain, is properly or improperly fulfilling their obligations (Dentos. Global Energy Game Changers — Blockchain in the energy sector: evolving business models and law).The document is available hereComprehension of what is happening is successfully integrated into the context of T. Kuhn’s scientific paradigms with their inherent methodological pluralism and interdisciplinarity. The paradigm approach makes it possible to study and evaluate new legal or quasi-legal realities, burdened by economic globalization and the development of technology, which until then, it seemed, could not even be explained in legal language. If nevertheless, we talk about a new paradigm of law (Domingo R. Gaius, Vattel, and the New Global Law Paradigm // European Journal of International Law. 2011. Vol. 22 (3)), then the most suitable theory, in our opinion, is the concept of “network law,” generated by no less mysterious “network state” and “network society.” The Spanish urban sociologist Manuel Castells describes them as dynamic open systems based on networks of production, power, and experience (Castells M. The Information Age. Economy, Society, and Culture. The Rise of the Network Society. N.Y., 2010). Energy, like the modern world as a whole, also consists of numerous industrial, economic, political, legal, informational networks, strengthened by the Internet and the introduced network technologies.Playing in contrast to the positivist legal paradigm, private international law in the network economy plays a special role, which is predetermined by the very subject of regulation — cross-border private law relations that are at the forefront of globalization processes. This correlates with a unique toolkit — conflict and substantive methods of regulation, unification and harmonization, ways to resolve conflicts of jurisdictions, the possibility of applying non-state sources to cross-border transactions, and much more.II. Aggravation of the conflict problemAgree, it is curious to observe how the law reacts to changing conditions. The proliferation of blockchain platforms and smart contracts has sparked an explosion of scientific research.The document is available hereThe blockchain is a decentralized digital database that contains information about all completed transactions and operates on the basis of cryptographic algorithms (Sulkowski A.J. Blockchain, Business Supply Chains, Sustainability, and Law: The Future of Governance, Legal Frameworks, and Lawyers? // Delaware Journal of Corporate Law. 2019). Closely related to blockchain technology is the concept of a smart contract, which was first described by Nick Szabo as a “computerized contract-enforcing transaction protocol” aimed at “satisfying general contractual terms … minimizing their breaches, both malicious and accidental, reducing intermediaries as well as reducing losses from other transaction costs.” Blockchain and smart contracts work like a vending machine. If the correct coins or bills are inserted into the slot, the water bottle will tip over into the container; if the bottle does not tip over or is missing, the money is returned to the buyer.The document is available hereM. Lang and M. Müller, in relation to energy, ask the question whether smart contracts are contracts in the legal sense, or are they automated computer protocols that fulfill the obligations contained in this contract, based on the conditions stipulated in it and agreed outside computer code. While the answer to the question will depend on the jurisdiction concerned, even if smart contracts do not qualify as contracts by themselves, there is no doubt that classical contract law applies to the underlying transaction and that smart contracts expressed in computer code should comply with certain applicable law.Blockchain and smart contracts: how does it work in the oil and gas sector? was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.
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Author: IMBA-Exchange