In oil & gas there are two methods to capture costs. The first is the AFE for capital, and the second is the Lease for revenue and operating expenses. These have been the standard methods used throughout the industry for many decades. They have served the industry well, particularly from the point of view of distributing costs and revenues to other working interest partners. We are introducing an additional document to augment the AFE and Lease and improve cost control in the industry. It is what People, Ideas & Objects call a Work Order. It has two distinct roles and captures costs in ways not captured today. A key objective of the Work Order will be to enable innovation within the oil & gas industry, producers,and Joint Operating Committees. Enable innovation in the science and technology of oil & gas exploration and production.
The Work Order is an implementation of our Accounting Voucher. A feature that we introduced as a separate module in the Preliminary Specification and a reflection of the capabilities of the Vouchers template characteristic. The Work Order is designed to capture costs in producer firms, Joint Operating Committees or other organizational structures that may or may not have a defined structure in terms of a formal agreement supporting the project or Joint Operating Committee. In these ad hoc organizations, costs and revenues could be assigned and authorized in the Work Order. These are not generally material costs, but they involve other complicating factors. This is not a license to spend funds in unauthorized areas. It is a feature of the Preliminary Specification that enables innovativeness to expand by allowing informal collaborative research and development work to be conducted throughout the industry. This is on the basis of its sciences and applied sciences. A means to benefit those participating in the research and development project.
Today these types of costs fall outside the scope of the authority and responsibility of the producers' management. As a method of capturing costs, the AFE and Lease currently constrain producers. These costs are therefore accountability and accounting nightmares that have proven to be more onerous for those that have attempted to benefit from conducting this type of research and development or even ventured to suggest them. Accounting for them is usually manual in nature as it is necessary to capture the distinct understanding of each effort and reflect it appropriately from a business perspective.
Examples of these costs may include a geologic study of producer shale gas characteristics in the Permian vs. those in Pennsylvania's Marcellus formations. An investigation of the effect of fracting a multilateral section of shale gas wells on a longitudinal vs. latitudinal orientation on multilateral results. The last one was made up, but these types of studies would not be specific to any one property. They are necessary to advance the industries underlying science and technology, costly for one producer to undertake and of limited value to the one producer that undertakes them. If costs can be mitigated through a shared model the results become more valuable, and it is this distribution of knowledge that is the basis of what we learned in our research from Professor Giovanni Dosi’s “Sources, Procedures, and Microeconomic Effects of Innovation.” That would be of benefit to any of the producers who participated in the study. Contributions from the producers could include financial or technical resources, computer simulations and other data, assets or value that a producer could contribute to the study. All participating producers would be entitled to the findings if their contributions were deemed equitable and other criteria for how long the study would take etc were defined. From this a group of producers would gain a better understanding of whatever they were studying. It is helpful to remember that innovation isn’t always due to these successes but also the failures that prove what the science is not.
The other method in which the Work Order is employed is in the process necessary for a dynamic, innovative, accountable and profitable industry to broaden science and applied science resource availability. This is done through specialization and division of labor of earth science & engineering capabilities of each producer firm and industry. What People, Ideas & Objects define as one of the producers' competitive advantages. The other being their land & asset base.
In order to unleash the unshared and unshareable aspects of these critical, competitive and soon to be constrained resources to the broader market based on their specialization. This is done through the elimination of today’s operator role in the Joint Operating Committee and introducing the Preliminary Specifications pooling concept. The “pooling concept" involves those with the required specializations available from the participating producer firms making up the properties Joint Operating Committee, or the market of earth science and engineering capabilities that are available to fill the needed role demanded of the property. The pooling concept is designed to introduce advanced specialization and division of labor to these resources. And to release what we’ve described as the hoarding of these resources in each producer firm. The need to have just-in-time capabilities available to meet the demands of the producer's operated properties requires that a surplus capacity of engineers and earth scientists be available to deal with the cyclical nature of the internal demands for these resources. This hoarding consumes large amounts of these resources in terms of industry population.
To make my point clear, let's break down a process that may be provided as a more effective service. This is in terms of the type of earth science or engineering resources that could be reorganized based on specialization. In order to drill a well successfully, effective well control is necessary. This can be achieved when the well is drilled on a known seismic line that reflects the targeted zones' geological features. It can then be compared with a variety of well logs from similar wells in the area. These wells are produced in the target zone or drilled there. In this way, the sea level could be determined and the depth of the well can be ascertained. This could be done in the future by an outside service that specializes in a variety of these different processes of analyzing the logs. This could include using the seismic to choose the well location and picking the tops. These technical specialists could manage machine learning, Artificial Intelligence and have human determinations in the selection of the tops. This would enable quicker turnaround, at a much lower cost and with higher quality. Releasing the vast numbers of technical resources burdened by these tasks by each producer today. The service provider's results are available for the producer to verify. Much of this is done in software today, however by the producer firm with the resources of the firm being dedicated to it in an unshared, unshareable and unspecialized manner which is costing the industry and producers due to the inefficient use of engineering and geological resources consumed within each producer. With less specialized equipment and constantly switching between tasks unnecessarily and inefficiently. These technical tasks can be provided to the producer firm to establish valuable well control. In turn the engineering and earth science resources of the producers would be focused on the highest level, value generating methods of dealing with the firms and Joint Operating Committee assets. While the service provider specializes in highly sophisticated ways to ensure service delivery is of the highest quality, lowest cost, precision and effectiveness.
The other example of our Work Order is noted in Organizational Constructs. This changed start-up and small oil & gas producers' competitive advantages to include Intellectual Property to earth science & engineering capabilities and land & asset base. Essentially the other side of the transaction outlined previously. The ability to generate initial revenues using the Work Order from the services provided. This is done by marketing the start-up's Intellectual Property and earth science and engineering capabilities to other producers and Joint Operating Committees. These revenues would help offset the difficulties of the start-up oil & gas process and defer much of the overhead burden today. Moving the success or failure of the start-up oil & gas firm from its ability to access capital to its technical capabilities. It won't be an industry based on who you know in the future, but on what you know, and what value you bring. These will be the determining factors of success and failure in the future oil & gas industry.
Facilitating these changes is the Work Order and this is our solution to the constraint of these resources in the foreseeable future. What is agreed upon is the lack of replacements and the retirement of the industry braintrust. What we know is that the North American economy is the most powerful economy in the world and will continue to be so. For the oil & gas industry to attain and maintain profitable energy independence, it will require much more of this existing scientific and technological resource base that may be static in terms of its population for some time. This shortage may be further aggravated as we also know that each barrel of oil produced will continue to be more difficult from an earth science and engineering point of view. Work Orders resolve this shortage by leveraging more throughput from the same resource base by leveraging specialization and division of labor principles. These are some of the Work Order details.
The Work Order system for budgetary control
We discussed how the Joint Operating Committee managed who was available to work on the property. The ability to pool earth science and engineering resources from the partnership is asserted as a necessity in the future of the oil & gas industry. It should be stated here that our Industrial Command & Control Metaphor would not be limited to just earth science and engineering disciplines. Instead, it would include everyone employed within producer firms. So this would help us deal with who, now we need a mechanism to deal with what they'll do.
The next part of the Partnership Accounting module deals with the operational side of how field work within the Joint Operating Committee gets completed. Partnerships have always had AFE’s and operations budgets to address how much will be spent annually at a facility etc. In People, Ideas & Objects, these continue in their traditional ways. This discussion deals with how the Industrial Command & Control Metaphor can deploy resources and authorize budget spending in a manner that provides for the governance of the Joint Operating Committee. We are talking about the collaborative Work Order System that is part of Partnership Accounting and other modules. (Compliance & Governance, Petroleum Lease Marketplace, Resource Marketplace, Accounting Voucher modules etc).
Deployment of these people within the Joint Operating Committee, with the budgets agreed upon, is not enough to satisfy any interpretation of appropriate governance. Proper authorization and responsibility are needed to ensure plans and budgets are executed successfully. Without a work order system within the People, Ideas & Objects application, governance of the property would not be possible. The ways and means of successfully controlling costs and deploying resources in a manner to complete the tasks at hand are what the work order system is designed to accomplish.
The work order system will be deployed in the following manner. If someone asks you to work on a project, your first question should be “what’s your work order number?" Then your time will be charged to that code. It doesn’t matter if you're an employee of the producer where the request came from, a partner in a Joint Operating Committee, a vendor or supplier. If they don’t have a work order number you're not generating revenue. If they have a number, you key the work order number into your device or keyboard and continue. The work order system aggregates and bills your time spent working on that project. The details of the Work Order, chain of command, tasks and deliverables are all delivered within the work order system provided when you key in the number. Your role, based on your capabilities, is populated with those who are also part of that Work Order.
Note that one of the benefits of this system is that no unauthorized work gets done without a work order. Assigning budgets from an AFE, Lease or from internally sourced overhead accounts will be a matter of selecting from budget accounts or from pre-approved allocations. The ability to approve a work order would therefore be at an appropriate level within the chain of command of the Joint Operating Committee. This would be pre-authorized and designated through the Industrial Command & Control Metaphor (involving multiple producers) or producer firm. If a work order were to exceed its budget it is reasonable to assume that it was exceeding its AFE or account budget(s if it involved multiple producers), which could trigger action from the Compliance & Governance module of the People, Ideas & Objects application, if that is what management desired or deemed necessary and established in that module.
What People, Ideas & Objects propose in the Preliminary Specifications Partnership Accounting module is nothing like any other joint venture accounting system. When we account for the Joint Operating Committee as the key organizational construct. Align all producer and Joint Operating Committee frameworks together. Unleash innovation of both the producer and the Joint Operating Committee. Accounting becomes a torrent of activity where no transaction is the same as prior decades or generations.
Some processes described in the Preliminary Specification involve multiple organizations, over multiple accounting periods. Whether that’s the development of capabilities that begins in the Research & Capabilities module. It touches on the Resource and Financial Marketplace modules, and passes to the Knowledge & Learning module. Some of these processes carry transactions that are as complex and difficult to quantify as the process. Some will be for the joint account, some will be for the producer to incur on their own. As we learned in the Financial Marketplace module some transactions might be the result of an investment by an investment group.
Discussing the Work Order system that controlled project costs. The projects contained within a Work Order might be funded by multiple producers, AFE’s or budgeted accounts, and as a result we will be able to control the costs of the project, monitor them and maintain governance through the use of our Industrial Command & Control Metaphor of the People, Ideas & Objects system. The Work Order system will be able to charge the costs to the appropriate owners of the projects. This will be established at the Work Order initialization. Since the Work Order is a multi-organizational system, members of a Joint Operating Committee or members of the field services industries will be allowed to participate in a Work Order. This means they will then need to pre-approve their participation in the project. The accountant working within the Partnership Accounting module won't be running around trying to seek approval from partners to authorize individual expenditures on projects that weren’t authorized or budgeted properly. If everyone within the industry works to chargeable work orders, and all work orders are approved by those who will be financially responsible for the charges, then the accountant's job in chasing their tail and aggravating people is over.
The point of the Work Order system is hopefully not lost on others in the industry. Some may feel that the Work Order duplicates the AFE attributes, and I would argue that they are fundamentally different. The AFE approves spending for field level and construction projects of a capital nature. The Work Order system is a means to deploy the producer or Joint Operating Committee capabilities in an authorized and ad-hoc manner. When we extend the Work Order system across multiple producers, Joint Operating Committee and suppliers, the ability to deploy the capabilities of multiple organizations will enable the innovation that we are seeking in the oil & gas industry. The Work Order may take budget dollars from multiple AFE’s and assign them to a team of engineers that are asked to develop the process necessary to make their firm more capable. Or, departmental budget dollars from two producers may be contributed to a Work Order for their Geologists. This will enable them to attend a conference and conduct research on some promising development. The defining element being that no one works without a Work Order to charge their time to. No Work Order can collect charges without budget pre-authorization and approval.
This will make the Partnership Accounting module workable from the point of view of controlling the costs of the multitude of different arrangements being implemented within organizations. If the accountants are tasked with putting together the costs and determining who is to be charged after the fact, this is how they become the annoying bothersome people they can / have become and accountability frightens those into inaction. By imposing the Work Order system in this fashion, within the Partnership Accounting module, the arrangements are pre-determined and authorizations are required before charges can be incurred. Making accounting for capabilities deployment systematic instead of problematic, resolved before the fact and automated. This is not about accountants hounding people trying to understand why such and such was done.
The Work Order system as a tool for innovation
We are discussing the role that the Work Order system would have in clearing up the administrative minutiae of the accounting related issues of the Partnership Accounting module. I want to continue that discussion and ask what that has to do with innovation? Let's look at the Work Order system from the perspective of a successful producer in the marketplace. They have developed an earth science and engineering capability. The CEO is approached by one of the engineers who hears of several other producers who are conducting a study on something of interest to the firm. They are looking for other participants to join in and you want the engineer that brought the news to join in the project. Assuming each producer was using the Work Order system they would pool the resources they have within the Work Order that was set up to manage the project. You committed to a 10% share of X costs. You offset those costs with your engineers' time, office space and computer resources. (Note all of these producers' costs are pre-approved and budgeted from other accounts.) With the Work Order you could make these commitments subject to the other 90% being committed to, and then your approval would be automatic.
We have here the means by which people working within the industry can commit to programs and projects in a manner that is natural to their business. This is the way systems should work today. What we have today is an impediment to the industry operator who feels that participation in the study with the other producers would be worthwhile. However, the accounting, approval and accountability nightmare will haunt him for the next three quarters. It will subject him to regulatory oversight that questions his moral integrity. So instead the project doesn’t get proposed, funded, participated in or done.
In Professor Dosi’s paper “The Sources, Procedures and Microeconomic Effects of Innovation” he discusses the role a number of administrative minutiae have on innovation.
The discussion will aim to identify (a) the main characteristics of the innovative process, (b) the factors that are conducive to or hinder the development of new processes of production and new products, and (c) the processes that determine the selection of particular innovations and their effects on industrial structures.
There are financial resources available in our example. Motivation exists within the organization to do an excellent job on the project. What happens is bureaucracy gets in the way and slows things down and makes it a task that requires superhuman effort to even try. And maybe one or two projects will get done each year out of sheer will. But what is needed is the ability to conduct a volume of projects far exceeding one or two, and that is beyond the scope of the organizational context as producers are organized today. Without ERP systems to define and support these innovative processes and ad hoc organizations, these processes will not spontaneously appear.
We discussed how one producer could participate in a study with other producers by setting up a Work Order to capture their involvement. Their contribution involved one engineer, office space and computer time. That they would contribute some cash was also a possibility as they signed on for 10% of the project's projected costs. I wish to discuss producers' involvement and how the Work Order system, being a multi-organizational system, can capture the different ways each producer will participate and account for these differences within the People, Ideas & Objects Partnership Accounting module.
The emphasis remains on these producers' innovation. Collaborations and interactions between producers and industry participants will lead to many innovations in the future. The impediment to doing these as a result of the bureaucracy and the current suite of accounting systems in use in the oil & gas industry is what I want to contrast in this scenario of using the Work Order. It's time in this day and age that systems become as elaborate as what is described here. This is so that innovation in earth science and engineering disciplines can occur. Professor Giovanni Dosi expands on this point further in the following quotation.
Additional issues include the conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulation, tax codes, patent and trademark laws and public procurement.)
As part of the project that the producers wish to participate in. Some want to contribute a variety of different resources, some have specialized capabilities that are critical to the project and others are more or less along for the ride and are willing to participate by paying cash. Some have an AFE that has been approved that directs funds to pay for their participation. It is possible for some companies to incur the costs as part of their annual engineering payroll budget. Others have a working interest partner that is willing to share the costs over Joint Operating Committees. The combinations and permutations of how a Work Order gets financed and funded are unlimited when we consider the number of different ways producers can participate.
Now to have a Work Order system that takes the information from these various parties and assimilates the understanding of the deal from the five or six people who have the “meeting of the minds” to initiate this project is the critical point to start. People, Ideas & Objects Partnership Accounting modules Work Orders should clarify their understanding of how their participation is funded and costed. All of the participants use one Work Order, or in this case an Accounting Voucher, that is shared across all of the producers. This agreement's understanding needs to be captured within the Work Order system before approval by these producers. An Accounting Voucher must not only contain accounting details, but also identify the sources of funds. Within the Preliminary Specification we are moving away from traditional transaction recording. Automation is the focus and this can be achieved through the design of transactions. This way the system can process the charge within the firm in the manner it was expected to be. For any charges that are above the threshold that a firm was willing to commit to, that implies that another firm's cash commitment would be provided to cover those costs. The Work Order should make these cash transactions between these producers as a result of the document approval. The point of the exercise is that once the Work Order is approved, the understanding of the deal, as captured by the interface, or the designed transaction, is executed.
As I indicated, an accountant's ability to follow on with the necessary accounting for these transactions requires significant recreation of the “deal” and the time of the parties who conceived of the deal in the first place. A bureaucratic waste of time. The Work Order interface should be sophisticated enough to understand the substance of the deal. This is in whatever permutation or combination the creators chose at the beginning. I understand the myriad ways to do these and the difficulty in making an interface that captures them. That I don’t think is the difficult part. What I think would be the difficult part would be to create an interface that provides these services in a manner that is simple and easy to use. This interface should capture the deal's substance. I, however, know it can be done. The reason it hasn’t been done is that the budget for software development like this has not been set out.
Continuing the scenario of using the Work Order system across multiple producers. I will use this scenario to show how the Partnership Accounting modules integrated nature with the other modules of the Preliminary Specification provides value to these ad-hoc working groups. Also why they are such a crucial element of innovation in oil & gas.
We used the scenario in engineering, however it could just as easily be used in geology or any other area of oil & gas interest. A working group could also include the vendor or supplier marketplace. The importance of the Work Order is that the producer or participant can designate how they want to participate in the working group. Before their approval they are allocated the source of funds and where the costs will ultimately be allocated because of their participation. Each participant or producer in the working group conducts this, all within the same interface for the same Work Order.
One of the most obvious areas that this interface will interact with the other modules is the Security & Access Control module. Access to the Work Order will be unlimited for a certain period of time. It will then need to be closed to everyone except the existing working group members. An interesting point will be reached when the search for participants reaches a threshold and the people feel there is sufficient substance for a working group. Only those who are within the working group, or are subsequently granted direct access can participate directly in the working group.
With the Security & Access Control module we also inherit the Industrial Command & Control Metaphor. This allows people to impose a chain of command across the working group. This might be something they want to do if they have a difficult task or a large group of people. The opportunity to do so is available to them if they so desire as this is part of the Security & Access Control modules core functionality.
The designation of the source of funds and where costs will be incurred is coded directly to those accounts. This is the Work Order taking on elements of the Accounting Voucher module. Each producer's accounting system will be charged, upon approval of the Work Order, according to the way they have coded the Work Order.
I see these working groups, as we have called them here, as an essential element of how an innovative oil & gas industry identifies and solves its problems. Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi defines this as “In other words, an innovative solution to a certain problem involves“discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve information derived from experience and formal knowledge. It is the specific and uncodified capabilities, or “tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.”
It is therefore asked specifically, how can the knowledge, information and capability of oil & gas firms solve technical and scientific problems of the future? How can a firm more effectively employ its capability to solve problems and encourage the discovery of upcoming problems and creation of their solutions? Clearly some companies are more effective at this process than others. However, this research in oil & gas asks, is there a means for an organization to increase its ability to innovate that leads to higher performance trajectories?
Having these working groups spawn at will without the bureaucratic, accountability and accounting logistical nightmare that they instill today will be a significant first step in making the industry more innovative.
The complexity of the relationships within the Joint Operating Committees must be captured and accounted for in the Partnership Accounting module of the Preliminary Specification. Whether we are talking about the various forms of contribution that a producer may make to the joint account, or how they may participate in a working group, the bureaucratic machinations of accounting for these transactions can’t stand in the way of the innovativeness of the producers.
Business arrangements are difficult to capture and account for today, inhibiting the freedom to participate. What is needed is the ability to develop software that captures the substance of the manner in which contributions are made, and then the manner in which they are accounted for. That is the purpose of the Partnership Accounting module, to support the innovative oil & gas producer in innovative actions. Professor Giovanni Dosi emphasizes once again the need for business aspects to support the technical aspects of the business.
Internalization and routinization in the face of the uncertainty and complexity of the innovative process also point to the importance of particular organizational arrangements for the success or failure of individual innovative attempts. This is what was found by the SAPPHO Project (cf. Science Policy Research Unit 1972 and Rothwell et al. 1974), possibly the most extensive investigation of the sources of commercial success or failure of innovation: Institutional traits, both internal to the firm - such as the nature of the organizational arrangements between technical and commercial people, or the hierarchical authority within the innovating firm - and between a firm and its external environment - such as good communication channels with users, universities, and so on - turn out to be very important. Moreover, it has been argued (Pavitt 1986; Robert Wilson, Peter Ashton and Thomas Egan 1984) that, for given incentives and innovative opportunities, the various forms of internal corporate organization (U form versus M form centralized versus decentralized, etc.) affect innovation and commercial success positively or negatively, according to the particular nature of each technological paradigm and its stage of development. p. 1135
Capturing the context of the deals made in both the Joint Operating Committee and working groups as described here in the Preliminary Specification can’t be done historically. What is needed is for the software to be robust enough for the dealmakers to use while formulating the deal, to capture the substance of the deal, so that understanding will be used to allocate the costs and charge their accounting systems for these costs when they are incurred. The process we’ve defined is Designing Transactions within the Preliminary Specification. Then and only then will accountants have a chance of keeping up with the speed and innovation of the industry as it is contemplated here. Technical people will be free to pursue their science and not be hounded by those looking to recreate what was history and dealt with long ago.
This is a necessary part of the People, Ideas & Objects software development team and most importantly, our user community. It won’t be too difficult to capture the multiple and myriad ways a deal can be formulated. The algorithm will be complex but with time and money it can be done. The real challenge in making this critical part of the Partnership Accounting module work is the user interface. Having the user's ability to intuitively use the module to capture their understanding of their part of the deal. This is to capture it in the People, Ideas & Objects system and account for it on that basis. That is what makes this innovation possible.
We discussed previously how producers collaborated on a project to conduct research. The Work Order system of the People, Ideas & Objects Partnership Accounting module enabled the producers, who may not have been affiliated in any form or fashion until this working group was formed, to be able to form and contribute to the project. The capturing of the meeting of the minds was the objective of the Work Order system. To capture the manner of each producer's contribution and payment method at the time the project was formed. This enabled them to be free of bureaucratic difficulties associated with participating in these types of working groups. Today accountants can make participation in these more difficult than they are worth, and therefore, the working groups are avoided. The reason we have to cut through the bureaucracy and promote working groups is that participation in these types of activities is critical to an innovative oil & gas industry.
The accounting interface for the Work Order will have two elements. One will account for the costs. This will list the costs of the working group and your working interest share based on your participation rate. Fairly simple so far. The second element is where problems arise. Participation can be funded from a variety of sources and contributions. Some will have a key piece of research that builds the project. Some will contribute time and some can contribute cash. Combinations and permutations are unlimited. The one constant in these contributions is that they all have budgets. The second element will identify the source of funds or contributions that makes up your participation in this working group. It will need to be determined if that means cash will be transferred from your firm to others by simply clicking on a box in the interface. Once all of the producers have completed their interfaces the balancing of the Work Order will be attempted with any variances worked out to determine who will make up any shortfalls. Once all shortfalls are resolved, work can begin.
