Petroleum Trading intends to employ blockchain technology to become number one oil products seller. This ambition was voiced by Petroleum Trading’s Maxim Diachenko, Managing Partner, at Crypto Expo forum.
Minimize costs or die
Currently, Petroleum Trading is Russia’s second largest independent trader in terms of oil products sales volume. Its turnover is RUR 21.5 bln ($340 mio). The company has offices in 78 Russian regions and in six foreign countries. According to Kontur.Focus service, Petroleum Trading is in equal shares owned by Denis Vendrov and Maxim Diachenko.
There are 120 players in the wholesale market of petroleum products in Russia. Europe, apart from local traders, is also targeted by the US competitors.
“The market is highly competitive, but the process of innovations implementation is very slow”, Diachenko says.
Petroleum Trading started its computerization and faced two bottlenecks in its activities. First, it was the price inquiry processing which took 20 minutes. That is very long. The sales division communicated with producers, 18 Russian large refineries which may adjust their prices any minute. Second, it was the paperflow. It used to take about two months between striking a deal and getting signed hard copies of respective documents (the trader used services of the Russian Post).
The company started to computerize these processes. It designed a Telegram bot to process price inquiries. It is directly connected to stock exchange and Russian Railroads’ quotations. Currently, having received a client’s request, the bot searches and finds the lowest and effective prices from among the quotations of all refineries. Then, it calculates the sale price (with consideration of costs of delivery to client’s location) and submits two best offers.
At the moment, 50% of Petroleum Trading’s customers use its Telegram bot. The company thus got a direct communication channel to reach out to all market participants such as top managers, business owners, drivers, etc.
Procurement of petroleum products bears high risks of corruption. The deals therefore are usually handled by chief executives and corporate owners. Now, processing a price inquiry takes few seconds only, while the entire document flow takes about an hour. Having successfully resolved that problem, the company decided to integrate all of its systems into one and to launch a fully automatic operation.
‘Blockchain sorts out all the problems’
But that was very hard to do. It is nearly impossible to combine Telegram bot, Customer Relationship Management system, and electronic accountancy. Every move required years-long efforts and sophisticated and expensive IT solutions. Ernst & Young quoted €100K for the initial research only and €50K for designing business processes. When the consultants found out that Petroleum Trading is an oil products trader, it raised its quotes even higher. Yet in the ultimate solution the entire business process was reduced from 65 minutes to 60 minutes. Petroleum Trading decided it was not worth the efforts and continued looking for alternative solutions.
The situation changed when Maxim Diachenko read an article about a company whose value grew by 400% after it merely added blockchain word to its name. The businessman decided to find out what blockchain is about.
As he puts it, “It turned out blockchain sorts out all the problems and we do not need to integrate anything. We do not have to spend exorbitant money, since blockchain is a smart, efficient and simple solution capable of resolving our difficult problems”.
Architecturally, the solution is as follows. There is a bot which checks the prices. There are three AI compute cores. One is to forecast future prices as a junior analyst. It must constantly learn as a neural network (for example, if the ruble exchange rate drops, it sends an immediate notification of the petrochemicals’ price change). Another core is to operate as a sales unit. The third core is the blockchain per se. The goal was practically testing the technology and coming up with a fast and inexpensive solution. Petroleum Trading uses Ethereum open platform.
The algorithm is as follows. Any client can register in the bot and sign a supplement agreement with Petroleum Trading specifying that the parties employ Telegram user ID, Ethereum wallet and a simple digital signature (under Russian laws, a simple digital signature can be used if the parties to a deal have so agreed). Telegram user ID, Etherium wallet and a simple digital signature can not be tampered. Once the agreement is signed, the dealings start. The bot researches the petrochemicals prices and once a client is satisfied with a quotation, a button should be pressed to buy the product. A deal is thus made and registered in a blockchain.
Deals and court evidence
In late February Petroleum Trading made three first ever deals on sale of oil products through blockchain. The deals were made with RS OilOpt (seller of petroleum products in Rostov-on-Don), Trust TEK (wholesale distributor in Leningrad Region), and TopLine (fuel stations chain in Omsk). The deals’ aggregate amount was RUR 7.5 mio ($120K), and the settlements were made in the national currency, not in cryptocurrencies since that is at the moment prohibited by the Russian laws. Blockchain was used for document flow, registration and transaction support purposes. The products were delivered from Omsk oil refinery, Astrakhan gas refinery, and Kirishi oil refinery.
The project team included a software specialist, a lawyer and a marketing consultant. To make the deals possible, it took RUR 213K ($3.5K) and three weeks of solution development. To accomplish a deal, it only took five minutes due to the use of Ethereum. Transactions can be accomplished even faster if clients pay for them. Yet Petroleum Trading decided not to charge anything and employs a private blockchain.
In total, the company made 9,000 deals last year and intends to make 12,000 deals this year.
Nevertheless, there is a problem. Russian laws do not regulate any blockchain deals. Petroleum Trading is in litigation with a client who claims the company underdelivered 500 liters of fuel. Petroleum Trading is certain the court will support the trader. If that happens, it will be a precedent in Russia establishing legitimacy of blockchain deals.
Diachenko recollects that blockchain was in fact implemented forcefully. Nevertheless, now 500 out of 900 counterparts of Petroleum Trading use blockchain and clients line up to join, but the company is not rushing to employ blockchain technology on a large scale since some technical deficiencies have been discovered. Yet in June all dealings with counterparts will be blockchain-based. By the yearend the company plans to abandon all paperflow apart from the accounting. All transactions will be performed with use of blockchain. Petroleum Trading is now negotiating with a bank a mechanism of a bank guaranty of the deals.
Prospects
The trader expects that this year blockchain will help saving RUR 5 mio ($80K) on document flow and mail services only. Its clients are likely to save just as much.
“A regular paperflow is like travelling in a horse wagon, electronic document flow is like flying in a rocket, while blockchain is a teleportation”, the businessman says.
Petroleum Trading now has agreements with all petrochemicals producers in Russia. Due to cheaper deals servicing, the company expects to become a leader in Russia’s petrochemicals wholesale market.
After Telegram messenger was blocked in Russia, a new solution was found. As it turned out, the artificial intelligence employed by the trader can communicate via any messengers. Petroleum Trading intends to use six most popular messengers.
Representatives of Gazpromneft and Sibur had meetings with Petroleum Trading executives. Diachenko believes that those companies will need five years to implement blockchain technology, since for just a project design they need a year.
“We reshape the petrochemicals market. The prospects of implementing blokchain technologies are immense. An oil tanker sails away and you get paid in cryptocurrencies”, Diachenko says.
Petroleum Trading is preparing an ICO at which it expects to raise $15 mio to further develop its blockchain platform.
By Natalia Kuznetsova