World Energy Outlook

Fatih Birol, Chief Economist and Head, Economic Analysis Division, International Energy Agency (IEA) makes a speach that is broadcast on YouTube. This speach addresses the Annual IEA Report released in November 2008. The audience for this speech is the Council of Foreign Relations. The discussion is predominately about the climate impact of CO2 produced from the use of energy. This is a disappointment as the scope of the IEA is on energy. Climate change has its own custodians and is not really an appropriate topic to take the time away from the discussion abut energy supply and demand. The energy issues alone have the potential to obscure all of the issues mankind faces. If we are faced with those dire energy related problems, will we be able to look to the IEA for the answers? Not in my opinion. If the topics of discussion are continually diverted away from energy supply to travel down obscure bunny trails such as climate change and alternative energy, we most certainly will suffer the consequences of an inadequate supply of energy.

The first part of his speech deals with the current pricing situation. Making the assertion that the supply of oil is not benefited by the decline in prices. Based on the IEA Report there is a risk of permanent damage to the supply of oil if many of the larger projects are not completed. Particularly, Mr. Fatih Birol raises his concern over the accelerating decline of existing known oil and gas reserves. Suggesting this accelerated decline risks the ability to meet market demand in the long term.

At 47:39 an excellent question is asked by "Sally  " of Columbia University. She comments that the current IEA report is a "radical departure" from thirty years of reports that suggested the supply would rise to meet the demand. The IEA Report suggests that their is a supply problem and asks if it is possible to keep supply at these levels in light of the issues that the accelerating decline curve reflects.

Who knows what the future holds. As I have mentioned before my training and experience in oil and gas is in management. I do not understand the particular nuances of what reserves are produceable or which are of value. Limiting my upward mobility in the industry. I do know, however, the amount of time, energy, money and most important of all "ideas" it takes to find a barrel of oil in the current industry environment. I also know the demand from China and India on top of the high demand levels of the advanced economies will challenge the industry on the demand side of the equation. 

I also know that SAP and the current crop of ERP systems that are in use in the industry, are inadequate to approach this problem. Supporting and cementing the bureaucracy in its well established rhythms, as is SAP's success, is the impediment to innovation, adequate supply of energy and the ability to continue on as a civilization. 

The energy supply problem is a long and difficult task for the industry to undertake. We need to take the first steps in making this happen. We live in an advanced economy where the division of labor requires thousands of people to undertake the smallest of transactions. These people are unable to know all of the necessary connections to make these transactions successful. The role of software is critical in identifying and making these people function at the optimal performance. I am suggesting we first and foremost organize the producer in a fashion that meets the needs of the industry. Now is the time to develop these systems and unleash the human resources necessary to solve these critical problems. We need to begin this new approach to the industry by changing our organizations to instill the innovation and performance that this new environment demands. Please review the  Draft Specification, and join me here. 

Technorati Tags: People's Energy IEA Innovation Peak-Oil

Robert Malone, on MIT video.

Achieving U.S. Energy Security Through Energy Diversity

Robert Malone is the Chairman and President of BP America and is speaking about energy policy in the United States. Going back to the Nixon administration and reiterating some of their goals in terms of where and how the U.S. would source their energy. Stating the attempts to formulate a policy have failed, and now is the time to address this difficult situation. 

Talking about our future and the difficulty in getting people's focus on a national energy policy. Its a market economy, and I think the idea is that you get paid when you explore, develop and produce the product. Looking to the government for the leadership in making the policy changes  to enable domestic supply has provided the U.S. with nothing but the failures going back to the Nixon and Carter administrations. 

I disagree with the argument that the U.S. is spending too much on foreign energy supplies. The cost of a barrel of oil is the deal of the millennium. What the U.S. economy, the most efficient consumer of energy, is able to generate with one barrel of oil is far greater then the cost. The U.S. is the largest consumer of energy, and the largest economy in the world. We need to stop thinking in terms of the costs of energy and think more in terms of the value. This requires that we begin to understand and use energy in the most efficient methods possible to fuel our economy. One of the dumbest ways we spend our energy is in gridlock each day twice a day, in order for our supervisors to take attendance. What we need is systems that enable the user to do their jobs when and where the user is, and when the job needs to be done. This begins with the oil and gas producers sponsoring the software developments contained within the Draft Specification.

I can foresee the future user of People, Ideas & Objects waking up and logging in to the system within the first fifteen minutes of their waking. In comparison today, this simple act of logging into the system takes the average person up to 2.5 hours from their waking. The only analogy that I can draw to this foolish idea of getting to work; is having to drive back home in order to make a personal phone call. Ridiculous, join me here.

Technorati Tags: People's User Video Energy Economics

Bloomberg is reporting

A little off topic but the scope of the economic difficulties is coming into focus. Bloomberg is reporting the Fed and Treasury are prepared to provide unlimited financial resources to the market to offset the threat of deflation. If you have read the Preliminary Research Report that I wrote in May 2004 I expressed a concern that if left unchecked, the economy could slide into a deflationary period that would be particularly brutal. It would seem that the Fed is in agreement that this must be avoided and is willing to spend up to $7.4 trillion to eliminate the risk. 

Are we not pushing on a rope? Having the value of money erode in the market is one thing. Having the governments contribute to its further erosion by dropping interest rates and bailing out potentially failed organizations just seems wrong. People need higher interest rates in order to encourage savings. The more logical solution to this problem is to get people motivated to invest by giving them a decent return for the risk they are taking in their investments.

We can generally agree that the source of this problem was the low interest rates of the early part of this decade. (See my entry on mis-allocation of capital.) When capital provides little to no returns, with high risks associated with those returns, money is considered cheap. If money had a cost, would it not allocate financial resources to the projects with the highest return. When money is worth little investments have little to compete with. When the government guarantees every and all transactions, a sloppiness in the capital allocation process starts us down the road to moral hazard. 

I know this is contrary to current economic thinking but I have to ask are we only making this problem greater by further diluting the already sloppy capital allocation that has been carried out? It seems to me to be the case.

Our current policies of expansive money supply were created in the great depression. They are assumed that these are the means in which to have the economy return to a normal operating environment. But is this assumption, which is based on the lone event of the great depression interpreted incorrectly? Stuffing the banks full of cash does not make them want to loan it out. Handing money to consumers does not make them want to spend. What motivation is there to take a risk?

One unforeseen consequence of this over-stimulated economy is the demand for energy was obviously significantly overstated. The current price declines are a reflection of the influence of deflation in a market and the long term capital deflation appears to be right around the corner.  To make matters worse, the decline in reserves and production are only exacerbated by the energy industries long term capital projects being shelved. How many times have we seen these big projects stopped and never return. It will be a gutsy investor who stands up and says their building a new offshore drilling rig. Making our future production horizons even more constrained.

There are serious distortions being introduced into the marketplace for energy. I think the dynamics of the industry are accelerating at a pace that many of us, and certainly myself, are only now realizing how fast paced this environment is. One last link to Bloomberg shows them suing the Fed in order to determine if the Fed has made an unannounced change in their policies and are targeting inflation; to eliminate the deflation by flooding the market with "printed money." If we already have the recession, why doesn't the Fed invert the yield curve to force the market interest rates to rise. Throwing cash around in a panic is only making everyone nervous.

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And the transition begins.

Creative destruction in its purest form is beginning to operate in the oil and gas industry. I'll start with the destruction aspect of this phrase. The transition from the structured hierarchy to the new science based producers has begun. In Canada we have the majority of oil and gas companies failing. This will become more and more obvious in this next phase of the market meltdown. The preliminary symptoms of the transition are evident today. Here is the CEO of mid-sized producer Anderson Energy Ltd.

"We have seen significant, unprecedented changes in capital, equity, commodity and currency markets in the past few months and ongoing concerns about the global credit crunch," said president and chief executive Brian Dau in a note released with third-quarter results.

As a result of these events Anderson Energy is reducing its capital expenditures, and financing some of the remaining expenditures through the sale of some properties. Expect to hear a lot of companies beginning to do these types of things for the next two years. As these firms continue to slide in their organizational performance, aggravated by the decline in commodity prices, producers are faced with the ultimately difficult decision of what to sell to make the next quarter.

The creative part will come into play when the new and innovative science based producer will be able to purchase these assets at very large discounts. Comparing the metrics of the bureaucracy to the performance metrics of the innovative oil and gas producer will make the assets far more valuable in the hands of the innovative producer. Innovators will be able to purchase these assets based on the poor performance of the property. Turnaround the property and make the asset more valuable through applying new science and ideas to the property.

Recall the competitive advantage of the innovative, scientific based oil and gas producer is in their land base and their technical capabilities. Having anything more in terms of an in-house capability should be considered overhead. These firms are defined and supported through the software we should be building here to ensure this transition is conducted in the most positive manner.

Clearly I don't expect any existing producer will want to use this software to run their organization. They have made it clear they don't want anything to do with the changes that are implemented in this new way of operating the industry. Which is fine, theirs is a road that ends quickly in a brick wall. Nonetheless the ability for these firms to hang on by implementing this software I don't think is possible. Therefore they will cannibalize themselves in a very short and desperate process.

And in related news, Penn West Energy Trust also made news as it's the largest royalty trust organization of the Canadian industry. It too is having financial challenges that lead the management to state:

"With the number of opportunities that everybody anticipates coming up in the next little while, the key is going to be discipline and maintaining focus in terms of what our acquisition appetite looks like," Foulkes said.

Even having the CEO going out as far to say the following:

"I don't want to hang my hat on any number," chief executive Bill Andrew said during a conference call. "But we wouldn't continue to operate in a position where we were borrowing money from the bank to distribute to the shareholders."

I'm sure their shareholders are enlightened by their CEO's assurances. If these producers are in such need of capital. After several years of high prices, and are unable to survive without cannibalizing themselves, you know that the transition is near. Particularly when it is someone who has been able to successfully put together companies in the range of multi-billion market capitalization's such as J.C. Anderson has done in the past. Cutting at a critical time as this is obviously the wrong thing to be doing. You can not change the spots on a Leopard either.

If you find yourself in the position of being severely affected by the market meltdown. I would be pleased if you gave some thought to joining this project. I am looking for 100 people to take the Draft Specification and enhance it to the level of the Preliminary Specification. This is a ground floor opportunity for those that may find they have lost a lot, and don't know where to turn in the future.

I believe the only sustainable competitive advantage for an individual is to have some Intellectual Property owned or accessible. Such as this project is. This is the key value proposition that an individual has to offer a producer. I would encourage you to review this blog as much as you need, find an area where you are familiar and have some ideas on how to improve these areas in the application. Please join me here.

Technorati Tags: People's Trends Change Energy Management

International Energy Agency 2008 report.

The BBC is reporting the results of the International Energy Agency 2008 report contains a warning derived from the implications of the current credit crisis on investment in oil and gas,  and hence future production deliverables.

IEA is declaring the era of cheap oil is over. The cheaper prices we are experiencing today are attributable to the market meltdown as the world consumption of energy continues to tank. No one has any quality information as to the extent of the decline in demand, and as such is assuming the worst scenario and prices are collapsing. This is a temporary situation that may last for the full term of the markets meltdown, which may be the next five years.

The lack of investment is cited by the report as the reasons behind the warning. The geological aspects of peak oil, or declining production due to lack of reserves, is not the issue that the IEA is warning about. It is the lack of investment by the industry to ensure the market supply of energy is maintained. I would tend to agree with these assumptions that the lack of investment is a more dire and serious problem then peak oil.

This project does not have the financial resources to pay for the full report. However, the BBC coverage is providing us with the scope of the warning and the material information in the IEA's report.

But, they point out, field by field, declines in oil production are accelerating and more money will be needed in research and development to extract the oil there is.

While world oil supply will rise, the report's authors predict that massive investments in energy infrastructure will be needed - an eye-watering $26 trillion dollars up to 2030.

A significant amount of this money - $8.4 trillion - will need to be spent on oil and gas exploration and development.

Big numbers. I sarcastically assume that the structured hierarchy will be able to provide the industry with the appropriate organizational structure to 2030. It seems ridiculous to me to throw this type of money at the problem on the same basis as we have relied on in the past. Doing the same thing and expecting different results will be insane. The bureaucracy will fail, I would have 100% concurrence from those in the oil and gas industry and energy consumers in general. We need to begin the process of developing the software and building the organizations and systems necessary to undertake this critical task. A critical task that may materially affect our way and quality of life if we are not successful.

I suggest we develop the People, Ideas & Objects application based on the vision provided in the Draft Specification, please join me here.

Technorati Tags: People's IEA Energy Geology Peak-Oil

The State of the Energy Industry.

Quotes from ASPO-USA.com

The price of oil and natural gas have both tanked as a result of the market meltdown. What is most impressive about this changing marketplace is its speed. The rapid decent has caused the commodities to be brought down with the rest of the market. For oil and gas that spells more trouble down the road. What we lose in terms of capacity to conduct operations may turn out to be substantial. The further we get behind the natural decline curve, the harder it is to reclaim lost positions.

I continue to believe one day within the next five to ten years we will see oil at $600.00 / barrel. When demand does return, the product lag may be severe with investors committing to long term projects on much much longer lead times. The Canadian oil sands will be seen as the white elephant that it is, with most projects being scaled back in order to mitigate the losses.

This market is much more dire then I suspected. Professor Perez suggests the turning is necessary to institute the changes between the old economy and the new economy. What we forget is the reality of the situation when we are in it. What I suspect will happen is the stock markets to drop more in the next two years. The liquidity crisis is contained and the markets will ease into a steady decline. Now the tough bit comes. Choosing who stays and who goes. The solvency of companies in all industries will be as brutal a drop as we have seen in this liquidity drop.

Canadian Natural Resource Ltd will be announcing their third quarter results on November 6th. This may be the end of the firm as we know it, I can't even see how they've been able to make payroll this month. There will be the need to address the credit crunch and their Mickey Mouse approach to financing. For the firm to make money will be as a result of the valuation of mark to market coming on September 30, a time when energy prices were lower, therefore lowering their unrealized loss on commodity sales. The point will be made very clear to them that they can't finance a $3.2 billion working capital deficiency and $26 billion in total debt. I am sure the Horizon project is sinking beyond the horizon of what is possible. The ability to have this project propped up is next to impossible. CNRL is insolvent and needs to be shut down.

The ability to have a partner come in and take over the remaining development will be difficult. The heavy oil plant is generally an overall strategy of the firm, companies need to dedicate natural gas for fuel and condensate for diluent. A company coming in can't create this situation and as such getting into the Horizon plant will be difficult.

Nonetheless the following quotations are from the ASPO USA weekly bulletin. The first item is very disconcerting in that I am not aware of any attempt to deal with the difficulty mentioned, the retirement of the human resource in the industry. We know that the retirement of the brain trust is going to happen in the next five years. Weather this market meltdown stops many from retiring is too optimistic to suggest. This problem must be dealt with, and in the Draft Specification I have proposed that building redundant capabilities in each company is the source of the problem and its ultimate solution. The producers need to pool their capabilities in order to mitigate this problem. Pool them on the basis of their interests in the JOC. Using the Military Command & Control metaphor to provide the governance mechanisms that the producers need.

Despite falling costs for steel and other materials, the oil and gas industry again finds itself confronting a shortage of people with the skills and experience to lead new developments. If efforts to plug the skills gap don't succeed, senior industry executives say oil companies' ability to tap new and challenging hydrocarbon resources fast enough to meet demand may have already have reached its limit. (10/23, #17)

The speed and ability of the industry is in question, imagine that, someone should have suggested a new organizational structure for the industry to follow. Please excuse my sarcasm, I really can't help myself.

This next article / quotation is from Jim Gray who had built up a strong natural gas company that is now buried somewhere in Connoco Phillips. He and his partner, John Majors were able to solve some difficult geological problems in the late 1980's building up a firm by the name of Canadian Hunter. Here he suggests there is more at stake then just the money issues that are in the news headlines.

“I’m strongly of the opinion that we’re on the cusp of a global liquid fuels crisis. The forthcoming energy crisis, should it develop, could result in economic, political and social stresses, and turmoil on a scale not experienced for half a century.”
-- Jim Gray, former CEO of Canadian Hunter Exploration

As the Canadian industry moved towards its ultimate strategy of "me too" and we have 10 or so heavy oil projects. The rest of the industry has waned substantially. Natural gas production is down 12% and as our former Governor General stated, Canadian conventional oil production is in steep decline as well.

Ed Schreyer in the Q&A, Ed noted that tar sands are now 50% of Canadian oil supply, as conventional production is declining steeply. With the current financial crisis and very high capital costs for tar sands development, turbulent times are coming for the oil & gas industry in Canada.

So here we are faced with an impossible situation in an impossible financial meltdown. What will these boy geniuses think of to make this problem workable. Fund this development? Not on your life. They want nothing to do with working for a living.

The funding has to come from the two previously identified sources. The disgruntled shareholders who are fed up with the management and can see the vision as it is layed out in the Draft Specification. And the various governments who have royalty regimes in place in oil and gas producing regions. And are able to see that society is too complicated for Hayek's Spontaneous Order to occur. And realize that the "new" economy after this meltdown has had all its fun, needs to have the software built first before we can reorganize based on specialization and define a new division of labor. Please join me here.

Technorati Tags: People's Energy Call-to-action Vision

Offshore drilling ban, banned!

If the political climate remains constant in the states, we can assume offshore drilling to survive the next administration. The American people want offshore drilling for oil and gas to fuel their economy. Add the necessary technical leap that is required to fully exploit the resource potential of the Pacific and Atlantic offshore. On top of the operating environment of the Gulf of Mexico, the Arctic, heavy oil, unconventional gas. Makes North America the most demanding operating environment. Add to it the retirement of the brain trust of the industry, politics and environmental concerns and you have a sizable task ahead.

One of the key developments in the Preliminary Research Report was that systems define and support the organization. What's SAP's plan for the oil and gas industry? Whats their approach for the high energy cost era? Or do they see the industry as unchanged from the $25 / barrel era?

Its at this point where the first reaction will be to spend more money. I think that will be a mistake. Its a systems first world we live in. If we approach this opportunity with the same old bureaucracies, we're not going to get there. (Increased production volumes). Offshore drilling is expensive and I don't expect any increase in drilling for a number of years. The time lines for new offshore production is long, and we have the opportunity to build the systems that will enable a more innovative, science and engineering focused producer. An appropriate competitive advantage for a producer in this new era of oil and gas.

I propose we build this system to ensure the innovation that is possible gets implemented into the industry. As I have stated here before I believe this system could attain an exponential increase in the performance of the producer. Innovation and performance increases are what have been solved through this five year research project. Now its time to build. Please, join me here.

Technorati Tags: People's Energy Funding Offshore Science

Edith Penrose on the development of oil and gas.

I am reviewing a paper that was written by Professor Edith Penrose. The title of the paper is "Limits to the Growth and Size of Firms." This paper was published in The American Economic Review in May of 1955. Her papers are available through the various Journals that published the articles. Unlike most of the current research these papers are accessible only through paid services. In this case I was able to download them from JSTOR.

While I was at JSTOR, I ran across two very interesting Penrose papers regarding the oil and gas industry. I highly recommend that you pull down a copy and read them both. They reflect the dynamics of oil and gas pricing on a global basis.

The two documents are entitled:

Middle East Oil: The International Distribution of Profits and Income Taxes. Published in Economica, New Series, August 1960

and

Importance in the World Oil Industry. Published in International Affairs January 1979

Anyone suggesting that our current high energy prices are a result of speculation should put these two papers on their must read list. The depth of analysis, the lucid and objective discussion of how energy prices were established during the industries "easy era" is impressive.

One of the key conclusions she makes is that OPEC was a necessary mechanism for the market to function correctly. It is difficult to recall the days when the abundance of energy conspired to ruin the business at any moment. Articles like the 1999 Economist cover story "Drowning in oil" when commodities were in surplus, just created more long term problems for the industry.

Although written in the early 1960's and late 1970's Professor Penrose' articles show the complexity of the information inherent in the pricing of oil. The articles also intimate the power that OPEC has in these times of reduced supply and very high demand, however, this week saw the Saudi's somewhat turn their back on the cartel.

Technorati Tags: People's Energy Reference

Apple, my favorite tech company.

Apple is a company that has risen from the ashes in 1997 to a stellar performer and one of the top four technology companies. Only Google, IBM and Microsoft are larger in terms of market capitalization. Apple had a market cap of approximately $700 million in 1997. Today it is $153.3 billion.

Here is a firm that has taken the world by storm in one of the highest profile industries, and in ten years turned itself into a juggernaut. I'll bet their stock based compensation must be stratospheric. Not really Apple recognized $242 million in stock based compensation for 2007 and $631 million in unrecognized compensation for a total of $873 million.

So here we have what has to be the greatest story of a company rising from the ashes and building 219 times their 1997 values. Apple is 2.4 times the size of Encana (the largest oil and gas company that I have highlighted in this stock option review). Only Apple is capable of approaching the values of the stock option feeding frenzy of these producers. We know that Apple's management generated $152 billion in shareholder value to earn their stock options, what have these oil and gas companies done to deserve theirs?

Technorati Tags: People's Energy Governance Failure

Profit from the Peak.

The end of the oil game and the greatest investment event of the century.

Profit from the Peak is a book that I've been wanting to review for a while. An interesting premise is suggested in the sub-title. From some of the blogs that I follow it sounded like it may provide for an interesting read.

A little background on myself. With over 25 years of experience in the oil and gas industry I could see this "Peak Oil" energy train wreck starting. In August 2003 I came up with an idea on how to solve it. And in September 2003 started the research into using the oil and gas industry standard JOC (Joint Operating Committee) as the key organizational construct of the innovative oil and gas producer. If we moved the compliance and governance that the hierarchy managed, with the legal, financial, operational decision making and cultural frameworks of the JOC. We would achieve an alignment in all five frameworks that would enable the science and engineering needs of the industry to be the focus, and mitigate the effects of Peak Oil.

What does this mean. As most people know oil and gas is made up of partnerships between companies. This is to reduce the risks inherent in the business, and because the aerial extent of many of the properties, multiple owners work together. Since its beginning this has been the culture of the industry. And as one can imagine their are legal documents, financial distributions and operational decisions made with the input of the producers in the JOC. What isn't done is the competition to this software development project, SAP, Oracle and Qbyte, haven't a clue what a JOC is. Their focus is on the compliance and governance and therefore only provide the producer with at best 20% of the functionality.

The other major finding that I published was the software defines and supports the organization. Noting that SAP is the bureaucracy. To change an organization, one must first change the software. If we want innovative oil and gas producers, we need to build the software first. Or be relegated to manual systems. So this is what I have written about since the publication of my research in May 2004 and the posts in this blog. But enough about me lets review this book.

The first point I want to make is based on the following quotation in the Introduction and its associated implications. And regarding this graph entitled "Worldwide Oil Production".

For the past 50 years, we have explored the entire earth intensively looking for more oil. But despite the latest technology and the most elaborate efforts, global oil discovery peaked in 1962 and has declined relentlessly ever since. Generally we are finding less and less oil each year, and for the past 25 years, we have consumed more oil than we have found. In 2006 we found about 6 billion barrels of oil, but we consumed 28 billion, and the trends continue in the direction of increasing demand and decreasing supply. pp xvi - xvii

Although Peak Oil accurately captures where I think we may be in the history of the industry. My opinion is that we have established a high water mark that may be permanent. The graph clearly shows the discoveries peaked in 1962 and have declined since that time.

My question to the authors and everyone interested in this topic. Does this graph mean all the oil was discovered by 1962? Or did the industry stop looking for more oil after 1962. Now this is not an accusation that they purposely stopped exploring. But consider the world had an abundant volume of energy. Prices were in the very low single digits, and the need to "develop" these resources became the focus. This situation was followed by the 1980's and 1990's where low oil prices were causing no end of greif to the producers. The industry more or less cannibalized itself to survive over those two decades. To say that technologies in 1965 discovered all of the oil is an assumption that the Peak Oil theorists may have incorrectly assumed. Based on my current understanding of the oil and gas industry. And the process necessary to explore for oil and gas. The industry generally doesn't have a clue on what exploration is. The generation of oil and gas workers that started in the 1980's and 1990's never experienced an exploration mindset.

The next incorrect assumption of the authors is stated on page 4 of the book.

"Matthew Simmons, the top oil investment banker in the world" p. 4

Now I have read Matthew Simmons for many years and overall he is correct in many things that he states. However he is the worlds top investment banker in the oil and gas services industries. Based on Mr. Simmons comments about the need to publish the worlds reserves data. So that it can be pointed to as the gospel truth of the Peak Oil situation, unfortunately disqualifies himself from making any comments about reserves.

I have now worked in the industry for over 30 years and have gone through the accounting, audit and systems areas extensively. I have been a CFO of small producers and I have looked at my fair share of reserves reports. I can't tell you if the reserves are the greatest thing since Ghawar, or the latest scam. Looking at reserves reports is the same at looking at art. Why would someone pay that much for those reserves, or art, reflect the beauty is in the eye of the beholder. And indeed oil lives in the minds of oilmen.

The same criticism can be leveled against Dr. Daniel Yergin. He claims he and his 220 PhD's on staff have the best global oil and gas reserve data. This prompted him to make the claim in 2005 that "the world would soon see an unprecedented increase of 16 million barrels of oil". If I were you I would dig out some of those paintings your kids made in elementary school, I think I see a market for them.

Some minor criticisms as to the accuracy of some of the claims made in the book. On page 42 of the book it is claimed that "hydrogen sulphide (sour gas)" is in injected into oil formations. H2S is one of the most toxic substances known to man. One breath of it and your dead, instantly. I'm sure the safety concerns of injecting H2S are adequate to assure that no one is doing it.

Enough criticism of this book now lets get on to many of the jewels. On page 49 "Its as though the adults of the oil industry have been forced to sit and watch as the children take control." In reference to the industry being knocked aside by the National Oil Companies (NOC's) desire for control. I can't agree more with that statement, and I'll comment on this later in the review.

On page 67 the authors suggest "Essentially, it looks as though oil majors are running a shell game here, no pun intended. The question is: When will investors figure it out?" They have hit the pile driver on the pile with this one. As I have mentioned many times the management of the producers are acting in their best interests, not the investors or societies in general, with their muddling attitude toward the energy business. One has to take a jaded look at the stock options that are being distributed in many of these companies.

The first knock your socks off comment that is made by the authors, and I have not seen anything like this analysis before, but intuitively believed it to be so. And is the underlying reason why I blame the companies for the risks we now face. Is reflected in this quote;

"A strong man, working hard all day long, can do less work than an electric motor can with 10 cents worth of electricity." and "A barrel of oil contains the equivalent of 18,000 man hours of energy." p. 72

If the fact that the physical labor equivalent of energy is now static or declining doesn't scare you, then you must be a different type of animal. It was in 1870 when mechanical leverage exceeded the labor output of man. The reason we live in such a prosperous world is the fact that we have figured out how to mechanically leverage one barrel of oil so extensively. This however does not mean that we should consume most of it by hurtling a 4,000 lb. vehicle down the highway at 60 miles / hour. I'll have more to say on this point later.

I am not a believer in the scare tactics of the Al Gore's et al. To me climate change is real when the news of the day has video reflecting strange weather occurrences we only ever heard of before. Much in the way that the world thought the Japanese economy would rule the world in the 1980's; when the majority of people saw the world through a Japanese TV. Turn off the TV and go outside, notice any change? Nonetheless, that should not preclude us from coming up with solutions. The authors ring the bell with this next set of suggestions.

"The ultimate culprit is the American consumer culture that is responsible for most consumption in the world. At the end of the day, the culture of consumption must change." p. 88

and

"To heavily invest U.S. tax dollars in renewable energy production in China. Why? Because the Chinese have a chance to build their burgeoning economy on renewables from the beginning." p. 92

Brilliant! Although I would suggest not just the U.S. but the western world should subsidize renewable energy production in China. Not only does it limit the production of the highest levels of CO2 (China), but provides immediate value (reduction in CO2). Changing the western worlds infrastructure is not going to happen as quickly. These two authors should win an Academy Award and a Nobel Prize each for these comments. Its this out of the box type of thinking that we need a lot more of, if there is a climate change problem.

One of the key characteristics of this book is its focus on the facts. When it comes to the renewables, I find the activities in the U.S. so focused on keeping people in their cars that they can't see or think straight. Here the authors note that the value generated by ethanol is approximately equivalent to the inputs of oil. Therefore if the U.S. stopped producing ethanol. People would be able to afford food and a bunch of bureaucrats in Washington would lose their jobs. That's it, you'd have just as much energy. The facts are clear this is a foolish and dangerous game.

I have suggested in my blog many times that the oil and gas industry is in need of a desperate transition. One in which the survival and cannibalizing of the industry in the 1980's and 1990's be replaced by an exploration mindset that hasn't existed since 1962. A move to a science based industry and away from the banking mentality that pervades the incumbent management. The reason this hasn't happened is as I suggest. An organization today that doesn't have the software systems in place to make the transition, will be reduced to manual systems. Something that I know the incumbent management readily appreciate. I have also suggested many times that the investors will need to fund this software development project to ensure that there is an alternative method for them to manage their oil and gas assets.

This transition is necessary and time is wasting. What the industry did learn in the 1980's and 1990's was how to draw down the reserves of a field much quicker then they did in the 1960's. So not only are we not exploring, we don't know how to explore, can't get organized to explore, and, the past exploitation methods are the proverbial brick wall we are about to crash into.

I therefore disregard the comments of the authors made in chapter 6 "Twilight for Fossil Fuels" and suggest that oil lives in the minds of oilmen. On page 120 they note;

Ironically, one of the causes of the receding horizons problems is the very success of the oil and gas industry. Record oil revenues being raked in by oil producing countries of the Middle East are causing a boom in building and expanding their infrastructure.

Imputing, I think correctly, that the U.S. based oil and gas industry has not been welcome in the Middle East, Russia and China. I think it was reflected clearly around the time that Halliburton moved their head office from the U.S. to the Middle East. But was this transition away from western based capabilities a mistake? I believe it was. Since then the industry has had their head stuck in tar. The tar sands I mean. Their herd mentality is noted by the authors.

"In some cases the price of oil itself is stifling oil projects. For example, at Shell's Alberta oil sands project, the cost of producing a barrel of oil, after a planned 100,000 bpd expansion, will be six times higher than the cost when the project first started." and "Depending on a host of factors, the total net energy gain for tar sands production is in the range of 5 - 10 percent." p. 121

But hell, it is seen as the thing to do.

I think the energy executive, if that's not an oxymoron, is beginning to wake up to a brighter future. I note the following from Thursday July 10th's news. The Calgary Herald on Russia's changing attitudes towards western technology. ASPO International notes BP CEO Tony Hayward stating "He said the problem was a failure of supply growth to match demand growth." "Pemex oil output fell by 10% in May." And Total pulling out of Iran due to their fireworks.

The Russians are considering tax incentives for the western based companies! Is this an admission that the western technologies are superior? Russian production certainly leaped when they were invited in, now with Shell and BP more or less financially abused by the Russians the production declines. With Mexican production in steep decline it is fair to assume that the world could benefit from more western based producers and service industries. Iran wasn't expecting to be on the losing side of their missile launches, but western technology walked on a critical investment in Iran.

I would recommend this book to any and all oil consumers where ever you may be. It provides an understanding of the industry and its difficulties. But also educates them to use energy more wisely. In a globalized world we need everything that we can think of. If Ludwig von Mises correctly noted that the industrial revolution was the solution to hunger and over population, IT needs to be the solution to today's problems. Albert Einstein said, that today's problems are not solved by today's thinking. These authors give you the facts so that new thinking can begin to address these problems. I personally think that IT and Segway's are two of the real solutions.

On the topic of alternatives the book provides excellent information about the changing economics of some alternatives. On page 137 they note;

The portion provided by solar and wind energy -- what most people think of when they think about renewable energy -- is a fraction of 1 percent of the total mix.

And bio-diesel has the potential of producing;

400 million gallons a year of bio-diesel. p. 143

Or 26,000 barrels / day. We've probably wasted more energy thinking and talking about bio-diesel then it will ever produce. There are three good alternative energy sources noted in this book. Unfortunately none of these alternatives has the ability to propel a 4,000 pound vehicle down the road at 60 miles / hour. But they are commercial, have huge potential and as the authors note, companies are making money.

Chapter 9 Endless Energy: "Here comes the sun." Starts with a quotation of Thomas Edison "I hope we don't have to wait till oil and coal run out before we tackle that." The future is solar, but the issues are daunting and much research should be put into the field.

The price of solar power has fallen to less than 4 percent of what it was in the 1970's. It is already economically competitive in states where electricity is expensive, including Hawaii, Massachusetts, and New York, and states with good solar exposure and lots of land, like California, Nevada, and Arizona. p. 156

The entire chapter provides the comprehensive review of the solar industry with some very good recommendations on how to get in on the ground floor of this industry. Making Chapter 9 a must read for everyone who lives in a house.

The same can be said about Chapter 10 "Pressure Cooker: Tapping the Earth's Heat" on geothermal energy. And Chapter 11 "Nuclear's Second Act". Nuclear, solar and geothermal energy are now commercial, clean and available to be used in areas where gas and coal are used today. An opportunity to replace the electricity produced from gas and coal and leave those commodities to support industrial mechanized labor, or the 18,000 man hours per barrel.

Chapter 12 "What's Needed: A Manhatten Project for Energy. President Bush is quoted as saying "we need an energy bill that encourages consumption." and Vice President Dick Cheney "Conservation may be a sign of personal virtue but it is not a sufficient basis for a sound, comprehensive energy policy." Then the authors note the result of big government science based programs.

While both projects were famous for unprecedented technical achievements -- the Manhattan Project cracked the secret of the atomic bomb, and the Apollo Project put a man on the moon -- we need to do more than come up with new technology to solve the problems we now face. We also need to rethink and remake our entire infrastructure, our economies, and even our culture. p. 180

A Manhattan Project will only boost the bureaucrats in Washington. This is a global problem. As a part time wanna be economist, I would suggest the market price mechanism is motivating the forces necessary to solve this problem. There was no market for the Manhattan or Apollo projects, I suggest we leave these energy problems to the market to solve.

I therefore disagree with the authors on their call for a Manhattan styled project. And fundamentally agree with the President and Vice-President. If 18,000 man hours of effort are contained in each barrel of oil, then we should encourage its use at any cost. Its a competitive advantage to those who use it most effectively, which happens to be the U.S. The alternative is to hire 18,000 people to do the work of one barrel. Therefore the President and Vice President are absolutely correct.

If we look at the numbers of the oil dollars flowing to the Middle East we will be distracted into believing that we should reduce our consumption. I suggest we start using our heads here and employ the Information Technologies and stop waisting the energy hurtling vehicles down the road at 60 miles an hour. I repeat get a Segway as a supplement to your vehicle. Use it for the short trips (24 mile range on most models) and cut your costs substantially. (Segway's cost less then $1.00 of electricity for that 24 miles). Secondly the Segway runs at 12.5 mph which is 4 mph faster then a car stuck in grid-lock. I repeat, IT and the Segway are the solutions to the problems of today.

On page 193 Carbon Taxes and Cap-and-Trade Systems are introduced by the book;

Carbon taxes are probably the simplest, most effective, and least economically damaging option, because they let the market decide what the best solutions are.

July 11, 2008 the Wall Street Journal wrote an article entitled "Kyoto's Long Goodbye" which addresses these mechanisms silly and wasteful ideas.

The irony is that Kyoto has handed them every reason not to participate. Europe knew all along that it couldn't meet its quotas, so it created an out in "offsets." A British factory, say, buys a credit to pay for basic efficiency improvements in a Chinese coal plant, like installing smokestack scrubbers. This is a tax on the Brits to make Chinese industries more competitive. Sweet deal if you can get it.

and

It gets worse. The offsets are routed through a U.N. bureaucracy that makes them far more valuable in Europe than the cost of the actual efficiency improvements. So far, Kyoto-world has paid more than €4.7 billion to eliminate an obscure greenhouse gas called HFC-23; the necessary incinerators cost less than €100 million. Most of the difference in such schemes goes to the foreign government, such as China's communist regime.

Lets not chase any bunny trails that lead us down this ridiculous waste of money and energy. Recall that Al Gore hasn't reduced his personal large "carbon footprint", he just offsets his abundant use of energy with these bureaucratic Cap-and-Trade Systems. Enough said?

Gasoline taxes are are also recommended as deterrents to people using too much energy.

Most observers agree that the best, and possibly the only, way to achieve a reduction in the amount of oil used in this country is through the price mechanism, particularly in transportation fuels. It seems a pinch in the pocketbook is necessary to make consumers drive less.

It is well known that the U.S. has the lowest taxes on gasoline in the western world. This is the motivation in the authors desire to raise more taxes. I would assert this is the wrong direction on two fronts. Increasing the cost of fuel will impede the productivity of the U.S. economy. Taxes at high levels, such as in Europe certainly deter driving, however, the U.S. out performs Europe by a substantial margin. This is why China chooses to subsidize the use of fuel in their economy. At 18,000 man hours per barrel, the lowest cost producer will ultimately win. That is China in the developing world and the U.S. in the western world. For example France currently has a per capita GDP that is lower then Mississippi's, the poorest state of the union.

It seems the authors are on the other side of the political fence in terms of how and where the solution to these problems will come from. Thankfully they debunk the Hydrogen fuel source as an alternative. Through their calculations they show that Hydrogen requires 5 energy inputs for each energy output. Not a smart direction to turn. What the authors don't mention is the cost of building an appropriate delivery system that can scale to what gasoline is now distributed as. Hydrogen requires stainless steel in all of its pipelines, tanks everything that it touches. And the cost of that is beyond what we are able to calculate with modern computers.

But then again, maybe the authors and I are not so far off in our expectations. On page 239 under the heading "Never Sell Short Humanity" the authors note;

And that's the true moral of the story: Every crisis -- no matter how dismal it looks -- contains the blueprints for its own solution.

And with that I highly recommend this book. For the average consumer, little is known about the complexity and difficulty in bringing the abundant and valuable energy resources to their door, and place of work. This fact-based book refutes many myths on its own and I have pointed out some of where I think they may be a little short. Given the price of the commodities today. And given the volume of words that are being consumed by the energy issues. The solutions will soon be at hand and society as a whole will be able to profit from the peak.

Technorati Tags: People's Peak-Oil Review Energy Books

McKinsey Mobilizing Minds

During the writing of the Research & Capabilities and Knowledge & Learning modules I have stumbled across a McKinsey document that I should have reviewed back in 2006. Clearly this document has had significant influence over my thinking during the time I set out to define the draft specifications. The article is titled "The 21st Century Organization" and they have recently expanded the article into an excellent book called "Mobilizing Minds: Creating Wealth from Talent in the 21st Century". The information that I am looking at in this post is from Chapter 1 of the book. I have also reviewed the document in the Research & Capabilities and Knowledge & Learning module specifications.

One of the reasons that I am so confident in this project is, first of all, the need as reflected by the oil and gas prices. Secondly the effect that Information Technology is having on releasing the constraints within companies and industries. We are in a period of time where anything can be accomplished, and if done properly, with the People leading the way, we can solve these problems.

It was Professor Ludwig von Mises who noted that the industrial revolution was the solution to the problems of the day. I believe the Information Technology revolution is the solution to the problems of today. This book, which originated from the McKinsey article, speaks clearly to the time and place we find ourselves in.

Ask any mid-level professional or manager at almost any large company - even a successful one - and he or she will tell you that the growing complexity of work is becoming a greater and greater problem.

Starting off with a clear statement of how congested and constrained our traditional organizations have become.

One survey by the research firm Net Future Institute (NFI) showed that nearly 75 percent of senior managers consider the workload of people in their department to be too heavy. Another survey by the same firm found that most people do their best business thinking not while at work but while commuting to work or in their home. Why? Because that's when they finally get some time to think.

The problem in oil and gas is that the organization that brought us to this point in time can not deal with the complexity of the current business. The best term I have heard is that the easy or cheap energy era has ended. The firms as they stand have provided commercial volumes of energy to the markets for many years. When oil was valued at $9.00 to $22.00 a generations worth of time had past. The constraints of change and the complexity of the business are catching up to a generation of neglect in building the business. What brought us to this point is inadequate for our needs. The traditional Schumpeterian creative destruction has been delayed in this industry because of the current earnings of the producers. But if you listen closely, they are claiming their costs are inching towards the point where the bureaucracy will not be able to earn anything from their production.

The People who have worked in this industry are the ones that need to lead the changes in these organizations. These companies will never exercise the level of change that is necessary to bridge this new energy era. Are we to wait for this industry to turn to ashes before we are motivated to make the necessary changes?

The increasing frustration of the workforce is symptomatic of an even more fundamental issue: the organization of most companies today - and how it limits the ability of talented people to perform and take full advantage of the opportunities of the 21st century. The modern, "thinking" company should be a fluid and fast moving creature, in which its workers discover knowledge and exchange it with their peers collaborating with others to create value.

In many ways the industry is not just dealing with the difficulties of the business they are in, they also are faced with a "better way" to do their work as offered by IT.

The problem, however, is that most of today's large companies fall well short of creating conditions that maximize the productivity of their thinking, problem-solving, self-directed people. Too bad this thinking machine isn't working nearly as well as it should be.

And here is the paradox that most people face. The technology provides the opportunity to move to a "thinking, problem-solving, self-directed people" but also locks them into the traditional ways of the organization. As I have mentioned many times before "SAP is the bureaucracy".

Much of the communication is worthless noise: In a 2005 survey conducted by the McKinsey Quarterly, of senior and top executives, 60 percent said their company's size and complexity have made it somewhat difficult, or much more difficult, to capture opportunities than it was just five years ago. Little wonder, then, that ineffective bureaucracies develop within large companies, that the head office seems remote from the field, and that the "left hand doesn't know what the right hand is doing."

As Nobel laureate Herbert Simon stated. "What information consumes is rather obvious. It consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention."

A symptom of the problem companies face today is simply the amount of energy they waste. In the cities the problem is congestion. In companies, the problem is unproductive complexity.

It is opportune at this time to ask what happens next. In oil and gas we see the past leadership holding to the notion that they do not understand why the prices are so high. The fact is the market is allocating the financial resources to these firms to deal with the increased complexity involving the earth science and engineering disciplines. Information Technologies are enabling people within these organizations to do so much more, however, they have no authority to exercise any change. Is this situation to remain in the oil and gas industry for another five years? Or is there an alternative, such as this software development project?

The organization of most companies today bears limited resemblance to the original intended design. While there are plenty of well managed companies that are exceptions, most are struggling: Their hierarchical relationships have become so confused that the power of hierarchy to drive performance is compromised. This dysfunction is usually felt most severely at the front line, where the brainpower and the energy of front-line workers are significantly consumed in the struggle against the internal complexity of their organizations.

This is a software development project that has researched the problems in oil and gas and arrived at a solution to these problems. The five years that I have spent on this research is time that would have needed to be expended, and therefore, I am able to offer the industry the ability to turn back the clock on the past five years and establish this development as a priority.

The fact is that even the most self-directed, brilliant people can't create wealth by working alone. They need help mobilizing the talents of other thinking intensive people and securing crucial capital and labor. They need to be able to convert their thinking into moneymaking activities.

In order to proceed from here requires the People who are doing the work in these organizations to put their heads together and make this application capable of doing their jobs. This mass collaboration could start at anytime and the longer we wait, the longer the problems will fester. The involvement of the People is not something that can be replicated in any other manner. The industry needs to fund these developments and I can not do the work of thousands so time is now being lost.

A new problem

In this book McKinsey articulate further problems that are inherent in the bureaucracy. One that reflects that the lack of motivation to resolve these issues is rewarded by the price driven increases in profits of the producers.

Much of the underlying problem is the use of internal financial reports that do not reflect the underlying economic relationship of intangibles to profit making. Managers can look good on reported results, even as they take actions that hurt the enterprise. These issues are compounded by performance measurement approaches that reward selfish, divisive behavior at the expense of collaborative behaviors for the common good.

Mobilizing Mind Power

What would be the effect of having this software operational in an oil and gas concern? Would using the JOC revolutionize the performance of the science based oil and gas producer?

If your organization can harness this mind power -- if you can boost the profits from each thinking employee -- then your organization will be on the path to great success and competitive advantage in the 21st century world.

and

Most companies are tapping into only a small fraction of the potential to create wealth from the mind power of all the managers and professionals they employ. During the 20th century, the costs of coordinating work across large companies were so large that mind power was trapped in small pockets of people scattered throughout each company. But nowadays this is no longer true. As a result, today there is an opportunity to earn large "rents" (that is, profits disproportionate to the amount of labor and / or capital that are invested.)

Where the Money is

Obviously it is my belief that the changes in organizing the oil and gas industry will provide value to producers, individuals, and society. Alternatively we face a future led by the bureaucracy and its continued failure. Does anyone see how these organizations will survive until 2020?

It would be reason enough to develop better organizing approaches if all that was accomplished was to make the jobs of talented employees more rewarding. All business leaders know how important talent is to their current success. Furthermore, it could be argued, actions taken that will enable companies to attract, develop, and reward talent bring their own reward. Still, we believe developing a better organizing model is more that that. In the 21st century, its where the money is.

What I think is a critical component of this development is a refocus on the competitive advantages of the oil and gas producer. The land base and physical assets are the producers' competitive advantages. As I indicated in the Research & Capability module the intellectual property of how things get done is transferred away from the producers to the vendors, suppliers and People working within the industry. That is their competitive advantage and hence their motivation to develop the most advanced drill bits, rigs, etc. The producer does not have the scale and scope necessary to fully develop the idea, or the application to make the idea commercial. So lets stop playing the game of no one earns any intellectual property because the industry holds all the money. The producers have to actively spend the resources necessary to fully develop the support industries that will make the energy producer the most innovative and profitable. We won't get there if the intellectual property is passed around to the vendors competition by the producer firm. And that also applies to this software development project.

Because of the development of globalization and advances in technology, scale and scope effects have increased across the board -- particularly in those effects related to intangibles. By "intangibles" we mean such assets as the brands, intellectual property, and proprietary networks that are unique to individual firms.

If we don't allow the ideas that are a critical part of an innovative science based industry to be developed where and when they are needed, we will be stuck with the problems of the 20th century. The clock is now ticking.

The opportunity is to bring the entire firms [industries] mind power and the related intangibles to every job, to increase the value of every person's work, every day.

and

We are arguing that companies need to view investing in designing and building strategic organizational capabilities as means to capturing rents from everything they do. Companies are being constrained, unnecessarily, by the unproductive complexity of working in their organizations. We believe that investing in capabilities to relax these constraints, thus enabling a company to mobilize not just labor and capital but also the company's unique mind power, is the key to creating wealth in the 21st century.

and

Furthermore, we truly believe that companies have only begun to tap the opportunities to create wealth in the 21st century. Why? Because they are still using an organizing model designed for the industrial age rather than for the digital age. to create greater wealth in the future, we believe that all companies should make organizational design the centerpiece of their corporate strategies.

Please, join me here.

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Robert Metcalfe on MIT Video

As I've mentioned in this blog before, Robert Metcalfe is someone that I find to be great interest to this energy problem. The introduction of Metcalfe in the Video provides a good summary of his background, and I would note that even despite his accomplishments his attitude remains fresh, and challenging to the status quo. The energy industry needs to be shaken and Metcalfe does a bit of shaking in this video.

Another aspect that Metcalfe was involved in was in participating in the MIT's founding of the Massachusetts Enertech Cluster. I held out high hopes that this was the necessary direction of the academic community, only to find soon after its forming it was hi-jacked by the climate and alternative fuels red herrings. I expressed my disappointment of this in this blog post here. Metcalfe is single handedly criticizing the Massachusetts Enertech Cluster in this one hour talk and returning the hope that I expressed of the MEC. Early on in the presentation @ approximately 9 minutes he states a few interesting points:

"Here are these trillion dollar markets (energy) that are poorly served."
"The people who have been doing energy investing for 50 years are annoyed with people like me, Internet people, invading the energy space." Stating, "look you guys have had your chance, and haven't solved it, move aside, here come the Internet people." (Here, here)

"In energy there are some particularly nasty people out there that are not going to welcome your technological developments."

Stating the goal should be that we pursue "clean" and "cheap" energy, Metcalfe summarily attacks the founding premises and objectives of the Massachusetts Enertech Cluster (MEC). Stating that;

• Climate change is a "motivational bubble" that may be solved quickly.
• Conservation should not be an objective of this project (MEC), we need abundant energy not conservation. Our economies need to grow, not be stifled by energy conservation.
• No Nukes (MEC), which meets the clean and cheap energy objective. Technology can and will mitigate the effects of nuclear energy production.
• Corn ethanol is a fraud.
• The government needs to adopt a Manhattan styled project for energy. The government will have no solutions outside of taxes.
• Only scale projects are needed, which of course is very foolhardy. Innovation will come from everywhere.
• And lastly there are no silver bullets. Metcalfe suggests we spend more time finding the silver bullets instead of opposing their development.

Which leads me to this project. How is it that the energy industry can ignore the People, Ideas & Objects application as a solution?

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Constrained Organizations

In a follow up post to the "Unconstrained Prices", I thought it might be a good time to reiterate the reasons that I see for the ever escalating oil and gas prices. Energy production is driven by the earth science and engineering disciplines. As one would expect, over a given period of time the science and engineering will be subject to new discoveries and findings, leading to further enhancements of the underlying sciences. Innovation plays a key role here in that the new sciences bring about new innovative uses, and in turn, lead to new science. This is the key area of long term value add in the oil and gas industry. A producer that is able to apply the science and ideas to the problem at hand will, over time, increase their production and reserves. I'd like to call this the "Capabilities Approach" to the oil and gas industry.

If we reduce the competitive nature of the industry down to this Capabilities Approach. We see the interactions and understanding of the industry as it developed over the past 100 years. Someone figures out how to drill deeper, then the subsequent wells expose more oil bearing formations and hence more opportunities for increased oil or gas production. As time has passed the more lucrative and "big" ideas have been applied in broader areas, and for longer periods of time.

As we have learned from Stanford Professor Paul Romer's new growth theory, "more" ideas are needed to progress forward from the current base of understanding. The supply / demand for these ideas is not linear, but logarithmic, and occur at a much faster pace through their life cycle. Enter the classic bureaucracy and realize its efficiencies are based on expansion of the underlying activity (growth) and continuous process improvement. Change, and particularly scientific and engineering change, are the hierarchy's deficiency. What we need is a new form of organizational structure that will support and enable the industry to compete in this dynamically changing and high demand marketplace. Until such time as we can change the performance dynamics of the organizational form for the oil and gas industry, prices of commodities will continue to rise.

It is these comments and ideas that I have asserted in this blog for the past few years. They are a direct result of my thesis that provides evidence that the Joint Operating Committee is the method of organization of the innovative energy producer. We need to start building the software that I have specified in the 11 module People, Ideas & Objects application and unleash the potential of the sciences for the betterment of society. I find these ideas are consistent with many of the industries leadership. The International Energy Agency recently made some comments that reflect these concerns.

The IEA states that by 2015 there will be a shortfall of 12.5 million boe / day.

"Future crude supplies could be far tighter than previously thought."

"Reflects an increasing fear within the IEA and elsewhere that oil producing regions aren't on track to meet future needs."

"The oil investments required may be much much higher than what people assume."

My personal favorite;

"This is a dangerous situation."

"We are optimistic in terms of resource availability, but wary about whether the investments get made in the right places and at a pace that will bring on supply to meet demand."

Yet nothing is done by these bureaucracies. They know what the problem is, there is just no motivation for them to make the necessary changes. Record profits at Exxon Mobil mask the 10% production declines. We need to consider who's responsibility this problem is, as the companies are unwilling to do so. After all it is not they who will be suffering with energy shortages but society in general.

On the other hand, and what I truly do not understand is that the $135 prices are rewarding those that find and produce the energy. This is an entirely new dynamic for the industry, when will we see the companies that are able to outperform the current crop of producers? The answer to that question unfortunately is not soon. Until this software is built to organize the efforts of the industry, our choices are limited to the status quo or manual systems. Join me here.

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Unconstrained prices.

We have seen the price of energy increase by rather large amounts over the past 6 years. One would have to think that the upper limit of what is reasonable has to be near.

Oil and gas is unique in that it is the only resource that has a finite value. There are only so many volumes of oil and gas that ever existed. Like wood, wheat or rice it is not renewable, and like gold, silver and platinum not reusable. Once oil and gas is used its irretrievably lost. These attributes are what make them unique to other commodities.

The other aspect is that they are expensive, but more importantly difficult to find and develop. Conceptually the energy industry is the most difficult from a science and engineering point of view. As we have progressed through the cheap energy era, we now find ourselves in the era of difficult energy.

The pace at which the consuming public has learned the dynamics involved in the industry and its pricing has increased. The point that I want to make in this entry is that oil and gas prices are no longer constrained by the idea that there are easier to produce alternatives. The market has always generally believed that corn, wind and solar would replace the "dirty" oil used to power the SUV. That the future of the world's energy sources would now suddenly be clean, cheap and environmentally friendly.

The lesson that has been difficult to learn is that we can't use our food for fuel. Rice, wheat and corn are being disrupted and it is the food supplies of developing nations that suffer. Secondly the volumes of energy consumed in the alternative energy manufacturing process are higher then what is produced. And finally solar and wind, as they stand today, are prepared to take on less then 1% of the total supply of energy

So where may we see the price of energy go? If my suspicions are correct, we may ultimately see the price of oil reach $650.00. Within the next three months we may see $175.00 / bbl and we should consider that cheap. Cheap because it will only lead to temporary shortages.

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