OCI Knowledge & Learning, Part III

 Innovation Supported by Permanent ERP Software Development Capabilities

In both the Knowledge & Learning and Research & Capabilities modules producers benefit 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 its Revenue Model and importantly, derives its quality from our user community. People, Ideas & Objects will remain unbiased as to which producer's perspective it takes. As a result, our user communities - service provider organizations are no different. 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, our user community and their service provider organization are focused on providing Cloud Administration & Accounting for Oil & Gas. This is for dynamic, innovative, accountable and profitable oil & gas producers. Based on the Joint Operating Committee as the key organizational construct in combination with six other Organizational Constructs. Establishing this new culture across the North American producer population. 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 an organization uses is a “technology paradigm” that the oil & gas industry must consider. And a permanent iterative ERP software development capability puts the industry on its own “trajectory” just as we’ve discussed here for the earth science & 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 ERP software and cloud computing attributes. 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 for making software changes to accommodate other producers' businesses? The third party, objective nature of People, Ideas & Objects, our user community and their service provider organizations are necessary for the software to be amenable to its user communities' needs. If the producer relies on this paradigm and trajectory as a key advancement in their business, 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 earth science & engineering disciplines, will generally prevent decreasing returns in the search for innovations. 

Review of the Preliminary Specification to this point shows how different it is from any other ERP system. We are designed around the Joint Operating Committee, the innovative oil & gas producer, and our user community to ensure quality and determine the industry's precise needs. This is the type of application that is needed for the 21st century oil & gas producer. A vision that focuses the industry on the activities people do best. Leadership, issue identification and resolution, creativity, collaborating, researching, evaluating, planning, negotiating and compromising, observation, reasoning, judgment, and making decisions. An application that leaves computers to do what they do best: storage and process management. A software development capability designed to provide the innovative oil & gas producer with the means to provide all of their ERP software needs. 

Capabilities as the Focus

In Professor Richard Langlois' paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization” he introduces capabilities as an emerging theory of economic organization. Its primary concern, as it is here in the Knowledge & Learning module, is production. References in this section are to Professor Langlois’ paper.

However, a new approach to economic organization, here called "the capabilities approach," that places production center 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. abstract.

The capabilities approach picks up and builds on the transaction cost approach we've discussed throughout the Preliminary Specification. It also builds on the boundary between firms 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 a complementary area of research p. 7.

Building oil & gas producers' capabilities to conduct their own field operations is impractical and inefficient. Sourcing producer field operations needs from the service industry is the only viable solution. Deployment of those capabilities becomes an issue in the innovative oil & gas industry. This is especially true when competitive differentiation is based on earth science and engineering. “What” and “how” those capabilities are developed and deployed are critical elements of oil & gas producers' competitive differentiation. The Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification organize these capabilities 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 behavior but (also) of creating the possibilities for productive rent-seeking behavior in the first place. To put it another way, economists have neglected the benefit side of alternative organizational structures; for reasons of history and technique, they have allocated most of their resources to the cost side. p. 6.

An innovative oil & gas producer uses the Joint Operating Committee as the key organizational construct. The Knowledge & Learning module is a Joint Operating Committee focused module. There the participants in the Joint Operating Committee can review the capabilities of the various firms that are members of the Joint Operating Committee. Enabling them to make 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.

Field coordination meets innovation

The energy industry is faced with a number of issues that continue from year to year. One of those issues is the cost of field work. We have heard a variety of claims about the service industry. However, there are no solutions outside of traditional cost control and budgeting. We will now discuss how the Knowledge & Learning module of the Preliminary Specification provides a solution to what are believed to be 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 as part of the Preliminary Specification. Specifically, Industrial Command & Control (ICC) that enables a Joint Operating Committee to impose a chain of command over a multi-organizational group of people during field operations. Members of the Joint Operating Committees, their employees, and contractors from the service industry will be involved in these operations. Having them configured so the chain of command is immediately recognizable. Secondly within the Preliminary Specification is the Job Order system. This provides a means to execute operational orders within the chain of command during field operations. These two systems provide tight control over the entire operation. No action is taken without an authorized Job Order being issued. 

This tight operational control seems to contradict free markets in the service industry. I disagree. 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 are mutually exclusive. Recall that the AFE and Job Order are provided through the “Planning & Control Interface'' which also brings in the capabilities from the specific “Dynamic Capabilities Interface'' that the Joint Operating Committee has decided to implement. These capabilities include the information necessary for people to conduct the work and the operation to succeed. The following quotes are from “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization."

[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 labor 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). p. 20.

What we imply 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 we know the extent of the control implied by the Industrial Command & Control and Job Order systems. There is a command structure. Everything is documented. This level of coordination is provided to offset the detail necessary for the scientific basis of the business to take precedence during operations. 

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. 10 - 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 eliminate bureaucracy. In spite of this, bureaucracy lowers the cost of qualitative coordination in a world of uncertainty, albeit poorly. It is therefore necessary to 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. p. 15.

By coordinating field operations in the manner proposed in the Knowledge & Learning module of the Preliminary Specification we can eliminate the incentive problem and increase control over the implementation of the science basis of the business. All while maintaining free and open markets in which innovation in the service industry can develop. 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 pursue different strategies than their partners. The Preliminary Specification enables each producer to pursue their 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 other producers may not. The makeup, strategies, and costs of each producer are unique and do not necessarily lead them to make the same decisions. Financial gain drives consensus.

As we noted, when the Joint Operating Committee conducts a field operation using the Knowledge & Learning modules tools. Coordination of capabilities is provided through Industrial Command & Control and the Job Order system. These capabilities are the “knowledge, experience, skills” and ideas of the people that are part of the producers on the Joint Operating Committee. They are also 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. Oil & gas business relies on geology, geophysics and engineering. Operational control at this level is necessary and a competitive advantage. From Professor Langlois’ paper “Competition Through Institutional Form: The Case of Cluster Tool Standards."

Industrial economists tend to think of competition as occurring between atomic units called "firms." Theorists of organization tend to think about the choice among various kinds of 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 appropriate.

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 discuss modularity from the Knowledge & Learning module. How it isolates the Joint Operating Committee and focuses on field operations. Yet provides the Joint Operating Committee with the most up-to-date information regarding each participating producer's capabilities. A capable, innovative Joint Operating Committee that is the legal, financial, operational decision making, cultural, communication, strategic and innovation framework of the oil & gas industry. 

Within each of the Research & Capabilities modules of the participating producer firms, people are involved in the research and development of their respective firms' capabilities. During this process, they test these capabilities that engineers and geologists are developing. Once these ideas are proven and developed into usable and valuable technologies and processes, they are added as capabilities to their “Dynamic Capabilities Interfaces” in the Research & Capabilities modules. Depending on the selection of the producers' criteria, a capability might be provided to the Joint Operating Committee in that zone, or available for use with multi-frac technology etc, and will be available to the members of those Joint Operating Committees. 

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 and Organization."

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. 19.

The producer firm is engaged in research and development into improving production and reserves. 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 they can operate these groups as separate and distinct as 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. 19.

Organizational constructs guide the nature of work in more ways than modules. There are also markets in which they operate. Research & Capabilities will be an internal and academic focus in the geological and engineering disciplines. Meanwhile, Knowledge & Learning will be steeped in service industry initiatives and operational control. These differences also help to differentiate the nature of work between 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. 20.

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 latest, proven and field tested capabilities available to them.  

Modularity and Interdependency

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

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. 21.

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

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

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. There are three parts to the visible design rules (or visible information). 

• 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 in 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. 21 - 22.

People will approach data contained within these modules from different perspectives and roles. In the producer firms, engineers and geologists develop the Dynamic Capabilities Interface. In the Joint Operating Committees, engineers and geologists develop the Lessons Learned interface. Data and information will be updated and changed by all participants involved in a dynamic, innovative, accountable and profitable producer, Joint Operating Committee and obtain the necessary operational control.

OCI Knowledge & Learning, Part II

 Emulating the Small Producers Adaptability

This discussion will 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 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 & gas producer to find more oil & gas, increase the production of oil & 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 are three interfaces. The first is the "Dynamic Capabilities Interface" which is the published version of each producer firm's 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 participating producers' capabilities pertinent to that property. People, Ideas & Objects publish and subscribe model allows individuals to subscribe to specific capabilities in either the Research & Capabilities or Knowledge & Learning modules. Knowledge & Learning’s subscription model will allow subscription to all of the capabilities of the producers associated with that Joint Operating Committee.

Getting the right information to the right people at the right time. There is also a “Knowledge Area” that includes 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 contained within it. Lastly, the "Lessons Learned" interface is used by people within the Joint Operating Committee to record operations that did not meet expectations.

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

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

Capabilities and stimuli generated within each firm and within the industries.

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 and so on;.

Conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change; market conditions, particularly in their bearing on inter-firm competition and on demand growth; financial facilities and patterns and criteria of allocation of funds to the industrial firms; macroeconomic trends especially in the effects on changes in relative prices of inputs and outputs; public policies (e.g., tax codes, patent laws, industrial policies, public procurement.) p. 1121.

Recall that these key factors are funneled through the Research & Capabilities “Dynamic Capabilities Interface." It is there, in the producer firm, that the more significant issues of science, capabilities, microeconomic trends and public policy, etc. can be centralized and dealt with on behalf of all Joint Operating Committees that the producer has an interest in. To expect that each Joint Operating Committee would engage with these major issues would be unproductive and disorganized. By dealing with these points, and codifying them in the Dynamic Capabilities Interface the producer firm publishes the appropriate information to each of their Joint Operating Committee at the appropriate time. The Joint Operating Committee is left to deal with the property's issues and opportunities. It can ignore any noise that may or may not argue for attention. A quotation from Professor Herbert Simon,

What information consumes is rather obvious. It consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it. (1971).

One of the first items 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've discussed each producer publishes the pertinent capabilities they have to the various Joint Operating Committees. Therefore the people working within the Joint Operating Committee 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 as the Knowledge & Learning module.

It would also be the case that company A who is a member of the Joint Operating Committee has developed a capability for XYZ operation. This capability is considered state of the art in the industry. This capability is one of several listed in the Knowledge & Learning modules Dynamic Capabilities Interface for XYZ operation. However, the Joint Operating Committee has operational decision-making authority. It has decided to execute company B's capability for XYZ operation through the Knowledge & Learning modules fourth interface, the "Planning & Deployment Interface." The Joint Operating Committee has the operational decision making authority and therefore the choice as to how day to day operations are implemented. Performance is the driving motivation, and they are most familiar with the property. In the football analogy this may 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 Joint Operating Committee 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 a trend that has created significant differences in the stratification of the oil & gas industry. This is in terms of the size of the producers and their associated innovation. The small organization purchased 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 ability to innovate in the larger organizations. Most disturbing is the lack of concern or identification of this as an issue over the past decades. The combination of depressed commodity prices, especially for natural gas, and a significant overhead burden that is fixed and demands a large percentage of free cash flow to meet the regulatory and other demands of all oil & gas producers. This overhead burden has offset the innovativeness of small producers who are about to disappear from the landscape. People, Ideas & Objects see this as detrimental to North American oil & gas's long-term health and prosperity. 

The Preliminary Specification has changed the behavior of producers' overhead costs from fixed to variable, based on profitable production, through implementation of our user communities service provider organizations. And established two distinct sources of revenue for producer firms. Revenues from oil & gas sales and creating markets for earth science & engineering capabilities developed by producers and charged directory to the Joint Operating Committees. Taking advantage of both of their strategic competitive advantages to generate revenue. Consisting of oil & gas sales from their land & asset base, but also deployment of their earth science & engineering capacities and capabilities to generate revenues to offset these costs.

With this structure and arrangement between the Research & Capabilities and Knowledge & Learning modules, focused around the Joint Operating Committee. It replicates the environment of a small oil & gas producer that is focused on performance. Alternatively, suggestions that further industry consolidation as the solution defies prior consolidations performance history. Globally, decentralization and disintermediation have been adopted as successful strategies in all industries. And the logic of consolidation contradicts any probability of resolving the identified difficulties North American producers are dealing with. 

Revenue Per Employee at the Joint Operating Committee

We want to discuss the calculation and publication of specific Joint Operating Committee calculations of Revenue Per Employee, and particularly the factor's trajectory. How this financial 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 one month. Calculating the hours worked by the people within these Joint Operating Committees from the different companies is not going to be difficult for People, Ideas & Objects software. Within the Security & Access Control module, Industrial Command & Control, our Work Order records the time and tasks each individual performs and in turn charges that time out at a factor of the producer's calculated Revenue per Employee.

A comparison of revenue per employee over time, or its trajectory, has been discussed previously. These trajectories were key financial performance indications as to where the property was heading. Was the property accelerating its innovation or decelerating? We also broke down the trajectory into three different variance types. Volume, price, and number of employee hours variances. Each of these variances reflects a reason why the trajectory changed. All of these variables should be shown on their own “Revenue Per Employee” interface within the Joint Operating Committee. Each member assigned to the property should have access to this page and contribute ideas and suggestions on how to improve the factor. An open collaboration focused on enhancing Revenue Per Employee and its trajectory. In addition, this page could have the historical context of many time periods captured in a graphical format. Showing over the past many years how the revenue per employee variances and trajectories performance scored at that Joint Operating Committee.

We also learned that revenue per employee reflects the asymmetry (revenue per employee is widely variable) of asset quality within the industry. That asymmetry would be very apparent in a comparison of Joint Operating Committees. 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.

Professor Giovanni Dosi describes the most effective way to deal with the factor is as follows;

In very general terms, technological innovation involves or is the solution to problems. p. 1125.

In other words, an “innovative solution” to a certain problem involves “discovery” and “creation” since no general algorithm can be derived from the information about the problem that generates its solution “automatically.”

Certainly, the “solution” of technological problems involves the use of information drawn from experience and formal knowledge (e.g., from the natural sciences); however, it also involves the specific and uncodified capabilities on the part of the inventors. p. 1126.

Members of the Joint Operating Committee can access the "Dynamic Capabilities Interface" which contains the capabilities of the producer firms partnership. There, people could see what the firms offered in terms of their earth science & engineering issue identification and resolution capabilities. It may then be realized that some formerly unknown or recently developed and now available capability being applied to the situation in the Joint Operating Committee will yield greater productivity, or...

Deploying Capabilities, Not Hoarding Information

We start this discussion of capabilities with a clear definition of what they are. These are some of the definitions published earlier in the Research & Capabilities module and are noted here for clarity. The first is from Professor Richard Langlois in his 1992 paper “Transaction Cost Economics in Real Time” defines what capabilities are in a corporate setting. (Oxford University Press 1992)

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.

We have Professor Carliss Baldwin’s “Knowledge begets Capabilities, and Capabilities beget Action.” There is also the quotation from Professor Richardson that capabilities are "Knowledge, Experience and Skills” (1972, p. 888) to which we at People, Ideas & Objects have added “Ideas.” And this next quote from Professor Langlois “Transaction Cost Economics in Real Time” 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 & 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 become well known throughout the industry. It is sometimes harder to communicate information within an organization than across an industry. The question therefore becomes how does proprietary information, and more importantly these proprietary capabilities that are available within producer firms, be 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, it has never been easily transferable to other companies within those industries. The ability to replicate a competitive advantage from one company to another may not be worthwhile doing.

What the firm can hope to do technologically in the future is narrowly constrained by what it has been capable of doing in the past. p. 1130.

Moreover, even when licensing and other forms of interfirm transfer of technology occur, they do not stand as an all or nothing substitute for in house-search: One needs to have substantial inhouse capacity in order to recognize, evaluate, negotiate, and finally adapt the technology potentially available from others. p. 1132.

Within the Knowledge & Learning module we operate within the Joint Operating Committee. Populated with the capabilities of each participating producer through the “Dynamic Capabilities Interface" of the Knowledge & Learning module. It may be a concern for some producers that the publication of these capabilities to other producers' representatives on 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 means they can’t be reproduced by a simple matter of recording the text. As we have discussed elsewhere, development of capabilities is the result of research and application of the firm's resources in a determined and purposeful manner. This is to achieve an outcome. Copying plans or instructions would not necessarily provide the means to achieve the objective. Copying the “pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities.” What we have to ensure is the ability to deploy the right information, knowledge or capability at the right time and at the appropriate 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 dynamic capabilities, not hoarding of information.

Deploying Innovations

Keep in mind that innovation is not research. Research is conducted in the Research & Capabilities module. When the research is proven and added to the "Dynamic Capabilities Interface" which in turn is populated through appropriate and relevant 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 a football team’s plays are developed and executed. Using the analogy of a football coach, motivated by winning, he selects plays from a long list of possible plays.

Professor Giovanni Dosi states;

Clearly, the commitment of resources by profit-motivated agents must involve both the perception of some sort of opportunity and an effective set of incentives. Are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both? Jacob Schmookler, in his classic work, argued that the serendipity and universality of modern science provide a wide and inter-sectorally indifferent pool of opportunities that are exploited to different degrees in each economic activity according to differential economic incentives, and in particular, to different patterns of demand growth. (Schmookler 1966) p. 1135.

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 presented to them through the Knowledge & Learning module. The listing of capabilities presented by 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 increasing revenue per employee trajectory.

We’ve all seen the football coach on the sidelines with a list of hundreds of plays to call during the game. Selection of the appropriate plays will help the team move towards winning the game. To be presented with a list of hundreds of opportunities within a Joint Operating Committee is probably 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 every Joint Operating Committee should not have this type of efficiency. Efficiency in selecting and executing the capabilities made available to them.

As in the Research & Capabilities module, the Knowledge & Learning module has a “Planning & Deployment Interface." Within this interface the user can select the capabilities they want to deploy from the "Dynamic Capabilities Interface" and manage the operation from Industrial Command & Control. Scheduling and other considerations must be made regarding resource requirements since the Joint Operating Committee capabilities are from various firms. The "capabilities" are for company x, derived from company x, not necessarily for Joint Operating Committee xyz without x. Therefore special arrangements to augment the Joint Operating Committee with resources from company x will be required. It is then possible to execute the capabilities.

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. The ability of 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 for earth science & engineering work needed with each incremental barrel of oil & gas produced, the need for the North American marketplace to be energy independent, a Joint Operating Committee will be required to conduct its work in a highly organized and controlled manner.

Added to this level of increased workload for the Joint Operating Committee is that the field and service industries are moving 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, there will be significant time and energy wasted on pursuing “things” that may or may not bear fruit for the property. Something to be avoided. However, the Joint Operating Committee needs to deploy the latest state of the art proven technology in the most capable manner.

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

This process helps the Joint Operating Committee focus on the property. To eliminate the noise of what is currently happening in the oil & gas arena and deploy known capabilities and innovations that add value. It is as if when the coach calls the play the only concern is to ensure that each person executes their 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.

First, the specificity, cumulativeness and tacitness of part of the technological knowledge imply that both the realized opportunities of innovation and the capabilities for pursuing them are to a good extent local and firm-specific. Second, the opportunity for technological advances in any one economic activity (and, thus, also the "innovative productivity" -- were we able to measure it -- of a dollar investment in R & D) can also be expected to be specific to and constrained by the characteristics of each technological paradigm and its degree of maturity. Moreover, the innovative opportunities in each economic sector will be influenced by the degree to which it can draw from the knowledge base and the technological advances of its suppliers and customers. p. 1137.

Professor Dosi notes the implications of the processes managed in the Research & Capabilities and Knowledge & Learning modules. The Knowledge & Learning module enables 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.

OCI Knowledge & Learning, Part I

 Introduction

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 talk about using the Joint Operating Committee as the key organizational construct of a dynamic, innovative, accountable and profitable oil & gas producer. However, I also noted in the Preliminary Research Report that Occam’s Razor was referenced as “It's 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). 

Joint Operating Committees having full operational decision rights regarding the course of action to take. Thanks to the work done at the participating producer firms we know what we know from their work in the Research & Capabilities modules. Those capabilities are populated in the Knowledge area of the Knowledge & Learning module. 

The Joint Operating Committee-focused Knowledge & Learning module of the Preliminary Specification shares many similarities with the Research & Capabilities module. In fact, it is populated with that module's capabilities as its base of information. Recall that the objective is to move the producer's knowledge to where decision rights are held, the Joint Operating Committee.

As I noted the Research & Capabilities module should be organized based on geologic zones, geographic region, type of operation, vendor pool and other criteria. This is so that the capabilities pertinent to each Joint Operating Committee can be separated and populated within the Knowledge & Learning module. Additional ways to sort capabilities by the Research & Capabilities module might include geographical location. Where all vendors operating within a certain geographical location are referenced only in those regions in the Knowledge & Learning module. This does not involve asynchronous information sharing outside of the members of the Joint Operating Committee. Vendors and others are offering their data for producers information purposes only.

With each Joint Operating Committee concerned with one or two 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 contained within the module is aggregated from the multiple producers involved in that specific Joint Operating Committee. Any of the participating producers who have capabilities contained within their Research & Capabilities module will have those pertinent capabilities for those geologic zones etc. These capabilities will populate the Knowledge & Learning module for that Joint Operating Committee.

Getting to the Business of the Business

Our discussion of Research & Capabilities and Knowledge & Learning modules, discusses earth science and engineering research, developments, innovations and thinking of the oil & gas producer and the Joint Operating Committee. Many may wonder what an ERP system has to do with these activities? These activities are where the oil & gas business is 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 determined by our user community's input and involvement. These modules are where the business of the oil & gas business happens. 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. To enhance this capability we recently wrote the fourteenth module of the Preliminary Specification, Operations Management. Which expands on these concepts.

Today there are significant financial resources available for innovation. Commodity price increases allocate capital to fuel innovation without encumbering other capital expenditures, shareholder returns or bank repayments. In a dynamic, innovative, accountable and profitable producer, all of these can always be conducted satisfactorily. Producers' reorganization to facilitate and enable innovation throughout the broader oil & gas economy was the purpose behind People, Ideas & Objects' research. That research was the basis of the Preliminary Specification 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. These capabilities are then sent through the Knowledge & Learning module to the Joint Operating Committee. This is where knowledge is applied, successfully implemented, and specific learning occurs.

There will be many ideas and money spent over the next few decades. Successful innovation is not cheap. Unsuccessful innovation is expensive. Repeating failed ideas is not in anyone's long-term interest. Building on prior failures is the key to innovative success. The difference is as stark as Apple’s iPad's commercial success vs. HP’s Touchpad lasting only seven weeks. What we know is that innovation can be reduced to a defined and replicable process. And even though having innovation processes in place will not guarantee that each producer will be innovative. I can guarantee that innovation will not arise without defined and replicable processes, such as People, Ideas & Objects Preliminary Specification have defined and supported.

Dynamic Transaction Costs and Capabilities

What do the people who work for a Joint Operating Committee know? Where does a person just assigned to the property learn what is significant in terms of how it's 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 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 firm's capabilities to the market or vice-versa. 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.

In the Knowledge & Learning module, we must focus on reducing the Dynamic Transaction Costs of the Joint Operating Committee. That is to adapt to change efficiently. Change is one of the constants. Learning to adapt organizationally to that change is critical. Recognizing the high costs associated with Dynamic Transaction Costs, or change, must be handled strategically. This will initiate the discussion and document how the learning section of this 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 & 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). p. 341.

People, Ideas & Objects argue that the oil & gas issue originates here. I have been overtly critical in these writings of the repeated excuses, blaming, and viable scapegoats generated by producers. This is to cast the authority and responsibility they hold, and are therefore the only ones capable of solving the issue. And why others always cause the producer's business to fail. We’ve all had enough but the excuses continue and only become more obscene, yet comical. Professor Winter has nailed the source of the issue that created the producer's symptomatic behavior. “But in a context where technological, regulatory, and competitive conditions are subject to rapid change, persistence in the same operating routines quickly becomes hazardous.” Producers even proudly strut their misguided “muddle through” strategy as the solution that has worked so many thousands of times before. People, Ideas & Objects assertion is an incapacity for organizational learning. A lack of motivation as evidenced by the state of the industry, the persona non-grata treatment People, Ideas & Objects have received for two decades as of August 2023. And the wealth and prosperity of the officers and directors as the only evidence of trillions of cubic feet of gas and billions of barrels of oil produced.

We need to strike a fine balance between these two opposing goals. Maintain an environment of dynamic capability for change and organizational learning. But also strategically control Dynamic Transaction Costs. Note: One of the capabilities of the Preliminary Specification general accounting will be 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 incurred for further investigation.

The first component of the learning module will include a wiki-styled information repository that contains the property's operational, policy and management. This will be managed by the Security & Access Control module so that only those assigned to the property can access the wiki. Within the wiki will be the life history of the property in terms of the information collected. Well files, schematics, reports, agreements, etc. Everything and anything, indexed, referenced and searchable. Recall that the Knowledge area contains the “Dynamic Capabilities Interface” of the producer firms affiliated with the Joint Operating Committee. The underlying technology of this interface will be supported by the Blockchain module of the Preliminary Specification. Then, contributions to the knowledge base will be aggregated and presented to the user in wiki form. As a result of these prior decisions, it will be possible to see how the policy evolved.

Using Oracle Autonomous Database Blockchain Table. Each update to the Joint Operating Committee will be contained within its own unique block of that specific table. Oracle's implementation of the blockchain table is not theoretically complete. (Compromises aimed at improving performance and reliance on existing database security were made. Their blockchain tables are not used for coins or currency. The only action accepted in a blockchain table is the INSERT command. And Oracle's database generally has a comparable level of security to blockchain.) There will be a publish and subscribe model developed in Knowledge & Learning. Individuals assigned to the Joint Operating Committee in their job description will receive information regarding updates to the Knowledge section of the Joint Operating Committees Knowledge & Learning module immediately upon publication. This feature will also be present in the Resource & Capabilities module.

Another section is set out for “Lessons Learned" 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 learning and understanding. As these occur these items will be made available to each person in the property in addition to being posted in a central location. And posted back to the "Lessons Learned" interface in the Research & Capabilities module. 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, preparing 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 & gas producer? The answer is that it's the business of the business of oil & gas that needs to be supported by an ERP system. And that is the Joint Operating Committee, for both the oil & gas business and the People, Ideas & Objects Preliminary Specification. It's not just about debits and credits anymore. It's about identifying and supporting dynamic, innovative, accountable and profitable oil & gas producers.

Learning Through Markets

It's important to explain the context of what the Joint Operating Committee will learn. To do that we turn back to the definition of where the firm and market boundary is defined. The Joint Operating Committee must rely on the market for the majority of the work done in the field. I understand that this depends on the size of the facility. It will vary based on the types of operations and 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 firm's 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 generalizations 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 contractors and producers know, and what they think they know may not be relevant to the property. The following discussion relates to the general rule that operations can be limited to the least experienced crew member. How do we avoid the general rule applying to any detailed operation? And how do we avoid what are called motivational and cognitive paradoxes from becoming the “mindset” of the contractors in this or any of the Joint Operating Committee's operations?

Motivational paradoxes arise from production biases. 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. An application of division of labor and specialization that deals with the overall organization and efficiency of the company. This will directly affect the contractor's makeup and the learning processes in this module.

These issues become the concern of users of the Knowledge & Learning module of the Preliminary Specification. In an innovative oil & gas industry change will be a constant variable that requires everyone's attention. How do we maintain the awareness and attention needed by 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 in “Transaction Cost Economics in Real Time”;

"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, compared 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 producers to move all 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 needed) in the process of incurring them and record them as such, we can deal with them and draw lessons from them. That may be the first step in learning what to do with learning costs in this high-change and high-cost era of oil & gas.

In the end the choice of whether to use the market or vertically integrate is a purely academic exercise. The choice to depend on the market is a given in oil & gas, and alternatives have little practical application. Our discussion has been more about how we can establish processes of learning from using the marketplace. In a period of rapid change with high levels of innovation we will 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 oil & gas business is managed through these modules, the People, Ideas & Objects application will need to identify 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. This will avoid Dynamic Transaction Costs. Ensure a successful operation for the Joint Operating Committee. 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. p.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.

OCI Research & Capabilities, Part XI

 Economic Growth Through Organizational Change

There is no question about how economic growth will occur. That is because of organizational change. But I think that it is intended to be as a result of constructive action and would never occur as a result of atrophy and inaction. In Professor Richard Langlois’ book “The Dynamics of Industrial Capitalism, Schumpeter, Chandler, and the New Economy.” he reflects on this point. 

Institutions may be the ultimate drivers of economic growth, but organizational change is the proximate cause. As Smith tells us in the first sentence of The Wealth of Nations, what accounts for “the greatest improvement in the productive power of labor” is the continual subdivision of that labor (Smith 1776, 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 (Young 1928; Richardson 1975). p. 3.

With the selection of ERP systems like SAP the bureaucracy has secured their future in a bureaucratic and stifling maze of paper. Change occurs in decades and centuries for an application that has no concept of a Joint Operating Committee or even what a partner is. In this day and age, when the organization is defined and supported by the software it uses it is critical that the organization be supported by a software development capability like that which People, Ideas & Objects proposes. Otherwise you set your organization in the proverbial SAP like concrete that only today’s bureaucracies are pleased with. In his book “The Dynamics of Industrial Capitalism, Schumpeter, Chandler, and the New Economy.” Professor Langlois notes.

Economic growth is about the evolution of a complex structure (Langlois 2001). p. 6.

It is in the Research & Capabilities module of the Preliminary Specification that the producer firm can take advantage of its opportunities for economic growth. By developing their capabilities and documenting them within the “Dynamic Capabilities Interface” they can populate these capabilities with the various Joint Operating Committees that they have an interest in. Reducing the cost of innovation experimentation while opening up the assets of the firm to innovations.

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.

The quote above captures so much of what we should be concerned with. I think it also shows that using the Joint Operating Committee, and structuring the development and deployment of capabilities in the processes of the Research & Capabilities and Knowledge & Learning modules achieves much of what is discussed.

To expand the economic performance of the oil & gas producer requires focusing on their competitive advantages of their land & asset base, and earth science & engineering capabilities. The Research & Capabilities module focuses on the producers' earth science & engineering capabilities. It provides the means to document them, expand them, deploy them, and most importantly innovate upon them. Professor Richard Langlois in his 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.

As we have learned “knowledge begets capabilities, and capabilities beget action” and capabilities are the “knowledge, skills and experience” of the people involved. People, Ideas & Objects are working to bring these systems to the oil & gas industry. Systems that use computers for storage and processing. Which is the work they do best. And the work people do best consists of "knowledge, skills, experience" to which we add ideas. We note the distinct competitive advantages people have over computers. Consisting of leadership, issue identification and resolution, creativity, collaboration, research, design, planning, thinking, negotiating, compromising, financing, observation, conflict and contradictions, spontaneity, reasoning and judgment to begin the list. The Research & Capabilities module enables producer capabilities to be captured and deployed in innovative ways. 

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.

And

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.

This next quotation is focused on a specific type of innovation. The type of innovation that People, Ideas & Objects brings to the oil & gas industry. However, I believe that the conclusion is universal in its application to capabilities of all types, and not just organizational capabilities. And that is “those capabilities were the result, not the cause, of the innovation.” This is the primary reason Research was grouped together within a module with Capabilities. They have strong interactions with one another. 

The first, and most obvious, point is that it was an outside individual, not an organization, who was responsible for the reorganization of the industry. Lazonick is right in saying that genuine innovation involves reorganizing or planning (which may not be the same thing) the horizontal and vertical division of labor. But it was not in this case “organizational capabilities” that brought the reorganization about. It was an individual and not at all a “collective” vision, one that, however carefully thought out, was a cognitive leap beyond the existing paradigm. If SMH came to possess organizational capabilities, as it surely did, those capabilities were the result, not the cause, of the innovation. p. 46.

As we move to the Knowledge & Learning module, we will discuss the deployment of these capabilities in the Joint Operating Committee.

Two Primary Processes of Innovation

We have discussed operations coordination and how that is organized in the People, Ideas & Objects Research & Capabilities module. Coordination of operations is one of the things that is covered in the module, and innovation is another. To refresh our memory, the primary process of innovation in the Preliminary Specification is as follows. 

The producer firm through its interactions with the service industry develops new and innovative capabilities that are captured and documented in the “Dynamic Capabilities Interface.” The interactions with the service industry are through a variety of interfaces in both the Research & Capabilities and Resource Marketplace modules. Using the football analogy the Research & Capabilities module is the practice field where the team develops original and innovative plays to be worked on and perfected before game day. Game day is when the capabilities are published in the “Dynamic Capabilities Interface." This enables them to be deployed in all of the Joint Operating Committees that the producer has an interest in. This process enables the producer firm to eliminate unnecessary "trial and error" learning repeated in each and every Joint Operating Committee. Learning can be done once, reducing the amount of repeated experimentation that is unnecessary. As I stated this is the primary process of innovation in the Preliminary Specification. 

If there was a secondary or optional process of innovation in the Research & Capabilities module it would be based on the following. This is from Professor Richard Langlois’ paper “Innovation Process and Industrial Districts.”

In this survey, we examine the operations of innovation processes within industrial districts by exploring the ways in which differentiation, specialization, and integration affect the generation, diffusion, and use of knowledge in such districts. p. 1.

Opportunities do occur at times and in places that are not planned for. Innovation is something that frequently falls within this description. 

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.

To limit the opportunities to act upon these types of discoveries would leave spontaneity out of the oil & gas industry. When faced with the knowledge provided to the user by the “Dynamic Capabilities Interface” some things may become obvious. Serendipity and spontaneous order are economic terms. We should adopt them here to ensure a dynamic and innovative industry. 

But there is more in this secondary process. We are building on the already well established earth science & engineering capabilities of the producer firms of the Joint Operating Committees. This broadening of the scope of users occurs at the same time there is limiting of the focus to just that Joint Operating Committee. Professor Langlois notes in “Innovation Process and Industrial Districts.”

When accompanied by close social relationships, tight geographical proximity may affect innovation in ways that are less common in more highly dispersed environments. For example, an awareness of common problems can encourage several firms, or their suppliers and customers, to seek solutions, leading to multiple results that can be tested competitively in the market. pp. 1- 2.

And

Relationships within industrial districts therefore lead to diffusion but also to the creation of new knowledge through shared preoccupations. Because many people or firms can work on a problem simultaneously, a number of different solutions may be found (Bellandi, 2003b). The result is a larger and stronger "gene pool" within the sector (Loasby, 1990, 117), with the further advantage that solutions that are originally regarded as competing may turn out to be complementary and well-suited to different niches within the district.  p. 7.

What is therefore needed is a means to capture innovations that arise from this secondary process. Whether they are in the service industry or earth science and engineering fields. A means to turn them into the primary innovation process so that they can be further populated throughout the various Joint Operating Committees that the firm participates in. That will limit the amount of trial and error learning costs that might occur if each Joint Operating Committee field tested their own innovations based on ideas heard elsewhere. The "Lessons Learned" page of the “Dynamic Capabilities Interface,” where specific Joint Operating Committees can document their spontaneous changes.

Conclusion

The Research & Capabilities module documents the earth science and engineering “capabilities” of an innovative and profitable producer firm. Capabilities are those firm's knowledge, skills and experience. People, Ideas & Objects have added “ideas” to that list. Capabilities have also been defined as “knowledge begets capabilities, and capabilities beget action.” These are the cornerstones of an innovative and profitable oil & gas producer in the 21st century. Capabilities are developed here in the Research & Capabilities module. These capabilities enable, enhance and provide innovations development and deployment for publication through the Knowledge & Learning modules pertinent to their Joint Operating Committees. 

The Research & Capabilities module enables the producer firm to structure a division of labor between those that develop the research and innovations within the producer firm. It also enables those to deploy innovations within Joint Operating Committees. This is the major process of innovation that is carried out in the module. Another major process is that it provides the innovative oil & gas producer with the ability to move knowledge and capabilities to where decision rights are held, the Joint Operating Committee. This module is at the core of the innovative oil & gas producer. Identifying and supporting the key elements of “what” and “how” innovation requires. 

Bringing new knowledge and capabilities into the organization provides economic growth. Deployment of that knowledge to the right people at the right time is a producer's challenge. These are the roles the Research & Capabilities module undertakes in a producer firm.

We noted the paradoxical dilemma producers face in oil & gas exploration and production. Ensuring profitable operations everywhere and always is their primary role in a capitalist society. With oil & gas we must also provide evidence that we did not waste any resources that future generations may depend upon. We can prove to future generations that we did not waste these resources when produced profitably. Passing a viable, prosperous and healthy oil & gas economy on to them for their needs. While ensuring consumers receive the lowest energy costs. Innovation satisfies all of these requirements. It will be the producers' profitable operations that fund the enhanced innovations necessary to fulfill these needs. These are the overall objectives of the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. 

OCI Research & Capabilities, Part X

 Technology's Impact, 

We now want to discuss the “Dynamic Capabilities Interface” from a different perspective. One in which we take a more high-level look at the attributes of what we are attempting to achieve. With this perspective it should be possible to see how the Preliminary Specification relies on the dynamic service industry as a marketplace. It defines and supports the framework to execute field operations with military precision. These two seemingly contradictory objectives are attainable when we realize field operations are a temporary snapshot of the marketplace’s offerings. Upon completion of that operation, that organization and its capabilities will no longer exist. That is not to suggest that the capabilities are deleted from the “Dynamic Capabilities Interface,” it's just that they do not exist in the organization used for that specific field operation. 

We want to maintain all elements of a dynamic and innovative service industry. The Preliminary Specification has provided for this by ensuring the service industry receives strong support from the oil & gas industry in the Resource Marketplace module. This is also necessary for the energy industry to ensure that society's energy demands are met. In the Preliminary Research Report we discussed Professors Anthony Giddens and Wanda Orlikowski's Theory of Structuration and Model of Structuration. People, society and organizations must move together or fail. It should be asked if these societal demands for energy can be met by the current oil & gas organizations? Technology will have a role in this. From Professor Orlikowski’s paper "The Duality of Technology: Rethinking the Concept of Technology in Organizations."

The structurational model of technology is intended to punctuate key aspects of the technology phenomenon, and suggest typical relationships and interactions surrounding its development and use. Even though casual associations may be postulated and investigated, the premises of the structurational model caution us against undue determinism. While expected relationships may hold empirically for certain organizations in certain historical and socio economic conditions, the ever present ability of actors to alter the cycle of development, appropriation, institutionalization, and reproduction of technology with organizations must be understood dialectically, as involving reciprocal causation, where the specific institutional context and the actions of knowledgeable, reflexive humans always mediate the relationship. p. 423

To achieve organizational performance necessary to meet society's demands, technologies must be implemented first. This was one of the key findings of the Preliminary Research Report. We live in a time and place where technology plays such a significant role in our day-to-day lives. To change our organizations, we must first change technology. Professor Richard Langlois picks up this theme in his paper “The Vanishing Hand: The Changing Dynamics of Industrial Capitalism.”

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.

So where are we? The People, Ideas & Objects Preliminary Specification supports innovative and dynamic markets. This will enable the oil & gas industry to meet energy demand. But neither the demand for the product nor the software exist. More than 23 million cars were sold in China last year. The same number will be sold this year and next. The point is that energy markets are developing and the demand will grow. The question will be who will volunteer to keep their economy stagnant due to energy shortages? And just as the energy market develops, the software needs to be developed as well. 

People, Ideas & Objects resolves the paradox producers face regarding oil & gas commodities. Higher commodity prices provide financial resources for innovation. Ensuring consumers have the lowest energy costs possible. We provide producers with production discipline that ensures all production is produced profitably everywhere and always. Creating healthy, prosperous oil & gas, service and tertiary industries. Which can be passed along to future generations. Our obligation to the future is not to waste oil & gas resources by producing them unprofitably. By producing them profitably we can prove that we did not waste them. Consumers' value proposition from oil & gas consumption is 10 to 25 thousand man hours per barrel of oil equivalent. Which provides 27 to 68 times the world's population in mechanical effort. Professor Richard Langlois in his paper “The Vanishing Hand: The Changing Dynamics of Industrial Capitalism.”

As in Chandler, secular changes in relative prices attendant on "globalization" (driven by technology or politics) affect economic organization not only directly but also, and perhaps more importantly, indirectly through changes in technology. Production costs matter as much as transaction costs (Langlois and Foss 1999). Moreover, the kind of transaction costs that matter in history are often not those of the Williamson kind but those I have labeled dynamic transaction costs (Langlois 1992b). Costs of coordinating through markets may be high simply because existing markets - or more correctly, existing market-supporting institutions - are inadequate to the needs of new technology and of new profit opportunities. But when markets are given time and to a larger extent, they tend to "catch up," and it starts to pay to delegate more and more activities rather than to direct them administratively within a corporate structure. p. 5.

There will be significant changes in the markets during the time we are developing the People, Ideas & Objects software. Changes to be captured in the software. There is never an ideal time to approach these changes, however, now with approximately $94 billion, as a minimum, in annual revenue shortfalls, from deficient commodity prices (please review the decentralized production model), the time has well past for the industry to act. 

Tacit Knowledge

We emphasize the way the Research & Capabilities module captures producer firm capabilities. In providing for the capture of these capabilities the Preliminary Specification is limited by the attributes of the different types of knowledge and the culture of the oil & gas industry. These two forces have formed the way the Research & Capabilities module deals with knowledge and its capture. It is in Professor Richard Langlois’ paper “Capabilities & Governance the Rebirth of Production in the Theory of Economic Organization” that he states the following.

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.

We’ve discussed before that tacit knowledge cannot be captured in written form. Therefore the “Dynamic Capabilities Interface” can only refer to others' tacit knowledge. Tacit knowledge is deployed in the Research & Capabilities and Knowledge & Learning modules through the Job Order system. Since it is knowledge that “normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use.” There are three critical elements for coordination of operations in these two modules of the Preliminary Specification. 

• The explicit Knowledge captured in the “Dynamic Capabilities Interface.”
• The “Planning & Deployment Interface” including AFE’s and Job Orders.
• Industrial Command & Control.

Therefore the interface elements of the “Dynamic Capabilities Interface” will contain knowledge of “what” and “how” regarding the earth science or engineering capabilities, production or operation of the concern. Times when tacit knowledge needs to be documented will have to be replaced by rich media and references to the appropriate individuals. This is for the operation to be undertaken. We note that knowledge is often “distributed knowledge carried out by multi-person tasks.” All of these tasks should be captured for one operation and included as one capability in the interface. Dealing with these different types of knowledge is how the Research & Capabilities and Knowledge & Learning modules' “capabilities” are defined.

A Critique of the Bureaucracy

As I stated earlier, the industry culture also influences the design of modules. These cultural conditions reference the boundary of firms and markets and determine future changes. Since we are dealing with the service industry, all but the smallest number of producers source their field operations from the market. We are consistent with the industry culture. Nonetheless Professor Langlois notes three factors are of importance. Application of this framework to the methods used in the Preliminary Specification provides an understanding of the choices made. From Professor Richard Langlois in “Chandler in a Larger Frame: Markets, Transaction Costs, and Organizational Form in History.”

The pattern of existing capabilities in firms and markets. Are existing capabilities distributed widely among many distinct organizations, or are they contained importantly within the boundaries of large firms? p. 7.

The nature of the economic change called for. When technological developments or changes in relative prices generate a profit opportunity, does seizing that opportunity require a systemic reorganization of capabilities (including the learning of new capabilities), or can change proceed in autonomous fashion along the lines of an existing division of labor? p. 7.

The extent of the market and the level of development of market supporting institutions. To what extent can the needed capabilities be tapped through existing arrangements, and to what extent must they be created from scratch? To what extent are there relevant standards and other market-supporting institutions? p. 7.

The service industry was robust and dynamic prior to oil & gas producers' antics from 2017 onwards. Wholesale destruction has been exercised to the point where there is no faith, trust or belief in what producers say and do. Producers must actively rehabilitate the service industry with their financial resources is a necessity. Service industry providers who watched as their rigs were cut up for scrap metal to eat, while producers chanted in harmony to “muddle through” have learned once, and are not falling for it again. 

People, Ideas & Objects sees the development of the Preliminary Specification as the initiation of this rebuilding effort. Oil & gas producers need to build the interfaces described here. Once they have their capabilities documented and deployed in such a manner the natural evolution of the service industry will continue, although at a faster pace and with more competitive offerings. 

The question is why focus on oil & gas capabilities? I think it is because we have lost the ability to respond to market signals and initiate original and innovative thinking. These next two points will ask the difficult questions in terms of “what” and “how” the industry has operated and what should be done to correct these behaviors. The Research & Capabilities module, along with the other modules of the Preliminary Specification enable the oil & gas producer, and particularly the Joint Operating Committee, to act in their best interests. 

In the Preliminary Research Report I suggested that the oil & gas industry was not fundamentally different from the former Soviet Union in terms of its ways and means. Following through the motions and determining “best practices” shows a high level of stagnation within the industry. We see natural gas prices deteriorate from 6 to 1 boe which is its traditional pricing structure and heat equivalent. To as high as 40 to 1 in 2023. Producers watch but don’t act and another decade of waste goes by. Producers, in their most robust obtuseness, complain about the service industry. It's as it was in the former Soviet Union where there was no bread because everyone was lined up at the bakery waiting for bread. The market system hasn’t existed in the oil & gas industry for so long, no one knows what it looks like. From Professor Richard Langlois' book “The Dynamics of Industrial Capitalism” chapter 1.

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.

To reinstate the market and the dynamism of the market system in the oil & gas industry will require new systems to identify and support innovative producers, suppliers and Joint Operating Committees. At the start. The Research & Capabilities module is designed to enable the systemic thinking necessary for earth science and engineering capabilities of the producers and Joint Operating Committees. This is to act dynamically, innovatively and market-wise. 

The parallel of the current system to the former Soviet Union is striking when you realize the pervasiveness of the non-thinking environment. From Professor Peter Klein “Economic Calculation and Limits of Organization.” 

Indeed, traditional command-style economies, such as that of the former USSR, appear to be able only to mimic those tasks that market economies have performed before; they are unable to set up and execute original tasks. The [Soviet] system has been particularly effective when the central priorities involve catching up, for then the problems of knowing what to do, when and how to do it, and whether it was properly done, are solved by reference to a working model, by exploiting what Gerschenkron . . . called the “advantage of backwardness.” ... Accompanying these advantages are shortcomings, inherent in the nature of the system. When the system pursues a few priority objectives, regardless of sacrifices or losses in lower priority areas, those ultimately responsible cannot know whether the success was worth achieving. The central authorities lack the information and physical capability to monitor all important costs—in particular opportunity costs—yet they are the only ones, given the logic of the system, with a true interest in knowing such costs. (Ericson, 1991, p. 21). p. 13

This is one aspect of the industry we are actively working against. It is also the most powerful. Bureaucracies control the budget and exercise it by not supporting People, Ideas & Objects. Show me an ERP system with the depth of oil & gas research the Preliminary Specification has, and there are none. They all get financed through relationships that maintain the status-quo with the bureaucracy. The fact that there has been no funding proves that the bureaucracy is too conflicted to do the right thing in this regard. The decision to fund People, Ideas & Objects will have to be taken out of officers and directors hands and handed over to investors. After all they have some performance related concerns with the bureaucracy as well.

There is no denying that the management revolution has taken the oil & gas industry to an impressive and productive scope and scale. The question is where do we go from here? We currently stand on the shoulders of giants and have absolutely no vision, no plan and no means to deal with the future demands of society's energy needs. We not only have no plan for the future we run the risk of failure of the existing “management” infrastructure. We'll have far to travel if we choose to continue to fail due to the substantial consumer's value proposition from oil & gas. Bureaucracies have failed before, and when they fail, they leave it to bond holders and investors to clean up their mess. In addition, management looks for greener fields elsewhere.