Sunday, April 30, 2006

Aprils Business Report

As reported last month, March was our first month of actively marketing the Genesys project. A target selection process was undertaken, with specific marketing deliverables and objectives being defined. We selected our target, Petro Canada, and began the slow process of revealing that bureaucracies capabilities. Unfortunately we did not receive the response we were expecting. Petro Canada's first quarter provides further evidence of the problems with the hierarchy in oil and gas and we will continue on with our marketing program.

Technical Architecture
We have subscribed to Google Analytics and are able to map out the response to the blog entries. This a comprehensive tool that provides significant advantages for our marketing plans.

    • Revenue to the end of April: $0.00
May 1, 2006 budget items. (All costs are in U.S. dollars and include the 33% premium for the development copyright fee.)
    • Sun Grid The first thing we need is a home for the code. The grid provides everything we need in this instance, and the Grid that I selected was Sun's. At $1 per processor hour, a very affordable way to secure the resources we need. I think that our first years requirements would be amply satisfied with 10,000 hours of processing for the remainder of 2006 calendar year. Total requirement = $13,300
    • Ingres Open Source database and part time DBA, Total requirements = $57,500.
    • Collabnet. I would like to have a generous budget for this critical tool. Provides the code management, community process, project management and issue management. Budget includes tools, appropriate setup and consulting services. Total requirements = $34,500
    • General and Administrative, first 6 months of operation Total requirements = $69,000
    • Membership in W3C Total requirements = $9,500
    • Project management and development = $300,000
        • Total Capital and Operating budget, 2006... $484,000
  • Sponsors, producers, and user contributions are accepted.
  • Please recall that this community is and will be supported by the producers. Based on an annual $ assessment per barrel of oil. For 2006 the assessment was fixed at $1 per boe per day per year.
  • A company such as Encana in Canada would therefore be expected to support the community to the tune of $700,000 for the 2006 calendar year.
  • These Monthly Business Report budgets are being proposed on a pay as you go basis for 2006 to support the community and ensure the community develops in the manner that is expected.
  • Your donations are greatly appreciated, no donations means minimal work is being done.

Saturday, April 29, 2006

Petro Canada's first quarter.

Our favorite company Petro Canada filed its first quarter report this week. Unfortunately no response was forthcoming from the company regarding my criticisms of 2005, so we'll just keep working on that. Since the company proceeded through the annual meeting and did not address these issues we have acquired some history, and they are now in a fixed position regarding their comments to shareholders.

The first quarter is not looking good to me. Petro Canada is now in what I would call a desperate situation, and I have to say that things are worse in 2006 then 2005, here are my concerns. I will elaborate on them further in other postings.

  • Why were the Syrian properties sold.
    • Syria earned $152 million profit and was sold for $645 million. Was this a fire sale?
    • Allegedly the property was "mature"?
  • Earnings from continuing operations were $54 million however,
    • After deducting the downstream operations, Petro Canada lost $40 million.
      • Maybe it was these assets that were "mature"?
  • Without the cash from the Syrian property sale, Petro Canada would have only had $428 million in cash. Not the $1.073 billion as stated.
  • I am also concerned why the firm has such large accounts receivable. $1.372 billion accounts receivable should recognize the additional $480 billion that was sold under its securitzation program. On that basis total accounts receivable would be $1.852 billion or 42% of the first quarters sales.
    • If Petro Canada did not sell the Syrian property and securitize the Accounts receivables they would have had to restate cash to $(52) million as a shortfall.
      • Was cash the reason the property was sold?
  • The excessive compensation of the management continues in 2006, without missing a beat.
    • General and administrative costs are up 22% year over year.
    • $65 million in stock based compensation was recorded.
    • Total options now issued = 21,823,525 shares at $49.18 U.S. = $1,073,281,451 U.S.
    • $227 million in forward futures contracts recorded for the quarter. (I've listed the hedges here as I believe the only reason the hedging is done is for management appearances.)
The ability to raise additional cash has to come into question. The loss of Syrian assets will have a significant effect on 2nd quarter earnings and cash flow. The continuation of the excessive levels of compensation may become a glaring sore spot for the company. I do not know of a manner in which these management costs are justifiable, particularly based on this performance.

Recall that my purpose in providing this analysis is that the hierarchy, or in Petro Canada's case the management, has failed in the traditional form of organizational structure. Proof that the failures are occurring is evident to me based on this analysis. The criticism is directed at Petro Canada because they are by far the most representative of the concerns that I have for this industry.

Friday, April 28, 2006

People and Processes.

In my recent entry regarding Asynchronous Process Management I did not mention the manner of the communications. Consider that the processes that are being asynchronously managed could be any one of the four following types.

  • Person to Person.
  • Person to Process.
  • Process to Person.
  • Process to Process.
These methods of asynchronous process management provide an unlimited capability in managing a process as I had mention here.

Wednesday, April 26, 2006

Asynchronous Process Management a cornerstone of the Genesys technical vision.

It has been a while since I posted any information regarding the technical vision stated here. Each of the four elements of this vision will be broken down and expanded upon individually in the next few weeks.

Today I want to start this review with the Asynchronous Process Management (APM). Asynchronous communications are like a letter where the reader has ample time to reflect and respond. Synchronous communications are like telephone conversations in that the communication itself engages its participants in real time. Asynchronous Process Management (APM) is the style of communication applied to the variety of oil and gas processes that require interaction through a number of different individuals, disciplines or producers. The Java Programming Language can engage in transactions that are asynchronous in nature and as a result reside as real objects with tasks and processes that may take many days, weeks or months to complete, based on the individual responses throughout the process.

The area that I foresee APM playing a strong role is in the joint venture billing, or as I have re-stated, the Partnership Accounting methods. Specifically how the reporting process is updated amongst the partners. We need to consider the number of ways that a producer may contribute to the joint account. I have limited these contributions to capital, leases, intellectual property, human resources and operational capabilities. There may be more types of contributions that can be discussed at a later date.

Each month an accounting of the property is required. I have suggested that this process should be accelerated and lets assume that we bring this up to a weekly process. The example will involve the drilling and day work for a well that was rig released 3 days ago. The example will start with the completion and distribution of the Daily Drilling Report, then the Vendors Invoice, comparison to the Drilling Contract, and finally distribution of the Joint Venture Billing to the partners and final resolution through payments.

You are the successful geologist in a productive well drilled just last week. You as Chairman of the Joint Operating committee have assumed operatorship of the property and are in receipt of the last information required for the Daily Drilling Report. Filing of the report in the file system (noted here) populates the report to the authorized partners and authenticated users of the information. Due to the security of the information you know that none of the information about the tight hole will be leaked to any third party.

Completing that task the Drilling Contractor submits a finalized invoice based on the drilling contract. Comparisons are run between the current invoice and pre-paid invoices to the Drilling Contract. The system kick's out an anomaly in the mud and tubing used, and the invoice is approved subject to the holdback of the costs in the mud and tubing algorithm. This is then sent to the various partners through a weekly joint venture billing process.

For the purposes of the example, we should assume that there are only two other partners. One whom is the original P&NG lease holder, and geologist by training that promoted the deal based on his theory, the other providing the capital to drill the well where as the operator provided the operational expertise and drilling rig availability.

Based on the agreement that was put across by the geologist partner, the recognition of the lease, the capital, the capability and drilling contract are all assessed in determining the working interest distribution of the new well. The Chairman then sends the partners their agreed to share of the final drilling contract. As with all invoices there is a net 30 day payment requirement that would apply to both the drilling contractors invoice and the Statement of Expenditures.

Each partner peruses the invoice based on their agenda's availability. As the individuals time comes free the system offers the opportunity to review and approve the joint venture billing invoices of the operators that manage their properties. And on the 15th and 22nd days the two other partners approve the invoices for payment on the due date of the 30th.

On the 30th the invoices are paid with the automatic transfer of the funds from bank to bank based on the approval of each partner earlier that month. These payments are aggregated by the system and the operator then approves the payment of the invoice to the drilling contractor.

What we have in essence done is provided the cost justification and process management of one of the key processes of oil and gas. This is carried out in the paper based world industry wide with little variation. The process mentioned here is entirely electronic based on the Genesys Web Services provided. Each time the opportunity or need occurs the process is re-awaken to complete another element of the overall process, based on the relative criteria of each individuals decisions.

When the original invoice is approved by the operator it is automatically forwarded to the partners, who wait to peruse it on their time availability, upon review, which would include a comparison to the drilling contract in this case, would see that the tubing and mud reconciliations have some outstanding issues would accept them in to their Genesys Web Service and pay them at the appropriate time.

Each aspect of the process is being completed when it is convenient or required to be completed. Which ever is the latter. Java's asynchronous capability and exception handling are the most robust of any system. Their ability to conduct these types of operations asynchronously so that people are reduced to making the key decisions in their own time frames is the desire of the Genesys system.

I think that the ability to build on this concept requires that other elements of the technology vision to be brought about and discussed in the next week or two. As the asynchronous methods are able to build on the Java objects, Wifi and IPv6 component's of the vision. Until then we'll leave the discussion here.

Tuesday, April 25, 2006

Anne Mulcahy at Xerox.

Anne Mulcahy the long term CEO at Xerox is finally being recognized for the leader that she is. She took on a very difficult job in the ailing Xerox and has made the firm stand on new and innovative product offerings, that resurrect the days of old. (Click on the title of this entry to get a summary from the Business Innovator.)

Quoting her words about being disruptively innovative:

"This is the pain of technology transitions. You can either sit and wait like Kodak or Fuji Photo and fall off a cliff when it happens. Or you can migrate. We're transitioning the light-lens [traditional copiers] out as quickly as possible. If you look at what that's cost us, this company would have been growing for the last three years very nicely. It cost six points of growth in 2003; four points last year. It will cost us probably a point and a half this year. So it's going away... It's always more attractive to stay in the old technology from a profit standpoint. Always. But you'll be going out of business."
It is too bad that here in Calgary the oil and gas industry chooses to treat me as a pariah for offering the opportunity to "migrate" to the new technologies. Now they have the same problems that I identified two years ago in the Plurality publication. Only these problems have manifest themselves to include accounting reporting issues, poor reserves replacements and related issues. To listen to the oil and gas producers they seem to think that higher energy prices are their biggest surprise! What business are they in?

The time to proactively start building the systems focused on the Joint Operating Committee is passing quickly. There remains very little time left to make the transition from the old energy industry to the new. As I have indicated here before, if we had the resources to start tomorrow, we would still take three years to complete the development.

No one can stand up to the concept of using the Joint Operating Committee and refute the logic. Everyone agrees that this is the manner that companies need to proceed with, yet the bureaucracies continue on in an attempt to reward themselves for their success in their businesses. Its the high commodity prices that are providing the "good" earnings guys, not any skill's you may lay claim too. Go back and recalculate what you would have earned at $25 / bbl prices. The sad fact is that many of the companies, like Petro Canada, would be run by court administrators if oil were at yesterday's prices.

Sun Microsystems is our key supplier...

Reading the technology entries of this blog will provide an understanding of the significance of Sun Microsystems in this development project. Sun has prepared an offering that I find compelling, complete and all within their one shop. Something that no other firm does. IBM uses Java and Linux, HP and Dell use Windows and Java.

Apple and Sun are my two favorite companies. This is primarily based on their understanding of providing the user with the entire environment. Sun offers Java, Solaris, Grids, Servers, Workstations and Storage. Everything a project like this needs. Not only do the offer these items, they own them, and they are the best offerings in the business. The only area they do not have a footprint is on the desktop. Apple's domain.

So here is to the fulfillment of the vision of Scott McNealy. I always looked to him more as a Chairman then as a CEO. Now as he hands the CEO position over to Sun's President Jonathan Schwartz we're seeing a continuity of the vision and the horses to take the market with their offerings.

I will leave the reasons why Scott McNealy has such a profound effect on the market place to his worthy successor Jonathan Schwartz. Click on the title of this blog for his entry recognizing that "The Network is the Computer".

Monday, April 24, 2006

Exploration vs. Exploitation the subtle differences.

What is the difference and why can't exploitationist make money as explorationists. There is a critical difference in comparing a firm that makes money exploiting oil and gas reserves and another firm that explores for reserves.

A funny thing happened when the oil and gas prices declined overall in the 1980's. Companies learned that to make money at $20 per barrel. The ability to exploit what was known within their properties was the key to their success. Larger firms were able to enhance their fields production through in-fill drilling and testing of what was known to exist. The time and the manner of making money in the manner of an exploitationist has expired.

The ability to earn profits at $20 required that an oil and gas company lay off the majority of their engineering and geological staff. They were not required in a world where it was determined that the drilling locations were between the two existing wells and the same depth as the others. This has been the successful oil and gas companies forte for the past 20 years or more. Accountants, businessmen, lawyers and "managers" began occupying the CEO's seat and these firms were run on risk profiles that projected windfall profits by controlling costs at $20 oil prices.

An explorationist determines where and how reserves are found on the basis of scientific theory. These theories are usually formulated over several years and take the geologist decades and sometimes lifetimes to prove their hypothesis. In a nutshell these are the very rare geologists that are generally credited with some major discovery. In Canada we have people like Arnie Nielson who discovered the Pembina field and eventually went on to run Mobil Canada, Dr. Hriskivich who found Rainbow pinnacle reefs and Ram River for Acquitaine, or smiling Jack Gallagher of Dome fame. This list is fairly long and all were handsomely rewarded for their discoveries. It is believed in the geological profession that only 3% of all geologists find any oil or gas in their career.

The explorationist was treated as a pariah and run out of the companies in the low cost environment of the 1980's. In many instances these "explorationists" sought refuge in smaller firms eking out marginal earnings competing in $20 oil. Or as consultants for relatively mundane tasks, compared to their training as rabid scientists.

The firm that made money exploiting in the 1990's at $20 per barrel in general terms can no longer make money at$75. Doesn't make sense I know, but using our marketing example of Petro Canada, I'll explain my point. After running the explorationists out of the firm in the 1980's the mindset became business as usual. The ability to find exploitable reserves was augmented by the abilities of the service companies that developed new "Horizontal Drilling", "Top Drives", "Coiled Tubing" and other innovations that provided value for the exploitationist. These technologies could be amortized over vast inventories of known reserves and profitably make money. It is fair to assume that the $20 oil, the world over, is gone for ever.

The service companies innovations that I mentioned also lead to the more rapid depletion of the reserves that were available. What used to produce for ever at 10 barrels a day is replaced by the horizontal well that produces 100 barrels per day for 6 years. Many of these exploited fields are now close to the end of their productive lives.

Here we are in 2006 with the following scenario.

  1. The easy oil and gas reserves are gone.
  2. The remaining reserves are being exploited too quickly for the markets needs. Creating a false sense of security as to the overall productive capacity of the world petroleum marketplace.
  3. And all the geologists that could find oil and gas are twenty years older and generally have forgotten what the industry knew in the 1980's. Now in their pre-retirement years they have no desire to pick up the craft again.
So we leave the burden to the current population of recent university graduates that "may" be able to think like an explorationist and find some oil and gas reserves. I recommend we employ the shot gun approach of hiring as many as we can and setting them to their task.

In my opinion there has never been a more serious problem that the world has faced as the energy problem we have today. We are producing faster then we are replacing reserves, we have lost the ability to find new fields and do not have the intellectual talent to meet the needs of the marketplace in the next 10 years. How this gets resolved is with a lot of pain and $25 / gallon gasoline.

Companies such as Petro Canada are unable to operate in these environments and I think they have even given up trying. As I indicated here, here, and here they have systemically failed in every criteria of a successful oil and gas firm. Their inability to tell the truth covers the facts as I had revealed them. The accountants and lawyers are able to smooth over the issues and present a reasonable facsimile of an annual report. It will be interesting to see how the firm performs in the next 3 years, as it may be within that time frame that the firm runs aground permanently.

Google video of interest.

For many years I have described myself as an engineer wannabe. The science of math always got in the way and had to live with the fact that I couldn't make it. This video is of an A380 being built. The largest airliner in the world. The way that it is made makes the engineer wannabe in everyone scream out for more.

If this is the state of the art engineering, I am glad I found the math difficult. Truly one of the most impressive videos I have ever seen.

Sunday, April 23, 2006

Dr. Giovanni Dosi, Sources Part IV, B & C


Continuing on with the overall review of Dr. Giovanni Dosi's theories on innovation.

B) Appropriability of Technological Innovations.

Dosi defines appropriability as the:

"properties of technological and technical artifact's, of markets, and of the legal environment that permit innovations and protect them, to varying degrees, as rent-yielding assets against competitors imitation."
Companies that are innovative in their markets are able to secure a variety of intellectual property as a means of competitive advantage. The IP may consist of the traditional patents, trademarks and copyrights but should also include secrecy, lead times, learning curve capabilities and internal processes. Dosi suggests that these forms of intellectual properties form strong advantages when combined together.

The costs associated with imitating the competitive advantages of another firm become expensive. Dosi provides evidence that the cost of imitation is often higher then the original innovation! Noting that both innovation and imitation are creative processes that involve search. And imputing that a capability has to be built to be either innovative or imitative, with the latter being the more costly. It is at this point I would ask what the purpose of "best practices" is for?

C) The Driving Forces of Technical Change.

The various levels of innovativeness of each firm in an industry are derived through either exogenous scientific advances and / or endogenously accumulated capability within the firms. Dosi's general point is;
"the observed sectoral patterns of technical change are the result of the interplay between various sorts of market inducements, on the one hand, and opportunity and appropriability combinations on the other."
In terms of oil and gas this clearly sets the point that we are at. Oil hit $75 today and this is a major shift in the "market inducements" of the industry. Using Dosi's theory in oil and gas, it is clear that a producer that is able to establish higher levels of appropriability, as Dosi calls capability, would benefit from the higher commodity prices.

In the competitive market that exists today we see that each oil and gas company attempts to secure a competitive advantage based on the scientific capability built within the firm. In a related matter we are now seeing a projected shortfall in the number of qualified earth scientists and engineers. Universities will not be able to produce enough new graduates to fuel the prospective demand and replace the soon to retire baby boomers. This is where I think that Dosi's theories can be extended to communities, clusters, or ad-hoc self organizing teams.

If we continue to replicate the scientific and technical capability of each firm in an entrenched silo we most certainly will have failed in providing the marketplace with the energy required. These silo's of scientific capability mirror themselves in each large company. How wasteful of these critical resources is this? Smaller producers are less stringent on their use of outside assistance but could and should encourage greater sharing as well. What if we applied the theories of Dosi to the overall cluster of companies. Building the scientific and engineering capability from the larger pool of technical resources from each silo?

To arrange this pooling would be the simple part. The sharing of intellectual property and general mindset of the industry is that sharing is limited. I think that this is counter to the natural culture of most scientists who publish and submit their thesis and hypothesis to the community for critical review. What would happen if the Genesys system was able to:
  • Manage all of the business attributes of the oil and gas operations.
  • Provide market access to assets and resources for the producers.
    • Including human, financial and technical resources.
I am unable to see how else we are to mitigate the issues of the market demand and the retirement of the knowledge base of the industry? Building independent silo's of capabilities higher is not the alternative.

Is this community the type of organizational structure and manner that the industry needs to gravitate too in order to rectify these issues? If so this blog should be seen as the main focal point of this reorganization. Building the systems to support this type of organizational structure and enable the community of oil and gas workers to get on with the job at hand.

Saturday, April 22, 2006

The "Fifth" constraint.

The oil and gas producers are having a difficult time in keeping up with the demands for energy. I have attributed this problem to the organizational structure and named the hierarchy as the culprit. The resource constraints are serious and include human, technological, scientific, financial and lets name the fifth constraint "speed".

The problem as I see it is a deliverability one. The next ten years will see the productive capacity of the industry slowly adapt to the market demands. The time lines and capabilities are not in the supply of energies favor. Time is necessary to formulate scientific concepts, purchase land, drill and produce the oil or gas. This process is usually around ten years in terms of the beginning to production, especially for offshore and oilsands.

In terms of where the attitude and mindshare of the bureaucracies is at, it's 1996. When there were no such energy demands and a productive surplus of around 10 million barrels per day. None of the issues of the supply demand imbalance of today. Oil in 1996 is trading at around $20 per barrel and the capital budget of the large company is based on these criteria. These are the resources and production that are being brought to market today.

If you hear the large companies talk they fear a price drop to the 1996 levels. That there is no energy shortage and a sense of urgency doesn't exist. Why are they so calm? You have literally two billion plus people joining the industrial revolution and the large companies just blink at you in a stunned state of confusion.

The larger companies are experiencing information overload in addition to the lack of understanding of their market. They are completely engulfed in a paper world that has so confused them that they have no idea what year it is.

As these large companies will not be in existence in 10 years we should let them off the hook and let them die in peace. Anyone that would suggest the hierarchy will rise up to this challenge and solve it are being sarcastic at best. The effort necessary needs to be organized first, that is what this blog is about, defining the joint operating committee as the central organizational focus of the oil and gas producer.

This new organization needs to have the systems built to operate the new producer in the manner that the individual users need. Just as SAP defines the bureaucracy, this blog's developments will define the innovative producer, user and investor. So for those that have seen that blank stare of the large companies, join us here and help out where you can.

Web 2.0 based value propositions.

Google reported their quarterly earnings yesterday, boosting their market capitalization to $136 billion. This brings to mind the value proposition of Google, and for that manner, any and all Web 2.0 services. Not many people can say they ever paid any money to Google, I for one have never, even though I use all of their services.

Earning small advertisement revenues from the firms asking for exposure of their product on Google's sites doesn't sound like a great business. However, when the value generated produces multi billion dollar earnings for a ten year old company, this makes for interesting times.

Web Service companies that are Web 2.0 are able to aggregate users easily and share the costs and the load over far larger bases of customers. This site subscribes to this wisdom. If the usage of this Web Service (when built) charged as little as $1 / barrel of oil equivalent per year, the costs of systems to fuel the energy industry would collapse to the level that would parallel the value proposition of Google's.

Thursday, April 20, 2006

Where we are...

It has been a long road to this point. I am not aware if the Calgary Herald will run a story regarding my criticisms of Petro Canada. I hope that they do as it would be a solid beginning for this blog to become the area of focus for our prototypical users, the people who earn their living in oil and gas.

This blog introduces a very disruptive innovation from the point of view of how organization's should be formed. To suggest that the hierarchy has failed is generally concurred with by most people, and feared at the same time. This has been a risky and controversial suggestion from the start. And that is the point, change is upon us, we either get with the changes or get out. I choose to challenge the old with the new.

There is a saying by George Bernard Shaw...

"The reasonable man adapts himself to the world; the unreasonable one persists to adapt the world to himself. Therefore all progress depends on the unreasonable man."
I am an unreasonable man.

Wednesday, April 19, 2006

Jonathon Schwartz and James Gosling in Brazil


I had the opportunity to attend a speech of Dr. James Gosling in Calgary. Firstly I am a big fan, and secondly, as both of us are Calgarians we share similar attitudes towards the large producers. The attitude being the oil and gas producers are not getting the new technologies, and are indeed resisting them.

Dr. Gosling stated some very interesting points regarding the status of the technologies employed in North America. Calling them third world due to the constraints of the legacy infrastructure. Noting that all Brazilians had cell phones which were used to access government services. And the high quality of the broadband in Asian countries.

The President of Sun was in Brazil with Dr. Gosling, and filed this entry on his blog. (Click on the title of this entry for the link to this article.) Reading this entry should concern those that reside in North America who think we are advanced in these technologies, we need to get with the program or we'll be left behind.

Sunday, April 16, 2006

A summary for the press.


I recently submitted a comprehensive summary of this blogs activity to the Calgary Herald and wanted to highlight what the point is / was. Firstly I would like to think that this blog provides a strong opportunity for anyone interested in innovation in oil and gas to actively participate in building the future. A Herald article would be very valuable for this blog and those readers.

Another point is that I wanted to show that the major oil and gas companies are now jeopardizing the future of the industry and the people that rely on it. This is quantified and qualified in the example I have made of Petro Canada. In summary this shows the following:

  • Inability to find economic replacement reserves.
  • Fudging the replacement reserves with;
    • longer amortization on heavy oil assets
    • restating as economic, formerly uneconomic reserves based on today's prices.
  • Employing questionable independent and objective review of all reserves.
  • Have participated in "lottery" style compensation of its managers.
    • I'm all for rewards for performance, but have to ask where is the performance?
  • Skewed earnings by not recognizing the costs of those reserves.
These managers have handsomely rewarded themselves for what can only be described as comprehensive failures. Covering up the problems with rosy numbers that don't correlate with the truth. This failure extends beyond the control of management to all those that were party to releasing the financial statements. So here are some questions.
  • Mr. Brennaman did exercise 180,000 shares in 2005, but how many of the 4+ million shares options did he receive? For that matter what was the distribution of those share options?
  • What are the actual reserves based on an independent review? Why did the company find only 26 million barrels of oil after spending over $2.4 billion? (Independent implies they did not receive share options.)
  • What are the actual costs of the depletion, depreciation and amortization? If Petro Canada drew down 12% of its reserves, why recognize only 6% of property plant and equipment as the costs of those reserves?
The old hierarchical way isn't working, and that is clear to me. The only manner in which the industry can continue is through participation here and reorganization to new organizational models. These are more or less my words in 2004, and those that are now being echoed by Harvard, McKinsey and Strategy & Business. The justification to proceed and reorganize is there.

To continue will be the managers vain attempt to maintain the hierarchy and their stock options. These organizations will continue to function as they always have until the failure is admitted by them in bankruptcy court. I only hope that there is time as this system will need several years of development.

It is my hope that the Calgary Herald takes the opportunity to ask these questions of Petro Canada's management before their annual meeting on April 25, 2006. If so we will see the beginnings of the replacement to the hierarchical organizations.

Genesys' GUI technical definition.

I want to mention that there are a few unique characteristics of the Genesys system, particularly from the user interface point of view. First as discussed in the previous entries regarding the technical infrastructure and partnership accounting, the global scope of the core application, in my opinion, demands the strong "typing" offered by the Java Programming Language.

The system needs to be reliable and predictable. It is predictability that is particularly difficult to attain in the browser / Ajax world. When we consider the number of potential users and the exponential number of interactions between those users. Reliable and predictable can only be attained by taking the strict approach to how the systems will be built.

To define the user elements of the system, the following tools will be added to the technical architecture of the Genesys system. (For a more detailed description select the following links to Wikipedia.)

These Java components and tools make the development more difficult, however, in exchange, developers have greater control over the development of the system. These component's provide an unlimited tool kit in terms of what the developers and users can think of. But most important of all the reliability and predictability of the system will be what the users and developers need. Therefore we need to specify these as basic requirements for all components of the system and include the reliability and predictability with the other Java foundations of security etc.

Saturday, April 08, 2006

The new energy economics...


A few housekeeping items that I wanted to comment on. These provide a bit of a common thread I'll summarize at the end.

Firstly, the price of gasoline continues to rise due to the seasonal consumer demands and the overall global demand for oil. (Click on the title for an interesting gas price summary in the New York Times.) Understanding energy is the fuel of the economy, we have seen that India and China have been able to sustain a labor based energy advantage in the globalized economy. This labor advantage has many countries concerned for their long term ability to compete. The U.S. has significant competitive advantages to sustain their economy in the face of these challenges, their key advantage may be the low gasoline prices their consumers enjoy.

With Europe's small population base, their ability to compete with China and India are limited. Europe also has a poor ability to compete in the horsepower, or industrial economy, due to the high taxes they assess on gasoline. The U.S., I think, has it right. By limiting the amount of taxes on gasoline provides the U.S. with an overall lower cost associated in generating horsepower.

I expect to see this will become a competitive advantage that most western governments will realize they are hurting their industrial infrastructure by assessing gasoline taxes. The gasoline tax cuts would be attributable to a further increase in demand for oil, hence further oil price increases. Could this thinking become the manner in which labor and energy is valued? Where the 8 hour shift of one man in China being the basis of the same value of one gallon of gas? Therefore to generate 1 horsepower for 2 hours (the cost of gas) vs 8 hours manual labor (the cost of food, tools, training, etc) being approximately the same.

Secondly, I wanted to create a new analogy to the saying that "If a tree falls in the forest...". And revise this to read, "If a natural gas compressor detonates in the field, will the commodities traders in Chicago hear it?"

Third point to make today is Einstein's calculation of E=MC2. This may be the most profound innovation in the oil and gas industry. If the mass of one atom is multiplied by the square of the speed of light, then one atom of C (Carbon) has the potential to power one person's needs, maybe for a lifetime. The source of the energy issues that we have today could be mitigated by the acceleration of our ability to more efficiently use each molecule of energy.

Since the 1960's we have seen how we produced 200 bhp for the average "Pony" car, and today provide the same 200 bhp in the family car that is longer lasting, more fuel efficient, and much smaller in displacement and pollutants. Does the aggressive exploitation of E=MC2 provide real competitive, and structural advantages for the North American automobile manufacturer?

Finally, this past weeks death of Casper Wienberger has started a variety of reflections of the 1980's energy pricing policies. Long lines of consumers at the gas pumps in the 1970's was quickly replaced by collapsed oil prices in the 1980's. Casper Wienberger was defense Secretary in the Reagan administration. History shows that he and Reagan were successful in breaking the Soviet Unions back by bankrupting it through spending for the alleged "Star Wars" initiative. At the same time the administration was dealing with the Saudi's who willingly flooded the market with oil and orchestrated the collapse in prices during the mid eighties.

The Soviets needed hard foreign currency to fuel their "Star Wars" level defense. Initially this was easily attained through the abundance of energy of the Former Soviet Union (FSU). However, when the energy prices collapsed, so did the bankrupt and corrupt communist regime of the Former Soviet Union. The Saudi's went along with the plan because they were in direct energy competition with the FSU. The house of Saud was also concerned with Iran and Iraq being supported by the FSU and the Saudi's wanted them out of the region.

Lastly putting these disparate threads together, by having producers drill more wells is the mindless (Petro Canada) solution to our energy problems. Energy problems that have been with us since the 1970's and are far worse as a result of the unintended consequences of the aggressive removal of the FSU. Don't get me wrong, I am as pleased as punch the FSU is gone.

We are however, behind the eight ball in terms of where the energy market should be, and the next decade will deal with these issues in remarkable ways. I certainly am doing my part here for the producers that need appropriate software built for these new market realities. I for one hope that Petro Canada's management can stop lining their pockets with shareholders money and start dealing with these issues as a responsible and practical organization. But don't get me wrong here either, I doubt the management can. Like the FSU in the 1980's their days are numbered.

Wednesday, April 05, 2006

Capturing the technology...


The title of this blog entry will lead you to an article in today's New York Times. This article captures the state of the technology marketplace today and should create a sense of urgency for all users. Users, particularly business' should heed the warnings contained within the article. The technology revolution is here and very capable.

To argue that this is the same as the technology bubble that burst in 2000 is fundamentally incorrect. These technologies are able to automate human thought and therefore provide real value. The only solution, in my opinion, is to fully immerse oneself in the technology in order to ride this very fast and extremely complicated trend.

Tuesday, April 04, 2006

Dr. Giovanni Dosi, Sources Part IV, A


Part IV Opportunities incentives and the intersectoral patterns of innovation.

Dr. Dosi notes that the purpose to involve an industry in innovative activities is based on incentives and opportunities. Noting this Dosi starts his analysis with the key question.

"Are the observed intersectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both."
A. Technological opportunities: Exogenous Science and Specific Learning.

To state the oil and gas industry is heavily dependent on the sciences is an obvious comment. The issue that I am raising is not so much the use of science but industries ability to keep pace with the changes in the current and prospective earth sciences and engineering disciplines. Scientific changes will be the fuel of innovative producers in the near to long term. Producers that are able to interpret these scientific findings will be rewarded with higher levels of revenue and earnings. A difficult statement to support, yet something that is well understood and generally agreed to in the industry.

How can a bureaucracy, built on the basis of command and control, keep up with the changes in the sciences that are developing exponentially faster? I suggest they can't and have suggested a new method of organization needs to be adopted. An organizational structure who's focus is the industry standard joint operating committee. The severity of this innovativeness capability in oil and gas is leading to a substantial failure in the supply of energy to the market. A serious and detrimental issue for one of, and possibly the most important primary industries, energy.

Dosi asserts two important qualifications to this discussion. That technology is a derivative of science and science is dependent directly upon the technology that defines it. We first discussed the theory of communicative action with Dr. Jurgen Habermas. Dr. Habermas theories were first published in the 60's and Dosi is tacitly reflecting these as pertinent to the science and technology in general. The best way to state this simply may be to impute a symbiotic relationship between science and technology.
Dosi notes an important point as well. That science usually spawns "a widening pool of potential technological paradigms." p. 1136.
Based on this information, Dosi then draws an extremely pertinent point about the science and technologies associated within an industry. The point arises out of the fact that the organizational structure has a limited or defined capacity of knowledge and understanding of both science and technology.

Dosi states the following;
"the idea that technological opportunities are paradigm-bound is also consistent with the historical evidence and interpretive conjectures... stemming from the gradual exhaustion of technological opportunities along particular trajectories." p.1137.


"New paradigms reshape the patterns of opportunities of technical progress in terms of both the scope of potential innovations, and the ease with which they are achieved." p. 1138.
It is my assertion here the failure of the oil and gas firms to manage their technology and keep pace with the changes in science are now organizationally and paradigm constrained. They can not keep up to any of these changes.

What can only be described as a failure of industry is glossed over with the immediate response that their is lots of oil remaining. Well if that is the case then provide the market with its demands! There is plenty of oil left for the remainder of the century, however, at fundamentally different economic values then they are willing to acknowledge publicly. These economic values require that new scientific and technological paradigms be introduced to enhance the capacity of the industry. Why has this not happened?

It is my opinion that the management of these firms require time for their pensions and stock options to vest before they will even begin to address these issues. This is the failure that I attribute to the organizational mess that they have created. They are well aware of the problems, they just don't have solutions and are in no urgent financial need to get to work on these issues.

This latter point is evidenced in the fact that since 1997 the companies based in Calgary have tripled their annual capacity to drill wells. Despite this tripling of wells drilled, the provinces overall deliverability is down from 2003. Evidencing, in my opinion, that the level of creative thinking in finding more oil and gas is equal to the number of wells drilled. An industry that has no capacity to think outside of this capability due to the organizational constraints discussed.

As I visualize the industry, I see a large rat running ever faster in the wheel in anticipation that the faster it runs the quicker it will get there. The ability of the industry to stop and think, as opposed to do, is zero due to this level of activity. And as with the rat in a wheel ultimately meets its demise, a similar fate awaits Petro Canada.

Monday, April 03, 2006

Partnership accounting Part III.

[Partnership accounting] [Java programming language]

In previous entries, located here and here, we discussed some of the accounting related issues of using the joint operating committee as the organizational focus. In Part I we discussed the ability for each partner to contribute time, effort, intellectual property, and capital in disproportionate amounts compared to their interest. In Part II discussion of the specific issues regarding billing was raised. This involved an enhanced method of equalization, or capacity utilization to be calculated individually for each producer on a frequent basis.

In Part III I want to expand the scope of the discussion to include a few characteristics that bring additional programming issues to deal with, and they are:

  • Penalties, Casing point elections, Before and after payout. (Points in time when the working interests of the producer changes, and therefore, imposition of an accounting cutoff.)
  • Accounting for the traditional concept of "accounting" month and "production" month.
The number of possible scenarios that a property may have is unlimited. There are many established traditions and cultural influences in oil and gas that are systemic the world over. These relate to not only working interest owners but also to royalty interest owners and lease holders. When we combine the additional layer of complexity of the accounting for interests over top of the discussion in Part I and II we begin to see another level of complexity. I want to reiterate the innovative producer will use more creative means to structure a deal and the need to have these complexities mirrored within the system adds a dimension that we have discussed elsewhere.

The second element that I want to discuss in this entry is the traditional accounting and production months and the differences in the timing of certain costs and revenues. In Canada, and specifically Alberta, the reporting process for reporting volumes requires that a long lead time is necessary to ensure the accuracy of the production data. The marketing process may also take some time. These lead to the deferment of the actual production month reporting for a later time in the accounting system. This lag in timing has to be dealt with in the system and the appropriate production reported in the appropriate month requires that there be an accounting month and a production month.

Of course I would be remiss at this point if I did not state the numerous amendments to the recording of the actual data may go through many iterations. These changes are created through a myriad of different justifications that are systemic through the industry and have to be addressed. Revised pricing, allocations, nominations and distributions are not uncommon.

What these two additional criteria for accounting in oil and gas do is complicate the calculation and reporting for this data. To model the possible outcomes of what may or may not happen in a specific property becomes conceptually difficult. The ability of the Java programming language is designed to deal with this level and style of complexity. I frequently think that Java can model data in up to ten different dimensions, and therefore Java provides the capability to address these type of programming problem easily. For this I have strong opinions as to how they should be managed, however, I will leave the technical decisions to the developers when they join. Needless to say I can see how the Java environment, based on the technical environment I stated here, can deal with this level of complexity.

I will close the discussion at this point and pick it up again in Partnership Accounting Part IV.

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