Monday, September 30, 2013

Introduction to the Financial Marketplace

The financial crisis has had a tremendous effect on the capital intensive oil and gas industry. Capital structures and lower demand for the commodities have been the two issues that have caused significant management upheaval. Times appear to be improving and moving to a more normal basis of economic performance. However that will bring higher interest rates with the higher expectations of performance and no guarantee of higher commodity prices. Producers remain stuck in a business model that sees them produce at full capacity and have no capability to deal with any underlying changes in the business. The Preliminary Specification works to provide the producer and Joint Operating Committee with an innovative and profitable business model. The Financial Marketplace module provides the means in which the capital structures are managed.

The primary point that the Financial Marketplace module is making is that there are competing interests and motivations in the industry in attempting to get things done. With different strategies being deployed by different partners within a Joint Operating Committee, is it any wonder that the financing of a project can ever fall into place. What the Financial Marketplace module proposes is that instead of the property being funded by several different company bankers, each taking a working interest share claim against the firm. The Financial Marketplace module would see one bank, or one consortium of banks fund the property in its entirety on behalf of the partners represented in the property. Aligning of the bank financing to the innovative oil and gas producers and Joint Operating Committees legal, financial, operational decision making, cultural, communication, strategic, innovation, compliance and governance frameworks.

Today that may or may not be an objective or opportunity worth pursuing. However, I think that the freedom of having the attributes of the Financial Marketplace module still reside within the oil and gas market, and possibly even more as a result of the financial crisis of 2008. Why? The demand for capital will continue to be strong, and the supply will continue to be tight. What we seek to prove in this module, is that through its use we can provide the innovative and profitable oil and gas producer and the Joint Operating Committee with the ability to ensure that their capital structures are more efficient than what can be attained in any other system.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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.

$94 Billion With a B

I want to take a moment between our review of the Petroleum Lease and Financial Marketplace modules. To go through how the Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. The value of People, Ideas & Objects solution for 2012 alone was an incremental revenue stream of $94 billion. It is the solution to profitable operations of oil and gas, and particularly a solution to the unique characteristics of shale gas reservoirs. The value difference that is calculated here is a result of the ability of the producers to shut-in 15% of the marginal production, raising the prices to a point where gas begins to return a profit. A price which they claim is $6.70 / mmbtu. This is applied to the production profile of North America. This is done through the Preliminary Specifications use of the decentralized production model.

The issue with shutting in production is the associated costs of administration and accounting are fixed. The Preliminary Specifications use of the decentralized production model converts the producers fixed administrative and accounting costs to the variable administrative and accounting costs of the Joint Operating Committee. We do this by first of all making some changes to the profile of the prototypical oil and gas producer. That is the producer is configured with the c class executives, earth science and engineering resources, land and legal and some support staff. The remainder of the people are reorganized into service providers who are focused on the process and are using the entire industry as their client base. These service providers will be using specialization and the division of labor to enhance their services to their clients, the Joint Operating Committees.

When a property is unable to cover its marginal costs from the revenues from production. The associated losses can be more costly than having the property shut-in. These costs as a result of any losses have to be added to the reserves costs to be earned from the future and will require higher prices to make up for the losses that are being incurred. In today’s environment the producer has a fixed capability in terms of their administrative and accounting capabilities. And these must be maintained. The ability to cut these costs with their production profile doesn’t exist due to the unique specialized nature of the capabilities. What the Preliminary Specification will do will be to move the administrative and accounting capabilities from the producer firm and make them the administrative and accounting capabilities of the industry. Then the ability to charge for the services that are rendered by each service provider to each Joint Operating Committee can be made.

If the property is shut-in due to the marginal costs not being covered. The service providers will not have the work for that property cross their desks and their billings for that month will not include that property. Therefore no Joint Operating Committee that is shut-in will have any administrative or accounting costs charged during times of shut-in production. Leaving the property with no profit or loss situation. Saving those reserves for a time when the prices rise to a point where profitable operations can be achieved. And removing the marginal production from the marketplace so that the commodity prices can find the real market price.

With the high cost, prolific nature of the shale gas reserves this provides a business model in which to profitably produce those reserves. To continue to produce at capacity, and at a loss, is a fools game. However, one in which the bureaucracy seems content to play. Then again its not their money, and either way they still get paid.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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.

Friday, September 27, 2013

Conclusion to the Petroleum Lease Marketplace

The Petroleum Lease Marketplace is the second of three “Marketplace” modules of the Preliminary Specification. As with the Resource and Financial Marketplace modules it too employs the “Marketplace Interface” as the ultimate collaborative interface. It is within the Petroleum Lease Marketplace that the majority of the producer firm and Joint Operating Committee data and information is developed, recorded and stored. Many of the other modules will be sourcing their primary data from the Petroleum Lease Marketplace.

The innovative oil and gas producer relies on their competitive advantages of their land and asset base, and their earth science and engineering capabilities. The Petroleum Lease Marketplace is the module that provides the producer and Joint Operating Committee with the tools to build their land and asset base. The Petroleum Lease Marketplace provides the producer with the competitive advantages to compete in the 21st century.

The division of labor and specialization plays a large role in this module as well. As in the Resource Marketplace module, service providers are relied upon to provide for the management of processes like lease rental payments and other areas of land administration. These aid in the conversion of the producer firms fixed overhead costs to the Joint Operating Committees variable overhead costs. This conversion is a critical part of People, Ideas & Objects ability to provide the oil and gas producer with the most profitable means of oil and gas operations.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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 first thing we need to do is we need to pick up an important piece of technology that will work with all of the technologies in the Preliminary Specification. It's important to mention it here in the Petroleum Lease Marketplace as so many of the unique oil and gas attributes are stored within this module. The technology of course is the data model. And the data model that we are including in the Preliminary Specification is the industry standard PPDM (Professional Petroleum Data Management Association). This will provide a solid foundation for the innovative producer to base their ERP, engineering and geotechnical applications upon.

The PPDM Association defines and creates standards to help oil and gas companies manage exploration and production data. Included within the scope of their data model is the following data; general well header information, digital well log data, seismic location information, seismic data, land parcel information, reservoir field / pool information, faults and formations, geographical information, and surface grids. Although many of these data elements may seem outside of the ERP scope only seismic location information, seismic data, and faults and formations are outside. Particularly the land information, since we are in the Petroleum Lease Marketplace module, will be of significant value within an industry wide collaborative application.

The data model is currently quite large in the last upgrade PPDM suggest that just the upgrade is an addition of 500 tables. I am not a member of the association and am therefore not able to download the model and can’t tell what level of normalization the data model conforms to. Looking in the wiki however I see a number of tables with similar first names that have different second names. It would appear to me that the first name should be the table and the second name should be an attribute within that table. Therefore instead of 10 or 15 tables they would only need one table. However data models being data models it is difficult to understand them without a comprehensive look into them.

Many of the innovative oil and gas producers will already be using applications that access the PPDM data model. These would be for earth science and engineering applications primarily, and as a result we are building on the producers current infrastructure of technologies. In addition we are adding to the scope of applications that the technical staff are able to access and use their data for. Having well header information for engineering information that also references the accounting information provides real value for the engineer. I would suggest it is also something that is necessary as we get into some of the more complex accounting that we do in the Material Balance Report of the Accounting Voucher.

Data models are sophisticated architectures that reside within the Oracle database and provide a structure for the data to be stored and retrieved. The database ensures that the rules and requirements of the data are enforced so that elements of the database remain in balance. Database technology provides this value through the Oracle database and the data models that are developed. We will use the PPDM data model. Oracle will have developed their own data models for their Oracle Fusion Middleware Applications. And we will be developing our own data models for the data that is unique to the needs of the People, Ideas & Objects application modules. All of these data models will be employed by the same RDBMS (Relational Database Management System) that being the Oracle database. The size of these databases will be enormous.

Service Providers

There are many things that require transaction support in the Petroleum Lease Marketplace of the Preliminary Specification. Transactions such as lease rentals, surface rentals and bonus payments all would fall within the modules domain. In this discussion I want to look at the Oracle Fusion Applications Financial Management module to determine what services are available to assist in the processing of these transactions.

We once again should look to the service providers in terms of the expanded division of labor and specialization that has been enabled through the Preliminary Specification. The focus of the innovative oil and gas producer and Joint Operating Committees are on their land and asset base, and their earth science and engineering capabilities. The Research & Capabilities and Knowledge & Learning modules focus on the development and deployment of capabilities and the Petroleum Lease Marketplace module is focused on the land and asset base of the producer. Therefore to focus on those assets would require that the administrative minutiae of land administration, production and exploration administration and the accounting associated with land and assets be outsourced to specialized service providers. Enabling the producer to focus exclusively on building and maintaining the competitive and strategic land and asset base of their firm. A task that is the key to building value for the producer, and a task that is unlimited in terms of the amount of time and energy they could expend in pursuit of that base.

Here we have a scenario where the producer has selected the People, Ideas & Objects application modules as their ERP system. Which includes the Oracle Financials and imputes that high levels of specialization and division of labor are incorporated. Meaning that these accounting applications are primarily used by individuals who reside outside the producer firm. There will be members of the producer firm who use them as well, however, the majority will reside within the service provider firms. Thankfully we are using a cloud computing model of delivery of the systems to enable the use of these systems to be used by these other organizations. Let's assume for a moment that there are service providers for lease payments who guarantee your surface and lease rentals will be paid on time, lawyers for maintenance of agreements and one for Crown / Federal lands, to name just a few. Each of these service providers are representing many producers with a large market share of the industry. Each have highly organized and efficient processes that require specialized software systems to meet their specific needs. People, Ideas & Objects, on behalf of the producers represented in our subscription model would need to provide access to the producers data and the development of these highly automated systems.

What processes would be adequate for one producer would be fairly simple and straightforward. In terms of a highly organized process, the ability of one producer firm to have the volume of activity to justify the systems to build the highly automated systems wouldn’t exist. In a scenario where the industry is being represented by highly specialized service providers the need for highly automated systems however is necessary. And these systems have to be an integral part of the producers system in terms of their Security & Access Control. For instance the lease rental service provider would be able to access only the tables relating to the lease rental data. Without this level of access the ability of the service provider to do their job would not exist.

In terms of the Oracle Fusion Applications we will need to adopt the full suite of Financial Management modules. These include the General Ledger, Accounts Payable, Accounts Receivable, Asset Management, Payments & Collections and Cash & Expense Management. We had already adopted these in the Resource Marketplace module and therefore only have to access the specific services within those modules that we need. Such is the advantages of modularity.

If we look at the innovative oil and gas producer from the scenario of using the People, Ideas & Objects Preliminary Specification. Within the Petroleum Lease Marketplace, we noted that the focus of the producer was on building their land and asset base and having accounting, land administration and other service providers taking care of the administrative and accounting aspects of their firm. This requires the access of the People, Ideas & Objects application to be specifically developed to meet the needs of these highly specialized service providers and for them to have very limited access to the producers data. We now want to talk about the billing process and how the service provider is able to earn their service fees from the producers that are their customers.

Part of the specialization and division of labor process requires that the customer and service provider are able to come to terms on price for the service. Since the service provider is able to process larger volumes of lease rentals with a fixed number of resources, they are able to pass these savings on to the customer. This in turn makes it economical for the producer to use the service provider as the cost is lower and the service is higher than they can achieve on their own.

One thing the service provider doesn’t want to be doing is to going through reams of data to prepare a thousand invoices each month. And the producer doesn’t want to reward the service provider if the lease rentals are not paid. So it is agreed that the billing for the service will be automated based on the successful payment of any and all lease rentals on behalf of the producer. When a lease rental payment is processed by the service provider the billing for that service will be sent through the People, Ideas & Objects systems, which both the producer and the service provider are using for these purposes, creating an account payable for the producer and an account receivable for the service provider.

In many oil and gas producers you might have needed a whole department to process the accounts payable service fees from the service provider for lease rental payments because of the volume of lease rentals. However, with highly automated systems, and the billing being dependent on just a successful lease rental payments being made, and verified that there are no duplicates, we can be assured that the costs to maintain such a system are minimal. The efficiencies are gained by the producers, the service provider and society itself as the people are involved in more productive use of their time, like the producer building their land and asset base.

This is also a step further than what we discussed recently in terms of what the service provider was using the People, Ideas & Objects applications for. We had discussed that they were being used on behalf of the producer and now we are discussing that they are being used for the service providers purpose. Oracle Fusion Applications and particularly Oracle Financial Management suite are designed to be used in a cloud computing configuration. Whether the service provider would also have their own accounting system is not relevant to this discussion, what is pertinent is that the billing process for the producer remains as efficient as possible and that imputes that these processes have the Oracle Financial Management suite available to the service providers.

A Scenario

It is within the Petroleum Lease Marketplace that we find some of the data elements and characteristics that form the unique culture of the oil and gas industry. Things like the AFE and the working interest distribution, and many others, are a result of the culture of the Joint Operating Committee and these are stored and originated within the Petroleum Lease Marketplace module. The unique nature of these attributes requires that they are not dealt with by generic accounting classifications for application modules. They require specific modules like the Petroleum Lease Marketplace to be built and for that we need to drop down from the Oracle Fusion Applications to the Oracle Fusion Middleware layer.

What we should do therefore is start with the beginning of the process, a sort of asset life cycle, starting with the acquisition of a petroleum lease, the development of partners and forming of an agreement, to the raising of an AFE to drill a well or some other operation to show how the People, Ideas & Objects application is different from other ERP systems.

Capital is king, the 2008 financial crisis is still felt throughout the markets. Many producers are readily available to make a deal to farmout large blocks of land in their shale positions. You negotiate a 32,000 acre 20 well deal to participate in a promising area where the farmor has shot extensive seismic. Participation is at 100% and the farmor has input as to the drilling locations. You will earn an undivided 50% working interest upon completion of the drilling of the 20 well program. You have limited shale capabilities to take on a 20 well program and have promoted another producer to join you who has extensive capabilities in the region. They will participate at 20% to earn a 12.5% interest and provide these capabilities by agreement.

Looking at this scenario from the point of view of the producers who just happen to all be using the People, Ideas & Objects application modules. The leases that are part of the deal that are with the farmor can now be, as a result of the agreement, listed in the companies that are party to the agreement, the farmees. By way of the agreement they would have registered an encumbrance against the leases and lets assume for these purposes that happens coincidental with the agreement. Under the agreement, the costs associated with the lease rentals falls to the farmees. Therefore these leases are copied from one system to the other in a data download. The service provider that we discussed who provides the lease administration services on behalf of the farmee then uploads the lease data to the farmees system and begins the process of managing those leases as part of their administration. As soon as those leases require payment of lease rentals they will be paid, and the billing for the annual services provided by the lease administration service provider will be billed. A similar process will happen for the other farmee in terms of their lease data download however, there will be no lease rental payments made and no lease administration service fees. Those will be billed, at 20% of the total, through the joint venture billing, from the other farmee, the you in this scenario.

Within the Oracle Fusion Middleware suite of tools there are a variety of frameworks that will be used to make this happen. The frameworks that we would use as a minimum for what is discussed above would include, Business Intelligence, Business Process Management, Collaboration, Content Management, Cloud Application Foundation, Data Integration, Oracle Fusion Middleware for Applications, Service Oriented Architecture, SOA Governance, and Transaction Processing.

So one can see even when we step out from the Oracle Fusion Applications we are still able to inherit substantial capabilities in terms of infrastructure from Oracle Fusion Middleware. And that is the promise of Java, building on previous efforts. Oracle has expended great effort in developing Oracle Fusion Middleware. If fact all of Oracle Fusion Applications are derivative from it.

We pick up with the discussion regarding the scenario where you were with a firm that was farming in on a 32,000 acre parcel of land and a 20 well commitment to drill. We now want to discuss the elements of the agreement that has been formed and how the People, Ideas & Objects Preliminary Specifications Petroleum Lease Marketplace module will use the Oracle Fusion Middleware layer to provide the services to the partners of this agreement.

What has been executed between the three parties to the agreement, the farmor, the farmee (you) and a partner with the capabilities in the shale formations is a traditional farmin agreement complete with accounting and operating procedures. All of the variables that are defined in the agreement and these procedures need to populate the various areas within the Petroleum Lease Marketplace module. A point of interest is that operating decisions require 60% approval for passage which leaves you with de facto control of the operations prior to the point of earning. Once earning has been achieved however, this will be a difficult threshold to cross as it will require almost full consensus amongst the partners on all operations.

The manner in which these operational decisions are made is through the collaborative elements of the “Planning & Deployment Interface” in the Knowledge & Learning module. When a decision is required from the Joint Operating Committee participants, using the Collaboration Framework of Oracle Fusion Middleware as the foundation we will be able to create the necessary collaborative environment to initiate, document, discuss and record the voting of these decisions.

One area that will be new will be the area where the capabilities of the partner who was brought on to provide the experience in the shale area has to be documented. These are listed in the “Capabilities & Commitments Interface” of the Petroleum Lease Marketplace. Before the agreement was signed you had the opportunity to review with their team and look at their Research & Capabilities “Dynamic Capabilities Interface” for the shale capabilities they had and were satisfied, that when those capabilities were available to you in the Knowledge & Learning module through the Joint Operating Committee; they would be more than adequate for the farmin. It was documented in the agreement that these were being made available and that the capabilities would be part of the consideration that is paid to the producer. Some of that consideration is paid in the form of a higher working interest through earning, and established day rates for their engineering and geological staff members. It will be incumbent on the producer who is providing the capabilities to note in their “Capabilities & Commitments Interface” that they are providing these resources to the farmin and what consideration they are earning in exchange for this. These will help both producers in balancing the costs and revenues of developing their capabilities and ensure that they are not over committing their resource base in the years to come.

The agreement itself is not a static document. It might have been that the “Marketplace Interface” was used extensively during the development of the agreement. Changes to the agreement could be done using that forum again. Expanding the scope of the lands or including some equipment to deal with the production from the lands. These are all elements of how the agreement could evolve during the life of the assets. The variables that are stored within the system would change, of course, and provide raw data to most of the modules that operate in the Preliminary Specification. As the agreements are the place of origin of most of the critical data that is used within the oil and gas industry. From working interest distribution scenarios, to methods of accounting, to land and procedural requirements this is where its at.

We now want to discuss the AFE process and how the Petroleum Lease Marketplace of the Preliminary Specification handles the elements of that document. We will also discuss the Oracle Fusion Middleware frameworks that would be used to implement the processes, functionality and features that are discussed.

As we indicated at the beginning of this scenario, capital is king. And you have the resources available to complete the 20 well program within the next drilling season which is consistent with your partners capabilities. It's time to get to work and that involves reviewing the “Dynamic Capabilities Interface” in the Knowledge & Learning module. Which also involves the “Planning & Deployment Interface” which has as part of that interface the AFE. The variables that are used to populate the AFE are derived from the agreement and include the working interest distribution, the participants, the location and the contacts for execution. Other variables such as the budget, also prepared within the “Planning & Deployment Interface,” and are derived from the Partnership Accounting module. Preparation of an AFE therefore is the least problematic in terms of creating the document. The ability to select from pull down menus and options that automatically populate the form are necessary to make the user interface as intuitive as possible. Items such as selecting the well id should automatically populate the partners and the working interest distribution variables.

Now that the form of the AFE is complete the need to have the internal routing of the document for approval is necessary. The various departments need to sign off on all expenditures internally before the AFE is sent for external approval. The document is sent through the process of routing that is managed by the Oracle Middleware Business Process Management framework. There it is sent to the CEO, CFO, COO, Land and Legal department for digital approval. Once all approvals are complete the document will be rerouted back for external distribution. In this case it is only necessary to gain the approval of the partner that we have brought on for their capabilities as they are paying 20% of the costs. However, we are also routing the document to the farmor as the AFE will be used by them to document the 20 well commitment we have under the earning provision of the agreement. As we indicated these producers were using the same People, Ideas & Objects systems that you are using. And as such, this routing is similar to the internal routing and approval process. However, upon approval, verification of the signed AFE’s are circulated to the partners to inform them that the AFE is now a valid cost center and will begin the process of, in this case, drilling the well.

Due to the fact that you and the partner that is bringing in the shale capabilities are both actively involved in drilling these 20 wells. Both of you will be incurring costs on behalf of the joint account. This is consistent with the pooling concept that the People, Ideas & Objects software was built around. That no one producer would fulfill the operator role and that all producers would be drawn into participate in some form or fashion in order to make up for any potential resource shortfalls. Therefore each of you will be participating and incurring costs in unequal proportions to your working interests. What the People, Ideas & Objects system will do each month is conduct an equalization on the participants interests and participation rates to make each other whole during the Joint Venture Billing process. This requires that both producers in this case, however it could involve as many producers as a Joint Operating Committee has, post their costs to the AFE for the month in which they have incurred these costs. Then during the month end process the equalization will be run based on their participation and the total costs incurred by both partners that month, and either compensate them or bill them for the difference to their actual working interest share. This is of course on an AFE by AFE basis.

Lets not forget that part of the pooling concept involves the billing of a producers engineering and geological resources to the joint account. The concept of overhead allowances is eliminated with the operator. The ability of a producer to maintain a technical resource base, when that resource is in such high demand, requires that that base have its own source of revenue. And that is the ability to charge these resources to the joint account for services rendered. Under the terms of the agreement with these partners it is by agreement that the shale capabilities are billed by that partner in such a manner. That however, does not preclude you from doing so as well.


I thought that we would spend some time discussing the management of royalties in the Preliminary Specification. It is here in the Petroleum Lease Marketplace along with the Accounting Voucher and Partnership Accounting modules that the royalties are calculated, paid and processed. One of the key determinants of the Preliminary Specification will be the geographical scope of the application. That will determine which jurisdictions the People, Ideas & Objects application modules will calculate, pay and process royalties. If you participate in a remote area and you want all of your areas covered by the application then participation in the community is the manner in which you need to make this happen. If you have production or leases in Alaska then you should assert that Alaska be part of the scope. Don’t assume someone else will participate in the user community and do this for you.

When we talk about royalties we have a myriad different ways in which they are calculated and processed. Although over time many have adopted what could be called generally accepted royalty principles, there are still differences that need to be accounted for. On top of these differences are the systems that are used to calculate the royalties themselves. And let’s be honest Excel does a pretty good job. But that is not the way in which many of these royalty frameworks were designed to be handled. Excel is very labor intensive. From a Gas Cost Allowance (GCA) point of view, no one has implemented an ERP process anywhere within any of the systems in the industry. These royalties are the producers largest cost items. With high commodity prices significant value can be attained by ensuring that the minimum correct royalties are calculated and paid.

It is within the Petroleum Lease Marketplace that the Lease document is stored and therefore the royalty information is captured and stored. The jurisdiction, whether that is Crown, Federal, Freehold, Private or State will have its methods and procedures to calculate royalties on its lands. In most cases these are comprehensive and impose significant levels of Information Technologies be used. Some use the prices that were realized and some use their own pricing models. There are a variety of different ways a unit of production can attract a royalty. Nothing however that can not be handled by a software development capability like that proposed by People, Ideas & Objects. Lets also look at how that compliance is achieved.

Using the division of labor and specialization we will have within each royalty jurisdiction a royalty accounting service provider, or several providers, who specializes in the management of royalties for, in this example, the state of Texas. The only thing these people deal with is Texas production and Texas Railroad Commission for state royalties. They operate on behalf of the hundreds of producers that produce oil and gas in the state of Texas and pay Texas State royalties. Using specialized software developed specifically for the service provider by People, Ideas & Objects they are able to calculate the royalties and ensure that the producers pay their minimum correct royalty. The service provider is also able to keep up with the changes in the Texas royalty administration and ensure that these changes are reflected in the software at the appropriate time on behalf of their clients. Consider that there would be royalty specialist service providers located in each jurisdiction for each royalty that falls within the scope of the Preliminary and subsequent Specifications of the People, Ideas & Objects application modules.

We have certainly reduced the footprint size of the oil and gas producers square footage requirements for office space. Through the process of specialization and the division of labor we have handed off everything from an administrative basis to these service providers to increase the quality of the service, and reduce the overall costs. This is the only proven method of increasing the economic performance of the industry. The alternative is that we continue to build individual silos of fully capable oil and gas producers. A scenario in which only the managers will be happy, and more of an operational myth than reality.

The act of paying royalties is an individual producer's responsibility. I believe this holds true in the majority of jurisdictions. Therefore the royalties are calculated on the producer's share and not on the Joint Operating Committee’s production. Nonetheless the production is derived from the Joint Operating Committee and that involves the Material Balance Report. This discussion will deal with the production end of the royalty calculation and the tie in to the Accounting Voucher and Partnership Accounting modules Material Balance Report.

First let's revisit the manner in which production accounting is handled in the Preliminary Specification. It is through our favorite tools of specialization and the division of labor that we have looked to service providers to provide these production accounting services to the Joint Operating Committees. Being specialized in a geographical region the production accounting service provider is possibly located within the region to have a hands on interaction with the operation. Working for the many Joint Operating Committees that may be located in the region the service provider may as a result work indirectly on behalf of many producers production accounting.

Therefore looking at this situation from a reasonably large producers point of view. They may have upwards of a few hundred geographically based production accounting service providers and twenty to thirty royalty accounting service providers depending on the number of jurisdictions they operate in. The complexity in dealing with these many providers is not the issue as much as it is the size of the producer. It should be restated here that the basis of the billing of these services should be on some positive action based transaction. In the case of the production accounting service provider it would be on the basis of original production for the month. Then if there was no production for that month, then no charges would be incurred, etc. The same situation should hold for the royalty accounting service provider, however, you do not want it to depend on the calculation or payment of a royalty.

Within the Accounting Voucher and Partnership Accounting modules resides the Material Balance Report. It is a report to provide for the material balancing of any facility for oil and gas purposes. We have discussed in those modules how the volumetric information is reported and managed within the Preliminary Specification. To review the discussion to date please review the Material Balance Report in the Partnership Accounting and Accounting Voucher modules. Royalties is one of the areas that will be using the outputs of the information from the Material Balance Report. Production for each producer is allocated through the report as one of the outputs of the process. Therefore this is the input into the royalty calculations for the various jurisdictions that apply to that production. Taking note of any swaps or inventory this volume should be the final production volume for royalty purposes. However, the endless process of amendments begins and will no doubt carry on for at least 30 - 60 days before everything settles down. The royalty calculation being a nature of revenue less costs times royalty rate equals royalty, these production volume changes do not require any human interaction until such time as the point the royalties are due.

In terms of paying royalties on the appropriate volume of production, the Material Balance Report will be a key aspect of this control.

The prices that the royalties will be based on is what we will be discussing. It is critical that the producer pays the royalty on the net price at the wellhead for all of the commodities that are produced. How these prices are calculated in the People, Ideas & Objects application is the point of discussion.

The first point I should make is that some jurisdictions use their own pricing scenarios. Provinces in Canada calculate the average gas and NGL prices for each producer to pay royalties on. They also use standard costs for gas processing. These are excluded from this discussion as they are unique to the Canadian oil and gas producer and require substantial software development commitments from the Canadian producers that may preclude them from participating in the Preliminary Specification. Please review the July 28, 2011 blogpost “Budgets and Canadians.” (—2011_07_01_archive.html)

In most other jurisdictions it is the net realized price that is used for calculating the royalty. We’ll use a gas contract to describe the scenario that we are using here. For simplicity we will assume there are no liquids. Going back to the Material Balance Report we see that the gas that is sold under the contract is all of the gas that is produced by company A in the region that is serviced by gas plant B. This gas is aggregated from over 50 wells and is collected over, in some instances, a substantial distance. None of the gathering or facilities is owned by the producer and they pay custom processing and gathering fees for these services. The gas contract is to an industrial consumer who is situated across the state and the point of sale is the delivery into their facility.

The need therefore is for this producer to pay for the transportation and processing of this gas to the point of sale, the consumers front door. The royalty price will be what the consumer pays less the costs of the processing and transportation to get it to them, netted back to the wellhead. Turning to the Material Balance Report each production stream must have a sales contract and transportation contract from the point of origin to the point of sale. This is a requirement of the system. Each of these contracts support the production stream within the Material Balance Report, without a contract the Material Balance Report will not balance, just like in the real world. Therefore all of the information that is needed to determine the royalty price is going to be available from the various Material Balance Reports, where they should be available.

Taking the production from a well by well perspective the prices that will be received at each wellhead might be slightly different since the distance that some of the wells gathering might be materially different and therefore would pay more in gathering. The royalties are going to take the calculations from the point of view of the wellhead and begin the royalty calculations on that basis. These prices are derived from the Material Balance Report based on the contracts that are necessary to make that document operate and balance. Changes in prices and volumes do occur and that will lead to an amendment process within the Material Balance Report. Recall that the Material Balance Report is part of the Accounting Voucher module in the People, Ideas & Objects application. Any changes in the material balance must also correspond to the changes within the Accounting Voucher, and an Accounting Voucher can be for a producer or a Joint Operating Committee. So a volumetric change will recalculate the total custom processing and revenue receipts and a change in custom processing fees will affect total custom processing and net pricing to all the producers in that system. Making a change in one of the systems has an effect in the other. To change the price the producer received in the month can’t be done in the general ledger, it can only be done through the gas sales, custom processing or gathering contracts.

We’ve used a simple example of how the costs were netted back to determine the price used for royalties. Today we are going to show how the Preliminary Specification handles Gas Cost Allowance (GCA) and the costs of operations. This example will apply when a producer has a financial interest in the gathering or processing facilities that are used to carry the gas they produce. The GCA allows for the costs of capital and operations of those facilities to be charged based on its annual throughput.

Operation of those assets whether they are a gas plant or a gathering system will have their own Joint Operating Committee. However, the first thing to determine is what is an eligible capital item for GCA purposes. Not all the capital is necessarily allowable to be charged as a deduction for GCA purposes. There needs to be within the accounts of a producer a way in which you can tag an AFE with the designation that these costs would be eligible for GCA. Either that or through the chart of accounts, globally select the accounts that are eligible. From there the costs of capital, both a return on investment and depreciation, can be calculated for the year.

The operating costs associated with those assets will have been aggregated under that Joint Operating Committees accounts as well. These costs are eligible to be deducted and are included in the total costs of the facility. Each facility has to be accounted for on its own. A gathering system will be calculated so that there is a cost factor for the gathering system alone. If there are separate functional units within a gas plant then each of the functional units should be accounted for as separate calculations for GCA purposes. Calculations for throughput need to be based on the gas or liquid equivalent value. If the functional unit in a gas plant is a deep cut facility then the output will be in liquids and a gathering system will be based on the gas volume. The results of these calculations provide you with an amount of GCA to deduct from the royalty price for any product that is processed or gathered through that facility in a month.

Automation of these calculations is the purpose in the Petroleum Lease Marketplace module. The calculations of royalties for the current year are based on estimates of GCA using last year's factors. However, that does not mean they are not a labor intensive activity. All of the factors that go into a calculation are already stored within the People, Ideas & Objects applications. The Material Balance Report being the key to providing the production volumes and throughput at each functional unit. What is needed is the “Gas Cost Allowance Worksheet Interface” that aggregates these variables for the Revenue and Royalty Accountant for them to prepare their calculations for actual GCA, equalizations and estimates.

The “Gas Cost Allowance Worksheet Interface” provides the accountant with the ability to look at each functional unit as a separate facility. The interface will pull in the the producers variables of the AFE’s and cost centres that are pertinent to that facility and the throughput information from the Material Balance Report. These AFE and cost centres information are live. Then the accountant can organize the information in the manner that the calculation is automatically populated with the current information from the system. The accuracy and timeliness of this information, and the format of the data would be such that the production of GCA values for each month of the year would be possible. The outcome of the “Gas Cost Allowance Worksheet Interface” would be the value that is used to deduct for royalty purposes.

Now each producer's working interests in the various gathering and processing facilities are possibly different then their working interests in the producing property. Therefore these calculations are not done on a Joint Operating Committee basis but at the level of each producer. This will continue to be one of the areas where time is spent by the royalty accounting service providers. Having people who specialize in the administration of royalties will help to ensure that the producer pays the minimum correct royalties.

So far we have used the Oracle Fusion Applications Financial Management suite in unique ways within the Petroleum Lease Marketplace. It provides for the accounting and billing services to the producers, Joint Operating Committees and service providers that are involved in the Petroleum Lease Marketplace module. The Oracle Database is fully employed as well as there are many attributes, or data elements, that are stored within the Petroleum Lease Marketplace module. From the unique strategy of the Joint Operating Committee, the Lease, the agreements with all of their variables, the royalty information and data about the service providers. What is needed now is an understanding of how the unique attributes of a royalty infrastructure for an oil and gas system will be put together.

In Oracle Fusion Middleware there is Oracle’s Business Process Management Suite (BPM) which is a collection of tools and previously defined processes that developers use to configure for specific processes. The royalty process is an ideal candidate for the use of these tools. Based on the Oracle Database, Java and XML Oracle BPM is a front end, or high level graphical user interface that users can relate to in terms of the process that is mapped. Using data models provided from PPDM and the Oracle Fusion Application Suites, augmented by the People, Ideas & Objects data model, data storage and integrity will be the highest that can be achieved.

Key to the Oracle Fusion BPM tools is the dependence on the user. People, Ideas & Objects being user based developments need to have tools that can interface directly with the user community. Having them learn Java, XML and SQL just won’t work. Reviewing a process from the business logic point of view, ensuring it is consistent with their needs and seeing a step by step basis of that logic assures them of the accuracy and the possibilities of what more they could have. All of this would sound like the end product would be bloated and slow. That’s not the case as the technologies used are the same as if the process was being hand crafted. The result is that Oracle Fusion BPM’s output is fully scalable and appropriate for a cloud computing distribution model, and the manner in which People, Ideas & Objects intends to use these processes.

Calculating royalties for multiple jurisdictions, each with their own nuance of how those royalties are calculated are well within the scope of what the People, Ideas & Objects application development objective are. This becomes a simple if-else-then statement to calculate the royalty on the basis of the specific jurisdiction. One of the important determinations in this is what jurisdictions are we developing for. This question is answered in our scope, and is one of the reasons producers should subscribe to this software development. To make sure we are covering all of your royalty jurisdictions. Maintaining the up-to-date requirements of each of the royalty regimes will be an ongoing part of our responsibilities. However, I would reiterate our value proposition is that we would be doing this on behalf of all of the producers in the industry. The one time cost allocated over our entire subscribing producers will make these changes incidental to the innovative oil and gas producer. Specialization and the division of labor works in terms of your software development team as well as your service providers.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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.

Thursday, September 26, 2013

Management's Role in this Transition

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” of the marketplace. The representation of the marketplace would of course be through the “Marketplace Interface” that we have been discussing here. 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 discovery of using the Joint Operating Committee was the key to administrative efficiency in the innovative and profitable oil and gas producer. Our other key discovery, 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 need 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

The assertion by the bureaucracy that the oil and gas service industry vendors and suppliers are greedy and lazy is as much self serving and designed to ensure that the markets don’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.

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 well within 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 producer with the most profitable means of oil and gas operations. 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.

More on Capabilities

What follows is a general discussion focused around the Marketplace Interface in the Petroleum Lease Marketplace module. It is intended to provide some understanding of the ability of the Marketplace Interface to enable the user to engage with other elements of the market and build the producer firms land and asset base.

It was during the Preliminary Research Report that we initially applied Professors Anthony Giddens and Wanda Orlikowski’s research in Structuration to the Joint Operating Committee. Their research states that people, organizations and society move together or there will be failure. Professor Orlikowski’s Model of Structuration states that technology is a part of society and these both define and constrain action. Therefore when we look at the two possible organizational types of architectures for Petroleum Leases we see the Marketplace and the file cabinet. But seriously the choice is as stark and the contrast is that dramatic. To match the organization, the people and societal definitions and constraints make the marketplace the ideal architecture. To therefore designate a module within the Preliminary Specification as the Petroleum Lease Marketplace builds on this simple architecture. From Professor Richard Langlois “Modularity in Technology, Organization and Society.”

Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces - which can then communicate with one another only through standardized interfaces within a standardized architecture - one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections. p. 1

This next quote is the critical one. Its a bit of the chicken and egg problem however. I don’t know if we are taking elements of the technology and mapping them to the organization, or taking the marketplace and mapping it to the technology. Both are undergoing significant changes in the development of the Petroleum Lease Marketplace.

What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to modularity in the design of the organizations that produce such products. p. 1

Lastly a scenario, users need a window in which to view the marketplace. In the Petroleum Lease Marketplace is the “Marketplace Interface.” Consider a user was viewing a Unit that they are a member of the Joint Operating Committee within the Marketplace Interface. While viewing, contextual tiles of agreements, leases and other data are populated with the properties information. If the user wants to click on those and query the information it is there as well as historical accounting data. If users from another firm are also viewing the property, they can be seen and engaged in a collaboration, and immediately contextual tiles of information about the person are available to you, and any previous correspondence and outstanding matters appear on your screen. Meanwhile you click on the newly drilled well that you heard was performing beyond expectations to get an update of its actual production. You also notice that the adjoining lands have just been posted for bid by a producer firm who is not a member of your Joint Operating Committee. You are able to call on the other producers in the Unit and share a recorded video meeting within the Petroleum Lease Marketplace within ten minutes of that discovery, and set in motion a plan to deal with it.

Professor Richard Langlois in his 1992 paper “Transaction Costs Economics in Real Time” provides us with an excellent definition of what capabilities are in the corporate setting.

This is the basic modularization of the market economy. It accords well with the modularization G. B. Richardson (1972) suggested in offering the concept of economic capabilities. By capabilities Richardson means "knowledge, experience, and skills" (1972, p. 888), a notion related to what Jensen and Meckling (1992) call "specific knowledge and to what Hayek (1945) called "knowledge of the particular circumstances of time and place." For the most part, Richardson argues, firms will tend to specialize in activities requiring similar capabilities, that is, "in activities for which their capabilities offer some comparative advantage" (Richardson 1972, p. 888). p. 27

Recently we discussed the “Marketplace Interface” of the Petroleum Lease Marketplace. We hopefully saw with the brief description of how the system could provide a window on the Petroleum Lease Marketplace and how that contrasted with the current rows and rows of file cabinets. Application of the firms capabilities within that “Marketplace Interface” will be how the producer and Joint Operating Committee will build its firm and earn its profits. Or as Hayek says about capabilities, how much “knowledge of the particular circumstances of time and place” is not being acted upon in your firm today?

There will be significant change in the transition from the file cabinets to the deployment of People, Ideas & Objects Preliminary Specification. These changes impute that there will be a cost and part of these costs will be this software development. Professor Langlois calls these “Dynamic Transaction Costs.”

Over time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost - the cost of transferring the firm's capabilities to the market or vice-verse. These "dynamic" governance costs are the costs of persuading, negotiating and coordinating with, and teaching others. They arise in the face of change, notably technological and organizational innovation. In effect, they are the costs of not having the capabilities you need when you need them. p. 99

Who said that its not the destination, but its the path. That is what this software development is about, the path. We have a rough idea where we are going and what it might look like, however, without the involvement of the user in the development of these systems it's all pretty much an exercise in futility. User involvement is critical to the success of People, Ideas & Objects. The Preliminary Specification is only a starting point, the user community can take it and build upon it as they desire and need, and over time as the organization and markets change, so will the software. And the capabilities of the marketplace and the firms will develop as a result.

"F.A. Hayek (1945, p. 523) once wrote that 'economic problems arise always and only in consequence of change.' My argument is the flip-side: as change diminishes, economic problems recede. Specifically, as learning takes place within a stable environment, transaction costs diminish. As Carl Dahlman (1979) points out, all transaction costs are at base information costs. And, with time and learning, contracting parties gain information about one another's behavior. More importantly, the transacting parties will with time develop or hit upon institutional arrangements that mitigate the sources of transaction costs." p. 104

There is a distinct market capability that is available in the Petroleum Lease Marketplace of the Preliminary Specification. A capability that is not reflected in the Research & Capabilities module, a capability that resides in the “Marketplace Interface” of the PLM. A capability that provides the innovative oil and gas producer with the ability to participate in the dynamic marketplace of oil and gas leases, lands and properties. If the Research & Capabilities module handles the earth science and engineering aspect of the producers competitive advantage, it is the Petroleum Lease Marketplace that handles the Land and Asset Base attributes of the producers competitive advantage.

As we have discussed here many times, the amount of engineering and earth science effort for each barrel of oil or gas produced will continue to increase as time passes. Naturally therefore the volume of activity associated with oil and gas will increase as well. This imputes that the number of P&NG Leases and agreements will increase as will the number of Joint Operating Committees you may participate in. The Petroleum Lease Marketplace is the means in which to participate, make sense of and build your land and asset base from. It is reasonable to assume therefore that this may require a multiple of legal, administrative and negotiating resources on your behalf in order to achieve these outcomes. The “Marketplace Interface” therefore becomes the first place for you to source the skills, knowledge and experience you need.

Although one can find versions of the idea in Smith, Marshall, and elsewhere, the modern discussion of the capabilities of organization probably begins with Edith Penrose (1959), who suggested viewing the firm as a 'pool of resources'. Among the writers who have used and developed this idea are G.B. Richardson (1972), Richard Nelson and Sidney Winter (1982), and David Teece (1980, 1982). To all these authors, the firm is a pool not of tangible but of intangible resources. Capabilities, in the end, are a matter of knowledge. Because of the nature of specialization and the limits to cognition, organizations as well as individuals are limited in what they know how to do effectively. Put the other way, organizations possess a pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities. pp. 105 - 106.

It will be through the “pool” of knowledgeable providers who enable the innovative oil and gas producer. The “Marketplace Interface” will enable these providers to engage with the producers and build their firm. These will be the Land people, the administrators and those that support the negotiations and transactions involved in land deals. Traditionally these people have been employed by the individual producers, however, with the “Marketplace Interface” there will be a need to have these services provided by the marketplace. That will be one of the changes that occurs during the development of the Preliminary Specification.

But often - and especially when innovation is involved - the links among firms are of a more complex sort, involving everything from informal swaps of information (von Hippel, 1989) to joint ventures and other formal collaborative arrangements (Mowery, 1989). All firms must rely on the capabilities owned by others, especially to the extent those capabilities are dissimilar to those the firm possesses. p. 108

Now that there is a marketplace established for the knowledge, skills and experience of the resources used in the Petroleum Lease Marketplace. We can begin to approach that marketplace from the point of view of its specialization and division of labor. So much of the work that is undertaken within a producer firm for Land administration etc. is done for the purposes of timeliness and accuracy. Due to the scope and scale of the individual producers volume of lease and land activity. Efficiencies from the analysis of the division of labor and specialization may not have been available. With the development of the “Marketplace Interface” of the Petroleum Lease Marketplace the opportunity to conduct that analysis during the Preliminary Specification is provided.

It was autonomous innovation that Adam Smith had in mind when he argued that the division of labor enhanced innovation: each operative, by seeking ways to make his or her lot easier, would discover improved methods of performing the particular operation (Smith, 1976, I.i8, p. 20). The improvement he had in mind were such that they improved the efficiency of a particular stage without any implication for the operation of other stages. Autonomous innovation of this sort may even further the division of labor to the extent that it involves the cutting up of a task into two or more separate operation. Instead of being differentiating in this way, however, an innovation may be integrating, in the sense that the new way of doing things - a new machine, say - performs in one step what had previously needed two or more steps (Robertson and Alston, 1992). More generally, a systemic innovation may require small modifications of the way work is performed at each of a number of stages, and would thus require coordination among those stages. pp. 116 - 117

In today’s market we have powerful tools that help alleviate us from the repetitive nature of lower level work. Two of those tools are computers and globalization. Our analysis of the marketplace should use these tools to the fullest extent to enable us to focus our attention on innovation. If we look at the Petroleum Lease Marketplace “Marketplace Interface” from this perspective there is much work to be done, and a significant opportunity to provide real value for all producers. Having a Petroleum Lease Marketplace that provides the producer and Joint Operating Committee with the ability to focus their capability on building their land and asset base would be a worthwhile objective for this module. It is fully one half of an innovative oil and gas producers competitive advantage.

Designing and implementing a marketplace that organized these capabilities in an efficient and effective way would not be the difficult part. Ensuring that the user community was supported through their learning and development of new and innovative capabilities would be.

A market form of organization is capable of learning and creating new capabilities, often in a self reinforcing and synergistic way. Marshall describes just such a system when he talks about the benefits of localized industry. p. 120

To review what we have with the “Marketplace Interface” of the Petroleum Lease Marketplace in the Preliminary Specification. Is that we have an environment that is accessed by the user, a member of a producer firm or Joint Operating Committee, through the People, Ideas & Objects Marketplace Interface. There they find a rich market environment where they are able to resource the skills, knowledge and experience they need to secure and manage their Petroleum and Natural Gas lease and land base. Given that marketplaces time to develop and grow, with its own market supporting institutions, it will take on its own characteristics and efficiencies. Enabling the innovative oil and gas producer to leverage the marketplaces capabilities and focus on their core competitive advantages.

Making this transition to where the producers and Joint Operating Committees capabilities are sourced from the marketplace will take time, incur unique costs and involve many iterations. These “Dynamic Transaction Costs” as Professor Richard Langlois calls them are necessary as the transfer of capabilities from the firm to the market occur. One should recall the reasoning for this transition. And the reasoning is that we are moving the industry from the “High Throughput Production Model” to the “Decentralized Production Model.” This provides the producer with the capability to shut-in production, and then have the associated costs of production and overhead not incurred.

One might think that, as governance costs diminish in the long run, the boundaries of the firm would be determined solely by capabilities. But capabilities also change over time as firms - and markets - learn. The classical presumption was that the firms capabilities would diffuse completely to the market in the long run, leading to complete vertical disintegration. This reinforces the point that capabilities are more than a matter of production costs in the neoclassical sense and, more importantly, suggest that the notion of a firm's capabilities implies a kind of information or knowledge cost - the cost of transferring the firm's capability to the market (other firms) or vice versa. these costs are a neglected kind of governance cost, which I call 'dynamic' governance costs. These are the costs of transferring capabilities: the costs of persuading, negotiating and coordinating with, and teaching others. These costs arise in the face of change, notably technological and organizational innovation. They are in effect the costs of not having the capabilities you need when you need them. pp. 123 - 124

As one can imagine, this marketplace would be dynamic. The need for a dedicated software developer to identify and support not only the innovative oil and gas producer and Joint Operating Committee, but also those changes that are occurring in the marketplaces vendors and suppliers, would be critical. That is the role of People, Ideas & Objects.

"The basic argument - the vanishing hand hypothesis - is as follows. Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets, much as Allyn Young (1928) claimed long ago. But the components of that process - technology, organization, and institutions - change at different rates." p. 3

Let's assume for a moment that you are a vendor that is involved in the Petroleum Lease Marketplace and you want to involve yourself in the People, Ideas & Objects Preliminary Specification to expand your business. To include your firm in the “Marketplace Interface” would require you to use some of the interfaces that we developed in the Resource Marketplace module. This discussion is how the vendor would interact within the “Marketplace Interface” and engage with the producers and Joint Operating Committees that were looking for your products and services.

First we should mention who it will be that makes the changes that we expect to see in the “Marketplace Interface” of the Petroleum Lease Marketplace. Resistance to People, Ideas & Objects by the current bureaucracies has been strong. They have a comfortable system that keeps them firmly in control and do not foresee any need for change. So how do these changes in the marketplace come about? And how does a marketplace like that which has been described here come about? The answer is simple and is reflected in this next quote from Professor Richard Langlois paper “The Vanishing Hand: the Changing Dynamics of Industrial Capitalism.”

"Ruttan Hayami (1984) have proposed a theory of institutional change that is relevant to my story of organizational and institutional change. As they see it, changes in relative scarcities, typically driven by changes in technology, create a demand for institutional change by dangling new sources of economic rent before the eyes of potential institutional innovators. Whether change occurs will depend on whether those in a position to generate it - or to block it - can be suitably persuaded. Since persuasion typically involves the direct or indirect sharing of the available rents, the probability of change increases as the rents increase. And the more an institutional or organization system becomes misaligned with economic realities, the more the rents of realignment increase." pp. 36 - 37

Simply is the profit opportunity from being an innovative oil and gas producer greater than what is offered by today’s marketplace? And will those that operate in the “Marketplace Interface” find greater profits by providing services that innovative producers will want and need. If either of those situations are the case then the profits will motivate the changes within the marketplaces described within the Preliminary Specification. (Please review the Preamble to the Preliminary Specification.)

In terms of the interfaces that will help the vendors who provide lease and land services to the innovative oil and gas producers the first would be the “Vendor / Supplier Contact Database.” This provides the basic information that is needed for the oil and gas producer or Joint Operating Committee to have on the vendor. Think of it as a rich contact database that is maintained by the vendor. There is a second aspect of this data base that provides a secondary or tertiary level of data to the producer when the firm is engaged by the producer. This includes access to the vendors staffing profiles, calendars and scheduling information and enables the producer and vendor to work to establish further elements of their working relationship. (Query the “Vendor / Supplier Bidding / Commitment Manager” in the Resource Marketplace module for further information on the extent of these interactions.)

The second interface that would help the vendor in operating within the “Marketplace Interface” of the Petroleum Lease Marketplace would be the “Gap Filling Interface.” Recall this is the interface that is used by producers and vendors to communicate the need to have a “Gap Filled.” The gap being a situation where the division of labor could be expanded by providing a further service that is not currently offered. The expansion of the division of labor is done through the process of filling gaps. And if producers and vendors identify and communicate needs and services that are in need of filling, or demanding of new services, then the opportunity for the service to meet the demand will occur quickly. The reason for this is that we live in a time and a place where the service and the need may be located thousands of miles away from each other, or even just next door, and may never know that either exist. The “Gap Filling Interface” helps to eliminate the time and distance of these needs.

The third interface that provides value to the vendors in the “Marketplace Interface” of the Petroleum Lease Marketplace is the “Actionable Information Interface.” Although somewhat similar to the “Gap Filling Interface” it fills a different role. If a vendor was undertaking a strategic and competitive investment over the next five years that would fundamentally change their service offering. They would publish this information in the “Actionable Information Interface.” This would inform the producers and Joint Operating Committees of the prospective changes in the marketplace and allow them to engage the vendors on what they need. This being a collaborative interface the vendor would be able to engage the market to help define their market offering in the mid term. Most of this information is available to the prudent Google enabled researcher today. However, it being located in one database in the “Actionable Information Interface” the value of the information in its aggregate would provide a unique window on the marketplace offerings and the direction of the industry. One might question why you would publish such sensitive information? I would remind readers that the act of publication is how you earn the copyright.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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.

Wednesday, September 25, 2013

The Marketplace Interface

To develop a new system for the oil and gas industry is an opportunity that I think is a once in a lifetime, maybe a once in a century opportunity. To think that we will use these systems in the manner that we use systems today underestimates the possibilities. The user interface is the area where the most innovation will occur in terms of how people will interact with larger volumes of data. These and other types of issues should be considered in the Preliminary Specification. I offer the “Marketplace Interface” and this discussion to expand the scope of what is possible in terms of the Preliminary Specification.

The Petroleum Lease Marketplace module is the second “marketplace” module of the Preliminary Specification. Like the Resource Marketplace module, which deals with the resources used in the development of oil and gas, the Petroleum Lease Marketplace emulates the marketplaces that exist for Petroleum & Natural Gas Leases, concessions, etc. and the associated activities involved around those “things.” What is helpful in understanding the capabilities that are attained by developing “marketplaces” in the Preliminary Specification is this quote from Frederick von Hayek.

The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. ...The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement. (Hayek 1945, pp. 526 - 527)

Prices for the bonus paid on acreage. The price asked by a producer for a working interest share in a property. These are the activities that occur in the marketplace everyday. What we are doing in the Petroleum Lease Marketplace is emulating the real marketplace to enable it to grow thicker and more robust. With market opportunities being dislocated sometimes by thousands of miles from interested parties, the ability for market participants to meet is limited. Even with the Internet the chance of finding someone is difficult. However, with a module like the Petroleum Lease Marketplace, you have a focused forum in which to deal with interested parties. At the same time you have the means in which to transact and manage the business, develop agreements, pay lease rentals etc. The Petroleum Lease Marketplace is a software environment that provides for the marketplaces emulation.

Critical to the success of this marketplace is the further division of labor and specialization. We have discussed earlier in the specification how the Lease Rental Administration could be handled on an industry wide basis by a service provider. Other roles may be able to be handled in a similar fashion in the Petroleum Lease Marketplace. With the development of this software module or marketplace emulator, would be the market supporting institutions that would bring in the efficiencies that would enhance the effectiveness of the marketplace. Providing assurances such as when a new P&NG Lease was acquired it was known that it would automatically have its lease rentals paid by your service provider.

There are many advantages to emulating the Petroleum Lease Marketplace in the Preliminary Specification. Just as there are advantages in the Resource and Financial Marketplace modules. Attempts at exchanges and other technical solutions have been tried before but they don’t have the “business” aspects that a “marketplace” has. What we are replicating is a business unit, not creating a technological solution. A significant difference to the users and producers who use the marketplace today, and will use the Petroleum Lease Marketplace module if it provides further value in their use of the actual marketplace. And with that I want to introduce the “Marketplace Interface” which uses the technology available from Open Wonderland. Here it is shown as an example of the ultimate collaborative interface.

(Please review the video below.)

We have detailed some of the interfaces that would be used by the suppliers and vendors in providing specific products and services to the oil and gas producers and Joint Operating Committees through the “Marketplace Interface” of the Petroleum Lease Marketplace. We note the Community of Independent Service Providers as they are called at People, Ideas & Objects, or Industrial Districts as Professor Langlois refers to the concept, is structurally different than in the Resource Marketplace. The focus of the work that is done in the “Marketplace Interface” is primarily administrative. Although the disruption in moving the majority of the work from the firm to the marketplace will involve innovative and creative processes, once the marketplace settles into a rhythm, the administrative level of change will slow. Much of the actual work that is conducted in the “Marketplace Interface” will be to support the transactions that are conducted by the producers in the marketplace environment.

The “Marketplace Interface” is not a source of innovation for the oil and gas producer. It is an area where the producer can focus on their core competitive advantage of their land and asset base. The administrative efficiencies and effectiveness are certainly part of that competitive advantage. I only raise this point to identify that there will be the dynamic nature of the marketplace for buying, selling, purchasing, bidding, acquiring, dealing, surrendering, leases and properties.

As a possible scenario, in the Marketplace Interface, we have a producer who is interested in determining what the market value for their interest in a small gas plant will generate. The average production is 100 barrels of oil equivalent per day from 50 wells, compression and dehydration. Through the “Marketplace Interface” the producer puts their 17.5% working interest in the property on the market for sale and is open to offers. The property is then highlighted in the property section of the “Marketplace Interface” where users can see that property was just posted for sale. It is also listed by zone and product category in the international markets databases. Soon offers are made and the property attracts a reasonable price. The seller deems the property is to be sold, none of the partners are able to match the best offer, and the property is sold. Immediately the administrative aspects of having the leases, agreements and partners recognize the sale agreement, and with the closing executed, these administrative tasks are done.

Or something along those lines. The point in this scenario is to briefly show how many of the attributes that we have been talking about will work together in the “Marketplace Interface.” The efficiencies of the marketplace in terms of having a ready market to buy and sell properties, leases and interests. And to have those transactions backed up by the transaction processing that is as complex as is necessary to close the most complex of purchase or sale agreements. This is how the innovative oil and gas producer will need to operate in the 21st century.

We have focused on the deliberate nature of developing the “Marketplace Interface” of the Petroleum Lease Marketplace of the Preliminary Specification. During the 1960's systems capabilities were limited and their applications were quite crude. Organizational developments were therefore constrained by the limitations in Information Technologies. The focus of systems development was the firm itself, and that focus was driven primarily by the compliance and governance requirements of firms (Accounting, Tax, Royalty, SEC etc). During this time, in oil and gas, the Joint Operating Committee was secondary to the demands of the compliance and governance frameworks of the firm. This systems thinking grew over a period of time in which it included several generations of people. Through this process the administration, oil and gas became more oriented to the compliance and governance frameworks of the firm and conversely more withdrawn from the seven frameworks of the JOC.

It is my opinion that the Preliminary Specification is not revolutionary in its move to the Joint Operating Committee, but evolutionary. Particularly from the point of view that we are moving towards the common-sense form of organization of the industry. Leaving this 1960’s “systems thinking” that is prevalent in today’s systems behind. This is what is necessary for the innovative producer to attain the speed of operations to compete in the 21st century oil and gas industry.

We also must contend with the concepts that originated in the minds of the software developers of SAP and Oracle which certainly were different then what have been stated in the Preliminary Specification. I believe that whatever their vision may have been, for oil and gas it is misguided as it does not recognize the unique nature of the business, the Joint Operating Committee. The unique nature of the industry had developed solutions to the problems and manner of operation. Those solutions consist of the JOC and the dependence on the market to provide for its needs. I can't think of an industry that comes close to the culture of the energy business.

Today the technologies involved in the Internet provide the industry with the opportunity to realize the fashion that it operates is unique, and deal with those anomalies in the best Interests of the industry. A dedicated software developer to build the systems that mirror the manner of the industries operations, the Joint Operating Committee and marketplaces, will enable greater innovation by relying on the marketplace and allowing the innovation to flow from wherever and whomever. This will not happen by chance. It is a deliberate act. And today that demands a software development capability and vision like that offered by People, Ideas & Objects and the Preliminary Specification.

Here again, I think the problem is one of conceptual imprecision. It is perfectly common, and often unobjectionable, to contrast a market and an organization, that is, to contrast the institution called a market and the institution called an organization (such as, notably, a firm). But the opposite of “organization” in the abstract sense is not “market” but disorganization. More helpfully, the opposite of conscious organization is unplanned or spontaneous coordination. In this sense the market-organization spectrum (and similar spectra one could imagine) are arguably orthogonal to the planned-spontaneous spectrum. One could well wonder, as I have (Langlois 1995), whether large organizations do not in fact grow far more as the unplanned consequence of many individual decisions than as the result of the conscious planning of any individual or small group of individuals. And it is certainly the case that, as Alfred Marshall understood, both firms and markets “are structures for promoting the growth of knowledge, and both require conscious organization” (Loasby 1990, p. 120).

Therefore development of the “Marketplace Interface,” is not a nice to have but a necessary for the innovative oil and gas industry. And the first technology I want to discuss will reside in the Oracle Fusion Middleware layer. It is in fact the “Marketplace Interface” that is made available through the open source Open Wonderland organization. Recall that there is only one “Marketplace Interface” that serves the three marketplace modules of Resource, Petroleum Lease and Financial Marketplace modules.

The origins of the Open Wonderland organization are of interest and pertinent to the discussion. Originally a Sun Microsystem research initiative the Project Wonderland development was open sourced and made available to the larger community. When Oracle purchased Sun Microsystems it deemed that the technology was of no commercial value to it or its customers and set the community to find a new home. Needless to say Open Wonderland has struggled since, without a major sponsor the technology has not advanced and the marketing of the technology is limited and difficult. There seems to be an inability of the community to relate the marketplace metaphor for the technology. That is what I think they need to make theirs the killer app in the commercial market space.

Open Wonderland is written in Java and therefore consistent with the Oracle Fusion Middleware server. Having this operate as a module in itself would not technically be an issue. The business risk of using the technology of a weak organization is mitigated by the fact that they have open sourced the code for the applications. If something should happen to Open Wonderland as an organization there is still an avenue to pursue with the code itself. It would be incumbent upon People, Ideas & Objects, when our revenue streams begin, to support initiatives such as Open Wonderland since we are in direct benefit of their technologies and their organization.

(Please review the video below.)

The “Marketplace Interface” is a place where anyone in the oil & gas or service industry is able to establish a market presence or create an avatar to collaborate with others within the industry. People, Ideas & Objects will enable these avatar’s to conduct business through the ERP service of the People, Ideas & Objects application modules and the Oracle Fusion Application modules. Interactions such as buying and selling oil and gas assets, purchasing field services, creating an AFE, making decisions within a Joint Operating Committee. Doing many of the things that can be done physically, only virtually through the use of the avatars that have been created and enabled in the “Marketplace Interface.”

Here’s why I think the “Marketplace Interface” is so critical to the innovative oil and gas producer. Phone calls can’t do it. That is to say they are usually, or preferably, with only two people. They can’t be documented and any business that arises from them has to be entered in other systems. They do have the benefit of spontaneity and are available anywhere. Meetings are difficult to schedule all the participants within a reasonable time frame, no spontaneity, no virtualization. However they are easily documented and business that arises from them need to be input into other systems. Meetings can be with any number of people, however the law of diminishing returns comes into play. There has to be a compromise in terms of these two mediums of collaborations. Keep the phone calls and the meetings and add the virtual collaborations from the “Marketplace Interface.”

The “Marketplace Interface” will provide the spontaneity of the phone call and the ability of people from far distances to meet up in no time. Documentation of the business can be comprehensive and include video of the simulation and copies of the documents. Any business that is generated during the meetings can be dealt with through the “Marketplace Interface” by selecting the appropriate ERP related option-command submenu. Productivity would be the result. Attendance at these virtual meetings could increase and overall travelling time would be substantially reduced. The follow-on business associated with meetings would be initiated during the meeting and things would get done. Not so much a fancy technology but a real productivity enhancing business tool.

(Please review the video below.)

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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.