Transforming Energy Markets with Intelligent Commodities™ Part II
Part II: Digital Feedstock™ Will Empower a New Market Paradigm
Keith Guerrini, VP Business Development
In Part I of this post, we discussed how the new data economy and the low-carbon transition have enormous implications for commodities markets. In the past, energy producers struggled to create differentiated products and communicate high-resolution production data across their ecosystems, through supply chains, and to investors. Digitization will open up new opportunities for producers, enabling unprecedented differentiation and accountability.
Xpansiv and its core product, Digital Feedstock, sit at the convergence of these trends.
How Commodity Data Is Refined into Digital Feedstock
Xpansiv has developed a technology platform that refines raw information from physical commodity systems into a high-resolution, high-integrity data format called Digital Feedstock. Developed using state-of-the-art data science, cryptography, and distributed-ledger technologies, Digital Feedstock is a digital asset that is engineered specifically for commodities. It is both a unique data architecture and a robust database with registry functionality, so it can act as an auditable record of attributional production and an immutable transaction mechanism. Digital Feedstock represents the physical realities of commodity production, transportation, storage, and consumption.
Each unit of Digital Feedstock is a highly detailed digital representation of each unit of a given commodity, generated from production source data. In the case of an mcf of natural gas, for example, the corresponding unit of Digital Feedstock not only records the time and location of production, but also a rich attributional profile of all available relevant information about the physical and qualitative metrics of production. This might include production attributes such as natural gas liquids composition and co-produced CO2.
This mcf of Digital Feedstock can be appended as the gas flows along physical infrastructure—through gathering systems, into processing facilities (where it can be split into constituent components), through pipelines, into and out of storage, and all the way to end users. It can even be converted to megawatt-hours of power in a gas-fired plant.
More importantly, Digital Feedstock includes intelligence about operational and environmental metrics like flaring, fugitive methane emissions, and hydraulic fracturing. In addition, externally generated information can be included in Digital Feedstock, such as environmental standards and certifications (e.g. IES Trustwell Gold) and data from drones and methane sniffers.
The level of detail contained in Digital Feedstock allows producers to create Intelligent Commodities.
After Xpansiv collects source data and converts it into Digital Feedstock, producers have access to a graph database containing rich attributional profiles of relevant information about the physical and qualitative metrics of production. This tool offers enormous potential for optimizing assets, maximizing trading economics, and streamlining business processes. In short, monetizing data.
For the first time, producers will be able to reliably communicate their responsibility efforts to stakeholders. As discussed in Part I, investors, consumers, and regulators are generally dubious about sustainability claims. Xpansiv provides independent, high-resolution, high-fidelity, auditable insight into a broad range of responsibility features, including methane emissions and carbon intensity.
Digital Feedstock: From Data to Digital Asset
Producers have a responsibility to their shareholders to produce at the lowest cost and for the highest value. It is here that the value of Digital Feedstock is most powerful, because it enables producers to transform basic commodities into differentiated products. Producers and supply-chain buyers can transact Digital Feedstock using the Xpansiv platform as a transaction registry. Trading is possible either as a whole—where a unit of Digital Feedstock representing the entire unit of production is traded alongside a physical barrel or mmBtu—or in part, where an attribute of Digital Feedstock is transacted separately from physical volumes.
For example, a producer can generate natural gas from wells that are certified IES Trustwell Gold. Xpansiv collects data from the wells and converts it into Digital Feedstock. One attribute of the Digital Feedstock file that is generated is the IES Trustwell certification for a certain volume (e.g. 100,000 mmBtu) produced over a certain time horizon (e.g. the month of April).
Instead of the producer having to sell specific volumes of gas to a utility under a physical arrangement, the producer can separate the attribute of “IES Trustwell certification” and sell it to any utility that demands that attribute, while selling the physical gas in the most economically optimal manner. This form of trading is similar to how RINs or RECs trade, where how a commodity is produced (landfill methane capture, wind turbines, etc.) is transacted separately from the otherwise fungible commodity, which is gas or electricity.
Does this demand exist in voluntary markets? Yes, it does.
There is a groundswell of support on the part of energy buyers to procure “cleaner” fuels, and the easiest wins are in low-methane production and with top-of-class producers that can achieve recognized certifications. A recent example is Southwestern Energy’s sale of IES Trustwell Gold gas to New Jersey Natural Gas.
Xpansiv’s technology enables these markets to scale. In the case of compliance markets (RINs, RECs), the trust mechanism is a government regulator; here, the trust mechanism is the high degree of technical integrity that underpins Xpansiv’s data engine. Digital Feedstock is the representation of the separately traded attribute, and Xpansiv acts as the registry of transactions, validating the creation, transfer, and retirement of environmental attributes.
In one of our first trading examples, Carbon Creek (a coal bed methane producer) sold IES certified frack-free gas—backed by Digital Feedstock—to East Coast Power & Gas. Xpansiv made this deal possible by validating the existence of the production and maintaining a registry of the attributional information.
The two key requirements of converting to a low-carbon economy are, 1) differentiating products, and 2) ensuring accountability. Xpansiv makes this possible with Digital Feedstock, a new data format for transacting commodities. For the first time, the way energy products are created, transported, and consumed will directly influence their value in the marketplace, enabling unprecedented transparency and accountability.
The Expanding Potential of Digitization
Opening the markets for differentiated, responsible products is just one of many use cases for Digital Feedstock. With this technology, Xpansiv radically improves the level of resolution on product specifications available to the market—at scale, in real time.
This is analogous to looking at cells under a microscope. With a standard optical microscope, we see blobs of “cells,” perhaps differentiated into broad categories (e.g. skin, muscle). But with an electron microscope, we can differentiate amongst cells to an astonishing level of detail, examining the molecular constitution of structures within each cell in order to diagnose and cure disease.
Digital Feedstock is the electron microscope of commodities differentiation.
Xpansiv is working with a number of other oil and gas producers and utilities—including our investors BP and Avista—to scale the market for differentiated products, and to develop further use cases. We’ve engaged in a partnership with CBL Markets, a leading environmental products exchange, to trade Digital Feedstock as a spot product; we’re engaged with other leading commodity exchanges to find ways to unlock entirely new product classes; and we’re working with investor partners S&P Global Platts to define market benchmarks for differentiation features.
We are at the end of an old regime in commodity markets, which have developed over hundreds of years based on the premise that all commodities are essentially identical. Xpansiv’s technology will bring new transparency, integrity, and value to this market, changing the way commodities are valued forever.