Monday, April 30, 2007

Transition of the generations.

Sun Microsystems have posted on their Sun Executive Boardroom, information that details issues around the Boombers commencing their retirement in five years. As always, click on the title for the article. This is a very interesting article and one that certainly applies to the energy industry. Essentially what it appears to me is a small window of opportunity for the four generations, the Boombers, Gen X, Gen Y and Millennial's to resolve how the industries that are currently managed by the Boombers will get handed over. There are needless to say many problems ahead. That I would point to technology to help is probably the smallest surprise in this entry.

Wow, only one paragraph, didn't think I could do it!

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Sunday, April 29, 2007

McKinsey on the Environment

McKinsey consulting have prepared an economic summary of the relative costs and opportunities to address the "Global Warming" issue. This study is a global look at the situation and what the different methods will have in terms of success and costs of each method to the overall economy.

Two things I notice in the article is the size of the problem from the point of view of China's and the rest of the third worlds production of CO2. It is difficult to understand how there could be any progress made without those countries actively participating in CO2 reductions. In the Kyoto protocol China and the third world countries are now in compliance, and will be well into the future, without any changes. As these economies expand they may make the "Global Warming Crisis" into a real issue.

The second item that I noted is the cost, if McKinsey's calculations are correct, is less then the amount of insurance. Calculating the cost of insurance, excluding life insurance, the cost to the economy in 2030 is 3.3% of global GDP. Whereas the costs of climate change abatement totals only 0.6% of Global GDP, or 500 billion euros. If that is the cost, then what is the concern? And this last question needs to be questioned, I think.

You may be able to tell that I am skeptic about the impact of CO2. I need to be convinced that the globe is rising in temperature directly as a result of CO2 production. 500 billion euros is a lot of money to waste. It seems odd to me that the temperature on Mars has also increased lately, however, I don't think there is any human involvement in their atmospheres changes. What I am concerned about is we waste time and energy pursuing the wrong factors. Is there not natural phenomenon that can account for this. I would also suggest if you frame each weather oddity as evidence of global warming each night on every news channel around the world, then the distorted view of the climate change people will only be reinforced. How much of the CO2 is attributable to the spectacular volcanoes we have seen in the last 30 years? Humans don't necessarily cause everything on earth.

Much can also be done about the environment through effective and intelligent programs. In the 1980's we were subject to acid rain that was going to wipe out our forests. Maybe we should go back to creating acid rain so that the forests will be eliminated. The CO2 released by forest fires is very large. Prior to that, the ice age was coming back in the 1960's. I think that McKinsey have done a very good job at attempting to quantify the costs of global warming. Based on the understanding that we have today. And I don't doubt that global warming may be a fad that will abate as the acid rain and ice age did.

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Thursday, April 26, 2007

Modularity in Technology, Organization and Society

This is a follow on to the posting of Professor Langlois' recent article "Organizing the Electronic Century". This article was written in August 1999 and contains several valuable ideas. Let me point out first that the topic is something I have discussed in this blog before. Going back to 1984's Dr. Anthony Giddens Constitution of Society" ISBN 0520057287 he notes that people society and organizations move together or there is failure. And Professor Wanda Orlikowski's Model of Structuration notes that technology is part of society. To read the details of these theories in this context please see me previous post. This post may be the longest post that I have made. I would encourage you to read it in its entirety, there are many valuable points and ideas that are documented here.

What I have proposed in this project is a system that is designed to operate an industry. Not one that is limited to operate just within a company. The Joint Operating Committee (JOC) by definition dictates this different perspective in order to operate between its member firms. This is a system in which the user is a consultant, an employee of a firm, or member of one the many service companies operating within the industry. In other words anyone who is employed in the energy industry. A tough prospect, and lets not forget a system that implements changes in the ways of life of most of these people mentioned. How could this possibly function as intended? The scope of the application notes the interactions between partners are as dynamic as the industry itself.

I have noted here a technological vision that includes Wireless, IPv6, Java and Asynchronous Process Management. These technologies not only allow the industry to achieve these overall system objectives, they guarantee it. And that is the inherent threat of ignoring these technologies. Although technical risk is part of any software development, the risks associated to this project are mitigated through many new and effective tools, like modularity. Modularity is an important component in dealing with change and complexity and the difficulties they involve.

Professor Richard N. Langlois writes about the elements of "Modularity" with the organization as the primary focus. I will take these theories, apply them to my understanding of oil and gas, and then layer the technologies and how they could be involved in mitigating these risks.

"Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces - which can then communicate with one another only through standardized interfaces within a standardized architecture - one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections." p. 1
"What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to modularity in the design of the organizations that produce such products." p. 1
Modular design of products can lead to the modular design of organizations is highly consistent with my "SAP is the Bureaucracy" thinking. Systems support, and therefore, define organizational structures. This comment by Langlois seems to intimate the same result of the alignment of systems.
"Why are some (modular) social units governed by the architecture of the organization and some governed by the larger architecture of the market?" p. 2
And lastly Langlois asks why modularity is sometimes seen in the market, and sometimes within the firm. Since we are seeking the boundaries of the firm, we are interested in Modularity in both the market and the firm. Langlois provides an excellent example of modularity's benefits in the following watch maker analogy.

Modularity and Complexity
"Tempus and Hora both make complicated watch-systems from myriad parts, and both are interrupted frequently in their work. Tempus does not design his watches as decomposable systems, so every time he is interrupted and forced to set aside his work, the entire unfinished assembly falls to pieces. By contrast, Hora first builds stable sub-assemblies that he can then put together in hierarchic fashion into larger stable sub-assemblies. Thus, when Hora is interrupted, only the last unfinished sub-assembly falls apart, preserving most of his earlier work. In an evolutionary selection environment, such stability would be be rewarded with survival (Simon 1962 [1981, pp. 200 - 205])." p. 4
"In the end, however, what makes Tempus's unfinished watches unstable is not the sheer number of distinct parts involved. Rather, it is the interdependency among the parts in his design that cause the watches to fall apart." p. 4
"In organizational and social systems - and perhaps even in mechanical ones as well - it is possible to think of interdependency and interaction among the parts as a matter of information transmission or communication." p. 5
In the system description I have proposed, I have described the Petroleum Lease Marketplace, or PLM. The PLM is a Database of the Crown and Freehold leases that are available and issued in a certain geographical region. The PLM will provide access to the leases ownership, royalty obligation and other information that is publicly available. A producer looking for a new partner, lease, or deal could engage other producers within the PLM and have their business relationships recognized in this virtual marketplace. A marketplace where like minded producers, investors and land holders meet to exchange ideas and build relationships that generate oil and gas deals and activity. From within the PLM the details of the prospect would be populated to those producers that shared some common interests. Ultimately, in time these collaborations could lead to a meeting of the minds and facilitate the inevitable agreement, operating and accounting procedures. These items that were negotiated, and the attributes would contribute to forming the initial data elements that will go on to drive other modules within the overall Genesys system.

How can modularity help in this example? Langlois states interdependency and standards are critical components of modularity. With these PLM based transactions we are able to review standard data elements, standard operating and accounting procedures, standards in how the governments issue information. We can also see how these interactions could be carried out. Each producer enters the PLM with only a desire to expand the drilling and production prospects of his firm. The flexibility and modularity of the PLM provides the producers with the system that will document and provide the support necessary to facilitate and complete the transactions as they are conceived by the disparate participants. Once there, the producers are afforded a variety of opportunities that can be codified and begin the documentation process of their deal. Ultimately in a fully operational system, these data elements would provide the necessary transaction processing I have detailed in the Partnership Accounting module.

Langlois now turns to the technology to explain how the modularity of the system can be captured and managed. His use of hardware and software provide strong analogies, and I am concerned that I may hop down a technological bunny trail if I am not careful. Therefore let me note the points that Langlois states, and point the reader to the Java Programming Language for the implementation of this modularity. It is a fundamental underlying concept of the programming language and I will write another specific post to deal with Langlois modularity theories and the technologies.
"At one point, Brooks briefly considers a "radical" alternative proposed by D.L. Parnas, whose "thesis is that the programmer is most effective if shielded from, rather than exposed to the details of construction of system parts other than his own" (Brooks 1975, p. 78). This radical alternative is in fact the strategy of seeking decomposability in the design of the development project and of the underlying software. Parnas (1972) is the inventor of the notion of information hiding, a key concept in the modern object-oriented [Java] approach to computer programming. Programmers had long understood the importance of modularity, that is, of breaking programs into manageable pieces." (Parnas 1972, p. 1056)." p. 6
"Recently, Baldwin and Clark (1997, p. 86) have drawn on similar ideas from computer science to formulate some general principles of modular systems design. The decomposition of a system into modules, they argue, should involve the partitioning of information into visible design rules and hidden design parameters. The visible design rules (or visible information consists of three parts. p. 7
  • An architecture specifies what modules will be part of the system and what their function will be.
  • Interfaces describe in detail how the modules will interact, including how they fit together and communicate.
  • And standards test a modules conformity to design rules and measure the modules performance relative to other modules.
These visible pieces of information need to be widely shared and communicated. But contrast, the hidden design parameters are encapsulated within the modules, and they need not (indeed, should not) be communicated beyond the boundaries of the module." p. 7
Design Processes

Is modularity good for all types of systems and developments? How about Oil and Gas in particular, with a high level of change and in demand as quickly as possible? Is this even a worthwhile objective of systems development? Or would the industry be better off to build a highly interconnected system? Here Langlois makes note of the following;
As usual, however, there is no free lunch. It turns out that modular systems are much more difficult to design than comparable interconnected systems. The designers of modular systems must know a great deal about the inner workings of the overall product or process in order to develop the visible design rules necessary to make the modules function as a whole. they have to specify those rules in advance. And while designs at the modular level are proceeding independently, it may seem that all is going well; problems with incomplete or imperfect modularization tend to appear only when the modules come together and work poorly as an integrated whole (Baldwin and Clark 1997, p. 86)." p. 8
"Under some circumstances, the benefits of modularization may not be worth the cost. For example, a system whose environment never changes may not have to worry much about modularization: Tempus will do as well as Hora if neither is ever interrupted. Systems that develop slowly in slowly changing environments may not acquire, or require, much modularity." p. 8
Makes a lot of sense to me. If I would be as bold to suggest this is also why the majority of the ERP software applications operating in oil and gas fail. Taking the entire industry from a scope and scale basis requires significant application development. The ability of the industry to integrate disparate modules form different vendors, and have them operational in the firm is a large task and difficult to do. The ability to mash these systems into one cohesive ERP style of application have been attempted many times and in many different ways before. The interconnectedness problems originating from the inability of the vendors to standardize on the requirements, data elements and processes. What the industry truly needs is a single vendor solution that addresses the scope and scale of the industry in a modular fashion. One that adopts the industry standards, such as those established through Public Producer Data Model (PPDM), Canadian Association of Petroleum Landman (CAPL), and Petroleum Accountants Society of Canada (PASC) and others. And through a dedicated solutions provider, such as what is discussed and proposed here in this blog, and focused around the JOC. Only then can these associated issues of interconnectedness vs. modularity be addressed.

Encapsulation boundaries.
"In a world of change, modularity is generally worth the costs. The real issue is normally not whether to be modular but how to be modular." p. 11
I can't think of a better reason to employ the one vendor focus, such as is described here. The multi vendor approach to building interconnected system in oil and gas has failed, in any manner of criteria. Langlois' analogy is precisely on point.
"We would think it odd indeed to assign two interior designers each half of a room (von Hippel 1990, p. 410). It makes a good deal more sense either to give each designer a whole room or to give up encapsulation entirely and let the two designers communicate extensively." p. 11
The traditional separation of Production Accounting from Financial Accounting modules by different software vendors is as laughable as the output from the two interior designers being assigned half of a room. One vendor pointing to the other vendors is the favorite game when problems arise. With the oil and gas industry being somewhat stable in terms of change, the vendor finger pointing was tolerable. Now with a dynamic demand rewarding the most innovative, change is the order of the day. How will this vendor strategy fair in this current and future environment?
"For example, the tasks in an innovative development project cannot be partitioned in advance, since knowledge is continually changing. In such a case, the modularization of the system (the development project) has to change continually; moreover the modularization at any point has to take into account the inevitability of re-modularization as learning takes place." p. 11
Social Institutions and Modularity.
Picking up again with the works of Giddens and Orlikowski structuration theory, and a model of technological structuration. What strikes me as being particularly on target here is the discussion around adaptability. Recall also that Sun Microsystems CEO Jonathon Schwartz has written on the positive attributes of adaptability.

Dr. Wanda Orlikowski built upon the Theory of Structuration when she defined her Model of Structuration for Technology. Dr. Orlikowski's model asserts that a fundamental component of society is technology, that technology provides a duality and therefore is a constraint or facilitator to successful advancement of society, people and organizations. Giddens and Orlikowski's background information are directly in line with what Langlois states in this section. It is with great interest of mine that Langlois seems to be of a similar mindset to what has been written in these documents.
"I now want to make the discussion more concrete by considering a particular kind of system; a society. My contention is that the theory of modular systems provides a useful way to look at the theory of social organization and to recast the classic debates in that literature." p. 14
Setting the societal foundations in a modular context makes clear to me the objectives of this research, and software development are attainable and the opportunities prolific. Not just from an individual point of view, but from one that is as broad as society itself. Langlois in this discussion also notes the contribution of externalities. Or economic benefits to society from industry actions.
"The set of design rules that guide social interaction are what we can generally call social institutions (Langlois 1986). These rules determine (among other things) the extent to which, and the way in which a society is a modular system. The desirability of modular design is a theme with a long history in the theory of social institutions. Adam Smith long ago proposed a decentralization scheme based on what he called "the obvious and simple system of natural liberty," by which he meant a system of private property regulated by common law and subject to minimal central administrative intervention. On the economic level, this approach would lead, he believed, to economic growth spurred by innovation, learning, and an ever increasing division of labor." pp. 14 - 15
Not only Langlois but Hayek and Smith wrote on this topic.
"More recently, Hayek argued for similar principles in terms that draw even more explicit on the theory of complex systems. Indeed, the benefits of information hiding lie at the base of Hayek's opposition to central planning, which he viewed as a cumbersome non-decomposable system ill-adapted to change. Because of the dispersed and often tacit character of the knowledge individuals must use, he argued, it is not only costly but ineffective to try to construct society as an intertwined system." p. 15

"if we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place," he wrote, "it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its order. We must solve it by some form of decentralization" (Hayek 1945, p. 524)." p. 15
The work that we have done with Langlois has been very fruitful to date. We have been able to apply many of his theories to the determination of the boundaries of the firm and of the market, we have assigned roles within the price system of transaction costs and production costs respectively. All of which fully endorse the use of the Joint Operating Committee as the key organizational construct for the market. And there have been other benefits, now modularity provides a conceptual tie in to the technologies we use here. I believe the next quotation of Langlois puts into context the overall value of his research to the work being done through this blog and proposed software development project.
"What makes decentralization economically effective is the possibility of a standard interface that allows the modules to coordinate with one another without communicating large volumes of information. This interface is the price system. "The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned" (Hayek 1945, pp. 526 - 527)"" pp. 15 - 16
"Abstract symbols and rules can provide a visible information structure that allows individuals to operate effectively on the basis of their more concrete (and hidden) information." p. 16
Langlois now introduces the effect of property rights. I have asserted in the past the energy industry needs to refocus on new forms of competitive advantage. Specifically the inventory of oil and gas leases are the private property rights that entitle the producer to earn economic rents. In addition, the ability to employ the operational necessities of finding and producing oil and gas are the attributes that are most important to the innovative producer. How those operational necessities are employed innovatively is the producers value add that is not replicable from one producer to the other. Oil and gas leases and operational efficiencies form what I would call an energy innovation strategy, and I have not seen a more compelling, nor indeed, sensible strategy for oil and gas. Outside of these specific tasks of the producer, a less constrained view of how and where they can apply their knowledge most effectively are the benefits that are evident to me.

I have proposed that the go forward revenue stream (outside of the initial development needs) of this software project is an assessment of $X / boe for access and use of the system. If the assessment were $10 / boe / year then the costs to use this system for Encana Corporation (a 700,000 boe / day producer) would total $7 million to access and use the system for all their transactions. The definition of these systems is heavily dependent on the standards making bodies, and the demands of its users providing the direction, and use, of the system. These users being compensated for their time as either employees or independent workers of the innovative producer.
"But when the sphere of property are not well modularized - when property rights are absent, ambiguous, or ill defined - the initial assignment of property rights matter to efficiency. The symptoms of imperfect modularization came to be called transaction costs." p. 17
"Imperfect modularization came to be called transaction costs." Recall that inefficient use of transaction costs support the justification for the firm. This we have learned from Langlois. We have also learned that standards are a critical part of modular architecture, and now that poor property rights affect efficiency of the market particularly, and the firm. This last point being somewhat common sensible, however, from the viewpoint of an oil and gas producer there is no threat, ambiguity, or deficiency with the property rights they hold. This reinforces and promotes the concept of modularity that is sought through these writings in the market structure of the Joint Operating Committee.
"The economic benefits of carving out a protected sphere of authority fall into two broad categories, the concentration of rewards and costs more directly on each person responsible for them," and "comparative advantage effects of specialized applications of ... knowledge in control" (Alchian 1965 [1977, p. 140, emphasis original]). We might call these the incentive benefits and the division of knowledge benefits of property rights. Both are important, even if the first has attracted a disproportionate share of the attention of economists." p. 18
The processing of a "production cost" or market transaction has no substance or value to the oil and gas producer. It is inert, it is nothing, it is based on matter of fact principles that can, and will, never provide the holder with any sustainable competitive or strategic advantage. There is no interpretation, no analysis to determine the correct process, only application of the standards as defined in the agreements and understandings of the JOC. The producer can be provided with this market and firm based transaction processing service through the development of the software described in this blog. The firms "transaction" costs are exclusive to the specific producer, yet highly dependent on the actions of the market. Processing of "transaction costs" has no monetary, tangible, competitive or strategic value either.
New rights will emerge (or old rights will be altered), he argued, whenever exogenous conditions conspire to make the costs of modularization worthwhile. p. 19
With this last comment it is clear to me that the opportunity for the energy industry to offset the production and transaction cost processing burden to the market forces is the appropriate and timely solution to the problems that they are facing. Particularly when it comes to the difficult topic of innovation. Outsourcing is a term that poorly represents these concepts.

Modularity and Organization

The mechanisms that were used to aggregate the property rights of large corporations were the justification of the hierarchy over the past 100 years. It is the 100 years of its dominant form that has made possible the hierarchy. Now IT enables the means to more ideally place the boundaries of the firm at the optimal point, one that is consistent with Langlois theories. As I have indicated here before, the JOC is comprised of like minded producers who are motivated by their financial interest in the property. Achieving consensus is surprisingly not an issue.
"In the property rights tradition, the theory of the firm is simply an application of the theory of the coalescence of property rights. Although it is seldom clearly spelled out, the starting point for analysis is typically a world of completely modular atomistic production: each stage of production consists of an individual who owns the necessary physical capital (tools) and who coordinates his or her actions with other stages of production through arms-length transaction. Why is not all production carried out this way? Coase's (1937) famous answer is that their is a transaction cost to using the price mechanism. If transaction costs are the costs of a bad modularization, what can go wrong with the atomistic modularization?" pp. 22 - 23
What follows is a quotation that deals specifically with the joint ownership represented on the JOC. That in other industries there may have been leakage of externalities, oil and gas has had to deal with these issues since its inception, and have provided the JOC with the means, and importantly the standards, to deal with it.
"This formulation focuses on the incentive aspects of property, and it takes ownership to be equivalent to a claim on residual income (Foss and Foss 1998). Another view, originating as early as Coase (1937, pp. 391 - 392), sees ownership as involving not residual income streams but residual rights of control. Oliver Hart (1989) and his coauthors have lately championed this approach in a series of formal models. Because of uncertainty, no contract can foresee all possible contingencies. Thus there must be a residual right to make decisions in situations not covered by contract. That right is ownership, and ownership should be allocated to the party whose possession of it would maximize the joint surplus of production." pp. 23 - 24
The ownership interest within a property provides many of the attributes of a modular society. Specifically the owner of a property could be completely withdrawn from the operation of his property, and may involve himself in cashing the checks each month. Or, should the need arise, the sphere of influence over his property can be exercised. Langlois notes these rights are inherent in ownership.
"Frank Knight (1921) suggested that comparative advantage might arise if one party possesses the superior faculty of judgement (Langlois and Cosgel 1993). But, ceteris paribus, genuine uncertainty - the prospect of or need for radical change - may by itself call for a consolidation of ownership. Stephen Littlechild provides one example. p. 24
"If I am quite sure what kinds of actions my neighbour contemplates, I might be indifferent between his owning the field at the bottom of my garden and my owning it but renting it out for him to graze his horse in. But once I take into account that he may discover some new use for the field that I haven't yet though of, but would find objectionable, it will be in my interest to own the field so as to put the use of it under my own control. More generally, ownership of a resource reduces exposure to unexpected event. Property rights are a means of reducing uncertainty without needing to know precisely what the source or nature of the future concern will be. (Littlechild 1986, p. 35)" pp. 24 - 25
"There is also a flip side. Ownership may not only insulate one from certain kinds of unforeseen change, it may also enable one to generate radical change. I have tried to suggest on a number of occasions that concentrated ownership can overcome what I call the dynamic transaction costs of significant economic reorganization (Langlois 1992b). This is a motive for vertical integration little noticed in the literature." p. 25
This discussion strikes at the heart of the reason for this blog and the proposed software development. The energy industry employs assets that are highly specific, or asset specificity in economic terms. Many participants are involved in a project and all have the property right and title managed by a JOC. These interests are easily divisible with the ability to buy, sell or trade the interests on an open market. Little can be done without the consent of the majority ownership, the percentage of which is defined by the JOC. Other rights and obligations are detailed through the establishment of the JOC and then subsequently through additional agreements, AFE's, Mail Ballots etc. From my non-technical point of view, having change hoisted on the property has been usually welcomed. The major properties are in a constant state of change in order to optimize the resources. This would normally pose a challenge to the management of the property, however, I have to say it doesn't. The JOC is systemic throughout the industry on a global basis. We have all heard of company x getting our of country y for political reasons. This is how the industry operates.

So why is the industry in need of the Joint Operating Committee to be defined as the organizational construct? Because it isn't recognized in its appropriate manner within the software applications that are in use in the industry. The perspective of the ERP vendors is that the corporation needs to file tax returns, SEC requirements, local government legislation's and other statutory and regulatory requirements. The corporation has evolved to the point where the only thing they are managing is these processes. The participation in the JOC's is an engineering and geological focus that are not directly recognized within the organizations systems and procedures. To be specific, the JOC is the legal, the financial, the operational decision making, and cultural frameworks of the industry. These are what drive the business, not the tax and royalty legislation. If we moved the accountability framework and sub frameworks over with the JOC's frameworks, the alignment of these frameworks would enable, greater organizational speed from the Information Technologies that are available today, and greater innovativeness on the earth sciences and engineering fields.

From a modularity point of view, the properties that are owned by the corporation are neatly encapsulated within their own environment. One facility does not leak out any information to another facility that it should not. The staff of the producer are able to move about these modules where and when they are required. A producer would know their access to the areas of which they operate would limit their exposure. Modularity to me is not just a concept that can be implemented in the systems we develop. It is a concept that is applied universally throughout the domains of the industry.

Langlois has these points;
"Jensen and Meckling (1992) agree that the concept of ownership must involve not only the possession of decision rights but also the right to alienate those decision rights. Granting an individual both control and alienability is clearly a more complete modularization than granting control alone, since the owner with alienability needs to engage in less explicit coordination with others to use the asset effectively under all circumstances. In economic terms, it is alienability that solves both the problem of knowledge decentralization and the problem of incentives: the asset may be placed under the control of the person whose knowledge best equips him or her to use it, and alienability disciplines the owners use of the asset by making its value (to which the owner has a residual claim) measurable on a market." pp. 26 - 27
"This is the basic modularization of the market economy. It accords well with the modularization G. B. Richardson (1972) suggested in offering the concept of economic capabilities. By capabilities Richardson means "knowledge, experience, and skills" (1972, p. 888), a notion related to what Jensen and Meckling (1992) call "specific knowledge and to what Hayek (1945) called "knowledge of the particular circumstances of time and place." For the most part, Richardson argues, firms will tend to specialize in activities requiring similar capabilities, that is, "in activities for which their capabilities offer some comparative advantage" (Richardson 1972, p. 888)." p. 27
"So why don't we observe everywhere a perfectly atomistic modularization according to comparative advantage in capabilities - with no organizations of any significance, just workers wielding tools and trading in anonymous markets? We have already seem the outlines of several answers. The older property rights literature, we saw, would insist that the reason is externalities, notably the externalities of team work arising from the nature of the technology of production itself. The mainstream economics of organization is fixated on another possibility: because of highly specific assets, parties can threaten one another with pecuniary externalities ex post in a way that has real ex ante effects on efficiency (Klein, Crawford, and Alchian 1978; Williamson 1985). Richardson offers a somewhat different, and perhaps more fertile, alternative. Firms seek to specialize in activities for which their capabilities are similar: but production requires the coordination of complementary activities. Especially in a world of change, such coordination requires the transmission of information beyond what can be sent through the interface of the price system. As a consequence, qualitative coordination is necessary, and that need brings with it not only the organizational structure called the firm but also a variety of inter-firm relationships and interconnections as well." pp. 27 - 28
As I indicated in the pre-amble of this entry the theories of Giddens and Orlikowski were consistent with the theories of Langlois in this article. In my thesis I noted that SAP is the bureaucracy and that is generally agreed too. How the industry obtains these benefits being discussed here requires the industry to first develop the software to recognize the organizations that are necessary. I would also at this time note that the failure of industry to act in a prospective manner on developing software. Will leave their organizations susceptible to failure before they have alternatives in place. Whether this is a chaotic or orderly world will be left to the readers imagination.
"Whichever story one chooses, organization (in the broadest sense) arises as a non-modular response to the fact of, or the need for, interactions among the modules. Organization is always a de-modularization and repartitioning that severs the right of alienation from at least some of rights of decision. And, in all cases, the technology of production both causes and shapes the resulting no-modular interconnections." p. 28
Modularity, organization, and technology.
"Sanchez and Mahoney (1996) contend that products design organizations. In a sense, however, this is a variant on what the mainstream economics of organization has long believed: production processes design organizations. If the production process requires team production or calls for highly specific assets, a non-modular structure ("hierarchy") is in order; otherwise, a modular structure ("the market") is more appropriate." p. 28
The energy industry is a unique business. An industry that operates with the full cooperation of the other producers. Others producers are necessary to aggregate a land position, process production, or to meet regulatory requirements. As a result it has established a variety of non-profit organizations that define the operations and procedures. The JOC is the means for the industry to meet these requirements. If as Langlois and others say, "production processes design organizations" the JOC should be more involved in the day to day interactions of the producers. If we designate the scope of authority of the JOC as being the "market" and have the software developed to support this classification, it is clear in the writings of Giddens, Orlikowski and Langlois that the performance of the industry would change. For as the JOC is the legal, financial, operational decision making and cultural means of the industry.

Although I have not included much discussion regarding the technology and its role in defining modularity in the oil and gas industry. It is surprisingly close to the writings here of Langlois. Today it can generally be considered that the collaborative technologies are superior to the current methods of meetings, memo's, and snail mail. The business is the efficient discovery and production of hydrocarbons. It truly has nothing to do with the SEC, the Tax authorities or for that matter the shareholders. These are secondary to the primary role of the business. The focus should be on the primary responsibilities and let the secondary requirements flow from the actions of the former. The technology, as has been detailed here by Langlois, enables this.

I hopefully have also laid to rest the concept that the manner of this software development project does not provide any producer with a strategic advantage. The advantage is earned through the competitive and difficult process of acquiring land and establishing commercial hydrocarbons. Generic transaction processing is a requirement of the business, not a strategic or competitive advantage. It's ultimate role should be the deployment of the most efficient methods.

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Photo Courtesy Troels Myrup

Wednesday, April 25, 2007

Conservative environmental policy.

An announcement by the Canadian Federal Government on environmental policy was leaked, with few specifics, on how the country would achieve certain CO2 targets.

There will be more information coming on Thursday at which time I will post an update. I "hope" that the government does not assess industry as it is suspected of doing. The tax, if any, should be assessed on the consumer, not industry. Secondly the majority of the taxes should be focused on bringing the costs of Coal in line with Natural Gas.

The other interesting point was, the reduction in greenhouse gases was proposed at 150 million tonnes. In my previous posting, the one facility had injected 7 million tonnes over four years on a pilot project. Maybe the injection of CO2 as a miscible agent will provide the environmentalists with the means to solve this alleged problem. Therefore I would recommend the Federal government join the Alberta Government and provide incentives for the energy industry to act in this manner.

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Monday, April 23, 2007

Changes at Shell.

First off, I am a "Shell Brat", my father worked for Shell Canada for over 33 years and retired in 1982. I was also fortunate to work at Shell for two summers during my high school days in the 70's. During my first year I was helping out in the mail-room, and the second summer was spent washing dirt in their geological warehouse. Shell holds a special place in my mind and strongly influences my perception of the oil and gas industry. That is why it is with extreme disappointment regarding The Royal Dutch Shell group, who just purchased the outstanding shares of Shell Canada, have announced that the CEO of Shell Canada will be retiring and the new CEO will be the CEO in their Houston operation. The time when the decisions and understandings that Calgary may have had on Shell Canada will now cease to be a factor.

In my thesis that was the precursor to this blog. I suggested that if the producers were not willing to move toward a more innovative footing, the loss of their independence would be the result. That Shell is the first is disappointing, and I can not determine which producer would be next, nor can I provide any of the cause and effect analysis that proves my thinking. It would only seem reasonable with Houston's focus moving away from the Middle East, Russia and China, that Canada would lose its independence and stature, as Houston asserted its influence.

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Sunday, April 22, 2007

CO2 as a solution, not a problem.

In this article,the April 2007 Oil & Gas Network (Print Edition), "What's New in EOR Research" talks about the use of CO2 in Enhanced Oil Recovery schemes in Alberta. Each of the highlighted projects are taking advantage of an Alberta Government's CO2 Projects Royalty Credit Program. The participants include Apache, Devon, Penn West and Anadarko. The schemes use the EOR technology that has been learned by the energy industry over the past 20 years. Using pattern drilling to sweep the reserves to the production wells with a Water Alternating Gas (WAG) injection, sometimes horizontally as well. I found it interesting in the article that the producers could now justify this type of flooding with the higher oil prices. I did not realize CO2 injectants would be more costly then C2+. However the article states that the source of these injectants is primarily from the neighboring gas plants. And that the sources of CO2 would constrain the further development of these pilot projects. Another interesting element is the use of reserves that have been very prolific, yet difficult to find, areas like the Rainbow Lake pinnacle reefs and Nisku formation in Pembina. Another area where it is being tried is the Pembina Cardium Miscible Flood.

The injection of liquefied CO2 is a miscible agent that will also maintain pressure on the oil being driven to the producing wells. In the Weyburn area over 7 million tonnes of CO2 has been injected over the past 4 years. And unlike any other miscible flood where the miscible agents are expected to be recovered, the CO2 will be left in the ground permanently. If the energy industry is able to discern any value from CO2 injection, a given as far as I am concerned, and the Alberta Government continues to provide incentives to the industry to do so, we may have shortfalls in those green house gas supplies. If we used the 7 million tonnes of injectants as a guide how much human production of CO2 is offset?

Using the "Carbon Dioxide Calculator" we can determine that the atypical home heating and other associated demands produce of CO2. Using rather liberal values, and particularly 5 eight hour flights per year, I came up with 935 tonnes per household. Now in the past 4 years, 7 million tonnes of injected CO2 at the Weyburn facility essentially eliminated the annual production of 7,486 homes. If we extend the number of facilities that could use CO2 as a miscible agent, maybe these Kyoto targets are not necessary after all.

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Saturday, April 21, 2007

Eric Schmidt, Google CEO

There is an interesting and worthwhile video on YouTube of Google's CEO at the Web 2.0 conference. Within this video Dr. Schmidt says something very interesting that applies to the work being done around this blog.

"Collaboration is the 'killer app' for how communities work."
In economics one learns fairly early on that transportation, communications and financial resources are key ingredients of economic growth. Collaboration is a key technology of communication. If the energy industry is going to be able to grow, enhanced communications will be necessary.

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Friday, April 20, 2007

The Role of Networks in Organizational Change

McKinsey have published a very interesting article, (Premium Membership Required) regarding organizational change. Noting that "organizational charts mask the invisible networks that employees use to get things done." I think this may be right on target with respect to the Joint Operating Committee, what do you think?

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Tuesday, April 17, 2007

Organizing the Electronic Century

A very current working paper form Professor Richard N. Langlois.

March, 2007

This post is the first of two to reviews Professor Richard N. Langlois papers on modularity. In March 2007 he published a new working paper that adds value to the work that we previously reviewed. That work was used primarily to build the table that summarises the application of his theories to the oil and gas industry.

We have been reviewing and defining the boundaries of the firm between the market and the firm for the oil and gas producer. Discussing how the market could easily be deemed the Joint Operating Committee (JOC), and the division of tasks and obligations that are handled by either the JOC or the firm. The table provides a coherent and precise division of these roles and responsibilities. People with experience in the energy industry can see the manner in which this software could identify and support both the market and the firm. It is almost a natural division of the industry, a division that makes sense as to where this or that would best belong in the firm or in the market.

What these two new documents discuss is modularity, its benefits and difficulties. Modularity really isn't an option, its a necessity in today's marketplace. The ability to manage the scope and scale of activities involved with the human resources and speed of change, managing can't predict and prepare for all the tasks that need to be carried out. The market needs to anticipate the changes and provide the solutions to the firms as they are required. How the market does this is through the loose coupling of modularity.


The introduction to this first document throws the topics of discussion out extremely well. The following paragraphs are direct quotations of the introduction. I have to admit that I am a bit of dupe when it comes to papers that start discussions around the revolutionary periods of business. Langlois notes however, that talk of whether industrial revolutions exist is only a "convenient container" for his narrative. I fundamentally believe the time today is best reflected in Professor Carlotta Perez' call that the installation period is over and the deployment period is upon us. We live in probably the most exciting business times imaginable. Nonetheless, how this deployment period is undertaken is directly in line with the theories of Langlois and he starts this introduction talking about the different perspectives of where we are in terms of the first second or third industrial revolution.
"Talk of a Third Industrial Revolution presupposes that there has been a Second. Alfred Chandler (2006, pp. 12) tells us that the Second Industrial Revolution began in the 1880's, when the railroad, steamships, electricity, and the telegraph and telephone called for the economies of scale and set in motion genuinely multinational enterprises (Chandler 1977, 1990). The revolutionary barricades were manned by a large number of integrated multi-divisional firms wielding a multiplicity of technologies. By 1930, that revolution was over, leaving behind the infrastructure of the Industrial Century - the twentieth century. As Chandler (2006, p. 48) reminds us, with what one suspects is a great deal of satisfaction, 98 of the 100 largest industrial enterprises in the U.S. in 1993 had been founded by the early 1930's." p. 1
Our review of Coase has been through the works of Langlois. In a series of slides, Langlois highlights the work of Coase and summarizes it with a graph on slide 11. This graph shows the optimal point of which the firm size is a result of a hybrid of efficiencies in the "Costs of administrative coordination" and "Costs of the price system." Coase has also noted that the size of the firm would or should be reduced if the efficiencies or "costs of organizing an extra transaction within the firm become equal to the costs of carrying out the same transaction by means of an exchange on the open market or the costs of organizing in another firm." Coase 1937, p.395. It is clear to me that the size of the firm has sought the "integrated multi-divisional" firm at the expense of what would more reasonably been organized, if it were possible.
"The Third Industrial Revolution, which Chandler tends to call the Electronic or Information Revolution, began just as its predecessor was ending. It would eventually generate the infrastructure for the Electronic Century now upon us. Unlike the Second Industrial Revolution, the Information Revolution bubbled up from a narrow set of technologies - the vacuum tube, the transistor, the integrated circuit, and the microprocessor - and thus involved a smaller set of players (Chandler 2001, p. 12) But the organizational outcome was identical, because it would be the same kind of large multi-divisional firms that would commercialize the scientific and technological ideas of the new century. As first movers, and occasionally fast followers, these firms developed an integrated knowledge base from which they could launch innovative products." p. 1
This brings up memories of what we have seen in the North American business landscape. Since the 1980's when these giant industrialized groups roamed the landscape. Made up of a variety of business that offered the investor diversification. The only case that probably exists today is GE and its associated and diverse business lines. The type of firm is now for all intents and purposes extinct. If we assume that these monoliths were the high point of the bureaucracy, the next 20 years may see the current form of "integrated multi-divisional" organizations follow the same path of extinction. What can a large firm provide that can't be done by an efficiently operating marketplace? Here Langlois takes steps to understand how these "integrated multi-divisional" firms can continue, and notes his opinion on the survival of these firms is different then mine.
Although a "supporting nexus" of smaller, more-specialized firms was crucial to the success of the overall industrial enterprise, it was the multi-divisional firms, not the web of specialists, who did the heavy lifting. So long as the pioneering firms employed virtuous strategy of related diversification and remained on the straight-and-narrow paths of learning the first movers had mapped out, those firms were able to enjoy economies of scale and scope and to become the perpetrators rather than the victims of creative destruction. But when the pioneers strayed from the path, and especially when they succumbed to the temptation of unrelated diversification, they stumbled and fell (Chandler 2001, 2006)" p. 2
"My approach will be to steer between - or rather to recombine elements from - these competing accounts of the Electronic Revolution. In accord with the "new economy" view, I will be sensitive to the ways in which changing technology and other factors have affected the nature, role, and scope of both the multi-divisional firm and the "supporting nexus." Indeed, I will concur in the view that the forces of the modern age have led to a widespread "de-verticalization" of production in this and other industries, although, as in previous work (Langlois 2003, 2004, 2007), I will locate the source of that phenomenon less in the specific demands of digital technology and the Internet than in the larger Smithian forces of specialization attendant on a growing economy, increasing globalization, and an expanding base of technological knowledge. At the same time, however, I will not consign the multi-divisional firm to the dustbin of history. I will attempt to tell a tale of the electronic industry that is fundamentally Chandlerian in character, as it will focus on the development of technological and economic capabilities and on the paths of learning in the industry." pp. 3 - 4
Capabilities and Architecture

I have written extensively in the past six months about capabilities. Mostly in regards to Langlois writings, but also of Professor Sydney Winters work published through the LEM Working Paper series. Capabilities and governance are two issues that go hand in hand. Here Lanlgois uses the contrast between an integral and modular architectures to help in relating the benefits of modularity within markets.
"Baldwin and Clark (2000, 2006) make the argument more formally when they suggest that a given set of innovative activities - of economic experiments - are more valuable in a market than in a (large multi-divisional) firm: the value of a portfolio of options in always greater than the value of an option on a portfolio." p. 5
"A complex systems product is underlain by an architecture: a set of parts and a way of fitting those parts together. An integral architecture is one in which the parts depend on one another in complex and often unpredictable ways: the system is a tangle of spaghetti. By contrast, a modular architecture is one that regularizes the dependencies among the parts, forcing them to interact only in relatively formalized and predictable ways (Lanlgois 2002b)" p. 6
"What can we learn form all this? The present-day theory of capabilities has much to say about paths of learning; but it does not prescribe that those path be trodden by large multi-divisional firms alone - or, for that matter, by small highly specialized ones. Rather, it provides a toolkit I will use in nailing together an account of how the infrastructure of the electronic century came to be organized." pp. 7 - 8
The energy industry is driven, in my opinion, by the needs of the regulatory environments that it operates. The SEC and Tax authorities, the environmental and local conservation groups that dictate certain behavior from the producers. This has left the focus of the business, from a business perspective, away from the operations. In addition, the ability of a CFO to stand in front of his shareholders and promise a 10% increase in production volumes next year, has very little influence on how or where those additional volumes will be generated. To discuss the operational increase in capabilities and capacities from an oil and gas point of view is the domain of the Joint Operating Committee. These decisions are made with all of the partners that are involved in the asset. And that asset may consist of just one well, or a field and plant that represent 10% of the countries productive capacity. The CFO will have influence on the desire to increase production, as long as it is the consensus of the JOC. From a strategic and tactical point of view the CFO's input is traditionally determined through the capital budgeting process. A powerful tool, but nonetheless one that does not provide the level of understanding and innovativeness that is possible to achieve. In other words the decision makers are so far removed from one another that the understanding of where the critical decisions are made is predominately not known in a large firm. Where an innovation has been created would fall into the same category.

What it is that I am proposing here is that the architecture of modularity which Lanlgois speaks of is facilitated through the "Electronic Century". Modularity is entirely consistent to the producers interest in the JOC. The number of JOC's that the firm may participate in is limited to the capital the shareholders have invested in the management of the firm. If modularity is to be sought and achieved in the marketplace, the JOC is the organizational construct and market focus. This is more then just me highlighting a self fulfilling prophecy, as Langlois writes more regarding this and his concepts of modularity. Taking into consideration the controversial comment that I had just made. Langlois notes the following in his analysis of the consumer electronics industry.
"Thus in radio it was not the case that an integrated path of learning within a large firm gave rise to innovation; it was rather that innovation, channeled within a particular structure of property rights, contained the path of learning within a single large firm." p. 16
My understanding of the energy industry leads me to believe this statement is correct. Innovation can occur if it is channeled within a structure of property rights, a.k.a. the JOC. How is it that the focus of the industry has removed itself so far from the operational area? Langlois addresses this in the following, and I would assert consolidation and limiting of General and Administrative costs within the producer over the past 20 years has led to the same outcome as Langlois example.
"Why? Chandler (2001) lays great stress on the strategic mistakes. RCA (and other integrated American firms) strayed from the virtuous strategy technological development and related diversification that would have maintained paths of learning on which they had originally embarked. Instead, they succumbed to the temptation of conglomerate diversification, thus ultimately destroying the integrated knowledge base on which success depended." p. 26
And in today's marketplace perspective;
"The strategy of massive unrelated diversification in this reading is merely the proximate cause rather that the ultimate cause. As Michael Jensen (1986) has taught us, unrelated diversification is one possible symptom of "free cash flow," corporate windfalls that allow managers to pursue their own interests and visions without the short run discipline of product markets and financial markets. Although it is not often remarked on, the hey day of the large American multi-divisional firm coincided with a period of relative economic isolation. The Depression, tariffs, and wars of the first half of the twentieth century constitute what economic historian now see as a massive collapse of nineteenth-century globalization (James 2001; Bordo, Talyor, and Williamson 2003). And, with the destruction of the German, Japanese, and other economies in World War II, that isolation continued for the better part of two decades. In a general sense, then, the post-war golden age of the large multi-divisional American firm was one in which competition was relatively relaxed by later globalized standard - and in which managers found themselves with sources of free cash flow. The resulting (relatively) slack environment not only encouraged diversification (as Chandler insists) but also reinforced the multi-divisional form itself, a form of which unrelated diversification is the logical if extreme extension, and arguably isolated that form from economic realities to which it was increasingly ill adapted (Langlois 2003, p. 37 - 371)." pp. 26 - 27
Convergence and conclusion.
Langlois focus has been on firms within the electronics and digital industries, companies such as RCA and IBM. His research has been over been several decades of time and provides sound advice for the environment that any industry finds itself in today. For the energy industry, these points that have been made resonate with the work that has been done and is proposed to be done in this blog and software development project. Langlois finishes off with a salient conclusion that is strong and valid for the oil and gas industry.
"What does all this imply? Paths of learning are not thoroughfares excavated by large multi-divisional firms with entourage in train. they have always been, and are perhaps increasingly, trails beaten out by a variety of specialists working in cooperation and competition. The Chandlerian model works well for producing system innovations in their early stages (television was a prime example) and occasionally for generating fundamental new ideas (like the transistor). But many if not most important development - from the vacuum tube to the planar process, from the radio to the personal computer - were the product of specialists within the network. (The digital computer was the product of a special kind of specialist, the university.) Moreover, by taking advantage of a range of capabilities far wider than the boundaries of what even the largest firm can encompass, a network of specialist suppliers and competitors is better able to exploit the value of a complex and potentially modular product architecture."

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Wednesday, April 11, 2007

Copyright issues on MIT Video

MIT Video is hosting a discussion on the topic of copyright. As I have mentioned here before, intelectual property is the most valuable assets on a go forward basis. Copyright, Trademark and to a lesser extent Patents provide their owners with powerful tools to ensure their thoughts and ideas are respected and commercial. It is interesting to see the constraints that are realized by the Professor of these universities are required to consider whether they can even use their own ideas. If the professors previously published their ideas, it seems that most of the publishers had taken the rights to the copyright in consideration of the costs of publication. Now with the desire to let those ideas be heard by a larger, and electronic audience, they are unable to secure those rights from the publishers. In addition to this point regarding overall access their is many other worthwhile points. I would recommend the viewing of the video on this important topic. People need to generally understand these points of law better then they do now.

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Tuesday, April 10, 2007

Professor Langlois' Slides

I've been reviewing some of the material that I gathered when I was looking into Professor Richard N. Langlois' writings. Going slowing through the slides that he produced for his "Economics 486, The economics of organization" course reveals a number of very interesting nuggets. I can't technically recreate the slide, and I do recommend that everyone download and study this rather comprehensive and valuable information that Professor Langlois has included in the file. Slide number 21 deals with measurement costs. Recall that we are discussing the role of the firm and of markets. And the "production" costs are being handled by the market and the "transaction" costs help to define the firm. To give you a good understanding of the oil and gas application of Langlois' theories I would refer again to the table that I prepared.

Now as for slide number 21, is this just me cluing into something that is generally known or understood, or is this something more then than that? The text of the slide is as follows;
"Measurement Costs."
Here Langlois is noting that if the costs to measure and negotiate the terms of the transaction are too high, then the role of prices will be established by firms and not markets. Not a great description but I am trying to get to an obscure point here.
"Consumers seek attributes of goods, not goods themselves."
This is where the obscure point starts. If I said that I was to go grocery shopping, I would say that I was not just buying food, but I was buying high quality goods at reasonable prices that meet my discerning tastes. The key words being "high quality", "reasonable prices" and "meeting my tastes". I could go into a Safeway and buy what I want and I would be able to more then satisfy my needs using just those three specific attributes.
"Costly to measure attributes."
I can see how a grocer would need to determine his pricing. How much product does he get, Oranges are rare due to the crop freezing, the amount of wastage and spoilage incurred by the shipper and the customer, and finally what the store will cost in terms of overhead. This can't be calculated for each Orange and therefore depends on the market for the price determination. The point being that the ability to standardize the attributes would help to establish the market pricing. Note information is what the market provides the consumer, grocer, distributor and farmer, and that is the role of markets.
"Level of buyer sorting depends on variability of goods."
The buyer will have to deal with what is provided. If the quality or price is not to his liking then they will not buy it, and leave it for the next consumer. The market information being generated here by the buyer and seller is significant.
"Sellers may reduce variability to lower buyers' search costs."
If the Safeway were located in affluent neighborhoods it would be inappropriate to attempt to sell products that are of low quality or bargain pricing. The buyer may be minimally challenged by price and therefore will look to other attributes to choose. Again markets provide information, and if their costs to transact are too high, then the firm is the optimal choice. For oil and gas the important component to consider is the level of standards that support the market. These standards mitigate the costs of completing transactions.
"Net price goes down when excessive measurements reduced."
The grocer and the consumer will share their information indirectly through the pricing and purchasing of each individual Orange. This information is being communicated through the price, set by the market.

OK so we have travelled along way to state some pretty basic facts. And I will attempt to tie these points into what I am seeing.

Attributes of goods are what consumers seek, not the goods themselves. In a market where standard means and measures, glossaries of terms, default contract templates, like those in oil and gas are able to communicate, facilitate and support the markets ability to establish price and other information to the oil and gas producer purchasing / selling them. That is to say that the majority of the work that can and should be done within oil and gas ideally should be by the market. The oil and gas industry has established many of these market supporting components of standard etc. in the variety of non-profit and non-governmental organizations that make up the industry.

I am now taking a hard left turn, so try to stay with me. In databases the table is called entities, and the columns are named attributes. And that is consistent with the information that is stored in database. The "Oranges" table is made up of volume, price, grade etc (attributes). In XML (which is a key technology in discussing databases) "Elements, which are the building blocks of XML documents, are bounded by start tags and end tags that may hold content, or may consist of one empty-element tag," and, "Attributes are name-value pairs that may appear in a start-or empty-element tag." Confused, don't be. Simply XML here is being used to portray the information contained within the database, which uses standards, and for the purposes of communication of those elements to the data user.

Thanks for keeping with me to this point, I hope its been worth your while. Here is what I am thinking that may be my new epiphany, and I hope it is for most people, and not just me.

If we, as I have suggested in my table that I noted earlier, wanted to move to a market orientation, according to these facts as I have laid them out, we could establish a functional market for those areas that are under the domain and administration of the joint operating committee. There is only the need to build this according to this "theory" we have all the parts and pieces that will make the JOC function as we expected it to do.

Going back to the proposed development, and particularly the Petroleum Lease Marketplace, the critical data attributes that are available and can be queried and searched. These data elements are well developed, what is needed now is to create the virtual Petroleum Lease Marketplace I have proposed here. Imagine for a second that you were trying to secure the petroleum lease rights in an area that you believed through geological mapping and seismic to be of particular value in a zone of your specialty. By reviewing the PLM you would be able to find out what was available, with whom, for how long. Or you would then be able to post the land and prepare for a bidding based on new reserves valuations and pricing. A PLM being a virtual marketplace of Leases, partnerships, joint ventures and farm-in/out, companies that want to do business, and companies that may want to sell their interest. All within a virtual environment that is search-able and leads to the necessary transaction processing that will eventually become the producing field. And here is my epiphany, because the marketplace can be supported in this manner.

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Sunday, April 08, 2007

Collaborative Advantage

"The days of U.S. technological domination are over. The nation must learn to thrive through working with others."

Leonard Lynn
Hal Salzman

Blog Summary

I found this kicking around on my hard drive. I had apparently downloaded it from the Kauffman Foundation a while ago, a copy of this document can be secured by selecting the title of this entry. Collaboration is clearly a key attribute of how work will be done in the future. Collaboration facilitated by technologies that are available today provide competitive advantages, and different methods and means of completing work. This article suggests the American dominance in technology leadership is waning. How the U.S. can regain the leadership position they once enjoyed is suggested in this article is through collaboration. This document takes a critical look at the realities of globalization for the U.S. Based here in Canada, much of the same feelings of the need to compete is shared by most. We have lost some of our leading position, however, the U.S., and to a lesser degree Canada, were in need of a competitive challenge. Competition is good, and we are faced with some formidable competitors in a globalized world. This document focuses on collaboration in the sciences and technology, and specifically noting the role of engineers in providing the means for North America to compete.

It at times seems that the differences that made North Americans unique are fading quickly. Whether or not a reconciliation of the standard of living of all people is in force, most people would concur with this documents premise and hypothesis. The authors note;

"It is not that the new globalization has gone unnoticed. Many observers are concerned that the United States is beginning to fall into a vicious cycle of disinvestment in and weakening of its innovation systems. As U.S. firms move their engineering and R & D activities offshore, they may be dis-investing not just in their own facilities but also in colleges and regions of the country that now form critical innovation clusters. These forces may combine to dissolve the bonds that form the basis of U.S. innovation leadership." pp. 75
Were these challenges demand driven? Or, has the scientific and engineering capability to conduct most of the high end complex tasks what made North America so dominant? Or was it the freedom and liberty were being released in the former communist nations, that is now rising up to challenge the west? I think it is the latter, that with China in 1978 and the Former Soviet Union (FSR) since 1989, can now focus on quality of life issues and be less concerned with controlling their populations. The authors seem to think that some of the ways in which business had been conducted has been exploited by other countries. In an open society that is what will happen, and did happen to the benefit of all people. Although losing these competitive attributes is possible, the competitive focus they unleash is both the purpose of an open society and the key to its future.
"Strategies that may have served U.S. firms in the second generation globalization will not work in the third generation world. The new emerging economies are an order of magnitude larger than those that emerged a generation ago, and they are today's growth markets. Nor does the United States, despite its undeniable strengths, enjoy global dominance across the range of cutting-edge technologies. More-over, U.S. multinationals are weakening their national identities, becoming citizens of the countries in which they do business and providing no favors to their country of origin. This means that the goal advocated by some U.S. policy makers of having the United States regain its position of leadership in all key technologies is simply not feasible, nor is it clear how the United States would retain that advantage when its firms are only loosely tied to the country." pp. 77
These comments may appear to resonate more with a protectionist mindset then with a more globalized point of view. It also seems to state a wanting for a greater share of a smaller pie then sharing a large pie to a certain extent. If the third generation globalization ties into Professor Carlotta Perez's theories, the third generation is the point where the benefits are soon to arrive. Dr. Perez made that call just recently. So the installment period as she described has been made, and thankfully we had a large and growing China and India to help sustain the world through this transition. It is also necessary to point out that what fuels this activity is the oil, gas and coal industries. These resources are constrained due to the global demand, and are potentially a hindrance to the progress of the world economy. The only manner that the energy industry can meet this demand is to re-organize for this challenge. This reorganization has to be made explicit through the software that defines and supports the structure. We should be less concerned about the losses of competitiveness and focus more on how they can be solved collectively.

The authors offer some of the ways in which the past competitiveness of the U.S. market is slipping away. In these four categories I can clearly see that the authors are not offering a means to stop the hemorrhaging of the U.S. economy. But offering constructive ways in which the U.S. can participate in the global economy and compete.

The Bandwagon Syndrome.
"As U.S. multinationals join the bandwagon of offshore technology development, they often seem to go beyond what makes economic sense." pp. 77
The Snowball Effect.
"The more that U.S. multinationals move activities offshore, the more sense it makes to offshore more activities." pp. 77
The loss of Positive Externalities.
"Some multinationals are finding that if their technology is developed offshore, then it makes more sense to invest in offshore universities than in domestic universities." pp.78
The Rapid Rise of Competing Innovation Systems.
"Regional competence centers or innovation clusters in the United States grew haphazardly in response to local market stimuli. China, India and other countries are much more explicitly strategic in creating competence and innovations centers." pp. 78
"Rather, the United States needs to develop new strengths for the new generation of globalization. With U.S. and other multinational firms globalizing their innovation work, emerging economies developing their education systems and culling the most talented young people from their huge populations, and communication technologies enabling the free and fast flow of information, it is hard to imagine the United States being able to regain its former position as global technology hegemony." pp. 79
"No amount of science and engineering expansion will restore U.S. technology autarchy. Instead, a new approach - collaborative technology advantage - is needed to develop a vibrant S&T economy in the United States." pp. 80
Policies for strength,
"We believe that the government, universities, and other major players in the U.S. innovation system need to work toward three fundamental major goals:" pp. 80
  • "The United States should develop national strategies that are less focused on competitive, or even comparative, advantage in the traditional meaning of these terms, and are more focused on collaborative advantage." pp. 80
  • "To start, the nation needs to counter the bandwagon and snowball effects that are driving the out-sourcing of the technology in potentially harmful ways." pp. 80
  • "Designers of Tax Policies at all levels also can redirect policies in these directions." pp. 81
  • "To a large degree, the U.S. patent office serves as the patent office for the world." pp. 81
  • "As a second goal, the United States need to help create a world based on the free flow of S & T brainpower rather that a futile attempt to monopolize the global S&T workforce." pp. 81
  • "Immigration policies that support global circulation would allow easy short term entry of three to eight months for collaboration with U.S. based scientists and engineers." pp. 81
  • "Finally, in working toward the first two foals, the United States needs to develop an S&T education system that teaches collaborative competencies rather than just technical knowledge and skills." pp. 81
  • "Our finding suggest that it is not the technical education but the cross - boundary skills that are most needed (working across disciplinary, organization, cultural, and time / distance boundaries)." pp. 81

Finally as part of the conclusion of this paper, "the enhanced communications within and between organizations". In oil and gas the consistency of motivation between the members of a Joint Operating Committee (JOC) resonates with the recommendations of this paper. The science, technology and engineering is the focal point of those JOC members. It is their backgrounds and scientific interests. The JOC has the operational decision making capabilities, however, it must retard these processes for the various bureaucracies to sign off on the plan. Its time to stop placing the bureaucrats at the centre of the organization and adopt this papers recommendations. And it is my opinion that the start of this change would be to develop the software as part of the solution to our long term economic well being.
"Our research suggests that the new engineering requirements, like the old, should build on a strong foundation of science and mathematics. But now they go much further. Communication across disciplinary, organizational, and cultural boundaries is the hallmark of the new global engineer. Integrative technologies require collaboration among scientific disciplines, between science and engineering, and across the natural and social sciences. They also require collaboration across organizations as innovation emanates from small to large firms and from vendors to original equipment manufacturers. And obviously the require collaboration across cultures as global collaboration becomes the norm. These requirements mandate a new approach not only to education but to selecting future engineers:colleges need to recognize that the talent required for the new global engineer falls outside their traditional student profiles. Managers increasingly report that although they want technically competent engineers, the qualities most valued are these other attributes."

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Friday, April 06, 2007

Format change.

Taking a little time off this past week to reflect on the past three months research. I had completed a good chunk of what I have to do, and spent some time reviewing what has been discovered. The difficulty and the pace of the research were a bit too much for my liking and I think that is also reflected in my writings. I am particularly pleased with the writings of Professor Richard Langlois in determining the division of the market and firm. (The summary table is located here.)

The difficulty in reviewing so much information is that the ease of reading has been lost. Although I will continue to use this blog to secure the intellectual property that I feel is necessary to support the basic hypothesis. The manner in which the writings will be completed will change for the future. I will now in addition to the posting, summarize the key points of the entry in an opening commentary. The abstract or summary will provide the reader with enough of the necessary information to see if they desire to read on. I hope this helps in making this research more usable by the growing population of people visiting this site. I am pleased with the numbers of visitors and the growth. I think with a little more effort on my behalf it should make their experience better.

I would also point to the del.ic.ous and Google Reader columns at the side of these posts. For anyone interested in oil and gas, and information technologies, there are some very high quality information and writings there. The search for quality continues and I hope that this blog becomes the focal point for most people that are interested in innovation within oil and gas. I will also be posting many smaller items that I think require special notice. These will consist of a quick summary and introduction to other articles, videos and podcasts. One last point regarding tags and labels. It may seem redundant to being posting to both Technorati tags and Google for labels, however, using the labels limits the tags to this site exclusively, where as Technorati tags will aggregate any and all blog tags. Any other comments or suggestions would be greatly appreciated. So with that we resume regularly scheduled writing on Monday. And most of all thank you, I know I've enjoyed myself.

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Wednesday, April 04, 2007

Globalization at the turning point: A Perspective from the great surges model.

Professor Carlotta Perez has been one of the many Professors that I keep a close eye on. Her work is in the area of long wave economic theorists. Defining two distinctive periods of time marked by change. The installation period, and the deployment period. I found this abstract to a seminar that she is holding at Sussex University. Within this abstract, she calls the current time period as the "Turning Point between the two periods." A very important point in time.


Though Schumpeter himself emphasised the double agency of the entrepreneur and the financier in the innovation process, neo-Schumpeterians have generally neglected the role of finance in technological diffusion. The great surges model proposed by the author addresses these complementary roles and suggests that the propagation of technological revolutions has historically involved two distinct periods of two or three decades each: The Installation period, led by financial capital and characterized by radical innovations or creative destruction and the Deployment period, led by production capital and marked by processes of expansive growth that could be termed “creative construction”. After indicating the differences with Schumpeter’s long wave model, it will be argued that, at present, the diffusion of the ICT revolution is at the Turning Point between the two periods. The world economy would be in a phase of instability, imbalances and income polarisation, calling for institutional changes as profound as those of Bretton Woods and the Welfare State, which enabled the full flourishing of the previous technological revolution, that of mass production and its “Fordist” paradigm. On this occasion, due to the nature of the “Knowledge Society” and the flexible ICT paradigm, much institutional innovation would need to be at the global level. Thus, seen from the great surges model, globalisation would be at the crossroads choosing a path between two extremes in the current “space of the possible”: between creating the institutional conditions for a global “golden age” that would be a positive-sum game for all countries, developed and developing, or letting the short-term criteria of the financial world continue to guide investment towards what is likely to result in merely “a gilded age” of polarised incomes, very uneven growth and an incomplete realisation of the wealth generating potential of the ICT paradigm.

Carlota Perez is Professor of Technology and Socio-economic Development at the Technological University of Tallinn, Estonia, currently Visiting Senior Research Fellow at CERF (Cambridge Endowment for Research in Finance), Judge Business School, Cambridge University, and Honorary Research Fellow at SPRU. Originally from Venezuela, where she served as Director of Technology Policy at the Ministry of Industry, she is also an international lecturer and consultant, specialised in the social and economic impact of technical change and in the historically changing conditions for growth, development, innovation and competitiveness. As such, she has worked for various public and private organisations, for major corporations and governments in Latin America, North America and Europe, as well as for the EU, the OECD, the UN and other international agencies.

For many years she has collaborated with Chris Freeman in the study of long waves and techno-economic paradigms

Carlota Perez’ articles from the early 1980s and her book Technological Revolutions and Financial Capital: the Dynamics of Bubbles and Golden Ages (Elgar 2002) have contributed to the present understanding of the relationship between technical and institutional change, between finance and technological diffusion and between technology and economic development. ISBN 1843763311

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