Thursday, July 31, 2008

I knew this was the right path.

Were traveling down a dark and unknown path in this software development project. Much of what has to be discovered and learned is determined by feel more then any blueprint or map. I think this project is 100% on target to be successful in making the oil and gas producer execute its plan's faster and more innovatively. Today we have some proof that we are in the right place and time to achieve the success we desire.

Some research was carried out on the Service Oriented Architecture (SOA) type of software delivery model. Click on the title of this entry to be taken to the research web page. This article suggests the odds are against us with only a 20% success rate in the SOA business model. It also provides a guide as to what we are doing correctly. And I think a clear understanding of where we need to move to in order to achieve the success that we are expecting.

What are we doing right;

Failed SOA projects get too focused on the means rather than the end. The failure to focus on business goals is a problem and focusing on them is the solution. There is sometimes a failure to ask the most basic questions in building the business case for SOA. Why should we be building services? What does it mean at the end of the day?... While one of the business drivers for SOA is reducing costs and achieving return on investment (ROI), ROI for SOA remains an elusive goal and SOA project leaders frequently take a leap of faith where ROI is concerned.
People, Ideas & Objects is about identifying and supporting the industry standard Joint Operating Committee (JOC). Aligning of its financial, legal, operational decision making and cultural frameworks with the compliance and governance framework. Compliance and governance being the sole domain of the bureaucracy, the separation of operational decision making and compliance and governance is a recipe for disaster. Nonetheless, the stated objective of this software development project is to enable;

"This community, using this software in their own service business offering, will be the method and means that the oil and gas producer will conduct its most profitable commercial operations."
This is not about the technology. It is not about project management. Although this project uses these two disciplines to achieve the stated objective. This is about getting the business of the oil and gas producer in alignment with the rapidly changing earth sciences and engineering disciplines. This alignment facilitates innovation and enables the oil and gas producer to keep pace with the changes in the underlying sciences.

  1. Business and IT reorganization, usually with a new CIO coming on board
  2. Sponsorship at the C-level or by the Board of Directors
  3. Agile/iterative development methodologies put into place
  4. Projects tied to and measured by business goals, not IT drivers
  5. Well-defined funding and maintenance models that balance the needs of service providers and consumers
  6. A simplified architecture, making it easier to access and manage quality data
  7. A culture of trust between business and IT
Here we have a mixture of opportunities and problems. Item #'s 3, 4, and 6 are in place in my opinion. Item # 1, 2, 5, and 7 are hitting on the one area that has caused this project to struggle, money and trust. This may be a short term problem as the community involved in this software development continues its logarithmic growth in the U.S. I fundamentally mis-trust the companies I highlighted in my review of stock based compensation. These little piggies attempt to steal this project from me during September 2003 and April 2004 has left a bad taste in my mouth. As such I will not miss them. I however am willing to fully participate with the U.S. and British based industries and any other region that wishes to participate. We have much to do, and as you may have guessed, I have a driving passion for this project.

With that in mind I am frankly grateful for this next set of recommendations.
  • Define the business cases clearly. If you can’t, don’t do SOA
  • Empower those who need to drive the systemic change that SOA requires, typically, with the money and the authority to do something. Else, don’t bother. You need to control the money and be able to fire people if this is to work in a reasonable amount of time. Otherwise, you’re in endless meetings with people who have agendas that don’t include rebuilding the architecture for agility and reuse.
  • Think long term and strategic, not short term and tactical. It’s okay; things won’t collapse as you move from a reactive to a proactive mode. Indeed, that’s how companies win their markets.
  • Start small, but keep the momentum going. Small battles win the war, and little by little the architecture will get better if you just keep moving the ball forward
I have a fear of the issue that these points intimate. We don't need to follow any blind bunny trails and desperately need to keep the focus and tract of development in-line with the needs of the producers. However, we need the resources to build this project. If as I suggested a few weeks ago the scope of this project might be in the billion dollar range, over probably four years. The smooth application of the financial resources over the life of the project is the obligation of the collective group of project sponsors. This project needs to be managed on a basis that delivers the application with these constraints and difficulties in mind. This I will diligently work toward.

Which leads me to reiterate the value proposition of this software development project. The costs of development are allocated to the producers on a "per barrel of oil / day" basis. These costs are incurred plus a percentage of those costs for the project. The costs therefore are a small percentage of what the license costs of SAP or Oracle. Once the project is released in a commercial offering the costs of supporting and further developments will be handled on the same basis.

This article brings out another point that was assumed but never identified or communicated. The SOA model within an oil and gas company doesn't provide the value an industry focused SOA solution does. Does this mean an SOA denotes that it is an industry focused solution? I think it does and it seems this research indicates that conclusion may be valid.

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Wednesday, July 30, 2008

But can this project scale?

Many people look at a start-up such as this project and say, it'll never work, they can't scale. I look at the existing infrastructure of SAP and Oracle and say, it'll never work, too much code and too many customers. How's that for different points of view.

The constraints of organizations are quickly becoming the impediment to growth. That is by removing the constraints, growth will accelerate. Look at what has happened in the technology marketplace in the last ten years. Apple reacquainted itself with Steve Jobs and restarted the organization essentially from scratch. New designs, new processors, new operating system with 5 major upgrades, invented the iPod, iPhone and who knows what else exists in the man's mind. It's now 3 times the size of Dell.

Google has started as two PhD students with some fancy search algorithms. Ten years later they have built one of the most prolific cloud based product producers. And Microsoft continues to spawn vaporware in every product category as a means to sew Fear, Uncertainty and Doubt (FUD). The performance of the start-ups in the last ten years vs. the industry behemoths has created more value then the behemoths have lost.

Sun Microsystems have two projects Project Hydrazine and Project Caroline. There is a very informative (technical) podcast that you can listen to on Project Hydrazine here. These two projects provide People, Ideas & Objects with the ability to scale better then SAP and Oracle.

Lets look at the Draft Specification - Security & Access Control Module of the People, Ideas & Objects application. This module uses the Federated Identity products of Sun Microsystems. (I recommend you watch the four minute video with the perspective of a JOC in the forefront of your mind.) I take these tried and true applications and implement them in what I believe to be the greatest level of security and user friendliness. I do this development on Project Hydrazine and then deploy it their as well. Suddenly the users of this application have a state of the art Security & Access Control module capability. I provide the major accounting firms with the necessary access for compliance and boom, the job is done.

Well maybe not that easy, but far easier then the two ERP vendors I mentioned earlier. They have a lot invested in their code. They can't, and won't, throw that code where it belongs, even it is not up to the quality necessary for compliance. The reason they don't want to change is that it will take them the better part of this century to change the user base over to the better product. Constraints of code and customers for a software firm are the impediments of growth. I'm certainly pleased that I have neither code or customers at this point in time.

And that is the point. When I do commit to the code, it will have to be in such a fashion that I am not undertaking a huge infrastructure that needs to be built to support it. I hire Sun through Project Hydrazine to deploy the application and run it on their servers. I think they know a few things about that, and they sure are motivated to be the best.

So can this project scale? You tell me. And don't tell anyone but I feel like I'm cheating.

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Tuesday, July 29, 2008

The Draft Specification has moved.

I have moved the Draft Specification from the old wiki to two Knol pages. The Draft Specification is no longer accessible from the wiki. The first part is here and the second part is here. Knol makes it much easier to read and navigate.

Most of the text has been edited, Modules like the Security & Access Control are being rewritten and / or heavily edited so check back frequently for new information.

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In a word, Whiplash.

U.S. Energy Secretary James R. Schlesinger (1977 - 1979) once stated that energy is framed by two emotions, complacency and fear. There is an air of complacency since the oil price has fallen over $20. How distant the problems of earlier this month seem. It almost makes sense to fill the tank again.

How much of this price change is the result of the inventory builds in the U.S. is unknown at this time. Over the past two weeks we have seen exceptionally large builds as it is rumored that U.S. consumption dropped substantially. The two weeks of inventory build was preceded by an unusually large draw down of inventories the week before. I hope this is a sign of the effect of higher prices on consumer demand, but I think we may also be in for a bit of a surprise.

In Supply Chain Management there is a phenomenon known as whiplash. It is an appropriate phrase as the analogy to whiplash is appropriate. You learn the intricacies of this phenomenon by conducting a simulation of a beer supply chain. The retailer, distributor, warehouse and brewery are each represented by four individuals. The objective is to keep the appropriate amount of beer in stock to satisfy your companies needs.

Starting off the game with minimal supply in each location you begin by passing information confidentially from one area of the chain to the immediate neighbors. What happens is as the supply demands fluctuate the effect on inventory begins to switch between the two extremes. One moment you have an excess, which reduces your next order, then you are faced with a draw down of inventory and the supply never recovers. The phenomenon once it is in the supply chain is very difficult to remove. The variance in inventory at all four locations are providing absolutely useless information.

If as I suspect, whiplash has entered the U.S. inventory of energy, then we may see the resumption of demand and a significant draw down in inventory. Leading to price increases and so on...

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Monday, July 28, 2008

The End of IT As We Know it

Click on the title of this entry to view an interesting Sun Microsystems Net Talk that was produced in October 2007. It has some interesting statistics and opinions on where the Information Technologies (IT) are headed.

For instance, the number of people that Sun employs is 34,500 and over 25,000 of those are not assigned a permanent office or working environment. Many work from home or work occasionally in meeting rooms. This is how I see most industries operating and particularly the oil and gas industry. The mandatory attendance in your office from 8:00 to 5:00 will change to a more flexible schedule. The oil and gas industry operates 24 hours a day and this will be reflected in people's schedules. Another reason will be the time zone changes in the area of operations of the producer. Fuel costs on the daily commute may also become a primary reason for this change.

Java has 6 million developers. One for every thousand people in the world. Java has been the number one programming language for a number of years so this is not surprising. The ability to source the numbers of developers that are necessary for this project should, as a result, be easily accommodated.

Other comments in the presentation were around the concept of the "Enterprise computing in the open network." The costs associated for each company to build the appropriate data-center for their needs is quickly outstripping what is reasonable from a cost point of view. The reason is the demand for processing during peak loads is causing the companies to source additional processing capabilities. This is the beginning of a trend that is discussed in this video. A trend that is the reasoning behind Sun making the claim that a firm will have 100% of its processing, applications and networks provided by service providers. This is also the basic assumption in the People, Ideas & Objects application.

In oil and gas having the hardware, applications and network in-house does not provide any competitive advantage. The innovative producer has the land base and physical assets augmented by their understanding and application of earth sciences and engineering capabilities. IT is a cost that is best handled on a service basis. And as the Net Talk points out, services hosted by providers on the Internet. The presenter, Bob Worrall, Sun's CIO points out that this trend will be the end of the traditional Intranet and Data-center. The role of IT within the firm will involve aggregating the relevant services and distributing them. IT will be involved in management of the service providers.

An area that Sun is addressing at this point in time is the area of access control and security. You can watch a good summary provided by Craig MacDonald. Sun Federated Identity is a component of the first module in the People, Ideas & Objects, the Draft Security & Access Control Module. A module in which we are layering the Military Command & Control Metaphor over the Joint Operating Committee participants and those that work for them. This module provides access to the IT resources necessary for People to do their jobs. Providing the producer with access and assurance that data and information are provided to only users that are authorized. This area is a key differentiating point of all other systems providers and the key reason that I have used Sun Products exclusively in the Security & Access Control Module.

Sun suggests that billing is the issue or impediment to full deployment of this changed IT environment. It is difficult to quantify and value every transaction in a service level offering. What I think is needed is an overall service that is billed, based on the size of the producer, that covers the associated costs that are incurred by People, Ideas & Objects in providing that service. This will have to be something that is discussed when we move toward the deployment of this application.

On a related theme, Cisco has a number of videos on YouTube about their new "Tele-Presence" product. Although expensive in comparison to video chat, I think Cisco has identified a market here. When you have large numbers of people needing to sit down in a meeting on a regular basis, the services of Tele -Presence would help in facilitating that communication. Although costly from the point of view of an unproven technology, I think it may pay for itself in reducing flight and accommodation costs, and increase productivity through better communications. Have a look.

Cisco Tele-Presence

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Saturday, July 26, 2008

McKinsey Managing Capital Projects.

This is number 38 of the long list of McKinsey articles. They are clearly making the organizational implications of Information and Communication Technologies (ICT) their specialty. Nonetheless this article talks about the managing of capital projects in the oil and gas industry. In the Draft Specification there are many new and innovative ways that capital expenditures are handled. A few key points are;

  1.  Petroleum Lease Marketplace - The aggregation of the producers five year capital expenditure budget by geographical area. Such that suppliers and vendors can see where the industry is headed in terms of their needs. Providing the supplier with a window on the producers long term needs. 
  2. Accounting Voucher - The best description of this module is that we are moving away from people managing the processes of transactions. And taking the higher level work of designing transactions. Tactical Project Management is the area within the Accounting Voucher module that handles these.
  3. Compliance & Governance Module - This is where for a variety of reasons the Strategic-Project Management function is managed.

These modules work together to provide the tools for the industry. Both producers and suppliers, will work together on determining the project size, sourcing and tactical project management of the overall industry resources needed to satisfy the producers needs.

One criticism of the industry is that they overuse a handful of suppliers, and under use the rest. In essence they are holding a higher expectation of performance from their primary suppliers and the rest satisfy themselves on the bits left over. This has led the industry to the current situation where the volume of work being done exceeds the capability of the service industry. What is needed is a different approach. One in which the producers work to increase the overall capacity of the service industry. Then they will be able to effectively deal with the cost overruns and scheduling delays.

In the Draft Specification the modules mentioned provide the opportunity for the producer to plan the contract with the supplier and work with them to offset their weaknesses and build on their strengths. The majority of this transaction design is done through the Joint Operating Committee, as it is the "market" definition in this software application. In the McKinsey article this is the focus of the discussion and therefore lets begin.

Subtitled "Investments in capital projects is rising. First-rate contracting will help companies to get a leg up on their rivals." With most people consider the energy industry needs to invest up to $20 trillion in capital expenditures in order to meet the markets demand for energy. I don't think there is any doubt that the current state of capabilities of the companies is unable to approach even today's capital expenditure volume. Chronic cost overruns and project delays are symptoms of the low level of capability. Commodity prices have adjusted to make the investments profitable. Things need to change from an organizational point of view and the producers need to undertake a greater Project Management capability, and, begin working with the suppliers more closely in terms of developing their capacities and capabilities. McKinsey reflects on the issue;
Many of these undertakings are larger and more technological complex then ever. The result is heated competition for the basic materials, equipment and talent that all asset-intensive industries need to deliver multi-billion-dollar capital projects successfully. p. 1
Many asset owners are however struggling. Some companies approach every capital project as an isolated, individually tailored undertaking and fail to align the contracting efforts of individual project teams with their long term capital strategy. Others hastily lock themselves into agreements; choose inappropriate contracting models; or misjudge the risks, organizational resources, or skills that capital projects involve. Such mistakes generate missed opportunities, significant delays, and cost overruns in the hundreds of millions of dollars. p. 1
As is the case in many industries today the advanced economies have the additional problem of aging infrastructure. China and India are able to build with modern more efficient methods unconstrained by "the way it's done". The advanced economies infrastructure is rusting, as Matthew Simmons suggests, and will compete for the capital of the producer companies. Add to it the largest regulation and engineering requirements and you have a situation that's complexity is not being addressed by the producers current capabilities. In addition, McKinsey notes, that capital expenditures of all industries will increase from $54 Trillion in 2002 - 2007 to $71 Trillion in 2008 - 2013. Demand for the skills that are currently in short supply must be developed by the industry itself. Blaming the cost overruns on the service industry is the wrong approach.

Two of the biggest problems that I deal with in this project is how to break the mindset of the user and developers from what are called the motivational and cognitive paradoxes. These two paradoxes were discussed in the preliminary research report and are derived from the work of Sir AnthonyGiddens. Professor Professor Wanda Orlikowski defined them as follows;
"Based on extensive studies of user's experience with word processors, Carroll and Rosson (1988) identified two significant paradoxes; The motivational paradox arises from the production bias. That is, users lack the time to learn new applications due to the overwhelming concern for throughput. Their work is hampered by this lack of learning, and consequently productivity suffers. The cognitive paradox has its root in the assimilation bias. People tend to apply what they already know in coping with new situations, and can be bound by the irrelevant and misleading similarities between the old and new situations. This can prevent people from learning and applying new and more effective solutions." (Cox, Delisle 2003)
In other words change is not in our genes and clearly change is in the cards. I believe that systems are a big part of breaking these things down. If we use SAP we are constrained by the views of the developers who made that application for GM. If we ask the users what it is they do and in turn learn the entire scope of the industry understanding and apply that to the development process I think we have a chance of approaching the issues that McKinsey states in this article.
Heightened competition can increase the damage caused by poor decisions and, in some cases, make them more likely. p. 3
We see this phenomenon playing itself out in the tar-sands of Alberta. Too many producers attempting to do too many things all at once. The result is heightened competition, cost overruns and systemic project delays. These projects have a remaining work in progress capital budget of another $200 billion. If the industry is to achieve the level of market demand for energy it must approach this capital spending problem before the brain trust retires.

Another definition of the same problem is provided by McKinsey;
Meanwhile cultural factors -- notably many asset owners' strong focus on engineering -- shape an environment that doesn't value commercial skills highly. p. 3
This is an oil and gas business that is generally operated by the earth scientists and engineers. Commercial criteria don't necessarily get considered as McKinsey states;
At one industrial company, for instance, engineers defined the parameters for a new plant so narrowly that a critical piece of equipment could be obtained from only 2 suppliers rather than the 50 that might have been possible with a more sensible approach. p. 4
The solution that I propose to this problem is contained within the modular Draft Specification. Designing transactions to consider the elements that McKinsey raises in this article is the area where much of the research that was done in defining the Draft Specification. Professor Richard Langlois' research in understanding the component costs of transactions helps to understand where the costs of transactions occur. McKinsey addresses the same issue with a recommendation of three methods.

   1. Creating optimal delivery models for their deal.
   2. Orchestrating contract-award processes to ensure strong competition among the suppliers.
   3. Structuring supplier contracts to align the suppliers' incentives with their own. p. 5

These issues are projected to become critical in the next five to ten years as the brain trust of the industry retires. I have suggested, and defined within the Draft Specifications, that companies can no longer afford to build individual silos of capacity and capabilities within each firm. Companies need to pool their resources and talent through the cultural form of the Joint Operating Committee. Doing so will enhance the industries overall capability by reducing the duplication inherent in the development of eachsilo'd company.

With the demand for project management skills developing as noted in this article. It would seem prudent to ensure that the right approach be taken. The oil and gas industry is currently suffering with project delays and cost overruns. I would assert that they are not pursuing all the areas that need to be addressed due to shortages in these areas. It seem unreasonable in this day and age that the ability to expand the capabilities of the industry doesn't include organizational design and systems development. Join me here.

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Friday, July 25, 2008

New Institutional Economics, A Guidebook.

This may become mandatory reading for the users of this software development project. That's all that I can say after I read the table of contents of this book. (Click on the title of this entry to go to the editors website.)  I can't wait until its published. (Some time in August.)  In fact I think I will buy one for each of the users that are signed up for this development.  Just reading the chapters makes me drool. Here is the introduction from the editors website.

Institutions are today recognized as the main drivers of differences of performances among industries, nations, and regions. Thanks to Ronald Coase, Douglas North and Olivier Williamson, New Institutional Economics has been developing a comprehensive and consistent knowledge about the infrastructures required for the performance of an economy. The field is burgeoning with researches on firms’ organizational strategies, the reshaping of industries, the design of markets, alliances and networks to manage innovations, the interplay between private self-regulation and public ordering, the performances of alternative legal systems, the respective role of formal (e.g. legal) and informal (e.g. beliefs, customs) institutions, the design of political and constitutional systems, the management of reforms, development and transition policies, etc.
To carry out such a program, multi-disciplinarity stimulates cross-fertilization among political sciences, anthropology, sociology, management sciences, law, and economics. The goal of this book is to provide theoreticians, practitioners and advanced students in economics and social sciences with a guide to reconcile these many developments and better grasp the underlying methodologies. Based on contribution of recognized scholars, it draws a synthesis of the current knowledge and identifies the most relevant questions to be explored.
Kind of makes you feel we are on to something here.

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Thursday, July 24, 2008

Something's not right.

As expected Encana announced their second quarter earnings. I'm having problems reconciling what my expectations were with what is reported. These are the points that I can't resolve.

Earnings were down slightly on higher revenue from prices and some production increase. Revenue was up 37% over the first quarter. The first quarter recorded a $1 Billion hit to revenue reflecting the losses from their derivatives. If prices are up, why would the second quarter hit for derivatives be only 25% of what was recorded in the first quarter. For Encana to experience a 37% increase in revenues would require them to experience a 62% increase on the 60% of production that is not covered by the derivatives contracts. How did the company experience that?

Secondly, the amount of text that is written about the actions of derivatives trading is voluminous. Pages of notes detailing in every conceivable table the present situation. With realized and unrealized losses from derivatives trading. What is however different here is that the financial statement treatment between the first quarter and second quarter, for derivatives is changed. The first quarter has the $1 Billion hit from derivatives listed as an offset to revenue. In the second quarter that is changed with a note to the statements that the change in reporting is due to the splitting of the company in two in December 2008. A split that has not been approved by the shareholders. And a cryptic comment that the derivative losses when realized would be allocated to the appropriate operation.

I don't honestly understand the situation that I detailed here. I used an average gas price of $11.00 for the quarter. Encana experienced gas prices of $10.93. The derivative loss for each unit of gas is $2.53. Calculating that on 1.6 BCF / day for 91 days production is $368 million not including the royalty effect. For the oil derivative on 23,000 bbls / day for 91 days at $70 equals another $105 million. The royalty effect is only on gas and that would have added another $103 million for an overall total of $576 million just for the second quarter.

It was my assumption, maybe incorrectly that the mark to market required the calculation for the remainder of the derivative contract. Why would you continue to mark to market the second half of 2008 on the basis of the contract price when the market price is so much higher?

It is of course always possible that I am incorrect in my calculations. I don't have enough information to fully reconcile the effect on earnings but I will certainly keep my eye on it.

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Business users.

I recently commented in a number of posts how developers and users need to communicate more effectively during the software development process. I suggested that Users may want to have a look at some of the tools that are available today and highlighted a series of videos on "Eclipse day at Google". I also commented that the developers may want to consider their NetBeans tool set to include some tools for enhancing the communications with users.

Business rules, data models, UML and XML make for a very precise definition of the business. However, to the business user these are very abstract representations of the business and there is so much more to what they do in their jobs. I think the business user needs to understand the Java Language to the level where they are thinking of their problems in Java and then can relate them to the developer. I think the developer needs to understand that an innovative and change oriented business needs to have development work done on a constant basis.

Making a comment on Geertjan's blog reflected well the attitude of the developers and how difficult a task this may be. I feel this is a serious problem. Users and developers in a distributed development project, as big as this project is, are going to need as much help as possible. I would go as far as to say that bridging this gap may be one of the next frontiers in developer productivity.

Then along came Anne. Anne Botha has picked up the topic of how difficult the current environment is for the business user. A developer by trade Anne tried a few jobs in which she became the prototypical "business user". Her writing is very frank, interesting and comical about this subject. She is writing 10 articles about her undercover adventures and I think she is defining this problem very eloquently in her first two posts. If you want to subscribe to her writing it is a little difficult as I don't think she has her own blog, and is posting the series at DZone. Her first two articles are here and here. Very informative and good entertainment.

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Wednesday, July 23, 2008

Langlois on Dosi and Lazonick

An interesting debate has begun between Professor Giovanni Dosi and Professor Richard N. Langlois. Dosi's 1988 "Sources, Procedures and Micro-economic Effects of Innovation" was the key document I used in the preliminary research report. Professor Richard N. Langlois has taken up the majority of writing and thinking on changes in business' organizational structure which was used in defining the Draft Specification.

Professor Dosi, Alfonso Gambardella, Marco Grazzi, and Luigi Orsonigo submitted a new paper a few weeks ago entitled Capitalism and Society. I have reviewed the paper and found nothing of real interest in it. It suggests that the large organizations have not been impacted by Information Technologies. A very provocative research topic but one that I think is limited in its scope. The research is based on a review of Italian and French firms. I am certain that there is not a substantial amount that can be related to the rest of the world. Old Europe doesn't change, they have the same firms occupying the top wrung of the corporate latter for over 50 years. Nothing changes much there.

Nonetheless much of the underlying premise for Dosi et al's research was based on Professor Langlois research, and specifically his paper entitled "The Vanishing Hand". This was a document that I reviewed here. Professor Langlois writes a response to Dosi et al that helps to clarify his position in writing about the boundaries of the firm and organizational change. Here is the focus of the discussion.
The Dosi et al. paper takes issue with the Langloisian point of view. The authors adduce statistical evidence on changes in the size‐distribution of firms and industrial concentration in the advanced economies over the past few decades that contradicts the notion that there has been a significant movement toward market coordination of the advanced economies. They argue that, if anything, organizational complexity has become greater in the ICT age, requiring industrial enterprises to engage in more, not less, organizational interactions, as distinct from market interactions. Indeed, they raise the possibility that organizational complexity, and hence the challenges for the visible hand of managerial coordination, may be greater across vertically specialized firms in the New Economy than it was within the vertically integrated firms of the Old Economy. (Lazonick 2008, p. 1.) p. 1
Nonetheless this is a finding that challenges Langlois' theory and the core underlying thinking of this software development project. I have suggested, and the Draft Specification reflects, that the "market" definition is the Joint Operating Committee (JOC) which imputes the volumes of suppliers and contractors involved in the service businesses, and the producer represents the firm.

Lanlgois cites IBM as his example of how Dosi et al misinterpret him. In the 1960's IBM was able to provide the soup to nuts type of computing experience that purchasers appreciated then. The majority of components were manufactured in-house by IBM. Today the situation has changed significantly as a result of the Information and Communication Technologies (ICT). Yes there are large businesses just as there always will be. However, the methods used to develop products and build them have changed substantially.

As an example I would select Apple which considers themselves to be a software development company. Their competitive advantage is in developing software that is substantially more "user friendly" and functional then other software. When it comes to hardware, Apple has not manufactured a computer for many years. They involve themselves in the design and secure manufacturing capability from other firms that specialize in chips, hard-drives, assembly etc. The iPod and iPhone are similar in that Apple notes on the product that it is designed in California, assembled in China and uses mostly Japanese parts. Therefore Dosi et al's argument that ICT has not changed the make up of firms is incorrect. They are predominately organized around the contract, which denotes clearly that the firm uses the market to attain their competitive advantage.
Charles Sabel and his collaborators have begun looking into the nature of the relationships that characterize the New Economy (Gilson, Sabel and Scott 2008; Jenne john 2007; Sabel and Zeitlin 2004). And what they find is not common ownership or hierarchy but rather a “form of contracting [that] supports iterative collaboration between firms by interweaving explicit and implicit terms that respond to the uncertainty inherent in the innovation process” (Gilson, Sabel and Scott 2008, p. 3). The New Economy may be highly organized. But it is fundamentally contractual, in a way that large Chandlerian multi‐unit enterprises are not. These latter, properly understood, are indeed fading away in a world of extensive, capable, diversified markets.
The Draft Specification uses much of Langlois thinking in its overall architecture. The best example I can think of is the use of the producers five year Capital Expenditure budgets. These budgets are aggregated by region and displayed in a fashion that enables the "market" of suppliers, the Schlumbergers, Halliburtons and Joes' Welding to peruse and determine what the producers may need in terms of their future spending. This information in the hands of the market will then enable innovative solutions to be proposed to the producer when the contract is sent out for bidding. Bringing a new capability to the firm with a perspective that is not limited to the firms current quarter.

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Tuesday, July 22, 2008

These companies don't deserve your respect.

As you can tell they haven't earned mine. They have sat back and done nothing about the markets demand for energy. Economists frequently say that prices tell the markets many things. Today the prices are shouting many things, but these companies management can't, or chose not to here them. They have done nothing other then endow themselves with complacency, inactivity, stock options and retirement benefits. Following the money reveals that they have been richly rewarded for their inactivity.

Faced with the overwhelming facts that I have presented in this web log. And the many proposals I have made to industry on systems supporting the JOC. They have done nothing. 37 McKinsey articles, 26 Articles from Professor Richard Langlois, 45 Calls to Action, publication of a future technical vision, etc. Codifying of all this research into a draft specification of eleven modules. The only response is the comment "not at this time".

The draft specification of eleven modules that are so fundamentally different from what is available today. Fundamentally different in that it sets out a course of action in making the producer companies innovative, increases industry wide capability and addresses many of the key issues facing the industry. But that requires effort on behalf of these companies.

Led by uninspired people with uninspired goals these companies have languished to the point where they are indistinguishable. Royalties are up, another reason to do nothing. They should be preparing for moves into the Beaufort Sea, the Arctic, offshore. Increasing the internal infrastructure necessary to explore. Instead they do the easy targets, the coal bed methane and shale oil. Have they no vision, drive or ambition?

I am unable to convince them of the merits of this research and software development. It's time for the shareholders of these energy companies to show the management the door. Either that or watch their investments wither away through dilution from management, declining reserves and ultimately declining production.

Does anyone believe inaction is the right approach? Are these managements able to foresee the future is different than what I have proposed here. Are they able to provide an alternate vision of how this industry has fundamentally changed? No they haven't. This series of entries showing the extent of the abuse of stock options, should provide you with an understanding that the direction we are traveling is not going to present any new opportunities for the companies or the shareholders that own them. All the opportunities involve stock option compensation and retirement of the fat and lazy management. If you doubt this after reading this series you may have a future in oil and gas management.

And what has my competition provided? SAP has stated that they want the upstream producer to get closer to the customer. Which is the most dramatic example of how SAP does not know anything about the upstream oil and gas business. Oracle is off doing something with the application vendors they purchased and the world is not holding it breath. I wouldn't either.

Sir Anthony Giddens theory of structuration, which was a part of the preliminary research report, states that organizations, society and people need to move in lock step or there will be failure. Society and people want to move ahead, organizations are holding up the show and causing all three to fail.

They have isolated themselves from any form of criticism and pursued their personal strategy of sloth, wealth and retirement at the expense of shareholders and society at large. They appear to me to be shut-ins as opposed to productive members of society. Where is the outrage? Failure is the only way to describe it. Join me here.

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Sunday, July 20, 2008

McKinsey on Organizing for Value.

McKinsey have been able to provide a solid foundation for this software development project. This will be the 37th McKinsey article I have reviewed! (Click on the title for access to the document.) When it comes to organizational change and the impact of IT, McKinsey has invested heavily in this mega-trend and consistently gets it right. In applying this article to the oil and gas producer, strong support is given to the use of the Joint Operating Committee (JOC) as a key organizational construct of the industry.

This organizational blind spot, often combined with an excessive focus on short-term earnings, can produce unfortunate results, in our experience. Managers end up optimizing earnings goals at the expense of long-term growth and value creation. “We typically spend 80 percent of our time figuring out how to squeeze the economics, and only 20 percent on actual strategy, without numbers to back our decisions,” says one executive. Some readily admit to cutting back on value-creating projects in order to meet short-term earnings targets.
This is the systemic problem that all public companies face. Don't meet you targets for the quarter and you will be punished. Managing to these criteria becomes the focus and strategy that drives the management to perform at its best. It certainly leads many companies to focus on optimization at the expense of innovation and long term value generation. However, McKinsey are hitting on a key point with their definition of "value cells".
As a rule of thumb, value cells have standalone economics and must be relatively “homogeneous” in regard to their target market, business model, and peers—that is, they must have one target segment, one country or region, or one group of products. The trick is to create financial analyzes, such as P&L statements, as if a value cell were a stand-alone business. This is normally not done in a classic divisional structure, where each division’s financial's are an amalgam of different products, markets, and costs relating to shared assets. A useful litmus test is determining whether a value cell could be sold and whether there would be a clear market price for it.
A JOC does all the things that McKinsey define as required for a value cell. But their is more, McKinsey intimate that the value cells are somewhat separate from the divisional organization structure. Just as I have defined the boundaries of the firm and the JOC in the eleven module Draft Specification. The firm undertakes the role of establishing and attaining the financial targets, whereas the JOC develops the innovative ideas and builds value for the long term.
Value cells can easily coexist with the organizational structure of a division, which might need to take other factors into account, such as geographic proximity or economies of scale in common functions such as production plants, supply chain, or sales networks. As an overlay on an existing structure or a lens through which to view existing businesses, however, the cells facilitate strategic decision making.
An oil and gas firm may have hundreds of JOC's, this would cause the management workload to increase substantially. Not so McKinsey say;
In our experience, a company of above $10 billion market capitalization should probably be managed at the level of 20 to 50 value cells, rather than the more typical three to five divisions.
While managing so many value cells might appear to increase the CEO’s workload, the reverse is often true. Focusing more on single cells actually reduces complexity because managers find it much easier to identify and monitor the two or three operational metrics that truly drive performance, as well as to make decisions in a more straightforward way. In essence, the CEO can use value cells to take out a “disintermediation layer” between actual business decisions and the corporate planning process. Instead of aggregating strategies and economics into complex divisions and then spending lots of time understanding the overall strategy and performance, the CEO can take a larger number of more rapid, more specific, and more radical decisions at the value cell level.
This makes intuitive sense. The logic in using the JOC in the oil and gas industry is substantial. It is the financial, legal, operational decision making and cultural framework of the industry. Participants in JOC are motivated by financial rewards therefore concurrence can be easily attained. Today's Information and Communication Technologies (ICT) also enhance the expanded use of the JOC. In the Draft Specifications it is stated explicitly that the management role would increase in the redefined boundaries of the firm.
It’s worth noting that a value cells approach is meaningful only if a company has the courage to follow up on decisions to invest or divest. Managers must regularly scrutinize cells that destroy value and divest them if turnaround plans don’t materialize. They must nurture high-potential businesses aggressively and continuously. If competitors devote far more resources to a given business, for example, the real choice is exiting it or doubling down on the investment—not adapting marginally.
This however does not mean that our four little piggies can double down on their stock options. Which appears to be the only strategy in play. This next quote from McKinsey imputes the level of change that needs to be adopted within an organization. To benefit from value cells requires some major systems, organizational and people changes.

And that is what we have done in the eleven module People, Ideas & Objects Draft Specification. Our motivation is to focus on innovation within the JOC. That is what the commodity prices are telling the producers, and providing the financial resources for, to innovate. As everyone generally agrees, the easy oil is gone and an earth science and engineering based capability is the new methodology of earning value in the oil and gas industry. As science and innovation come to influence each other, the speed of change will accelerate. The firms in the industry have lost the ability to keep up with the market demand for energy. Without the systems to support any organizational changes in place, we are relegated to manual systems or utter failure.
Using value cells to emphasize value management requires some obvious implementation challenges—creating better data, exerting pressure to collaborate, adopting incentives that reflect the value created per cell. The real change of culture and mind-set requires even more: instilling business managers with the feeling that the new process gives them more freedom and more resources for good ideas.
We also live in a time where the technologies, based on the People, Ideas & Objects Technical Vision, will conspire to overwhelm the unprepared producer with information. Recall that Nobel Laureate Herbert Simon stated "a wealth of information creates a poverty of attention."
Focusing corporate and divisional decision processes on value and growth isn’t simple, particularly when the activities that create value are embedded in large divisions. Companies that adopt a finer-grained, granular approach can better identify and manage their value creating assets.
The performance of the oil and gas producers stock option compensation costs is the only thing spectacular coming from these firms. They have abused the trust of the investors and poorly prepared their firms for the changes brought about by the commodity prices. Potential retirement is liberating them from responsibility. The oil and gas industry has changed fundamentally? Someone should tell the management.

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Friday, July 18, 2008

15 TCF of Natural Gas

That was the volume of gas that Shell bought from Duvernay Oil Corp. The purpose of this entry is to provide a little more about the understanding of reserves.

Way back when the geological survey determined that Canada would potentially produce 150 TCF of natural gas. Updates to the survey show that Canada has produced a little over two thirds of what they once had.

Now Duvernay comes along and discovers 15TCF of gas? The question is, is this 10% of the 150 TCF or is it an addition to total 165 TCF. The answer is "I don't care". Reserves have taken on a distorted meaning in the Peak Oil crowd. They are meaningless in determining what the future potential of an entrepreneur can do if they truly understand the business. While the Peak Oil crowd and Cambridge Energy Research Associates were reviewing reserves, Duvernay got down to the business at hand. Getting down to the business at hand is available to everyone, everyone who is not so glazed over by the value of their stock options.

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Thursday, July 17, 2008

Nexen reports it's losing its mind.

Reading Nexen's second quarter financial results press release; leaves one with the feeling all is well "Nexen reports solid second quarter financial results". Yet Bloomberg reports a rather poor performance, and the stock is down over 10%. How's this? Bloomberg in their opening paragraph.

July 17 (Bloomberg) -- Nexen Inc., the Canadian producer that gets most of its output from oil fields, said second- quarter profit rose 3.3 percent as stock-based compensation costs blunted higher crude prices.
Makes it very clear that the management were celebrating the latest round of stock based compensation. Another $300 million for the piggies, and $380 million for the shareholders. That seems fair doesn't it? If these little piggies can't boost their profits by more then 3.3 percent at a time when oil prices are up, then they never will. All the upside from the increase in oil prices is clearly deemed as the valuation of further stock based compensation. I suggest the shareholders show them the door.

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NOC's Don't Explore.

First of all, a quick comment, price volatility is not a welcome trend. The price of oil in the world is moving up and down in a rather violent manner the last few weeks. This is a precursor to some major upswing in the price, so hang on this might get really rough.

I find it amusing that the companies are not even listed in the call to action by the former Secretaries of Defense, State, Commerce and Energy. The companies have cruised to the point where even the politicians are not expecting anything from them!

Back to the key topic of this post. One of the key complaints of the oil and gas companies is that they are being kicked out of the countries that manage their energy assets through "National Oil Companies" (NOC's). Countries such as Saudi Arabia and Venezuela. To expect an exploration mindset from either Saudi Arabia or Venezuela is wrong headed. They're only interested in the efficient and effective management of their countries energy resources. Because of this the oil and gas companies should not have any competition from NOC's. (Wasn't that in the movie "Apocaplypse Now" "NOC's don't explore"). Sitting in the corner and crying is not a proper posture for these oil and gas companies. Or do pigs squeal in the corner.

If as I had suggested in my review of the book "Profit from the Peak", these companies don't know how to explore, can't explore and are not able to organize themselves to explore. I say sure they have exploration departments; but the people there are only picking up their companies leadership position in having their retirement homes bathrooms wallpapered with stock certificates. If they are doing nothing but squealing and lining their pockets why don't we send them to the slaughter house?

Is an exploration mindset necessary? Would it provide the discovery of new oil and gas fields? You be the Judge. In Calgary, Duvernay was purchased this week by Shell for $5.9 billion. Never heard of Duvernay Oil Corp? I can assure you not many have. They started in 2001 from nothing and this is their story:

Duvernay Oil Corp. is an aggressive Alberta based oil and gas company with an aggressive activity plan for future growth. The company is engaged in exploration and development of natural gas and crude oil emphasis on the deeper, western portion of the western Canadian sedimentary basin in Alberta and Northeastern British Columbia.
Reading their annual report for 2007 will reflect that exploration is their core focus. If you download the report, look at the awesome pictures on page 2. Aggressive innovation is Duvernay's middle name. And the map on page 13. That little map contains the work of probably a few genius level geologists life-time of work.

Therefore a start-up focused on Alberta and BC can earn $1 billion per year? That's what exploration is about. I'm tired of the noise and smell of the oil and gas companies that I have highlighted as pigs. Lets get rid of them. Join me here.

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Wednesday, July 16, 2008

And this little piggy...

Up next in the shocking level of stock option compensation, is Nexen. Their 2007 based compensation was $175 million "in the money" and $465 million "in the money" stock options issued and outstanding. For a total "in the money" compensation of $640 million. The total of the four oil and gas companies is now $3.36 billion. You tell me if you think its excessive.

Company Stock-OptionsMarket Cap
Canadian Natural Resources$1.53 billion$50.6 billion
Petro-Canada$492 million$24.5 billion
Encana$698.2 million$62.8 billion
Nexen$640.0 million$19.3 billion
Total Producers$3.36 billion$157.2 billion
Apple$873 million$151.9 billion

I have stated here that these companies had the opportunity to address these problems almost five years ago. What has happened since then is an inability of these firms to make their targets in terms of production volumes. This has occurred on an almost systemic basis with each company reporting that there are material cost overruns and scheduling problems. More or less these companies can't keep up to the demand for energy. Can't keep up because they are too bureaucratic.

But there's more. Over the course of time we have seen the problem escalate in the world. That wasn't of any concern of these companies. Indeed we have seen the slackening of their pace and a deadening of their sense of urgency. Confident in their abilities to control their environment from any serious criticism of their performance. They became bold in their actions and believed they were entitled to these stock options. Stock options that became valuable from increases in earnings from higher prices. High prices that masked the declines in reserves and production. After all it was working. They are now that much closer to their retirement, a retirement that will be far more comfortable. This was their special reward for gracing the oil and gas industry with their presence. Don't do anything and be richly rewarded.

The consequence of their greed is reflected in this article from ASPO USA:

The CIA reports that there are 266 “nations, dependent areas, and other entities” on the world today. During the last few weeks at least 90 of these are reported to be having continuing serious or very serious energy shortages. The number of countries with energy problems may be much higher as the CIA also reports that 94 of the world’s nations are islands many of which are so small they are rarely heard from but are almost certain to be suffering from $140 oil.
When I proposed this idea in September 2003 and subsequently published the research results in May 2004. These two dates were not the only times I marketed to these companies. I have contacted those within the industry, and particularly the four pigs I've already mentioned, (Petro Canada, Encana, Canadian Natural Resources, and Nexen) on an annual and semi-annual basis. The last time being December 11, 2007. I always received the same response of "not at this time". Well of course not, they hadn't retired, and who wants to work hard?

Well the time has now past by any reasonable measure. And the management have proven that they are not capable of acting in any constructive way, other then for themselves. Therefore I appeal to the investor class to take action and fund these software developments. Create the necessary alternative organization for you, the investors, to able to manage your assets.

Do we have to wait until their are riots in Europe, Canada and the U.S. before someone dispatches these people to the pig sty? Is $4 gas enough? I don't think so, we have a lot of pain heading our way due to these selfish people. What more do we need to realize that the same old muddling along just isn't going to work. Join me here.

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Tuesday, July 15, 2008

Apple, my favorite tech company.

Apple is a company that has risen from the ashes in 1997 to a stellar performer and one of the top four technology companies. Only Google, IBM and Microsoft are larger in terms of market capitalization. Apple had a market cap of approximately $700 million in 1997. Today it is $153.3 billion.

Here is a firm that has taken the world by storm in one of the highest profile industries, and in ten years turned itself into a juggernaut. I'll bet their stock based compensation must be stratospheric. Not really Apple recognized $242 million in stock based compensation for 2007 and $631 million in unrecognized compensation for a total of $873 million.

So here we have what has to be the greatest story of a company rising from the ashes and building 219 times their 1997 values. Apple is 2.4 times the size of Encana (the largest oil and gas company that I have highlighted in this stock option review). Only Apple is capable of approaching the values of the stock option feeding frenzy of these producers. We know that Apple's management generated $152 billion in shareholder value to earn their stock options, what have these oil and gas companies done to deserve theirs?

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Monday, July 14, 2008

The last 2 Draft Specifications!

Draft Specification - Performance Evaluation
Draft Specification - Analytics & Statistics

Two plus nine equal's eleven. These specifications are now the communities to take and build upon. The draft specifications are in a way a codification of my vision of what could be, and the research that I have conducted on the organizationally constrained producer companies.

I can not tell you how good it feels to have completed these.

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User friendly development tools.

The other day I wrote about how the Users involved in this community could get an understanding of how the modern development tools operate. Although new and innovative development tools is a major part of the ways and means that our work is changing. I now think that the perspective that I had, community of users looking at the development tools, is putting the cart before the horse.

In many ways it is the development communities responsibility to show their tools and help the Users understand what is being done. New interfaces, applications and perspectives that are designed to help the user to communicate with the developer what it is they are thinking.

These IDE's (Integrated Development Environments) have come a long way in the past few years. You can develop code faster and better then one could imagine only a few years ago. But what is being developed? Is the limit of these IDE tools somewhat constrained to where the developer understands the problem? A developer who is able to communicate and deal with other developers who share that point of view, and hence create a consensus on what action to take.

User based developed applications, such as this People, Ideas & Objects application, are generally larger, more complicated, and technically feasible. But, unproven mostly as a result of their size. Are these tools able to support the user? A user who knows what their job consists of and is able to communicate what it is they want or need. What if the developer is unable to understand why business users are demanding some of the things that they ask. Developers understand the science and engineering of systems. However, do they stumble on some of the more advanced business concepts used in today's companies?

I left a comment on Geertjan's blog on this topic. He is involved in the community that deals with the direction of where NetBeans is heading. And is one of the people that runs the NetBeans podcast. If this community of like minded business users could meet with his community of NetBeans developers. Would the users be able to improve not only applications but tools as well?

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Sunday, July 13, 2008

Matthew Simmons calls to stop the witch hunt.

I have to credit Mr. Simmons with the fact that he is the individual that turned my thinking towards solving this problem. He is the leader of the Peak Oil theorists and his recent CNBC video reflects his sense of urgency. He states lets stop the witch hunt and get on with it.

I would tend to agree with him however, the bureaucracies that are endowing themselves in the trough today are the same people and companies that have ostracized me from the oil and gas industry. I feel fair is fair. I was certainly on topic when I wrote the following in my May 2004 report to them.

It is suggested in this research that the speed that a bureaucracy can adapt and change is inadequate for the operational demands of a future oil and gas operation. Innovation within the oil and gas industry will be required in order to keep up with the natural and increasing rate of decline in production. Where the sciences of geology and applied sciences of engineering, which cover a broad range, will need to progress substantially in the next 10 years in order to achieve the demand requirements of the North American energy consumers. p. 71
It is these same bureaucracies that now point to the accelerated depletion as the reason for their loss of production. Again this is not something that they are becoming familiar with today. If I wrote about it May 2004 I can assure you that it was common knowledge at the CEO, CFO and COO level throughout the industry.

Secondly, who does the energy consumer turn too. I say we follow the money. These companies have 100% of the revenues from oil and gas sales. It is they that could have, AND SHOULD HAVE, done something. In their attempt to steal this idea from me, after I made my September 2003 proposal to them, is evidence that this idea had legs in their minds. That is the point in time in which they should have realized their ILLEGAL ways and done something positive. Nonetheless, and irrespective of the past, if they have known about this for almost 5 years, why have they done nothing?

The fact of the matter is the companies know the investor class has no alternative but to turn to them. In this day and age doing any change in the organization requires the software to be developed first. I know they know this because I was the one that told them. In my May 2004 preliminary research report it was stated in the review of Dr. Anthony Giddens and Dr. Wanda Orlikowski.

Dr. Orlikowski’s structurational model of technology proposes two key aspects: the duality of technology and the interpretative flexibility of technology.

"The duality of technology means that technology is the product of human action and assumes structural properties: it is physically constructed in a given context and socially constructed through different meanings."
"The interpretative flexibility of technology suggests that technology is continuously constructed in social and physical ways, that there is a time space discontinuity (development is separated from use in both context and time) in traditional models, and that individual and social factors influence users working with and shaping technology."
I say let the witch hunt begin! These companies have done nothing since 2004 to earn the benefit of the doubt. They knew the problem, they tried to take this idea and manage it themselves, and they know the investor class can only turn to the management. And they have known all these things for the past 5 years.

So lets toss another log on the fire. Encana Corporation paid "in the money" stock options worth $490.7 million and has options remaining that are "in the money" by $207.5 million. Now remember, I only distributed the research proposal and preliminary report to firms with head offices in Calgary.

These three (Petro-Canada, Canadian Natural Resources and Encana) have endowed their managements with a total of $2.7 billion in stock based compensation.

Join me here, and lets cast these pigs from the trough to the mud pits.

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Saturday, July 12, 2008

More Pigs at the Trough.

Stock options again. This coming from the company Mr. Murray Edwards started, Canadian Natural Resources. Recall he was one of the most vocal about the royalty increases by the Alberta government. I posted that comment "Like a Bully in the School Yard".

Anyway this management scores on the higher end of options based compensation. I've calculated their total "in the money" stock options as $1,338 million as of the end of 2007. They also provided $193 million "in the money" for stock options tendered in 2007. For a whopping $1.53 billion in stock based compensation as at today's stock price. All for a decline in annual production of 8,200 barrel? Imagine what it could be like if they increased production. I'm still calling on the investor class to fund this software development project. In turn the investor would have an alternative organizational structure to break up this noisy feast.

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Friday, July 11, 2008

Profit from the Peak.

The end of the oil game and the greatest investment event of the century.

Profit from the Peak is a book that I've been wanting to review for a while. An interesting premise is suggested in the sub-title. From some of the blogs that I follow it sounded like it may provide for an interesting read.

A little background on myself. With over 25 years of experience in the oil and gas industry I could see this "Peak Oil" energy train wreck starting. In August 2003 I came up with an idea on how to solve it. And in September 2003 started the research into using the oil and gas industry standard JOC (Joint Operating Committee) as the key organizational construct of the innovative oil and gas producer. If we moved the compliance and governance that the hierarchy managed, with the legal, financial, operational decision making and cultural frameworks of the JOC. We would achieve an alignment in all five frameworks that would enable the science and engineering needs of the industry to be the focus, and mitigate the effects of Peak Oil.

What does this mean. As most people know oil and gas is made up of partnerships between companies. This is to reduce the risks inherent in the business, and because the aerial extent of many of the properties, multiple owners work together. Since its beginning this has been the culture of the industry. And as one can imagine their are legal documents, financial distributions and operational decisions made with the input of the producers in the JOC. What isn't done is the competition to this software development project, SAP, Oracle and Qbyte, haven't a clue what a JOC is. Their focus is on the compliance and governance and therefore only provide the producer with at best 20% of the functionality.

The other major finding that I published was the software defines and supports the organization. Noting that SAP is the bureaucracy. To change an organization, one must first change the software. If we want innovative oil and gas producers, we need to build the software first. Or be relegated to manual systems. So this is what I have written about since the publication of my research in May 2004 and the posts in this blog. But enough about me lets review this book.

The first point I want to make is based on the following quotation in the Introduction and its associated implications. And regarding this graph entitled "Worldwide Oil Production".

For the past 50 years, we have explored the entire earth intensively looking for more oil. But despite the latest technology and the most elaborate efforts, global oil discovery peaked in 1962 and has declined relentlessly ever since. Generally we are finding less and less oil each year, and for the past 25 years, we have consumed more oil than we have found. In 2006 we found about 6 billion barrels of oil, but we consumed 28 billion, and the trends continue in the direction of increasing demand and decreasing supply. pp xvi - xvii
Although Peak Oil accurately captures where I think we may be in the history of the industry. My opinion is that we have established a high water mark that may be permanent. The graph clearly shows the discoveries peaked in 1962 and have declined since that time.

My question to the authors and everyone interested in this topic. Does this graph mean all the oil was discovered by 1962? Or did the industry stop looking for more oil after 1962. Now this is not an accusation that they purposely stopped exploring. But consider the world had an abundant volume of energy. Prices were in the very low single digits, and the need to "develop" these resources became the focus. This situation was followed by the 1980's and 1990's where low oil prices were causing no end of greif to the producers. The industry more or less cannibalized itself to survive over those two decades. To say that technologies in 1965 discovered all of the oil is an assumption that the Peak Oil theorists may have incorrectly assumed. Based on my current understanding of the oil and gas industry. And the process necessary to explore for oil and gas. The industry generally doesn't have a clue on what exploration is. The generation of oil and gas workers that started in the 1980's and 1990's never experienced an exploration mindset.

The next incorrect assumption of the authors is stated on page 4 of the book.
"Matthew Simmons, the top oil investment banker in the world" p. 4
Now I have read Matthew Simmons for many years and overall he is correct in many things that he states. However he is the worlds top investment banker in the oil and gas services industries. Based on Mr. Simmons comments about the need to publish the worlds reserves data. So that it can be pointed to as the gospel truth of the Peak Oil situation, unfortunately disqualifies himself from making any comments about reserves.

I have now worked in the industry for over 30 years and have gone through the accounting, audit and systems areas extensively. I have been a CFO of small producers and I have looked at my fair share of reserves reports. I can't tell you if the reserves are the greatest thing since Ghawar, or the latest scam. Looking at reserves reports is the same at looking at art. Why would someone pay that much for those reserves, or art, reflect the beauty is in the eye of the beholder. And indeed oil lives in the minds of oilmen.

The same criticism can be leveled against Dr. Daniel Yergin. He claims he and his 220 PhD's on staff have the best global oil and gas reserve data. This prompted him to make the claim in 2005 that "the world would soon see an unprecedented increase of 16 million barrels of oil". If I were you I would dig out some of those paintings your kids made in elementary school, I think I see a market for them.

Some minor criticisms as to the accuracy of some of the claims made in the book. On page 42 of the book it is claimed that "hydrogen sulphide (sour gas)" is in injected into oil formations. H2S is one of the most toxic substances known to man. One breath of it and your dead, instantly. I'm sure the safety concerns of injecting H2S are adequate to assure that no one is doing it.

Enough criticism of this book now lets get on to many of the jewels. On page 49 "Its as though the adults of the oil industry have been forced to sit and watch as the children take control." In reference to the industry being knocked aside by the National Oil Companies (NOC's) desire for control. I can't agree more with that statement, and I'll comment on this later in the review.

On page 67 the authors suggest "Essentially, it looks as though oil majors are running a shell game here, no pun intended. The question is: When will investors figure it out?" They have hit the pile driver on the pile with this one. As I have mentioned many times the management of the producers are acting in their best interests, not the investors or societies in general, with their muddling attitude toward the energy business. One has to take a jaded look at the stock options that are being distributed in many of these companies.

The first knock your socks off comment that is made by the authors, and I have not seen anything like this analysis before, but intuitively believed it to be so. And is the underlying reason why I blame the companies for the risks we now face. Is reflected in this quote;
"A strong man, working hard all day long, can do less work than an electric motor can with 10 cents worth of electricity." and "A barrel of oil contains the equivalent of 18,000 man hours of energy." p. 72
If the fact that the physical labor equivalent of energy is now static or declining doesn't scare you, then you must be a different type of animal. It was in 1870 when mechanical leverage exceeded the labor output of man. The reason we live in such a prosperous world is the fact that we have figured out how to mechanically leverage one barrel of oil so extensively. This however does not mean that we should consume most of it by hurtling a 4,000 lb. vehicle down the highway at 60 miles / hour. I'll have more to say on this point later.

I am not a believer in the scare tactics of the Al Gore's et al. To me climate change is real when the news of the day has video reflecting strange weather occurrences we only ever heard of before. Much in the way that the world thought the Japanese economy would rule the world in the 1980's; when the majority of people saw the world through a Japanese TV. Turn off the TV and go outside, notice any change? Nonetheless, that should not preclude us from coming up with solutions. The authors ring the bell with this next set of suggestions.
"The ultimate culprit is the American consumer culture that is responsible for most consumption in the world. At the end of the day, the culture of consumption must change." p. 88
"To heavily invest U.S. tax dollars in renewable energy production in China. Why? Because the Chinese have a chance to build their burgeoning economy on renewables from the beginning." p. 92
Brilliant! Although I would suggest not just the U.S. but the western world should subsidize renewable energy production in China. Not only does it limit the production of the highest levels of CO2 (China), but provides immediate value (reduction in CO2). Changing the western worlds infrastructure is not going to happen as quickly. These two authors should win an Academy Award and a Nobel Prize each for these comments. Its this out of the box type of thinking that we need a lot more of, if there is a climate change problem.

One of the key characteristics of this book is its focus on the facts. When it comes to the renewables, I find the activities in the U.S. so focused on keeping people in their cars that they can't see or think straight. Here the authors note that the value generated by ethanol is approximately equivalent to the inputs of oil. Therefore if the U.S. stopped producing ethanol. People would be able to afford food and a bunch of bureaucrats in Washington would loose their jobs. That's it, you'd have just as much energy. The facts are clear this is a foolish and dangerous game.

I have suggested in my blog many times that the oil and gas industry is in need of a desperate transition. One in which the survival and cannibalizing of the industry in the 1980's and 1990's be replaced by an exploration mindset that hasn't existed since 1962. A move to a science based industry and away from the banking mentality that pervades the incumbent management. The reason this hasn't happened is as I suggest. An organization today that doesn't have the software systems in place to make the transition, will be reduced to manual systems. Something that I know the incumbent management readily appreciate. I have also suggested many times that the investors will need to fund this software development project to ensure that there is an alternative method for them to manage their oil and gas assets.

This transition is necessary and time is waisting. What the industry did learn in the 1980's and 1990's was how to draw down the reserves of a field much quicker then they did in the 1960's. So not only are we not exploring, we don't know how to explore, can't get organized to explore, and, the past exploitation methods are the proverbial brick wall we are about to crash into.

I therefore disregard the comments of the authors made in chapter 6 "Twilight for Fossil Fuels" and suggest that oil lives in the minds of oilmen. On page 120 they note;
Ironically, one of the causes of the receding horizons problems is the very success of the oil and gas industry. Record oil revenues being raked in by oil producing countries of the Middle East are causing a boom in building and expanding their infrastructure.
Imputing, I think correctly, that the U.S. based oil and gas industry has not been welcome in the Middle East, Russia and China. I think it was reflected clearly around the time that Halliburton moved their head office from the U.S. to the Middle East. But was this transition away from western based capabilities a mistake? I believe it was. Since then the industry has had their head stuck in tar. The tar sands I mean. Their herd mentality is noted by the authors.
"In some cases the price of oil itself is stifling oil projects. For example, at Shell's Alberta oil sands project, the cost of producing a barrel of oil, after a planned 100,000 bpd expansion, will be six times higher than the cost when the project first started." and "Depending on a host of factors, the total net energy gain for tar sands production is in the range of 5 - 10 percent." p. 121
But hell, it is seen as the thing to do.

I think the energy executive, if that's not an oxymoron, is beginning to wake up to a brighter future. I note the following from Thursday July 10th's news. The Calgary Herald on Russia's changing attitudes towards western technology. ASPO International notes BP CEO Tony Hayward stating "He said the problem was a failure of supply growth to match demand growth." "Pemex oil output fell by 10% in May." And Total pulling out of Iran due to their fireworks.

The Russians are considering tax incentives for the western based companies! Is this an admission that the western technologies are superior? Russian production certainly leaped when they were invited in, now with Shell and BP more or less financially abused by the Russians the production declines. With Mexican production in steep decline it is fair to assume that the world could benefit from more western based producers and service industries. Iran wasn't expecting to be on the losing side of their missile launches, but western technology walked on a critical investment in Iran.

I would recommend this book to any and all oil consumers where ever you may be. It provides an understanding of the industry and its difficulties. But also educates them to use energy more wisely. In a globalized world we need everything that we can think of. If Ludwig von Mises correctly noted that the industrial revolution was the solution to hunger and over population, IT needs to be the solution to today's problems. Albert Einstein said, that today's problems are not solved by today's thinking. These authors give you the facts so that new thinking can begin to address these problems. I personally think that IT and Segway's are two of the real solutions.

On the topic of alternatives the book provides excellent information about the changing economics of some alternatives. On page 137 they note;
The portion provided by solar and wind energy -- what most people think of when they think about renewable energy -- is a fraction of 1 percent of the total mix.
And bio-diesel has the potential of producing;
400 million gallons a year of bio-diesel. p. 143
Or 26,000 barrels / day. We've probably wasted more energy thinking and talking about bio-diesel then it will ever produce. There are three good alternative energy sources noted in this book. Unfortunately none of these alternatives has the ability to propel a 4,000 pound vehicle down the road at 60 miles / hour. But they are commercial, have huge potential and as the authors note, companies are making money.

Chapter 9 Endless Energy: "Here comes the sun." Starts with a quotation of Thomas Edison "I hope we don't have to wait till oil and coal run out before we tackle that." The future is solar, but the issues are daunting and much research should be put into the field.
The price of solar power has fallen to less than 4 percent of what it was in the 1970's. It is already economically competitive in states where electricity is expensive, including Hawaii, Massachusetts, and New York, and states with good solar exposure and lots of land, like California, Nevada, and Arizona. p. 156
The entire chapter provides the comprehensive review of the solar industry with some very good recommendations on how to get in on the ground floor of this industry. Making Chapter 9 a must read for everyone who lives in a house.

The same can be said about Chapter 10 "Pressure Cooker: Tapping the Earth's Heat" on geothermal energy. And Chapter 11 "Nuclear's Second Act". Nuclear, solar and geothermal energy are now commercial, clean and available to be used in areas where gas and coal are used today. An opportunity to replace the electricity produced from gas and coal and leave those commodities to support industrial mechanized labor, or the 18,000 man hours per barrel.

Chapter 12 "What's Needed: A Manhatten Project for Energy. President Bush is quoted as saying "we need an energy bill that encourages consumption." and Vice President Dick Cheney "Conservation may be a sign of personal virtue but it is not a sufficient basis for a sound, comprehensive energy policy." Then the authors note the result of big government science based programs.
While both projects were famous for unprecedented technical achievements -- the Manhattan Project cracked the secret of the atomic bomb, and the Apollo Project put a man on the moon -- we need to do more than come up with new technology to solve the problems we now face. We also need to rethink and remake our entire infrastructure, our economies, and even our culture. p. 180
A Manhattan Project will only boost the bureaucrats in Washington. This is a global problem. As a part time wanna be economist, I would suggest the market price mechanism is motivating the forces necessary to solve this problem. There was no market for the Manhattan or Apollo projects, I suggest we leave these energy problems to the market to solve.

I therefore disagree with the authors on their call for a Manhattan styled project. And fundamentally agree with the President and Vice-President. If 18,000 man hours of effort are contained in each barrel of oil, then we should encourage its use at any cost. Its a competitive advantage to those who use it most effectively, which happens to be the U.S. The alternative is to hire 18,000 people to do the work of one barrel. Therefore the President and Vice President are absolutely correct.

If we look at the numbers of the oil dollars flowing to the Middle East we will be distracted into believing that we should reduce our consumption. I suggest we start using our heads here and employ the Information Technologies and stop waisting the energy hurtling vehicles down the road at 60 miles an hour. I repeat get a Segway as a supplement to your vehicle. Use it for the short trips (24 mile range on most models) and cut your costs substantially. (Segway's cost less then $1.00 of electricity for that 24 miles). Secondly the Segway runs at 12.5 mph which is 4 mph faster then a car stuck in grid-lock. I repeat, IT and the Segway are the solutions to the problems of today.

On page 193 Carbon Taxes and Cap-and-Trade Systems are introduced by the book;
Carbon taxes are probably the simplest, most effective, and least economically damaging option, because they let the market decide what the best solutions are.
July 11, 2008 the Wall Street Journal wrote an article entitled "Kyoto's Long Goodbye" which addresses these mechanisms silly and wasteful ideas.

The irony is that Kyoto has handed them every reason not to participate. Europe knew all along that it couldn't meet its quotas, so it created an out in "offsets." A British factory, say, buys a credit to pay for basic efficiency improvements in a Chinese coal plant, like installing smokestack scrubbers. This is a tax on the Brits to make Chinese industries more competitive. Sweet deal if you can get it.

It gets worse. The offsets are routed through a U.N. bureaucracy that makes them far more valuable in Europe than the cost of the actual efficiency improvements. So far, Kyoto-world has paid more than €4.7 billion to eliminate an obscure greenhouse gas called HFC-23; the necessary incinerators cost less than €100 million. Most of the difference in such schemes goes to the foreign government, such as China's communist regime.
Lets not chase any bunny trails that lead us down this ridiculous waste of money and energy. Recall that Al Gore hasn't reduced his personal large "carbon footprint", he just offsets his abundant use of energy with these bureaucratic Cap-and-Trade Systems. Enough said?

Gasoline taxes are are also recommended as deterrents to people using too much energy.
Most observers agree that the best, and possibly the only, way to achieve a reduction in the amount of oil used in this country is through the price mechanism, particularly in transportation fuels. It seems a pinch in the pocketbook is necessary to make consumers drive less.
It is well known that the U.S. has the lowest taxes on gasoline in the western world. This is the motivation in the authors desire to raise more taxes. I would assert this is the wrong direction on two fronts. Increasing the cost of fuel will impede the productivity of the U.S. economy. Taxes at high levels, such as in Europe certainly deter driving, however, the U.S. out performs Europe by a substantial margin. This is why China chooses to subsidize the use of fuel in their economy. At 18,000 man hours per barrel, the lowest cost producer will ultimately win. That is China in the developing world and the U.S. in the western world. For example France currently has a per capita GDP that is lower then Mississippi's, the poorest state of the union.

It seems the authors are on the other side of the political fence in terms of how and where the solution to these problems will come from. Thankfully they debunk the Hydrogen fuel source as an alternative. Through their calculations they show that Hydrogen requires 5 energy inputs for each energy output. Not a smart direction to turn. What the authors don't mention is the cost of building an appropriate delivery system that can scale to what gasoline is now distributed as. Hydrogen requires stainless steel in all of its pipelines, tanks everything that it touches. And the cost of that is beyond what we are able to calculate with modern computers.

But then again, maybe the authors and I are not so far off in our expectations. On page 239 under the heading "Never Sell Short Humanity" the authors note;
And that's the true moral of the story: Every crisis -- no matter how dismal it looks -- contains the blueprints for its own solution.
And with that I highly recommend this book. For the average consumer, little is known about the complexity and difficulty in bringing the abundant and valuable energy resources to their door, and place of work. This fact-based book refutes many myths on its own and I have pointed out some of where I think they may be a little short. Given the price of the commodities today. And given the volume of words that are being consumed by the energy issues. The solutions will soon be at hand and society as a whole will be able to profit from the peak.

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