Thursday, May 31, 2007

The Next Technological Revolution:

Will the US Lead, or Fall Behind?

I stumbled upon this excellent summary of the way that innovation, research and development have changed in the new globalized economy. Noting the corporate research popularized in the 1960's and 1970's has faded from the landscape. Xerox, IBM, GE, AT&T and others were involved in large volumes of primary research in a variety of areas that may not have had a defined business for the company. Today these research dinosaurs have faded from the modern corporation. With few companies involved in research and almost no primary research being done anywhere.

The authors document how research and particularly innovation occurs today. Defining "Open Innovation" as;

"Open innovation is the new business paradigm in American industry. Under Open Innovation, a company's value chain is no longer fully contained within the company, and ideas, people, and products flow across company boundaries, to and from other companies, universities, and even countries. Innovation is now a global game characterized by both cooperation and competition between firms and between nations." p. 2
The need to collaborate on a much greater scale is necessary for open innovation. I think and firmly believe that in oil and gas, the need to cooperate, compete and collaborate is necessary for "ideas, people and products" to be able to keep up with a large amount of science moving at an ever increasing pace.

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Wednesday, May 30, 2007

Adam Smith meets SMP

The title of this post will take you to an article that provides an interesting perspective on some of the actions that are occurring in the technology field. As I have discussed before, one of the theories that Adam Smith was responsible for was Division of Labor. Back in the 1700's Smith proved through re-organization of a pin factory that dividing the tasks amongst the employees produced significant externalities. (240 fold increase.) These externalities are the benefits associated with all economic growth. If you have economic growth it is fair to assume that someone has made an effective and further division of labor. Externalities are the benefits that produce financial returns above and beyond their costs. This theory of course has been proven many times.

The author of this article argues that the development of multi-core processors or Symmetric Multi-Processors is the further division of labor that will bring about externalities for future economic growth. Duh, well of course, but why didn't I think of that? Intel is currently selling quad-core multiprocessors. Sun Microsystem are shipping 32 core processors and are believed to be in the area of 128 core processors in their next chip. Intel claims to be able to provide future iterations that have a logarithmic volume of cores and hence performance.

The other piece of technology that makes Adam Smith so relevant today is part of the Technical Vision that I have developed here. That technology is Asynchronous Process Management or APM and it is a critical (for me) technology of the Java Programming Environment. Recall that processes are either synchronous, like a conversation or telephone call, or asynchronous like an email or letter. Asynchronous processes provide the user with the opportunity to consider their response at a time and a place that is optimal in terms of convenience and availability. To put a half completed Asynchronous process in a restful state, until such time as the user has responded is something that is inherently part of Java. For an oil and gas user think of the joint venture billing process as it travels through the various companies affected. How much of this processing can be asynchronous, and how much of the operational time of the joint venture billing process can be reduced? 90 days?

These technologies in the hands of the right developers will enable the producer to increase the division of labor. And as mentioned, have the operational time reduced in doing so. And receive the externalities that Adam Smith discovered at the pin factory. The producer's being the net benefactors of this division of labor and the user's being highly productive with minimal interruptions.

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Friday, May 25, 2007

The Firm in a Knowledge Perspective.

Professor Sidney G. Winter, The Wharton School, May 15, 2006, European School of new Institutional Economics presentation slides.

Professor Sidney Winter presented at last Years European School on New Institutional Economics (Esnie). Click on the title of this entry to be taken to Esnie. It appears that Professors Winter, Dosi and Langlois have submitted working papers and participated in this organization. Also, I have included Esnie in both the oil and gas and academic "Google custom search engines" you can find in the first column of this weblog. Although Professor Winter did not submit any working paper, and his presentation is only 23 slides long, there is much to learn from this resource, so lets begin.

Recall that many of the papers that have been reviewed on this blog were authored by Professor Winter and the "Winter" label will pull together the individual blog posts. With only 7 posts to date, Professor Winter's contribution is of very high quality. The firm in a knowledge perspective is something that I recently wrote about in the Life and Times of Humpty Dumpty. I suggested that Chrysler's loss of engineering capability in the move to design teams is something the energy producers needs to consider may also apply to them. In the redefining the boundaries of the firm I have also suggested here that the scientific and engineering research capability reside with the firm. This is so that the losses realized by Chrysler are not symptomatic of the move to "Design Teams", or similarly, the Joint Operating Committees in the energy industry case. And operational performance metrics override the knowledge capability within firms. I have also suggested elsewhere that the competitive advantages of an oil and gas producer depend on their land base and the capability to find and produce oil and gas are the critical competitive strategies and value creators. This article will therefore focus on the role of the firm and particularly the Research Module of our proposed application.

Winter suggests the key competitive advantage of a firm is the "Knowledge Based View" a subset of the "Resource Based View." Clearly arguing that the knowledge of the firm is the key competitive advantage. This may seem contradictory to what I just stated about the land base and engineering and science based capabilities as the competitive advantage of oil and gas producers. I think we are saying the exact same thing. What does a company know and how is it known? What key resources are required to deploy that capability? (Land, Scientific and Engineering Capabilities). These are more direct questions that seek to reconcile the two different "views" of what has been stated. It is the knowledge of the firm and the ability to deploy it that makes the firm more competitive. And Winter concurs with this assertion with the following quotation;

"Some speak of a competence view or a capabilities view or even a dynamic capabilities view -- all to roughly the same, fairly vague, effect." Slide # 2.
As we have discussed before, in determining the boundaries of the firm and the market. I believe the market is ready to take on a greater role in deploying and developing the innovative approaches to how, what, where, when, who, and why of the industry. To have the contracts between firms free the hand of the market to conduct the operations in dare I say a "just in time" basis. These contracts are able to handle the transaction costs better then the bureaucracy is able to micromanage at this time, primarily through enhanced Information Technologies. And it is this thinking that Winter states
"In that view, firms are where productive knowledge lives, the only place it lives, and knowledge does not travel among them. When firms are a "nexus of contracts" or have boundaries determined only by transaction costs, this traditional perspective tends to fade form view." Slide # 3.
Here I think Winter, is also making the assumption that the move to Design Teams at Chrysler is responsible for the slackening in the intensity of global engineering capabilities. And therefore the risk of a degradation in firm knowledge and capability is a potential outcome of organizational change focused on moving to a market perspective only. The firm exists, and it is the firms sole responsibility for knowledge.

On the next slide Professor Winter comes in with a few solid home runs.
"On this view, firms are central to the social arrangements for storing productive knowledge for extending its application, and for advancing it - three very closely related economic functions."
"Of course, there are also other players - other types of institutions, organizations and individual roles complement the firm role." Slide # 4.
This last point firmly pointing to the production related transactions, and other activities of the Joint Operating Committee as proposed in this table.

Winter then makes the point of this discussion with a handful of objectives. Slide # 5.

  • "Explain what has been added to the traditional understanding of knowledge and the firm."
  • "Point out some specifically "institutional" aspects of the current view."
  • "Take note of recent and potential research topics in this area."

It is also at this time Winter takes the entire scope of operations and opens it up for consideration and discussion. Slide # 6

  • "Organizational learning."
  • "Creativity and innovation, and diffusion." (Innovation has been primarily assigned to the market or JOC.)
  • "Knowledge transfer -- transfer of practices, replication (broad scope), imitation (from afar)"
  • "Industrial and technological evolution."
  • "Knowledge Management."
  • "Communities of practice, networks."
  • "Routines, capabilities, dynamic capabilities."

Outside of innovation these items should be conducted primarily by the firm. With the caveat that items like "creativity" are not the sole domain of the firm or the market but the global oil and gas industry.

Next Winter asks for and attempts to define what knowledge is. Noting that "it is to achieve some understanding of how society's work gets done." Let a definition emerge! (If needed.)" And Winter provides an excellent definition of "productive knowledge that guides work" with a few global parameters. Slide #'s 8 & 9.

  • "Situated, context dependent."
  • "Embedded - in physical, temporal and social contexts at various levels."
  • "Partly Tacit - skills, pattern recognition, not facts."

If we look at these three parameters and the scope of operation of the upstream oil and gas producer. We see the constraints and opportunities based on this definition of knowledge. I hesitate to discuss the impact of these three categories of knowledge for fear that I may limit the scope of the knowledge base. I will state however that the importance of this definition needs to be codified in this applications Research Module. "How" may have to wait until I complete more of this research into this critical area. That I believe the energy industry needs to move in this direction obviously resonates with the academic community overall. Today there is more research being put into these areas. It is overwhelming in volume and quality of the work being done. I can also assure my readers that the scope of this problem, what I am asserting as the "Chrysler Issue", for purposes of this blog, will not be raised as a reason for any failure associated with this software application. The scope of the "firms" responsibilities has not diminished in my opinion. The firm needs to be as strong, and as involved in their operations then they ever have been. The boundaries of the firm, and the allocation of some responsibilities to the market does not provide any opportunity for the "Firm" to rest. The transition will bring an enhanced focus to the competitive differentiators of its land base and this knowledge stuff. And Winter agrees. With Slide # 10 recreated here.
  • "We must put aside, probably forever, any ambition of drawing a sharp conceptual line between productive knowledge and the context in which such knowledge is operative."
  • "All three of the named considerations point to the infeasibility of that; it is a futile exercise."
  • "The good news: dropping the idea may be the main key to understanding knowledge."

It is at this point that Winter provides an excellent discussion on the issues around personnel turnover and firm knowledge. Citing a combination lock with three numbers from 0 to 9 on each dial. If each dial were represented as an individual, it is fairly easy to replace only one, in fact it would only take 10 tries to have the key replaced. If all three need to be determined it may require a 1,000 searches and 500 expected in order to restore the combination. A strong analogy to the human resource issues that are being faced in the oil and gas industry as we transition to new leadership and management. The retirement of the baby boomers in the next 5 to 10 years, based on this analogy, may be devastating to the operations of the firm and market. If the knowledge that is contained within the boomer generation isn't captured in the short time available, we could experience serious difficulty.

It is at this time that I want to add this information to our table and module breakdowns. And this is how I see the situation evolving;

Joint Operating Committee
Military Styled Command and Control
Transaction Costs
Production Costs
Routine, compliance and accountability
Financial Framework
Legal Framework
Cultural Framework
Operational Decision Making Framework

P = Primary
s = secondary

Application Modular Breakdown

So if we take a moment and define some of the modular architecture of this system.

  • Partnership Accounting Module,
  • Human & Supplier Resource Marketplace,
  • Financial Resource Marketplace,
  • Governance & Compliance Module, (a.k.a. Military Command & Control Structure)
  • Research Module (Primary is the Firm)
    • Firm Knowledge Objectives
      • Storing Productive Knowledge
      • Extending Knowledge Application
      • Advancing Knowledge
    • Organizational Learning
    • Knowledge Capture
      • Situated, context dependent.
      • Embedded - at various levels
        • physical,
        • temporal
        • social contexts
      • Partly tacit
        • Skills
        • Pattern Recognition
        • Not facts
      • Replication
      • Imitation
    • Knowledge Management
    • Industrial and Technological Evolution
    • Communities of Practice, Networks
    • Creativity, Innovation and Diffusion
    • Other
      • Routines
      • Capabilities
      • Dynamic Capabilities

I think the primary thing we have learned through Professor Winter's slides is that the firms role is not diminished in this proposed organizational change. And with some concurrence on the issues regarding Chrysler. Some of the aspects and attributes are ceded to the market, however, the firm is as vitally needed in these new capacities as it has in the past 100 years. As we look to the challenging future of the energy industry, the needs to address these points will become more prescient as the knowledge contained within the firm begins to retire, and hopefully left in the hands of those that will able to continue on.

I noted in the entry about Matthew Simmons that May 2005 was possibly the point of peak oil. Which may or may not be the case. It is important to realize an interesting aspect of all declarations of peak oil in terms of a single field or a single country. (Such as the U.S. onshore peak occurring in 1972) Each time that the Peak has been attained it is also the point where half of the recoverable oil or natural gas remains in the ground. So even though the total throughput will continue to decline. At least we know the reserves that remain are what fueled the world economy for the past 140 years.

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Thursday, May 24, 2007

McKinsey on Vertical Integration.

In honoring of the passing of Alfred Chandler, the McKinsey Quarterly is issuing a reprint of a 1993 article entitled "When and when not to vertically integrate; A strategy as risky as vertical integration can only succeed when it is chosen for the right reasons". The article was originally published in Sloan Management Review and was authored by John Stuckey and David White.

Vertical integration was the survival strategy of the oil and gas industry for many years, particularly back in the days of the "Seven Sisters" Exxon, Mobil, Amoco, Shell, BP, Chevron, Texaco and Gulf. The ability to handle the exploration, production, processing, distribution, chemical processing, retail operations of oil and gas firms was through Verticle Integration. Without the integration, it was believed, the company would not earn any returns. This type of thinking left the industry scene sometime in the 1980's when the then junior producers focused on exploitation. Nonetheless this is a review of some of the criteria that was used to determine the validity of using a vertical integration strategy. I think this review would be worthwhile particularly as many of the writings in this blog are pointing away from integration as a strategy.

The primary message of the article is the company should not consider vertically integrating unless there is some risk of losing value, or if value will be gained in the integration. The reason for this limited view of when integration should be used. Is the difficulty in integrating the various disparate parts and have them operate as a whole. I would also assert that the focus on integration is a management belief that the more sophisticated the domain of operations, the more valuable their services were required.

The authors do a very fine job of defining what Vertical Integration is in the following quotations;

"Vertical Integration is simply a means of coordinating the different stages of an industry chain when bilateral trading is not beneficial. Transaction costs and the risk of exploitation would be high."
We discussed the markets role in transaction costs and this is the issue that causes the vertical integration to be considered. Transaction costs are expensive. It is only the ability to reduce the transaction costs that I have proposed the Joint Operating Committee (JOC) to operate as the market for the industry, and process the markets "production transactions" with the modern Information Technologies.
"Vertical Integration typically reduces some risks and transaction costs, but it requires heavy setup costs, and its coordination effectiveness is often dubious."
The authors note the justifiable reasons that vertical integration is required.

  • The market is too risky and unreliable - "it fails".
  • Companies in adjacent stages of the industry have more market power than companies in your stage.
  • Integration would create or exploit market power by raising barriers to entry or allowing price discrimination across customer segments; or
  • The market is young and the company must forward integrate to develop a market, or the market is declining and independents are pulling out of adjacent stages.

The authors note the first reason is the most important one, and hence, the most applicable justification for proceeding with using the JOC in oil and gas. The markets transaction costs are negligible with today's Information Technologies. The marketplace in oil and gas is where the ability to deal with all that the energy industry needs resides. And this is the point. In immature markets the need for producers to integrate vertically was necessary to ensure that the operations were managed appropriately. Today the level of micromanagement, I would assert, is unable to deal with the level of complexity, innovativeness and speed at which things should be done of even the most focused producer. The other justifications, in my opinion, barely rise to the level of an excuse.

The question I should ask is how many JOC's are there. For every company there may be hundreds and even thousands. Bringing the total population of Joint Operating Committees into the hundreds of thousands globally. Each and every JOC that exists in oil and gas is unique to all the others. I am certain there would be a strong concurrence on that point. This market vs. the vertically integrated firm is determined in favor of the JOC's just on the basis of the number of JOC's that exist in the world. How can the needs of each unique JOC be met in this high demand era of the oil and gas industry. I assert the market, managed in the manner that this software development project has proposed, is the only method that makes sense. By reviewing this article it is clear to me, that in 1993, the decision to integrate vertically was still an option in the managers toolbox. Today, based on my understanding of the industry it makes absolutely no sense. And as we see companies like Daimler shedding many of the Vertically Integrated divisions they managed, the value of the stock continues to climb. How long will it be before someone begins the process of breaking down the vertical nature of the oil and gas companies. In theory, the remnants of the seven sister's would be able to generate larger values for their shareholders by discarding the theory that Vertical Integration is a strategy of value creation. For it is false.

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Wednesday, May 23, 2007

JavaFX is a go!

Sun Microsystems has announced a new scripting language, JavaFX. Designed to work with Swing, Java's GUI toolkit, JavaFX gives the developer many of the attributes of the current trend to asynchronous page loading and graphics. This trend started off on the wrong foot and has become a nightmare of coding hell. AJAX was the first, Asynchronous Java Script with XML is a dynamic hodge podge of technologies that unleashes the power of coding into any wrong direction it can find. Next was Adobe Flex, then Microsoft SilverLight and they all offer the ability to write anything on the web and the desktop of the user. Very dangerous as the access to the desktop and web provides the developer with the ability to do just about anything malicious that they can dream up. I have cautioned about the use of these products before and they certainly should never be used in a corporate setting. JavaFX is different in that it maintains the security model of Java and is unable to access the local machine. This is the primary reason that there are no associated virus' or related garbage brought to the user through their use of Java.

JavaFX takes another step above the competition in that it is statically typed, not dynamic. Dynamic languages are the easy to implement and are the Swiss army knife of programming. Perl, Python and PHP are all good languages that aid the developer in many of the tasks and routines necessary for their productivity. Few would recommend the use of these languages in an enterprise setting, and that relates to the languages inability to scale to size. JavaFX being statically typed enforces a rigid framework or constraint on the developer that aids in the codes ability to scale.

Other benefits of JavaFX is it applies across the development implementations of J2ME, J2SE and J2EE, Sun's mobile, standard and enterprise editions of Java. Enabling the use of JavaFX in mobile phones and other devices that are proliferating and making the oil and gas worker more productive. This will also aid in the deployment of the many sensors and control devices. I suspect technologies will proliferate under the new Internet protocol IPv6. The prolific use of GPS in vehicles and Google maps could be used to determine who is where. Lastly this years JavaOne conference highlighted the use of the language in the area of robotics. JavaFX also provides access to this developing area of technology.

Therefore, Groovy, the previously proposed scripting language is out. I thought that Groovy would be worthwhile tool to have as a scripting language in the developers toolbox for work being done on this project. Groovy is a dynamically typed language that enabled the Groovy developer to use the same Java classes. The only issue that I had was that it was a dynamically typed language and therefore I stated that in the design specification for this project, it would be inappropriate to have any Groovy code in the final commercial versions.

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Tuesday, May 22, 2007

The peaking of Offshore Oil and Gas:

Is the party over?
Or just Beginning to get exciting?

April 30, 2007

Matthew R. Simmons

Although the majority of this information is sourced from this Simmons presentation, little specifically is referenced. I felt that most of the information was factual and therefore not subject to Mr. Simmons copyright. (You can't copyright a fact.) I highlighted only what I thought was Mr. Simmons opinions in the noted references below.

Simmons noted the significance of the earlier period of the years 1859 to the 1930's where "no one had any idea what to do with so much oil"! The 148th year of the oil era is marked this year. 70 Years ago drilling teams began hunting for oil in the Middle East. Scouting for oil in Kuwait, Iraq, Iran and Saudi Arabia. Many of the large commercial fields that still produce in that region where found. Ghawar, the biggest was discovered in 1948, Safaniyah in 1951, up to 1967 with the last great super giant onshore Middle East find being Shaybah.

During 1947 Kerr-McGee moved offshore beyond piers and brings in the era of offshore oil and gas. These initial wells reached as deep as 150' feet of water. 150 feet being the limit of human endurance and safety due to the "bends". 1967 saw the Siberian Samoltar region develop, ARCO discovered the North Slopes Prudhoe Bay in 1968, Phillips found Ekofisk in 1969 and in 1975 Pemex found Cantarell. These regions and discoveries were the last 3 great oil frontiers.

With the development of mixed gas for diving, hyperbaric chambers, and the "Jim Suit" c/w GE's robotic arm. Led to testing and drilling into 1,000 feet of water in the early 1970's. Commensurate with this deeper diving capability Drill-ships and Semi-Submersible were able to conduct drilling into 150 to 400 - 450 feet of water. Further development of sub-sea production systems led to offshore satellite fields. During the 1980's the offshore drilling industry was faced with declining returns due to the costs of these technologies and the relative decline in demand for offshore drilling due to the delcine in the price of oil. As I recall it went to $10 / barrel in 1985 or 86. The pricing problem led to what was believed as the overbuilding of the offshore drilling fleet. This lack of offshre drilling demand dropped the capacity utilization rates to 43% overall. However when 1993 saw new offshore drilling technologies being introduced, the associated declines in costs and the producers earning reasonable returns on moderate oil prices of around $18 - 21 / barrel. This led to the real deep-water / ultra deep-water opportunities. This lead to a rebound or recovery of offshore drilling when in May 1997 Sonat Offshore announced the building of a deep-water rig with a 5 year contract at $200,000 / day day-rates.

"After 1980: all growth in oil output came from offshore oil". In his presentation Matthew Simmons shows the volume of oil production increases since 1980 are attributable to the offshore drilling discoveries. 120% of the 1980 to 2007 increase in the global oil production has come from offshore exploration and production. This is significant in showing the way in which the industry should turn. If the industry was able to make these discoveries with immature technologies and imploding commodity prices, I think the answer as to where the oil and gas industry needs to turn is evident.

Today after 38 years, the contractors for offshore drilling are financially healthy and prosperous. Only the number of rigs has not changed in the last 20 years. And the vintage of that fleet is quickly realizing its useful life. Recall that rust never sleeps and the useful life issue becomes more focused. Only 15% of the total fleet is new, with the majority being 25 years or more in age. It is unknown how quickly the fleet can be refurbished and how fast the fleet could be rebuilt. Simmons asks what does 500 offshore rigs cost. With 126 rigs on order, the delivery dates being from 2008 to 2011 it would seem the drilling platforms are very limited in their opportunities for the energy industries redevelopment capabilities. Time seems to be the greater cost in rebuilding the fleet. One must recall the effort of the United States during WWII, mixed in with some modern day innovation and science in seeing how the number of platforms could be built in time. With all of the oil found from offshore wells since the early 1980's, what is the prospect of the industries productive capacity and uptake?

One of the reasons that I follow Simmons is his analysis is usually unimpeachable. He is / has been a lightning rod for the wrath of the industry soothsayers that state all is well. Dr. Daniel Yergin seems to have sampled some magic cool-aid when it comes to predicting the supply possibilities, and hence his popularity. Simmons on the other hand has consistently put quality analysis that has proven correct over time. I have been following him since 1997 and his comments are stark, to the point and not something that Yergin appears to want to wake up to. For example, in this article Simmons notes the following prospective changes with respect to the supply that Yergin thinks is going to explode in the next 10 years.

  • USA's onshore oil totals approximately 4.5 MB/D with an associated produced water of 128 MB/D. A 96.6% overall average water cut.
  • Middle Easts giant oilfield now in decline. (Based on reserve analysis and decline in production from the region.)
  • Mexico's Cantarell complex is beginning its steep decline.
  • Lake Maracaibo is a "mess".
  • Niger Delta is a rust belt of decay.
  • The North Sea is in steep decline.

In light of this and the fact that 120% of the increase in oil and gas production in the past 27 years is from offshore oil exploration and production. How is it that Yergin believes the onshore oil and gas industry can respond to today's demand challenge. If it didn't contribute in the past 27 years to the global capacity of production, what is it that Yergin believes will solve this problem? More and more each day I think that Yergin is actively attempting to impeach his history and contribution to the oil and gas industry. As time passes he will become known for getting it all wrong.

Simmons falls definitively in the category of Peak Oil Theorists. He asks if the January 2007 production profile is 1 MB/D lower then May 2005's 74,151,000 B/D. This decline may show that May 2005 was the point of no return from a Peak Oil theory point of view. Unless the number of wells that can be drilled increases size-ably, then Peak Oil starts it's otherwise impossible decline. With the associated growth in the global fleet of offshore drilling capability, production decline will accelerate.

Its at this time that Simmons puts across one of the other phenomenon he has asserted many times before. The ability to accelerate the decline by aggressive exploitation is the only thing that the industry has really done in all of the onshore and offshore fields. This has raised the deliver-ability of oil and gas from known reserves to its absolute optimum, and cleaned out what was producible form the formations quicker then what has been found to replace it. In some companies in Canada this replacement rate is consistently 15% of the production! If you see a hamster in the wheel running at full speed your correct, however, this last point demands a doubling in the speed from the hamster. Our current consumption of energy is enabled by the aggressive and highly technical exploitation of known reserves over the past 25 years. This deliver-ability rate is therefore not sustainable. And if the peak oil theory is proven right, since May 2005 a very large clock has been ticking for the energy consumer who is unawares and unprepared. Thank you Dr. Yergin.

The dire nature of Simmons facts are captured in his 27th slide. Asking "Can the industry survive post peak oil?

  • Will the global economy survive post-peak oil world?
  • How high could oil prices go?
  • When demand outstrips supply are shortages inevitable?
  • Will the Offshore Technology Conference (OTC) survive Post Peak Oil? (The OTC is the group Simmons made this presentation too.)

How this gets done, and I cannot imagine anyone arguing for the bureaucracy to lead this charge. We need to organize our efforts to scale to this level. The industry is significantly bound by constraints and needs to reorganize around this proposed software development. How much longer will we face an angry consumer regarding the alleged gouging at the pump? How much longer will the bureaucracy feel complacent and wealthy in their deliberate inaction? How much longer will Yergin continue to belittle the Peak Oil theories and Simmons, and tell his customers, the consumers and bureaucracies, things are not as rosy as he has stated?

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Monday, May 21, 2007

The life and times of Humpty Dumpty

We all know what happened to old Humpty after his fall, all the Kings horseman and all the Kings men... I think today we have an excellent business example of what the nursery rhyme taught us. The example company is Chrysler. Recall in my thesis I noted that Chrysler experienced a strange depreciation of their engineering capability. I said the following then;

"The need to clarify that holding the JOC accountable is not, and should not be, construed as a capitulation of the innovation process and its inherent benefits to the four winds. A study was undertaken at Chrysler to determine why the changes to “teams” were successful in product development, as reflected in their cab forward design, yet the overall engineering and technical capability of the company declined. The Chrysler study reflects that the accountability of the JOC (or team) needs to be augmented by an internal management system that provides an overall focus and direction to the innovations. Management needs to create and guide the internal innovative science and engineering capability that is unique and a key competitive advantage."
Were the "Synergies" that Mercedes sought in the merger with Chrysler an attempt to source and resurrect Chrysler's overall engineering capability? We know Mercedes saw these synergies as the key to the mergers value creation in their 1998 $36 billion purchase of Chrysler. However, did all the Kings horses and men (Mercedes) soon realize they could not put the engineering capability back together again? Selling the firm for $7 Billion (although we don't know what stays and what goes) seems to indicate that there is something fairly seriously wrong with Humpty (Chrysler).

Irrespective of the validity of this possibility, is there a lesson to be learned here regarding the current capability in oil and gas and the potential move to the Joint Operating Committee? Is it possible that during this transition the capacity to function from an industrial engineering capability is somehow lost? I don't think so, for a few reasons. First the industry is showing symptomatic failures at every turn. In the past two weeks we have seen Canadian Natural Resources Ltd. loose control of the building of their tank farm at Horizon, their heavy oil plant. With the lose of life in the second incident being averted, we see these types of failures everywhere. I also see the inability of the industry to capitalize on the higher oil and gas prices as a failure to respond to the market's demands. The oil and gas prices just seem to keep climbing, with no response from industry.

Secondly, I see a fundamental misunderstanding of the supply structure of the energy industry. It's not about the supply. The demand dynamic we are now dealing with has its origins in a world energy supply that catered to predominantly Japan, Europe and the U.S. or 750 million consumers. Now with India and China competing we have 3.15 billion consumers, or 4.2 times the demand for energy. I attribute this inability to identify the competitive demand landscape to a myopic focus on supply that was the industries focus while there were surplus barrels of production available. Now the industry has not switched, in my opinion, and don't have the ability to switch to the demand satisfaction of the equation under the current bureaucratic organizational structure.

In summary I would suggest the risks associated with losing an advanced engineering and scientific capability within the oil and gas industry is limited. For the reasons cited and the history of the industry over the past 25 years. The last quarter century has been a survival game. Living off assets that were innovated on from the perspective of exploitation. This capability will be needed and expanded upon, but what is needed now is for the industry to increase their scientific and engineering capability in the exploration and development areas as well. An area I suggest where little has been done in the past quarter century. The offshore drilling, the Arctic, the Tar Sands and areas that were too risky before the prices rewarded the larger risk profiles.

I also think that the industry having access to the Research Module in this proposed application will be critical to developing the new exploration requirements and at least maintain the exploitation capability. The Research Module will contain the explicit knowledge of the firm, with links to partners, consultants, academics and supplier capabilities. Within this mix will be much of the leading edge thinking in the academic community and the applied project processes the company uses to discover the new techniques, procedures and policies. The more that the Research Module is pursued the greater level of Intellectual Property that the firm will have access too. This will also provide the majority of the industries scientists and engineers to develop their ideas and monetize their intellectual property through their rights of copyright, patent and to a lesser extent trademarks. For that is the stated benefit of Intellectual Property, and particularly, copyright. The ability to copyright the idea is earned through the act of publication. Therefore society as a whole has access on the ideas within the marketplace for others to expand upon and benefit from. What the Research Module will do primarily is provide a forum to capture this knowledge on a global basis and provide a means of transaction processing and cost measurement to the companies, vendors, academics and suppliers who use it. Note, I will be writing more on this important module in the proposed application in the near future.

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Sunday, May 13, 2007

Modularity on Google Video

"Aspect Oriented Programming: Radical Research in Modularity."

Gregor Kiczales, Professor of Computer Science at the University of British Columbia.

Professor Kiczales does an excellent job in making this presentation (click on the title of this entry for the video). He hints at his past experience throughout the video, and this experience includes leading the Aspect Oriented Programming (AOP) development at Xerox PARC. This is a highly technical video of aspect oriented programming in Java. This is a key technology for this system's developments, and if you have a desire to learn these topics (recommended) this is a good video.

Much of object oriented programming is defining the objects or classes that interact with each other. The net result is an overall hierarchy of your code. In order to invoke one class from one area of the code to the other may be difficult due to the recognition of the hierarchy. (Casting up the hierarchy, over, and then down to the class that you want.) Aspects maintain this hierarchy but allow the developer to "crosscut' the hierarchical structure as if it were modular.

One of the key components of Java is the ability to use different aspects. How these different aspects are implemented in oil and gas is very common in a design such as we have proposed in this system. Not to get into too many of the components of Java code, I want to point out that this video is entitled "Radical Research in Modularity". A key aspect of the system as designed with the research that we have done with Professor Richard Langlois and applied here. Professor Kiczales makes the following points that are critical to the understanding, purpose and value of aspects in programming. This discussion begins around the 50 minute mark (50:10) and carries on to the end.
"Modularity has a cost, the cost being sometimes you get an indirection, and its only worth paying this cost if you get something back. What your getting back here is a couple of things. One thing is;"
The Raw Benefit of Modularity, which is in some sense, I could ship point (cut) without display update."
"Second an ability to reason about the structure now, and this is provided by aspect orientation."
And then later on, at (55:25) Professor Kiczales says
"What can I modularize now, that I couldn't modularize before."
The last point that I wanted to make was Professor Kiczales did point to a text of "Baldwin and Clark" that we were prompted to review by Professor Langlois. Kiczales also has some very good papers that are available on his website if readers wanted to follow through on this topic. Hopefully reviewing this video and a little research in the area of aspect and object oriented programming will begin to reflect on the value of the modularity being discussed on this blog and elsewhere.

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Wednesday, May 09, 2007

McKinsey Enterprise Software Customer Survey

I participated in a McKinsey study a while back and the results of that survey are now being published. (Sorry no link, the survey hasn't been released yet, email me if you would like a copy.) The topic of the survey was "Enterprise Software Customer", was sponsored by McKinsey & Company and the Sand Hill Group. The survey was completed by 475 senior IT and business executives. The objective of the survey was to;

"determine how software budget levels will change, who will control the spending, what industry trends will most impact their company in the near term, and what role innovation plays in their decision making."
"The results draw a picture of continually increasing software budgets, a shift to more decentralized purchase decision with increased roles for the business side in purchasing decisions, and the increasing importance of software innovation that respondents predict will come from small vendors."
Music to my ears, looking at the details of the result of the survey.

Software will account for an increasing portion of IT budgets.

McKinsey notes software accounts for 31% of spending which is expected to grow to 36% of IT costs. No change in the composition of that spending is expected.

The majority of software purchase decisions are still made centrally, although line of business buying is expected to increase.

The survey shows there may be some change in the way that software budgets are controlled. Moving from a centralized model to include business leaders and end users having a greater say.

Innovation and Service Oriented Architecture (SOA) are top of mind issues for software customers.

Respondents noted that "SOA's" were expected to be the top pick at 23% and "Software on New Devices" would total 20%. Other new trends that were noted is the Open Source Software movement.

In another question regarding "which of a list of trends would most impact their business" Software Industry Innovation claimed top spot at 33%, Software as a Service at 21% and Web Services / SOA 18%.

Product Innovation scored highest when asked "where the software industry most needed to improve, our respondents again pulled product innovation into the top slot, ranking it number one with 30% of responses. Followed closely by ease of use and customer service in the second and third spots. Curiously, "Cost" slipped in the rankings "with only 14% of respondents ranking cost as their top issue for improvement", and "48% of respondents omitting this from their top three areas". The study notes "While price will certainly continue to be a factor in purchase decisions, business customers seem to be placing a greater premium on the value that the software industry can deliver in innovative new ways."

We are still early in this software innovation wave with considerable product innovation, business model innovation, and process innovation yet to come.

"The vast majority of respondents clearly think the best innovation is yet to come. Fifty-Five percent of respondents reported they still expect significant new technology innovation to come, and another 22 percent saw the industry near the peak of technology innovation with only business model and process innovations still ahead of us."


"We polled our respondents to understand what type of software innovation they were looking for. Across the board buyers want more innovation, citing all of the various types of product, business model, and process innovation as important."


"We also inquired about the speed with which respondents were adopting various new software business models. The results showed a great degree of enthusiasm for business model innovation, with respondents predicting that more than 40 percent of their software budgets may be spent in alternative business models over the next 2 years (subscription, transaction, advertising, or another format.) Even more striking in analyzing the fraction of respondents that plan to at least try each of the proposed alternative business models a whopping 80 percent plan some subscription on demand spend, 60 percent plan some transaction based spend and 33 percent plan spend funded by advertising. This broad willingness to experiment indicates alternative business models have hit the mainstream and software vendors of all types and sizes need to ensure their level of business model innovation matches the level of product innovation."

Few customers expect to see innovation coming from large software vendors.

When asked where the innovation likely to come from, 59% of respondent's pointed to the community of small software vendors. With only 19% expected to come from the largest software vendors.

From my point of view I can't be happier with these responses. I have worked on this project as the better model and now the business community is beginning to follow. I can not think of a more timely opportunity for the oil and gas industry to get on with the development of this project. Its scope is too large for someone to come along and throw a usable software application on the table that everyone can use. It has to contain the users and the customers involvement in order for it to be functional. The energy industry can not expect the venture capital people to step up and fund this. By doing so the venture capital would eliminate the key ingredient, the user involvement from the mix.

All in all a very loud call to action.

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Tuesday, May 08, 2007

Where we're at, Part II

In reviewing the recent posts of Professor Langlois' works, I find there are many points of great interest. Modularity is a critical component of the development environment of Java. Dr. James Gosling, the founder of Java, has put together an extremely powerful and safe environment in which we can develop these modular applications. One point that I should have made in those entries is the logical application of the Military Command & Control Structure (MCCS).

MCCS has its own label to aggregate all of the postings in this blog. It is an important concept of using the Joint Operating Committee (JOC) and I would suggest a review of the posts to gain a strong understanding of the principles that I have proposed. The principle is that a means of command and control is necessary to replace the hierarchical command and control that is otherwise lost in specifically recognizing the JOC. By recognizing the JOC there are many opportunities to accelerate the performance of a producer. By pooling the joint human and other resources, and making them fully available to the Joint Account, virtually, the performance of the work being done by the JOC will increase. The work being the planning and execution of the drilling, completing, building of gathering and facilities. To have the JOC populated by the members seconded (permanently) to the JOC and operating in a manner consistent with the Military analogy of command and control. Not only the people who are actively representing the owners of the JOC, but the suppliers and vendors that are usually the boots on the ground in implementing the plan. This enhanced collaboration would provide a collective knowledge base and would be able to mitigate any issues as quickly as is possible. It should also, in an almost natural way, provide the documentation and transaction processing as direct fall-outs of the decisions and actions of those active JOC's.

Modularity demands the Military Styled Command & Control Structure. The loose coupling that modularity in the organization, and in the systems, requires a strong bond to ensure that it is operating as expected. This bond is the MCCS. In periods of high growth and rapid change modularity needs the support of the MCCS.

Most importantly we have addressed the scope of this application with the analogy that Langlois uses in architecting these systems. The industry would not hire "two interior decorators" to design and implement 1/2 of a room. Systems, and systems design need to have a more holistic approach. Modules help to define exactly where the user will find what it is that they are looking for. Some of the modules reside in the exclusive domain of the firm, such as the Research Module, and some reside exclusively in the market domain, such as the Petroleum Lease Marketplace Module.

I am recreating the table that I produced after review of some of Langlois' works. This makes the division between the market and the firm as I foresee the JOC being employed. Various elements of the JOC are assigned the responsibility of the market and in other areas, such as research, are assigned the primary domain of the firm.

Joint Operating CommitteePs
Military Styled Command and ControlsP
Transaction CostssP
Production CostsPs
Routine, compliance and accountabilitysP
Financial FrameworkPs
Legal FrameworkPs
Cultural FrameworkPs
Operational Decision Making FrameworkPs

P = Primary
s = secondary

So if we take a moment and define some of the modular architecture of this system.
  • Partnership Accounting Module,
  • Petroleum Lease Marketplace,
  • Human & Supplier Resource Marketplace,
  • Financial Resource Marketplace,
  • Governance & Compliance Module, (a.k.a. Military Command & Control Structure)
  • Research Module
These module classifications enable one to begin to see the value of modular thinking. Langlois noted Hayek's comment;
"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
Those who are within the oil and gas industry can clearly see and determine where each part of their understanding of the industry would fall under. The beginnings of seeing the "hidden" information is already beginning to bear fruit, just with these modules classifications. It is very clear to me where I could find a specific issue, information or opportunity in the appropriate module. This "hidden" data and information is a very powerful concept. These six modules will become the core of the system we are building here. If there are any other modules that you might think of, please comment on it.

Recall a salient point of Langlois regarding private property;
"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." p. 25
I read this as being innovation, where the innovation is being generated in the modular architecture that I have laid out? And this is the point, it is no where specifically but innovation is everywhere. The innovations may come from anyone using any of the modules. Innovation is not something that can be defined as a process. It needs however, to be facilitated through the organizational construct that allows the innovators to apply their craft.

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Wednesday, May 02, 2007

Mission possible?

In this FastCompany article written by J.J. Brazil, a Pulitzer Prize winner, the necessary organizational transition of the FBI is well documented. I intimated the difficulty of the changes that I have proposed in my last article reviewing Professor Langlois' paper. Change within oil and gas is the biggest issue we face in terms of the move to the Joint Operating Committee (JOC). What they are attempting to do at the FBI is completely change the Bureau. That they have the fortitude to deal with these changes in not a question, it will be done. And if the FBI can change as radically as is proposed, this industry, the oil and gas industry, can do it as well. There is no doubt in my mind, and here is why. Billed as possibly the "toughest, most important change effort of our time" the FBI has had to consider some serious questions regarding the September 11, 2001 attacks.

"More than five years after the 9/11 attacks spurred a top to bottom redesign of its mission and culture, the FBI is still battling to change itself - to adapt to the 21st century world of technology and terrorism. It's not just a matter of installing computers, which in any case has proven far from simple. The FBI must address the way its people are hired, managed and trained. It has to fix the way they communicate and the way decisions are made. It has to remedy a balky, hierarchical structure that sometimes thwarts local action."
Later in this article the author notes that the perspective of the Bureau has changed from chasing the crook, to finding the foreign terrorist before he acts. In an era of high technology the FBI is in the stone age when it comes to its technology use. At the time of the 9/11 attacks the FBI were still using non-networked x386 computers. Today is not much better.
"Making change, Kotter observes, comes down to this: understanding the awesome power of tradition. "Leaders underestimate it, and they don't find enough ways to bar the old culture from seeping into the new," Kotter says. "The bigger the organization and the older the organization, the tougher it is."
Thankfully we have a problem of a substantially different scope. Although the size of the FBI's and this systems are in the same league, the issues are almost exactly reverse. In energy we are trying to tie together what until now have been two disparate organizations that barely recognize each other. The hierarchy and the Joint Operating Committee. And move the recognition of how the business operates to the JOC. One that would place the 5 frameworks, the cultural, financial, legal, operational decision making and compliance together. This project from an organizational point of view is a unifying change, not a disruptive change. Although I would agree that the oil and gas industries current hierarchies will find this disruptive, the changes will be surprisingly easy as the employees find more efficient alternative ways of completing their work through this system.

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Tuesday, May 01, 2007

Patent Changes

The Supreme Court has made two important decisions in the area of U.S. Patents. (Read the New York Times article by clicking on the title of this entry.) The application of U.S. Patent Law is enforceable only in the United States. Apparently many people were thinking the U.S. Patent was pertinent to other jurisdictions in assessing fees and determining damages. The second decision was the more interesting decision and it pertains to the definition of prior art.

In the past few years, the issuance of software patents has become a bit of a joke. Microsoft and other companies have been filing patents for the most blatant and obvious software advances. The cost of filing a patent escalated and the burden of being awarded a patent went to those with the most money. Now a process and a reasonable standard are in place to challenge many of these patents on the basis of prior art and obviousness. There will be many companies that have been awarded patents that will now have them revoked.

The patent troll is most definitely out of business. Filing for patents on what was prior art, then without making anything new or truly innovative, went after the company that developed the idea first and did not think to file a patent. These trolls were usually successful. Under the old rules they were easily able to be awarded a cease and desist order on the original developer. These types of transactions are now over thankfully and in the area of software patents, hopefully it will make that category extinct. Software Patents are a nuisance and most importantly not necessary. Copyright law can enforce the software code easier then the patents could.

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