Objectives of the Financial Marketplace Module

We move now from the Petroleum Lease Marketplace module to the Financial Marketplace module for a review of its features. There are a couple of overall objectives that the Financial Marketplace module provides the innovative oil and gas producer and Joint Operating Committees. Those are the alignment of the financial interests with the legal, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee, and the compliance and governance frameworks of the hierarchy. The second objective is to make the capital structure of the innovative producer more efficient than that which is achieved under any other ERP system.

Recognizing and leveraging the Joint Operating Committee in our systems in the manner that the Preliminary Specification does is a substantial breakthrough in terms of our research. Significant value is gained by the innovative and profitable oil and gas producer by using People, Ideas & Objects Preliminary Specification and its recognition of the Joint Operating Committee. One of the keys to that value is the alignment of the seven frameworks of the Joint Operating Committee. Alignment is a key buzzword in systems integration. However, by using the Joint Operating Committee in the manner that we have in the Preliminary Specification we have achieved an alignment that is fundamental and to the core of the producer.

Within the Financial Marketplace module the alignment of the financial interest across the participants in the Joint Operating Committee is the alignment that we are seeking. To have a bank finance each of the participants working interest share, and therefore aligning the interests of that one bank with the participants of that Joint Operating Committee is the alignment that we are discussing. When banks, as they do in most instances today, take a general claim against all of the assets of the producer firm, and that occurs with each participant in the Joint Operating Committee, it is difficult to reach a consensus in terms of the banking issues for one specific property.

In terms of the second objective of the Financial Marketplace module of making the capital structure of the producer more efficient, this is provided in the following manner. There are a number of assumptions made about the way that business will be done in the future of the oil and gas industry. The Preliminary Specification makes these assumptions based on a reasonable trajectory of the manner in which “things” are progressing today. We can safely say that the level of work or activity in the production of one barrel of oil will be substantially more tomorrow then it is today. The demand for energy will be higher and the production volumes from the industry will be necessarily much higher as a result. It is also reasonable to assume that the volume of earth science and engineering resources will not materially change over this period of time. Doing more with the same resources is therefore somewhat of a given. The same could therefore be stated for the capital structure of the producer firm as well. Much more capital will need to be raised to fuel the increase in production volumes, and those volumes will require greater capital investments to be made.

It would therefore be incumbent upon us to include these assumptions in the designing and delivery of our ERP systems that we will use during this period of time. And that is what the Preliminary Specification has done. We will discuss these points more in the days to come but the two points that have to be considered are speed and control. The producer must have the ability to turn over larger volumes of capital in shorter periods of time if they want to be successful. And having speed is nothing without having the control necessary to deal with that speed. Having an ERP system that enables the producer and Joint Operating Committee with the speed and control in the capital markets are what will be necessary for the innovative and profitable oil and gas producer to deal with the marketplace in the future.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

People, Ideas & Objects and Oracle Corporation

The base of functionality of all eleven of the Preliminary Specifications modules is Oracle Corporation’s database, Fusion Middleware and Fusion Applications. We have chosen Oracle’s applications to support the Preliminary Specification as they are the leader in the Enterprise Resource Planning marketplace. Particularly from a technical point of view. Oracle’s technologies are the most advanced in terms of the database, and their Fusion product offerings are the most current in the marketplace. We have chosen a foundation in which to build the Preliminary Specification that is consistent with the needs of the innovative oil and gas producer.

When you review the Preliminary Specification there is a section within each module that discusses the products that Oracle provides. Use of the individual Oracle products is very high level and only provides a flavor of how the technology will be used. The Preliminary Specification is about the business of the oil and gas producer and Joint Operating Committee. The capabilities and constraints of the Information Technology are not to be considered during the further development of the Preliminary Specification. I have only mentioned the Oracle technologies to give the user an understanding of the direction in which People, Ideas & Objects is moving in terms of the product that the users will be working to develop.

As our marketing program is currently seeking commitments from producers and investors to fund the development of the Preliminary Specification. And the development costs associated with the Preliminary Specification are estimated at $100 million. This process may take some time and there is no urgency in making any contact with Oracle Corporation. They will have little to add to this and are more oriented to applying the technology and booking our business. What I am saying is they don’t have the patience to wait for the market to develop. And therefore its best to let them do their own thing while we do ours and we’ll contact them when we are ready with a handful of producer commitments.

Within the Petroleum Lease Marketplace module I have included some comprehensive discussion regarding the Oracle technologies. This includes the adoption of the Professional Petroleum Data Management Associations (PPDM) data model. How the service providers that we have discussed throughout the Preliminary Specification and are a key to the productivity of the innovative oil and gas industry. And these service providers are able to interact with the producers and Joint Operating Committees by also using People, Ideas & Objects systems, software and particularly our software development capabilities to meet the users needs.

I also use a scenario that is common in the industry to describe how the Preliminary Specification and Oracle Fusion Applications will provide value to the producers in the development of some properties. Touching on the various modules and features within the Preliminary Specification it provides an understanding of “how” and “what” the innovative producer and Joint Operating Committee could be using the software.

Lastly there is a detailed description of the Royalty Accounting process that will be used in the Preliminary Specification. Using service providers that are organized and specialized based on one royalty jurisdiction, a producer will rely on them to ensure that their royalties are consistent with the regulations and provide the lowest possible royalty costs of this, the highest cost item of an oil and gas producer.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

A Critique of Current Management

The key deliverable that would be the outcome of the development of the Petroleum Lease Marketplace of the Preliminary Specification. Would be the removal of management control by the current bureaucracy and replace it with the “vanishing hand” as Professor Richard Langlois describes the marketplace. The representation of the marketplace would of course be through the “Marketplace Interface” in the Petroleum Lease Marketplace and also in the Resource and Financial Marketplace modules. In this quotation, taken from Professor Richard Langlois’ book “The Dynamics of Industrial Capitalism” he reflects on this point.

In highly developed economies, moreover, a wide variety of capabilities is already available for purchase on ordinary markets, in the form of either contract inputs or finished products. When markets are thick and market-supporting institutions plentiful, even systemic change may proceed in large measure through market coordination. At the same time, it may also come to pass that the existing network of capabilities that must be creatively destroyed (at least in part) by entrepreneurial change is not in the hands of decentralized input suppliers but is in fact concentrated in existing large firms. The unavoidable flip-side of seeing firms as possessed of capabilities, and therefore as accretions of habits and routines, is that such firms are quite as susceptible to institutional inertia as is a system of decentralized economic capabilities. Economic change has in many circumstances come from small innovative firms relying on their own capabilities and those available in the market rather than from existing firms with ill-adapted internal capabilities. Chapter 5 will reconstruct the New Economy of the late 20th and early 21st centuries along exactly these lines, once again adding nuance and historical texture. If the antebellum period reflected the Invisible Hand of market coordination, and if the late 19th and early 20th centuries saw the rise of the Visible Hand of managerial coordination, then the New Economy is the era of the Vanishing Hand. p . 14

One could certainly accuse me of being anti-management. They and I have had an interesting battle since the breakthrough of using the Joint Operating Committee was the key to administrative efficiency in the innovative oil and gas producer. Our other key breakthrough, that software defines and supports the organization, and therefore to change the organization requires that we change the software first. Management have distorted this knowledge by realizing, if they never changed the software, their domain would never be challenged. Using this knowledge to seal their future. But we know many things from our review of Langlois, Coase and Chandler; specifically.

• Management have no stake in the firm. 
• If a crisis were to strike a firm, the management would resume elsewhere. 
• It is the investor and debt holders who will shoulder the costs.
• Management currently hold the reigns, and are mindful that their options may lay elsewhere. 
• Ownership, in the same fashion as the Merchants needs to start over. 
• Starting over begins with supporting People, Ideas & Objects and the Community of Independent Service Providers.
• Chandler noted that management have failed before. 
• During the great depression. 
• A time when government had to increase its involvement in the economy.
• Management may not see the more global picture, and therefore, may fail again.

The knowledge that management have in not changing the software is an extension of their monopoly on the tacit knowledge of how to get things done. They know that the tacit knowledge can be held by bureaucracies or markets and have ensured that no tacit knowledge capable markets gain a foothold to challenge their franchise. Making the entire People, Ideas & Objects idea an exercise in futility, or a call to action for the ownership class of the oil and gas industry.

Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. p. 359

Management’s assertion that vendors and suppliers are greedy and lazy is as much self serving and designed to ensure that a market doesn’t develop and compete with management. What is needed is the market supporting efforts of an innovative oil and gas industry that depends on a dynamic and effective “Marketplace Interface” in the Petroleum Lease, Resource and Financial Marketplace modules.

I think that what we have learned about capabilities is valuable and applies to the “Marketplace Interface” that we have detailed here. That “knowledge, skills and experience” are the basic ingredients of capabilities and these fit in well with the Petroleum Lease Marketplace module. If we at People, Ideas & Objects could be so bold as to assert that we include “ideas” with knowledge, skills and experience then we are starting to really build on these concepts.

The other aspect of what we have discussed is the role the oil and gas industry has in making the market supporting infrastructure. This includes standards and, as we have discussed, software like People, Ideas & Objects to support the markets and the marketplace. The choice between the marketplace and the management as to who will control the industry in the future has already been made. The Internet demands the decentralized methods of the market will rule the day. Just don’t tell the current management as they fight to hang on to their last few moments of control.

When a modular product is imbedded in a decentralized production network, benefits also appear on the supply side (Langlois and Robertson 1992). For one thing, a modular system opens the technology up to a much wider set of capabilities. Rather than being limited to the internal capabilities of even the most capable Chandlerian corporation, a modular system can benefit from the external capabilities of the entire economy. External capabilities are an important aspect of the “extent of the market,” which encompasses not only the number of possible traders but also the cumulative skill, experience, and technology available to participants in the market. Moreover, because it can generate economies of substitution (Garud and Kumaraswamy 1995) or external economies of scope (Langlois and Robertson 1995), a modular system is not limited by the weakest link in the chain of corporate capabilities but can avail itself of the best modules the wider market has to offer. Moreover, an open modular system can spur innovation, since, in allowing many more entry points for new ideas, it can create what Nelson and Winter (1977) call rapid trial-and-error learning. From the perspective of the present argument, however, the crucial supply side benefit of a modular production network is that it provides an additional mechanism of buffering. p. 70

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

The Marginal Production Threshold Interface

We have discussed the People, Ideas & Objects competitive advantages of providing the oil and gas producer with the most profitable means of oil and gas operations. One of the components of our competitive advantage is the ability for the innovative oil and gas producer to suspend marginal production until the commodity prices return to the point where their operations are profitable. In today’s post we’ll discuss the Marginal Production Threshold Interface in the Petroleum Lease Marketplace module.

Firstly, let us recall that any shut-in production does not incur any additional losses due to the fact that People, Ideas & Objects Preliminary Specification uses the decentralized production model. By using service providers for production, royalty and revenue accounting, and lease rental payments etc., the charges for these overhead costs are charged directly to the Joint Operating Committee. If there is no production for the current month then there will be no activity to account for in these overhead accounts and hence no charges to process to the Joint Operating Committee. Therefore during times of shut-in production only the costs of capital are uncovered.

The manner in which it is determined if production should be shut-in is based on the financial criteria of whether the property is contributing to the profitability of the Joint Operating Committee. In order to make that determination the accounting for that property would need to reflect that, and those reports are included in the Partnership Accounting module. Upon determination that the property was not contributing then it becomes a part of the Joint Operating Committees operational decision making framework as to whether or not to shut-in production. This is where the Marginal Production Threshold Interface comes into play.

The ability to predetermine at what point the Joint Operating Committee would suspend production is an option in the Marginal Production Threshold Interface. For instance if the property was in a loss situation for two months then at the beginning of the third month production would be suspended until pricing resumed a more normal course. This would be pre-approved by the members of the Joint Operating Committee and implemented at the beginning of the third month of losses.

The ability to collaborate and agree among the partnership falls within the functionality of the Petroleum Lease Marketplace. Having all of the Joint Operating Committees that you have an interest in located within one interface in the Petroleum Lease Marketplace will provide you with an understanding of what your production profile will be at various price scenarios. This can be provided through a “what if” scenario page within the interface. Extensions of the prices and volumes will also calculate what your pro-forma revenues will be. Determinations can also be made on the overhead and production costs and therefore what your returns from all of your operations will be.

The objective of the Marginal Production Threshold Interface is to have the pre-approved operational decision made. The Joint Operating Committee is the operational decision making framework of the innovative oil and gas producer. If the oil and gas industry were to conduct their operations in this manner then the fall in commodity prices would be very limited in both scope and time. It would be necessary to remember that any production that was taken off the market would have to remain off the market for the entire month, or alternatively the partial months production would have to carry a whole months overheads cost. If the price dropped precipitously and large portions of the industries production profile were taken off the marketplace then the natural gas storage business could make up for any shortfall in the demand. This latter situation might be a good thing in the long run as a means to eliminate the storage providers influence from the natural gas markets pricing.

If each producer within the industry was able to manage their production in this manner there would be less destruction of capital and less volatile commodity prices. The industries current method of managing prices by reducing capital spending is a very blunt instrument that leads to over and under production at the extremes. The Marginal Production Threshold Interface will enable the producers to stop producing the marginal production and save the reserves for the day when they can be produced at a profit. A little faith in markets is all that is required.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Leveraging the Capabilities of Others

In yesterday’s post we discussed how producers might form partnerships based on their earth science and engineering capabilities. Using the Revenue Per Employee Interface in the Petroleum Lease Marketplace module to find other producers of similar capabilities. In today’s post we want to discuss how the Petroleum Lease Marketplace, the Research & Capabilities and Knowledge & Learning modules work to leverage those capabilities within your Joint Operating Committees.

Recall that we have used specialization and the division of labor to deal with the shortages of geologists and engineers. For each producer to build the capabilities necessary to deal with all of the possible situations they may face within their firm was a “nice to have” that was maybe possible in the past. With each producer pursuing this strategy it creates unused and unusable surplus capacity in these needed resources. In addition, in the future, by using specialization and the division of labor the broader scope of the range of duties necessary to cover off all of the tasks will consume all of the producers financial resources. Therefore the need to specialize in specific areas will become a necessity for each producer. And therefore a reliance on these partnerships based on technical capabilities that are complementary to those that are developed internally. This is what is called the pooling concept in the Preliminary Specification.

Within the Petroleum Lease Marketplace there needs to be an interface that lists the areas where the capabilities of other producers are being leveraged. These listings need to be based on the agreed to and documented exchanges of capabilities that are part of the CO&O or other agreements that make up the Joint Operating Committee. This same report could detail the commitments that the producer firm has made in terms of its capabilities to the partners in future years. This "Capabilities & Commitments" interface would of course be organized based on the Joint Operating Committee and would give them an understanding of their contractual position in terms of their capabilities and commitments.

Within the Research & Capabilities module is the area where the producer firm documents its own capabilities. These capabilities are documented for the purposes of deployment through the Knowledge & Learning module. The process of the capabilities development proceeds through the research, testing and ultimate documentation in the Dynamic Capabilities Interface of the Research & Capabilities module. Deployment of the capabilities for its own account are possible for the producer through the Research & Capabilities module, however most deployments will be conducted through the Knowledge & Learning module.

Within the Knowledge & Learning module the perspective is from the Joint Operating Committee. Each capability is sorted based on its type, for example if it was a capability that was geological in nature and associated with shale then it would only be available to Joint Operating Committees that had that same criteria. Those capabilities that met the criteria for the Joint Operating Committee would be available for review by each member of that Joint Operating Committee. And therefore the full scope of the partnerships capabilities would be made available to the Joint Operating Committee in terms of what the available capabilities of the partnership were.

A last point to make is the manner in which to organize these disparate resources is done through the Security & Access Control’s Military Command & Control Metaphor. Which provides the partnership with a means to impose a temporary structure over the resources that are assigned to conduct any operation. These resources would include the resources from any of the members of the Joint Operating Committee and the service industry representatives. It would also include the Work Order system in which to accumulate the costs and the Job Order system in which to execute the programs that are necessary. In essence an entire command and control system is made available to these temporary organizations that is tailored to the needs and the types of work that is carried out by the innovative oil and gas producers.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Calculation of Revenue Per Employee

Traditionally the selection of your working interest partners is a result of the fact that they hold financial interests in the same regions and properties that you have an interest. This and the financial capability are the two primary reasons for the formation of the various Joint Operating Committees. But what if there was another way in which to strike a partnership in the oil and gas industry? One based on the similar earth science and engineering capabilities that you have. In an innovative oil and gas industry, a partnership founded on the basis of the capabilities of a number of producers would provide some strategic advantages.

What would be the determining factor in establishing these partnerships. Certainly everyone would want to partner with the most attractive producers, but how does the industry pair off in a meaningful way where there are various strata of partnership being formed and competitive strategies being made by producers of very similar capabilities. People, Ideas & Objects research have developed the Revenue Per Employee Interface within the Petroleum Lease Marketplace to provide that understanding.

Clearly the factor of revenue per employee would reflect many factors other than the innovativeness of the firm. However, would the comparison of revenue per employee over multiple periods be a determining factor of innovativeness? I think it would. That the increase / decrease in the factor would be as a result of an increase or decrease in price and volume, with the volume being particularly affected by the changes and innovations that occurred over the period in the firm. The one other critical determining factor is the number of employees the firm employs. Changes in the number of employees would skew the results significantly. Calculations for the industries population of producers would be one element of the Revenue Per Employee Interface.

So what have we got? We have run some elaborate calculations that “might” prove that one producer is innovative. What does that prove? That depends on what is imputed by being innovative. Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.”

Clearly Revenue Per Employee and its trajectories would impute a capability that the producer has achieved in terms of their earth science and engineering skills. Their trajectory in terms of the production volumes over time would impute the capacity to identify and resolve the issues present in the oil and gas business. Either that or its just plain old luck that makes some companies successful. Other considerations would have to be taken in the calculations such as any material acquisitions or divestitures etc., however, the factor and its trajectories would have material meaning in the selection of partners with similar earth science and engineering capabilities.

If I have not convinced you of the validity of the argument you’ll need to run some of the calculations yourself. Take a few producers that you know and determine their Revenue Per Employee by reading their annual report. What you will find is the diversity in terms of the range of Revenue Per Employee between producers. The leaders are substantially far ahead of the laggards. Having this information as detailed in the Preliminary Specification Petroleum Lease Marketplaces Revenue Per Employee Interface. Where the producers analysis would be augmented by detailed analysis of each and every Joint Operating Committee that you participated in, I think builds value for the innovative oil and gas producer.

The grouping together of like minded and technically capable producers will be a means in which to approach some of the inherent risk in the industry. Whether you're a group of industry leaders or a group of laggards, together you’ll be much stronger and more capable and will be able to grow and prosper faster and stronger in a more dynamic and innovative oil and gas industry.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Managing Data and Information in the Petroleum Lease Marketplace Module

We move now to take a quick look at the Petroleum Lease Marketplace module of the Preliminary Specification and its attributes over the next few days. The objective of this module is to replicate virtually what the physical oil and gas marketplace is. And that begins of course with Petroleum Leases.

When we are replicating the physical oil and gas marketplace, the Petroleum Lease is the source document that is the common denominator of all activity and ownership within the industry. Any physical oil and gas assets will be attached to some lease, agreement, rights or concession granting the holders the rights and privileges of ownership, lease or rental. These are the things that are contained within a marketplace. They are what are purchased and sold, bargained and traded for. They are the things that people are recruited to provide services for. Generally a marketplace is a dynamic and evolving commercially oriented hub of activity. That is what we are replicating in the Petroleum Lease Marketplace.

When we look at the types of work that are carried out in the Petroleum Lease Marketplace we see a large group of administrators working within different areas within a producer firm. Whether it be the Land or Legal department, Production or Exploration Operations staff or Accounting people; all of these groups have an interest in the information, people, assets, documents, processes and functionality contained within the Petroleum Lease Marketplace.

The types of documents that are generated within the Petroleum Lease Marketplace are somewhat self-evident. Most of them are created in collaboration with the participants of the Joint Operating Committee and include: Authority for Expenditures (AFE"s), Capital Budgeting (Firm and JOC), Construction Ownership and Operating Agreements, Mail Ballots, Daily Drilling Reports, Lease Bonus, Lease Rental, Lease Taxes, Areas of Mutual Interest are some of the forms, processes and attributes of the Petroleum Lease Marketplace Module. A more detailed specification will be the result of the user communities contribution and commitments.

Included in the data elements of the Petroleum Lease Marketplace are the working interest distributions that make up the partnership representing the Joint Operating Committee. And since the Construction, Ownership & Operating (CO&O) agreements are part of the Petroleum Lease Marketplace module. They include the production allocation for any facilities that are owned and operated by that Joint Operating Committee. This brings into play the manner in which the production allocation algorithm is managed, and this will include the Material Balance Report that we discussed earlier this year.

The issue comes down to the fact that there are two different ways in which to calculate the working interest distribution of the throughput of the product through the facilities. One is to take the literal chemical reality of the situation, the other is to take what is agreed to by the owners and operators of the facilities in the Construction, Ownership & Operation (CO&O) agreement. The two worlds could not be more different. As you can imagine the agreed to situation has to rule the day. The facts of the agreed situation are very dynamic and create variances that are unique and depend on the situation that is in play that day. What the situation is at issue with, is the owners or the producers who have production processed through that plant or facility will have either sold or purchased product or had done some transaction with their production at that facility that needs to be accounted for.

Now to handle that day-to-day activity there needs to be an ability for the plant owners to account for the transactions that are occurring within the plant based on the CO&O. Relying on the Partnership Accounting module will be part of what they will use for the handling of the plants accounting. However, because they can’t take a literal working interest distribution and they have to rely on a dynamic distribution based on the CO&O, a special algorithm will need to be built within the Petroleum Lease Marketplace to deal with the CO&O. This algorithm will capture the agreements production allocation methodology. This algorithm will be dynamic based on the gas composition, production factors and activities at the plant, but it is also not fixed. There are changes to the algorithm on a month to month basis. As new wells are brought on, new functional units are brought on, new products are sold to new purchasers etc. these need to be taken into consideration into the algorithm. It will be necessary for the user community that develops the Petroleum Lease Marketplace captures the full scope of the needs of this particular element of the oil and gas business. It has been poorly handled by the software vendors to date and there is much that can be improved upon and the Material Balance Report is a good start.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Encana's 2012 Results

We can't call them earnings, so we'll call them results. Encana announced the results of their 2012 "activities" late on Friday before the long weekend. That way most people would forget about their results and the stock would not take a big hit for such poor performance. Encana lost $2.79 billion in fiscal 2012. This should not be a surprise as they have been leaderless and rudderless for a number of years. Now that they finally punted their CEO maybe they can get someone who can run the show and get the company performing. They'll need a business model first, but then I am a little biased and have a preference for the Preliminary Specification. Clayton Woitas who's now running the show on a temporary basis would be a good choice but he doesn't seem to be interested in sticking around.

Anyway we'll be taking a running total of the earnings and losses for 2012 as they're announced. The running total for 2012 stands at a loss of $2.79 billion. Its the beginning of the season so there'll be plenty more to come.

Removing the Business Risk

In yesterday’s post we contrasted the two business models that the oil and gas investor has to choose from. The current bureaucracies muddle along business model and the Preliminary Specification from People, Ideas & Objects. It was suggested that the investor could take the assets under management by the bureaucracy and in turn manage them through the People, Ideas & Objects software. There is one problem with that in that the oil and gas business is inherently risky and the investor would be taking on the full scope of the risk associated with the business. And that would not be a good idea. Instead what we need in addition to the software is for the investor to have the software, the organization and the people needed to run the industry for the investor to reduce the risks inherent in the business. What we should seek to do is to remove the bureaucracy in the transition to the new business model. And for clarity purposes this is what we are attempting.

Since the publication of the Preliminary Research Report in May 2004 and its proposal in August of 2003, the bureaucracy has declared war on People, Ideas & Objects. Using the Joint Operating Committee puts the writing on the wall for the archaic ways in which the industry is currently run. They have done everything in their power, their budgets primarily, to ensure that what has become the Preliminary Specification does not see the light of day. The bureaucracy chose to fight instead of participate. I don’t see them changing their tune now. As for the C class executives I think they are in a difficult position. The pressures of the job are far greater now as a result of the crisis in 2008 and I get the sense that they don’t have the bandwidth to take on anything with the scope and scale of the Preliminary Specification. There is also the feeling that even if they could support the Preliminary Specification the bureaucracy would not follow them. A mutiny if you will.

So why would the investor class be successful in making the transition to the Preliminary Specification, if even the C class executives are unable to do so. Simply it comes down to the health of the industry. The profitability is not a temporary situation. It is a permanent structural problem that requires a new business model to address the issues. Continued losses over the short to mid-term, particularly when the costs of, and reserves of shale are being brought onto the market are unacceptable. The industry needs to position itself for the insatiable energy era, to be innovative and dynamic. Not an industry losing money based on a business model of muddling along. The bureaucracy can’t support their justification for these losses. They have done nothing in the face of these challenges. And will do nothing as a result of these challenges. They are leaderless and faceless. They are also the first to leave when the trouble really begins. So we should act well before then and relieve them of their duties.

Back to the original point of the inherent risk of the business being taken on by the investor. By removing the bureaucracy we have a stripped down version of today’s oil and gas producer. The C class executives, the earth science and engineering resources of the firm, some legal and support staff would be directly employed. And the remainder of the needs of the producer, the accounting, production administration, land administration etc would be obtained through service providers organized across the industry. These service providers would be able to achieve levels of service and cost metrics that would make the current bureaucracies embarrassed at their inefficiencies and ineffectiveness. This organization would not only provide the business model for the innovative oil and gas producer, but would also provide the organization that would mitigate the inherent risks that the investors would seek to use an organization for. And after all if the business model doesn’t provide the means to mitigate the risks in the business, what good would it be?

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Indirect Control of the Business Model

There is a storied history with respect to how the bureaucracy has handled their ERP systems. To say that it was poorly is giving them credit for having an overall strategy. And it would be generous to grade them as poorly based on their history. The only first tiered vendor with a presence in the marketplace is SAP. IBM and Oracle left decades ago. Second tiered vendors such as P2’s Qbyte provide large portions of the markets offerings. P2 in fact purchased the Qbyte application from IBM when they decided to leave the business.

There has been an attitude that ERP systems are a basic necessity in business and they are purchased for primarily the producers compliance and governance requirements. No one sees these purchases as a strategic competitive strategy, only something in which it is necessary to ensure that the ERP system checks off all the right boxes. Get the application installed at minimal costs and ensure we are compliant with all of the firms requirements. Check. This is the way business was done. Might I suggest there has been a change and the ERP system is front and center in terms of the way in which the firm operates. That it defines and supports the organization's business model.

The bureaucracies business model that was pursued in the past was one of a low cost producer which was consistent with how the ERP systems approach was taken. Now the business model of the producer firm must focus strictly on the competitive advantages of the firm and ensure that these are front and center in the minds of its people. To focus the resources of the firm requires the software that connects them to be built with that business model and competitive advantage in mind. And it is because the existing tier one and two software vendors offerings do not support a competitive business model for oil and gas, that they are inadequate for the innovative oil and gas producer.

I would argue that the bureaucracies have not been able to establish a business model in either their current ERP systems, or in their businesses. And certainly not one that is consistent with the needs of the innovative producer. And are therefore rudderless and adrift. Indeed as 2012 will most certainly prove to be one of the worst years in terms of profitability. And one in which there are no plans or actions to deal with the situation. Control of the industry must be taken by some group. I expect that the investors will eventually declare they have had enough of this mindless, leaderless group of zombies and take control. But how.

Simply by taking control of the business model through the development of the ERP systems necessary to support that business model. Such as People, Ideas & Objects Preliminary Specification. One in which we provide the oil and gas producer with the most profitable means of oil and gas operations. Through use of the industry standard Joint Operating Committee. Which is the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. And when we move the compliance and governance framework from the hierarchy into alignment with the seven frameworks of the Joint Operating Committee we will achieve a speed, innovation and accountability in our operations that is necessary for the 21st century.

It is through the development of the Preliminary Specification with People, Ideas & Objects that the investor can achieve the profitability in their operations that they desire. It is also the means in which they can wrestle control of the oil and gas asset from the bureaucracy. To control the business model is through the development and use of the ERP software. And the bureaucracy have neither control of their business model or participation in an ERP system that is providing them the necessary means to control their business model. If the investors were to support People, Ideas & Objects, taking control of the innovative oil and gas producers business model from the hands of the bureaucracy would be like taking candy from a baby.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

A Summary of Our Competitive Advantage

For the last number of days we have been highlighting our competitive advantage of providing the oil and gas producer with the most profitable means of oil and gas operations. I thought today would be a good day to summarize the six points.

1) Our Value Proposition

We are the lowest cost ERP systems provider in the marketplace. That is by charging for the one time costs of software development, plus an element of profit as our fee structure. Therefore the industry is only paying for the one time cost of software development.

2) Specialization and the Division of Labor

If we review the Preliminary Specification there is a defined restructuring of the industry that takes place throughout the modules. The oil and gas producer is a stripped down version of itself that has the C class executives, earth science and engineering resources, a bit of legal and minor support staff. And that’s it. The rest of the producers needs are provided by service providers. And each of these service providers are focused on one process, or one element of a process, that is organized through the toolset of specialization and the division of labor across the industry. So for example there would be a lease rental payment processor that handles all of the industries lease rental payments. Where the cost of the lease rental payment, and the billing for the lease payment processor is billed directly to the appropriate Joint Operating Committee. Not to the individual producer.

What the advantages of moving to a system or methodology such as this is the lower cost and efficiency. The costs associated with the lease payment processor would be a small percentage of what is incurred by the industry today. By focusing on the most efficient way to process lease rental payments, and only lease rental payments, the processor would become so specialized as to reduce the time and effort in administering these tasks as to be a small component of the costs today. In Adam Smith’s pin factory, his research yielded a 240 fold increase in productivity from the changes that he made in the process of making pins. Having the lease rental payment process, and most particularly the administrative and overhead processes in the industry subject to this type of analysis, complete with a software development capability as proposed by People, Ideas & Objects, similar results in productivity would be attained.

3) Capability to Remove the Marginal Production

With the costs associated with exploration and production, its no surprise that producers are reporting losses on operations. What is surprising is that producers have done nothing to mitigate the overproduction that has caused the decline in natural gas prices. The reason for this chronic overproduction is the producers have to generate the revenues to cover the overheads they incur in the “high throughput production” model they employ. This model has the overhead costs of the producer firm being incurred whether there is production or not, and as a result, it makes their operation a high cost operation, even at full production. At lower production volumes it skews their earnings and their overhead costs appear out of place.

In the Preliminary Specification the “decentralized production” model is employed. As we mentioned in the second point above, the service provider charges for their services directly to the Joint Operating Committee the costs of their service. In most cases if there is no production, there is no charge for the overhead item and neither the producer or the Joint Operating Committee is incurring any of the overhead during times of shut-in production. Therefore the only costs that are not covered during times of shut-in production are the costs of capital. The producer can therefore shut-in production that is not meeting the marginal cost and save those reserves for a later time. And keep that production off the market until the prices rise to the point where they cover the marginal cost.

If producers across the industry follow this process then prices would not have the significant declines that we have experienced in the last eighteen months. If the downswing in natural gas prices were averted by way of a ten percent reduction in production volumes, the total revenues of the industry would have been substantially higher than what they have been. Making the production that would have continued exceed the marginal cost and be profitable, and for that production that was shut-in, no loss on operations would have been incurred because there would have been no overhead or production costs.

4) Innovation for Profits

As the fourth element of our competitive advantage of providing the innovative oil and gas producer with the most profitable means of oil and gas operations. We focus on innovation as the way in which to enhance the profitable nature of the producer. Innovation for profit, particularly from the science basis of the business, is the successful perspective for the 21st century oil and gas producer. It is within the DNA of the Preliminary Specification how the processes of innovation are identified and supported that enhance the ability of the innovative oil and gas producer. From Professor Giovanni Dosi.

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

5) Lower Costs of Exploration & Development

The oil and gas industry needs a successful, dynamic and innovative service industry in order for it be successful, dynamic and innovative. Today we have producer firms accusing the service industry of being greedy and lazy due to the high costs that are being experienced. A huge gap between what is required and what exists. The Preliminary Specification works to mitigate this conflict by addressing the issue of how the producer firm deals with the generation and management of ideas in the service industry. Currently the producers ignore the rights of the ideas developers and as time has passed, the number of companies that have initiated new products, services and competition have dwindled. Leading to the situation today where the producers have a limited number of participants who have the pricing power on their side.

It is through the Preliminary Specification that the producers begin to respect, sponsor and support the ideas of the service industry. In this way the marketplace will respond with new and innovative products, services and competition. Through a variety of interfaces in the Resource Marketplace and Research & Capabilities modules the producers are able to participate and lead the creation of new and better products and services by clearly expressing their needs.

When the oil and gas industry has a successful, dynamic and innovative service industry supporting the oil and gas industry then the profitability of the oil and gas producer will be enhanced, further contrasting People, Ideas & Objects business model to the current bureaucracies.

6) Earth Science and Engineering Resources

It is through the use of innovation, specialization and the division of labor that we leverage the earth science and engineering resources of the producer firm. As with the fourth and fifth point above, investment in innovation are undertaken with the express intent to return a profit. Innovation on the sciences of oil and gas are the express purpose of the modules within the People, Ideas & Objects Preliminary Specification.

In terms of specialization and the division of labor, the producer firm must approach the issue of the limited resource base of earth science and engineering resources. People, Ideas & Objects have developed the pooling concept to eliminate the unused and unusable surplus capacity that is trapped within the silo’s of each bureaucracy. In addition we have used specialization to reorganize certain skills within these professions to service providers who can specialize on the specific skill. It is with the pooling and specialization that the demand for engineers and geologists will be more manageable in the insatiable energy era.

A quick note about software

All of these components of our competitive advantage require the software known as the Preliminary Specification to be built. As we learned in the Preliminary Research Report (2004), software defines and supports the organization. Without the software to run the industry as described above, it will not happen.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

The Earth Science and Engineering Resources

We now move on to the final component of our competitive advantage of providing the oil and gas producer with the most profitable means of oil and gas operations. Today’s focus is on the earth science and engineering resources of the producer firm and how these are more efficiently and effectively employed in comparison to what we call the standard corporate business model employed by the bureaucracy. There are many aspects of this component of our competitive advantage, however, they all generate their profitability for the producer firm through innovation, specialization and the division of labor.

In the area of innovation we look to the Research & Capabilities and Knowledge & Learning modules to highlight the processes that are managed within those modules. Focused on the documentation and deployment of capabilities within the Joint Operating Committees. It is there that the research and development of those earth science and engineering capabilities are funneled into the Joint Operating Committee for their ultimate deployment. From an innovation standpoint there is also the Work Order that enables the innovative producer to participate and sponsor working groups to research and study various earth science and engineering based projects. Designed to eliminate the bureaucracy and the inherent difficulty in managing the logistics in accounting for the ad hoc nature of these groups. The Work Order is an interface that enables the user to allocate their overhead and AFE budgets to these studies in a manner that is consistent with the nature of the opportunities.

These innovations are made with the understanding that they will develop revenues in the long run that will exceed the costs. And with the focus on capabilities, the ability to build on previous innovations and maintain a corporate focus is a key part of the process. In addition to innovation we learned a significant amount about capabilities, and that has been incorporated into the Preliminary Specification. My favorite has to be what we have done with the phrase from Harvard Professor Carliss Baldwin “Knowledge begets capabilities, and capabilities begets action.”

The specialization and division of labor of the producer firms earth science and engineering resources takes on the difficult issue of the constraint of these resources. Over the next couple of decades the demand for these resources will outstrip supply due to retirements and the inability to bring on any increase in the numbers of new recruits. There just isn’t that percentage of the population that gets geology or petroleum engineering. The need therefore to deal with the resource constraints is a problem that the industry must resolve and the Preliminary Specification has used specialization and the division of labor to do so.

One of the key difficulties is what I call the hoarding problem. Each producer is building the capabilities within their firm to deal with any contingency at any time. This hoarding of earth science and engineering resources, when taken across the industry, builds unused and unusable surplus capacity within each producer firm. With each producer firm attempting to provide all of the capabilities necessary for their producer firm, they are the master of none. The solution that is provided within the Preliminary Specification is what is called the pooling of technical resources. Each member of the Joint Operating Committee commits the technical resources, based on their capability, to the property. Any deficiency is made up from service providers or outside producers who provide the capabilities for a fee.

Which brings up the last aspect of the division of labor and that is as it applies to the bread and butter geology and engineering work. Much of this work can be turned over to service providers who are organized on the basis of providing a service to the industry. Organized around a process or skill that is common or generic and could be specialized to high level if the scope and scale could be brought into the picture. Having each producer conduct all the earth science and engineering necessary for all of their properties will seem like a business model from the dark ages in a few years. What is being proposed here in the Preliminary Specification is the only reasonable solution to the real issue of the limited resource base.

It is the earth science and engineering capabilities that form a critical part of the innovative oil and gas producers competitive advantage. The Preliminary Specification enables the firms resources to focus on the research and development of ideas, and the deployment of those ideas in the properties that are held by the firm. This is the appropriate posture for a profitable oil and gas firm, and the sixth component in how People, Ideas & Objects provides the oil and gas producer with the most profitable means of oil and gas operations.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Lower Cost of Exploration and Development.

We now come to the fifth component of our competitive advantage of providing the oil and gas producer with the most profitable means of oil and gas operation. There are certainly other aspects of our competitive advantage, I am only highlighting the major ones. Today’s component is the lower costs associated with any field work done for exploration or development. This would also include the field operations on producing properties that were covered by a workover or an AFE.

There have been many complaints from the oil and gas producers about the high costs of field operations. I have written about the accusations made by producers toward the service industry and how the situation has developed and what needs to happen in order to correct it. Everyone would agree with the need for a more productive environment to be developed between the service industry and the producers. And I have put the onus on the producers to begin the process of building the capabilities for a more dynamic and innovative service industry. This can begin by developing the Preliminary Specification and implementing the changes within it to start the ball rolling.

There are a variety of interfaces within the Resource Marketplace and Research & Capabilities modules that provide windows to the service industry representatives. These collaborative interfaces are designed to deal with the one issue that is systemic throughout the industry. That issue is the manner in which the oil and gas producers deal with the ideas of others who have developed them. They ignore them. And they use them without respect to who the rightful owners are. This is counter to their own best interests. What has happened is that those that know the time and effort necessary to develop a new idea will not take the effort because the oil and gas industry will not respect their efforts, and therefore they don’t bother developing the idea. No new ideas are coming into the service industry at a critical time when the science is becoming paramount. And to add to the problem the oil and gas producers will not hire anyone for field operations that is not of size and scope to handle the job. So all of the money is going to the larger firms in the service industry, no new competition is being developed and no new ideas to support that new competition. Is it any wonder that the producers complain about the costs associated with field operations?

In order for People, Ideas & Objects to claim that we provide the most profitable means of oil and gas operations. We need to show that the costs associated with field operations would be lower in an environment where the Preliminary Specification would exist. By having the oil and gas producers respecting the ideas of others in the service industries will be all that is required to make the changes from the current status to a dynamic and innovative service industry. There are a variety of interfaces and modules that are dedicated to the initiating, sponsoring and supporting of ideas throughout the Preliminary Specification. As I indicated, these are what are necessary for both an innovative oil and gas and service industry. When drilling a well in a shale formation can cost ten to fifteen million dollars the opportunities for innovation are strong. Today no one is motivated to do so because the producers will not respect the owner of the idea. So everyone just picks up their paycheck and carries on. Its a simple matter of you reap what you sow. Recall in yesterday’s quotation of Professor Giovanni Dosi that investments in innovation is for the purpose of profits. That reasoning applies in this instance as well in that the innovation will reduce the time, effort and costs of field operations by finding a better way.

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Innovation for Profit.

As the fourth element of our competitive advantage of providing the innovative oil and gas producer with the most profitable means of oil and gas operations. We focus on innovation as the way in which to enhance the profitable nature of the producer. Innovation for profit, particularly from the science basis of the business, is the successful perspective for the 21st century oil and gas producer. From Professor Giovanni Dosi.

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

The Preliminary Specification has been designed to capture the “what” and “how” of innovation within the software that is used by the innovative producer. Throughout the modules the principles and understanding of innovation were researched and incorporated into the software. Our research included the works of many but most particularly Professor Giovanni Dosi and his paper “The Sources, Procedures, and Microeconomic Effects of Innovation” (1988). It was there that we learned many of the fundamental aspects of what is necessary for the oil and gas producer to focus on innovation. Recall that it was in our Preliminary Research Report (2004) that we learned that innovation can be reduced to a defined and replicable process.

To highlight a few of Professor Dosi’s work, in this next quotation he notes the opportunities, the processes of innovative search, and incentives to investments in innovation.

Thus, I shall discuss the sources of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search, and the nature of the incentives driving private agents to commit themselves to innovation.

To capture all of the research within one blog post would not be possible. I am only highlighting the fact that the Preliminary Specification was designed and developed with these principles in mind. Reference to the pertinent research of Professor Dosi and other researchers is presented throughout the eleven modules of the Preliminary Specification.

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

1) Capabilities and stimuli generated with each firm and within the industry of which they complete.

2) Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.

3) Additional issues include the conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulation, tax codes, patent and trademark laws and public procurement.)

Innovating for profit as the fourth element of People, Ideas & Objects key competitive advantage of being the most profitable means of oil and gas operations. It is within the DNA of the software how the processes of innovation are identified and supported that enhance the ability of the innovative oil and gas producer. We are beginning to see the substantial nature of People, Ideas & Objects competitive offering. With our value proposition of being the lowest cost ERP system provider, using specialization and the division of labor to reorganize the administrative and overhead resources of the industry, to use the decentralized production model to remove the marginal production from the marketplace, and today’s innovation for profit. No wonder the bureaucracy is so upset with me.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Organizational Constraints

At People, Ideas & Objects we state that organizations are defined and supported by the Information Technologies that are used by that organization. This post will discuss this point further and detail the nature of the constraints that the current oil and gas producers are experiencing as a result of the poor quality Information Technology they are using.

First of all it is necessary to state that the organization is going to be enabled and constrained by the IT that it uses. That is the nature of IT in that it does limit the organization in certain ways, even though it enables it in others. This is why it is important that the industry adopt the Preliminary Specification which includes the People, Ideas & Objects software development capability to ensure that these organizational constraints are removed through further development of the software.

In the current environment of the oil and gas producer I see a number of similarities in both the Canadian and U.S. marketplaces. And that is an incapacity to deal with the same old issues that have been dealt with before. Its like we have been here before, but the same players are executing the same difficulties over and over again. These issues are the inability to effectively plan for the appropriate takeaway capacity, and the inability to scale back production during pricing difficulties. These old issues are systemic in their application because they have no systems in place to deal with them. What is the producer to do. They have nothing to change to. Change requires that the systems be built to deal with the situation first, and then the change can be implemented. We live in a time and a place where the use of Information Technology is that important to our lives. Organizations don’t change when SAP or any other system doesn’t change.

The other aspect is the ability to deal with the future issues of the industry. Such as we mentioned a few days ago of how the unconventional reserves were going to be produced. Or how the relationship with the service industry was going to develop so that the reserves could be developed in a more cost effective manner. If the industry were to rely on the current systems then the expected outcome would have to be on the basis of the fact that the current systems would return the same outcome. There can be no change in outcome from the status quo until you change the systems to reflect the changes that you want in the organizations first and foremost. Dealing with the same old routine of the day to day is the only way that the current bureaucracy can deal with it because that is the only the thing that the system is programed to do and that is the only thing in terms of software development capability that the industry has developed.

Until such time as the industry has adopted and developed the Preliminary Specification and the software development capability that People, Ideas & Objects is offering. It should expect more of the same. It is that simple. Otherwise we are in this endless programming loop without an exit.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Commodity Prices Above the Marginal Cost

We have been discussing how use of the Preliminary Specification provides the innovative oil and gas producers with the most profitable means of oil and gas operations. Last Thursday we mentioned how People, Ideas & Objects were the lowest cost ERP system provider. And on Friday we discussed how the administrative and overhead costs of the industry would be reduced through the specialization and division of labor that are defined and supported through the Preliminary Specification. Today we want to discuss the manner in which higher profits are attained through the use of the Preliminary Specification by way of ensuring oil and gas production is sold only when its marginal costs are recovered.

It's been eighteen months since natural gas prices have declined. And its not that the prices that were being realized before then were all that spectacular. With the costs associated with exploration and production, its no surprise that producers are reporting losses on operations. What is surprising is that producers have done nothing to mitigate the overproduction that has caused the decline in pricing. The reason for this chronic overproduction is the producers have to generate the revenues to cover the overheads they incur in the “high throughput production” model they employ. This model has the overhead costs of the producer firm being incurred whether there is production or not, and as a result, makes their operation a high cost operation even at full production. At lower production volumes it skews their earnings and overhead costs which appear out of place.

In the Preliminary Specification the “decentralized production” model is employed. As we mentioned on Friday the service provider charges for their services directly to the Joint Operating Committee the costs of their service. In most cases if there is no production, there is no charge for the overhead item and neither the producer or the Joint Operating Committee is incurring any of the overhead during times of shut-in production. Therefore the only costs that are not covered during times of shut-in production are the costs of capital. The producer can therefore shut-in production that is not meeting the marginal cost and save those reserves for a later time. And keep that production off the market until the prices rise to the point where they cover the marginal cost.

If producers across the industry follow this process then prices would not have the significant declines that we have experienced in the last eighteen months. If the downswing in natural gas prices were averted by way of a ten percent reduction in production volumes, the total revenues of the industry would have been substantially higher than what they have been. Making the production that would have continued exceed the marginal cost and be profitable, and for that production that was shut-in, no loss on operations would have been incurred because there would have been no overhead or production costs.

Adding the ability to shut-in production on marginal operations to the ways in which People, Ideas & Objects provides the innovative oil and gas producer with the most profitable means of operations. Is a substantial part of our competitive advantage. Shutting in production is the logical thing to do but producers refuse to do it due to the impact on their performance. The method used by People, Ideas & Objects would actually improve the profitability of the producer, retain the reserves for the future when prices rise, and reduce the costs of operation.

Whereas today’s continued unprofitable production maintains high cost operations, and adds the losses on operations to the cost of the reserves to be recovered from future operations, requiring even higher prices. Yet the bureaucracy is happy with the status quo, so there is that. Instead of doing what it needs to do, the bureaucracy will continue to do what it know’s how to do, particularly when it lacks strong leadership. But lets be honest, maybe their strategy of hoping for a cold winter will come through this year.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Making Oil and Gas Profitable.

We continue our discussion of how People, Ideas & Objects provides the most profitable means of oil and gas operations. Today’s discussion will focus on the areas of specialization and the division of labor and how these tools will be highly effective in reducing all of the costs incurred in the producer firm. Bold claims, but that’s my job.

What we do know is that today we stand on the shoulders of giants and benefit from a very sophisticated and complex specialization and division of labor. Everyone in oil and gas has attained skills from education and training, and gained experience from years of working within their chosen field to conduct very select and highly specialized work. To disrupt this in any fashion without a full understanding of the global aspects of how specialized this work has become would be a failure. At the same time, with the corporate model proving to be unsustainable, the focus will be on cutting costs. Cutting too deep could have greater implications than what were intended. The point is to move to higher level of specialization and division of labor will not be done, and can not be done without significant forethought.

Secondly we have to consider the role of software in our society. If we intend to move to a high level of specialization and division of labor. Then the software that we use, and particularly the ERP software, is going to have to define and support those changes. Therefore we are not only going to have to deliberately plan the next level of specialization and division of labor, we will need to build the systems that define and support it first, before the implementation of any changes or benefits will be seen. This is one of the defined benefits of having the software development capability which is proposed by People, Ideas & Objects.

If we review the Preliminary Specification there is a defined restructuring of the industry that takes place throughout the modules. The oil and gas producer is a stripped down version of itself that has the C class executives, earth science and engineering resources, a bit of legal and minor support staff. And that’s it. The rest of the producers needs are provided by service providers. And each of these service providers are focused on one process, or one element of a process, that is organized and specialized across the industry. So for example there would be a lease rental payment processor that handles all of the industries lease rental payments. Where the cost of the lease rental payment, and the billing for the lease payment processor is billed directly to the appropriate Joint Operating Committee. Not to the individual producer.

What are the advantages of moving to a system or methodology such as this. Cost and efficiency are the reasons. The costs associated with the lease payment processor would be a small percentage of what is incurred by the industry today. By focusing on the most efficient way to process lease rental payments, and only lease rental payments the processor would become so specialized as to reduce the time and effort in administering these tasks as to be a small component of the costs today. In Adam Smith’s pin factory, his research yielded a 240 fold increase in productivity from the changes that he made in the process of making pins. Having the lease rental payment process and other processes in the industry subject to this type of analysis, complete with a software development capability as proposed by People, Ideas & Objects, similar results in productivity could be attained.

When we consider the current corporate model attempts to provide the producers administrative needs for all that falls within their domain. And the understanding that is necessary to support those administrative tasks. The ability to build that administrative capability is costing each and every oil and gas producer their profitability. What will become to be seen as an archaic business model will be the way in which the industry is operated today. It has to because it is unsustainable. And a more effective and efficient business model based on a higher definition of specialization and division of labor will become the norm through the adoption of the Preliminary Specification. The industries survival requires it. And this assures our targeted market, the oil and gas investor that we do indeed offer the most profitable means of oil and gas operation. As without the software to define and support this higher level of specialization and division of labor, it will not happen.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Unconventional Oil and Gas Reserves

The Oil and Gas Journal reports the following unconventional reserves information.

BP’s latest energy outlook, which it released on Jan. 16 in London, said that worldwide, there are an estimated 240 billion bbl of technically recoverable tight oil resources and 200 trillion cu m (tcm) of shale gas. Asia’s resources total an estimated 50 billion bbl of tight oil and 57 tcm of shale gas, compared with North America’s 70 billion bbl of tight oil and 47 tcm of shale gas, it indicated.

That is certainly a lot of oil and gas. Add the 70 billion bbl of tight oil to the 170 billion bbl in oil sands and North America has adequate supplies to meet its needs. Conversion of the North American gas reserves brings in 1,659 tcf of gas which is mind numbing. To give some context, the amount of estimated conventional gas reserves for all of Canada was at one time around 153 tcf with cummulative production of approximately 80 tcf, leaving 73 tcf remaining. The amount of remaining U.S. gas reserves is estimated at 317.6 tcf. What these numbers show is the value of the shale revolution in meeting the demands of the energy consumer.

What is also apparent is these reserves will not be produced inexpensively. If anything the discussion around the Preliminary Specification in terms of the relationship with the service industry and the profitability of the oil and gas producer are or should be the primary concern of the industry. Approaching the development of these reserves should be the topic of discussion, but it isn’t. The way we approach the development of these reserves should be based on the new organizational and market basis as presented in the Preliminary Specification. This is the first step in developing these reserves.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Our Value Proposition

It is People, Ideas & Objects claim that we provide the most profitable means of oil and gas operations. And we do. This is through a variety of means and we’ll detail them here in the next few blog posts. The first aspect of our claim is that our Revenue Model provides the lowest cost of obtaining an ERP system in the industry. And that is by charging for the costs of software development, plus an element of profit as our fee structure. Therefore the industry is only paying for the one time costs of software development. A fundamentally more efficient value proposition than any of our competitors.

We can do this because we are not focused on the traditional software company concerns of code and customers, but are oriented to the changing business dynamics of an innovative oil & gas, and service industries. This difference determines the motivation of the software developer over the long term. In People, Ideas & Objects instance we generate revenues on the basis of the changes that industry desires. Our motivation becomes the constant improvement of the software. In the traditional software vendor’s case they are motivated by their code and customer bases. The larger their code base the more difficult it becomes to change, which coincidentally does not generate revenue. And the larger the customer base the more costly the changes that need to made to each customer. Which coincidentally these changes to the customer software do not generate any revenues. What you have is a contrast in the dynamic nature of the software itself. In terms of its cost to the industry and the motivation behind the developer.

Within our Revenue Model we have an annual fee and penalty structure for those who have not participated on a timely basis. Isn’t the penalty, when paid, a benefit to the software developer above their regular fees? No, it is not. The penalty structure is designed so that each producer pays an equal share of the total costs of all of the development. There are no free riders in this program. If a producer were to wait until the fifth year to start to participate in the user community and use the software that was built by others; then they would have to pay the fees for those past five years plus the associated penalties as well. These fees and penalties would then be used to offset the following years costs before the calculation of the next years fee assessment. So the next years fees would be proportionally less the amount of any fees and penalties that were paid by producers who decided to join the community and use the software. We call this the participation bonus.

When we aggregate the fees across the industry. The revenues for People, Ideas & Objects fall within the scope of what is necessary to undertake the kind of work that is described in the Preliminary Specification. These fees remain incidental to each producer on a comparative basis to the total costs of the software purchased from other ERP vendors. Producers / investors will be receiving an application that was developed with the full budget of the project. These costs, which will include the cloud computing infrastructure, will be a small percentage of those Information Technology costs that it replace. And as we will detail in the next few blog posts, these costs paid to People, Ideas & Objects will provide one of the elements of our claim that we provide the most profitable means of oil and gas operations.

Each year we specify the amount that each producer's share of costs will be. These will be on the basis of estimates of our understanding of what is required to maintain and develop the software to meet its competitive advantage of providing the most profitable means of oil and gas operations. So there is an inherent level of trust in the work that is done through the community, and the financial support that is provided. The research and software development necessary to make this happen can be significant and needs to be undertaken in a timely fashion. With today’s tools it can be done in a commercial fashion with remarkable speed. The real inhibition will be the communities ability to think fast enough. The producers are a critical part of the community. What can not happen is to have the funding for this development terminated as a result of a lack or fading interest by the producers. It is therefore inherent upon me to provide a compelling reason for that not to happen and that is through the fact that we provide the most profitable means of oil and gas operations.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.