The Preliminary Specification Part CCCXXII (AV Part XVIII)

We discussed the Material Balance Report in the Partnership Accounting module a few days ago. The overall discussion regarding the Material Balance Report can be aggregated by selecting its label. What we want to discuss today is the specific attributes of the Material Balance Report in the Accounting Voucher of the Preliminary Specification.

Simply the process of closing the Accounting Voucher will need to consider not only the balancing of the debits and credits from a financial point of view. They will also need to ensure that the material, system and partnership volumes reported in the Material Balance Report are also in balance. Without these systems in balance, the Accounting Voucher will not close.

This imposes another rather strict provision on the quality of the information that is accepted into the People, Ideas & Objects Accounting Voucher module. Precluding the acceptance of a voucher due to the inability to balance a volumetric requirement holds the system up for what could be a fairly common occurrence. What if the volumetric information is unavailable in a timely fashion? What if the information is part of the normal amendment process? Then we are left with the traditional accounting methods of dealing with these types of issues. An accrual of the volumes in order to achieve the balancing necessary should be able to be processed in the current month. These accruals would then be automatically reversed in the following months Material Balance Report. What is different from existing systems is that we are enforcing the systems to balance. Not just inputting key variables, imposing the facts of what actually happened at the facility, or if the facility is subject to a comprehensive Construction, Ownership and Operation agreement, what is agreed to.

The difference may be subtle but the implication is significant. Locking the volumetric balancing, over the long term, into the Accounting Voucher itself enforces the system to follow the volumes as produced and processed. Once this is achieved a certain level of integrity is achieved and then the automation of detailed processes based on those volumes can begin.

Tomorrow we will begin with our fifth pass through the Research & Capabilities module.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decisions. The development, release, and timing of any features or functionality described for People, Ideas & Objects products remains at the sole discretion of People, Ideas & Objects.

The Preliminary Specification Part CCCXXI (AV Part XVII)

One thing that we have not been able to discuss regarding the Accounting Voucher module of the Preliminary Specification, is the module is used for entry of all transactions for accounting purposes. Whether it is through the Material Balance Report, which is encapsulated within its own voucher, or a simple accounts payable voucher, everything that will be entered into the People, Ideas & Objects system is through an Accounting Voucher. And there will be different types of vouchers for different types of charges. Each with their own voucher series numbering. (For example all Material Balance Reports will be 200,000 series.) This also imposing somewhat of a strict Prepared By and Approved By process where everything that is entered into the system has high levels of accuracy, timeliness and authorization. This is somewhat contrary to the open and freewheeling style of data entry in Oracle Fusion Applications Financial Management Suite of modules. We will need to enhance their applications methods of accepting our view of Accounting Vouchers and the way they work.

Business is also in many cases, repetitive. The ability to reuse an Accounting Voucher as a template for subsequent months should be a feature of the People, Ideas & Objects Preliminary Specification. This could include the use of firm wide forms such as expense accounts and petty cash. What is being intimated here is that the user interface of the Accounting Voucher needs to be highly user friendly. With high levels of intelligence and multiple ways of interacting with it.

Some of the Accounting Vouchers will be open to charges from multiple producers represented in the Joint Operating Committees that your producer firm is a participant in. We have discussed this in other posts that the revenue, capital and operations of each of the Joint Operating Committees accounts are open to the direct debit and credit charges of all of the participants in the JOC. This is a result of the pooling concept that is a basic assumption of the People, Ideas & Objects Preliminary Specification.

The pooling concept has been developed as a replacement to the “operator” designation that currently exists. The ability for each producer to have the just-in-time capabilities available for all the properties they manage requires, on an industry wide basis, to have unused and unusable earth science and engineering capabilities. The ability to pool these critical resources from participating producers into the Joint Operating Committee releases these unused and unusable capabilities. The pooling concept also implies that some producers will provide other resources to the property in disproportionate amounts to their working interests. All producers need to contribute the skills, knowledge, experience and ideas that they have in an innovative oil and gas industry. Therefore for each of these producers the need to have the ability to charge for these resources to the joint account in the current month for administrative ease and to unleash these capabilities is necessary. All charges are subject to the AFE or Work Orders budget requirements and cost control remains the domain of the Joint Operating Committees.

There is also the producers need to earn a return on their investment in their capabilities which is an aspect regarding the pooling concept. We have detailed the ability for a producer to offset the costs of their earth science and engineering capabilities, and their development, to the various Joint Operating Committees that they participate in. With the expected increase in the earth science and engineering effort in each barrel of oil produced. And the difficulty in increasing the supply of geologists and engineers to meet the demands of the business. The pooling concept was also developed within the People, Ideas & Objects application to deal with the supply and demand of these finite technical resources. It is within the Accounting Voucher of the Preliminary Specification that the automation of the charging for these resources to the joint account enables the producer to earn a return on their investment in their earth science and engineering capabilities.

Needless to say we will be relying heavily on the Oracle Fusion Middleware layers Business Process Management Suite to provide us with this functionality in the Accounting Voucher. The base level General Ledger, Accounts Payable and Accounts Receivable are there and we need to build these specific functions within the module.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decisions. The development, release, and timing of any features or functionality described for People, Ideas & Objects products remains at the sole discretion of People, Ideas & Objects. 

The Preliminary Specification Part CCCXX (AV Part XVI)

The Accounting Voucher presents some difficult conceptual problems that I think I have begun to identify. The most difficult is the concept of designing transactions and what purpose it fills in the Preliminary Specification. This post will be a summary of designing transactions that will hopefully clarify what it is that we are trying to accomplish in the Accounting Voucher.

Essentially we have discussed the detailed information that the service industry providers will provide in the “Vendor / Supplier Contact Database”. This will include general contact information that everyone is familiar with however there are three important distinctions regarding this information. One is it’s maintained by the vendor / supplier themselves. Two it is located in the People, Ideas & Objects Preliminary Specification. And three it contains details which includes their banking information, their field staff and representatives and their calendars, which are able to be committed to projects of specific producers. Producers understand that having the field staff committed to their projects reflects quality, and in turn reflects additional costs for that commitment.

Now this situation provides the opportunity to define some service industry systems integration that would be complementary to the Accounting Voucher of the People, Ideas & Objects application. The service industry provider could have their people populated into the Work Order system that we discussed earlier. Or, the Purchase Order system could also be used as a means of direct communication between the producers represented in the Joint Operating Committee in the Accounting Voucher, and the service industry providers. As well as other interfaces.

Therefore, according to the research of Professor Richard Langlois the transaction costs will be an immaterial item in comparison between suppliers and producers or Joint Operating Committees. That is to say the cost of processing these transactions will be the same in all instances. And People, Ideas & Objects have asserted that they will be immaterial due to the application of Information Technologies. However the differentiating costs between suppliers and producers and JOC’s will be the costs of coordinating the market. Making the Accounting Voucher module a critical tool in the ability to offer the producer firm and JOC the most profitable means of oil and gas operations.

... while transaction cost consideration undoubtedly explain why firms come into existence, once most production is carried out within firms and most transactions are firm-firm transactions and not factor-factor transactions, the level of transaction costs will be greatly reduced and the dominant factor determining the institutional structure of production will in general no longer be transaction costs but the relative costs of different firms in organizing particular activities. p 19

and

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).

In this day and age, with such large distances, geographic, size, language and other, between vendors and producers leaving the coordination of the markets to “spontaneous order” is asking too much of human ingenuity. Particularly with the focus of the industry to a further division of labor and specialization, where the risk and reward of oil and gas operations are so great, market coordination or transaction design will be a critical and necessary task to be carried out. Each operation may be the result of more people being involved. Once again it is not from an operations point of view that we are attempting to influence the operation, it is from the business point of view. How will the transactions and business be captured in such a manner that the firm and Joint Operating Committee are incurring the lowest possible costs of the most efficient methods of these business transactions. That is what is intended when we talk about “transaction design” in the Accounting Voucher.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decisions. The development, release, and timing of any features or functionality described for People, Ideas & Objects products remains at the sole discretion of People, Ideas & Objects.

The Preliminary Specification Part CCXXIV (AV Part XV)

We have been discussing the Accounting Vouchers “Transaction Design Interface” and its purpose as a tool to coordinate the use of the market. We want to ensure that the efforts in coordinating the market are consistent with the objectives of the firm or the Joint Operating Committee and don’t conflict with the objectives of those who are initiating the work in the Research & Capabilities or Knowledge & Learning or other modules. As we will see in this post the work in the coordination through the Accounting Voucher of the Preliminary Specification is focused on the business end of the transactions, not on the operational side.

The first question that most people will have is why are we concerned with the coordination of the markets in the Accounting Voucher. Here Professor Richard Langlois made the following comment in response to a question on his “Vanishing Hand” paper.

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).

In this day and age, with such large distances, geographic, size, language and other, between vendors and producers leaving the coordination of the markets to “spontaneous order” is asking too much of human ingenuity. Particularly with the focus of the industry to a further division of labor and specialization, where the risk and reward of oil and gas operations are so great, market coordination or transaction design will be a critical and necessary task to be carried out. Each operation may be the result of more people being involved. Once again it is not from an operations point of view that we are attempting to influence the operation, it is from the business point of view. How will the transactions and business be captured in such a manner that the firm and Joint Operating Committee are incurring the lowest possible costs of the most efficient methods of these business transactions.

As Harvey Leibenstein long ago pointed out, economic growth is always a process of “gap-filling,” that is, of supplying the missing links in the evolving chain of complementary inputs to production. Especially in a developed and well functioning economy, one with what I like to call market-supporting institutions (Langlois 2003), such gap-filling can often proceed in important part through the “spontaneous” action of more-or-less anonymous markets. In other times and places, notably in less-developed economies or in sectors of developed economies undergoing systemic change, gap-filling requires other forms of organization — more internalized and centrally coordinated forms. p. 6

and

Let’s take a closer look at the nature of the “gaps” involved. Adam Smith tells us in the first sentence of The Wealth of Nations that what accounts for “the greatest improvement in the productive power of labour” is the continual subdivision of that labor (Smith 1976, I.i.1). Growth in the extent of the market makes it economical to specialize labor to tasks and tools, which increases productivity – and productivity is the real wealth of nations. As the benefits of the resulting increases in per capita output find their way into the pockets of consumers, the extent of the market expands further, leading to additional division of labor – and so on in a self-reinforcing process of organizational change and learning (Richardson 1975; Young 1928). p. 7

If we recall in the Resource Marketplace module the vendors and suppliers are maintaining their own contact data. Within that data is there key personnel that include their field staff. They should also be including their key business people for the purposes of the “Transaction Design Interface” to collaborate on these interfaces. In addition their billing information and banking data, as well as other critical data and information that will help the producer firm or Joint Operating Committee efficiently coordinate and process the transactions they are involved in should be included. Lastly a collaborative interface should be provided for everyone within the Accounting Vouchers vendor pool to discuss how the transaction is designed.

Tomorrow we will begin our fourth pass through the Research & Capabilities module.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXXIII (AV Part XIV)

We continue today with our discussion of designing transactions in the Accounting Voucher module of the Preliminary Specification. The role of the Accounting Voucher in defining the source of the market or the firm as the originator of the transaction is minimal. However, it has a role in ensuring the costs of these transactions are minimal and are a source of the firms profitable operations. We can all envision a power mad accountant with an entourage of underlings going off to solve the next great accounting issue. These costly nightmares occur every once in a while, maybe People, Ideas & Object is the latest manifestation of this sickness. Having the ability to design transactions should be a value added process, not an exercise with no purpose. If there was a simple way to describe this purpose it would be as a tool to coordinate the firm or Joint Operating Committees use of the market.

This conceptually falls between transaction costs economics, capabilities and transaction design. All three are areas that Professor Richard Langlois has included within his area of research. We have also used Professor Carliss Baldwin for her work in transaction design. Professor Richard Langlois in his paper "The secret life of mundane transaction costs."

However, a new approach to economic organization, here called "the capabilities approach," that places production centre stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization. p. 1

and

"One of our important goals here is to bring the capabilities view more centrally in the ken of economics. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as complementary area of research" pp. 7.

It is the Accounting Voucher module of the Preliminary Specification that takes the accountant away from the benign score keeper role to the role of active participant in the operation. One that looks at the market from the point of view of how best to coordinate the various elements to provide the greatest value add to the firm or Joint Operating Committee they are employed by. In Richard Langlois “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization"

A close reading of this passage suggests that Coase's explanation for the emergence of the firm is ultimately a coordination one: the firm is an institution that lowers the costs of qualitative coordination in a world of uncertainty. p. 11

And this is maybe one of the important considerations of the work that we do here in People, Ideas & Objects. Is the realization that each producer firm and each Joint Operating Committee are going to be unique. That due to their makeup they are going to be different in material ways. Innovation will have a dramatic scale in how it is measured against each firm or JOC. The approach will be anything but cookie cutter.

Either way it boils down to the same common-sense recognition, namely that individuals - and organizations - are necessarily limited in what they know how to do well. Indeed, the main interest of capabilities view is to understand what is distinctive about firms as unitary, historical organizations of co-operating individuals. p. 17

Therefore, according to the research of Professor Langlois the transaction costs will be an immaterial item in comparison between firms or Joint Operating Committees. That is to say that they will be the same in all instances. And People, Ideas & Objects have asserted that they will be immaterial due to the application of Information Technologies. However the differentiating costs between firms and JOC’s will be these costs of coordinating the market. Making the Accounting Voucher module a critical tool in the ability to offer the producer firm the most profitable means of oil and gas operations.

... while transaction cost consideration undoubtedly explain why firms come into existence, once most production is carried out within firms and most transactions are firm-firm transactions and not factor-factor transactions, the level of transaction costs will be greatly reduced and the dominant factor determining the institutional structure of production will in general no longer be transaction costs but the relative costs of different firms in organizing particular activities. p 19

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXXII (AV Part XIII)

One area of the Accounting Voucher that we have not been very clear in getting our point across is the concept of designing transactions. With this fourth pass through the Preliminary Specification we should be able to spend some time on defining what it is that we are speaking of. What accountants will be spending their time on in the future is the designing of transactions and leaving the processing of transactions to the computers. If you have been reading the Preliminary Specification you will have an understanding of the methods of organization of the marketplace and the producer firm. And how the Joint Operating Committee interacts with these. It will be with that understanding that we can begin to understand the concept of designing transactions. So let us begin with a simple description of the transactions makeup. From Harvard Professors Carliss Baldwin and Kim Clark.

...objects that are transacted must be standardized and counted to the mutual satisfaction of the parties involved. Also in a transaction, there must be valuation on both sides and a backward, compensatory transfer - consideration paid by the buyer to the seller. Each of these activities - standardizing, counting, valuing, compensating - adds a new set of task and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction.

Lets use a scenario where a group of small producers have four producing wells of natural gas with some liquids production. They are situated next to a large gas plant that processes their gas in exchange for the liquids and markets their gas on the spot market. In this scenario we are evaluating these properties from the perspective of including them in the Preliminary Specification. And we begin by analyzing the production accounting elements in the Accounting Voucher with the Production Accounting Service Provider in the area.

The Production Accounting Service Provider assesses their fees on the basis of a unit of work incurred during the production month. For example this might include reading a gas chart, meter reading, material balance report etc. At each point they assess a standard fee for service. This then goes to their billing process and at the end of the month is billed to their clients based on the work output. This imputes that someone has designed their billing and work flow from a transaction design point of view. Professors Baldwin and Clark.

The user and Producer need to deploy knowledgeable in their own domains, but each needs only a little knowledge about the other's. If labor is divided between two domains and most task-relevant information hidden with each one, then only a few, relatively simple transfers of material, energy and information need to pass between the domains. p. 17

and

Placing a transaction - a shared definition, a means of counting, and a means of payment - at the completed transfer point allows the decentralized magic of the price system to go to work. p.22

Again if there is no production there is no basis for the Production Accounting Service Providers billing. Fulfilling the decentralized production model objective. This scenario shows how the Production Accounting Service Provider had designed their transactions to produce their billings. Their accountants were not concerned about the processing of transactions, but the processes of billings in a fully automated manner. This is the role of the Accounting Voucher for the producer firm and Joint Operating Committee. Automation of the business processes of the innovative oil and gas industry through transaction design.

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 is passed on... Frederick Hayek (1945)

The Accounting Voucher has the “Transaction Design Interface” that provides a worksheet for accountants to design transactions. There is a defined process of analysis of how to break down these transactions and we will get into that as we proceed through the Preliminary Specification. It is important to recall at this point that each Accounting Voucher can be used as a template for subsequent months. So once a transaction is designed, it can be reused through the implementation of it as an Accounting Voucher template.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXXI (AV Part XII)

When we talk about the capabilities of the innovative oil and gas producer. The Accounting Voucher module of the Preliminary Specification doesn’t necessarily come immediately to mind. Yet it is an important element in the capabilities that we have been detailing here in the Preliminary Specification. Particularly when we are moving to the “decentralized production” model from the “high throughput production” model that the industry is currently configured as.

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p. 58

In other modules we have detailed how the overhead costs of production, revenue and royalty and other accounting related costs associated with the property would not be incurred during periods when the facility was shut-in. The accountants these costs are representative of, are part of service providers and not directly employed by any of the specific producers. As such their service offerings were based on billings that were transaction driven, and therefore without production, no transactions were created to drive their billings. Hence no overhead, like accounting costs, would be incurred at the facility where the production was shut-in. The Accounting Voucher can be a further check and balance on the “decentralized production” model by ensuring that no overhead charges for the months are incurred if no production occurred.

Recall too that we have the Material Balance Report that balances the Joint Operating Committees volumetric inputs and outputs. Encapsulating these volumes within the Accounting Voucher itself as a means of enforcing the integrity of the systems balance. Where the “Material” balance, the “System” balance and the “Partner” balance for each of the participants in the Joint Operating Committee are as integral to the Accounting Voucher as debits and credits.

And the Purchase Order system that provides a means in which to control the costs for large projects. Ensuring that the contracts that govern these projects are adhered to in terms of payments, with-holding's and discounts. I think the Purchase Order capabilities provided, through an effective user interface, in the Accounting Voucher will provide significant value for the Joint Operating Committee.

We have also introduced the concept of costing the earth science and engineering resources of a producer firm to the joint account. These are in replacement to the overhead allowances that are provided for today. To charge these resources through the Accounting Voucher as a cost recovery and return on investment of the producer firms capabilities. With the elimination of the operator designation and the pooling of technical resources this charging of these resources to the joint account will be a necessary element of the pooling concept.

Lastly we have also discussed the concept of designing transactions in the Accounting Voucher. There are two different concepts here, and both are captured in the Accounting Vouchers implementation. The first is the same as the determination of who, for example, the drilling contractor, a third party or the producer will provide the product or service in the drilling contract. And the second concept is the determination of the thin crossing point of where the transaction should occur between the two firms. Although we want to select the “thinnest” point, with today’s Information Technologies we can also populate the transaction with a variety of data that makes for a much more valuable interaction between firms.

That brings to a close a quick high level review of the points to date in the Accounting Voucher module of the Preliminary Specification. We will commence our fourth, or capabilities, pass tomorrow.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CXIX (AV Part XI)

One area that has been difficult for the oil and gas producer to deal with is the volatile energy prices. With the costs of production and reserve replacement increasing and the reserve depletion on such a rapid pace, the decline in energy prices can have a material effect on the value captured from a field. With every producer producing at capacity, this risk of price declines comes into play more frequently then maybe needs to be realized. This blog post asks the question, what if, there was agreement in the Petroleum Lease Marketplace and implementation in the Accounting Vouchers Material Balance Report of the Preliminary Specification, to limit the production at certain thresholds based on predetermined commodity prices?

We can accurately tell what the costs of reserves and production costs are and there are many times when these exceed the prices that are received in the marketplace. The North American natural gas marketplace is a very good example of this situation. Selling at a loss may fuel the short term cash flow situation however, it as at the long term expense of reserve replacements. In a highly innovative oil and gas marketplace, the costs of innovation are being funded by the commodity prices. However, these costs may exceed the temporary fluctuations in the market prices for the commodities. Is it wise for the producer to continue to produce at capacity?

What if the agreement that governs the Joint Operating Committee has the partnership agreeing to a reduction of production by 15% when the price of the commodity drops below x value. And what if the agreement also reduces the production by 25% when the production prices drop below y value. These situations would help to mitigate the loss of earnings on the reserves and not materially affect the cash flow of the operation. The global implications of many producers implementing this type of price based production profile would put a floor on the commodity prices. A floor based on the marginal costs of reserve replacement.

The implementation of the production decreases would be triggered in the Petroleum Lease Marketplace and signaled to the Material Balance Report. One area that we have not yet discussed in detail is the field data capture that is implicit in the Material Balance Report. This signal from the Petroleum Lease Marketplace module would then choke back the production to the 85% threshold when the prices realized are below the level set in the trigger.

Selling at a loss is a fools game. The political issues surrounding the choking back of production are something that might make some wince. However, the reality is that the costs of production and reserve replacement are escalating and the volatility in the commodity prices only seems to becoming more prevalent. With shale gas costs in North America being as high as they are, who would contemplate producing at these prices? In many ways we are our own worst enemies.

This scenario of price driven production adjustments will be part of the Preliminary Specification. If producers decide to use it, it will be there choice. I think it is necessary with the situation in the energy market that the producer has some protection of their investment from the volatility and political influences of the commodity marketplace.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CXVIII (AV Part X)

The interactions between the Accounting Voucher and the Partnership Accounting modules of the Preliminary Specification are naturally quite significant. They both being accounting modules, it is natural that they have high levels of integration. The Accounting Voucher is unique in that it brings to the producer the ability to design transactions and the Material Balance Report. These are not innovations that the producer will use to become more innovative but are provided to ensure that the innovative producers processes are actively defined and supported through out the People, Ideas & Objects application modules.  When the business is a science, as it is in oil and gas, it would be in the producers interest to remain open and flexible in both its scientific and business approach. The Accounting Voucher and Partnership Accounting modules provide that organizational flexibility.

The manner in which these two modules operate is as follows. The Accounting Voucher captures the transactions. Partnership Accounting reports on the transactions. Accounting Vouchers remain open for one accounting period and are subject to the same closing process that is familiar and traditional in the accounting world.

We noted in the Partnership Accounting module how the Work Order enabled the producer with the ability to form and participate in working groups. This flexibility is what is sought in these accounting modules. Elimination of the bureaucratic inertia that impedes these activities today makes these modules critical to a producers innovation as much as the Research & Capabilities or Knowledge & Learning modules do.

Professor Dosi (1988) states that profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives.” (p. 1135) Professor Dosi introduces the theory of Schmookler (1966) and asked “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both”? (p. 1135) Schmookler believed in differing degrees of economic activity derived from the same innovate inputs. It is People, Ideas & Objects assertion that the “different incentive structures” and “different opportunities” are facilitated or constrained by the administrative ease in which the producer operates.

The same can be stated for the Material Balance Report. If the producer is confident that the deal that was conceived is accurately captured in the Accounting Voucher. And the operation is therefore also reporting a substantial profit. Then they know that their innovations are working, their systems are working and the alignment of the legal, financial, operational decision making, cultural, communication, innovation, strategic, compliance and governance frameworks is achieved.

This will be the last post on the Accounting Voucher during our third pass. We will be skipping over the Security & Access Control module as it is not directly involved in the producers innovation. Recall that our third pass is focused on innovation and therefore we will be moving to the Research & Capabilities module of the Preliminary Specification.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CXVII (AV Part IX)

Yesterday’s post detailed the ability for a producer to offset the costs of their capabilities and their development to the various Joint Operating Committees that they participate in. With the expected increase in the earth science and engineering effort in each barrel of oil produced. And the difficulty in increasing the supply of geologists and engineers to meet the demands of the business. The pooling concept has been developed within the People, Ideas & Objects application to deal with the supply and demand of these finite technical resources. It is within the Accounting Voucher of the Preliminary Specification that the automation of the charging for these resources, as detailed in yesterday’s post, enables the producer to earn a return on their investment in their earth science and engineering capabilities.

It comes down to the question of what business is it that the producer is in. Are they in the business of generating profits from producing oil and gas, or are they in the business of generating profits from providing geologists and engineers to the operations they have an interest in? If we look at the competitive advantages of the producer it is the land and asset base, and the earth science and engineering capabilities that they apply to that asset base. Clearly both production and capabilities development are within the scope of the business of the oil and gas producer. And to a large extent the costing of the technical resources in the manner mentioned in yesterdays post is not fundamentally different from what occurs today. In today’s market, the operator is provided with “overhead allowances” for the capture of some of these costs. The difference from today and what is proposed here is that the elimination of the concept of an operator by “pooling” the technical resources of the Joint Operating Committee participants to acquire the necessary capabilities.

To take this opportunity to charge the costs of the capabilities of the producer firm and earn a return on investment may be the issue that some people will have with the concept. In a world where the market for engineers and geologists is highly competitive. And you as a producer are assessed on your performance based on Revenue Per Employee. The acquisition of additional technical resources is a difficult process that has implications to your firm. The ability to offset the costs of your technical resources helps to mitigate these issues in the short term. This is the purpose for enabling the direct billing of technical resources to the joint account in the Accounting Voucher.

When we get to the review of the Research & Capabilities and Knowledge & Learning modules during this innovation review. We will see the development of these capabilities from an innovative point of view will take on a different perspective. The ability to capture this development of a firms technical resources as an investment, and have them as a source of revenue here in the Accounting Voucher is what I want to establish with today’s and yesterday’s posts. Looking at the development of the producer, it is somewhat of a paradox as to which is developed first, the land base or the capabilities. With the ability to have the capabilities generate their own revenue stream the paradox is resolved in the short term, in that capabilities development is expected to earn a return on investment.

Some may suggest that these costs offset the production revenues of the Joint Operating Committee that would have gone to the producer anyways. And that may be true. However, in a world where the demands for the technical resources are expected to be as significant as some suggest. The need to deal with the problem on a wholesale basis, as People, Ideas & Objects pooling concept does, is a requirement, and secondly, the assumption that everyone else will develop their technical capabilities might be false.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CXVI (AV Part VIII)

We return to the Accounting Voucher module of the Preliminary Specification for our focus on innovation. This module works closely with the Partnership Accounting module to capture the accounting for the Joint Operating Committee and the producer firm. If you recall we are introducing many new and innovative concepts to the Accounting Voucher, concepts such as the design of transactions, the comprehensive nature of the Material Balance Report, and the ability for all of the producers within a Joint Operating Committee to post to an open Accounting Voucher.

In this third pass through the Preliminary Specification we are focusing on innovation. And when we get to the Research & Capabilities and Knowledge & Learning modules we will be focusing heavily on the capabilities elements of those modules. With that understanding, and the knowledge that the producer firm is building a substantial technical earth science and engineering capability, we turn to Professor Giovanni Dosi.

Professor Dosi’s paper discusses the role of innovation in the market economy and 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 innovation theories application to earth science and engineering disciplines. These disciplines are key to the capability and success of oil and gas firms search, and production of, hydrocarbons. The investment in science and technologies is with the implicit expectation of a return on these investments, but also, to provide the firm with additional structural competitive advantages by moving their products costs and / or capabilities beyond that of the competition. 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.

The producer firm is committing to developing their capabilities with the understanding that they advance their competitive advantages, and, earn a return on their investment. How within the People, Ideas & Objects application does the producer earn a return on their investment in their capabilities? The most obvious answer is through direct charges to the joint account. That is to say that the people (representing the producers capabilities) who are pooled into a Joint Operating Committee, have been assigned a role within the Military Command & Control Metaphor and who’s costs are captured in the Partnership Accounting module are recovering a “revenue” stream for the producers capabilities.

The question then becomes what is the charge for the individual during the time that they are working in the Joint Operating Committee. It will be easy to determine the hours that are worked in the various JOC’s of the technical resources. Whether through the Work Order or through other means, the ability to capture the time spent will be available and accurate in the People, Ideas & Objects system. The hourly rate would need to include a number of factors. The skills of the individual. The technical resources of the producer firm that is at the disposal of the individual. And also a measure of the level of innovativeness of the producer firm, say something like Revenue Per Employee that reflects the overall productivity of the firm.

Once they have factored these elements in they could then assign an hourly rate to each individual in their firm and ensure that so many hours of their year are charged to the various joint accounts that they have an interest in. With the advanced level of systems automation that we are using, we can charge the joint accounts based on the hours worked each month based on the charge out rate of each individual in the producer firm.

The net result of this is that the revenues should exceed the costs and the producer will have captured a return on their investment in the capabilities that they have developed within their firm. To proceed on any other basis would be, I think, unreasonable.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part LXVI (AV Part VII)

Just a couple of small points to follow up on in this second pass through the Preliminary Specifications Accounting Voucher. Conceptually I think we may have captured all the significant areas in the published parts of this module. That doesn’t mean that the community won’t have significant changes to the specification, I’m sure they will. Its just that as it stands now, the contribution that I am able to make in starting the Accounting Voucher discussion is conceptually complete, and the remainder will be for further clarification.

We have discussed the point of Designing Transactions in the Accounting Voucher before. It comes to mind that we currently use a basic form of transaction design in oil and gas today. And as I mentioned elsewhere in the Preliminary Specification series, designing transactions is the type of work that is done by Lawyers in most commercial transactions. The transaction that I was referring to was the drilling contract which has a list of the categories of work that is being done during the drilling of the well. Under each category the producer is able to select whom will provide the service, the drilling contractor, a third party or the producer.

With the automation of systems, and the understanding of the other modules contained within the Preliminary Specification. It would be optimal to automate this and other interfaces within the People, Ideas & Objects application; such that the contracts, negotiations, execution and invoicing could be automated to the highest levels. This is the opportunity that the community faces in taking these “ideas” and making them real through the development of this system. That is the reason for the large budget in terms of the Preliminary Specification and overall software development.

The second item I wanted to discuss today was related to that level of automation. Transaction Cost Economics talks about the costs of processing transactions. Where if the costs of processing transactions is high, it is best to centralize them within the firm where they don’t have to be individually itemized. Or if the costs are small then they are best to be provided by the marketplace. By automating transactions we are able to reduce their costs to almost a negligible level. With the costs of transactions being so low, moving transactions to the market is the natural choice for the industry to undertake. And that supports a heavier reliance on the division of labor that we have discussed here and in other modules on many occasions.

So when we discuss the pooling concept in the Partnership Accounting module it is assumed that the costs of these resources will be recorded in an automated fashion in the Accounting Voucher. Reducing the transactions costs is the opportunity that we have and the technology provides the means in which to implement it.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification. Email me here if you need an invite.

The Preliminary Specification Part LXV (AV Part VI)

Its very 1970’s ish to be thinking of a Purchase Order system. The 1970’s is the last time that I can think of any one ever using one. (It certainly might be used in the larger firms, however, I am unaware of this.) The practicality and usefulness of these systems seemed to have vaporized in the 1980’s and no one has considered their existence since. Now we talk in terms of Supply-Chains, however oil and gas doesn’t have a “supply-chain” as the term is used. Supply chains are for retail and manufacturing. Purchasing is for oil and gas.

I would reiterate that the use of a Purchase Order system is something that the user community needs to determine if it wants one. I see substantial value in building one and these posts will attempt to document how that value can be realized.

The Purchase Order system is part of the Accounting Voucher in that it is a necessary part of the processing of any large capital item. The use and application of the AFE, Cost Centre or Lease charge code remains the same irrespective of the Purchase Orders existence or not. There is no change in the coding structure as a result of the inclusion of the purchase order number. The Accounting Voucher relies on the Purchase Order for further approval of the specific contract dealing with a particular vendor on a specific project.

There are a number of cases where the management of the vendor relationship needs to have special considerations. Particularly in oil and gas where the details of the project are specific and large. Engineering contracts for the building of gas plants, pipelines and facilities are some of the examples. Situations where the contract must meet certain criteria and the vendor must qualify to meet those criteria during a bidding process. Its of concern to the producers that the firm that is chosen is capable of undertaking the work that is described. It is not just a lowest cost and the bid wins type of contract bidding process. This overall bidding process falls under the larger Purchase Order process of the Preliminary Specifications Accounting Voucher.

Once the vendor has been selected then the approval of the invoices is subject to the terms and conditions of the contract. Any prepayments or partial payments can be processed on the basis of the strength of the Purchase Order document and the final payment is subject to the satisfactory completion of the contract. If the contract is subject to any hold backs and other conditions, then those would be applied within the Accounting Vouchers payments.

The Purchase Order system is designed to provide the producer(s) with a level of control over large contracts. Something that is done frequently in oil and gas. By managing the bidding process and providing a level of control over the contract in terms of making and controlling the payment process. The Purchase Order, I think is a valuable tool in any producers system. Having these contained within the Accounting Voucher of the Preliminary Specification is the natural placement of these control processes.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part LXII (PA Part IX)

We move now to our second pass through the Partnership Accounting module. Now that we have also made our initial pass through the Accounting Voucher we are able to compare some of the similarities and differences between these two modules. That is the topic of this blog post, how in the Preliminary Specification the Partnership Accounting and the Accounting Voucher work together to solve the difficulties in dealing with the accounting issues for the Joint Operating Committee.

The best way to continue to describe the similarities and differences are to pick up the discussion of the Material Balance Report. When we last discussed the report in the Accounting Voucher we noted that the voucher needed to balance the debits and credits as well as volumetrically for material, system and partnership balance. Note that these are all the monthly variables that have to do with either financial transactions or production volumes for the current month. Therefore these monthly variables would be processed through the Accounting Voucher. Also note that these balances are for the 100% working interest share of the Joint Operating Committee. How does the producer know that their share is calculated correctly?

We also discussed a “template” that contained information that was used to process the monthly variables. The wells that production was from. The contracts production was sold to, and the functional units that process fees may have been charged on, etc. These 100% share constants are part of what are contained within the Petroleum Lease Marketplace module and represent the whole contracts. They are pulled from the Petroleum Lease Marketplace module, or elsewhere, to populate the “template” that reside semi-permanently in the Accounting Voucher.

Now the Accounting Voucher, in the instance of the Material Balance Report, is a Joint Operating Committee voucher. Therefore the clearing of the accounts will be to each of the producers and they will each have access to the Accounting Voucher. The Partnership Accounting working interest share constants, which is similar in its makeup to the “template” in the Accounting Voucher, are a check and a balance for the Accounting Voucher calculations and each individual producers share to ensure that their interests are being calculated correctly in the Accounting Voucher. Since they are based on their understanding of the agreements as represented in the Petroleum Lease Marketplace module, there should be no variances. However this is oil and gas, if there was a variance then the producer would be notified before the voucher could be closed. [Note. Since we are developing these systems we will be using one data element to populate all three modules.]

The extent of this verification will be limited to the level of constants that the producer would have chosen to have populated the “template” in the Partnership Accounting module. The system won’t go out and look for the variables elsewhere. Therefore the level of system verification can be as high or as low as the producer feels comfortable with by populating the Partnership Accounting “template” with as many constants as they feel necessary. On the other hand the Accounting Voucher needs the full template of information in order to correctly process the information in the current months voucher. It is not an option or system verification as it is in the Partnership Accounting module.

I think that to have a variety of systems checks and balances on the calculations are a necessary part of the Partnership Accounting module. In the hands of the People, Ideas & Objects software development team, and user community I think this area of the module could become quite sophisticated, and as opposed to just tripping up the closing of the Accounting Voucher, be quite helpful in determining a number of accounting related difficulties to focus on. We discussed some of those possible accounting related areas in our previous posts on Partnership Accounting.

If a variance should arise in any area there would be a reason for it and upon further investigation probably lead to some adjustment. Any changes to an agreement that your firm was not made aware of would show up immediately. The data within the producer firms could not get out of line for more then the current month without large variances showing up somewhere. This system of checks and balances working in an automated fashion, if the data was updated appropriately, then the various instances of the data would be updated in the “template”, therefore leading to no variance. Once the “template” was setup, the user would only need to deal with any variances and work to resolve them. Ensuring that the producers accounting was being processed appropriately and the focus of the accounting resources was only on the issues that were of material concern.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.


Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification. Email me here if you need an invite.

The Preliminary Specification Part LVI (PLM Part VI)

In this our second pass through the Preliminary Specification, we turn now to the second marketplace module, the Petroleum Lease Marketplace (PLM). In our previous posts of the PLM I tried to impress upon you the importance of the user vision of the three marketplace modules. Having done so, I am now free to discuss the PLM from an oil and gas point of view. Today’s post will discuss the importance of the working interest distributions, particularly in the facilities areas, and how they need to be handled in the People, Ideas & Objects application modules. This discussion will include the Partnership Accounting, Material Balance Report and Accounting Voucher modules.

The working interest distribution for the production from a well is fairly straight forward. Other then the changes that we noted, before and after casing point elections, before and after payout etc, the values remain relatively constant over the life of the well. However, for gas plants and related facilities the distribution to the owners of the facilities is anything but constant. This brings into play a multitude of different ways to treat the ownership of the production and the costs of processing. The manner in which the accounting for that production and the cost of processing is of material concern to the owners of those facilities. In fact it is the difference between making a profit or not. The inability to grasp the scope of the concern has led many to disrupt the facility owners business.

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

Now to handle that day-to-day activity there needs to be an ability for the plant owners to account for the transactions that are occurring within the plant based on the CO&O. Relying on the Partnership Accounting module will be part of what they will use for the handling of the plants accounting. However, because they can’t take a literal working interest distribution and they have to rely on a dynamic distribution based on the CO&O, a special algorithm will need to be built within the PLM to deal with the CO&O. This algorithm will capture the agreements production allocation methodology. This algorithm will be dynamic based on the gas composition, production factors and activities at the plant, but it is also not fixed. There are changes to the algorithm on a month to month basis. As new wells are brought on, new functional units are brought on, new products are sold to new purchasers etc. these need to be taken into consideration into the algorithm.

In the current accounting world these “algorithms” are managed within spreadsheets. Not my favorite place to put a critical piece of business. I think that the user community can do something to embed these algorithms within the system so that they are more “mission critical” and less subject to human error.

As a plant owner the days of major changes are not over yet. There are still the equalizations that have to be calculated. These equalizations are some times run monthly but mostly done on an annual basis. They are done to correct any of the owners over / under capacity utilization during the year. If an owner owns 25% of the facility then generally they would not be billed processing for any of their throughput. However, at the end of the year it is determined that their actual throughput use was 29% then they would need to be charged for that 4% capacity that they overused. These calculations would also have an “algorithm” within the PLM for the Partnership Accounting module to use.

I would reiterate this is an area of extreme importance to the owners of the facilities in oil and gas. To handle these transactions appropriately is the only manner in which People, Ideas & Objects will approach this issue. As it stand today, I am certain no other software vendor fully comprehends the significance of these points and does not provide anywhere close to the level of functionality as we have proposed in these modules.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification. Email me here if you need an invite.

The Preliminary Specification Part LIV (RM Part V)

Today I want to discuss what I mean when I say that users of the People, Ideas & Objects Preliminary Specification will “design transactions” in the Resource Marketplace and Accounting Voucher modules. Transaction Cost Economics is an important element of how the energy industry can control its costs and designing transactions is a key to those savings and efficiencies. Also I want to highlight the role of the user as an active agent in making things “happen” in the Resource Marketplace.

As with any marketplace the focus has to be on the user. The user in this case could be representing either a producer, or a service industry provider. A user is someone with access to the People, Ideas & Objects module who would be optimizing the “tasks” and “actors” involved in transactions, and will be able to turn the producers needs into a demand for services in the Resource Marketplace Module.

There are two changes that might make things different in the future as a result of organizing on the basis of using the Joint Operating Committee as the key organizational construct of the innovative producer. One is that designing transactions will become a skill that is going to be used substantially more. And two, the division of labor is going to expand, meaning that the job which may have had a few contractors to complete today, may now have an order of magnitude more in terms of numbers of contractors tomorrow. Consider the following.

Designing transactions
When people buy a major item in their lives like a house or a car. They itemize the details of what is, and what is not included in the price. Who is to provide what and the terms and conditions of when the items will be completed. This is what is meant by designing transactions. Its more or less what Lawyers do for a living, or that is to say, it is an important aspect of their work in any commercial sale agreement. This type of work is where the costs and efficiencies of the organization can become onerous or very easy. If a firm has “engineered” their transaction costs down to a fine point then they are able to manage their costs efficiently. This will be the case for an oil and gas producer. Transaction costs include the costs of installation, finance, testing, the specifications, types of materials to be used and the engineering consultants, etc. In oil and gas it is easy to see how these costs, even for a small job could become problematic.

The division of labor
As the producer focuses on their land & asset base and earth science and engineering capabilities. Product and service providers will be focusing on their key competitive advantages as well. Letting some of the work that they may have done in the past to specialists at different companies. This will increase the number of vendors that a producer will use to do normal operations in the field. This specialization and enhanced division of labor will provide greater efficiencies and cost control for the producer firm through more competitive and innovative solutions. It will also increase the throughput of transactions that a producer will have to deal with and put more emphasis on the designing of transactions.

On the other end of this process is the product or service provider who is able to contract for what the producer needs. They too have interfaces to the Resource Marketplace module that are similar to the producers. These user’s that may have anticipated what the markets demand is going to be, and are the first to configure an innovative solution and are able to market their product or service effectively in the Resource Marketplace Module. These element’s of the competitive market changes are reflective of the producers needs as determined in the Resource Marketplace, and its use of transaction cost economics (TCE). This process involving an iterative loop of constant improvement of the transactions and processes in the energy industry.

Lastly when these resources are discovered by the JOC or producer, the contract negotiation between the two parties can begin to take place. The first step in contracting will be the determination of exactly what the transaction should look like as determined by the Accounting Voucher. This would then lead to the specific negotiations, automation of the creation of the contract, and assignment of the Resources to the contract. From there this software should enable high levels of automation in order to relieve the user from work that is better suited to computers, and focus on the optimization and efficiency of the transaction.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part XXVII (AV Part V)

As we metaphorically peel this onion we find that this will be the last post on the Accounting Voucher module. We will return to this module as we get down to the deeper layers. However, after this post we will be moving on to the Security & Access Control module to pick up on some of the interactions of the people who are working within the various producer firms and vendors. We have discussed many of these interactions in this the Accounting Voucher, the Petroleum Lease Marketplace, Resource Marketplace and other modules. I will also have one closing comment in this post on the general practicality of the Accounting Voucher outside of its use in the Joint Operating Committee.

In the Draft Specification the Accounting Voucher is described as the crossroads for a variety of other modules in the People, Ideas & Objects applications. And we have described how certain data elements are brought into the Accounting Voucher in order to activate them and make them part of the history of that Accounting Voucher. For example, if a new well is producing it is brought in through interfaces from the Petroleum Lease Marketplace module. Once in the Accounting Voucher it can begin capturing the field data and recording the transactions for that well. What the Accounting Voucher provides is the means in which to take the data elements from the other modules, and conduct the necessary transactions upon them.

The last few posts we have concentrated on in the Accounting Voucher module have focused on the Joint Operating Committee clearing system. And that would be one of the key attributes of this People, Ideas & Objects module. However, there are more attributes to the Accounting Voucher then just the Joint Operating Committee clearing system. As we have noted here before, the Accounting Voucher is able to be used by the producer to capture their 100% charges and that is for all intents and purposes what an accounting voucher would be for in any other system. The use of capturing general and administrative costs, payroll, paying bills and other purposes would be included in the Accounting Voucher module.

Lastly I want to raise the point about the Purchase Order system that we touched on in the Accounting Voucher is something that I think will be a necessity. It should be something that is built in the People, Ideas & Objects applications and be available as an option for producers to use. And as such on the second run through the Preliminary Specification we will spend a little more time on it.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.