The Preliminary Specification Part LXII (PA Part IX)

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

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

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

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

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

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

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

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


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

The Preliminary Specification Part LVI (PLM Part VI)

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

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

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

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

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

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

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

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

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

The Preliminary Specification Part XXIV (AV Part II)

Reading the Draft Specification for the Accounting Voucher is a tortuous read. What I can glean from the material is what I recall from the research, however, I’m sure no one else has read the research. Making the reading particularly difficult for everyone else. I will, hopefully, make some sense, in the next week or so, of the material through this discussion. I certainly promise to do my best. Another assumption that I am operating from is that everyone has a high level of understanding of how the oil and gas industry operates, making this content difficult to read.

Yesterday we discussed the manner in which the Accounting Voucher was able to handle the material balance report. How it handles the balancing of the volumes, debits and credits, and cleared these amounts to the partnership represented in the Joint Operating Committee. Today we want to talk about the contracts that the products produced may have associated with that JOC. Contracts that would include marketing for gas, oil, natural gas liquids, or contracts for charges for gathering, processing etc.

I don’t know what the correct term that should be used, but stream seems to me to be the most intuitive. If a stream of product was flowing through a facility, then a contract for processing or sale could be attached to it. The ability to attach a contract to a stream would enable the Accounting Voucher to establish the billing of gathering or processing charges / sale for that stream. These charges (invoices) or sales (receipts) being generated in an automated fashion by the People, Ideas & Objects software. This point now brings up a point that is obtusely discussed in the Draft Specification.

The Accounting Voucher is a for lack of a better term a template that is built upon as time passes. Each month as the property changes, these changes are captured within each Accounting Voucher and the template is renewed each month with the new information. If a new contract was added for the production from a new well, then that contract stream and the new well would be represented in next months Accounting Vouchers. The Accounting Voucher documents the changes in the property over time.

So it is with my sincere apologies to any readers that may have tried to make sense of the Draft Specifications Accounting Voucher. One can clearly see the value in a six month sabbatical. I’m sure we’ll run into more bumps along the way and will have to share a laugh at those.

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

The Preliminary Specification Part XXIII (AV Part I)

We now shift our attention to the Accounting Voucher module. This module introduces many new concepts that may appear to add a level of complexity to the oil and gas business. However, in reality these ideas help to alleviate the difficulties that are systemic in the industry today. For the purposes of clarity lets jump straight into the point that we have been deferring for a number of posts.

The point was raised initially during the discussion of the material balance report and then discussed further in the reporting of volumes to the many number of users of that information. Those posts deferred the discussion of a final solution of how People, Ideas & Objects resolves the volumetric reporting problems to the Accounting Voucher module itself. Now that we are reviewing the Accounting Voucher lets talk about this solution.

The concluding paragraph in the Draft Specification of the Accounting Voucher states:

The People, Ideas & Objects Accounting Voucher Module will provide the means for the application to manage the disparate inter-dependencies of modularity theory and Transaction Cost Economics. That is a summary application of Professor Baldwins comments. And therefore this Accounting Voucher is one of the key cross roads to all other modules in the application. What is necessary is for people to cease in processing transactions, by way of automation, and move toward the definition and design of transactions to optimize the business performance. The Accounting Voucher is also the most critical to the success of the application and hence the producers that use it. I am certain that in the hands of the user community it will achieve all that is possible.

Simple stuff. Critical to the “definition and design” of transactions is the fact that transactions are balancing themselves out. If the debits and credits were not in balance at the end of the day, then the automation of the systems and the accountants would not be doing their jobs. The same could be said for the volumetric reporting. If the material balance reports were out of balance (call this material balance), or were not balancing the inputs and outputs to other reports (call this system balance), or the internal accounting of those volumes to the partners, royalty holders and others were out of balance (call this partnership balance) the accountants and systems would not be doing their jobs.

What is proposed in People, Ideas & Objects is that for an Accounting Voucher to close it must balance the financial debits and credits, but must also from a volumetric perspective material balance, system balance and partnership balance. Each of these volumetric perspectives being accessed through a different “mode” within the voucher to make the necessary changes to correct any imbalances or errors.

The Joint Operating Committee is not a legal entity. It is a thing that exists in the minds of oil men and women. It therefore doesn’t own anything or incur any costs. All of the charges to the joint account must clear in the month they are incurred. Same for the volumetric information. The Joint Operating Committee "Accounting Voucher" balances to zero in terms of costs and volumes each month by clearing its charges to the ownership and royalty owners of the property.

Note that the clearing is done after the balance. That does not guarantee that the facility will remain in balance. Adjustments and amendments to the Accounting Voucher may occur. These may happen and they can be subsequently cleared to the partnership accounts.

The point of the exercise is that you have the business of the Joint Operating Committee being captured in the material balance report which is an integral part of the Accounting Voucher. Essentially all three are the same thing. (JOC, Accounting Voucher, material balance report.) An integrity of reporting that is embedded within the accounting systems that is as rigid as debits must equal credits.

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

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

The Preliminary Specification Part XX (PA Part VI)

In Canada at least, there is the accounting month and production month to deal with the delay in reporting of production volumes. The logistics of reporting volumetric information creates a lag of one month in the data so that July’s production data will be reported in the August accounting month. And I’m sure that everyone is familiar with the much loved amendment process for that volumetric data. The adjustment process never seems to end, I wonder if we’ll ever find a solution to it.

I think we have an interesting solution in People, Ideas & Objects. We talked about the material balance report the other day. While we noted the need to balance each report, and each input and output with the input and output of other material balance reports. And that each material balance report essentially represented a Joint Operating Committee. We also noted that we were deferring some of the discussion of our solution to the Accounting Voucher module, which we are still doing. However, today we should note that there are some problems that need to be addressed in the Partnership Accounting module that are a result of the adjustments to the material balance reports. That is that these material balance reports do shift and amend volumes of products around as time goes by and things are found to be incorrect. When the physical world is found to be inconsistent with the reporting, the reporting must change.

As I said I don’t want to get into into the solution today, other then noting that containing the problem within the domain of a Joint Operating Committee helps significantly. I want to add to the discussion of the material balance report by detailing the scope of the engineering problem that we have to solve. The first area of concern is that there are both daily and monthly volumes defining a period of time. Some of these volumes are “spec” vs. raw, products and by-products. Volumes are processed and gathered based on ownership and non-ownership of the processing facilities. There are in North America two, units of measures vs. metric reporting standards. How gas is nominated (daily) and marketed (annually). Finally the royalty holders and the ownership of the properties expect to earn something for their efforts. And each of these variables could generate their own amendment processes.

The myriad combinations of possibilities that happen within oil and gas have to be captured and handled within the systems that are used in oil and gas. That has not happened as of this date. The first aspect of solving this problem is to engineer the solution. Many have tried and have found their budgets to be to small for the job. Approaching this from the one producer perspective may seem like adequate funding, however, no one today is declaring success. If, as we have proposed in People, Ideas & Objects, aggregate the resources of the industry towards engineering the solution, this scope can be scaled, the costs to each producer will be incidental, and the results that each producer will realize will reflect the full scale of that software development effort.

The second aspect of the solution of this issue is to limit the scope of it. That is what we have done in People, Ideas & Objects. First by using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. What we are doing is adopting the material balance report as a function of the Joint Operating Committee. Which in reality it is. If however we separate it from other Joint Operating Committee’s from an accounting perspective then we can begin to deal within just that JOC as its own autonomous legal entity, which it is. This discussion may initially not make sense until we get into the Accounting Voucher module, and we get into the final aspect of this solution which is where we encapsulate all of this reporting within the accounting system itself.

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

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

The Preliminary Specification Part XVI (PA Part II)

One of the difficulties in discussing the Partnership Accounting module in the manner that I am is that the discussion is limited to the understanding of one person. Although I have a good understanding of how oil and gas operates it is limited to one persons view. The purpose in these developments is to have the community develop the Preliminary Specification and therefore have the full perspective of all aspects of how the industry operates. This limitation, although obvious in the other modules, is most evident in the Partnership Accounting module.

When we talk about the scope of operations that would be managed under the Partnership Accounting module I would say that it includes just everything. Simply the cut-off would be the inlet or outlet to any refinery. Therefore the total scope of any upstream oil and gas operation. Let me be more specific about that from the point of view of geography and type of operation managed by the People, Ideas & Objects application.

If we look at the North American oil and gas infrastructure we see a variety of oil and gas installations designed to serve both producers and consumers of oil and gas. Wells, gathering systems, gas plants, pipelines, storage facilities etc. At each point along these systems there may be additional deliveries of product, or sales of product or products inventoried. What seems to be an obvious and simple business becomes incredibly complex when it realized that each asset may be owned by a Joint Operating Committee itself and hold product on behalf of owners of other Joint Operating Committee’s. This summary glosses over the incredible complexity of this business when the volume of transactions that occur in these businesses make it an important part of the oil and gas operation.

Critical to controlling the business is the material balance report that is part of the Preliminary Specification. It is the central document that so much of the subsequent activity is based upon. If someone is to be charged for storage of butane for example, or if someone is to be charged a marketing fee for delivery of product to a customer. Or simply if a sale of a raw gas stream is deemed to have occurred at the well head. The material balance report captures these transactions and initiates the flow of documents that need to be generated. It is these documents that also need to be captured and generated in the People, Ideas & Objects Preliminary and Other Specifications. To name them all would require some understanding and consensus amongst the community which would include the producers.

To state as simply as this that the scope of the Partnership Accounting module captures all of these activities for all of these facilities is its purpose. Each material balance report must balance. And each reports inputs and outputs balance to other material balance reports. (This will be an important consideration in the upcoming Accounting Voucher.) Many of these reports are from one company to another.

As we explore the Partnership Accounting module further we see the reasons why we are taking such a broad scope of operations into considerations. It would be an understatement to state that this area has been poorly served by IT. To approach it from a global perspective that includes production operations, accounting and the other areas that depend on this information would be “ideal”, however, the complexity of the business has always been in the way. The engineering of software has never been available to approach the type of problem that this area presents. I think it exists now. And I think that the Partnership Accounting and Accounting Voucher modules of People, Ideas & Objects provides the vision of how this engineering solution solves this problem.

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

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