Monday, December 31, 2007

Draft - Security & Access Control Module

I am pleased to present to this community the draft of the Security & Access Control Module. This is the first of eight modules that will be developed for People Ideas & Objects. This critical first module will provide the collaborative, security and access enabled components for the remaining seven modules development. This allows people to become familiar with the tools, processes, the means and methods of developing open source software. I am providing copies of the specification in .pdf format. Please download it from the wiki or email me to get a copy.

The process will follow this schedule:

- Open for Community submissions and nominations to Expert Group and Executive Committee until May 30, 2008.

- Final Draft approval by the Expert Group, August 31, 2008.

- Executive Committee Approval, September 30, 2008.

- Commence development October 1, 2008.

Further time-lines and deliver-ables will be specified by the Expert Group.

To participate please review the first section of the Specification entitled "Innovation in oil and gas" and review the Developer and User tasks. The community should then nominate candidates to fill the Security & Access Control Module Expert Group and the Developments Executive Committee. Review of the time-lines and commence development. I will be spending my time securing the financial resources necessary to pay for these developments. Writing the specification for the Petroleum Lease Marketplace Module. Assistance in these would be greatly appreciated.

The purpose of this process is to get as much input as possible. Please do not hesitate to ask questions of myself and the other people who will be joining. Thank you.

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Sunday, December 30, 2007

A picture, and a thousand words.

Unsustainable! That is the only conclusion one can draw from this EIA Chart. Comparing the volumes of BOE (Barrels of Oil Equivalent) discovered to the capital expenditures expended by FRS (Financial Reporting System) companies. No one would want to extend this charts trend out further. Why have oil and gas exploration and development become unsustainable? I believe it is as a result of the engineering and earth sciences underlying the industry have become so complex, and the remaining reserves are skinny and difficult. That an annual acceleration of the amount of engineering and earth science effort needed per barrel of oil is increasing.

I don't believe the increase in the effort of these tasks can be conducted in the thick bureaucracies that have housed the engineering and earth sciences during the cheap energy era. What is required? The answer to that question is very easy and that is; more data, more eyeballs and most importantly exponentially more ideas. Implying a tidal wave of data and ideas will swamp the already constrained capacities of the bureaucratic energy industry. This projects vision of the future considers the increase in the volumes of data and ideas, and provides a solution that enables companies to employ the information and ideas in their optimal fashion.

Whether we call this changing marketplace peak oil, plateau's or valleys is not the point. It is a reality that faces those in the know within the industry. Where are tomorrow's barrels of production going to come from? I think from a lot of difficult and very hard work. My vision of how the industry faces these challenges is through the development of the software described in the archives of this blog. I will be publishing the Security & Access Module specification this week. People interested in this software development project will then be able to see how they can actively participate and make a difference in these systems developments.

There are no short-term solutions today. Just as there are no short-term solutions to climate change. People who need the oil and gas will just have to go without while the industry reorganizes and retools itself for the future. That process starts here with the People, Ideas & Objects software modules. I made the call for sponsorship of this project in mid-December. This call was followed by a similar call from ASPO-USA. Both of these organizations share a few similarities and differences. Both believe the time for their projects to be funded by the industry must begin. ASPO-USA has been a voluntary effort as have my efforts to date in this blog. This too is unsustainable and it is time for these projects to go forward, be funded, organized and built. Does anyone want to continue on with the trends reflected in EIA's chart?

I can't think of two more worthwhile projects for anyone in the energy industry to move forward with. Clearly since 2001 throwing more money at the problem hasn't provided, and never will be, a solution. The first thing we need to do is come up with better methods of organizing ourselves for these future challenges. Join me here in these tasks.

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Thursday, December 27, 2007

Ralph Waldo Emerson

Continuing on with my end of the year tradition, posting one of Ralph Waldo Emerson's works. This year is the "Divinity School Address". Enjoy.

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Tuesday, December 11, 2007

Commercialization 101

Throughout the past three and a half years, the development of the theories surrounding the Joint Operating Committee as key organizational construct, have been developed based on my efforts and resources. To commercialize the development of this software has always been with two key assumptions. Users as principle consumers of the software would always directly and indirectly control the direction and quality of the software. The second assumption was that industry would financially support the development and ongoing needs of the software.

This time has now arrived and it is therefore necessary for industry to begin their involvement with resource commitments to this project. I have documented several dozen calls-to-action that show this type of development will become the mainstream business model. These calls have also included the dire warnings of our energy future from the National Petroleum Council and International Energy Agency.

I am therefore canvassing the producers in the Calgary, Texas and Aberdeen areas for sponsorship of this software development project that I call "People, Ideas & Objects". Sponsorship is open to any company willing to pay the fee of $10,000.00. These funds will go toward the development as I have described in this blog. Those companies that choose not to participate will not have a seat at the table and will be unable to influence the direction of the software, or use it. The past year has seen my time in terms of completing this work evaporate from the scope of this challenge. Any company not participating at this critical sponsorship stage will have difficulty in garnering the future attention of this community.

Contacting me at my email address will commence the process of registering your firm in the sponsorship round. The sponsorship round ends January 15, 2008.

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Thursday, December 06, 2007

YouTube video on Object Capabilities

An report update on the development of the Security & Access Module being developed for People, Ideas & Objects. Of particular note I want to highlight the work of Berkeley Professor David Wagner in the above noted video. (Click on the title for the YouTube video). At one point he indicates that he is very interested in securing alpha users for his research and use of "Joe-e" programming language. I will be emailing him soon and offering this module's development for consideration as an alpha-user of his research.

The Joe-e programming language is an offshoot of the Java Programming Language, just as JavaFX and Groovy are. It incorporates a higher level of "Type Safety" as no "global" or "static" variables are permitted; it is single thread safe and has a number of other enhancements that make it ideal for the development of "Object Capabilities". What are "Object Capabilities" Professor Wagner points to two excellent papers that describe in detail the concepts. I will be reviewing these as both research and development of the module.

Mark Miller "Robust Composition: Towards a Unified Approach to Access Control and Concurrency Control." Johns Hopkins University 2005
Jonathon Rees "A security kernel based on the Lambda Calculus" MIT 1995
It will be worthwhile to look at the tie-in that we can make to Professor Carliss Baldwin's work on transactions. Recall the matrix's she introduced in defining the scope of transactions. And how "Vouchers" were how I would implement these elements of the transaction. Object Capability would define the access and concurrency of the interactions between users within that voucher as well.

In the process of this development it has become necessary to define the level of virtualization that is possible and needed for the operations of this application. Virtualization on Solaris provides the ability to have an instance of the OS and associated technology stack operate for one specific user-defined unit. The size of the unit could be the entire application, or I could define the virtualization level that would have each person, company and JOC have a virtualized OS and associated technology stack for each of those units. I would do the latter if it provided an enhanced level of security, and this will be determined through the research of this module.

What I hope to be able to do with Professor Wagner is to define the manner in which we layer the Military Command & Control structure of the Compliance & Governance Module over the Assets, People, Geography, JOC's, Companies, Disciplines etc. Much in the same way that the Military denotes in the "Sgt. 1st Class, Rick Emert, 1st ACB, 1st Cavalry Division, PAO". This definition is necessary for the application and the industry to function. The value and need of the end users to define these elements will be incalculable.

Lastly IPv6 is one of the cornerstones of the Technical Vision that I have put forward for this project. I want to review the impact of that technology on the policies and technologies mentioned in this post. Also, the level of encryption available in the Java Programming Language provides very high security. The cryptography available is well documented here.

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Wednesday, December 05, 2007

Open Office, not the software type.

The news (click on the title of this entry for the article) reported on a trend that is occurring at many of the offices in Silicon Valley. Companies such as Cisco, Sun and Intel, have been experimenting and implementing the "Open Office" or cubicle-less workplace. Unlike the cubicle world of before, the Open Office space provides work areas that can be transformed by any of the people assigned to the floor. The motivation for doing this is the company "saves space and money, and encourages collaboration among workers".

On any given day, said Neil Tunmore, Intel's director of corporate services, 60 percent of the company's cubes are empty because people are visiting customers, telecommuting, vacationing or in meetings. Employees work in assigned buildings only three days a week on average and spend 20 of the work hours telecommuting.
Already at Sun, about 56% of the workforce, or about 19,900 employees, work without assigned office space.
and possibly the most prescient comment of the article;
"My office isn't a space in a building", Livengood said. "My office is the space where I am."
I think this type of office layout would be ideal for the energy industry. In many of the same ways that the technology companies are experiencing benefits, the energy industry would as well. If we accept the reasoning that each incremental barrel of oil from this point forward will require increasing levels of engineering and earth science effort, then collaboration will be necessary. I wonder how long before employee demands begin to expect these types of working conditions.

According to the article, the companies that have been experimenting with this method of Open Office have experienced substantial savings, productivity increases, quicker decision making, and innovations from the collaborations. Cisco experienced a 40% increase in the number of people they could put on one floor. A savings that could help many of the major cities where oil and gas companies reside, relieve the demand on costly square footage.

The ways and means of work is changing. In oil and gas, using the Joint Operating Committee with collaborative information technologies, supported by a dedicated software development team, new office layouts enabling high levels of collaboration, ah the future.

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Monday, December 03, 2007

McKinsey on the Worlds New Financial Power Brokers

Authored by Diana Farrell, a director of the McKinsey Global Institute and Susan Lund, a McKinsey consultant. I have read many articles of Ms Farrell's and included a review of her October 2003 Harvard Business Review article in my original thesis. I find her articles to be on topic and earth shattering in their accuracy and scope. This article does not disappoint either. The global "money" business is changing rather rapidly. As witnessed by the anticipated losses in the U.S. housing industry, the financial resources that are available globally are jaw dropping. With the kind of money being discussed in this article, globalization faces a very bright future. (Click on the title of this entry for the McKinsey article, free subscription required.)

If as I had suggested here, the global oil and gas industries financial needs were pegged at $32 Trillion, this seems more then possible and well within the realm of reality based on the size of the global financial markets. This then begs the question, how best should the energy industry organize for this future? Should we stay with the structured hierarchy and its close cousin the bureaucracy? I think I'm going to continue looking for like minded people that want to joint me here.

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Sunday, December 02, 2007

Transaction Cost Economics: An Introduction

Professor Oliver E. Williamson, University of California, Berkeley.

It has been a while since I've been able to get back to a normal level of research. If you recall we were had begun a very large review of the "Laboratory of Economics and Management Sant'Anna School of Advanced Studies" or LEM Working Paper Series. This group of papers has many worthwhile documents to review, and our interest in them falls primarily on the topic of innovation, and as an extension to the work we have done in reviewing Professor Giovanni Dosi. We are also the majority of the way through Professor Langlois' works with 26 blog entries so far. And finally we had just completed the 2006 ESNIE conference presentations of Langlois' and Professor Sydney Winter, and were to review a document of Professor Oliver Williamson and a number of papers and slide presentation of Professor Giovanni Dosi. Last but not least I have one more blog entry to complete for Professor Dosi's "Sources Procedures and Macroeconomic Effects of Innovation" which was the cornerstone paper of my thesis. This entry is the sole working paper presented by Professor Williamson at the 2006 ESNIE Conference.

Now back to Williamson's "Transaction Cost Economics (TCE): An Introduction". With this review I hope to show that much of the past history in the oil and gas industry systems development area has been compliance and governance. SEC regulations, Tax Regulations and Royalty Regulations are what consume most of the managements time in an oil and gas company. This compliance focus is the fault, in my opinion, of the software provided to the industry by SAP, Oracle and IBM. The business of the energy business has been ignored, more or less, by the software vendors focus on compliance and governance.

Nonetheless the culture of the industry continued to evolve, with the methods and means of getting the work done existing within the working interest ownership groups. These processes to a large extent were required for the interaction between the oil and gas producers, as represented in the Joint Operating Committee. This area of how the business of the energy business operates has largely been excluded by the competition of this software development proposal. It is this culture of the Joint Operating Committee that is the natural form of organization in oil and gas. If we define the JOC as the key organizational construct, and support it through this software development proposal. The compliance and governance aspects of the producers interests can be automated and actively support the work that is the key and necessary aspects of the business of the energy producer at the Joint Operating Committee.

A few introductory comments from Professor Williamson.

This overview of transaction cost economics differs from prior overviews to which I have contributed in two respect: it presumes little previous knowledge of the transaction cost economics (TCE) literature; and it is organized around the "Carnegie Triple" - be disciplined; be interdisciplinary; have an active mind. It is partly autobiographical on that account. p. 1
As I have discussed elsewhere (2002a), the lens of contract divides into two related branches: public ordering and private ordering. The latter further divides into ex ante incentive alignment (agency; mechanism design, property rights) and ex post governance branches. Although these two are related, TCE focuses predominantly on the governance of ongoing contractual relations. pp. 2 - 3
..."the ultimate unit of activity ... must contain in itself the three principles on conflict, mutuality and order. this unit is a transaction" (Commons, 1932, p. 4). This prescient two sentence statement prefigures the study of governance in two respects: not only does the lens of contract / governance take the transaction to be the basic unit of analysis, but governance is viewed as the means by which to infuse order, thereby to mitigate conflict and realize mutual gains. This is a recurrent theme. p. 3
Hmm, Williamson must have done some work in oil and gas.
The third quotation goes to the importance of economizing, broadly in the spirit of Frank Knight's observation that (1941, 0. 252; emphasis added): "Men in general, and within limits, wish to behave economically, to make their activities and their organization "efficient" rather than wasteful." p. 3
I read this last point as the motivation and manner that people have created the "work-around" between the ERP system and actually getting the job done. Or as I have stated, the natural way of getting things done in the oil and gas business. If we reflect back to the work that Professor Langlois concluded, where the boundaries of the firm and market, taken in the larger scope of defining where the transaction should occur. And the division of labor necessary to achieve the greatest level of efficiency. The balance would appear to be dictated by a fulcrum of innovation, and I am stating that this efficiency and innovativeness can be captured and enabled within this software development proposal. And this is also reflected in the next quotations from Williamson's paper.
Of the various forms that economizing can take, TCE is predominately concerned with economizing on transaction costs - drawing inspiration from Ronald Coase (1937, 1960) in this respect. p. 3
Herbert Simon: "Nothing is more fundamental in setting our research agenda and informing our research methods than our view of the nature of the human beings whose behavior we are studying" (1985, p. 303) p. 4
Jon Elster's dictum that "explanations in the social sciences should be organized around (partial) mechanisms rather than (general) theories (1994 p. 75 emphasis in original). p. 4
People, Ideas & Objects is the name of this software development proposal. A modification of Professor Paul Romer's Economic Growth theory of "People, Ideas and Things". I think that I have captured some of the brilliance of the work that has been done in the area of organizational economics, and specifically the many ideas in which we are able to stand on the shoulders of.
TCE shares a good deal of common ground with game theory (Kreps, 1999, p. 127), in that the parties to a contract are assumed to have an understanding of the strategic situation within which they are located and position themselves accordingly. TCE nevertheless differs in that contractual incompleteness sets in as the limits on rationality becoming binding in relation to transactional complexity. Also, TCE views governance as a means by which to relieve the oppressive logic of "bad games," of which the prisoner's dilemma is an exemplar. p. 5
Pragmatic methodology

In many ways what I am suggesting with this software development process is that an energy producer do away with their current systems through a long process of atrophy. As this software development initiative replaces the needed functionality and capability to do their work. Using today's new technologies, with an energy industry focused technological vision, and based on the simpler methods of doing "the business of the energy business" through the Joint Operating Committee as the key organizational construct.
Describing himself as a native informant rather than as a certified methodologist, Robert Solow's "terse description of what one economist thinks he is doing" (2001, p. 111) takes the form of three precepts: keep it simple: get it right; make it plausible. Keeping it simple is accomplished by stripping away inessentials, thereby to focus on first order effects - the main case, as it were - after which qualification, refinements, and extensions can be introduced. Getting it right entails working out the logic. And making to a plausible means to preserve contact with the phenomena and eschew fanciful constructions. p. 6
I believe the track that current systems are on is one that leads to a systemic meltdown of both the application (such as SAP) and the client companies. The complexity of operating the systems has already reached an excessive point and the future only sees more of the same technical solutions to the technical problems and the business of the business falls further from the focus of the systems providers.
Solow Observes with reference to the simplicity precept that "the very complexity of real life ... [is what] makes simple models so necessary"(2001, p.111). Keeping it simple requires the student of complexity to prioritize: "Most phenomena are driven by a very few central forces. What a good theory does is to simplify, it pulls out the central forces and gets rid of the rest" (Friedman, 1997, p. 196). Central features and key regularities are uncovered by the application of a focused lens. p. 6
So yes, I am the current author of the idiotic and irresponsible comments of starting over with the systems used in oil and gas. But maybe I am also the first to tell the Emperor he has no clothes. The latter naturally seems more probable from my point of view. And more and more of the users that are being subjected with the types of work-arounds that I have discussed in this blog are beginning to see and appreciate the alternate perspective discussed here. Professor Williamson now emphasizes the need to get this right, and I will assert the role of the user in making, assuring and demanding that these systems are appropriate for the oil and gas producers.
Getting it right "includes translating economic concepts into accurate mathematics (or diagrams, or words) and making sure that further logical operations are correctly performed and verified" (Solow, 2001, p. 112). p. 6
For it is the user, who understands the job at hand and what is required. It is the user that can best define their needs and ensure that what is developed meets those needs. SAP may be able to formulate good software in Germany but their understanding of the geology, engineering and administrative aspects of an oil and gas producers pipeline, drilling, miscible floods and NGL business are very limited. And lastly my primary concern is that large gaping holes in SAP's understanding of the oil and gas business may lead to further operational failures of the type that BP has experienced in the last two years.
Plausible simple models of complex phenomena ought "to make sense for 'reasonable' or 'plausible' value of the important parameters" (Solow, 2001, p. 112). Also, because "not everything that is logically consistent is credulous" (Kreps, 1999, p. 125), fanciful constructions that lose contact with the phenomena are suspect especially if alternative and more veridical models yield refutable implications that are congruent with the data. p. 7
And it is my assertion that SAP would not be able to pass this simple test. To me this software development project should be self evident, and although a bit before its time, the ultimate demand will surface as a result of a failure of "business as usual" to meet the demands of energy consumers. Do we need to prove the failure is real before we proceed with the development of this software?
This last brings me to a fourth precept: derive refutable implications to which the relevant (often microanalytic) data are brought to bear. Nicholas Gergescu-Roegen had a felicitous way of putting it: "The purpose of science in general is not prediction, but knowledge for its own stake," yet prediction is "the touchstone of scientific knowledge" (1971, p. 37). p. 7
Most of my career I have found the contradictions and conflicts within the work I did in the oil and gas industry, frustrating. It was clear why things needed to be done from a systems point of view when the abilities of the technology, and the real constraints of the organizations where evident. When things get stressed to the limits, as I believe they are close too now, will those conflicts and contradictions compel people to deal with these problems as I have done. Where the time, energy and money necessary to start over, pales in comparison to the resource demands necessary to continue on with the futile systems of yesteryear. This reality also considers the sustained inability to increase the organizational performance in terms of time and innovativeness. One that is unable to adopt the ideas prescribed in this blog, based on the advanced research of the Economists we follow. A future where change and innovation within the producer organizations is desperately needed.
Most social scientists know in their bones that theories that are congruent with the data are more influential. Milton Friedman's reflections on a lifetime of work are pertinent: "I believe in every area where I feel that I have had some influence it has occurred less because of the pure analysis than it has because of the empirical evidence that I have been able to organize. p. 8
Be interdisciplinary

Professor Williamson brings the topic of being interdisciplinary to the economist. I would like to add to his list of disciplines the information technologies that are a foundation and enabler of these concepts. The browser's of the Internet have brought sophisticated information to the user. The future Information Technologies see an extension and continuation in the underlying concepts of the Internet. Concepts that are critical to the user to fully understand and comprehend. The list of technologies is too long for the purposes of this blog entry. I would suggest that each individual begin the long-term critical review of the Information Technologies that are available today, and continue with that curiosity / sense of discovery in the future.
The injunction to "be interdisciplinary" actually overstates. The qualified version is this: be prepared to cross disciplinary boundaries if and as this is needed to preserve contact with the phenomena. Being interdisciplinary is conditional, therefore, on a perceived need and is introduced strictly in a pragmatic way. Such conditionality not withstanding, training in one or more of the contiguous social sciences is instructive for all students of economic organization. The pragmatic reason for such training is this: economists who lack an appreciation that some of what is going on out there has non-economic origins will be neglectful of or will misinterpret forces that are responsible for consequential regularities that ought to be taken into account. As hitherto indicated, TCE joins economics with organization theory and selected aspects of the law (especially contract law).
Organization theory

In this next section Professor Williamson ties Transaction Cost Economics (TCE) in with organization theory. The two disciplines fit together and are inherently related. I would point to this software development proposal as evidence of the relationship. Professor Williamson now brings in Human actors as a further related item and clarifying the assumptions about those actions.
Human Actors: Attributes of human actors that bear crucially on the lens of contract / governance are cognition, self-interest, and foresight (where the last can be considered an extension upon cognition). Human actors are described as boundedly rational, by which I mean "intendedly rational, but only limitedly so" (Simon, 1957, p. xxiv). So described, boundedly rational human actors lack hyper-rationality but are neither non-rational nor irrational. Rather, such human actors are attempting rationally to cope. For TCE purposes, the key ramification of bounded rationality for the study of contract is that all complex contracts are unavoidably incomplete. The analytically convenient fiction of complete contracting is thus disallowed. p. 9
Self interest is described in a two part way. Routine events are described as benign - in that most people will do what they say most of the time and some will do more. Outliers, however, pose tensions. The spirit of cooperation that facilitates ongoing adaptations to routine disturbance prospectively gives way to a more calculative orientation as the stakes increase. The hazard of opportunism - defection from the spirit of cooperation in favor of the letter of the contract - thus arises. p. 9
Boundedly rational human agents who possess feasible foresight will thus attempt to mitigate contractual hazards in cost effective degree, as a result of which the efficacy of contracting is extended over a wider range. Fewer transactions are taken out of markets and organized internally on this account. p. 10
My perception of how this system is built reflects that the oil and gas "market" is the Joint Operating Committee. The bureaucracy, or hierarchy or what remains of it as a result of the changes to the "Military Command & Control" styled structure, is responsible for the "Compliance & Governance" of the market operations, and the "Knowledge & Research Module". I believe the need to move or adapt to this definition is necessary to facilitate the speed and innovativeness that the energy market is now demanding of the producers. Here Professor Williamson suggests two types of "Coordinated Adaptation".
Coordinated Adaptation: Adaptation is taken to be the main problem of economic organization, of which two kinds are distinguished: autonomous adaptations in the market that are elicited by changes in relative prices, as described by the economist Friedrick Hayek (1945), and coordinated adaptations of a"conscious deliberate, purposeful kind" accomplished with the support of hierarchy, as described by the organization theorist Chester Barnard (1938). Conditional on the attributes of transaction, adaptations of both kinds are important - which is to say that TCE examines markets and hierarchies in a combined way (rather than persist with the old ideological divide between markets or hierarchies). Explicating the differential efficacy of alternative modes of governance - whereby markets enjoy the advantage in autonomous adaptation respects, the advantage shifts to hierarchy as transactions pose a greater need for consciously coordinated adaptations, and hybrid modes are a compromise mode that display adaptive capacities of both kinds (albeit in intermediate degree) - is central to a predictive theory of governance. p. 10
I take this to be explicit validation of the boundaries of the firm as determined by the analysis reflected in this blog. And the means and mechanisms to this change is this software development proposal. And I am certain that the power within these ideas have the capacity to exercise these adaptations with or without the current organizations in the oil and gas industry. That is to say I can see building this software in a number of different ways.
Awaiting a demonstration that superior feasible and implementable alternatives can be devised, social scientists need to come to terms with, rather than denounce, unwanted path dependent outcomes. p. 12
Contract Law

A key understanding of the implications of contract law, TCE and markets / firms is made by Professor Williamson.
Whereas the details of firm and market organization are scanted under lens of choice setups, the lens of contract / governance describes each generic mode of governance (market, hybrid, hierarchy) as a distinct syndrome of attributes, each of which differs in incentive intensity, administrative control, and contract law respects. These differences give rise to different adaptive strengths and weaknesses. p. 12
Thus, whereas the contract law of markets is legalistic (corresponds to the ideal transaction in both law and economics, whereby disputes are settled by court-ordered money damages, after which each party goes its own way), hybrid transactions and especially, hierarchical transactions are ones for which continuity is valued. The common view of contract as legal rules thus gives way to the more elastic concept of "contract as framework," where the framework "never accurately indicates real working relations, but ... affords a rough indication around which such relations vary, an occasional guide in cases of doubt, and a norm of ultimate appeal when the relations cease in fact to work." (Llewellyn, 1931, p. 736). p. 13
Not only does TCE hold otherwise, but the contract law differences that TCE associates with alternative modes of governance are among the reasons why governance structures differ in discrete structural ways. p. 14
Obviously the legal profession has dealt with these differences many times. These differences were evident to them, however, now the general population of users within the oil and gas industry will need to recognize these subtle differences. The Compliance and Governance module will have to incorporate these changes. As it is responsible for all three domains (market, hybrid and hierarchy) in terms of how things get done in the industry.


Key to the redefinition of the energy industry is the boundary between the firm and market. It is here where the definition of the market is the Joint Operating Committee begins and ends. No individual is truly an employee of a JOC, they are seconded from the various producers who hold a financial interest. The majority of the work that is conducted is of a large capital nature and specialized type, or, operational and require a finite skill set that is spread out over a number of JOC's. It is the market definition that is the driving element of the energy producer. The JOC is where the business of energy exploration and production is conducted. To support this business with the software development and collaborative information technologies, the market definition can be the driving element in Compliance & Governance.
Ronald Coase's 1937 paper on "The Nature of the Firm" expressly confronted an embarrassing lapse: whereas the distributing of activity between firm and market had been taken as given by economists, the boundary of the firm should be derived from the application of economic reasoning to the make-or-buy decision. pp. 15 - 16
Using this definition of the boundary of the firm, no one would suggest the JOC's of a petroleum producer make the drilling rigs and such used in the industry. Purchasing and using contractors is the only way a producer can effectively operate. This is among the most common sense and application in oil and gas. What has been missing in my opinion, is the compliance and governance frameworks dictating the management time and focus away form the business of the energy business. Compliance and Governance should be automated to the level of what the SEC is implementing in their new XBRL framework. This is the purpose of developing this software, to define the market and firm, Professor Williamson now summarizes these benefits for business in general.
Both the longstanding neglect of transaction costs and ad hoc-uses of transaction cost reasoning were unsatisfactory. What to do? The unmet need was to operationalize the concept of transaction cost, broadly with reference to the four precepts of pragmatic methodology. Addressing the issues in a comparative institutional way with applications to specific phenomena facilitated operationalization efforts. Comparative analysis, moreover, relieves the need to take absolute measures of transaction cost, since the object is to ascertain the factors that are responsible for differential transaction costs as between alternative modes of governance. Efforts that begun in the 1970's continue to this day. As elaborated elsewhere, key operationalizing moves include the following: p. 16
1) Rather than proceed in a fully general way, TCE focuses on specific phenomena, of which vertical integration (the make-or-buy decision) is the paradigm problem. This choice had two advantages: it addresses the puzzle to which Coase (1937) referred; and transactions in intermediate product markets are less beset by contractual complications (such as asymmetries of information, resources, expertise, and risk aversion) than are other transactions. pp. 16 - 17
2) The transaction is made the basic unit of analysis and is thereafter dimensionalized (with emphasis on asset specificity, contractual disturbances (uncertainty), and frequency). p. 17
3) Alternative modes of governance are described as internally consistent syndromes of attributes to which distinctive strengths and weaknesses - in autonomous and coordinated adaptation respects - accrue. p. 17
4) Economizing on transaction cost is taken to the cutting edge, where this is implemented through the discriminating alignment hypothesis, to wit: transaction, which differ in their attributes, are aligned with governance structures, which differ in their cost and competence, so as to effect a transaction cost economizing outcome. p. 17
5) The basic regularities are captured in the simple contractual schema (see the Appendix), to which many other contractual phenomena can be interpreted as variations on a theme. Indeed, any issue that arises as or can be re-conceptualized as a contracting problem can be interpreted to advantage in transaction cost economizing terms. p. 17
6) Empirical test of the predictions of the theory have ensued. By contrast with theories of economic organization that yield few refutable implications and / or are very nearly non-testable, transaction cost economics invites and has benefited from empirical testing. Indeed, "despite what almost 30 years ago may have appeared to be insurmountable obstacles to acquiring the relevant data [which are often micro-analytic and require primary data], today transaction cost economics stands on a remarkably broad empirical foundation" (Geyskens, Steenkamp, and Kumar, 2006, p. 531). There is no question but that TCE is more influential because of the empirical work that it has engendered. pp. 17 - 18
7) Public policy has been transformed by working up the efficiency / inefficiency ramification of TCE for complex contract and economic organization. p. 18

Professor Williamson's paper provides clear and unequivocal support to the ideas of using the JOC as the key organizational construct of the market definition in oil and gas. I would reiterate that the need to develop systems first is a necessary and critical aspect of the ways and means of society and its people function. Holding out, as the industry has done, and denying the validity of the theories that I speak of here will only permit greater failures of the organization on which people and society depend upon. This may seem like an author who is over-reaching in expressing his ideas and views, or maybe not. Your choice.
Although still undergoing development in fully formal modeling respects (Bajari and Tadelis, 2001; Tadelis 2002; Levin and Tadelis, 2004; Tadelis and Williamson, 2007), the combination of semi-formal models (Riordan and Williamson, 1985), diagrams (such as the simple contractual schema), and a widely shared verbal understanding of the logic of discriminating alignment have provided the impetus for the numerous TCE application described elsewhere (Williamson, 1990, pp. 192 - 194; 2005b; Macher and Richman, 2006). Indeed, the move from words to diagrams to mathematical models is what the natural progression contemplates. p. 18
Using words and diagrams I have started the process of building this software brick by brick, and stick by stick. Join me, please.
Headway in the future will be realized as it has in the past - not by the creation of a general theory but by proceeding in a modest, slow, molecular, definitive way, placing block upon black until the value added cannot be denied. It is both noteworthy and encouraging that so many young scholars have found productive ways to connect. TCE, moreover, has benefited from rival and complementary perspectives - especially those that subscribe to the four precepts of pragmatic methodology. Such pluralism brings energy to the elusive ambition of realizing the "science of organization" to which Chester Barnard (1938) made reference to almost 70 years ago. As the forthcoming Handbook of Organizational Economics (Gibbons and Roberts, 2007) reveals, the economics of organization, of which TCE is a part, is a vibrant research agenda. pp. 18 - 19
The Simple Contractual Schema

This appendix has significant value in verifying the JOC is able to function effectively in this market and firm definition of their boundaries. Professor Williamsons analysis in this appendix is definitively able, in my opinion, to document why the JOC is able to function in the manner described through out this blog.
The paradigm transaction for TCE is vertical integration (or, in more mundane terms, the make-or-buy decision). Not only is vertical integration the obvious candidate transaction (Coase, 1937), but, because it is less beset with asymmetries of information, budget, legal talent, risk aversion, and the like than are many other transaction, it is simpler. Not only are transaction cost features more transparent for the make-or-buy decision, but the simple contractual schema described below applies (with variation) to the study of transactions more generally. p. 20
Thus assume that a firm can make or buy a component and assume further that the component can be supplied by either a general purpose technology or a special purpose technology. Letting k be a measure of asset specificity, the transactions in Figure 1 that use the general purpose technology are ones for which k = 0. In this case, no specific assets are involved and the parties are essentially faceless. Transactions that use the special purpose technology are those for which k > 0. Such transaction give rise to bilateral dependencies, in that the parties have incentives to promote continuity, thereby to safeguard specific investments. Let s denote the magnitude of any such safeguards, which include penalties, information disclosure and verification procedures, specialized dispute resolution (such as arbitration) and, in the limit integration of the two stages under unified ownership. An s = 0 condition is one for which no safeguards are provided; a decision to provide safeguards is reflected by an s> 0 result. p. 20
Node A in Figure 1 corresponds to the ideal transaction in law and economics: there being an absence of dependency, governance is accomplished through competition and, in the event of disputes, by court awarded damages. Node B poses unrelieved contractual hazards, in that specialized investments are exposed (k >0) for which no safeguards (s = 0) have been provided. Such hazards will be recognized by farsighted players, who will price out the implied risks. pp. 20 - 21
Added contractual supports (s > 0) are provided at Nodes C and D. At Node C, these contractual support take the form of inter-firm contractual safeguards. Should, however, costly breakdowns continue in the face of best bilateral efforts to craft safeguards at Node C, the transaction may be taken out of the market and organized under unified ownership (vertical integration) instead. Because added bureaucratic costs accrue upon taking a transaction out of the market and organizing it internally, internal organization is usefully thought of as the organization form of last resort: try markets, try hybrids, and have recourse to the firm only when all else fails. Node D, the unified firm, thus comes in only as higher degrees of asset specificity and added uncertainty pose greater needs for cooperative adaptation. p. 21
Note that the price that a supplier will bid to supply under Node C conditions will be less than the price that will be bid at Node B. That is because the added security features at Node C serve to reduce the contractual hazard, as compared with Node B, so the contractual hazard premium will be lowered. One implication is that suppliers do not need to petition buyers to provide safeguards. Because buyers will receive goods and services on better terms (lower price) when added security is provided, buyers have the incentive to offer credible commitments. p. 21
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