Friday, September 22, 2006

Proposal's Abstract.

Text of the abstract of the proposal to industry.

When we consider the effects of the organizational structure moving towards the joint operating committee, it is evident what the benefits and advantages are. This final research report captures the recommendations from the preliminary report, and begins a discussion about them. This discussion reveals a new direction for the energy industry, one that could provide the industry with revolutionary increases in performance and innovativeness. It is time for the industry to capture this opportunity and make these possibilities real.

Although the joint operating committee provides real value to the industry, this final research report is a derivative work of the ideas published in 2004. Further value is revealed in this final research report and more derivative works will be developed over time. For now this should be considered a small sampling of the types of benefits the energy industry could realize from these ideas.

The oil and gas industry is faced with a dilemma. Financial and operational performance are at all time highs. In the past 10 years reserves of oil and gas have become progressively more challenging and valuable. The discovery of reserves and replacement of production have become the critical management issues. Future reserves may require an expanded level of effort, particularly from the scientific and engineering perspectives in order to attain commercial viability. In other words the industry is becoming decidedly more complex and risky.

This proposal is industries first step in approaching these complex and risky issues. What it is that I am suggesting is that to address these difficulties, industry should optimize their approach by reorganizing. This proposal commences the development of systems and markets that facilitate the reorganization around the joint operating committee, the natural form of organization in oil and gas.

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Tuesday, September 19, 2006

Whom would Henry Ford hire?

I am adding the following text to the submission "Whom would Henry Ford hire?"

Therefore it is reasonable to ask whom would Henry Ford hire today, and what would these people do? This question is asked as a result of the impact that I anticipate will occur in moving to the joint operating committee. People will be far more receptive to the Petroleum Lease Market described elsewhere in this proposal. The ability to achieve breakthrough productivity metrics are assumed as a given in this discussion. Individuals faced with higher productivity or longer work hours will seek the choice requiring less effort. The history of this proposal also shows that many of the oil and gas producers will be able to ignore the results of any changes. Based on the theories of Giddens and Orlikowski's models the corporate organization is the odd man out in this trokia.

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Saturday, September 16, 2006

Partnership Accounting.

More text for the proposal that is being written for the energy industry.

Traditionally the Chairman of the Joint Operating Committee operated the joint account much as a limited partner would. In the past the company that the Chairman represented would have built up the capability to manage the joint assets effectively with the help of a few key suppliers. As operator it was predominately up to them to implement the budget and programs which were agreed to amongst the other non-operating partners. Outside of the financial contribution, little would be asked or expected from the partners involved in the joint operating committee.

In the future, I believe, the engineering and geological expertise residing within all of the organizations represented by the joint operating committee will need to be called upon due to the complexity of the operation and advances in the sciences. An anticipated shortfall in human resources will be the secondary reason that each producer will actively participate. It has become progressively more difficult for a producer to have the internal capability to conduct all the operations they as operators of the joint operating committees are required to possess. This trend will continue for the foreseeable future. With the partners’ motivation being driven by their financial interest, sharing in the forms of learning and contributing in many other ways is a solution to the increased demands for engineering and earth scientists, the shortfall in human resources that all industries are facing, and the retirement of the workers in the next ten years. Will a more open and active sharing by the partnership expand as the exploration focus becomes more predominate in oil and gas? And will this provide indirect solutions to these human resource demand related issues?

It is also necessary to ask, is it worthwhile to have essentially duplicate, non-cooperating and non-collaborating technical capabilities developed to this level within each company? Would a looser coupling of qualified capabilities, assembled and disassembled in self-organizing teams for each specific technical task be possible? Where management is able to emulate the hierarchy’s command and control structure by use of the military command structure. Enabling management to maintain the focus and direction of the producer. What type of enterprise business oriented software would be required to support that type of team? That is the question that needs to be asked, and what follows is a description of the partnership accounting module that needs to be built to accommodate this scenario.

The key component of the system will be the ability to represent the understandings and operations of the engineering and geological team as they conduct those operations. I foresee that each producer will be able to subsequently account for the joint transactions based on their individual policies and standards. This includes the differing international accounting standards, FASB, SEC and other regulating bodies of the accounting world. This required capability is inherent in two of the underlying technologies of this proposal. The technologies are the relational models sharing of data and the Java programming environment.

I can attest that the ability to follow the business has been a traditionally difficult area of accounting. Geologists and engineers are very creative deal makers when left to their own devices. This has created accounting issues which caused problems for accountants in representing the business arrangement. The inexperience of the accounting staff to represent the deal within the constraints of the accounting system is the problem in my experience. I believe that self-organizing technical teams, and creative deal making are all part of an innovative producer, and the accounting system should accommodate that greater flexibility.

I also believe that anything that can be represented mathematically could and should be adopted within the accounting system. Additionally a system built exclusively by oil and gas people, for oil and gas people, to be used on oil and gas operations is something that has never before been undertaken. SAP was built to handle complex supply chains, primarily in manufacturing settings, and in my opinion it has no purpose in an oil and gas setting.

Revisiting partnership accounting.

Contributions made by the staff of a producer must be costed and added to the joint account. This has traditionally been done for the field staff, but what about the head office staff? I would suggest as opposed to overhead allowances, a means of capturing these costs in the charge out rates of the field and head office staff is a requirement of this system. With the increased load on the operator to conduct high levels of engineering and earth sciences, and in turn earn marginal overhead allowances is a conflict that is being raised here and suggested is an issue that will be resolved through the discussion of the solution. Would this also imply that the costs of capital be valued? Increased contributions by many of the producers that are traditionally designated as "non-operator". Non-operated partners becoming equally active and contributing their time, effort, intellectual property and capital, in disproportionate amounts compared to their earned interest.

Another point that I will make here is the issue of how freelance workers are recorded and compensated. Ideally the system should have a collaborative work order system to deal with the potentially large volumes of people that work within a joint account. For example, how many employees are currently active in each joint account today, 100's, 1,000's?
These people are the highly specialized engineers and geologists that I noted before. Referring to the fact that their specializations require them to work for a large number of producers, representing many joint operating committees. Adam Smith noted that specialization was a requirement to expand economies and I am suggesting that another substantial level of specialization is needed and possible in the oil and gas industry.

I want to raise one of the major problems that I see that Genesys seeks to solve. The issue, I think, is unique to the accounting for operations in the joint operating committee. The issue is the partnership or joint venture accounting, and focuses on the way the functionality and process is written. The way the system needs to be designed will use concepts that are not present in today's oil and gas accounting systems. I also assert that these issues could not be addressed in prior programming languages but that Java opens up many opportunities to handle and solve these types of problems, and I can see how it would be very effective and mandatory in solving this issue.

The current systems, SAP in particular, focus almost exclusively on the accounting of the company of interest. The joint account is cleared monthly to the appropriate working interest owners, and from that point, little if anything is done other then from an internal perspective. With the change in organizational focus to the joint operating committee, this internal focus is maintained, and, from an accountability point of view, increased. However the partnership focus begins to take on a more substantial component of the interests of the collective organizations as represented by the joint operating committee.

I have discussed that many of the participants of the JOC will be more active in the day to day of each JOC. Micro Specialization is something that will have to come about as a result of the demands for so much work to be done by the existing and possibly declining population of oil and gas workers. I have also detailed here the use of personnel from various participants will be called upon to conduct activities, whereas currently, the operator undertook most of these tasks.

This point will help to mitigate the redundant and unproductive duplication of capabilities of the competitive oil and gas marketplace today. As Dr. Giovanni Dosi has suggested, the capabilities and qualities of each individual producer are currently being mirrored and this mirroring is constraining the understanding of the advancement of the sciences and engineering and their application in innovative ways. A more cooperative mindset amongst the producer population is required to fulfill the markets demand for energy.

The issues involved in Partnership Accounting.

Currently the direction of data and information is from the operator to the non-operators. This by nature was a simple programming issue to overcome, and there will be some elements of this simple method in the Genesys system. The difficulty comes when all participants of the joint operating committee have each been contributing people, financial and technical resources, and direct costs on behalf of themselves, and / or, other members of the joint account. All the producers’ collective resources are pooled to attain the highest level of technical capability, management and tactical deployment available.

These costs and resources are being incurred on each producer’s behalf or, their own behalf and possibly not shared initially, but may be eligible to offset their obligations to other partners or need to be recognized irrespective of which producer incurred the cost. This is further complicated by the fact that many of the internal charges and overhead allowances that have been traditionally charged to the joint account also become redundant. These overhead style of costs are replaced by the specific costs and attributes that were directly incurred by each producer represented in the joint operating committee. The Genesys system will capture these components as they are incurred by the employee / worker / investor / consultant in an active job costing state as the user / worker is logged on.

Therefore what is required in order to determine the 100% costs attributable to the JOC is a "pooling" of all the eligible associated costs and revenues involved in the property by any and all partners. Once these costs have been aggregated from each producer, then and only then, can the appropriate costs of each producer be determined, recognized and billed.

To make things more complicated for the developers, this cost data should be compiled into its usable form at least daily and ideally on a live basis. The elimination of the month end process is one of the objectives of this system, and things need to be dealt with on a more current basis. Cash redistribution based on contributions would remain on a clearing basis at the end of the month or when reasonable.

When a cost is incurred, the system is required to be able to denote that transaction is an operated or non-operated cost and if it is eligible. These two attributes are telling the system that these costs are incurred on behalf of all of the participants of the joint operating committee, or on behalf of the producer itself and if it should be recognized in the joint account or not. This reflects that there may be unique costing components of each producer represented by the joint operating committee. Essentially involving an enhanced method of equalization, or capacity utilization to be calculated individually for each producer on a relatively frequent basis.

I want to expand the scope of the discussion to include a few characteristics that bring additional programming issues to be dealt 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), and 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 not only to 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 the previous paragraphs 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 can not be accommodated within the systems that are available today.

Of course I would be remiss at this point if I did not state the numerous amendments to the recording of the actual data which may go through much iteration. 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 environment to deal with this level and style of complexity is possible. I believe that Java can model data in up to ten different dimensions, and therefore Java provides the capability to address these types of programming problems.

Additional issues involved in partnership accounting.

It is also necessary to raise the issue of currencies. The operation of a facility may be in a remote area of the globe and be owned by two or more producers located in other countries. This may be a likely scenario considering today's makeup of producers. For example, a producer in Texas may have partners from Canada and Great Britain involved in a large facility in the capital of Turkey. To represent the involvement of each partner in the currency they are regulated to report in is a new and difficult task in this era of large currency fluctuations.

Currency translations can take on two distinct characteristics depending on the type of account which are generally defined as balance sheet accounts and income statement accounts. This definition denotes a cumulative balance vs. a point in time transaction. The assets need to be reported at the lower of cost or market value. What is the impact on each producer if the currency in use by the partner is the U.S. and the Turkish dollar declines precipitously? What happens to some debt or obligation if your home currency declines and your debt is denominated in U.S. dollars? And the contra of this would be any values that had been collected through cash calls. The second type of currency translation involves revenue and expense type of accounts. These could also disrupt the makeup of the partnership accounting, particularly for example, if the U.S. dollar were to decline. Does this make the property present a disproportionate value to each one of the partners?

The purpose in raising these points in partnership accounting should be clear. The number and types of transactions are taking on a multitude of exceptions that need to be addressed. To make this system functional and useful in this environment will be a test of the technologies. Difficult at this point, but I am confident that given the right amount of time the Java developers will have made the system be able to accommodate all these various data elements. I therefore assign the technical risk of this system as low.

Daily and monthly volumes defining a period of time. Spec vs. raw, products and by-products. Processing and gathering fees based on (non) ownership. Imperial vs. metric reporting standards. Nominations, commingling of gas. Working interest owners earning different production values. I suggest that adding these requirements to an already elaborate Production Accounting algorithm is going to be a challenge for the entire information technology world. However, it is also something that can be done. The only impediment is money.

Some history of how the industry has developed and the influence that these historic attributes play is in order. Once an agreement has been put in place by the partners a general framework of understanding how the operation works is then established. These frameworks are legal agreements that are explicitly supported by the norms and culture of the oil and gas industry, both locally and internationally. These organizations in Canada include the Canadian Association of Petroleum Landman (CAPL) and the Petroleum Accountants Society (PAS).

Once these agreements and frameworks are in place, this is the precise point in time that real life conspires to make things complicated. These frameworks have also placed a number of processes in the hands of the companies to deal with these real life anomalies. Mail ballots, Construction, Ownership and Operation (CO&O) agreements define in detail what exactly the operation is. Company A will use Company B's gathering facilities for $4.50 / 103M3 etc. Sales agreements are defined between each individual producer with nominations being a process of balancing the sales and production processes. These also create unique accounting requirements for the property in the long run.

The influence of management here is significant. Each company has differing strategies for the area and each is attempting to optimize their assets. In other words, differing perspectives of the same data and information is an area where relational theory can help. The compromise and details of each partner in each issue creates the unique accounting requirements for each partner for each asset. This system is being built to accommodate these needs.

By way of an example, I as an operator in a major area have the desire to expand the throughput of my gas plant. This is done by drilling in other regions and zones and gathering of additional gas that may now be commercial. The land is held by another firm that has no facilities around the area and is beginning the process of searching for partners. A few years later our new partnership has made a significant gas find. The production is a rich gas stream that also happens to be sour. One company has an invested infrastructure to deal with their production, the other partner has only his production. These two firms will realize substantially different metrics regarding their investments in these properties. The partnership accounting for the joint operating committee has to consider these issues and attributes in a never ending evolution of the accounting requirements. Can you say Java?

What this Genesys system will do is provide the richest environment for managing these issues. In documentation regarding the Accountability Framework with SEC Chairman Christopher Cox it is noted that he is using XML to create a metadata standard for managing the accountability of companies reporting for SEC regulations. This is in essence using the power of the computers today to enforce compliance as opposed to the human influenced methods today.

If the facility needs to account for the literal chemical composition of its aggregate production, almost impossible in a large facility, then that could happen. Or alternatively the legal framework could override the requirements of the actual production, very common in large facilities and less so in small ones. Most likely, the joint operating committee (JOC) will need to select a hybrid solution from the Genesys systems two alternatives mentioned in order to deal with the unique strategies and production requirements of each producer represented at the JOC.

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Saturday, September 09, 2006

Calls to Action

More text that will make up the soon to be published proposal to industry.

There have been a variety of what I refer to as "Calls to Action" regarding the organizational structure of companies. Suggestions are made for companies of all sizes, but particularly for larger firms. These calls echo the message that I published in the preliminary research report "Plurality Should not be assumed without necessity."

Harvard Publishing

The expiration of the use and function of the organizational hierarchy is being discussed by members of the academic community. Harvard has published a book "Winning at Collaborative Commerce" (ISBN 0750678178) which addresses the need for organizations to use the collaborative tools currently available to eliminate the negative attributes of the hierarchy. Here is a summary written by a Harvard editor:

"More than ever, companies are sharing data, processes, and even employees with their customers and vendors to increase speed and efficiency. So what is collaborative commerce? The authors, who first introduce the concept in this book, suggest that just sharing information is not enough—new business models and organizational structures must be built around this open-door policy to reap maximum benefit."
Harvard's book is directly on topic with its introduction of what they define as "collaborative commerce". They note that the speed of innovation, and increased competitive advantages are at hand for the companies that implement these systems and procedures. they also note that collaborative commerce provides long term sustainable competitive advantage.

Harvard notes the need for:
"commitment and change across a number of areas: governance, strategy, process design, information technology infrastructure, people management, culture and change, and measurement."
The Harvard Book summary is available here.

McKinsey Consulting

McKinsey Consulting have published an article which is right on point with its focus on systems. Entitling the publication "The Next Revolution in Interactions" this ties into the "Enterprise 2.0" discussion which many people have branded the concept, and is consistent with Harvard's "Collaborative Commerce". Providing the entire article in a down loadable podcast was a good idea and I highly recommend listening.

On topic comments include:
"Technology and organizational strategies are inextricably conjoined in this new world of performance improvement."

"This shift toward tacit interactions upends everything we know about organizations. Since the days of Alfred Sloan, corporations have resembled pyramids, with a limited number of tacit employees (managers) on top coordinating a broad span of workers engaged in production and transactional labor. Hierarchical structures and strict performance metrics that tabulate inputs and outputs therefore lie at the heart of most organizations today."

"But the rise of the tacit workforce and the decline of the transformational and transactional ones demand new thinking about the organizational structures that could help companies make the best use of this shifting blend of talent. There is no road map to show them how to do so. Over time, innovations and experiments to raise the productivity of tacit employees (for instance, by helping them collaborate more effectively inside and outside their companies) and innovations involving loosely coupled teams will suggest new organizational structures."
These selected excerpts provide support for using the Joint Operating Committee as the organizational focus in oil and gas. The comments by McKinsey were written in December of 2005 and were the first to discuss these formerly taboo subjects. One interesting difference between what McKinsey writes about, and the oil and gas industry, is that the Joint Operating Committee can fulfill the objectives they note in this article. Unlike some industries that need to take a clean slate approach to the organizational construct, the oil and gas industry already has the joint operating committee to provide all of this value.

McKinsey - The next revolution in interactions.

Massachusetts Institute of Technoloy

MIT Video records MIT's president Susan Hockfield as calling for this prestigious university to lead the charge to solve the global energy problems. This frames MIT's role as not dissimilar to what their role was during World War II. Stating that Energy has entered a "perfect storm" in which demand is rising, supply is constrained and environmental concerns continue as issues for the industry.

Although during the video there was a belief that generating sufficient supply of renewable or bio-fuels was part of the solution. the video’s focus is on sustaining the energy demands of the world throughout the 21st Century and ensuring that economies were able to source the volumes of energy demand. MIT is forming an Energy Research Council to guide the various faculties in their research.


The Oil and Gas Journal
The next call to action is from The Oil and Gas Journal. The article is entitled "Innovation lacking in high-tech world of oil: New technologies needed to develop unconventional resources." They have identified the demands of quarterly performance as the reason why the energy industry has not resumed its role in addressing supply and pricing issues. Nonetheless they are stating that the demands for more energy are significant and it is critical for the producers to innovate. I consider it a must read article.

On page six the authors summarize many of the areas they suspect that innovation will be of value. They also point to the potential of higher prices leading to a reduction in demand. Nonetheless the scope of the suggestions covers all areas of conventional and unconventional oil and gas. They effectively state what is needed, but are lacking in the article as to how it is to be provided.

It is necessary for the industry to re-organize themselves for this challenge. A revised organizational structure that addresses the performance of an innovative producer is needed. That is why selecting the joint operating committee as the key organizational construct around which systems are to be built. By joining the hierarchy’s accountability framework with the four frameworks of the joint operating committee, performance will increase. Software defines the organization, and changing the organization requires that software be built to define the new organization.

Oxford Analytica.

Their website reflects;
"Oxford Analytica is an international, independent consulting firm drawing on a network of over 1,000 senior faculty members at Oxford, and other major universities and research institutions around the world. Founded in 1975 by Dr. David R. Young, Oxford Analytica has built an international reputation for seasoned judgment on and analysis of the implications of national and international developments facing corporations, banks, governments and international institutions."
Oxford Analyticas explicit conclusion to this article is stated as:
"Technological lead will prove critical in the efficient exploitation of frontier oil provinces. Upgrading portfolios means majors will divest assets that provide material opportunities for small and medium-sized independents.

Securities and Exchange Commision.

The Wall Street Journal contained an excellent article regarding the accountability framework of the Securities and Exchange Commission (SEC). This article is about the relatively new SEC Commissioner Mr. Christopher Cox discussing a revised method of compliance to the SEC's accountability framework. By using XML (Extensible Markup Language) and specifically XBRL (Extensible Business Reporting Language) he is defining the meta data necessary for automation of the accountability framework.

The preliminary research report stated the purpose was to build software to manage the accountability framework. Then by using the Joint Operating Committee as the organizational construct, this would achieve an alignment with the financial, legal, operational decision making and cultural frameworks. The report noted that these four frameworks are defined and constrained by the Joint Operating Committee, and that when accountability and operational decision making were separate, administrative difficulties creep in. Therefore when accountability is in line with the financial, legal, cultural and particularly the operational decision making framework these administrative issues would subside and innovativeness would increase.

Chairman Christopher Cox is interested in doing the same for the entire world's financial trading markets, which as SEC commissioner is his responsibility. By making the types of comments that Commissioner Cox states in the WSJ article it is clear to me that he is not only on the right track but will resolve the largest administrative nightmare, that being Sarbanes-Oxley, of the public company reporting process.

It would generally be concurred that the legislation known as Sarbanes-Oxley is too onerous for companies to comply with. How this issue gets resolved from here is difficult due to the mixed messages any revisions would send. To make any major amendment to Sarbane's Oxley would make it appear as the framework has become unmanageable and invite the Ken Lay's and Jeffry Skillings back for more hollowing out of investor’s wealth.

How the Sarbanes-Oxley legislation, in addition to the other SEC requirements, are maintained and the difficulties are removed from the process is by eliminating the need for the 800 plus forms and replacing them with a handful of standard tags in the Extensible Business Reporting Language. I can only thank that the Commisionner understands the technological capabilities and can apply it to the SEC.

The demise of the bureaucracy is what the Commissioner is saying here. He is laying the groundwork and infrastructure of how investors will be able to manage their assets in the future. Genesys, through this research has adopted the SEC's XBRL tag library and therefore will be compliant with the SEC's regulations. In August 2006 the SEC has issued an RFP to build this system.

Mr. Olivier Appert, Chairman and CEO of IFP.

Mr. Appert has written a fine conclusion that leads me to a subsequent comment.
"In order to meet the world's needs and demands for energy, while simultaneously observing our current energy supply and protecting the environment, the oil and gas industry will have to solve many complex technological problems in the coming decades and continue to innovate as it has done since its inception."

"Recent scientific and technical advances, the fruits of collaboration between the worlds of research and industry, have led to a profusion of promising emerging technologies and represent key assets for preparing for the future, particularly in terms of managing the energy transition from oil and gas to new energy sources."

"In the face of increasingly fierce competition, it is imperative these new challenges become integral to our research and innovation strategies. Developments will play a crucial role in guaranteeing genuine sustainable development for the world."
It is imperitive that the oil and gas industry does not fail in this critical task. That new and more innovative organizational forms are required for the 21st century. The joint operating committee being the global cultural manner of the oil and gas industry, is also the financial, legal and operational decision making framework as well. As noted, SEC Chairman Christopher Cox understands that the way to redefine the accountability framework is through the Extensible Business Reporting Language, and the SEC's tag library. What the oil and gas industry therefore need to do, first and foremost, is build the software to define and support the joint operating committee as the natural form of organizational structure. Until we do this, these calls to action are only words that will soon fade in their meaning in the face of the angry energy consumer who wants to know why they can not drive their car or heat their home.


Mr. Murray Edwards

Mr. Edwards of Calgary, at 46 years of age he has amassed a fortune of several billion dollars and is currently holding down the following roles.

President, Edco Financial Holdings Ltd.Vice-Chair, Canadian Natural Resources Ltd.Chair, Ensign Energy Services Inc.Chair, Magellan Aerospace.Owner, Resort of the Canadian Rockies Inc.Co-Owner, Calgary Flames.Mr. Edwards is quoted in the May 2006 issue of Alberta Venture, in which he is the cover story "Who Cares About Respect"
"We're really big proponents of flat organizations where people have a sense of ownership."
The Calgary Herald

A further call to action was contained in an article in The Calgary Herald. The article states that the junior oil and gas producers and royalty trusts are having difficulty making money. Peter Knapp of Iradesso Communications states
"Everybody thought it was going to be easy to make a lot of money and that just isn't the case".
With natural gas prices down almost 50%, they are also finding their costs are too high. They also clearly and unanimously feel that the gas price will rise after June 2006.

So how is this a call to action? The suggestion is that a solution to this problem is to innovate and move with the science. Not that this hasn't or isn't being done, it is just that we have hit a critical period in which the science is changing quickly. The capital being generated from higher prices is a reallocation of societies’ resources to fuel innovation. In the future a profitable energy firm will collaborate with a greater population of all resources to determine the most effective ways and means of exploration and production.

This is the role and responsibility of the joint operating committee. And for the "business" end of the oil and gas business to continue to ignore the joint operating committee in its organizational structure and systems, the industry I suggest, will begin to fail in making money. A subsequent failure will also occur in that the industry will be unable to deliver the appropriate amount of oil and gas to the market.

Institute for International Economics

In an article entitled "Accelerating the globalization of America" the authors made two interesting comments in the Executive Summary.
"Innovations not implemented because resources cannot adjust forfeit some of the potential of the economy." p.xviii

"Two additional links between productivity and international trade are that trade in technologically sophisticated products is associated with higher productivity and the industries that have invested heavily in IT have a greater propensity to export." p. xxi
The bureaucracy is slowing us down, (a given) and innovations that would otherwise benefit the economy are now having their value forfeited. The market demands for energy continue to outstrip supply. Whether we are at the peak of production or not is not the question. The question should be, how much are we giving up economically by not proceeding with this Genesys Software development project?

I highly recommend downloading the entire document. It is a substantial work in terms of its findings.


Energy Secretary Samuel W. Bodman on MIT video.

This video is on MIT World and is at almost 60 minutes but is time well spent. Recall that MIT has declared that energy is the great challenge of the next 50 years and describes it in terms that are best summarized as a "perfect storm". MIT has arranged as part of their Energy Research Council, U.S. Energy Secretary Samuel W. Bodman to speak on "Our Energy Future: Why American Science and Technology Must Lead the way."

Many of the things that Dr. Bodman speaks of are directly pertinent to the topics and thoughts within this research. Quoting liberally from his speech:
"Science and Engineering can and should be used to advance the public good. To solve complex problems and to help our society and economy to adapt in a complicated global environment."
"A time for breaking down the walls that could limit our future economic growth. And in many cases the tools that we use to do this will be found in breakthroughs in science and engineering."
"At a time of increasingly aggressive global competition America must do what we have always done best. We have to take risks, we have to lead, we must invent, we must innovate."
That last quotation is directly in line with the justification for using the joint operating committee, and direct support for these software developments. Today science and technology are constrained by the organizational conflict and bureaucratic interference that limit speed and innovation.

Bodman notes that the majority of his funding for the scientific research and technology has been as a result of a reallocation of resources under the Presidents "American Competitive Initiative"(ACI). He goes on to state that the:
"scientific disciplines are increasingly being linked."
And that the effort of the energy department and the ACI go to the
"future economic well being and security of our country".
Also noting that he is expecting more than just the development of new knowledge from these government funded research programs.

Although the research that he mentions in his "Advanced Energy Initiative" is on ethanol, hybrids, fuel cell, solar, wind, nuclear and clean coal. It is fair to assume that he is fully aware of the demand of the U.S. for gas and oil is, and will remain high. His approach currently seems to be limited to establishing some of the alternatives as viable enhancements for the long run in the U.S. and he noted as such the expectations of the market makeup of energy sources.
"Science and Technology must lead the challenge to provide good, clean and abundant energy."
Some noted targets, facts and objectives: Ethanol production = 5% of the current U.S. supply and uses 14% of the U.S. corn crop. The department of energy expects that Ethanol supply will grow to 5 million barrels / day in 20 years. Needless to say based on these projections the expectation of the US is to continue to use fossil fuels as its primary source of energy. Secretary Bodman sees the parallel between these energy related difficulties as similar to those in the cold war inspired space race. Having the Secretary of Energy making these types of comments adds some real urgency to the issues at hand.


Energy Secretary Samuel Bodman in Calgary.

U.S. Energy Secretary Samuel Bodman was in Calgary recently. After a quick tour of the heavy oil facilities in Fort McMurray Secretary Bodman stated that;
"The U.S. is ready to work with Canada to remove roadblocks facing Alberta's oil sands sector."
"Suppliers of oil in the world have really lost control of the market."
The question that seems to be answered by Secretary Bodman's visit is that the oil sands are a critical part of the U.S. energy security. Declaring the oil sands a "world resource" certainly puts the energy issues into context, and puts their development on a higher priority.

If it was only so easy. The problem comes in the area of infrastructure. There are not the basic necessities to support the current $100 billion in investment being made in Fort McMurray. The mayor of Fort McMurray has stated that the ability to sustain the current pace of development is in jeopardy. There are not enough people, 75,000 in Fort McMurray, to assess as a tax base to begin to even address the current issues, let alone the future oil sands developments. By all measures this is a pretty serious situation for any city to handle.

What we need from Secretary Bodman is help with our problems here. There were indications that the kind of help that may be provided from the U.S. was the U.S. based refineries and pipelines be upgraded to handle the oil sands output. First, that is not the problem, and secondly Alberta, irrespective of our leaders opinions of the situation, is not a hewer of wood and drawer of water. Now is not the time for our leaders to suggest that foreign groups develop the infrastructure necessary for heavy oil development. Invest here in Alberta where the problems exist. Don't move the raw material into the final market, essentially ignoring Alberta as a second class citizen.

The areas that we need help in are in the development of the appropriate civic infrastructure in Fort McMurray. What we need is engineering and knowledge on how to build the super refineries, pipelines and associated infrastructure for full development. Let’s work together to solve the energy needs of the continent. That is what is possible and that is what we are ready to do with our very good friends, the U.S., however, we will not limit the market for our production to the North American continent exclusively, why would we?

Sir John Browne Group Chief Executive BP p.l.c. on MIT video

Another MIT video, this one of Sir John Browne, Group Chief Executive BP p.l.c. An excellent speech entitled "The Purpose of Business".

Sir Browne developed his meaning or purpose of business as:
"We are fulfilling our purpose by supplying goods and services at a price people can afford and in a manner in which makes the activity sustainable."
In his speech Sir Browne documents the long lead times in oil and gas operations. In Azerbaijan BP has spent $15 billion and over 15 years to bring on production. Although it took this long to develop these assets in Azerbaijan, BP probably would not have been able to accomplish what they did in Azerbaijan in North America any sooner! The scope and scale of this business is such that the lead times are ridiculously long.

Sir Browne talks at length about the time in which BP went into Azerbaijan in the early 1990's and developed their offshore resources. These Offshore resources probably would have still been untapped if it wasn't for the perseverance of Sir Browne and BP. To invest $15 billion over 15 years without seeing any revenue, and to have the investment risked due to the political instability of the region shows the lengths that producers have taken in order to access the commercial fields. As he notes, supplies of oil and gas are concentrated in Russia, The Middle East and Africa.

Sir Browne talks about the things that he has to do for the future.
"And perhaps most important of all we need new ideas and knowledge, we need the advances in sciences which we as engineers can apply."
Again comments that are consistent with the objectives of this research, and the use of the joint operating committee as the organizational focus. How can it be expected that the bureaucracies will be able to keep up to the demands of the changes in sciences. Layer on the political risks and operational difficulties and one can see the complexity of the business is systemic in all areas of operation. The bureaucracies are doing the job today, but at what speed? Is it fast enough to provide the market with their demands for energy?


John Hagel III and John Seely Brown

I was able to incorporate much of Brown and Hagel's research within the preliminary research report. This was the culmination of much of Hagel and Brown's work up to the time of the preliminary research publication. Since then they have compiled further work that helps establish their leadership position in the business impacts, opportunities and issues of technology. Dealing with the "edge," both are asking some particularly challenging questions of management. Such as this from Seely Brown's website.
"It is not just corporate training that is important but rather rich participation with partners who are at the edge. Ask: how do you learn as much from a partner as you learn from creating something yourself? How does distributed collaboration around the world become a critical strategy for survival? What are the most effective ways to convert your existing global supplier networks into new nodes of innovation?"
Today they have published one concept that I want to mention here as a call to action. The idea addresses the three types of businesses that fall within this new classification system of theirs.
  • Infrastructure Management Businesses.
  • Customer Management Businesses.
  • Product Innovation Businesses.
How I foresee the future application of this thinking in oil and gas is: companies such as this software development proposal will fulfill the role of “Infrastructure provider business”. Secondly, the "Customer "Management Business will fulfill the requirements of the downstream marketing and refining businesses. And finally the traditional oil and gas industry will be seen as the "Product Innovation business". A business that is something that the traditional upstream oil and gas industry needs to and eventually will fulfill.

Links to John Hagel
Links to John Seely Brown

Newt Gingrich in the Wall Street Journal.

The Wall Street Journal published an editorial written by Newt Gingrich entitled "Bush and Lincoln". An article that parallels the strategic mistakes that both presidents appear to be making regarding the war's they were dragged into.

The particular points in the article that I see as a call to action are these quotations:
"The president should insist upon creating new aggressive entrepreneurial national security systems that replace (rather than reform) the current failing bureaucracies. For example, the Agency for International Development has been a disaster in both Afghanistan and Iraq. The president should issue new regulations where possible and propose new legislation where necessary. The old systems cannot be allowed to continue to fail without consequence. Those within the bureaucracies who cannot follow the president's directives should be compelled to leave."
"We see these first two factions today. The Kerry-Gore-Pelosi-Lamont bloc declares the war too hard, the world too dangerous. They try to find some explainable way to avoid reality while advocating return to "normalcy," and promoting a policy of weakness and withdrawal abroad."
"Most government officials constitute the second wing, which argues the system is doing the best it can and that we have to "stay the course"-- no matter how unproductive. But, after being exposed in the failed response to Hurricane Katrina, it will become increasingly difficult for this wing to keep explaining the continuing failures of the system."
"The first and greatest lesson of the last five years parallels what Lincoln came to understand. The dangers are greater, the enemy is more determined, and victory will be substantially harder than we had expected in the early days after the initial attack. Despite how painful it would prove to be, Lincoln chose the road to victory. President Bush today find himself in precisely the same dilemma Lincoln faced 144 years ago. With American survival at stake, he also must choose. His strategies are not wrong, but they are failing. And they are failing for three reasons. "
"We have to be honest about how big this problem is and then design new, bolder and more profound strategies to secure American national security in a very dangerous 21st century. Unless we, like Lincoln, think anew, we cannot set the nation on a course for victory. Here are some initial steps:"
System failures, bureaucracies that need to cease, muddling along as a strategy. These points are all music to my ears. It strikes me as odd is that here is a candidate to be the next president of the United States expecting the bureaucracies to do the honorable thing and fall on their sword. If the U.S. government is actively debating these points, the time for the energy industry to act surely must be at hand.

Summarizing these calls to action.

These calls are coming from a variety of academic, business, government and other voices. These voices have now been heard. The time for action in dealing with these issues and opportunities is now. This proposal makes the first in many steps that the industry needs to take to approach the tasks and difficulties ahead. The only thing that is missing, in my opinion, is the industries sense of urgency about these points.

In the Wall Street Journal article of Newt Gingrich's, he noted the three possible avenues that can be taken to solve a problem.
  1. To cower from the effort necessary to achieve victory.
  2. Muddle along and get through it.
  3. Approach the problems with new thinking.
Muddling along is not an option, as it appears to me that this is the strategy that the energy industry has employed. It is time to start anew with fresh thinking about the problems that the industry faces.

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Thursday, September 07, 2006

Newt Gingrich's call to action.

The Wall Street Journal today published an editorial written by Newt Gingrich entitled "Bush and Lincoln". An article that parallels the strategic mistakes that both presidents appear to be making regarding the war's they were dragged into. An excellent article that can be sourced by clicking on the title of this entry.

The particular point in the article that I see as a call to action is this quotation:

"The president should insist upon creating new aggressive entrepreneurial national security systems that replace (rather than reform) the current failing bureaucracies. For example, the Agency for International Development has been a disaster in both Afghanistan and Iraq. The president should issue new regulations where possible and propose new legislation where necessary. The old systems cannot be allowed to continue to fail without consequence. Those within the bureaucracies who cannot follow the president's directives should be compelled to leave."
It strikes me as odd is that here is a candidate to be the next president of the United States expecting the bureaucracies to do the honorable thing and fall on their sword. Maybe I wasn't as crazy as I thought I was when I proposed the same to the oil and gas industry in May 2004.

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Wednesday, September 06, 2006

Apple's Expo in Paris.

Apple says there are significant products that will be announced on September 12, 2006 in their "Apple Expo" in Paris. Whatever the result I would recommend that Apple do "one more thing" and that is they do a "Netscape".

What I mean by doing a Netscape is they announce that their new operating system Mac OS X v. 5 (Leopard) will be free. Microsoft which claims their Vista will be available around the same time have announced prices as high as $399. If Apple's operating system was free then Windows would be more or less obligated to issue their operating system for free as well.

Since Apple and Microsoft are the two remaining companies that still charge for operating systems, this could be an effective preemptive strike. If Apple were to also announce the release date of Leopard in December 2006 then they would have two effective advantages over Microsoft. I hope Steve Jobs does the right thing and Netscape's Microsoft.

In this age of disruptive innovation, Jobs could turn his reality distortion field on and say that after all cats (Leopard) need to be free in the Jungle.

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