Monday, August 31, 2009

Dr. Yergin guzzles the kool-aid.

I have frequently been critical of Dr. Daniel Yergin. For someone who has his background and influence in the oil and gas industry, he seems not to understand the business. In the past he has denied the peak oil theory and made unsubstantiated claims that we would be flooded with an additional 16 million barrels of oil per day. 

In this Foreign Policy article and in today's Wall Street Journal,  Yergin steps into it again. Instead of getting on board and pulling some weight, he raises the issues of climate change, industry regulation, alternatives and a number of lesser irrelevant issues. Clearly Yergin has drank the kool-aid, however its the grape flavor, of which the energy has no need or interest in. 

And maybe that's the point. Instead of contributing to the conversation about energy, he lays the groundwork for another book that will sell his vision of regulation, alternatives and climate change. Who knows maybe he'll start selling the hope and change mantra as well. 

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Sunday, August 30, 2009

McKinsey Interaction Costs Part I

McKinsey are re-publishing two very pertinent documents "A Revolution in Interaction" which I'll cover in this post, and "The Next Revolution in Interactions" which I will cover in my next post. I highly recommend downloading and reading both documents from here and here. I also reviewed "The Next Revolution in Interactions" back in December 2005 on this blog.

As I recall 1997, the boom in technology related companies had begun. and other ridiculous businesses were popping up with multi-billion dollar valuations. It seemed as if the collective intelligence of the markets had taken a vacation. McKinsey on the other hand were publishing "A Revolution in Interaction" that even today, provides a solid road map for any firm. 

Much of People, Ideas & Objects research has been around the work of Professor Richard N. Langlois' work at the University of Connecticut. His research, which has earned him the Schumpeter Prize, is on Transaction Cost Economics (TCE). As the 1997 McKinsey article says;
The structure of firms and industries at any given time is designed to minimize the total costs of transformation and interaction.
Using the Joint Operating Committee (JOC) as the key organizational construct of the oil and gas industry would not be possible without the analysis of TCE and today's Information Technologies. The Draft Specification has incorporated these elements and applied these principles to the energy industry. 
So what are Transaction costs or as McKinsey calls them, Interaction costs. And why is that important to oil and gas.
If interaction costs were negligible, an organization could in theory be atomized into a collection of individuals, geographically dispersed but connected by a communications network. In reality, however, substantial interaction costs and the human aspects of effective interaction limit the range of realistic configurations.
With the developments in Information Technology the oil and gas industry has the opportunity to reduce their transaction costs towards the negligible level. The basis of the industry is partnerships, as represented by the Joint Operating Committee. The interactions and transactions between the partnerships can be supported and facilitated in the manner described in the Draft Specification. McKinsey notes;
If providers anticipated this, wouldn't they communicate and develop and distribute products in a very different manner? What if their costs of interacting with customers [partners] also declined? Many of these circumstances may soon come to pass. When they do, falling interaction costs will trigger dramatic changes in the relationship between companies and their customers [partners]. 
Based on my experience and understanding in the energy industry. I can see how the Draft Specification could provide substantial value to the energy industry. Both from an innovation point of view, and, to define and support the movement towards the science and engineering based strategy. Critical to the success of this strategy will be the administrative cost reductions and efficiency brought about by the People, Ideas & Objects Community of Independent Service Providers (CIPS). McKinsey suggested back in 1997 the U.S. would benefit from interaction cost analysis.
For the US economy, the increase in interactive capability could translate into productivity gains worth a third of GDP.
In addition to TCE being applied to the energy industry. The knowledge that Adam Smith's concepts of division of labor and specialization provide the majority of value accretion in an economy. For the energy industry to increase its productivity will require new and more effective means of organizing itself. 
The types of trade-off described above are not made explicitly and transparently. Rather, they have become hardwired with time into the assumptions made in designing organizations and setting strategies - assumptions about customer behavior, distribution economics, manufacturing scale, in-sourcing versus outsourcing, and a range of other variables. In each case, relative interaction cost is a key component of the assumption. This variable is about to undergo radical change. We believe that the interactive capacity of modern economies will at least double, and could increase as much as five-fold, over the next five to ten years.
Clearly these concepts strike at the heart of the strategy of the oil and gas producer. I see producers quickly adopting new strategies based on these concepts. People, Ideas & Objects believes the energy producer is best focused on it's land lease & facilities, and the internal capabilities associated with engineering and earth sciences. With this light weight and nimble structure, small teams of people are able to form, explore, develop and sell for hundreds of millions and even billions of dollars in as little as five years. Only to turn around and do it again and again. These types of producers have no need for the systems and procedures, staff or compliance requirements of the industry in decades prior. These administrative and compliance requirements provide no value to the producer, and are impediments to speed and innovativeness. Using the People, Ideas & Objects application with the CIPS adds these necessary requirements on an as needed basis.
The impact of the new economics on forms of organization will be equally profound. Organizations will adopt a variety of structures that would not have been possible to manage when interaction costs were significant. Our research shows that half or more of a company's spending on labor may be devoted to basic interaction activities, many of them internal to the organization. As the costs of search, coordination, and monitoring fall, we can expect a radical shift in the way corporations are organized. The flatter organizations of the 1990s, for example, are an early reflection of the growing ability to manage distant front-line activity through interaction technologies.
Finally in McKinsey's closing paragraph we see what possibilities await the innovative oil and gas producer.
As in all major economic shifts, the successful innovators will be those that develop the best understanding of the underlying change and act upon it. Success in the next five to ten years will require a deep understanding of the power of interactive capacity in both your own industry and the economy at large.
Recall this was written in 1997. Has the industry made these changes? To a certain extent the new producers that are being developed by teams are showing the way. And these will be the producers that would benefit from the use of the People, Ideas & Objects and the Community of Independent Service Providers that support the innovative oil and gas producer. Please, join us here.

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Monday, August 24, 2009

An interesting view on oil and gas.

The Times Online have raised some interesting points as to the state of the oil & gas industry. In an article entitled "Timid oil giants hand back their cash". They suggest the majors as represented by BP and Shell, but also Exxon, Chevron, Total and Conoco Phillips are failing. Having the inability to maintain their production and reserves in the face of record capital expenditures. The lack of growth leaves the stocks as stagnant dividend and share buy back opportunities as investments. The article notes one unidentified comment as;
The scale of the payouts led one analyst to accuse energy bosses of a “complete failure of ambition”.
I can't agree more. Another interesting point of view is raised. One that shows the difficulty of the business from a political point of view. In the recent Iraqi lease sales the majority of the leases were left with no bidders. The only winning bids were by Chinese firms and BP. The rest of the producers felt that the terms were too steep for the majors to make any money. This is a continuation of what has been happening for many years. 
The national oil companies, backed by governments with the goal of grabbing as much of a dwindling resource as they can, are ratcheting up the pressure. In many cases they are willing to pay far more than publicly quoted rivals that have to explain the merits of such deals to their investors. Paul Wheeler, an oil banker at Jefferies Broadview, said: “National oil companies and the oil giants have the same objective, which is to secure new reserves, but they labour under very different conditions.”
This article also documents the major producing firms decline in known reserves from 85% in the 1970's to today's 15%. This decline in reserves has been despite the phenomenal increase in technical capabilities.
For investors such as pension funds, the only reason to hold the shares is the generous dividend payments. Without the dividend they are an unappealing proposition: low-growth companies that have no control over the price of their only product.
Ouch that hurts. I have held similar criticisms on this blog. Why would someone buy an oil and gas producer if the stock is only going to follow the commodity price. Why risk the investment on the management of the company, and just buy the commodity on an exchange?

I have considered the difficulty that a producer has in shutting in marginal production. The mechanism to shut-in production lies with the participating producers of the Joint Operating Committee (JOC). In most JOC instances the producers meet for too infrequently to make these decisions in a timely fashion. And this is one of the many reasons that the industry has to begin using the JOC as the key organizational construct of the industry. The operational decision making authority and framework resides with the JOC on a global basis. The conflict resides with the operators internal policies that employ compromise strategies and ignore the best interests of each individual property. I have included within the Draft Specification ways and means for the producers and JOC's to operate in a fashion that is consistent with the unique strategy and operational focus of each property.

There's a much larger opportunity that is being missed in this article. Since the 1970's the industry has had substantial declines in the sphere of influence of its business. We have also seen the decline of communism and the upswing in what we used to call the developing world. We seem to be globalized to a large extent, globalized except for the mindset of the management of the producers discussed in this article. 

The revenue model of this software development project considers this new reality. Both the producers and the energy producing provinces, states and nations have an interest in ensuring their investments are appropriately managed. With producers and nations financially supporting this community in an arms length, open and transparent manner. Please join us in building the systems the world needs to provide for a strong oil and gas industry.

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Sunday, August 23, 2009

MIT Video - Energy Secretary Steven Chu

I have expressed my disappointment about MIT's focus on energy in this blog before. Accusing MIT of having the right goals and objectives, but taking too many wild bunny trails down the path of alternative energy. When MIT suggests our energy issues requires an equivalent effort as to what was required to win WWII. That objective resonates with me, we have much work to do. Alternatives have proven more costly, more destructive of the landscape and of limited scale to replace the heavy lifting of the oil and gas industry.  

This MIT video of the U.S. Energy Secretary Steven Chu shows the destructive ways of the U.S. towards the oil and gas industry. A Nobel Prize winner, Chu is an academic. He has the budget and power to have a dramatic effect on the energy landscape and has indeed drank the alternatives kool-aid. Thankfully Chu is having difficulty getting many of his initiatives funded. 

This video is disconcerting as the "leadership" of Secretary Chu is heralded by MIT president Susan Hockfield. What appears to me as a rambling and incoherent discussion of his life and work, which was rewarded with the Nobel Prize. I don't see anything of value to be gained by reviewing this video. But there is much to learn of how off-base the current U.S. administration has become on the energy topic. As I have said before it is not a coincidence that the U.S. is the largest consumer of oil & gas and the largest economy. If we take an excursion down the alternative energy bunny trails I hope MIT and Secretary Chu understand that the great power the U.S. is, and will be, put in serious jeopardy. 

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Wednesday, August 19, 2009

McKinsey conversation with John Chambers

McKinsey have posted a conversation with one of our favorite technology presenters, Cisco Chairman and CEO John Chambers. I have highlighted his talks three times before. (Here, here and particularly here, where he coins the phrase "Content will find you".) I find his presentation skills to be second only to Steve Jobs and is unquestionably the best presenter of business related technology today.

In the first video segment Chambers talks about how he is unleashing the most aggressive set of initiatives he has launched as CEO of the firm. Counting the number of initiatives he launched in the previous 4 recessions at one or two. Chambers states "we're gong to be the most aggressive we've ever been in our history." And is launching 30 initiatives in this downturn. His experience shows that recessions last longer and are deeper then most people expect. Nonetheless he believes his biggest mistakes are as a result of not moving quick enough. 

Chambers warns that moving too quickly is a danger if you don't have the structure and discipline necessary to deal with the speed and change. As we recall the dot com meltdown was particularly difficult for companies in technology. Cisco was one of three companies with market capitalization well within the $400 billion mark. (GE and Microsoft were the other two.) The initiatives he undertook in that recession enabled the new structure and discipline to form, and with today's new collaborative technologies he feels he has the speed and capacity to take on those thirty new initiatives. 

Cisco is just one company. The need or demand for the changes Chambers implemented may have been presented to Cisco in the dot com meltdown. Today I believe the oil and gas industry has similar calls and demands for the entire industry to take action. Yet to date the oil and gas producers have collectively done nothing to change the underlying approach to the business. Do we believe that doing more is the answer to our energy problems? Last years performance should have provided the evidence that more is no longer adequate. Spending record levels of capital, to drop production by 5 - 6% is not positive for the managements. Did they consider doing nothing as an alternative? That may have been the wiser choice. 

Back to the video, Chambers documents how his use of technology has affected the way that he does his job. Blogging, and particularly video blogging is the major form of communication he uses for all of the 56,000+ Cisco employees. The new collaborative technologies are a key enabling technology for Chambers to get his ideas out. But there's more. I have written about Cisco's Telepresence on this blog before. Chambers says Cisco's internal use of Telepresence has cut its annual travel costs from $750 million to $350 million. 

In the third, fourth and fifth installments of this video presentation. It seems as though Chambers has bought into the kool-aid that Silicon Valley has been brewing. It may seem that way to a lot of listeners but I think it is very important to note that his experience with the dot com meltdown was personal and extensive. The use of alternative business models and organizations augmented with the current collaborative technologies are what are providing Cisco with the ability to innovate and move at speed. So much of a firms future competitiveness is capabilities based. The oil and gas industry has a capacity that is below what the market demand for energy is. Oil and gas companies have no plan and no idea what to do. I think it is imperative that people listen to the experiences of Cisco in making their organization perform at these levels. If after thinking about it you still believe it is Silicon Valley kool-aid induced thinking, then I would advise you to consider who Cisco's top competitors are, and what they think of the Cisco juggernaut. (Nortel Networks is selling off major parts while in bankruptcy. And Alcatel / Lucent lost 5.2 billion in 2008.)

Key to capabilities based competition is the enhanced role that leadership takes in the revised business model, organizational structure and technology. Clearly the leadership at Cisco, as represented in its CEO and Chairman have the means to prosper in this new environment. He makes it clear that collaboration requires much more from its leaders. Chambers states the following.
The classic question is, "Well if I'm going to lead, I've got to have people reporting to me, and I've got to control budget" and the answer is 'No', and "No".         
Budgetary power and authority are out. Command and control are the impediments. Clearly he expects the efforts and actions of his firm today will show in the performance criteria in three to five years time. And expects that the earnings and performance of Cisco are baked in the cake as a result of the actions the firm took three to five years ago. We must step off this earnings and performance focused cannibalization of our companies. As Chambers says "you've already won or already lost". 

Lastly, Chambers refocuses on the customer. Selling a vision and communicating it through the multiple channels of Telepresence, Web 2.0 and collaborative tools. This is what I have chosen to do with People, Ideas & Objects. Some may think that is hypocritical of me to suggest the customer is of importance. I have gone to great lengths to criticize the current oil and gas companies. And that is because I do not consider these current oil and gas companies as our customers. It is the Users of the People, Ideas & Objects application that are the customer for this software development project. Our Users in turn have the oil and gas producer as their customer. Please join us here.

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Monday, August 17, 2009

Fate is in our own hands.

That is the conclusion from the National Journal. They conducted a poll of American attitudes towards the future state of the economy. As the Wall Street Journal states;
Seven in ten Americans say that “when the U.S. economy recovers, the way the economy looks and works will be very different from what it was before the recession,” according to a new poll. Baby-boomers, in particular, see it that way, pollster Ed Reilly said.
We also need to understand the budget and control of the oil and gas industry is in the hands of the bureaucracy. The bureaucracy has effectively removed me from pursuing this software development project in an effective way. I have had no support for these ideas over the past six years. Working from outside the industry, while the bureaucracy lined their pockets, I have been able to complete this work and began the process of making the changes in "the way the economy looks and works" for the energy industry.

It is critical to remember the bureaucracy will not give up there control of the industry without a fight. At times I find it frustrating that I wrote the Preliminary Research Report in May 2004. over five years ago and they have denied me at every inch. Those that participate in this development need to know that their identity will not be visible to the public. Based on the past behavior it is reasonable to assume that the bureaucracy will treat any and all participants in the same manner that they have for the past six years. The Wall Street Journal notes;
The poll also found significant skepticism towards government and business, a reflection, perhaps, of the anti-establishment attitude spurred by the recession and financial crisis.
The pollsters asked Americans what they think is the best way to increase their own opportunity — their efforts, the government’s efforts, or companies’ efforts. Some 40% said their own efforts were the most important.
The poll, the second in a series, found American see “More promise. But also more peril,” Ron Brownstein, political director of Atlantic Media, a sponsor of the poll said. “Americans believe they are living in an economy of greater volatility that generally offers them more opportunity — but also leaves them exposed to greater risk, with few dependable allies from government or business to help them cope with it. On a turbulent sea, many Americans see themselves swimming alone.”
Fate is in our own hands. The opportunity is substantial. The risks to everyone are serious. Pleases join us here.
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Sunday, August 16, 2009

The past quarter's performance.

The conflicting information and contradictions present in the energy business show how difficult the industry has become. Prices have at least halved since last year, record levels of capital expenditures in 2008 have produced substantial 5 - 6% declines in production. Inventories are bursting with oil and many Super Tanker are idled with full loads of product. Yet here in Calgary we are met with significant shortages of gas. Companies such as Chevron have ceased to drill for any Natural Gas on the entire North American continent. With this technical, political and recessionary environment; is it any surprise that earnings have been challenged? Or that production and reserves continue to decline? What's a producer to do, they can't perform in the short or long term. I would ask if the past organizational methods, the bureaucracy, are appropriate for the current and future needs of the industry? 

The Times Online have prepared a summary of the most recent quarterly performance of oil and gas firms. Stating that lay-offs of 5,000 to 10,000 people will be cut in each of the International Oil Companies (IOC). Discussion in the article turns to how the industry may solve these problems. 
Anthony Lobo, head of oil and gas at KPMG, said that in the short term small mergers of, say, £20 billion, and joint ventures with national oil companies (NOCs) are more likely than huge mergers. “The deals of £40 billion or more seen in the last decade are unlikely to happen because one international oil company [IOC] buying another arguably compounds the problem,” he said.
Joint Ventures which are managed through the Joint Operating Committee and are the global and natural means of conducting oil and gas operations. The problem we face today is the development of Information Technology has focused on the technical capabilities and not on the business of the oil and gas business. The JOC is the legal, financial, communication, cultural and operational decision making framework of the global oil and gas industry. Using these "Joint Ventures" provides the industry with the ability to hit the ground running and deal with the unique attributes of the specific JOCs they are members of. Applying the JOC's unique strategic, financial and technical resources too the National Oil Companies reserves.

The difficulty is we have to develop the systems and organizations to define and support this natural and global manner of business operations. That is what we are attempting to do here at People, Ideas & Objects. Importantly, the author of the article takes the Joint Venture concept further.
“The magic formula is the combination of cash and reserves. The IOCs have cash and access to debt but the NOCs hold the keys to many of the reserves. As NOCs are not up for sale, we are likely to see international oil companies proposing joint ventures.”
This is because the “easy” oil — on land and in politically friendly regions — is drying up. NOCs own 80% of the world’s reserves, leaving the industry to fight over a shrinking number of fields in hard-to-reach places. Manouchehr Takin of the Centre for Global Energy Studies said: “The IOCs need the NOCs a lot more than the NOCs need them.”
I have established the revenue model for People, Ideas & Objects to consider this potential reality. Noting the two sources of revenue of this software development project are the oil and gas producer who needs to organize their approach to exploration and production. Secondly I have noted that the governments that are in producing regions. Have a vested interest in ensuring this software development project represents their compliance and governance frameworks. To ensure the management of the property in their country, state or province are consistent with their regulations and requirements. The financial resources necessary to develop the software for each of these unique jurisdictions, must be sourced from the individual governments themselves. There are three reasons this must be done.

  1. The financial resources needed to address the unique characteristics of Joint Ventures operating in a certain jurisdiction. These compliance and governance demands may total $40 to $100 million in software development costs per region. For the software developer to raise this type of money from anyone other then the governments themselves is impossible. As evidenced by the lack of any current applications in the market space. Who would benefit from a return on these types of investments?
  2. Secondly the producers are not motivated to fund these developments. It is not in their best interests to spend substantial financial resources on developing systems for government compliance in each region they operate. In the past the question of which producers should develop these systems is answered with the response that "all of them need to." So each producer firm should pay $40 - 100 million in software development costs in order to be in compliance with each jurisdiction that they operate in. Here I begin to define the surreal nature of the expectations of the oil and gas software developer.
  3. Governments need the energy industry to be an active member of their economy. All members of that community. The article incorrectly suggests that the IOC's should be the ones that propose Joint Ventures with the NOC's. From my point of view, why would a jurisdiction like the North Sea, Texas, Saudi Arabia or Alberta limit the number of producers that are capable of operating in their jurisdiction. Limiting operations to only those producers that can develop an ERP system with the scope to manage their jurisdiction. The entrepreneurial and dynamic focus of the producers will provide the longer term value of the natural resources of the NOC's. Bringing all producers into their environment requires the ability to operate in their country. Whether that is an IOC or a geologist with an interesting idea. This type of environment can be facilitated by funding People, Ideas & Object's software development to provide this capability to operate in their country. Opening their economy to all capable producers will ensure that their resources are developed in a competitive and open business environment. 
It's important to stress that People, Ideas & Objects are an open source strategy of development. The code that makes up the system will be available to those interested parties to ensure they are operating in compliance to the guidelines and regulations of the country where the JOC resides. Access to the software code provides a transparency to both producers and governments that their operations are calculated correctly in the software they use.

If we take the scenario that is the software developers competitive business model that exists today. The various software developers are required to undertake these large investments on behalf of their producer clients. Investments in software that do not provide a competitive advantage, but clearly offer a reason for the producer not to use the software. The surreal nature of oil and gas ERP software development business is being addressed in People, Ideas & Objects business and revenue models.  Please join us here

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