OCI Petroleum Lease Marketplace, Part IV

 The Marketplace Interface

To develop an innovative 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 same way as today underestimates the possibilities. The user interface is the area where most innovation will occur in terms of how people interact with large volumes of data. Google “Oracle Redwood” to see their groundbreaking work in Oracle Cloud ERP. 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 of three “marketplace” modules in the Preliminary Specification. Like the Resource Marketplace module, which deals with resources used in oil and gas development, the Petroleum Lease Marketplace emulates the marketplaces for Petroleum & Natural Gas Leases, concessions, etc. And the associated activities involved around those “things.” What is helpful in understanding the capabilities attained by developing “marketplaces” in the Preliminary Specification is this quote from Frederick von Hayek in “The Use of Knowledge in Society”.

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 bonus paid on acreage. The price asked by a producer for a working interest share in a property. These are activities that occur in the marketplace every day. What we are doing in the Petroleum Lease Marketplace is emulating the real marketplace to make it thicker and more robust. With market opportunities being dislocated sometimes thousands of miles from interested parties, market participants cannot even on the Internet find someone. However, with a module like the Petroleum Lease Marketplace, you have a focused forum to deal with interested parties. At the same time you have the means to transact and manage the business, develop agreements, pay lease rentals etc. The Petroleum Lease Marketplace is an ERP software environment that emulates marketplaces.

Critical to the success of this marketplace is the further division of labor and specialization. We discussed earlier in the specification how Lease Rental Administration could be handled industry wide by a service provider. There may be other roles in the Petroleum Lease Marketplace that are handled similarly. With the development of these software modules, market supporting institutions would enhance the effectiveness of the marketplace. Providing assurances such as when the P&NG Lease was acquired it was known that it would automatically have its lease rentals processed 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 replicate is a business unit, not some technological solution. A significant difference for the users and producers of the physical marketplace today. They will take advantage of 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 Open Wonderland technology. Here it is shown as an example of what we describe as the ultimate collaborative interface. 

See also this May 29, 2020 Wall Street Journal article.

We have detailed some of the interfaces that would be used by suppliers and vendors in providing specific products and services to oil and gas producers and Joint Operating Committees through the “Marketplace Interface” of the Petroleum Lease Marketplace. We note that the service provider organizations or Industrial Districts as Professor Langlois refers to the concept, is structurally different than in the Resource Marketplace. The "Marketplace Interface" focuses on administrative work. 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 in the “Marketplace Interface” will be to support the transactions 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. Administrative efficiencies and effectiveness are certainly part of that competitive advantage. In this regard, I wish to highlight the fact that the market will be dynamic when it comes to purchase, sale, bidding, acquisition, 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 the property was just posted for sale. It is also listed by zone and product category in international market databases. Soon offers are made and the property attracts a reasonable price. The seller deems the asset to be sold, none of the partners can match the most competitive offer, and the property is sold. With the closing executed, the administrative tasks of recognizing the leases, agreements and partners are completed. Additionally historical data may be available to be copied to the purchaser's Cloud Administration & Accounting for Oil & Gas for reference.

Or something along those lines. The point in this scenario is to briefly show how many of the attributes we have been discussing 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 supported by transaction processing that is as complex as necessary to close the most complex of purchase or sale agreements. This is how innovative oil and gas producers 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 in the Preliminary Specification. During the 1960's systems capabilities were limited and applications were quite crude. Organizational developments were therefore constrained by Information Technologies limitations. Systems development focused on the firm itself, and that focus was driven primarily by firms' compliance and governance requirements (Accounting, Tax, Royalty, SEC etc). During this time, in oil and gas, the Joint Operating Committee was secondary to the demands of the firm's compliance and governance frameworks. This system's thinking grew over a period of time that 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. In contrast, they became more withdrawn from the Joint Operating Committee seven frameworks.

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 industry organization. Leaving this 1960’s “systems thinking" behind. This is what is necessary for the innovative producer to achieve 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. These concepts were different from 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 has led to new solutions and new methods of operation. Those solutions consist of the Joint Operating Committee and market dependence. I can't think of an industry that matches the energy business culture.

Today the technologies involved in the Internet provide the industry with the opportunity to realize that the manner in which it operates is unique. It can deal with those anomalies in the best Interests of the industry. A dedicated software developer to build the systems that mirror the industry operations, the Joint Operating Committee and marketplaces, will enable greater innovation by relying on the marketplace. This will allow innovation to flow from wherever and whomever. This will not happen by chance. It is a deliberate act. And today that demands software development capability and vision like that offered by People, Ideas & Objects and the Preliminary Specification. From Professor Richard Langlois paper “The Vanishing Hand: The Changing Dynamics of Industrial Capitalism”

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, the development of the “Marketplace Interface" is not an option to have but necessary for the innovative oil and gas industry. And the first technology I want to discuss is Oracle Cloud ERP. It is in fact the “Marketplace Interface" made available through the open source Open Wonderland organization. Recall that there is only one “Marketplace Interface” that serves the three marketplace modules, the 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 project, Project Wonderland development was open sourced and made available to the larger community. When Oracle purchased Sun Microsystems it was deemed that the technology was of no commercial value to it or its customers. It 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 a lack of understanding of the marketplace metaphor within Project Wonderland. That is what I think they need to make it the killer app in the commercial market space.

Open Wonderland is written in Java and therefore is compatible with the Oracle Cloud ERP. Having this operate as a module in itself would not technically be an issue. The business risk of using weak organization technology is mitigated by the fact that they have open-sourced the code for the applications. If something happens 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 directly benefit from their technologies and their organization. 

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

Here’s why I think the “Marketplace Interface” is so critical to innovative oil and gas producers. 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 must be entered into other systems. They have the benefit of spontaneity and are available anywhere. Meeting scheduling is difficult, spontaneity is impossible, and virtualization of this kind is possible. However they are easily documented and the business that arises from them needs to be input into other systems. Meetings can be with any number of people, however the law of diminishing returns comes into play. There must be a compromise between these two forms of collaboration. Keep the phone calls and the meetings and add virtual collaborations from the “Marketplace Interface.”

The “Marketplace Interface” will provide the spontaneity of a 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 generated during meetings can be dealt with through the “Marketplace Interface” by selecting the appropriate ERP related option-command submenu. Productivity would follow. Attendance at these virtual meetings could increase and overall travel time would be substantially reduced. Follow-up business associated with meetings would be initiated during the meeting and things would get done. A real productivity-enhancing tool, not just Information Technology for its own sake.

OCI Petroleum Lease Marketplace, Part III

 The Strategy Interface

What People, Ideas & Objects is undertaking in developing the Preliminary Specification is the simple process of moving the compliance and governance frameworks of the innovative oil and gas producer into alignment with the Joint Operating Committees legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks. This discussion will deal with the strategic framework and how the Petroleum Lease Marketplaces “Strategy Interface” works to communicate the unique strategic direction of each of the Joint Operating Committees the producer has an interest in. In addition, the business model provided to an innovative and profitable oil and gas producer using the Preliminary Specification will be discussed.

In each property, earth sciences and engineering are required. Producers' ability to apply generic corporate strategies to all of their properties is quickly expiring. A unique strategy for each property must be developed to address each property's unique characteristics. Each property's unique strategy will be the result of collaborations among the Joint Operating Committee participants and will be subject to change from time to time. A key determinant, or business model, is optimizing reserve value profitably consistently over the project's life. The model must be transparent, and flexible enough to adapt to changing commodity prices. It must also be tailored to the financial goals of the project, with an emphasis on maximizing efficiency and minimizing risk. Finally, it must be designed to be a long-term, sustainable strategy that will ensure the profitability of the project.

Placing the Strategy Interface in the Petroleum Lease Marketplace is the logical location for this information. Along with the agreements, leases, AFE’s, and other partner related information that shares several things in common with the “Strategy Interface.” Those common threads are the collaborative nature of the development of the documents, and the access privileges that will be used to access the information. Each producer has read / write access to each property that they have an interest in. Where they can collaborate within the partnership on the overall strategy and tactical direction of the property. Where individuals who are authorized to work within the Joint Operating Committee through the Security & Access Control module, and who are authorized with read access to the Strategy Interface are able to determine whether their actions are in line with the strategic intent of the property. Additionally, the Strategy Interface provides a platform for the producer to communicate and collaborate with other partners in the property. Allowing each partner to share their thoughts and ideas in order to reach a consensus and move forward with the overall strategy. The Security & Access Control module ensures that only authorized personnel have access to the Strategy Interface.

From the producers perspective they have a database of strategic documents unique to each property. They can determine quickly what the strategy is for any property and engage the specific people responsible for further information. Although each property follows its own proprietary strategy, the producer firm is not without its input. It can quickly determine the key strategic direction of the property.

We have now documented the “Strategy Interface” of the Petroleum Lease Marketplace module of the Preliminary Specification. This being a simple collaborative interface that documents the unique strategy of each and every Joint Operating Committee the producer has an interest in. This further discussion will deal with the positive attributes of the Strategy Interface, the application of the business model and the difficulties it will impose on bureaucracies unwilling to consider individual property strategies.

Natural gas is experiencing an exceptional situation with the prolific nature of shale gas discoveries. And oil continues to experience high global demand and prices with nominal supply growth. Providing energy for today's markets requires more complex earth science and engineering than in the past. The land and asset base of an innovative and profitable oil and gas producer is the basis for competition. For producers, now is the time to adopt a profitable and performance-driven business model. People, Ideas & Objects Preliminary Specification provides that updated business model for the industry. One that is based on the decentralized production model that sees the producer firm reduced to C class executives, earth science and engineering resources, some legal and support staff. The remaining administrative, accounting and overhead resources are reorganized into service providers focused on the industry-wide process. Processes like lease rental payments, production, revenue and royalty accounting, etc. Our business model enables the producer firm to focus on its core business of exploration and production. And converts overhead costs into variable characteristics, based on profitable production. It is therefore most profitable when only profitable production is produced to ensure oil & gas replacement value is earned.

In this manner, when the service providers provide production accounting services, they can bill the Joint Operating Committee for production accounting services. Note: They bill the Joint Operating Committee and not the producer. The property may be shut in if it fails to meet its marginal cost and moved to the producer's work-in-progress inventory. This allows innovative work to be undertaken to return it to profitable production as soon as possible. While shut-in all of the administrative, accounting and overhead costs that are typically incurred by the service providers will not be incurred and therefore will not be charged. Causing the property to report a null operation and saving the reserves for a time when they can be produced profitably. This will achieve our business model objective of removing surplus commodities from the marketplace and putting a floor under the commodity prices. Shutting in the property is a short-term solution to balancing supply and demand. In the long-term, there needs to be a plan to increase the property's innovativeness, so it can remain profitable and competitive in the marketplace. And ensure consumers have affordable, abundant and independently sourced oil & gas.

The combination of the Strategy Interface with the People, Ideas & Objects Preliminary Specifications business model for innovative and profitable producers. Gives the producer the tools to optimize the value they can achieve from their reserves. This is the way producers can compete in the complex energy era. 

Exploration and exploitation of oil and gas reserves have been and always will be a function of technology based on science. This is undeniable, and is also likely to contribute to the short-term life cycle that many believe will continue. This reserve size and deliverability is paralleled in Professor Giovanni Dosi’s discussion of how innovations in industrial companies have been diluted by demand prediction and lower production volumes. Generic corporate strategies impede the value realization of petroleum and natural gas reserves. An innovative approach will also bring about different strategies in terms of investment timing. Professor Dosi notes;

Finally, empirical studies often show the coexistence, within the same industry and for identical environmental incentives, of widely different strategies related to innovation, pricing, R & D, investment and so on. Specifically with regard to innovation one notices a range of strategies concerning whether or not to undertake R & D; being an inventor or an early imitator, or “wait and see”; the amount of investment in R & D; the choice between “incremental; and risky projects, and so on (see Charles Carter and Bruce Williams 1957; Freeman 1982 and the bibliography cited therein). Call these differences behavioral diversity. p. 1157

Changing the innovative behavior of one producer carries a scope of change that is as broad and as diverse as is contemplated in the business world. Change at this scale often cannot be managed within an organization. Instead, it needs to be managed through creative destruction in the general economy. A time of dynamic change driven by organizational changes focused around the innovative Joint Operating Committee. How can a firm that has been developed in an era of cost control transform themselves into an innovative, dynamic, earth science and engineering focused producer? In many cases the will to do so might exist. However, with the speed and unforgiving nature of the business cycle, not much time will be provided to those attempting the transformation. Since the financial crisis of 2008, we've seen many interesting phenomena in the capital markets. To suggest any trend or definitive result from these would be premature. It's just a different world for oil and gas CEOs than it was before 2008. However I am sure we can all agree that continued production of shale gas reserves at a loss would be the continuation of the destruction component of creative destruction. CEOs need to be aware of the risks associated with overproduction and be prepared to adjust their strategies accordingly. It's worthwhile to remember that creative destruction is not just about destruction; it also involves creating something better in its place. Such a transformation will require an innovative approach such as the Preliminary Specification which capitalizes on shale gas reserves opportunities.

The Marginal Production Threshold Interface

Within the Preliminary Specification the producer can scale back their production in the face of poor commodity prices. This is part of the business model that allows the innovative and profitable oil and gas producers to optimize their reserves. In the Resource Marketplace module we discussed the implications shutting-in production has on production and overhead costs. That is by moving to the “decentralized production model” from the “high throughput production” model it turns the producers' fixed costs of overhead, administration and accounting, into the variable costs of overhead, administration and accounting of the Joint Operating Committee. Therefore all Joint Operating Committee costs decline in line with revenues. With no production there are no revenues, however there are no other costs other than capital costs. Leaving the property, or Joint Operating Committee with no loss, or a null operation during periods of shut-in production. It is in the Petroleum Lease Marketplace module that the capability to reduce production is acquired through the Marginal Production Threshold Interface. This is the subject of this discussion. 

The operational decision making authority lies with the Joint Operating Committee. And we have discussed throughout the Preliminary Specification how the decision may be made to shut-in production to mitigate the losses on the property and to help return the commodity markets to profitable prices across the industry. Ultimately removing the bust from the oil & gas boom / bust economy. With the Preliminary Specifications move to the “decentralized production model,” where all costs are variable and recorded in the Joint Operating Committee. Therefore costs are suspended with the decision to shut-in production when triggered through the Marginal Production Threshold Interface. 

The Marginal Production Threshold Interface would provide the collaborative means by which the Joint Operating Committee would agree to the criteria for suspension of production. We see today with natural gas prices in North America, a situation where no one makes money. When prices meet the criteria the partnership has agreed to, i.e. the marginal costs, the decision to curtail production can be carried out. Whether that is manually issuing the order to shut-in production, or if the systems are automated, the system is triggered at the beginning of the month when the criteria is met. 

The Joint Operating Committee has the ability to collaborate and agree among the partnership. Having all of the Joint Operating Committees that producers have an interest in located within the Marginal Production Threshold Interface in the Petroleum Lease Marketplace. This will provide producers with an understanding of their production profile at various price scenarios. Recall within the Partnership Accounting module detailed, actual, factual accounting financial statements are prepared each month to determine the performance and profitability of each Joint Operating Committee. This can be subsequently analyzed through a “what if” scenario page within the interface. 

Every marginal property within the industry would be shut-in and therefore have a null operation if each producer managed its production this way. Reserves would be saved for a time when production was profitable. Production and storage costs would be reduced to zero when reserves remained unproduced. Those reserves would not have to retrieve incremental profits to cover unprofitable production periods. Commodity prices would have fewer and less impactful downside swings due to less overproduction. Or unprofitable production as we've described it. As a result, these prices would apply across the producer's production profile, providing the much-needed replacement value. The current method of managing prices by limiting capital spending, or “capital discipline,” is a very blunt instrument that leads to over and under production at the extremes. Creating a boom-bust economy. People, Ideas & Objects Preliminary Specifications business model, with our user communities service provider organizations, enables producers to stop producing marginal production. This enables producers to employ the only fair and reasonable method of production discipline across North America. Producers, the service industry and all those associated with oil & gas will participate in a dynamic, innovative and robust economy. Providing producers with a wide range of markets for goods and services. And consumers will be assured of a sustainable industry providing affordable, abundant and independently sourced energy. A bit of faith in the markets is all that is required.

Focusing on Capabilities

Discussion begins on the boundary of the firm and markets in the Petroleum Lease Marketplace in the Preliminary Specification. In this section we focus on capabilities. And the question should be what capabilities are we seeking from the Petroleum Lease Marketplace? And why is there a need to transition to this organization model, a marketplace? We begin with a quote from Professor Richard Langlois’ paper “Capabilities and Governance: The Rebirth of Production in the Theory of Economic Organization.” 

The organizational question is whether new capabilities are best acquired through the market, through internal learning, or through some hybrid organizational form. And the answer will depend on (A) the already existing structure of capabilities and (B) the nature of the economic change involved. p. 21

What we currently have are a number of departments; Land, Legal, Land Administration, Production and Exploration Administration and Accounting, which will become elements of the Petroleum Lease Marketplace. These departments will transition to various roles, some in newly formed service provider firms, where they will be part of a marketplace environment. It will be within the marketplace that they will provide their capabilities to those producers and Joint Operating Committees that need their services. 

If a profit opportunity requires a configuration of capabilities different from what already exists in the economy, the Schumpeterian process of creative destruction may be set in motion. p.21

It's a marketplace, not a department within a bureaucracy. A marketplace within the dynamic, entrepreneurial and innovative oil and gas industry. A place where buying and selling leases or interests in properties, making deals or building producers can and will be done. 

Seldom if ever have economists of organization considered that knowledge may be imperfect in the realm of production, and that institutional forms may play the role not (only) of constraining unproductive rent seeking behavior but (also) of creating the possibilities for productive rent-seeking behavior in the first place. To put it another way, economists have neglected the benefit side of alternative organizational structures; for reasons of history and technique, they have allocated most of their resources to the cost side. p. 6

It is interesting that one of the roles of the firm, in this revised boundary of the firm and market, is the enhanced role that coordination undertakes. This next quote states explicitly the need to improve coordination through routines and capabilities. 

All recognize that knowledge is imperfect and that most economically interesting contracts are, as a consequence, incomplete. But most of the literature considers seriously as coordinating devices only contracts and the incentives they embody. It thus neglects the role - the potentially far more important role - of routines and capabilities as coordinating devices. Moreover, the assumption that production costs are distinct from transaction costs and that production costs can and should always be held constant obscures the way productive knowledge is generated and transmitted in the economy. p. 14

Since contracts are one of the key end products of the Petroleum Lease Marketplace module activities. It is these incomplete contracts that will continue to demand the services of those employed in the marketplace and the firm. "Routines and capabilities as coordinating devices." Making the "marketplace" a key interface of the Petroleum Lease Marketplace module. 

We have noted that the ability to build a company was one of the things done while working within the Petroleum Lease Marketplace. Implying that the marketplace was an area where the active state of affairs was to create something instead of filling file cabinets with agreements. This is the key reason why the Petroleum Lease Marketplace must be a marketplace. It must reflect the personality of the people who build their firm. From Professor Langlois’ Competition through Institutional Form: the Case of Cluster Tool Standards. 

Industrial economists tend to think of competition as occurring between atomic units called "firms." Theorists of organization tend to think about the choice among various kinds of organization structures - what Langlois and Robertson (1995) call "business institutions.” But few have thought about the choice of business institution as a competitive weapon. p. 1

The “Marketplace Interface” of the Petroleum Lease Marketplace module of the People, Ideas & Objects system provides innovative oil and gas producers with the competitive weapon they need to build their firm. 

On the other side of the ledger, an open modular system can more effectively direct capabilities toward improving the modules themselves (Langlois and Robertson 1992). Such a system harnesses the division of labor and the division of knowledge, allowing organizational units to focus narrowly and thus deeply; at the same time, it magnifies the number of potential module innovators, and thus can often take advantage of capabilities well beyond those even a large unitary organization could marshal. p. 19

The modular nature of the Preliminary Specification provides this ability to focus on the critical attributes within the module. The Petroleum Lease and Resource Marketplaces are different just as the Financial Marketplace, Research & Capabilities and Accounting Voucher modules are unique. Each has a unique set of individuals and activities. All of these factors work together in support of the oil and gas company's innovative approach. From Professor Richard Langlois’ Organizing the Electronic Century.

A complex systems product is underlain by an architecture: a set of parts and a way of fitting those parts together. An integral architecture is one in which the parts depend on one another in complex and often unpredictable ways: the system is a tangle of spaghetti. By contrast, a modular architecture is one that regularizes the dependencies among the parts, forcing them to interact only in relatively formalized and predictable ways (Langlois 2002b) p. 6

The point that I am struggling to get across is the interface in which users will access this marketplace in the Petroleum Lease Marketplace. It is the "Marketplace Interface" that I am highlighting in this discussion as an oil and gas concern's value proposition. It is through the reorganization of the industry based on implementing People, Ideas & Objects et al's Cloud Administration & Accounting for Oil & Gas. And through this software representation of the marketplace, much value will be gained.

OCI Petroleum Lease Marketplace, Part II

 Revenue Per Employee

One of the complaints I have regarding oil & gas management is the myopic focus on cost control. It arises from an engineering discipline where the most efficient and low cost method is used to solve the issue. Oil & gas needs to be managed as a business and this has been lost in today's industry. To bring back a more rounded view of the overall oil & gas business other elements of what the business involves and where management should focus must be considered. Revenue Per Employee provides a perspective on the producer firm and Joint Operating Committee revenues. How these are enhanced, where their innovations are sourced, where they should be applied and how they compete with other producers. There also need to be objective criteria to evaluate a potential or existing partner's value. A need to value the deployment of their resources to the Joint Operating Committees based on what that producer's capacities and capabilities are. These are necessary as a successful oil & gas producer in the near future will need to know and understand exactly where that success originated and why. 

In terms of evaluating a potential partner firm's performance in a Joint Operating Committee. Determining a property's performance over time. Or to determine the hourly charge out rate of a producer's technical resources. People, Ideas & Objects have developed “Revenue Per Employee” as the metric that provides an understanding of the state of capabilities and innovativeness of a partner firm or Joint Operating Committee. If you calculate revenue per employee you will find rather dramatic differences in terms of the different factors for producers. Special consideration must be given for integrated firms to ensure that you exclude the downstream operations and the smaller producers as the factor unfairly reflects their capabilities. Given the disparity in Revenue Per Employee for producer firms this factor is a valuable tool in determining the appropriate partner to select for a property. It is also an effective tool for motivating teams towards higher capabilities, innovativeness and performance. However, it is most effective in assessing the technical capabilities of producers.

Professor Giovanni Dosi’s paper “The Sources, Procedures and Microeconomic Effects of Innovation'' discusses innovation's role in the market economy. It assumes companies in a free market are willing to invest in science and technologies to advance the competitive nature of their product offering or internal processes. The key aspects of Professor Dosi’s theories that make them directly applicable to oil and gas are the application of innovation theories to earth science and engineering disciplines. These disciplines are key to the capability and success of oil and gas companies in their search for and production of hydrocarbons. The investment in science and technologies is with the implicit expectation of a return on these investments. However, it is also to provide the firm with additional structural competitive advantages by moving their products' costs and / or capabilities beyond that of the competition. Ensuring that your partners in the Joint Operating Committee are of the same mindset and capability is critical to your future innovation strategies. Professor Dosi notes:

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

A meeting of minds regarding innovation has to be established in the Petroleum Lease Marketplace module. This meeting needs to be captured in the agreements and associated modules. We will discuss the revenue per employee factor in the Analytics & Statistics and Performance Evaluation modules in the Preliminary Specification. Maybe what we need to do in the Petroleum Lease Marketplace module is find a place to compare the various producers' revenue per employee factors. This will enable people to determine if they are an appropriate or suitable partner in terms of being an innovative partner. A simple listing of the revenue per employee of your partners and potential partners on its own interface within the Petroleum Lease Marketplace module.

First we should ask ourselves: does the calculation of revenue per employee provide a reasonable comparison of the innovativeness of a producer? Or would this calculation reflect the quality of assets, the size of the firm or its actual innovativeness? That is the question hopefully answered here.

Clearly the factor of revenue per employee would reflect many factors other than the firm's innovativeness. However, would the comparison of revenue per employee over multiple periods determine innovativeness? The increase / decrease in the factor would be due to an increase or decrease in price and volume. The volume being particularly affected by the changes and innovations that occurred over the period in the firm. Another critical determining factor is the number of employees the firm employs. Unreported changes in employee numbers would skew the results significantly.

If the Revenue Per Employee interface in the Petroleum Lease Marketplace module calculated revenue per employee for the participants in the Joint Operating Committees of the producer. And calculate the factor for prospective producers there could be value in determining who would be a suitable prospective match as a partnership in the future. The report could also determine the trajectories on the basis of volume, price and employee variances during the periods under comparison by the user.

So what have we got? We have run some elaborate calculations that “might'' prove that one producer is innovative. What does that prove? That depends on what is expected of you as an innovator. 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 the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.”

Running this factor against the general population of producers within the industry provides value for the user. The ability to highlight who is solving problems in the industry innovatively and partner with them is positive for all concerned. However the real value in the Revenue Per Employee calculation would be the ability to run the report on the basis of the individual Joint Operating Committees that you are a participant in to determine where performance could be improved. Set the charge out rate of producers' earth science and engineering capabilities to Joint Operating Committees.

This is a more difficult task due to the calculation to determine the number of employees on each property. However, with People, Ideas & Objects Preliminary Specifications Industrial Command & Control and Work Order system, it is possible to determine who has worked and how many hours were worked. These systems will record the hours of the people from all of the various producers who are authorized to work on the Joint Operating Committee. Therefore the calculations that were run on the basis of the producers, can then also be run against any and all of the Joint Operating Committees that the producer has an interest in. This would also include the calculation of volume, price and employee variances, and their trajectories over the periods being compared. This being the first step in the process, determining which Joint Operating Committees were the most innovative. Why and how was that the case? And do those innovations apply elsewhere? The next step, and the most significant one, would be to understand where and who the innovations may be coming from.

Leveraging the Capabilities of Others

Our discussion of the producer's capabilities has documented a number of processes through the Research & Capabilities, Knowledge & Learning and Resource Marketplace modules. These are comprehensive processes that enable the producer to develop and maintain unique and valuable competitive advantages in earth science and engineering capabilities. These capabilities should be actively marketed to other producers as a potential partner in terms of the value added to a potential Joint Operating Committee.

We are in a period where the “easy energy era” has passed and it is generally agreed that the complex energy era has begun. The demand for earth scientists and engineers is substantial. This challenges producers to build the capabilities they need to operate all of their properties. Therefore the need to pool their capabilities with their partners in the Joint Operating Committee is not an option to have but a necessity. This pooling can take the form of an ad-hoc disorganized mashing of two or more producers or can be a deliberate construct as a result of the meeting of minds at the beginning of a joint venture. Enabling each producer in the pooled partnership of the Joint Operating Committee to specialize in their earth science and engineering capabilities. People, Ideas & Objects Petroleum Lease Marketplace assumes the latter is the preferred choice and provides the tools to develop these specializations and joint capabilities.

In Professor Giovanni Dosi’s paper he notes the following three factors involved in innovation development.

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

• Capabilities and stimuli generated with each firm and within the industry of which they complete.
• Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.
• 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.)

We assume for the purposes of these writings that the key stimuli are commodity prices which allocate financial resources to fuel innovation. Throughout the Preliminary Specification we focus on the producer's capabilities. What the producer must now learn to do is specialize in their own earth science and engineering capabilities. In addition, they must leverage their partners' specialized capabilities in their Joint Operating Committees.

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

Within the Petroleum Lease Marketplace of the Preliminary Specification we have established two redesigned interfaces. The first is what we have called the "Revenue Per Employee" listing that details the various calculations of revenue per employee by producers within the industry. These calculations are broken down to provide variances based on commodity prices, volumes and number of employees. Further calculations are conducted on each Joint Operating Committee the producer firm participates in. These calculations are broken down by the variances noted above and are confidential to the producers who participate in the Joint Operating Committee. In this case, we look for the trajectory change in the three variables over a period of time.

The second interface in the Petroleum Lease Marketplace is what we call the "Capabilities and Commitments Report." It details the capabilities provided by agreement in the various joint venture agreements the producer participates in. This report also details the commitments that the producer has undertaken to provide in terms of its capabilities under those same agreements. This report enables the producer to fully leverage their partners' capabilities and focus on developing their capabilities. It also meets contractually their requirements.

These reports add value to the producer and the Joint Operating Committees that use the information contained within them. They are unique and provide information that can be used innovatively. Of note I think that a service provider could be established to complete the task of regularly verifying the producer data for Revenue Per Employee on an industry wide basis. That way one service provider would need to verify industry wide producer related information. However, there is more to these reports when used in combination. And what we could provide is a hybrid report that sorts the information based on the Joint Operating Committee, having both the Revenue Per Employee calculation and the determination of the Capabilities & Commitments Report output together. Learning “who” and “where” the innovations were developed.

In our review of Professor Dosi’s paper, he summarizes that businesses commit to innovation stemming from... 

“exogenous scientific factors and endogenously accumulated capabilities developed by their respective firms.” His general point is that “observed sectoral patterns of technical change are the result of the interplay between various sorts of market-inducements, on the one hand, and opportunity and appropriability combinations, on the other.” p. 1141

Recall that “appropriability” for the producer includes lead times and learning curves as more effective ways of protecting process innovations. Therefore appropriability and opportunity are clearly reflected in the Revenue Per Employee report. What the Capabilities and Commitments Report reflects are the “market-inducements.” The result of the “interplay” between these reports would be “patterns of technical change.” That might be a bit of a leap for some to make on an industry wide level, and I would agree, however, the devil would be in the details. On a Joint Operating Committee basis, which we would have the data for, both the capabilities from the partners, the producer and revenue per employee, this information would be valuable.

Any “pattern of technical change” would be triggered by Revenue Per Employee trajectory changes. Most probably by any volume variance trajectory change. Therefore, what was the reason for the change and was it as a result of any change in producer capabilities due to any “patterns of technical change” or “market-inducements?” Maybe I am being too analytical and attempting to extend the value of innovation within the enterprise.

Highlighting what is effective within your organization, from an innovation standpoint, will be a difficult and challenging task. These reports will highlight any success or failure in the current month. I think that provides ample time for the producer to determine the viability of their or their partners' innovative capabilities. These reports are critical for innovative oil and gas producers. In the future, it will be necessary not only to succeed, but also to point to where it originated from.

System, Which System

Previously we documented how the division of labor might affect the lease rental payment process. It was there that we discussed the specialization of 20 individuals who processed lease rentals for all of the Joint Operating Committees who use People, Ideas & Objects. How these people would actively improve the process by identifying “gaps'' and being supported by our software development team to amend the software to accommodate the changes they made to their processes.

The Petroleum Lease Marketplace is rich with processes like lease rental payments. All of these processes as well as those in other modules would be subject to similar changes as those noted for lease rental payments. The Petroleum Lease Marketplace module deals with the administrative details of both the producer firm and the Joint Operating Committee. Both of which will undergo significant changes due to innovation in other areas of the business. What has been a rather constant area in terms of activity and change, the lease rental payment and other processes, may take on a more dynamic feel for the business. When the producer and Joint Operating Committee actively innovate, Professor Giovanni Dosi notes that two distinct phenomena are observed.

First, new technological paradigms have continuously brought forward new opportunities for product development and productivity increases. p. 1138

A rather uniform characteristic of the observed technological trajectories is their wide scope for mechanization, specialization and division of labor within and among plants and industries. p. 1138

The dynamic of the Research & Capabilities process, documented elsewhere, relies on the Petroleum Lease Marketplace for information and resources. The need for it to be responsive to Research & Capabilities changing needs is a necessary requirement of Research & Capabilities' innovative-ness. Looking to model the management of these change processes across all producers within all geographical regions would seem difficult. To capture this change process within People,Ideas & Objects software, is an even more difficult task. However, Professor Dosi notes that there are other serious concerns to consider.

The appearance of new paradigms is unevenly distributed across sectors and so are (a) the degrees of technical difficulties in advancing production efficiency and product performance, and (b) the technological competence to innovate, embodied in people and firms. pp. 1138 - 1139

Simply not everyone will be working off the same page when it comes to the types of innovation, the scale of their application and degree of complexity. In this next quotation it becomes clear that the processes under management by the software are the means in which to deal with these underlying paradigms and trajectories. Therefore, in order for the producers to begin the path of innovation requires that we resolve these process design issues, and build the software before they are implementable within the various disparate organizations.

These distributions of opportunities and competence, in turn are not random, but depend on (a) the nature of the sectoral production activities, (b) their technological distance from the “revolutionary core” where new paradigms are originated, and (c) the knowledge base that underpins innovation in any one sector. p. 1139

As the Preliminary Research Reports research question asked, can innovation be reduced to a quantifiable and replicable process? The answer was an unqualified yes. This last quotation is one of the reasons why. Our software captures the requirements of the "revolutionary core" and "knowledge base that underpins innovation". That does not mean that every producer will fully appreciate or understand the full scope or scale of what the system provides. Only those at the "revolutionary core" will be able to fully exploit its resources. That however, does not preclude the use of systems by everyone within the industry. For example not everyone is at the "revolutionary core" of Microsoft Excel and that does not preclude them from gaining value from its use. 

People, Ideas & Objects believes that if we engineer a software application to deal with these issues, we can accelerate the producer's performance and the industry. From a systems engineering point of view this has been beyond the scope of one software development team working with limited budget resources. For any producer to undertake the required analysis, let alone the development of the systems, is beyond the scope of what is possible or desirable. It is well beyond the scope of any software developer to undertake on their own, in a speculative manner. Therefore, it is beyond the industry's imaginations and possibilities. I would also argue that, in the past, automation of this business process would have generated limited value. Today we can, as with People, Ideas & Objects, define a more specific division of labor and specialization. This will, therefore, provide a more profitable oil and gas operation.

To state this point differently, we can focus the industry's resources on the comprehensive engineering of these processes. Allocating these costs over the entire energy producing base presents opportunities to undertake detailed software development that has not been attempted before. This is the approach necessary to deal with the issues associated with producers meeting market demands. Management of these processes is the key to enabling organizational performance, technological paradigms and trajectories that Professor Dosi notes in this paper.

OCI Petroleum Lease Marketplace, Part I

 Introduction

The Petroleum Lease Marketplace is the most interesting marketplace module as its objective is to replicate virtually what the physical oil and gas marketplace is. That begins with Petroleum Leases.

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

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

These groups are concerned with the information and data contained within the module. Its accuracy, access, and use by those within their firm, but also within the Joint Operating Committees that their firm has interests in. Most of this data will be similar to their firms' partners' data. A significant amount of the data has been generated cooperatively and collaboratively by those partnerships, as well as through the involvement of regulatory bodies.

For example AFE’s, Mail Ballots, agreements, are generated through interactions by each participant in the Joint Operating Committee. How much of this data and information could be held by the Joint Operating Committee with an interface to each firm? This is a question that should be answered with significant research during software development. To answer that question, we need to answer who those people we mentioned, the Land, Legal, Production and Exploration Administration and Accounting staff work for. The implications would be significant. In the Preliminary Specification these resources are reorganized into service providers owned and operated by our user community members.

One of the greatest opportunities in developing this system is to address the division of labor and specialization. To take these people’s work and reorganize it across the industry. This is so that it was focused on the Joint Operating Committee but very specialized in their tasks. And apply those skills across the entire industry, a geographical region, or another classification. This could increase oil and gas industry productivity and cost savings. That is to say that an individual would work for a process that is billed to 1,000 Joint Operating Committees that represent 200 Companies. By doing so the industry's profitability is materially enhanced by making these costs variable, based on profitable production. Ensuring the industry realizes People, Ideas, and Objects' $25.5 to $45.5 trillion value proposition. 

When we conducted our research, Professor Langlois noted that the expansion of the division of labor and further specialization were through "gap-filling." Work that wasn’t being done before, could-should-would, be nice if it was done now. The process of putting a person in place today might seem simple. However, what about the user community and software development capability to support that person in their newly created position? As I’ve suggested before, should we consider these administrative positions from the point of view that these people will work for a process? As opposed to any one company or Joint Operating Committee?

Employing the marketplace metaphor in the modules that make up the People, Ideas & Objects Preliminary Specification was deemed necessary. There had been discussion of exchanges and web services in the past and those never quite captured the reality of what was possible. I think exchanges are technological solutions to resolve non-existent business problems. While the marketplace is a business reality. A reality that we can build a virtual technical environment that emulates the marketplace. A difference in how we approach building these systems.

The next aspect was to determine what marketplaces existed in oil and gas that the technology would need to replicate? Firstly, the marketplace for financial resources, the marketplace for people, vendors and the service industry, and finally, P&NG leases. We developed three modules that replicate these three markets within the People, Ideas & Objects Preliminary Specification. These are marketplaces backed up by a user community and software development capability that can evolve the applications as these markets evolve.

Introducing the Material Balance Report

The working interest distribution for production from a well is fairly straightforward. Other than the changes that might occur such as before and after casing point elections, before and after payout, acquisitions etc, the values remain relatively constant over the property's life. However, for gas plants and related facilities the distribution of production to the owners of the facilities is anything but constant. This brings into play a multitude of different ways to treat ownership of production and processing costs. The manner in which accounting for that production and processing costs is of material concern to the owners of those facilities. It is the difference between earning a profit. Inability to comprehend the scale of the problem has led many to disrupt facility owners' operations.

The problem comes down to the fact that there are two methods to calculate the working interest distribution of the product throughput through the facilities. One is to take the literal chemical reality of the situation. The other is to take what is agreed to by the owners and operators of the facilities in the Construction, Ownership & Operation (CO&O) agreement. The two worlds could not be more different. When it's different, the agreed-to situation rules the day. The facts of the agreement are dynamic and create unique variances. These variances depend on the situation that day. Irrespective of the production allocation, the Material Balance Report, a key report of the Partnership Accounting and Petroleum Lease Marketplace modules of the Preliminary Specification, will still balance. It will also balance with other reports. The issue is the facility owners or producers whose products are processed through that plant or facility. Will have either sold or purchased product, or conducted some transaction with their production at that facility that needs to be accounted for.

To handle that day-to-day activity there needs to be an ability for the plant owners to account for the transactions occurring within the plant based on the CO&O. Relying on the Partnership Accounting module will be part of what they will use for plant accounting. However, because they can’t take a literal working interest distribution and have to rely on a dynamic distribution based on the CO&O, a special algorithm will need to be built within the Petroleum Lease Marketplace to deal with the CO&O. This algorithm captures the production allocation methodology used in agreements. This algorithm will be dynamic depending on the gas composition, production factors and activities at the plant, but it is also not fixed. The algorithm is updated monthly. As new wells are brought on, new functional units are built, new products are sold to new purchasers etc. These need to be considered as part of the algorithm.

In the current accounting world these “algorithms” are managed within spreadsheets. Not my favorite place to put critical business information. I think that the user community can embed these algorithms within the system so that they are more “mission critical” and less subject to human error. People, Ideas & Objects Material Balance Report contains these algorithms. 

As a plant owner the days of major changes are not over yet. There are still equalizations to calculate. These equalizations are sometimes run monthly, but mostly annually. They are done to correct owners' over- or under-utilization. If an owner owns 25% of the facility, they will not be billed for their throughput. However, at the end of the year it was determined that their actual throughput use was 29%. Therefore, they would need to be charged processing for that 4% capacity beyond their ownership percentage. These calculations would also have an “algorithm” within the Petroleum Lease Marketplace for the Partnership Accounting module to use.

I would reiterate that this is an area of extreme importance to oil and gas facility owners. Handling these transactions appropriately is how People, Ideas & Objects approaches this issue. Due to a variety of reasons, comprehensive software engineering of this process has not been undertaken until this proposal. See also the discussion of the Material Balance Report in the Partnership Accounting, Accounting Voucher modules and in the background section of this wiki. 

Specialization and Division of Labor

Discussion of how People, Ideas & Objects software development will support the division of labor and specialization in the Preliminary Specification. This is especially relevant to the Petroleum Lease Marketplace. We discussed earlier in this module that the Joint Operating Committee determined where the data would reside. And hence where people work in the industry. Is the data stored by the Joint Operating Committee or by the producer? This was to be determined by the community based on their research. We also noted that with the division of labor and further specialization of the people that work in the industry, it required that individuals not work for a specific producer or Joint Operating Committee but instead work for a process that was billed for example as a service to 1,000 Joint Operating Committees representing 200 firms. This discussion assumes that in both situations, the data is stored at the Joint Operating Committee. Cloud Administration & Accounting for Oil & Gas process management, as proposed, is a dedicated team of people working for multiple Joint Operating Committees.

When we consider the global experience and understanding of oil & gas industry employees, currently, we have a large number of professionals with diverse experience and understanding of the industry. When we think of the future, in order to deal with the ability to handle increased volumes of work, we generally feel that there is a need to increase the overall experience and understanding of the industry. But is this necessarily the case? With the division of labor and specialization we can rely on the level of experience and understanding of a few that understand the entire process. We can assign the specifics to those that specialize in their own domain. With each person taking responsibility for their part of the process, at a high level of understanding, the entire process is managed with efficiency and understanding. This aggregates the skills of everyone involved in the process. This is the advantage of specialization. And it enables the industry to handle increased processing throughput at the same resource levels.

If we assume a group that processed all the lease rentals for all the Joint Operating Committee and producers that used People, Ideas & Objects' proposed software applications. And this group was a very specialized team of 20 people. They were supported by the People, Ideas & Objects software development team and our user community. How would you divide that work to make it more efficient? Would it be based on the producer or Joint Operating Committee? It may be based on the rental due date and geographical location. One thing is for certain, the way the work was organized would be fundamentally different from the way lease rentals are organized within each firm and Joint Operating Committee today. No matter how large the producer is, and therefore the specialization that this service provider could provide would reduce lease rental processing costs. It would also increase the quality of the service, data and information. This is how we need to reorganize many industry processes. 

How does the division of labor expand? That is to say, this lease rental process continues under the service provider group identified above. They find that if they made a small change in the way they process a certain element, they could save x%. In addition, by adding this attribute producers would have a better product. Changes in the process in this instance are the result of information reorganization. This is the process of "gap filling". The problem today is that most processes are highly automated through software. And People, Ideas & Objects are taking Preliminary Specifications process automation further. Therefore the ability to change a process is heavily dependent on a software change. Which in the current environment is impossible. People, Ideas & Objects provide our software development capability, our user community and their service provider organizations. A comprehensive service that fills a gap and supports the needs of the dynamic, innovative, accountable and profitable oil & gas producer. Therefore the ability to make a change in the process and have the software updated to accommodate the process change is readily available. 

Making these software development changes at one service provider makes the process manageable. As opposed to the methods currently used within each producer firm which provide no efficiency. In today’s environment, software development changes are not efficient. In addition, there is no scale in terms of division of labor and specialization applied to a single producer's lease rental activity. It is also assumed in the People, Ideas & Objects example that the data is stored at the Joint Operating Committee. Therefore, the amount of lease rental data held by the Joint Operating Committee in today’s case is relatively negligible. This provides more support for centralizing the lease rental process under one service provider through our Cloud Administration & Accounting for Oil & Gas.

By introducing service provider organizations through our user communities, we are initiating these types of process services.This is how the industry needs to reorganize itself to achieve efficient processes in the future. Lease rentals are only one example of many possible processes that could be handled in similar ways. In fact, all the administration, accounting, and overhead processes would be handled this way. Innovative oil and gas producers have as their distinct competitive advantages their land and asset base, and coordination of the market for earth science and engineering capabilities. The efficient development of internal administrative processes will not provide producers with a competitive advantage or disadvantage. By developing processes in the manner that People, Ideas & Objects propose, all producers have access to the most efficient and cost effective administrative management. And it is one of the cornerstones of how we provide oil and gas producers with the most profitable means of oil and gas operations.

Different Perspectives on Data

There will be a large percentage of public data within the Petroleum Lease Marketplace. For example this data will include the lease documents themselves and reflect who the lessee is and the mineral rights held. Although this information is public in nature, readily available from the lessor's website, there is not much reason to hold it public in the Preliminary Specification from a producer perspective. Access to producers' or Joint Operating Committees' data and information through the People, Ideas & Objects application modules via a publicly accessible interface does not exist. Although the data and information may be accessible elsewhere, it is not available unless the individual has direct access granted through the Security & Access Control module.

Next there are areas where data and information are considered "partnership" or Joint Operating Committee in nature. We have discussed the research project our user community will undertake in the Preliminary Specification. This is to determine if data will reside within the Joint Operating Committee or the producer. This is an effective example of where the issue resides. If the agreements, leases and AFE’s are the same for all the producers why not store them within one location in the Joint Operating Committee and have access by the authorized producers? Everyone works from the same documents. Here’s where Industrial Command & Control will need to be sophisticated enough to enable the appropriate users from different producer firms to access these documents. Another consideration for our user community research project.

Then there is private information that the producer generates that serves strategic and tactical concerns. This will be for producers only. The discussions could be related to one of the agreements that shouldn't be included in the "partnership" category. How does a firm maintain access to this critical information and ensure it doesn't leak to someone it shouldn't? Please review the “Two Types of Data" section of the Security & Access Control module. 

The Preliminary Specification also provides many valuable opportunities regarding aggregated data publication. In the context of producers' capital budgets. If producers maintained their expected capital budgets in reserve report format within the Petroleum Lease Marketplace, would they be interested in publishing that data in aggregate through the Resource Marketplace module? This data would be scrubbed of all pertinent proprietary information and only represent dollars, general geographical area and account classification. This information would provide the Resource Marketplace with information as to what the marketplace would look like in the near future in terms of producer demand. This would enable service industry participants to plan to meet that demand. And would provide the service industry with a better understanding of their customers. 

Proponents of "big data" and other technologically focused solutions to business issues claim they yield value for their clients. I am unaware of any tangible results. Producers' inability to organize their data is one of the impediments to moving forward from failed status quo operations. Much of the data, and particularly the financial data at the Joint Operating Committee does not exist which is accurate or reliable in terms of determining profitability. It is issues such as these that People, Ideas & Objects need to contend with in addition to the Preliminary Specifications feature set. 

OCI Resource Marketplace Module, Part IX

 Organizational Constructs

Included within the Preliminary Specification is a cultural change to improve performance and profitability. This culture is defined, supported and provided through seven Organizational Constructs that People, Ideas & Objects include throughout the Preliminary Specification. Two of the Organizational Constructs evident in the Resource Marketplace module are the Joint Operating Committee and Markets. However the other five also play a role in the module. The following is a brief discussion of how the Organizational Constructs individually impact the Resource Marketplace module.

Markets

The Resource Marketplace module emulates the variety of marketplaces oil and gas producers participate in North America. The focus is on the resources of the oil & gas producer, the service industry and a means to expand the scientific and engineering capacity and capabilities of the greater oil & gas economy. Service industry representatives are the means by which producers extend their organizations across the North American continent. They provide the technical expertise necessary to participate and expand in oil & gas exploration and production. 

As producers have discovered in 2023 their prior inability to recognize the critical role the service industry plays in the success or failure of their organization has become a critical issue. One that I’m hesitant to prioritize. After profitability, the lack of long-term earth science and engineering talent or the rebuilding of the service industry, each would hold the top priority in the normal course of business. The fact that each of these and other issues holds the same urgent priority is testament to the quality of self-serving officers and directors of the producers we’ve been provided with. 

The long term treatment of the service industry as a cost that needed to be beaten down at every point while the producers continued to fritter and waste the opportunity to maximize their revenues through “muddle through,” “putting cash in the ground,” and “building balance sheets" is the ultimate level of incompetence that I can ascertain. The service industry is currently without faith, trust or goodwill in anything producers attempt. There will be those that jump at the sign of a dollar bill, as is always the case. However this is not the service industry necessary to ensure profitable energy independence. And it is not how a dynamic, innovative, accountable and profitable oil & gas industry will be resurrected from this disaster. 

The Resource Marketplace module provides the means to rebuild the service industry, and elsewhere. As part of that rebuilding process, oil and gas producers must communicate and participate actively. Expressing their needs clearly will help to define the supply of what entrepreneurs in the service industry need to do to meet future producer demand. The cost of this rebuild and redevelopment will be borne by the producers themselves. They broke it and they will fix it. As evident in 2023 no one else is stepping up to do so. No one trusts producers will not destroy what isn’t theirs again next time they run oil & gas prices into the ground. Therefore, if producers have some skin in the game, maybe they'll show some respect for the service industry. 

Joint Operating Committee

The Preliminary Specification recognizes the Joint Operating Committee as the key Organizational Construct of a dynamic, innovative, accountable and profitable oil & gas producer. It is an opportunity to adopt the natural culture of oil & gas exploration and production over the past century. Additionally, it is an opportunity to align the administrative, accounting, compliance, and governance processes with that culture. Founded on the principle of partnerships, oil & gas has used the Joint Operating Committee as the organization to deal with the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. It is standardized throughout the industry and all capital and operations are conducted through it. 

Accounting and management have been diverted from this reality for two similar reasons. The first is the introduction of computerized accounting that focuses on the corporation as the entity of concern for the bulk of the administrative and accounting functions. The second reason is that compliance and governance is focused on the corporation. Therefore you have two sets or groups interested in pursuing two different organizational objectives from the same assets. Owned by separate entities and virtually divorced from each other through geology and engineering difficulties. In the confusion performance and profitability are lost.

Through the development of the SEC’s Full Cost accounting methodology and the Ceiling Test. Misinterpretations of producer firm goals and objectives were developed. Shifting from performance evaluation to asset value. Producing the "build balance sheets" and "putting cash in the ground" claims of recent producers. 

People, Ideas & Objects, our user community and their service provider organizations' use of the Joint Operating Committee shifts accounting and administration into alignment with the producer firm's exploration and production. Enabling each Joint Operating Committee to report comprehensive financial statements each month that detail the property's performance. A task that is not possible today and the primary cause of financial issues in the industry. These issues can only be resolved by reorganizing producers and the industry through the Preliminary Specification. 

Specialization & Division of Labor

Throughout the Preliminary Specification there is a revised organizational structure in oil & gas. Our user communities service provider organizations enable producer overhead costs to be converted to variable costs based on profitable production. This is due to enhanced specialization & division of labor throughout the greater oil & gas economy. Only then will the oil & gas industry improve its performance trajectory. 

Specialization and the division of labor have been responsible for all economic value since Adam Smith published the Wealth of Nations in 1776. This value was enhanced through oil & gas in the twentieth century by applying mechanical leverage to enhance individuals' output. To the point where today each barrel of oil is mechanically leveraged between 10 and 25 thousand man hours per barrel. Producing an equivalent work force 27 to 68 times today’s world's population. People, Ideas & Objects believes the demand for energy and the ability to leverage this more effectively will be part of the human condition. As mechanical leverage drove prosperity in the twentieth century, Intellectual Property leverage will drive prosperity in the twenty-first century.

"New Growth Theory" by Professor Paul Romer

In his groundbreaking paper “Endogenous Technical Change” Professor Paul Romer, and as described by him in a Reason Magazine article. New Growth Theory is an innovative economic direction for the 21 century. It brings substantial benefits to those who apply it. What Professor Romer describes as People, Ideas and Things in the Reason Magazine article was adopted by People, Ideas & Objects, as we are object-based software developers. When we add the paper's key principle of “non-rival” costs to the reorganization of oil & gas we find that the sharing and shareable nature of the non-competitive attributes of a producer are easily accommodated through today’s Information Technologies. 

When we add Professor Romer's principles to specialization and the division of labor we have a toolkit that will yield untold value creation for dynamic, innovative, accountable and profitable oil & gas producers and the greater oil & gas economy. These are the reasons we have applied them throughout the Preliminary Specification. Why we configured our user community to be our key competitive advantage to ensure that the incremental and iterative development of specialization and division of labor with new growth theory principles can be applied constantly through the development of the Preliminary Specification and its derivative works. 

Professor Romer was awarded the Nobel Prize in economics in 2018 for the development of these ideas. They are valuable and we feel fortunate to have applied them in the Preliminary Specification.  

Intellectual Property

Intellectual Property (IP) is the foundation of the Preliminary Specification. Our three competitive advantages are our user community, Intellectual Property and research. These are how we compete in the ERP marketplace for oil & gas. We believe Intellectual Property will disintermediate all industries in the 21st century. As a result, we can rightly claim that it's not enough to own an oil & gas asset, it's also necessary to have access to ERP software in the form of People, Ideas & Objects Preliminary Specification that makes the oil & gas asset profitable. Use of our Intellectual Property has enabled us to assert the appropriate direction the industry should take to avoid its difficulties and resolve its issues. To eliminate the “me too” nature of oil & gas producers where in the past fiefdoms were controlled through “blind sleepwalking agents of whomever fed them.”  

Marketplaces direct activity based on demand. That is how we’ll get our marching orders and provide the services necessary in the future. By figuring out what the market needs and delivering it. Not mindlessly sitting through meetings and Zoom calls that never end. Where action is rewarded and risk is ever present. 

Information Technology. 

IT has matured over the last decade. Only now is it capable of delivering on the promises it has made for 60 years or more. What can be done today and what needs to be done in the next 25 years will yield the benefits of the work invested in building this infrastructure. Technology needs continue with developing advanced and innovative business models that exploit these technologies. It is now necessary to augment IT in creative and innovative ways to address the challenges of conducting business in the upcoming years.

Enterprise Resource Planning or ERP as they are known today are holistic systems that manage business operations. What they may be called in the future and their makeup will undoubtedly change but their purpose will remain the same. They hold an outsized role in today’s business environment due to their ability to define and support an organization and its culture. The difficulty with this is that they also constrain the organization to that definition as change can only occur once the software is changed. This is the primary reason People, Ideas & Objects is establishing a permanent ERP user community and software development capacities and capabilities, to accommodate change.

Innovation

The complexity and difficulty of oil & gas science is understood by a select few who have dedicated their lives to it. Engineers and geologists work in these sciences daily. Science and innovation depend and iterate upon each other. Therefore producers need to build dynamic, innovative, accountable and profitable oil & gas operations to meet capital markets' expectations. 

Innovative organizations are not accidental. They are purpose-built and designed through a variety of processes that allow innovation to flourish and eliminate its excessive costs. People, Ideas & Objects have defined a variety of innovative processes throughout the Preliminary Specification. These processes are designed to enhance the innovativeness of the producers and service industry. Enabling enhanced collaborations between these industries that are wholly dependent upon one another. 

The primary research used in the development of the Preliminary Specification. Was from Professors Giovanni Dosi and Richard N. Langlois among many others. If producers choose to follow the innovative processes in the Preliminary Specification they can establish a strong foundation for profitability. 

Summary

Oil & gas culture has been established over the past many decades and is embedded in the many generations employed within the industry. Ultimately, we found that the producers' objectives and rationale are incompatible with commercial enterprises. Raised on a dependence on annual infusions of outside capital, this culture has taken on various characteristics that are inconsistent with the future demands of a profitable energy independent industry. This culture is persistent and refuses to accept there’s even an issue. To attempt to change it would be a futile endeavor that would exhaust. 

Financially the current culture has extinguished the value generated in the industry, and all of the subsequent capital raised over the past decades There is nothing left to build on. A comprehensive rebuilding is necessary and that can be done based on the culture of these seven Organizational Constructs. By enforcing an element of an existing Organization Construct, the Preliminary Specification can facilitate the change we desire within the ERP software of the industry. Providing a foundation for understanding across the industry.

Conclusion

The Resource Marketplace module, in combination with the Research & Capabilities and Knowledge & Learning modules is how the dynamic, innovative, accountable and profitable oil & gas producer and Joint Operating Committee acquire their capabilities. The Resource Marketplace establishes thick markets for products and services from the service industries and service providers. Producers and Joint Operating Committee members benefit from these markets. Enabling operational control, innovation and flexibility for the 21st century.

And it is here in the Resource Marketplace module that profitable operations are established. Through the decentralized production model, producers can remove marginal production from the marketplace. This allows them to save those reserves for a time when they’re profitable. When producers can remove their production from the marketplace without financial consequences, the downside risk in both oil and natural gas prices is mitigated. It is here in the Resource Marketplace module that the solution to profitable production of shale oil & gas reserves, or any oil & gas reserves, is attained.