Modularity and Interdependency

We have been discussing modularity between the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. How the knowledge, skills, experience and ideas flow from the producer firms through to the Joint Operating Committees. From the development of innovative initiatives to operational control. We now want to discuss what is needed from a modularity point of view in order to attain these benefits. Quotes come from Professor Richard Langlois paper “Organizing the Electronic Century."

In organizational and social systems - and perhaps even in mechanical ones as well - it is possible to think of interdependency and interaction among the parts as a matter of information transmission or communication. p. 5

But this flow is also interactive. To start the process, the capabilities that are listed in the “Dynamic Capabilities Interface” are populated by relevant criteria through to the Knowledge & Learning module. However, there are lessons learned by the Joint Operating Committee in the course of the operation. And these lessons are captured in the “Lessons Learned” interface of the Knowledge & Learning module which is also populated to the specific producers Compliance & Governance module. Having direct knowledge of the operation updated to the capabilities of the producer firm in the “Dynamic Capabilities Interface” is necessary for further deployment of those capabilities. There are two versions of the same “Lessons Learned” interface which are provided to the two different organizational constructs. One for the producer that originated the capability in (Compliance & Governance) and one for the Joint Operating Committee (Knowledge & Learning).

Users of this information are seeking different purposes for this information. Although the environments in which the two modules are operating (Research & Capabilities and Knowledge & Learning) use the data and information in different ways. Research and innovation vs operational control. High levels of interdependency and interaction on the quality and quantity of the data and information contained within these modules exists.

Recently, Baldwin and Clark (1997, p. 86) have drawn on similar ideas from computer science to formulate some general principles of modular systems design. The decomposition of a system into modules, they argue, should involve the partitioning of information into visible design rules and hidden design parameters. The visible design rules (or visible information consists of three parts. p. 7

• An architecture specifies what modules will be part of the system and what their function will be.

• Interfaces describe in detail how the modules will interact, including how they fit together and communicate.

• And standards test a modules conformity to design rules and measure the modules performance relative to other modules.

These visible pieces of information need to be widely shared and communicated. But contrast, the hidden design parameters are encapsulated within the modules, and they need not (indeed, should not) be communicated beyond the boundaries of the module. p. 7

As people work on both ends of the data in these modules. Engineers and geologists within the producer firms developing the capabilities in the “Dynamic Capabilities Interface." And engineers, geologists and service industry representatives in the Joint Operating Committees on the “Lessons Learned” interface. Data and information will be updated and changed from all the participants involved in both innovation and operational control.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Separate and Distinct

Throughout the Preliminary Specification we have discussed modularity from the perspective of the different modules of the specification itself. We want to talk about modularity from the point of view of the Knowledge & Learning module. How it isolates the Joint Operating Committee and focuses on the operations in the field. Yet provides the JOC with the most up to date information regarding capabilities from each of the participating producers. A capable, innovative Joint Operating Committee that is the legal, financial, operational decision making, cultural, communication, strategic and innovation framework of the oil and gas producers.

Within each of the Research & Capabilities modules of the participating producer firms, people are involved in the research and development of the capabilities of their respective firms. They are the ones that are field testing the capabilities that the engineers and geologists are developing. Once these ideas are proven and developed into usable and valuable technologies and processes, then they are added as capabilities into their “Dynamic Capabilities Interfaces” in the Research & Capabilities modules. There they, depending on the selection of the producers criteria, might be populated to the Joint Operating Committee that is in that zone, or available for use with multi-frac technology, and will be available to the members of those JOC’s.

What we have been able to do with these two modules in the Preliminary Specification is to eliminate the crossover of the two different purposes of the same information. Quotations are from Professor Richard Langlois’ “Modularity in Technology, Organization and Society."

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

The producer firm is involved in the development and research into the improvement of how to better the production and reserves they hold. The Joint Operating Committee is involved in operational execution. These are two separate and unique organizational objectives that are necessary and involve, in some instances, the same people and the same firms. We need to separate these people into groups and provide some distance so that there is the ability to operate these groups as separate and distinct as is possible.

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

There are more than the modules organizational constructs to guide the nature of the work within the modules. There is also the markets in which they operate. The Research & Capabilities will be an internal and academic focus that will be collaborative in the geological and engineering disciplines. Whereas the Knowledge & Learning will be steeped in the service industry offerings and operational control. These differences also help to differentiate the nature of the work within the two modules.

Why are some (modular) social units governed by the architecture of the organization and some governed by the larger architecture of the market? p. 2

It is necessary for innovation purposes and operational control that the two modules are separated in this fashion. With the flow of information from the Research & Capabilities to the Knowledge & Learning module, and the speed at which electrons flow, the Joint Operating Committee can be assured that they have the most recent field tested capabilities available to them.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Innovation Meets Field Coordination

The energy industry is faced with a number of issues that seem to continue from year to year. One of those issues is the costs associated with any and all field work. We have heard a variety of claims made by the oil and gas companies about the service industry, but no solutions as to how to deal with them outside of the traditional cost controls and budgeting. We will now discuss how the Knowledge & Learning module of the Preliminary Specification provides a solution for the high costs associated with field operations. Quotations are from Professor Richard Langlois “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.”

We have with the Knowledge & Learning module a number of other tools that are part of the Preliminary Specification. Specifically the Military Command & Control Metaphor (MCCM) that enables a Joint Operating Committee to impose a chain of command over a multi-organizational group of people during the course of one of these field operations. These operations will include members of the Joint Operating Committees participating producers as well as the employees and contractors of the service industry representatives. Having them configured in a manner in which the chain of command is immediately recognizable. Secondly within the Preliminary Specification is the Job Order system that provides a means in which to execute the operational order within the chain of command during the field operation. These two systems provide a tight control over the entire operation. Simply no action is taken without the authorized Job Order being issued.

This tight operational control seems to contradict the free markets that we have been pursuing in the service industry. I disagree. Having tight operational control has nothing to do with free markets, and free markets have nothing to do with tight operational control. They are two separate and distinct “things” that do not affect one another. Recall that the AFE and Job Order are provided through the “Planning & Control Interface” which also bring in the capabilities from the “Dynamic Capabilities Interface” that the Joint Operating Committee has decided to implement. These capabilities include the information necessary for the people to conduct the work for the operation to be a success.

[I]t seems to me that we cannot hope to construct an adequate theory of industrial organization and in particular to answer our question about the division of labour between firm and market, unless the elements of organization, knowledge, experience and skills are brought back to the foreground of our vision (Richardson 1972, p. 888).

What we are implying with this level of operational control is that the Joint Operating Committee representatives, the earth scientists and engineers are in complete and total control of the field operation down to the water hauling driver. In a literal sense, yes, but I think you know the extent of the control that is implied with the MCCM and Job Order system. There is a command structure. Everything is documented. This level of coordination is provided as a means to offset the detail necessary for the science basis of the business to take precedence.

As we will argue in more detail below, there are in fact two principal theoretical avenues closed off by a conception of organization as the solution to a problem of incentive alignment. And both have to do with the question of production knowledge. One is the possibility that knowledge about how to produce is imperfect - or, as we would prefer to say, dispersed, bounded, sticky and idiosyncratic. The second is the possibility that knowledge about how to link together one person's (or organization's) productive knowledge with that of another is also imperfect. The first possibility leads us to the issue of capabilities or competencies; the second leads to the issue of qualitative coordination." p. 11

What Professor Langlois is implying here is that the converse of “incentive alignment” is “qualitative coordination." The high costs that have been experienced in the service industry to do their job has been in order to motivate the people and the capital to work in the industry. If we were able to better coordinate, in the manner that the Knowledge & Learning module suggests, the issues of costs and quality would be mitigated.

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

By using the Joint Operating Committee we are eliminating the use of the bureaucracy. However as the previous quote implies the bureaucracy lowered the cost of qualitative coordination in a world of uncertainty, albeit poorly in our case. It is therefore necessary that we replicate and expand on that coordination in the Joint Operating Committee.

More generally, we are worried that conceptualizing all problems of economic organization as problems of aligning incentives not only misrepresents important phenomena but also hinders understanding other phenomena, such as the role of production costs in determining the boundaries of the firm. As we will argue, in fact, it may well pay off intellectually to pursue a research strategy that is essentially the flip-side of the coin, namely to assume that all incentive problems can be eliminated by assumption and concentrate on coordination (including communication) and production cost issues only.

By coordinating the field operations in the manner that is proposed in the Knowledge & Learning module of the Preliminary Specification we can eliminate the incentive problem and increase the control over the implementation of the science basis of the business. All with maintaining free and open markets for which the innovation in the service industry can develop.

It might seem that with the opportunity to have such strong operational control provided in the Knowledge & Learning module of the Preliminary Specification. That each and every producer will be able to compete equally. That might be the way that some perceive the situation however, the fact is in an innovative environment that may not be the case. We have clarification of these points from Professor Richard Langlois in his paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization."

In a world of tacit and distributed knowledge - that is, of differential capabilities - having the same blueprints [or software] as one's competitors is unlikely to translate into having the same costs of production. Generally, in such a world, firms will not confront the same production cost for the same type of productive activity. p. 18

Producers within the same Joint Operating Committee may be pursuing different strategies than their partners in that JOC. The Preliminary Specification enables a producer to pursue the most effective strategy for each property. A producer may have acquired the property while it was in production and therefore have a different cost structure. Or alternatively the producer may have an interest in the infrastructure used to deliver the gas to market whereas the other producers do not. The makeup, the strategies and the costs of each of the producers are unique and not necessarily leading them to make the same decisions based on the same criteria. However, financial gain still drives consensus.

As we noted, when the Joint Operating Committee conducts a field operation using the tools within the Knowledge & Learning module. Coordination of the capabilities is provided through the Military Command & Control Metaphor and the Job Order system. These capabilities are the “knowledge, experience, skills” and ideas of the people who are part of the producers in the Joint Operating Committee, and the service industry representatives hired to conduct the field operation. All of these capabilities are documented in the “Dynamic Capabilities Interface” and deployed through the “Planning & Deployment Interface."

This in turn, implies that the capabilities may be interpreted as a distinct theory of economic organization. p. 18

Execution is the focus of the operation and the key competitive differentiation of the parties involved. Within the capabilities that have been decided to be implemented by the Joint Operating Committee there may be new and innovative tools and procedures to be implemented. The oil and gas business is based on the science of geology and geophysics and the applied science of engineering. Operational control at this level is a necessity and a competitive advantage. From Professor Langlois’ paper “Modularity in Technology, Organization and Society."

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

If one considers how the Knowledge & Learning module enables the producer to implement their capabilities. Calling them a competitive weapon is a reasonable perspective.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Capabilities as the Focus

Our first paper of Professor Langlois’ is “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.” In this paper he introduces capabilities as a new theory of economic organization. Its primary concern, as it is here in the Knowledge & Learning module, is its focus on production.

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

The capabilities approach picks up and builds on the transaction cost approach that we have been discussing throughout the Preliminary Specification. It also builds on the boundary of the firm and markets.

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 p. 7.

To build the capabilities of the oil and gas producer to conduct their own field operations is impractical and inefficient. Sourcing the field operations needs of the producer from the service industry is the only viable solution. Deployment of those capabilities becomes the issue in the innovative oil and gas industry. Particularly when the basis of competitive differentiation is on the earth science and engineering principles the oil and gas business is based. “What” and “how” those capabilities are developed and deployed are critical elements of the oil and gas producers competitive differentiation. The Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification organize these capabilities in a manner where innovation is the priority.

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

Using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer is the first step to this innovative setting. The Knowledge & Learning module is a Joint Operating Committee focused module. There the participants in the JOC are able to review the capabilities of the various firms that are members of the JOC. Enabling them to make the operational decisions based on the right information at the right time with the right people.

In sum, whether we see it from the perspective of the capabilities perspective or from the perspective of the modern economics of organization, there is an exciting theoretical frontier ahead. p. 31

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Innovation Supported by a Software Development Capability

In both the Knowledge & Learning and Research & Capabilities modules producers are benefiting from something that may not be too obvious on the surface. That is the objective nature of the People, Ideas & Objects Preliminary Specification and the fact that it is not affiliated with any one specific producer. That is to say it is not an application that grew out of Exxon Mobil, BP or Shell and was used there first. It will be an application that was independently supported through the Revenue Model and will remain unbiased as to which producers perspective it takes. The same can be said for the Community of Independent Service Providers. This may mean more to some producers than others, however, from an innovation point of view it will also mean a few things.

People, Ideas & Objects is focused on providing the innovative oil and gas producer with ERP systems based on using the Joint Operating Committee as the key organizational construct. By having a software development capability present while working within the Knowledge & Learning module, the innovative producer will be able to deal with the many new possibilities in their business. The software that an organization uses is a “technology paradigm” that the oil and gas industry has to consider. And software puts the industry on a new “trajectory” just as we have discussed here for the earth science and engineering disciplines. Professor Giovanni Dosi notes.

• First, new technological paradigms have continuously brought forward new opportunities for product development and productivity increases. p. 1138
• Secondly “A rather uniform, characteristic of the observed technological trajectories is their wide scope for mechanization, specialization and division of labor within and among plants and industries.” p. 1138

Which speaks to the attributes of software. However, would these technological paradigms and trajectories be available to the producer community if the software was owned and operated by ExxonMobil, BP or Shell? What motivation would they have in making the changes to the software to accommodate your business? The third party, objective nature of People, Ideas & Objects and the Community of Independent Service Providers is necessary for the software to become amenable to the needs of its user communities. If the producer is to rely on this third paradigm and trajectory as a key advancement in their business, then it must remain open to the needs of the community. Professor Dosi notes.

Similarly, new technological paradigms, directly and indirectly -- via their effects on “old” ones -- generally prevent the establishment of decreasing returns in the search process for innovations. p. 1138

Let me restate this for clarity, the indirect nature of ERP software via its effect on the earth science and engineering disciplines, will generally prevent the establishment of decreasing returns in the search process for innovations.

Review of the Preliminary Specification to this point shows how different it is from any other ERP system. It is designed around the Joint Operating Committee, the innovative oil and gas producer, and includes the user community in determining its precise needs. This is the type of application that is needed for the 21st century oil and gas producer. A vision that focuses the people who work within the industry on the activities that people do best. Collaborating, researching, evaluating and deciding. And leaves the computers to do the things that they do the best. A software development capability designed to provide the innovative oil and gas producer with the means to provide all of their ERP software needs.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Deploying Innovations

It is important to recall that innovation is not research. Research is being conducted in the Research & Capabilities module and when the research is proven, added to the "Dynamic Capabilities Interface" which in turn is populated through appropriate criteria to the Knowledge & Learning module. We have also drawn the football analogy to how the development and execution of capabilities in the Joint Operating Committees are similar to the way that football teams plays are developed and executed. We want to use the analogy of the football coach who is motivated to win, selects the plays from a long list of possible plays of what the team can execute.

Professor Giovanni Dosi 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. For the purposes of this discussion the perception of some sort of opportunity is realized through the members of the Joint Operating Committee reviewing the capabilities that are presented to them through the Knowledge & Learning module. The listing of capabilities presented from the various producers that are participants in the Joint Operating Committee would provide a depth of opportunity that was previously unqualified and unquantified. The incentives would be performance based and focused around the possibility of increasing the trajectory of revenue per employee.

We’ve all seen the football coach on the sidelines with the list of hundreds of plays that can be called during the game. Selection of the appropriate play will help to move the team towards its goal of winning the game. To be presented with a list of hundreds of opportunities within a Joint Operating Committee has probably been the case for many in the industry. The ability to select and execute them in the manner that the football coach is able to, and have them communicated to the team members for precise execution in the half second that it takes is the rarity. There is no reason why each and every Joint Operating Committee should not have this type of efficiency. An efficiency in the ability to select and execute the capabilities that are made available to them.

As in the Research & Capabilities module, the Knowledge & Learning module has a “Planning & Deployment Interface." Within this interface the user is able to select the capabilities they want to deploy from the "Dynamic Capabilities Interface" and resource it from the Military Command & Control Metaphor. Since the capabilities are listed from various firms in the Joint Operating Committees special considerations will need to be made in terms of the resource requirements. The “capabilities” that are selected are for company x, and available from company x, not necessarily for Joint Operating Committee xyz without the involvement of x. Therefore special arrangements to augment the Joint Operating Committee with resources from company x will be required. From there the execution of the capabilities can take place.

We have drawn the analogy of a football coach who reviews his list of plays, selects one, and calls it for the team to execute, to the “Planning & Deployment Interface” of the Knowledge & Learning module. The ability for a Joint Operating Committee to have this style of communication and understanding of what needs to be conducted may be necessary in the near future. With the insatiable demands for energy and the ever increasing demands of earth science and engineering work needed with each barrel of oil and gas produced. The amount of work required for the JOC will need to be conducted in a highly organized and controlled manner.

Adding to this level of increased workload for the Joint Operating Committee is the field and service industries are going through their own innovative cycles. The problem is that if each Joint Operating Committee is left to deal with each of these issues on their own, then there will be significant time and energy wasted on pursuing “things” that may or may not bear fruit for the property. This is something that needs to be avoided. However, the JOC needs to be deploying the latest state of the art proven technology in the most capable manner.

If we look over the previous discussion regarding the Research & Capabilities and Knowledge & Learning module we can see how these “things” are filtered out and dealt with. The Joint Operating Committee is being provided with the most up to date capabilities from the producer firms that have a financial interest in the property. It is those producers that are expending the research to expand their understanding of the earth science and engineering on behalf of all of their interests in all of their JOC’s. Taking the trips down the blind bunny trails once and only once on behalf of all the JOC’s. Not having each and every JOC discovery the blind bunny trail on their own. Then developing the capability to the level necessary for the inclusion in the "Dynamic Capabilities Interface" where it will be used successfully by all of the JOC’s they have an interest in.

This process helps the Joint Operating Committee to focus on the property. To eliminate the noise of what is going on in the larger oil and gas arena for the moment and deploy the innovations that are known to add value. It is as when the coach calls the play the only concern is to ensure that you execute your part of the play in the manner that it is designed. There may be times back on the practice field to fiddle with some changes, but for now it's time to run the play as it was designed. This is the business of the “Planning & Deployment Interface” in the Knowledge & Learning module.

Professor Giovanni Dosi asserts that much of the innovativeness of a firm is dependent on technology more than science, and is based on several implications. The first implication being the net benefactor of the cumulativeness, tacitness and technological knowledge implies that “innovation and the capabilities for pursuing them are to an extent local and firm specific.” Secondly, the “opportunity for technological advances in any one economic activity can also be expected to, and constrained by, the characteristics of each technological paradigm and its degree of maturity." This is further defined by the technological and scientific capabilities, and “the advances made by suppliers and customers.” (p. 1137)

These implications that Professor Dosi notes are reflected in the processes managed in the Research & Capabilities and Knowledge & Learning modules. The Knowledge & Learning module enabling the Joint Operating Committee to implement the “innovation and the capabilities for pursuing them are to an extent local and firm specific.” With the Research & Capabilities module providing the future with the “opportunity for technological advances in any one economic activity can also be expected to, and constrained by, the characteristics of each technological paradigm and its degree of maturity.” Providing the producer with the best of both worlds.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Deploying Capabilities, Not Hoarding Information

It is best that we start this discussion of capabilities with a clear definition of what they are. These are some of the definitions that were published earlier in the Research & Capabilities module and are noted here for clarity purposes. The first is from Professor Richard Langlois.

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

As well we have Professor Carliss Baldwin’s “Knowledge begets Capabilities, and Capabilities beget Action.” There is also the quotation from Professor Richardson that capabilities are the “Knowledge, Experience and Skills” (1972, p. 888) to which we at People, Ideas & Objects have added “Ideas.” And this next quote from Professor Langlois helps to bring the clarity we need.

In a metaphoric sense, at least, the capabilities or the organization are more than the sum (whatever that means) of the 'skill' of the firm's physical capital, there is also the matter of organization. How the firm is organized - how the routines of the humans and machines are linked together - is also part of a firm's capabilities. Indeed, 'skills, organization, and technology are intimately intertwined in a functioning routine, and it is difficult to say exactly where one aspect ends and another begins' (Nelson and Winter, 1982, p. 104). p. 106

With respect to information, we have all seen how information, and more specifically secrets, within the oil and gas industry can travel from one producer to another at a rather rapid pace. No one should be surprised to learn that what they thought was confidential to the firm, has somehow leaked and became well known throughout the industry. It is sometimes more difficult to communicate information through the organization then it is to get information across the industry. The question therefore becomes how is proprietary information, and more importantly these proprietary capabilities that are available within the producer firms, deployed on an as needed basis within the various Joint Operating Committees.

Professor Giovanni Dosi notes that although the free movement of information has occurred in industries for many years, yet has never been easily transferable to other companies within those industries. The ability to replicate a competitive advantage from one company to another is not as easy, and may be not worthwhile doing. Dosi (1988) goes one step further and states, “even with technology license agreements, they do not stand as an all or nothing substitute for in house search.” A firm needs to develop “substantial in-house capacity in order to recognize, evaluate, negotiate and finally adapt the technology potentially available from others.”

Within the Knowledge & Learning module we are operating within the Joint Operating Committee. Populated with the capabilities from each of the participating producers through the “Dynamic Capabilities Interface" of the Knowledge & Learning module. It may be a concern to some producers that the publication of these capabilities to other producers representatives in the Joint Operating Committee would lead to the leakage of proprietary information or loss of knowledge or capabilities. That may be, however the nature of capabilities are such that they can’t be copied by a simple matter of recording the text. As we have discussed elsewhere, the development of capabilities is the results of research and application of the resources of the firm in a determined and purposeful manner to achieve an outcome. Copying the plans or instructions would not provide you with the means to achieve the objective. You can’t copy the “pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities.” What we have to make sure that we don't lose is the ability to deploy the right information, knowledge or capability at the right time and at the right place. Knowledge, information and capabilities need to be employed and deployed when and where they are needed and required. That is the competitive advantage, deployment of the dynamic capability, not hoarding of information.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Revenue Per Employee at the Joint Operating Committee

We want to discuss the publication of the specific Joint Operating Committee calculations of Revenue Per Employee, and particularly the trajectory that the factor is on. How this calculation could affect those that work within the property; and the use of this information contained within the Knowledge & Learning module of the Preliminary Specification.

First of all it is understood that not all people are necessarily assigned to work for one Joint Operating Committee. There are times when people might be assigned to dozens during the course of one month. Calculating the hours worked by the people within the Joint Operating Committee from the different companies is not going to be a difficulty for the People, Ideas & Objects software. With the Military Command & Control Metaphor within the Security & Access Control module the time and tasks that each individual will be doing is being recorded for these types of information purposes. Although most will only work part-time on a JOC, the factor will be converted on a full-time equivalent basis. Calculations of Revenue Per Employee for the property should be straightforward.

In previous discussions, the calculation of a comparison of the factor of revenue per employee from one period of time to the other, or trajectory, was raised. These trajectories were the real key in determining where the factors were heading. Was the property accelerating its innovativeness, or decelerating. We also broke down the trajectory into three different types of variances. The volume variance, price variance, and employee # variance. Each of these variances reflecting the reason why the trajectory might have changed. All of these variables should be shown on their own “Revenue Per Employee” interface within the Joint Operating Committee. Each member that is assigned to the property should have access to this page and be able to contribute ideas and suggestions on how to improve the factor. An open collaboration focused on Revenue Per Employee. In addition, this page could have a historical context of many time periods captured in a graphical format. Showing over the past many years how the revenue per employee at that Joint Operating Committee has performed.

We also learned that revenue per employee reflects the asymmetry (revenue per employee is widely variable) of the assets within the industry. That asymmetry would be very apparent in a comparison of Joint Operating Committees. And I am not suggesting that the comparisons are valid, just pointing out that the industry has a large asymmetry in their competitive makeup. The comparison of revenue per employee for the same property over time however, will have a significant impact on the people that work for that Joint Operating Committee.

One certain way to increase the factor of revenue per employee would be to fire all the employees. However, the best way to deal with the factor is described by Professor Giovanni Dosi when he states “In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.”

Members of the Joint Operating Committee would be able to turn to the "Dynamic Capabilities Interface" which contains the capabilities of the producer firms that are part of the partnership. There the people would be able to see what the firms offered in terms of their earth science and engineering issue identification and resolution capabilities. It may then be realized that applying some formerly unknown capability to the situation in the JOC will yield greater productivity... or something along those lines.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Emulating the Small Producers Adaptability

This discussion will provide a focus on Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation." We also metaphorically move from the “practice field” of the Research & Capabilities module to “game day” with our football analogy in this the Knowledge & Learning module. In reviewing what has been written so far in the Preliminary Specification I was interested in this comment. The domain of the Joint Operating Committee is; “the ability to innovate will not only permit the oil and gas producer to find more oil and gas, increase the production of oil and gas from the field, but will also provide innovative ways in which to deploy its capital and reduce its costs.” Which seems to capture the focus that the Research & Capabilities and Knowledge & Learning modules provide the producer firm and Joint Operating Committee.

What we have so far in the Knowledge & Learning module is three interfaces. The first is the "Dynamic Capabilities Interface" which is the published version of each of the producer firms capabilities. These capabilities are sorted based on geological zone, and other criteria, and published based on those criteria. Therefore each Joint Operating Committee receives access to the capabilities that are pertinent to that JOC from each producer. Getting the right information to the right people at the right time. There is also a “Knowledge Area” that includes the policies, procedures, operational and management information for the property. This area also includes what is commonly referred to as the well file in terms of the information that is contained within it. Lastly there is the “Lessons Learned” interface where the people who work within the JOC record the information on the operations that did not follow the expected outcomes.

Let's review the three key factors of innovation Professor Giovanni Dosi notes:

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

• Capabilities and stimuli generated with each firm and within the industry of which they complete.
• Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.
• Additional issues include the conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulation, tax codes, patent and trademark laws and public procurement.)

Recall that these key factors are being funneled through the Research & Capabilities “Dynamic Capabilities Interface." It is there, in the producer firm, that the greater issues of the science, the capabilities, microeconomic trends and public policy, etc. can be centralized and dealt with on behalf of all of the Joint Operating Committees that the producer may have an interest in. To expect that each individual JOC would deal with these greater issues would be unproductive and disorganized. By dealing with these points, and codifying them in the Dynamic Capabilities Interface the producer firm is publishing the appropriate information to the JOC at the appropriate time. Then the JOC has only to deal with the issues and opportunities of the property and none of the noise that may or may not be arguing for attention.

One of the first items that we address in the Knowledge & Learning module of the Preliminary Specification. Is how the items within the various “Dynamic Capabilities Interfaces” of the many producers who are participants in the Joint Operating Committee are populated into the Knowledge & Learning module. As we have discussed each producer publishes the pertinent capabilities they have to the various Joint Operating Committees. Therefore the people who are working within the JOC are presented with a variety of capabilities that may be duplications and similar to others. That would be reasonable to expect. However, just as the football team's playbook may have similar looking plays, they may have subtle differences in the manner in which they are executed, etc. That would be the same case in the Knowledge & Learning module.

It would also be the case that company A who is a member of the Joint Operating Committee have developed a capability for XYZ operation that is considered state of the art in the industry. This capability is one of several that are listed in the Knowledge & Learning modules Dynamic Capabilities Interface for XYZ operation. However, the Joint Operating Committee has operational decision making authority, and it is decided to execute the capability of company B for XYZ operation through the Knowledge & Learnings modules fourth interface the "Planning & Deployment Interface" instead. The JOC is the operational decision making authority who have the choice as to how the day to day operations are implemented. Their motivation is based on performance and they are most familiar with the property. In the football analogy this would be the quarterback calling an audible.

As technical paradigms are introduced, Joint Operating Committees will accept and use these innovative capabilities at different rates. This rate of acceptance can be classified as early innovators, imitators and fence sitters. Thus a satisfactory understanding of the relationship between innovation and distribution of JOC’s structural and performance characteristics implies an analysis of the learning and competitive process through which an industry changes. Professor Giovanni Dosi notes these behavioral attributes.

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

We have seen over the past twenty years an interesting trend that has created significant differences in the stratification of the oil and gas industry in terms of the size of the producer and their associated innovativeness. The small organization was able to purchase reserves and facilities from the open market only to substantially increase the inherent value through increased production and / or performance. We can conclude that the bureaucracy inherent in the hierarchy had stifled the innovativeness in the larger organizations and most disturbing is the lack of concern or identification of this as an issue over the past number of decades.

With this structure and arrangement between the Research & Capabilities and Knowledge & Learning modules, focused around the Joint Operating Committee, replicating the small oil and gas producer and focused on performance. The probability that the lumbering bureaucracy has been defeated is significant.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Learning Through Markets

It's important to point out the context of what the Joint Operating Committee will be learning. To do that we turn back to the definition of where the boundary of the firm and market is defined. The Joint Operating Committee must rely on the market for a majority of the work that is done in the field. I understand that this depends on the size of the facility and it will vary based on the types of operations and a variety of other conditions. In Professor Richard Langlois’ paper “Transaction Cost Economics in Real Time” he notes the following constraints will be imposed on the Joint Operating Committee as a result of their dependence on the market.

The firms learning ability will depend on its internal organization. And the learning ability of the market will depend on technical and instructional factors, as well as on the learning abilities of the firms it comprises, considered both individually and as a system. The remainder of this paper is devoted to considering these two learning systems in slightly more detail. More specifically, it will set out some preliminary generalization about how the level of capabilities in the firm and the market - and the nature of change in those capabilities - affects the boundaries of the firm. pp. 111 - 112

What the contractors know, and what they think they know may be not relevant to your property. We discussed the fact that the general rule is that the operations being conducted are reduced to the understanding of the least experienced individual on the crew. How do we avoid the general rule being applied to any detailed operation? And how do we avoid what are called the motivational and cognitive paradoxes from becoming the “mindset” of the contractors on this or any of the Joint Operating Committees operations?

As background the motivational paradox arise from the production bias. That is, “users lack the time to learn new applications due to the overwhelming concern for throughput. Their work is hampered by this lack of learning and consequently productivity suffers.” The cognitive paradox has its root in the assimilation bias. People tend to apply “what they already know in coping with new situations, and can be bound by the irrelevant and misleading similarities between the old and new situations.” This can prevent people from learning and applying new and more effective solutions.

To add an extra layer of complexity to this process. Recall that we have changes that are being made in the marketplace as a result of the gap filling process seen in the Research & Capabilities and other modules. This being an application of the division of labor and specialization process that deals with the overall organization and efficiencies of the industry. This will have a direct effect on the makeup of the contractor and the learning processes in this module.

These issues become the concern of those users of the Knowledge & Learning module of the Preliminary Specification. In an innovative oil and gas industry change will be the constant variable that needs the attention of everyone concerned. How do we maintain the awareness and attention that is necessary of everyone to learn what is needed? Within Langlois’ paper I think we see the answer to the problem detailed within this discussion and in the review of Langlois’ definition of Dynamic Transaction Costs.

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

The answer is, there will be large, in comparison to what is incurred today, Dynamic Transaction Costs expended by the Joint Operating Committee through the Knowledge & Learning module of the Preliminary Specification. This is a strategic necessity whose alternative is for the producers to move all of the operations in-house and manage them internally. Not a viable alternative. If we identify what these Dynamic Transaction Costs are (not having the capabilities available when they are needed) in the process of incurring them and record them as such, then we can deal with them and learn from them. That may be the first step in learning what to do with the learning costs in this high change and high cost era of oil and gas.

In the end the choice of whether to use the market or to vertically integrate is a purely academic exercise. In oil and gas the choice to depend on the market is a given and there is little practical application in the alternatives. What our discussion has been about is more to learn from the discussion of how we can establish processes of learning from using the marketplace. In a period of rapid change with high levels of innovation we are going to be stretched in terms of our capabilities, knowledge and capacity to learn. These areas are the focus of the Research & Capabilities and Knowledge & Learning modules. As the business of the oil and gas business is managed through the interfaces of these modules, the People, Ideas & Objects application will need to identify the point when Dynamic Transaction Costs are about to be incurred. Then they can be controlled, effective learning put in place and the capabilities necessary to strategically mitigate these issues developed or implemented to avoid these costs. And provide the Joint Operating Committee with the successful operation. As noted in Langlois’ paper “Transaction Cost Economics in Real Time”;

How would learning proceed in a system of decentralized capabilities? As I have already suggested, progress would take place autonomously within the decentralized stages. There would be no need for integration unless a systemic innovation offering superior performance arrives on the scene. Indeed, as we have seen, fixed task boundaries and standardized connections between stages might make innovation difficult with the existing structure, requiring a kind of creative destruction. (Schumpeter, 1950). p. 121

and

Ultimately, the costs that lead to vertical integration are the (dynamic) transaction costs of persuading, negotiating with, coordinating among, and teaching outside suppliers in the face of economic change or innovation. (Teece, 1986). pp. 115 - 116

and

But in cases in which systemic coordination is not the issue, the market may turn out to be the superior learning engine because of its ability to generate rapid trial and error learning. p. 124

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Dynamic Transaction Costs and Capabilities

What is it that the people who work for a Joint Operating Committee know? Where does a person that has just been assigned to the property learn what is important about it in terms of how its run? Where is this history kept, who maintains it, and how is it accessed? We have discussed the knowledge area of the Knowledge & Learning module of the Preliminary Specification, I want to shift the discussion now to the learning area.

Let's first review Professor Langlois’ definition of Dynamic Transaction Costs.

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

Our efforts in the learning section of the Knowledge & Learning module must be to reduce the Dynamic Transaction Costs of the Joint Operating Committee. That is to adapt to change efficiently. Change is the one constant, learning to adapt to that change is critical. Recognizing the high costs associated with Dynamic Transaction Costs, or change, therefore has to be handled from a strategic point of view. This will initiate the discussion and begin documenting how the learning section of the module is configured to capture this data and information.

We now turn to a quotation from Professor Sidney Winter in his paper “Deliberate Learning and the Evolution of Dynamic Capabilities” to define some of the risks we face in the changing environment of the innovative oil and gas producer.

In a relatively static environment, a single learning episode may suffice to endow an organization with operating routines that are adequate, or even a source of advantage, for an extended period. Incremental improvements can be accomplished through the tacit accumulation of experience and sporadic acts of creativity. Dynamic capabilities are unnecessary, and if developed may prove too costly to maintain. But in a context where technological, regulatory, and competitive conditions are subject to rapid change, persistence in the same operating routines quickly becomes hazardous. Systematic change efforts are needed to track the environmental change; both superiority and viability will prove transient for an organization that has no dynamic capabilities. Such capabilities must themselves be developed through learning. If change is not only rapid but also unpredictable and variable in direction, dynamic capabilities and even the higher-order learning approaches will themselves need to be updated repeatedly. Failure to do so turns core competencies into core rigidities (Leonard Barton 1992).

We need to strike a fine balance between these two somewhat opposing goals. Strategically control the Dynamic Transaction Costs and maintain an environment of dynamic capability for change and organizational learning. Note one of the capabilities of the Preliminary Specification will the ability to “tag” a transaction. Included within those tags will be a tag “Dynamic Transaction Costs” which will identify these costs when they are being incurred for further investigation.

The first component of the learning module will include a wiki styled information repository that contains the operational, policy and management of the property. This will be managed by the Security & Access Control module so that only those that are assigned to the property are able to access the wiki. Within the wiki will be the life history of the property in terms of the information that has been collected. Well files, schematics, reports, agreements, etc. Everything and anything, indexed and referenced electronically. Recall too the Knowledge area contains the “Dynamic Capabilities Interface” of the producer firms affiliated with the Joint Operating Committee.

Another section should be set out for “Lessons Learned” in which to document where decisions were made based on actions or activities that occurred of interest. These have a dramatic influence on everyone in terms of their learning and understanding about the property. As these occur these items should also be published to each person in the property as well as being posted in a central location. As with the Research & Capabilities module the ability to act on these items in terms of right clicking on them and generating an AFE, a Work Order, a Purchase Order, prepare a new Capability or any of the other documents in the People, Ideas & Objects application modules should be possible based on the users needs. More will be discussed about lessons learned in the Compliance & Governance module.

Again it might be argued or asked, why is the ERP vendor so involved with the operational concerns of the oil and gas producer? The simple answer is that it's the business of the business of oil and gas that needs to be supported by the ERP system. And that is the Joint Operating Committee, for both the oil and gas business and the People, Ideas & Objects Preliminary Specification. It's not just about debits and credits anymore, it's about identifying and supporting the business of the innovative and profitable oil and gas producer.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Getting to the Business of the Business

Throughout our discussion of the Research & Capabilities and Knowledge & Learning modules. We have been discussing the earth science and engineering research, developments, innovations and thinking of the oil and gas producer and the Joint Operating Committee. Many of you may be wondering what exactly does an ERP system have to do with these activities? Simply these activities are where the business of the oil and gas business are being conducted. It is imperative that the systems that manage the commercial aspects of the firm define and support the people and activities that occur in these areas.

The final look and feel of these two modules will ultimately be the result of the user input and their involvement. These modules are where the business of the oil and gas business are happening. It will be within these modules that the engineer or geologist will never have to leave. If they find an idea within the research area of the Research & Capabilities module they should have the opportunity to right click their mouse to have a list of options to prepare a Work Order, Prepare a Budget, Raise an AFE or Resource a Project. The ultimate list of actions would include the supporting activities of a user defined commercially focused ERP system.

Today there are significant financial resources available for innovation. The commodity price increases are an allocation of capital to fuel innovation. The reorganization of a producer to facilitate innovation is the purpose behind the research that People, Ideas & Objects conducted. That research was the basis of the Preliminary Specification of which the Research & Capabilities and Knowledge & Learning modules are critical parts of. These modules are the two key points where innovation occurs. Within these modules there is a flow of “knowledge, skills and experience” and ideas from the service, and oil & gas industries, through to the producer firm, and then those capabilities are sent to the Joint Operating Committee where they are applied and specific learning occurs.

There will be many ideas and there will be a lot of money spent in the coming decades. Successful innovation is not cheap. Unsuccessful innovation is terribly expensive. The difference is as stark as Apple’s iPad commercial success vs. HP’s Touchpad lasting only seven weeks. What we do know is that innovation can be reduced to a defined and replicable process. And although just having the innovation processes in place will not guarantee innovation. I can guarantee that innovation will not arise without the defined and replicable processes, such as People, Ideas & Objects Preliminary Specification, in place.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Introduction to the Knowledge & Learning Module

The title of the Preliminary Research Report was “Plurality Should Not Be Assumed Without Necessity." This of course being Occam’s Razor which in its simplest form means - the simplest explanation is most likely the correct one. Very appropriate when we are talking about using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. However, I also noted in the Preliminary Research Report that Occam’s Razor was referenced as “Its not what you know that you do not know that hurts you. It's what you do not know, that you do not know that will. It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to bring about a new order of things.” Knoop & Valor (1997).

Imagine we are now in the Joint Operating Committee with full operational decision rights with respect to the course of action to take. Thanks to the work that is done at the participating producer firms we know what we know from their work in the Research & Capabilities modules. Those capabilities are populated into the Knowledge area of the Knowledge & Learning module. Now the rubber hits the road and the theory comes to practice.

We now move onto the Joint Operating Committee focused Knowledge & Learning module of the Preliminary Specification. This module shares many similarities to the Research & Capabilities module, and in fact is populated with the capabilities from that module as its base of information. Recall that the objective that we are working to achieve is to move the knowledge to where the decision rights are held, the Joint Operating Committee.

As I noted the Research & Capabilities module should be organized based on geologic zones and other criteria. This is so that the capabilities that are pertinent to each zone can be separated and populated within the Knowledge & Learning module. Additional ways in which the capabilities may be sorted in the Research & Capabilities module might include geographical location. Where all the vendors who operate within a certain geographical location are referenced only in those regions in the Knowledge & Learning module.

With each Joint Operating Committee being concerned with one or a handful of geologic zones. The focus of the Joint Operating Committee will be limited to just those specific areas. What is particularly different about the Knowledge & Learning module, however, is that the information that is contained within the module is aggregated from multiple producers. Any of the participating producers who have capabilities contained within their Research & Capabilities module will have those pertinent capabilities for those geologic zones populate the Knowledge & Learning module for that Joint Operating Committee.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Conclusion to the Knowledge & Learning Module

As with the Research & Capabilities module, I am very satisfied with the content of the Knowledge & Learning module. It is through this module that we are moving the knowledge to where the decision rights reside, the Joint Operating Committee. In the latter part of the modules specification we take the opportunity to isolate and berate the management of the current oil and gas companies. The bureaucracy have a unique characteristic that is easily identified and criticized. I for one am only happy to be the one that offers up the discussion. But the larger point of discussion is the war that rages between the bureaucracy that exists in every industry and the Information Technologies as represented by the Internet. As I have stated I’ve placed my bet on who will win this war, as I would suggest everyone else should determine which side they are on.

The role of software in society is becoming more pronounced. We are still in the beginning stages of what can be done. For an industry such as oil and gas to continue on without the software development capabilities that People, Ideas & Objects is proposing, and the organizational structure focused on the Joint Operating Committee, the prospects look dim. It is our claim that we provide the oil and gas producer with the most profitable means of oil and gas production. And we do. First by providing our software through the most cost effective manner. That is charging our subscriber base for the costs of developments once. And secondly, that in order to attain a higher level of economic output requires that the industry employ higher levels of specialization and division of labor. In order to organize that specialization and division of labor requires the use of the software specified in the Preliminary Specification. There is no other means in which to organize a higher level of specialization and division of labor. The bureaucracy is tapped out. Therefore our claim is valid.

When it comes to undertaking a large project such as People, Ideas & Objects Preliminary Specification. And we have costed the total software development project in the area of $1 to 2 billion in its first commercial release. Is the need to maintain a sense of urgency for the people involved through to the end of the project. As we know, most of the people will remain motivated as long as the money keeps flowing. So how do we ensure that the money keeps flowing? It is through the fact that we provide the most profitable means of oil and gas production that we can motivate the producers to maintain their sense of urgency in keeping this project funded and moving forward to its conclusion. Their alternative is the bureaucracy and we see how well they’re doing. In the future it may not be enough to own the oil and gas asset. It will also be required to access the software that makes the oil and gas asset profitable, that is the importance of software in tomorrow’s society.

People, Ideas & Objects is derivative of Professor Paul Romer’s “New Growth Theory." That is that economic growth is the result of People, Ideas and Things. We just exchanged “things” with “objects” as we are object based software developers. I highly recommend reading his interview on “New Growth Theory” it will provide you with a good understanding of the theory and how it pertains to the Preliminary Specification. It states that we need to structure the right institutions. “This new theory says technological change comes about if you have the right institutions.” Oil and gas being of course one of the most technical of all industries.

Within the Knowledge & Learning module we have the capabilities of the producer firms that are participants in the Joint Operating Committee. Each capability contains the knowledge, skills, experience and ideas of the people who are part of that producer firm and the service industry representatives. As we have learned “knowledge begets capability, and capability begets action." Quotes are from Professor Richard Langlois book “The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy.”

Indeed, the job of the entrepreneur is precisely to introduce new knowledge. The “Circular Flow of Economic Life” is a state in which knowledge is not changing. Economic growth occurs at the hands of entrepreneurs, who bring into the system knowledge that is qualitatively new – knowledge not contained in the existing economic configuration. p. 27

Here we begin to see the role that people take in the makeup of the oil and gas industry. And to sum it up is to state that it is everything. One also needs to consider the role of computers in these “actions” and that it amounts to not very much. People, Ideas & Objects divides the jobs between what people do well, the thinking, generation of ideas, leadership, collaborating, deciding and learning and leaves the memory and processing to the computers.

There has to be a mechanism by which new knowledge enters the system. And that mechanism cannot be rational calculation, for as David Hume (1978, p. 164) long ago observed, “no kind of reasoning can give rise to a new idea.” p. 27

There is much to be done in the industry and a lot of it involves blazing new trails. The hard work is what the people will need to be involved in doing. The challenges and opportunities are of historical significance and will require the dedication of a lot of people.

What has been done already has the sharp-edged reality of all things which we have seen and experienced; the new is only the figment of our imagination. Carrying out a new plan and acting according to a customary one are things as different as making a road and walking along it. p. 27

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Industrial Structure in the Innovative Producer

If we go back to the previous modules we recall the discussion around moving from the “high throughput production” model to the “decentralized production” model that was being conducted in the Preliminary Specification. Essentially the “decentralized production” model has all of the costs, production and overhead, matching the revenues. So when there was no production, there would be no costs associated with any shut-in production.

The “high throughput production” model has the overhead costs of the producer as fixed. These costs remain fixed despite the volume of production and are difficult to adjust to any change in the underlying business. The “high throughput production” model is something that the bureaucracy can do. It is their means of managing and is how they are able to provide value in the organization. That “high throughput production” is incapable of providing value today is a matter of the time and place that we find ourselves in. Using the “high throughput production” model requires the bureaucracy to summarily ignore the Joint Operating Committee as the key organizational construct of the oil and gas industry. It can not do both, “high throughput production” requires the designation of operatorship be granted to one partner for control over the property.

Industrial structure is really about two interrelated but conceptually distinct systems: the technology of production and the organizational structure that directs production. These systems jointly must solve the problem of value: how to deliver the most utility to ultimate consumers at the lowest cost. Industrial structure is an evolutionary design problem. It is also a continually changing problem, one continually posed in new ways by factors like population, real income, and the changing technology of production and transaction. It was one of the founding insights of transaction-cost economics that the technological system does not fully determine the organizational system (Williamson 1975). Organizations — governance structures — bring with them their own costs, which need to be taken into account. But technology clearly affects organization. This is essentially Chandler’s claim. The large-scale, high-throughput technology of the nineteenth century “required” vertical integration and conscious managerial attention. In order to explicate this claim, we need to explore the nature of the evolutionary design problem that industrial structure must solve. p. 50

With the Preliminary Specifications adoption of the “decentralized production” model and the recognition of, and technical support of the Joint Operating Committee. The elements of change are in place. It is the culture of the industry to use the Joint Operating Committee, it is an industry that is based on partnerships and the closer we move to that culture the greater alignment (speed, innovation, and accountability) we will achieve. This next quote should be read twice with either the hierarchy or the Joint Operating Committee in mind.

And there are certainly examples of this. But it is also possible that a structure of organization can persist because of “path dependence.” A structure can be self-reinforcing in ways that make it difficult to switch to other structures. For example, the nature of learning within a vertically integrated structure may reinforce integration, since learning about how to make that structure work may be favored over learning about alternative structures. A structure may also persist simply because the environment in which it operates is not rigorous enough to demand change. And organizations can sometimes influence their environments — by soliciting government regulation, for instance — in ways that reduce competitive rigors. p. 58

This discussion elevates the importance of the Research & Capabilities and Knowledge & Learning modules in defining how the industry operates. These modules remove the task of how the industry is operated from the hands of the bureaucracy and moves the operations to the Joint Operating Committee. It is therefore a critical module.

Over time, two things happen: (a) markets get thicker and (b) the urgency of buffering levels off and then begins to decline. In part, urgency of buffering declines because technological change begins to lower the minimum efficient scale of production. But it also declines because improvements in coordination technology — whether applied within a firm or across firms — lower the cost (and therefore the urgency) of buffering. p. 78

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Markets Replacing Management

We see with the decline in the natural gas prices that management are not attuned to the market or the “price” system. Management are more familiar when they have control of everything and it operates as it should. Well unfortunately for them the scope of their authority is not as a broad as it once may have been. What other areas has the market been sending price signals that the management refuse to hear? We can only imagine. The fact of the matter is that the oil and gas producer and the Joint Operating Committee need to be attuned to the marketplace in order to better understand the business. They also need to have better Information Technologies so that they can know that they are not making any money on any natural gas that sells below $5.00. We can in the last item of this next quote learn that management's lack of hearing is symptomatic of their species. Quotations are from Professor Richard Langlois book “The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy."

As Chandler tells us on the first page of The Visible Hand, two characteristics set the managerial corporation apart from earlier modes: (1) it is overseen by salaried professionals rather than by owners, and (2) it comprises multiple units or stages of production each of which could in principle have stood on its own as a separate organization. The last characteristic is really the essential one. In the large corporation, management supersedes the price system as a method of coordinating stages of production. p. 8

It is then within management’s character to not listen to the market. When natural gas prices hit $2.15 just ignore these signals and keep producing. That’s the solution. That Deer in the headlights look about the earnings is intended to solicit sympathy. It is Professor Langlois thesis that the Visible Hand of management is being replaced by the Vanishing Hand of the marketplace. I would suggest in oil and gas the transition hasn’t happened fast enough.

The question, then, is clear: why did managerial coordination supersede the price system? Why did “managerial capitalism” supersede “market capitalism” in many important sectors of the American economy beginning in the late nineteenth century? p. 9

In this next quote Professor Langlois percolates the entire essence of what is necessary for the oil and gas industry to grow and prosper. It is these elements that we have captured in the Research & Capabilities and Knowledge & Learning module of the Preliminary Specification.

Economic growth is fundamentally about the emergence of new economic opportunities. The problem of organization is that of bringing existing capabilities to bear on new opportunities or of creating the necessary new capabilities. Thus, one of the principal determinants of the observed form of organization is the character of the opportunity – the innovation – involved. The second critical factor is the existing structure of relevant capabilities, including both the substantive content of those capabilities and the organizational structure under which they are deployed in the economy. p. 13

It seems so simple now. When an earth scientist or engineer can deploy a capability with the ease of calling a play, as in our football analogy, to the opportunity that has presented itself. Economic growth is the result. Having a listing of the capabilities that are available from the participating producers of the Joint Operating Committee. Accessible within the Knowledge & Learning module provides for its own economic opportunity as well. Seeing that producer x has developed a new capability to conduct y operation may motivate that Joint Operating Committee to deploy the capability and enhance its production.

Replacing managerial capitalism with market capitalism is exactly what the oil and gas industry needs. By adopting the Preliminary Specification, and having access to the Research & Capabilities and Knowledge & Learning modules, producers and Joint Operating Committees will be able to make this transition.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Operational Control and Freewheeling Markets

A recent McKinsey Newsletter begins with “In a world of unprecedented volatility, the unprepared will be sorely tested.” Lets hope that no oil and gas firms are caught unprepared without an innovative oil and gas ERP system like People, Ideas & Objects. As we enter the era of insatiable demand for energy. With fixed earth science and engineering resources, reorganization is the only manner in which we can approach the situation at hand. “Unprecedented volatility” will provide remarkable opportunities for those that are users of the People, Ideas & Objects Preliminary Specification. I believe it will be necessary to not only own the oil and gas asset but to also have access to the software that makes the oil and gas asset profitable. Such are the times that we find ourselves in.

In his paper “Innovation Process and Industrial Districts” Professor Richard Langlois discusses Industrial Districts (ID’s). Which are small geographically located groups of vendors that work together to produce products and services. They are for all intents and purposes the same as what we have been describing as the service industry or marketplace that a Joint Operating Committee would access during an operation in the field.

As we have shown, much of the attractiveness of compact, highly-localized areas of production results from their ability to reduce search costs, but this is accompanied by the risk that the knowledge available in any given district may be substandard. But new information and communications technology (ICT), may make it possible for firms to draw more cheaply and effectively on diverse sources of knowledge and therefore to increase their access to innovative ideas (as well as their ability to market their own innovations if they wish) (Langlois, 2003; Christensen, 2006). This may not undermine all aspects of the operations of IDs because differentiation and specialization retain their importance, and proximity is useful in just-in-time and other lean ways of organizing production. For innovation, however, an ability to tap wider sources of knowledge quickly and cheaply can reasonably be expected to allow firms all along supply chains to consult more broadly than in the past. Improvements in ICT and new search techniques, many of them associated in one way or another with the Internet, not only increase access to knowledge but may force innovation on firms that in the past could shelter in IDs. Because their customers can be better informed, firms in IDs need to keep up to date in order to maintain competitiveness. p. 20

In the previous quote the customer is the Joint Operating Committee. The expectation through the Research & Capabilities and Knowledge & Learning modules is that the marketplace or ID’s will be state of the art in terms of their capabilities. That may not be the case, and most probably will not be the case. There are a lot of international firms that operate within the service industry. And these form the foundations of what these ID’s are. But in most cases they are local and to assume that they are able to organize themselves in a manner that will optimize the Joint Operating Committees needs is incorrect.

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).

Expecting the service industry to provide the Joint Operating Committee with “conscious organization” of disparate firms and organizations is wrong from the point of view of operational control. The Knowledge & Learning “Planning & Deployment Interface” use of the Military Command & Control, AFE, and Job Order systems provides the means in which to put some organization within the ID. And in turn provides the Joint Operating Committee with...

Charles Sabel and his collaborators have begun looking into the nature of the relationships that characterize the New Economy (Gilson, Sabel and Scott 2008; Jennejohn 2007; Sabel and Zeitlin 2004). And what they find is not common ownership or hierarchy but rather a “form of contracting [that] supports iterative collaboration between firms by interweaving explicit and implicit terms that respond to the uncertainty inherent in the innovation process” (Gilson, Sabel and Scott 2008, p. 3). The New Economy may be highly organized. But it is fundamentally contractual, in a way that large Chandlerian multi-unit enterprises are not. These latter, properly understood, are indeed fading away in a world of extensive, capable, diversified markets.

We had discussed the coordination of the markets or the service industry during a field operation. How it is up to the Joint Operating Committee to organize the markets to ensure the performance they desire is attained. We want to discuss the changes in the roles and responsibilities within those markets and the Joint Operating Committee itself. How those changes come about and the manner in which they are implemented within the JOC. Specifically how innovation is introduced into the field operation through further specialization and the division of labor. The Knowledge & Learning module of the Preliminary Specification uses the Military Command & Control Metaphor (MCCM) to coordinate the markets, it will also show the “gaps” that need to be filled with new innovative positions.

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

In each of the marketplace modules (the Resource, Petroleum Lease, Financial) there is a “Gap Filling” interface. These are for the purposes of identifying and publishing “gaps” in the markets offerings, and, publishing of ideas as to where “gaps” exist within the producer firm and Joint Operating Committees. Each of the “Gap Filling” interfaces is essentially the same interface and that interface can be viewed to determine its effect on the current Joint Operating Committee. Once these “Gaps” are filled they need to populate the MCCM and be assigned the roles and responsibilities within the chain of command for the field operation. This is a manual and deliberate process, it is not spontaneous as we might think that it is. It is as Professor Langlois stated in the previous quote “or in sectors of developed economies undergoing systemic change, gap-filling requires other forms of organization -- more internalized and centrally coordinated forms.”

The underlying assumption, normally unspoken, is that relevant background institutions — things like respect for private property, contract law, courts — are all in place. Whatever transaction costs then arise are thus the result of properties inherent in “the market” itself, not of inadequacies in background institutions. There is generally a tacit factual or historical assumption as well: that the relevant markets exist thickly or would come into existence instantaneously if called upon. p. 3

There is only one way in which the oil and gas industry is to become more productive. That is through specialization and the division of labor. Particularly in the earth science and engineering disciplines. People, Ideas & Objects have approached the issue of the insatiable demand for energy and the somewhat constrained resource base of earth sciences and engineers through specialization and the division of labor. To approach this issue without the use of software in this day and age would be the same as using tools from the stone age. The effect of pooling the technical resources of the participants in the Joint Operating Committee is the beginning of the specialization and division of labor necessary to expand the industry's overall output.

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

Knowledge & Learning is the name of the module. Although it seems to be pursuing conflicting goals of operational excellence and innovativeness at the same time. There is a time element where the operational control fixes all of the variables and locks them down. That is a time when the operation is conducted for its efficiency. Other times and in other ways the module remains open and flexible to change to allow for the second major process of innovation within the People, Ideas & Objects Preliminary Specification to occur.

But even in “developed” economies, novelty and change creates the sorts of gaps that call for business groups, including less-formal sets of “intermediate” relationships, as, for example, in geographic (or, increasingly, “virtual”) industrial districts. In this sense, the economics of organization generally can learn from the literature on business groups outside the developed world. The problem of gap-filling in highly developed economies differs from that in less-developed economies because the path ahead is cloudier, which suggests that more-decentralized organizational structures may be more successful at the cutting-edge of technology. p. 29

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.