Showing posts with label Langlois. Show all posts
Showing posts with label Langlois. Show all posts

Tuesday, August 08, 2023

OCI, Request for Proposal, Part III

 Organizational Constructs

Key to the Preliminary Specifications value proposition is its alignment to seven different Organizational Constructs that convey an understanding and common sense approach to how the Preliminary Specification operates. These Organizational Constructs consist of the Joint Operating Committee, encouraging and facilitating the expansion of Specialization and the Division of Labor. They also include Professor Paul Romer's non-rival costs, Intellectual Property, Innovation, Markets and Information Technology. Developers and users of the system will default to these constructs for process definitions, frameworks and methods. Therefore, they will be able to understand what should be done and the consequences of it. To enable all stakeholders in the greater oil & gas economy to focus on providing a dynamic, innovative, accountable and profitable producer.

Professor Richard Langlois believes business is in transition. What Adam Smith described as the “Invisible Hand” of the marketplace, Professor Alfred Chandler hypothesized the “visible hand of management” had replaced it in his 1977 book “The Visible Hand: The Managerial Revolution in American Business.” Professor Langlois wrote in his paper “The Vanishing Hand: The Changing Dynamics of Industrial Capitalism.” And features prominently in his June 2023 book “The Corporation and the Twentieth Century, The History of American Business Enterprise.” Within the paper and book of Professor Langlois is the discussion of market supporting institutions to enable the transition from managerial capitalism back to the dynamics of the marketplace. To suggest that this is a natural process that happens with no thought or influence is incorrect. These market-supporting institutions need to be in place for the transition to occur. These seven Organizational Constructs, and the seven frameworks of the Joint Operating Committee are market supporting institutions the Preliminary Specification has recognized and implemented in Cloud Administration & Accounting for Oil & Gas.

In a related matter, I would argue managerial capitalism has waned across the economy and is the primary reason why it has become susceptible to disintermediation. Professor Langlois writes in his book

For Chandler, the revolutionary change after 1840 was the newly abundant availability of coal as a powerful energy source. Coal made possible an unprecedented scale of production that slowly destroyed the small-scale market-based system and called forth the modern managerial enterprise. p. 3

To which I would add, 10 to 25 thousand man hours of mechanical leverage in each barrel of oil equivalent have contributed substantially to economic performance. It is therefore reasonable to ask, what contribution above and beyond the value realized from the enhanced mechanization of our economy was achieved by management? Are they claiming that the innovative developments since 1840 in the use of these three sources of energy were a result of management efficiency? If that is the case, why has their performance ceased to generate that value? Would it therefore be valid to claim the Soviet Union's hyper managerial system should have been more productive than ours?

The Joint Operating Committee

The first Organizational Construct that contributes to our value proposition is the Joint Operating Committee. This is the key organizational construct of a dynamic, innovative, accountable and profitable oil & gas producer. The Joint Operating Committee is the industry's legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. When we move the compliance and governance frameworks of the producer firm away from the hierarchy and into alignment with the seven frameworks of the Joint Operating Committee, we’ll achieve increased organizational speed, innovation, and accountability among producers. Continuing on with the theme of “what, how and why” we do that, these are some of the advantages gained.

Adoption of the culture of the oil & gas industry in the form of the Joint Operating Committee is one of the fundamental changes in our ERP system. By doing so we’ve changed everything done in oil & gas administration and accounting and reconfigured it around what is unquestionably its cultural method of operation. Creating an opportunity to solve these issues and take this once in a lifetime opportunity to move back to the more natural flow of the oil & gas business. This is focused around the Joint Operating Committee's seven frameworks.

Our research taught us that when compliance and governance are aligned with operational decision-making, accountability results. This is intuitively understood. We believe this to be a source of conflict throughout the oil & gas industry. This creates an atmosphere and culture of unaccountable decision making. The contradiction occurs when operators assume the responsibility of managing the Joint Operating Committee. This is based on the need to have the requisite capabilities available to conduct the necessary field operations. The Joint Operating Committee holds operational decision-making authority. This is then delegated in the Operating Procedure to an operator based on voting by its producer participants. A threshold percentage is established for any decision to be passed. Let's assume 60% is the required percentage for approval and the operator has a 33% working interest. Decisions are then made on this basis, AFE’s are issued, funds are spent and the initiative fails. Who’s responsible and who needs to be accountable for the difficulties? We believe this to be the root cause of a related issue we identified in our discussion regarding Specialization and the Division of Labor. When producers have never been held accountable for the day-to-day individual field decisions during any period of their tenure at the producer, why would they then be held accountable for any decisions when they’ve assumed officer or director roles in the firm? Just “muddle through.” It is the industry culture developed over the past six decades that underpins this unaccountability. In its place a culture of excuses, blaming and the generation of what we call viable scapegoats is the product of this lack of accountability. To resolve this the Preliminary Specification aligns and implements the Compliance & Governance module to the operational decision making framework of the Joint Operating Committee. This is to establish an organizational culture of accountability for decisions.

The next point is related to the accountability issue and to other issues around resource restrictions in the earth science & engineering resource supply. Professor Richard N. Langlois was an extensive source of primary research we used throughout the Preliminary Specification. His research is in industrial and innovation economics. He raises what he calls the agency issue or rights assignment problem in his working paper “Modularity in Organization and Technology

The question then becomes: why are capabilities sometimes organized within firms, sometimes decentralized in markets, and sometimes coordinated by a myriad contractual and ownership arrangements like joint ventures, franchisees, and networks? 

Explicitly echoing Hayek, Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 27.

Oil & gas has a looming crisis in its ability to source the appropriate level of engineering and geological resources available to it. This is due to retirements, low numbers of graduates, each barrel of oil produced demands an increased level of science involved in its exploration and production. In addition, it demands high production throughput. People, Ideas & Objects therefore questioned whether each producer firm could continue to establish the full suite of their in-house earth science & engineering capabilities and capacities at the level necessary to meet all of their needs, just-in-time, on a go forward, commercial basis. This would be particularly difficult when the solution to the resource shortfall can only be resolved by a revised specialization and division of labor. All producers would be unable to commercially sustain the burden of a full suite of operator capacities and capabilities with such diverse scientific and engineering demands. This is after specialization and the division of labor. And therefore we concluded that the control or agency problem would need to be resolved on the basis of knowledge being transferred to where decision rights were held. It is specifically in the Research & Capabilities, Knowledge & Learning and Resource Marketplace, but also throughout all of the modules of the Preliminary Specification that we’ve moved the knowledge of each participating producer in a Joint Operating Committee into alignment with its operational decision rights. Where it is then possible to pool the available and specialized technical resources of the producer members of that Joint Operating Committee, or available in the specialized market.

A secondary point I would raise is the definition of capabilities. Professor Langlois defined modularity in his paper “Modularity in Organization, Technology and Society”.

This is the basic modularization of the market economy. It accords well with the modularization G. B. Richardson (1972) suggested in offering the concept of economic capabilities. By capabilities Richardson means "knowledge, experience, and skills" (1972, p. 888), a notion related to what Jensen and Meckling (1992) call "specific knowledge'' and to what Hayek (1945) called "knowledge of the particular circumstances of time and place." p. 27.

To which we've suggested that “ideas” be added to that list. Professor Carliss Baldwin also notes that “knowledge begets capability and capabilities beget action.” 

What will become of the oil & gas earth science & engineering related capabilities and capacities now that officers and directors have committed their future to clean energy? Renouncing shale and casting it to the back of the bus where no one will see or hear from it again. Shale being the most advanced science the industry has ever seen or developed. Shale technologies will develop no further, atrophy or be cast adrift. I’ll reiterate that People, Ideas & Objects have a plan to make shale commercial in the energy independent North American market. This plan is the Preliminary Specification. Shale is a critical and highly necessary element of North America's energy independence. 

Officers and directors of producer firms have to stop reading tea leaves about what investors want. Investors want profits everywhere and always, and that is all. With their contrived positioning of clean energy and environmental concerns I would ask what is it in oil & gas that will be the new frontier if it is not clean energy? Offshore, the Arctic, conventional, heavy oil, shale or any of the other areas producers previously renounced as commercially viable? It is this focus on clean energy that will do more damage to the industry and seal the fate of existing producers. What message is communicated to oil & gas investors or related service industries? Let’s assume the service industry is looking for capital for a driller to build a drilling rig. Their potential investor’s first question is "why? Producers aren’t focused on oil & gas, it's clean energy.”

In a related manner, if investors haven’t seen any effort by the officers and directors to make shale commercial, don’t see producers investing in their organizations' profitability or remediating any of the damages, what message does that send?

People, Ideas & Objects have repeatedly stated that each BOE provides 10,000 to 25,000 man hours of equivalent labor. This is 28 to 71 times the world's population. Producers' capitulation of shale resources should be seen as irresponsible when we understand that it's the world's most powerful economy that is the largest energy consumer. Why aren’t officers and directors seeking to make shale profitable and accountable by adopting the Preliminary Specification? It's for reasons like these that people elected to boards of directors are given such responsibilities. Selling energy consumers the immense value they gain from oil & gas and taking the political high ground away from government actors and environmental groups. 

In terms of alignment with the industry's legal framework. The Joint Operating Committee is the representative organization for the partnership between producer firms on oil & gas properties. It is the standard method by which industry operates and all agreements and understandings are based on the work done through these joint ventures. It is rare that a producer firm has a 100% interest in a property. The diversity of producers in these holdings is necessary to mitigate financial risk and regulatory requirements that require specific land holdings etc to drill and produce. Current accounting systems report on Joint Operating Committee activities however People, Ideas & Objects et al have expanded the accounting and administration of these organizations to the level of stand alone reporting entities. Producing detailed, actual, factual financial statements each month for each Joint Operating Committee. Including detailed actual overhead costs. As a result, we can evaluate the property's performance based on its actual cost. This is what North American capital markets expect. By ensuring that each Joint Operating Committee remains profitable by not overproducing or engaging in unprofitable production based on low commodity prices. 

It is through our user communities individually owned and independent service provider organizations that we enable many of the value-adding features of the Preliminary Specification. Service providers are the reorganization of producer administrative and accounting resources into process-focused organizations. Focusing on one process and managing it for the entire oil & gas industry. There may be one lease rental payment processor that ensures all lease rentals are paid on time. The lease rental is charged directly to the Joint Operating Committee in addition to the service provider fee. An ancillary benefit of this reorganization is that the process management conducted by the service providers is standardized and objective in nature. Objective in the sense that no one producer firm dominates the software development process definition. The objective of People, Ideas, & Objects is to identify through our user community and industry participation the full scope of processes management. 

The need to have standardized accounting is necessary from the point of view of having industry rely on the accuracy of these methods. Objectivity is achieved because producing data and handling distinct circumstances is counterproductive in view of global dependence on data and process methods. Consider the process of balancing production data across the month, across a gas plant processing 1 bcf per day. Consideration of the specific location elements, regulations and needs of the property and industry as standard and having them captured in the software is necessary for this reason. By following this strict interpretation, when a property is reported as not profitable using Cloud Administration & Accounting for Oil & Gas' standard and objective accounting, it will be clear that the property is not profitable. The producers in each of these Joint Operating Committees will understand it is in their financial interest to shut-in the property for the short term. They’ll know the property was assessed on the same basis, under the agreements in the Joint Operating Committee, as all the other oil & gas properties throughout the continent. They'll be satisfied with standard and objective accounting understanding. And be satisfied that the determination of profitability or loss was the same that was applied across the continent. Producers will understand the impact on their organizations' profitability of shutting-in unprofitable properties. Their influence on their innovative processes, determining and applying these standard and objective methods and governing themselves accordingly. To increase property performance and value by producing only profitable properties and by innovating within that framework and understanding.

Overhead in the form of service providers fees for administration and accounting services are charged directly to the Joint Operating Committee by each service provider. If a property has been shut-in then no data is produced and nothing flows through our task and transfer system to the service providers. No process management is conducted by them when properties are shut-in and hence no billings will be rendered to the Joint Operating Committee. There is no profit or loss associated with the property's operation. The Preliminary Specification makes all producer costs variable, based on profitable production. 

The benefits of doing business in this manner are substantial. 

  • It enforces production discipline across the industry for the first time when producers learn that corporate profits are highest when only profitable properties are produced. Dilution of earnings from losses on properties will no longer occur. 
  • They’ll retain their reserves for a time when they can be produced profitably. 
  • Those reserves will not have to carry and recover the costs of any additional losses. 
  • Keeping the commodities as reserves instead of prematurely incurring the costs of production and storage. 
  • Commodity prices find the marginal cost when unprofitable production is removed from the market. Marginal prices are realized for all properties across North America. 
    • Producers argue this is collusion. However making independent business decisions at the Joint Operating Committee based on detailed, actual, factual, standard and objective accounting that determines profitability is not collusion. 
  • Markets provide one thing and only one thing, the market price. 
  • While properties are shut-in producers can innovatively work the property back to profitability. 
  • Is the only reasonable and fair means of production discipline. Capital discipline used by producers today is a very dull, ineffective instrument. 
  • Service providers overhead costs are incurred by the Joint Operating Committee, determining the cost of the property, which further defines the profitability threshold. 
    • Therefore overhead costs are captured from the consumer in the current period to establish a real cash float. Whereas today overhead is capitalized and the cash incurred is returned only after decades of depletion.
  • Building, maintaining and managing administrative and accounting capacities and capabilities through service providers at the industry level eliminates the costs associated with each producer continuing to build, maintain and manage these capabilities in an unshared and unshareable manner.

It's no longer enough to own oil & gas assets. It’s also necessary to have access to ERP software in the form of the Preliminary Specification which makes oil & gas assets profitable. We are configuring an industry of successful producer and service industry organizations based on resolving issues that cause systemic failures. These unresolved issues dictate future difficulties. Non-participating producer boards of directors in this initiative will have told their shareholders they’ve opted out of an investment in their organizations' profitability, accountability and performance.

Wednesday, August 02, 2023

OCI Knowledge & Learning, Part VII

 Markets Replacing Bureaucracies

We see with the decline in natural gas prices that the bureaucracy is not attuned to the market or the “price” system. Officers and directors are more comfortable when they have control of everything and it operates as it should. Unfortunately for them the scope of their authority is not as broad as it once was. What other areas has the market sent price signals that officers and directors refuse to hear? We can only imagine. The fact of the matter is that the oil & gas producer and the Joint Operating Committee need to be attuned to the marketplace to better understand their business. They also need better Information Technologies so that they can know that they are not making any money on natural gas that sells below $6.00. In the last item of this next paragraph, we learn that the bureaucracies' 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 therefore within the nature of bureaucracies not to listen to markets. If natural gas prices hit $2.15, it is simply a matter of ignoring these signals and producing as usual. That’s the solution. The aim is to create sympathy for poor earnings by looking like a deer caught in the headlights. Langlois believes the Visible Hand of management is replaced by the Vanishing Hand of the marketplace. I would suggest that in oil & 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 captures the essence of what the oil & gas industry needs to grow and prosper. These elements are captured in the Research & Capabilities and Knowledge & Learning modules 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.

When an earth scientist or engineer can deploy a capability with the ease of calling a play, as in our football analogy. This is the opportunity in the Preliminary Specification. Economic growth results. Having a listing of the capabilities available from the participating producers of the Joint Operating Committee. The Knowledge & Learning module offers economic opportunities. Seeing that producer X has developed an enhanced capability to conduct Y's operation may motivate the Joint Operating Committee to deploy the capability. This may enhance its production. 

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

The current “high throughput production” model has producer overhead costs 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 how North American oil & gas is configured. In the past, it was how management provided value in the organization. That "high throughput production” is incapable of providing value today is a matter of the time and place we find ourselves in. Using the “high throughput production” model requires officers and directors to disregard the Joint Operating Committee as the key organizational construct of the oil & gas industry. It cannot do both. "High throughput production” requires operatorship to be granted to one partner for operation of the property. From Professor Langlois.

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 recognizes and supports the Joint Operating Committee. All the change elements are in place. Industry culture uses the Joint Operating Committee. This is an industry based on partnerships and the closer we move to that culture the greater alignment (speed, innovation, accountability and profitability) 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 emphasizes 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 officers and directors and move 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, the 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.

As a point of interest when I read this last quote I became concerned about the natural gas business in North America. The size of North American natural gas storage has become so large as to dwarf any real purpose for its existence. What appears to be another officer and director capital incineration project was the rushing in a few decades to overbuild natural gas storage facilities. The subsequent sale of the facilities to midstream companies has put the business out of reach. They've effectively become a competitor with immediate, high deliverability to urban markets. I originally wrote this argument in August 2012 when natural gas prices became depressed after the proliferation of shale gas and the global financial crisis in 2008. Whether it was the overbuilding of storage, the transfer of ownership into others hands, or the overbuilding of shale gas or an all of the above strategy. What we know since August 2012 is that natural gas pricing has declined so dramatically as to be surreal. Natural gas traditionally trades between 6 to 1 with oil prices. Has grown as high as 40 to 1 and we’ve heard not a single concern or mention of this issue outside of People, Ideas & Objects. Only we have a plan to restore natural gas prices to historic traditional levels. How can producers in a market economy get market prices for their products again? The answer is through an industry wide deployment of People, Ideas & Objects decentralized production model. 

Conclusion

As with the Research & Capabilities module, I am very satisfied with the Knowledge & Learning module content. It is through this module that we move knowledge to where decision rights reside, the Joint Operating Committee. In the latter part of the specification, we isolate and berate the officers and directors of the current oil & gas companies. Officers and directors have a unique characteristic that is easily identified and criticized. I for one am happy to initiate the discussion. But the larger point of discussion is the war between bureaucracy in every industry and 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. 

Knowledge-based systems fell out of favor several decades ago due to their inability to capture organizational needs. Professor Richard N. Langlois' research has defined organizational needs. Points such as the inability to capture tacit knowledge, moving decision rights to where knowledge exists and many of the other points he raises. These points we've incorporated into both the Research & Capabilities and Knowledge & Learning modules.

What is needed now is the creativity and innovation of our user community to implement their "knowledge, experience, skills and ideas" into the foundation these modules have established. Dynamic, innovative, accountable and profitable oil and gas producers desperately need them.

Software's role in society is increasing. We are still in the beginning stages of what can be done. For an industry such as oil & gas to continue 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. Our claim is that we provide oil & gas producers with the most profitable operations.

To begin with, we provide our software in the most cost-effective way possible. That is charging our subscriber base for one-time development costs. And secondly, higher economic output requires higher specialization and division of labor. To organize specialization and division of labor, it requires the use of the software specified in the Preliminary Specification. There is no other method to organize a higher level of specialization and division of labor. The hierarchy is exhausted. And lastly I should point out that $94 billion in 2012 lost revenues and profits due to not using the decentralized production model. These have proven to be annual losses incurred under the current administration. Nothing has been done to recognize, remediate or rehabilitate what is so obviously wrong with their administration. "Muddle through" is the solution to all their concerns.

When undertaking a large project such as the People, Ideas & Objects Preliminary Specification. And we have estimated the total software development cost of $15 billion U.S. in its first commercial release. There is a need to maintain a sense of urgency for the people involved through to the end of the project. As we know, most people will remain motivated as long as the money keeps flowing. So how do we ensure money flows? It is through the fact that we provide the most profitable means of oil & gas operations that we can motivate producers to maintain their sense of urgency. This is in keeping this project funded and moving forward to its conclusion. Their alternative is bureaucracy and we see how well they’re doing. Owning oil & gas assets may not be enough in the future. It will also be required to access software that makes the oil & gas asset profitable. This is the importance of software in today's society. 

People, Ideas & Objects is a derivative of Professor Paul Romer “New Growth Theory," which states that economic growth is the result of People, Ideas and Things. We just exchanged “things” for “objects” as we are object-based software developers. I highly recommend reading his interview on “New Growth Theory” ; it will provide you with an understanding of the theory and how it pertains to the Preliminary Specification. It indicates that we need the right institutions. “This new theory says technological change comes about with the right institutions.” Oil and gas being one of the most technical of all industries. I've indicated that we completed the Preliminary Specification in August 2012. We are pleased that we selected the name People, Ideas & Objects. We have incorporated Professor Romer's sharing model throughout the industry reorganization. Areas such as Cloud Administration & Accounting for Oil & Gas offer a single source of capabilities for North American producers. This shared facility reduces overhead substantially, and makes them variable based on profitable production. The news is that Professor Paul Romer won the Nobel Prize in 2018 for "New Growth Theory" which is captured in his paper "Endogenous Technical Change," and expressed in this 2000 Reason magazine article.

Within the Knowledge & Learning module we have the capabilities of the producer firms that participate 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 have in the makeup of the oil & gas industry. And to sum it all up, 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, thinking, generation of ideas, leadership, collaborating, deciding, learning to list only a few. It leaves memory and processing to 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 much of it involves blazing trails. People will need to work hard. The challenges and opportunities are of historical significance and will require dedication from many 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.

One of the difficulties we see in oil & gas is the systemic lack of accountability. Whether that is at the level of officers and directors and the inability to act. To hide in the crowd of other producers who pursue the same strategy of “muddle through” or migrate towards the same spending patterns. The same spending patterns are seen in natural gas storage, shale gas, shale oil, heavy oil or any other aspect of the business. This is until that newly formed business is over-built to such an extent that it is rendered useless. Officers and directors have been raised in this industry culture over four to five decades. Where the ability to account for a property's performance is lost in the hierarchy. Experiencing this culture through their formative years, these officers and directors assume the level of accountability they’ve provided throughout their careers will continue to be adequate. 

By recognizing the Joint Operating Committee operational decision-making authority. The processes and capabilities selected by the partnership in the Research & Capabilities and Knowledge & Learning modules will be made by those designated individuals of each of the participating producers. Therefore the "lessons learned" will be able to be captured and those that make the decisions will be able to deal with what was learned as a consequence of their actions. No one is looking for scalps, we are looking for an effective accountability process that will ensure that what is learned is built upon and any negative consequences can be avoided through duplication throughout the producer firm.

Tuesday, August 01, 2023

OCI Knowledge & Learning, Part VI

 Two Major Innovation Processes

We turn now to innovation with Professor Richard Langlois' paper “Innovation Process and Industrial Districts." There are two primary innovation processes within the Preliminary Specification. One is within the Research & Capabilities module and the other is here in the Knowledge & Learning module. Each process works in different ways to capture innovation in a manner that is effective and efficient for both producer firms and the Joint Operating Committee. 

Innovation is based on the generation, diffusion, and use of new knowledge. p. 1.

In the Research & Capabilities module innovation is developed through the research and application of earth science & engineering to the assets of the firm. These innovations are then refined to ensure that they are proven capabilities which the firm can deploy. They are then listed in the Dynamic Capabilities Interface, tagged with their characteristics, and deployed to their related and appropriate Joint Operating Committees. To ensure that no testing or development of the innovation is repeated in every Joint Operating Committee, only fully developed and tested capabilities are included in the interface. 

While it is possible to conceive of a firm that is so hermetic in its use of knowledge that all stages of innovation, including the combination of old and new knowledge, rely exclusively on internal sources, in practice most innovations involving products or processes of even modest complexity entail combining knowledge that derives, directly or indirectly, from several sources. Knowledge generation, therefore, must be accompanied by effective mechanisms for knowledge diffusion and for "indigenizing" knowledge originally developed in other contexts and for other purposes so that it meets a new need. p. 1.

The second major innovation process is contained within the Knowledge & Learning module of the Preliminary Specification. It is a hands-on, ad-hoc type of innovation due to evolving knowledge expected in the marketplace. Even with the tight operational control we will establish in the Knowledge & Learning module. It is possible and advantageous to have high levels of innovation within an organization. With a strong command and control environment the ability to get an operational command decision to introduce some updated tool, or procedure is easily attainable. It’s not like someone has to wander around looking for someone with authority to implement an idea. With Industrial Command & Control and the Job Order System it will be obvious who has the appropriate authority and responsibility for implementing an innovation. The Joint Operating Committee holds operational decision making authority and is motivated by financial gain.

Once any changes and innovations have been implemented in the Knowledge & Learning module it is necessary to assess their impact on the operation. Updates to the “Lessons Learned” interface will be necessary. This will ensure that the firm whose capability was used for the operation is informed of the updated innovation and its results. This will enable the producer to update their capability in their “Dynamic Capability Interface" for use elsewhere in their organization.

Operational Control and Freewheeling Markets

A recent McKinsey Newsletter begins with “In a world of unprecedented volatility, the unprepared will be sorely tested.” Let's hope that no oil & gas firms are caught unprepared without an innovative oil & gas ERP system like People, Ideas & Objects. As we enter the era of insatiable energy demand, with a fixed earth science & engineering resource base, reorganization through specialization and the division of labor is the only manner in which we can approach the situation at hand. “Unprecedented volatility” will provide remarkable opportunities for those using the People, Ideas & Objects Preliminary Specification. I believe it will be necessary to own the oil & gas asset, but also have access to the software that makes it profitable. Such are the times we find ourselves in. 

In his paper “Innovation Process and Industrial Districts” Professor Richard Langlois discusses Industrial Districts. 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 described 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 Industrial Districts 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 Industrial Districts. Because their customers can be better informed, firms in Industrial Districts need to keep up to date in order to maintain competitiveness. pp. 19 - 20.

In the previous quote the customer was the Joint Operating Committee. The expectation through the Research & Capabilities and Knowledge & Learning modules is that the marketplace or Industrial Districts will be state of the art in terms of their capabilities. And that may not be the case, and probably will not be. International firms operate in the service industry. And these form the foundations of Industrial Districts. The firms are usually local, and to assume they can organize themselves in a manner that optimizes the Joint Operating Committee needs is possibly incorrect. In a comment made to the editor of Capitalism and Society, Professor Richard N. Langlois wrote a comment in response to an argument made Professors Giovanni Dosi, Alfonso Gambardella, Marco Grazzi and Luigi Orsonigo (2008)

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). p. 3.

Expecting the service industry to provide the Joint Operating Committee with “conscious organization” of disparate firms and organizations is incorrect from the point of view of operational control. The Knowledge & Learning “Planning & Deployment Interface” use of the Industrial Command & Control, AFE, and Job Order systems enables organization within the Industrial District. And in turn, it provides the Joint Operating Committee with... From Professor Langlois comment to Capitalism and Society.

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. pp. 3 - 4.

We are discussing the coordination of markets or service industries during a field operation. How the Joint Operating Committee organizes markets to ensure performance. We want to discuss the changes in roles and responsibilities within those markets and the Joint Operating Committee. How those changes came about and are implemented within the Joint Operating Committee. Through further specialization and division of labor, innovation is introduced into field operations. The Knowledge & Learning module of the Preliminary Specification uses Industrial Command & Control (ICC) to coordinate the markets. This will also reveal the "gaps" that need to be filled with innovative positions. From Professor Richard Langlois' paper “Economic Institutions and the Boundaries of the Firm: The Case of Business Groups.”

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 marketplace module (Resource, Petroleum Lease, Financial) there is a “Gap Filling” interface. These are for identifying and publishing “gaps” in market offerings. In addition, they publish ideas about 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 by market participants they'll be populated with resources under Industrial Command & Control. This will assign roles and responsibilities within the chain of command for field operations. This is a manual and deliberate process. It is not spontaneous as we might think 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 for the oil & gas industry to become more productive. That is through specialization and the division of labor. Particularly in the earth science & 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. This has been done through specialization and the division of labor. To approach this issue without ERP software in this day and age would be the same as using stone age tools. The effect of pooling the technical resources of the participants in the Joint Operating Committee is the beginning of specialization and division of labor. This is necessary to increase industry 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 labor” 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 module name. Even though it appears to pursue both operational excellence and innovation simultaneously. There is a time element where operational control fixes all variables and locks them down. That is a time when operations are conducted for 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.

Monday, July 31, 2023

OCI Knowledge & Learning, Part V

 Change and Cognitive Dissonance

We continue our discussion of the forces of change in the Knowledge & Learning module. We discuss inertia and equilibrium and how they’re managed in the Preliminary Specification. To achieve higher levels of economic performance we know that it requires a reorganization of the resources of both the service and oil & gas industries. Our problem came about because our society is very advanced and increasing our performance requires the necessary software in place first. Without software in place no change or improvement in performance will occur. Officers and directors in the oil & gas industry know this and use it to ensure their current positions are never challenged. They’ve done this by never changing their ERP software. Or they have implemented SAP to reinforce their methods. This has made it particularly difficult for the industry to advance. 

Should there be the changes that are suggested in the Preliminary Specification? Should we continue with the SAP perception of oil & gas producers? In an era of insatiable energy demand, what is oil & gas producers' vision? These are questions best left to others to answer. All I can do is continue to offer solutions based on the Joint Operating Committee. I would suggest that today’s topics of inertia and equilibrium can best be described in the industry as stagnant and disjointed. The quotations are from Professor Richard Langlois' paper “Institutions, Inertia and Changing Industrial Leadership." 

Several features of punctuated equilibrium stand out. Firstly, it is a lengthy process. Even the revolutionary or transitionary phase, in which two or more alternatives vie for success, may be prolonged for decades, or eons in the case of speciation. Secondly, the process, like Schumpeter's: creative destruction," is one of replacement. When there is punctuated equilibrium, the extinction of a species or discrediting of a scientific theory are not enough; there must be a new species available to take over the territory or a new theory to account for the phenomena that the old theory was once thought to explain. Thirdly, each period of punctuated change requires a behavioral shift to ensure alignment between the requirements of the new order and the actions of its agents. This shift might be accomplished internally, if the old agents adapt their behavior to meet the new conditions, or externally if they are supplanted by a new group of agents. Finally, inertia plays a central role in punctuated equilibrium by ensuring that change proceeds by fits and starts rather than smoothly and evenly. pp. 2 - 3.

The Preliminary Specification provides for the second item in this quote of “there must be a new species available to take over the territory or a new theory to account." And it also provides a vision for the third item in Langlois' quote of “a behavioral shift to ensure alignment between the requirements of the new order and the actions of its agents.” As we noted, the service providers and service industry representatives would be motivated to form new and innovative service offerings to their producer clients and the Joint Operating Committees. So with these we would be well on our way to the transition to the environment described in the Preliminary Specification. This is despite officers and directors' actions. 

I am also operating from two fundamental assumptions that lead me to conclude that these changes will occur. That the stuffing of another ream of paper in the printer is how the system is fed in today’s oil & gas industry. That is, the ERP systems that operate today are woefully inadequate for the needs in the era of insatiable energy demand in which we’re about to find ourselves in. These systems have no future. And that high levels of cognitive dissonance occur when people read the Preliminary Specification. That is to say it resonates with their understanding of what an oil & gas system should be, and they desire it. 

Inertia is the focus of this paper. As is explained in more detail below, inertia has two major functions in the cycle of punctuated equilibrium. Inertia results from, and in a sense embodies, the best feature of the stable phase of the cycle because it is based on the learning process in which producers determine which procedures are most efficient and effective. Once people are satisfied that they know how to do things well, they have very little incentive to look for or adopt new methods. In the words of Tushman and Romanelli (1985, pp. 197, 205), "those same social and structural factors which are associated with effective performance are also the foundations of organizational inertia..., success sows the seeds of extraordinary resistance to fundamental change." Inertia also provides the tension, however, that leads to the (relatively) short, sharp shock of the revolutionary period (Gould, 1983, p. 153) because the pressure required to displace a successful but inert system is considerable and takes time to accumulate. When there is little inertia, change can be assimilated in a gradual and orderly fashion, but an entrenched system may need to be vigorously displaced. p. 3.

I know that the officers and directors need to be vigorously displaced, however the inertia to change will be strong to replace the stagnant and inert systems that so poorly serve the needs of the people, producers, Joint Operating Committees, service industry participants and society in general. And this is represented in our value proposition which shows $94 billion in incremental revenues and profits irretrievably lost for the 2012 calendar year. Similar revenue losses will be incurred each year this bureaucracy is in place. Which in 2023, when seen through producers specious accounting, is valid. Continued operations in the face of such value destruction has set the stage for "vigorous displacement.”

They, the officers and directors, have effectively mismanaged the oil & gas business in North America. In the oil & gas industry, "inertia" is strong, as shown by the deer in the headlights' response to collapsed natural gas and chronically depressed oil prices. It is to muddle along. Take what is given and survive another day. Is this the appropriate footing for an innovative oil & gas producer in the era of insatiable energy demand? With the rapid depletion and high costs of reworking shale gas reserves, there must be a better way. And that is the decentralized production model of the Preliminary Specification. Quotes are from Professor Richard Langlois' paper “Institutions, Inertia and Changing Industrial Leadership." 

Here we concentrate on explaining the part played by inertia in causing economic displacement. We argue that inertia is often a rational response for firms or governments even after an important innovation becomes available, and that changes in economic leadership, whether on the level of the firm or the nation, may be inevitable when there is significant innovation. p. 4.

And

Here, we concentrate on the influence of institutional variables on inertia. Institutions may either retard or encourage innovation. If the institutional structure is unsuited to a new technology and inert, change will be difficult to implement. When existing institutions are flexible or well adapted to the requirements of an innovation, however, change will be accomplished relatively easily. p. 5.

Now is the time for the bureaucrats to retire to Florida permanently. They have forcefully resisted People, Ideas & Objects at every opportunity. And as indicated, unchangeable organizational structures were implemented. I don’t see any opportunity for cooperation, nor the need for cooperation. This can be done by the people who make the industry work. Entrepreneurs, movers and shakers and people who know there is a better way. The alternative to the Preliminary Specification has been a slow and painful atrophy. Intermixed with the bureaucrats' secondary business model of repeated bankruptcy.

And institutional change, we argue, can often take place through the more or less slow dying out of obsolete institutions in a population and their replacement by better-adapted institutions - rather than by the conscious adaptation of existing institutions in the face of change. p. 6.

There is a perception that moving away from the status quo bureaucracy will be difficult. How that transition occurs is through two possible alternatives. Existing producers can atrophy and die slowly. Or alternatively, the decision can be made to build the Preliminary Specification and move to the Joint Operating Committee, People, Ideas & Objects key Organizational Construct. There are seven Organizational Constructs that establish an innovative, performance and profitability culture in oil & gas. The decision to make the change is the appropriate choice to make, however there are other considerations to be made.

One of those considerations is the inertia within the current institutions. Many producers were developed in an era of low energy prices where survival skills were needed. Innovation was not rewarded and did not exist within the producer firm itself. Now that we are within reach of the era of insatiable energy demand, innovation is the key. This must become the firm's culture. Therefore in the Knowledge & Learning and other modules of the Preliminary Specification, whether it is by accident or by deliberate decision, the development of the innovative culture and the Preliminary Specification will always be an “outside” of the mainstream kind of development. Transitioning between these two eras would be difficult for any business to deal with. It is now clear that oil & gas can’t, won’t and will not ever make such a radical change to their underlying business. Higher commodity prices are the source of financial resources to support an innovative oil & gas industry. This is the polar opposite of the skills necessary to prosper in the survival, or low energy price era. Industry's counter argument is that they’re highly innovative. Which is incorrect. Any and all innovations can be identified and sourced directly from the service industry, not the producers.

Another aspect of capabilities that has recently received a great deal of attention is organizational culture. In practice, not all organizations may be equally able to cope with change, as existing patterns of behavior involving both executives and subordinates may be resistant to change. Organizations develop collective habits or ways of thinking that can be altered only gradually. To the extent that a given culture is either flexible or consistent with a proposed change in product or process technology, the transition to the new regime will be relatively easy. If, however, the culture is incompatible with the needs posed by the change and is inflexible, the viability of the change will be threatened (Robertson, 1990; Langlois 1991; Camerer and Vepsalainen, 1988). p. 9.

After all, we are not talking about minor changes to the accounting floor plan. Using the Joint Operating Committee and adopting the Preliminary Specification, we are making wholesale changes to the oil & gas industry. Change that is as significant as energy prices and the global demand structure. This will not be done successfully in a way that smooths over the rough edges. 

Teece... fails to note that the inflexibility, or inertia, induced by routines and the capabilities that they generate can raise to prohibitive levels the cost of adopting a new technology or entering new fields. Such inertia can develop to the extent that existing rules are both hard to discard and inconsistent with types of change that might otherwise be profitable. p. 10.

Creative destruction has such a profound ring. It's at times like these that we see the scope of change and the need for change clashing with the desire for change. Some might look back and say that the North American oil & gas business refused to change, and change will be forced upon it. 

Whereas major competence enhancing innovations may, in time, be assimilated, the creation of entirely new organizations may be needed to deal with innovations that undermine the capabilities or competencies of existing firms. p. 11.

As I have suggested, People, Ideas & Objects will be there one way or the other. 

One More Kick at the Bureaucracy

It is at the Joint Operating Committee that bureaucracy has little to do. Therefore it seems opportune to discuss the fact that the bureaucracy needs to fade from the scene for operational work to be done. Our discussion carries on with the theme of kicking the bureaucracy and highlights how they have failed in the past. This is a brief review of Professor Alfred P. Chandler's work through Professor Richard Langlois' writings in “Chandler in a Larger Frame: Markets, Transaction Costs, and Organizational Form in History.”

It is at the Joint Operating Committee that all industry business is conducted. That is to say that most field operations are commanded and controlled as proposed in the Knowledge & Learning module of the Preliminary Specification. Therefore it will naturally be where everyone will be trying to stick their fingers in to be part of the action. We can be certain that the bureaucracy will assert that they need such and such a report by midnight. Let's be mindful of their ways and means and ensure that doesn’t happen. 

One group that People, Ideas & Objects directed our message to is oil & gas industry investors. As Professor Chandler notes in his work, capital starts everything. Chandler's review of corporate history shows merchants' role. Investing their capital and skills, merchants started the ball rolling. I see no reason why we can’t turn to oil & gas investors in the same way. I expect that they will lead in this next phase of the industry. 

After all it is the investors who have the most to lose. Bureaucracy has no stake in the firm. If a crisis strikes a firm, bureaucracy resumes elsewhere. Investors will shoulder the costs. Bureaucracy currently holds the reins, and they know their options exist elsewhere. Ownership, like merchants, needs to start over. Starting over begins with supporting People, Ideas & Objects and the Preliminary Specification.

The possibility of a bureaucratic failure is not new, it has happened before. Professor Chandler noted that the bureaucracy had failed before. During the great depression, a time when the government had to increase its involvement in the economy. Bureaucracy may not see the larger picture, and fail again. Since 2008 we've seen many changes. The oil & gas industry has certainly changed. Information technology is also having an effect. The time to act is now as there is much work to do.

Friday, July 28, 2023

OCI Knowledge & Learning, Part IV

 Defining Tacit and Explicit Knowledge

We now want to discuss how capabilities are viewed by the users of the information in the interfaces of the Knowledge & Learning module of the Preliminary Specification. A capability listed within the "Dynamic Capability Interface" would contain a great deal of information regarding the operation. It would be inefficient to have everyone reading the same text repeatedly. And that is why we have computers. We want to also discuss the different types of knowledge (tacit and explicit, or formal knowledge) and note the deficiencies in recording tacit knowledge. I’ll quote Professor Richard Langlois’ paper “Transaction Cost Economics in Real Time." 

'Routines,' write Nelson and Winter (1982, p. 124), 'are the skills of an organization.' p. 106.

When the user is presented with a view of the capabilities within the “Planning & Deployment Interface” they are provided with several different views of the same data. One is the comprehensive view of the capabilities (explicit knowledge) which includes the full extent of the capabilities. Another is just the changes since the last time the user viewed the document. This can be presented to the user by fading the already viewed text by 50% so that only the updated information stands out. Leaving the user to learn just what has changed in the capabilities since the last time they were seen. There should also be annotations for the user to learn who authored the changes and when they were authored. This is so that if there are any follow up questions they’ll know who to contact. Please see the Blockchain module for this feature implementation.

A capability includes explicit knowledge of the operation as well as information about who is responsible for tacit knowledge. Having this information updated by reviewing only the clear text will enable the user to get up to speed on the changes within seconds. Since the capabilities will be the source for all of the people who are working on the operation, everyone will be on the “same page” in terms of the most up to date capabilities and the individuals who are responsible for them. 

Such tacit knowledge is fundamentally empirical: it is gained through imitation and repetition not through conscious analysis or explicit instruction. This certainly does not mean that humans are incapable of innovation; but it does mean that there are limits to what conscious attention can accomplish. It is only because much of life is a matter of tacit knowledge and unconscious rules that conscious attention can produce as much as it does." p. 106.

Getting a handle on these interfaces is vital to a dynamic, innovative, accountable and profitable oil & gas producer. Although this may seem like an academic exercise to some, they are core to the Joint Operating Committee and the producer's values. It is the actions and interactions that are derivative of these capabilities that will determine the success or failure of an innovative and profitable oil & gas firm. 

In a metaphoric sense, at least, the capabilities of 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.

And

But often - and especially when innovation is involved - the links among firms are of a more complex sort, involving everything from informal swaps of information (von Hippel, 1989) to joint ventures and other formal collaborative arrangements (Mowery, 1989). All firms must rely on the capabilities owned by others, especially to the extent those capabilities are dissimilar to those the firm possesses. p. 108.

It should be noted that each capability listed in the “Dynamic Capabilities Interface” is assigned a unique number distinct within the oil & gas industry. That way when they are presented to the Joint Operating Committee there will be no confusion as to the number of the capability selected. This technically isn’t an issue, however, with the interactions between multiple producers in multiple Joint Operating Committees it is a necessity. 

Additionally, we can use the football analogy to describe how a property employs X capability. Everyone has access to that capability and can review the explicit information contained within the document. This includes engineers and geologists from the various producer firms that participate in the Joint Operating Committee. It also includes field operations representatives contracted to provide services. Everyone works from the “same page” in terms of operations expectations. 

Upon selection of X capability, people's roles and responsibilities are assigned through Industrial Command & Control through the "Planning & Deployment Interface." This will impose a chain of command on how the operation is run and who has what authority over what operation. Additionally the AFE associated with the operation will be included with the “Planning & Deployment Interface'' to impose budgetary control over the operation. Lastly the Job Order system is made available to implement the commands to execute the operation. It is here, the “Planning & Deployment Interface'' where the operational budget, command and control, execution and authorization are planned for and managed. As we have mentioned elsewhere, innovation and free markets are what we seek to establish in the service industry and the greater oil & gas industry. This however does not preclude high levels of tight operational control during large, costly, critical science and technologically based operations. 

The People, Ideas & Objects Preliminary Specification moves the innovative and profitable oil & gas producer to the “decentralized production model," where the ability to shut in marginal production is possible during times of volatile energy prices. The decentralized production model, as we have discussed in other modules, also reduces shut-in productions royalty, operational and overhead costs to zero. It is during these times of low oil & gas prices that the Joint Operating Committee can review the capabilities provided to it by the participating producers in the “Dynamic Capabilities Interface.” This review will be to determine which capabilities can be deployed that will reduce the Joint Operating Committee cost of operation, or enhance the revenues and return the property to production and profitability sooner. Operational control, review and deployment of the participating producers' state of the art capabilities are two of the key attributes of the Knowledge & Learning module.

Professor Richard Langlois' paper entitled “Chandler in a Larger Frame: Markets, Transaction Costs, and Organization Form in History.” Provides us with a focus on tacit knowledge and how that is handled in the Knowledge & Learning module of the Preliminary Specification. Recall that tacit knowledge cannot be captured in the “Dynamic Capabilities Interface" or anywhere. Only explicit knowledge can be recorded. The fact that you can only record “textbook” knowledge is a limitation that all systems must deal with. The knowledge captured in the “Dynamic Capabilities Interface” is very rich and includes the information necessary to undertake the operation from the point of view of all of the people involved. Included in that information are the roles and responsibilities of the individuals who will be in charge and control of the operation. They are the ones with tacit knowledge of the operation.

A brief note to mention in the Preliminary Specification. Our software will capture the implicit knowledge of industry administration & accounting. And our user communities service provider organizations will deliver our software in combination with their tacit knowledge in the form of their services. From Professor Richard Langlois’ paper “Capabilities and Governance the Rebirth of Production in the Theory of Economic Organization.”

Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. pp. 13 - 14.

Direction, or command and control, is exercised through Industrial Command & Control, the AFE associated with the operation and the Job Order System of People, Ideas & Objects Preliminary Specification. Having these three tools available allows tacit knowledge to be deployed in a highly controlled environment. With Industrial Command & Control, multi-person tacit knowledge can be mobilized and coordinated effectively. The AFE controls the program budget. And the Job Order System enables the execution and documentation of individual orders and commands. The “Dynamic Capability Interface'' provides the resource for all people to determine their role and responsibility. This will ensure everyone is on the same page regarding the operation's objectives and deliverables. Lastly, any element of the Preliminary Specification will be able to be right clicked to invoke an accounting or administration process that a user may need to support the operation. An example might be a dynamically generated, or live, actual cost to date for AFEs.

In a world of tacit and distributed knowledge - that is, of differential capabilities - having the same blueprints as one competitor is unlikely to translate into having the same costs of production. Generally, in such a world, firms will not confront the same production costs for the same type of productive activity. Moreover, the costs that can make transacting difficult, and may lead to internalization, can go beyond those that arise in the course of safeguarding against opportunism or damping moral hazard through monitoring or incentive contracts. In such a world, economic activity may be afflicted with "dynamic transaction costs," the costs that arise in real time in the process of acquiring and coordinating productive knowledge. (Langlois 1992; Langlois and Robertson 1995) and which are different in nature from the transaction costs that are caused by problems of aligning incentives. This, in turn, implies that capabilities may be interpreted as a distinct theory of economic organization.pp. 14 - 15.

Members of one firm may quite literally not understand what another firm wants from them (for example, in supplier contracts) or is offering them (for example, in license contracts). In this setting, the costs of making contacts with potential partners, of educating potential licensees and franchisees, of teaching suppliers what it is one needs from them, and the like become very real factors determining where the boundaries between firms will emerge. p. 19.

We should remember that participants in any operation come from a variety of organizations. They will be due to a pooling of partnerships represented by the Joint Operating Committee. And the representatives of the field service industry who provide services to the operation. All of these people have the tacit knowledge necessary for the operation to succeed. It needs to be coordinated and directed to be effective. It is with these four tools - the “Dynamic Capabilities Interface,” the Industrial Command & Control, the AFE and the Job Order System of the Preliminary Specifications Knowledge & Learning module that tight operational control of any oil & gas operation will be available to the Joint Operating Committee. 

Learning, Then Operational Control

Having tight operational control during operations leads to a situation where learning opportunities may seem limited. However, the very temporary nature of the operation should lead to marketplace dynamics providing for further learning opportunities. Quotations in this section will be from Professor Richard Langlois’ paper “Transaction Cost Economics in Real Time.

A market form of organization is capable of learning and creating new capabilities, often in a self reinforcing and synergistic way. Marshall describes just such a system when he talks about the benefits of localized industry. (Marshall, 2961, IV .x.3, p. 271) p. 120.

In many ways the characteristics of a learning environment are different from those of an environment designed for operational control. Professor Langlois talks about getting everyone on the same wavelength as one of the objectives of operational coordination. And we have done that by unifying everyone around the capabilities in the “Dynamic Capabilities Interface." This is counter to learning organizations' needs. 

In this sense, the ability of a large organization to coordinate the implementation of an innovation, which is clearly an advantage in some situations, may be a disadvantage in other ways. Coordination means getting everyone on the same wavelength. But the variation that drives an evolutionary learning system depends on people being on different wavelengths - it depends, in effect, on out-breeding. This is something much more difficult to achieve in a large organization than in a disintegrated system. Indeed, as Cohen and Levinthal (1990a, p. 132) point out, an organization experiencing rapid change ought in effect to emulate a market in its ability to expose to the environment a broad range of knowledge gathering 'receptors'. p. 120.

So how are these two opposing and contradictory objectives paired together in one module? There are phases of when the team is put together, understanding what the operation is and learning the capabilities to be deployed. Bringing in the latest field operations staff and equipment for the job. These are times when learning occurs throughout the group. Then the operational control phase begins in which nothing but the plan's execution is the group's concern. Learning is over when this happens. There is however, a point at the end of the operation in which the group should input the lessons they learned into the “Lessons Learned Interface." 

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.

As members of the Joint Operating Committee, the "Lessons Learned Interface" is presented to them. Results are also presented in both the Research & Capabilities and Compliance & Governance modules of the producer firm who initiated the capability. This is for all Joint Operating Committees the producer participates in. The "Dynamic Capabilities Interface" allows them to update specific capabilities. Members of the governance team can see if systemic errors are made throughout the organization. 

Although they are at opposite ends of the innovation scale. Operational control and learning within one module make sense when feedback from those operations is critical to future operations. Learning is a part of innovation and it must update the firm's capabilities and Joint Operating Committees to build value over the long term.

Specialization and the Division of Labor

We want to discuss specialization and the division of labor with respect to the Joint Operating Committee. We also want to discuss what we can expect in the future as a result of demands for more energy. Quotations in this section will be from Professor Richard Langlois’ paper “The Vanishing Hand: The Changing Dynamics of Industrial Capitalism."

It will be through the “Dynamic Capabilities Interface” that the specialization and division of labor is most apparent. The volume of vendors and suppliers used to conduct an operation will be higher than currently. Through the further specialization of tasks in the field, the Dynamic Capabilities Interface will need to capture the explicit knowledge of those in the field. This specialization and division of labor is necessary for an expansion in economic output.

The basic argument - the vanishing hand hypothesis - is as follows. Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets, much as Allyn Young (1928) claimed long ago. But the components of that process - technology, organization, and institutions - change at different rates. p. 3.

I would suggest that the extent of possible changes in the current market is constrained by current ERP technologies. Having SAP or other ERP systems that do not focus on capabilities or specialization is the issue. When we look at modules like the Resource Marketplace module of the Preliminary Specification and see the “Gap Filling Interface” and note that its sole purpose is to expand the division of labor and specialization in the Resource Marketplace. In order for these interactions to develop, these constraints imposed by ERP systems must be lifted. 

But with further growth in the extent of the market and the evolution of institutions to support exchange, the central management of vertically integrated production stages is increasingly succumbing to the forces of specialization. pp. 3 - 4.

Rather it is an argument that, in a population sense, large vertically integrated firms are becoming less significant and are joining a richer mix of organizational forms. p. 4.

We have with the Preliminary Specification the coordination of the operation in the Knowledge & Learning module by the Joint Operating Committee. We also have the full extent and encouragement of the market in the Resource Marketplace module. It is not by accident that these two modules work together to provide both rich markets and strong operational control for the Joint Operating Committee. 

Industrial structure, then, is really about two interrelated but conceptually distinct systems: the technology of production and the organizational structure that directs production. pp. 6.

Industrial structure is an evolutionary design problem. pp. 6.

It was one of the founding insights of transaction-cost economics that the technological system does not fully determine the organizational system (Williamson 1975). Organization's - governance structure - bring with them their own costs, which need to be taken into account. But technology clearly affects organization. pp. 6.

Like a biological organism, an organization confronts an environment that is changing, variable and uncertain. pp. 6.

Also like biological organisms, business organizations differ in the mechanisms they use to process information and to deal with variation and uncertainty. Nonetheless, as James Thompson (1967, p. 20) argued, all organizations respond to a changing environment by seeking to "buffer environmental influences by surrounding their technical cores with input and output components." pp. 7.

Or as we like to say, SAP is the bureaucracy. To enable the market, specialization, the division of labor and the coordination of operations require technology and organization. We can all agree that the Joint Operating Committee is the key organizational construct of a dynamic, innovative, accountable and profitable oil & gas producer. It is the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of an innovative producer. 

The Joint Operating Committee will coordinate field operations. Furthermore, the People, Ideas & Objects Preliminary Specification needs to identify and support these markets and changes. We want to discuss how these changes will come about and the probable speed at which they will occur. This is given that everything these markets needed in terms of market supporting institutions was available. Quotations come from Professor Richard Langlois' paper “Institutions, Inertia and Changing Industrial Leadership.”

Ruttan Hayami (1984) have proposed a theory of institutional change that is relevant to my story of organizational and institutional change. As they see it, changes in relative scarcities, typically driven by changes in technology, create a demand for institutional change by dangling new sources of economic rent before the eyes of potential institutional innovators. Whether change occurs will depend on whether those in a position to generate it - or to block it - can be suitably persuaded. Since persuasion typically involves the direct or indirect sharing of the available rents, the probability of change increases as the rents increase. And the more an institutional or organization system becomes misaligned with economic realities, the more the rents of realignment increase. pp. 36 - 37.

It is profit motivated service providers and service industry participants that see the opportunity to make a substantial change for their clients and their own situation. One that is more enduring and profitable. That is the motivation for the change that will transition these groups to the marketplace. They will see alternative ways of organizing their firms, or have firms start up. This will provide for further specialization of their skills, experience and knowledge. 

Thus the vanishing hand is driven not just by changes in coordination technology but also by changes in the extent of markets - by increasing population and income, but also by the globalization of markets. Reductions of political barriers to trade around the world are having an effect analogous to the reduction of technological barriers to trade in the America of the nineteenth century (Findlay and O'Rourke 2002). Is this a revolution or the continuation of a long - standing trend? Again, the answer depends on one's perspective. My argument is that, just as the American "globalization" after the Civil War was revolutionary in its systemic reorganization of production toward standardization and volume, the new era is revolutionary in its systemic de-verticalization in response both to changes in coordination technology and to plain-old increases in the extent of markets. pp. 52 - 53.

As we’ve discussed, these markets must have a dedicated software development team to support growth and change. The Joint Operating Committee, the producer firm and the service industry marketplace all need People, Ideas & Objects available to change the software to meet these growing and dynamic needs. Without the ability to change technology, organizations will remain stagnant and unchanged. Despite the demands for change nothing will happen without software modification first.