Our Material Balance Report

It’s time once again to have a quick look at one element of the Preliminary Specification as a chance to keep it fresh in our minds. We began this series about a month ago with discussion of the Work Order in terms of its ability to enable like minded groups of producers to collaborate on research projects and study groups. We then wrote a few weeks ago about the Work Orders ability to control costs within the producer firm. Today we want to stay within the Partnership Accounting module and discuss the Material Balance Report.

The Material Balance Report is present in the Accounting Voucher and Partnership Accounting modules of the Preliminary Specification. The purpose of the Material Balance Report is to replicate what the traditional industry standard material balance report does in the reporting of facilities. In the Preliminary Specification the report takes on an expanded and enhanced role of the innovative and profitable oil and gas producer. The report becomes the cornerstone of the producers production activities, reporting and marketing of its products. Everything that is produced is managed through one or many Material Balance Reports until its point of disposition, or transfer of legal title. The enhanced nature of the report is that the balancing of the volumetric information takes on the same characteristics that the financial information has in terms of its unimpeachable integrity.

This unimpeachable integrity is achieved through the fact that a Material Balance Report represents a Joint Operating Committee. And in the case of volumetric reporting this Material Balance Report will be an Accounting Voucher in the Preliminary Specifications Accounting Voucher module. A unique accounting voucher that imposes the balancing characteristics that we desire. And those characteristics are the systems balance, each Material Balance Report must balance between other Material Balance Reports, partnership balance, ensuring that the volumes of each partner or royalty holder are accounted for, and volumetric balance within the report itself. Without the ability to balance each element of the Material Balance Reports volumetric balancing, the Accounting Voucher will not close. Enforcing an integrity in the reporting that those volumes and those values contained within the report are correct.

For what purpose are we expending so much energy on the volumetric balancing of the Material Balance Report? The production, revenue and royalty accounting processes are ripe with amendments and corrections throughout a ninety day reporting process. Is this not unreasonable to uphold the accounting close to a process that is consistently subject to adjustment? I would note that accountants have the tools of accruals and other methods of balancing the Material Balance Report in the short term. The point in enforcing the integrity is to establish a base of volumetric information that is unimpeachable, as I said, that is however, after that ninety day process and is not subject to question. It is therefore at that point knowing that the information, ultimately, will not be inaccurate, from any perspective, that we can automate the processes that depend on this volumetric information. And begin this process of automation on the first day of that ninety day process.

The Material Balance Report will take what is a generic manner of reporting in the industry and expand it to accommodate the regulatory, financial and stakeholder needs. This process of automating the processes of production, revenue and royalty accounting will be comprehensive in nature. This automation has been beyond the scope and scale of the current business models of the software providers and the producers IT budgets. Yet is something that can be handled in the scope of the People, Ideas & Objects, our user community and service providers domain.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Greater Science and Innovation With the Work Order

I am thinking that our focus has been on the user community development and the decentralized production model. And these are two worthy topics to be discussing at this time. However, there are many more attributes of the Preliminary Specification that we have not discussed for some time. I thought that from now on I would bring up a feature in the Preliminary Specification to remind people that there are many more attributes of the system. I'll do this from time to time and for no other reason than to broaden the conversation. Today I want to discuss the Work Order system.

The Work Order system seeks to resolve how the industry, and each producer can be more innovative. Collaboration on the sciences is a key to the establishment of new innovations as we learned from Professor Giovanni Dosi. The point is that new science leads to new innovations which leads to new science and so on. So how do we initiate more science and innovations in the industry and the producer firm. Collaboration and knowledge are two commodities that are low cost and effect a trajectory change in a dynamic and innovative industry. These are the things that we learned in our research of Professor Giovanni Dosi.

It used to be, and is not the case as much today. And needs to be the case tomorrow, on a wholesale basis, that working groups between producers were established to study, research, collaborate and experiment in the earth science and engineering disciplines. These study groups are founded by like minded producers who are interested in determining knowledge of a certain type and are willing to pay to learn of it. The costs of these working groups are small, usually in the tens of thousands or small hundreds of thousands of dollars. And shared across the groups of producers who are participating. Participation provides access to the knowledge when it is completed. As was indicated, for the oil and gas industry to become an innovative industry these working groups will have to become several orders of magnitude in terms of volume of what they are today. Participation between like minded producers is what makes them valuable. Both in lowering the costs, and increasing the diversity and quality of the population of participants.

One of the difficulties, and what People, Ideas & Objects asserts is the primary reason that these working groups current lack of use is. The bureaucratic difficulty in accounting and recording of costs for these working groups. Participation is not always straight forward as all participants are not always equal. Some can earn their way through contribution of some Intellectual Property, others through staff and resources and others through straight cash contributions. These working or study groups can take many months in which to complete so the accounting for them is conducted over a long period of time. Usually the direct participants are hounded by accounting more than they are participating in the working group. This constant barrage of questioning and administrative detail doesn't stop. And eventually affects the motivation of the participant in wanting to participate again in any other working groups. They may cherry pick a group here and there, but the needs of an innovative industry and producer requires that the number be an order of magnitude higher. We can all assume how that would be in terms of the accounting and administrative difficulties.

There has to be a better way. And that is what the People, Ideas & Objects Work Order provides. An interface that enables the participants to capture the structure of the deal within the interface as it is being agreed to. Then, with all the detail programmed into the Work Order the administrative details will operate within the People, Ideas & Objects Work Order as they should, without the bureaucratic nightmare they have in the past. As long as the detail of the deal has been captured properly, there should be no difference between planning and execution of the working groups administration. Accounting will be satisfied with the methods that are consistent with the plan and the earth science and engineering resources of the firm will be able to participate at the level necessary to move the industry and the producer forward.

Review of the Work Order in the Background section of the Preliminary Specification is here. And its part of the Partnership Accounting module if you would like to review that entire module.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Joint Operating Committee User Budget Category Part V

You would think that the last thing anyone would want to discuss would be the boring accounting modules. However, nothing could be further from the truth. According to the visitor logs of the Preliminary Specification its the Partnership Accounting and Accounting Voucher modules that are the two most visited modules. Accounting being at the heart of an ERP system being the probable source of this interest. It is in the Partnership Accounting module that a significant volume of activity is occurring. Therefore I have allocated a User Budget of $13 - 26 million or 39 to 78 man years of time. There are areas where these funds can be pooled with other User Budgets and that includes Compliance (Tax, Royalty, SEC), Service Providers, Service Industry, Accounting Firms, Engineering and Earth Science. Therefore the scale of these funds could be far greater than what they initially appear. Also, we are building upon the Oracle Fusion Middleware and Oracle Fusion Applications. Much of the “generic” accounting functionality already exists and only needs to be implemented in innovative ways. The Oracle Budget Allocation is also $333 - 666 million and includes hardware, software and services. It is these Oracle services that I know the user community would be of keen interest in the Partnership Accounting module.

It is in the Partnership Accounting and Accounting Voucher modules that some difficult issues are presented. These issues are unique to the Preliminary Specification and are as a result of using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. Within the Partnership Accounting module these issues include the Pooling of the technical resources, the Work Order, the decentralized production model, and the Material Balance Report. And these are just the large ones that I am aware of today. These will require significant effort in terms of their resolution. One thing that I have not mentioned to date and is of importance to the user community. Is that People, Ideas & Objects is a research and software development company. We will have a group set up for the continued research into areas of innovation and the Joint Operating Committee. Much the same as what we have done over the past ten years. These resources are also available to the user community to aid in resolving these larger issues and their implementation.

The Pooling concept is a strictly mechanical implementation of the Joint Operating Committee. There are a few additional twists that are above the manner in which accounting is done today, and those dovetail with the Accounting Vouchers ability to have multiple producers charging costs / revenues to an open voucher. This can be done simply, or it can be done extensively. As it is conceived in the Preliminary Specification it is done extensively with the costing of the earth science and engineering resources, the ability to budget the departments revenues from commitments to the Joint Operating Committees etc. This is a second source of revenue for the innovative and profitable oil and gas producer and it is a means to source the appropriate technical resources for any properties operation. The ability of this system to accommodate those two needs should be an administrative capability that defines and supports these critical processes.

The Work Order is technically and mechanically complex. If we only had to concern ourselves with the needs of one firm than we could implement this type of Work Order very easily. However the system needs to operate initially at the industry wide level. And then once it has received the subscriptions from the producers who are participating within the Work Order then it can operate within those producer firms. Then it is simply a matter of aggregating costs and distributing them based on a working interest distribution that will be unique unto itself. That is the first phase of the Work Order. The second phase is that it controls the costs and efforts of the producer firm and Joint Operating Committee in any operation that is undertaken. If you have an element of an AFE that you want to be completed by someone, set up a Work Order to have them collect their time and costs to. If you have an internal program that you want to control the costs on, set up a Work Order and collect the time and costs of the people who work on it. Everything that is done in an oil and gas producer should have a Work Order, and everyone should be charging their time to a Work Order.

In terms of the value that the user community can bring to the innovative oil and gas producer, the decentralized production model is the best there is. With over $170 billion in opportunity costs for 2012 and 2013 it is the dominant justification to proceed with the development of the Preliminary Specification. The decentralized production model is simple in its implementation and requires little in terms of technical complexity to overcome. The difficulty is in the level of change that is implemented in the people’s lives that are disrupted as a result of the introduction of the model. As with any change there will be winners and losers and with the level of disruption it is reasonable to assume that there will be big winners and big losers. It is my assumption that I am speaking to the potential winners. In that they can form the requisite organizations that can become the users and service providers that form the sub-industry that we will come to know as a result of the decentralized production model.

What the decentralized production model does is take the prototypical producer and reduces them to the C class executives, the earth science and engineering resources, the land, legal and support staff with the remainder of the resources moved to service providers that will be focused on a process, or part of a process. They will use the entire oil and gas industry as their client base for the one process that they manage. And they will bill the Joint Operating Committees for the services that they render. So that when a production accounting service provider located in an area where production was shut-in for the month doesn’t send a bill to the Joint Operating Committee. They will not be the only ones. As all the service providers for that area will have incurred no services for those properties and as a result have not charged those Joint Operating Committees for any of the administrative or accounting charges that they would normally charge during months of production. Therefore the Joint Operating Committee reports a null operation where only the costs of capital are uncovered. The operating costs, administrative, overhead and accounting costs are not incurred and as such the reserves are left for a time when they can be produced profitably, the commodity is removed from the marketplace and effectively places a floor on the commodities pricing and the producer doesn’t lose any money on their operations.

This requires that the service providers will have accounting and administrative process management capabilities that are consistent with the producer needs. Therefore they are part of the Preliminary Specification and indeed are using People, Ideas & Objects software to manage those processes. The User Budget allocation for the Service Providers is $83 - 166 or 250 to 500 man years of effort. These budget dollars will be implemented under the coordination of the user group that is participating in the Partnership Accounting and Accounting Voucher modules.

With little budget help from any of the other user groups. And little to no help from Oracle Fusion Applications. However, Oracle Fusion Middleware makes this next project doable. The Material Balance Report is reliant on the User Budget that begins and ends here. The Material Balance Report is something that should have been undertaken by industry years ago. The scope is however beyond what can be tackled by a single producer, even Exxonmobil. Since we are aggregating the resources of the industry we will be able to approach a technically complex problem such as the Material Balance Report. Tracking the source and disposition of product from its origin to its point of sale in an unimpeachable manner is a necessary requirement for the innovative and profitable oil and gas producer. It is the foundation of which they we build, which is also part of the budget requirements here, the processes that depend on that volumetric reporting.

One of the broader things that is happening here may not be too evident at this point in the discussion of the implementation. And that is the impact on the producer firm in terms of their staffs capabilities and requirements in use of the People, Ideas & Objects software. How will they be trained in the use of the software. How will the software be implemented in the producer firm. These are the traditional issues that cause the kind of complexity that we are talking about to fall apart. What works in the lab in the hands of the developers can fall apart immediately in the hands of the actual users. Its important to remember that People, Ideas & Objects are cloud computing provided software services. All of the software will be available anywhere on any device. And that the service providers will be the ones that are “replacing” the usual “in-house” accounting, administrative and overhead personnel. It won’t be the individual producers focus or responsibility to acquire the capabilities to understand or operate the software. It is the service providers who are focused on the individual process or subprocess that will be providing the capability to potentially Exxonmobil or the startup oil and gas firm. The administrative or accounting capability exists irrespective of the level of need within the producer firm or Joint Operating Committee. And that level of capability is state of the art in terms of the software, driven by the user community who may be active participants in the service providers. All operating as a sub-industry of the oil and gas industry.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz

Conclusion to Partnership Accounting

We should note that the Partnership Accounting module is the source of all accounting information for both the producer and Joint Operating Committees. This includes General Ledger detail, Trial Balance and anything and everything accounting related for producers and Joint Operating Committees. It is the source for all accounting related information. The key difference between the Partnership Accounting and Accounting Voucher modules is the difference between “what” and “how” of accounting.

Our discussion in the Partnership Accounting module included the following topics.

• Generic Reporting
• Material Balance Report
• Pooling of Technical Resources
• Decentralized Production Model
• Work Order
• Specialization and the Division of Labor
• Accounting Cutoffs and Differences
• Oracle Fusion Application Modules

Additional topics will be added by the user community. One of the key objectives of the Preliminary Specification is achieved within this module. By using the Joint Operating Committee we are able to align the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks into alignment with the compliance and governance frameworks of the hierarchy. This alignment provides the oil and gas producer with the speed, innovativeness, accountability and profitability that is necessary in this new era of oil and gas that we find ourselves in.

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

People, Ideas & Objects and Oracle Corporation

It’s the accountant in me that gets excited when I look at the Oracle technologies that will be used in the Partnership Accounting module of the Preliminary Specification. Under the Oracle Fusion Application Financial Management Suite there are the following six modules that are included in the Preliminary Specification. General Ledger, Accounts Payable, Accounts Receivable, Asset Management, Payments & Collections and Cash & Expense Management. It is unknown at this time if the last three modules will provide any value to the oil and gas producer, and therefore will leave it to the larger community to determine whether they remain.

What we need is a solid mission critical, as they used to describe it, general ledger for the innovative oil and gas producer, Joint Operating Committee and service providers. Oracle has competed in this arena since the late 1980’s with their own technologies. They have also focused their energies outside of their core database technologies on ERP systems by acquiring a number of the top vendors in the business. When it comes to the business of ERP systems there are SAP and Oracle as the two titans in the industry. 

When it comes to the technologies that these systems are built upon Oracle, in my opinion, wins out in a very big way. Their new strategy is hardware and software engineered together. And they have the industry leading products to do just that. With Oracle Servers, Oracle Operating Systems, Oracle Database, Java, Oracle Fusion Middleware and Oracle Fusion Applications all being industry leading proprietary technologies. SAP is only able to compete on the application layer. And Oracle’s technologies are new. All of the Fusion products have been written within the last five years as a result of a significant investment in Java and their database technologies. 

When we developed the Preliminary Specification we used modularity theory extensively. Both for the organizations involving the firm, the market and the Joint Operating Committee; and the technology as defined in the modular definitions of the Preliminary Specification. Oracle has also used modularity theory in the development of their Fusion products. Enabling us to build industry specific functionality that works seamlessly with their technologies. Everything that we need to build from scratch will be built from their Oracle Fusion Middleware layer. Which is exactly the same point where Oracle started in the development of their Oracle Fusion Application modules. 

So when we begin to write the code for the Material Balance Report we will be standing on the shoulders of giants by using the Oracle Fusion Middleware as the basis of where we start. And we will be using the General Ledger, Accounts Payable and Accounts Receivable, as a minimum to provide the innovative oil and gas producer, Joint Operating Committee and service providers, no matter their size, with the mission critical capabilities of the industry leader in all of these product categories. 

Let's turn now to the comprehensive nature of the accounting that is done in the Partnership Accounting module of the Preliminary Specification. Whatever kind of accounting that is done in the Preliminary Specification, whether it be for the producer firm, the Joint Operating Committee or the service provider, the Partnership Accounting and Accounting Voucher are the two modules that capture everything the accountant will need. From the General Ledger to the Financial Statements of the producer and Joint Operating Committees everything a user needs, from management accounting to financial accounting will be here. 

To provide for this we will be using the Oracle Fusion Application Financial Management Suite of modules as the base of the Preliminary Specification. Included within that are the General Ledger, Accounts Payable and Accounts Receivable modules that will be used extensively. It will be here in the Partnership Accounting module that the People, Ideas & Objects user community will determine the need for the other Oracle Financial Management Suite modules of Payments & Collections, Asset Management and Cash & Expense Management. 

It is important to stress the users involvement in determining the input, process management, function and output of the Partnership Accounting module. As with all of the modules within the Preliminary Specification this is your opportunity to define what it is that you need and want in terms of Information Technology in your firm. This should be looked upon as a once in a lifetime opportunity and there will be little opportunity to join the community once the Preliminary Specification begins. The time to participate is now, if you can see value in the development of the People, Ideas & Objects systems then you should begin the process and start to participate as soon as possible. 

Outside of the core Oracle modules we will be doing a significant amount of development that will be key to the oil and gas industry. This will require us to drop down into the Oracle Fusion Middleware layer and access what is a very elaborate Java EE server. This will be used to provide the revenue and royalties systems that will build off of the Material Balance Report. Recall that the Material Balance Report is also being crafted at this layer. Management of the firm and Joint Operating Committees capital and operating costs. And of course the revenues, royalties, capital and operating will all have the capacity to be reported in gross and net values. Users may have extensive ideas as to how they want their data to be displayed, and they may want the traditional formats like the Statement of Operations and Statement of Expenditures. This of course being just a small example of the feature set of the Preliminary Specification.

As we will see in the Compliance & Governance module there are extensive capabilities in the Oracle Fusion Applications that enable the Balance Sheet, Income Statement and Statement of Changes in Financial Position to automate the process of compliance. Updates to the regulations are done through Oracle and affect the Financial Statements that are submitted to the regulators. Such is the nature of dealing with automated systems. All in all providing the producer with an automated system from field data capture to financial statement is as broad a scope, and one that should motivate everyone to participate in this worthwhile endeavor.

In addition to the Oracle Fusion Application Financial Management Suite General Ledger, Accounts Payable and Accounts Receivable modules we will be using the Oracle Fusion Application Human Capital Management Global H & R Payroll module. There the costs of the resources can be billed out to the joint account at their actual costs. Technically it will need to be worked out by the user community how each producer is able to charge the joint account for these costs. However, that does not present too difficult a task when we have the control being handled through the Joint Operating Committee and the Security & Access Control modules Military Command & Control Metaphor. 

There is another assumption that is made in the People, Ideas & Objects Preliminary Specification regarding specialization and the division of labor. And that is the division of labor between computers and humans. I suggest we cease operating in large part, from an accounting point of view, as quasi computers and let the computers handle the work that computers do best. Storage and process management are their domain and the sooner we leave these tasks to computers I think the better off we will be. The things that we are better at are the decisions, the ideas, the innovations, the change management, the planning, the creative process among many other things. These are the elements of our work that we should be focusing on and leave the computers to do the work that they do best.

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

Costs Like Strategies Are Different

We should note that the cost structures of each producer within a Joint Operating Committee could be unique and mutually exclusive to each of the other producers in the property. When we expand the geographical view of the facilities owned in the area we see that the ownership of associated infrastructure by producers can be remarkably different. This cost situation provides us with an opportunity to discuss the strategic choices that producers have within a Joint Operating Committee -- and adjoining facilities which are their own JOC’s -- and how each producer can maintain their own unique strategy.

In addition, since each Joint Operating Committee is autonomous to each other, a producer is able to choose unique strategies for each JOC they have an interest in. That is not to suggest that each JOC within a facility would have their own strategy. They could, however that would be unproductive. What is suggested is that a producer could have each of their major properties operated under their own unique strategies that are developed to optimize the assets unique character. To reiterate, each producer within a Joint Operating Committee within a major area pursuing their own unique strategy irrespective of each other's strategy.

Lastly we most recently noted that the Joint Operating Committee was the strategic framework of the producer and it joined the legal, financial, operational decision making, cultural, communication and innovation frameworks within the JOC. This framework alignment has been unrecognized in any existing ERP systems that operates in the oil and gas industry today. People, Ideas & Objects is the only system to recognize, identify and support the Joint Operating Committee’s frameworks. In addition, People, Ideas & Objects aligns the hierarchies compliance and governance frameworks into alignment with the seven frameworks of the JOC. This alignment provides the innovative oil and gas producer with the speed, innovativeness, accountability and profitability necessary to compete in the insatiable energy era of oil and gas exploration and production.

Application of global or generic corporate strategies are what companies did in the twentieth century. Today producers need to respond at the asset level in order to ensure the optimal value is realized. These findings are based on the extensive research that has been conducted here at People, Ideas & Objects.

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

Accounting Differences

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 have talked briefly about the Material Balance Report. 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 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.

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 measure, British 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 in any of the existing ERP systems 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 too 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 will be that each producer will realize 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 and profitable 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 simplifies the solution from an accounting perspective and helps to deal with the complexity of the business. 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.

In a globalized oil and gas industry we have to deal with currency conversions in the modern era. And these are not your regular currency issues. The example I have used in the past is that a producer based in Texas (U.S. Dollar) with partners in Britain (British Pound) and Canada (Canadian Dollar) share an interest in facilities and production in Turkey (Lira). Transactions through the joint account will be in the Turkish Lira and recorded in the producers native currencies based on the exchange rate at the time.

Another aspect of this problem is the currency conversions have different treatments for asset & liabilities than they do for revenues & costs. Revenues & costs are converted at the time they occur and require no further action. Whereas asset & liability accounts maintain a balance over a longer period of time and may need further specific treatment to ensure they are recognized and recorded correctly. If, for example, a producer has finished inventory in a country with a volatile currency, what subsequent value should be assigned to the inventory? This may possibly be answered by the ability to record the finished inventory in US$. But the operational costs may be valued in the domestic currency. And what about items that are of a capital nature? These currency issues are predominantly producer related as they are cleared out of the Joint Operating Committees accounts each month. Therefore the accounting for each producer in this scenario is unique.

I would however caution users in the community that the oil and gas industries use of the Joint Operating Committee is unique, and these currency issues are not something that are realized in other industries. And although I believe it is a fair assumption that the Oracle Fusion Applications management of currencies would be state of the art. That state of the art would be for other industries like retail and other industries that would not have the scenario that is noted in this discussion. That because of the oil and gas industries use of the Joint Operating Committee, currencies are an area that can be built upon substantially from the point of view of what and how the community could contribute. We are only beginning to scratch the surface of the currency issues that are experienced daily in the oil and gas industry. These issues are what this community is after in terms of engineering solutions that identify and support innovative and profitable oil and gas producers.

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

Working Interest Distribution Changes

Producers have used a variety of mechanisms to determine a point in time when the working interest distribution of the Joint Operating Committee would change based on the financial performance or activity level of the property. These triggers have been used extensively in the past and I would suggest with the greater dependence on using Joint Ventures in the oil and gas industry, these mechanisms will expand in their use and type. What is therefore needed is a reliable means in order to calculate and invoke the necessary changes to the working interest distribution at the time of the change. With People, Ideas & Objects we have the user community to define the level of control that producers want to build into the Preliminary Specification for these types of accounting cutoffs.

Whether it be an activity level trigger like a Before or After Casing Point Election where the leaseholder has the opportunity to join the other working interest owners. The Partnership Accounting module will not necessarily provide any information to enable the decision makers any better decisions. However, it is still important to ensure that whatever decision is made, that the costs are allocated correctly before and after the decision point in the accounts. This is more of an accounting determination in current systems and if the community wants to automate this level of trigger by including the casing point election from the agreement from the Petroleum Lease Marketplace module. Then that is a possibility that can be easily accommodated in a community of user based systems development such as People, Ideas & Objects.

In some accounting cutoff situations the point at which the change in working interest distribution is a result of a payout or penalty situation. These require the calculation and determination of when the property has achieved a prescribed financial performance. And then at that point the distribution would reflect the revised working interest. These calculations, determinations and revised distributions are to be automated in the People, Ideas & Objects application modules.

Since these impute performance based calculations. Expanding the performance reporting of the property is an area where I think the user community may have significant influence in building valuable and innovative reporting. Traditional reporting of Statement of Expenditures and Statement of Operations are standard requirements, and included in this systems development. However I'm sure the community of users that are built around the development of the Preliminary Specification are able to expand on this reporting and provide real value for the innovative producer.

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

The AFE

One area that we have not discussed in any detail are the processes around the Authority for Expenditure or AFE. I am going to break the AFE discussion down into two parts, one here in the Partnership Accounting module and the other in the Research & Capabilities and Knowledge & Learning modules. What we will discuss are the partnership accounting aspects of the document, and later we will discuss the “capabilities deployment” elements in the other modules.

As with any interface in the Preliminary Specification the user has the opportunity to right click on an item and pull up a menu item called “Create an AFE.” The system will have intelligence and be able to populate elements of an AFE template with the information that you right clicked from. For the purposes of this scenario, lets suggest that you clicked on a well description. The system will then populate the AFE with the information for that well and the partners that are in that Joint Operating Committee. The suggestion was made that another lateral and fracing job be done to increase the production from the shale gas zone. And you populate the AFE with the appropriate account codes that would be used to account for the costs. Note: due to the extensive work done in the Preliminary Specification it should be anticipated that the industry would have access to a global chart of accounts. Budgeted costs were worked out with a number of vendors that you were working with who have developed some enhancements to the re-entry and fracing of multi-lateral wells. You think these are significant innovations and the costs make it a potentially valuable enhancement to the wells production profile.

To present the AFE to the partners you have asked them to join you in the “Marketplace Interface” at the vendor's facility to view a presentation of their new tool. All having confirmed their attendance. At the end of the presentation you digitally sign the AFE which releases the document to the other partners. (All with the data elements that are consistent with their data naming conventions. Global AFE #’s, account #’s, etc.) You indicate the cost estimates and time frame that this can be done to the one well, the poorest performer in the facility. You also submit the engineering and geological analysis of why you think the formation will perform well to the work that is proposed.

Within the AFE document itself there is a collaborative interface for the partners to discuss issues and opportunities related to the document. During the month this discussion focused on how the existing lateral could be protected from any damage during the drilling and fracing of the second lateral. Several partners expressed concern that the program did not do enough to ensure that no damage occurred so a supplemental was raised. After the supplemental there seemed to be a consensus amongst the members of the Joint Operating Committee that the risk was certainly worth the effort and the AFE was digitally signed by all the participants.

During the collaboration it was determined who was available from the producer firms to work on the project and a team was set up to manage the engineering and geological aspects of the program. These peoples time, as well as the accounts for the vendors for that AFE were now able to accept the charges for them. Cost overruns were not expected as an arrangement with the vendor for a fixed price was agreed.

This is a simple scenario of how the firm will raise an AFE and have the members of a Joint Operating Committee approve / disapprove of it. In larger firms there would be an automated routing of the document to the various internal departments for approval. This could be done simultaneously as multiple people can be reading one electronic document at the same time. Therefore accounting, production and exploration could each be approving the AFE all on the same day with none of the paper shuffling that normally goes on. Even within each department the various people who need to see and sign off on the information can do so at any time.

This routing of the document will of course be conducted at each of the producers who are party to the Joint Operating Committees. Each also having access to the collaborative interface of the AFE document between the partners.

In this discussion I want to clarify some of the similarities and differences between the AFE and Work Order in the Partnership Accounting module of the Preliminary Specification. And to point out an important difference in the People, Ideas & Objects systems documents that is different than those that operate today.

Another aspect of how both the Work Order and AFE are different in the People, Ideas & Objects system in comparison to other systems that exist today is the manner in which documents are stored. Everyone is familiar with multiple copies of files that have been edited by different people. A disappointing and troubling problem when it comes to electronic files, a disaster when it comes to documents. No one can have different electronic versions of a document. Therefore there can only be one copy of the document that is used by everyone. (Exclusions for backup etc.) Since its electronic, multiple people can be using the same document at the same time.

The best example of a system that uses this exact manner of file management is Google Docs. Where users have access to a list of files in which they or others they grant access to can edit the same file. Any conflicts in the editing of those files are resolved by the users while editing and the file stays as one complete edited file at all times. There is no need for someone to take edits from many files and put them into one file as is the case with Microsoft Word or Excel.

Instead of files People, Ideas & Objects will present the user with documents like AFE’s and Accounting Vouchers that they have authorized access to. They and others will have the ability to view, edit and delete based on their authorization level and be assured that only those documents exist. No other more advanced copies, or copies that are less advanced, are being worked on. The amount of time and energy that will be saved in knowing that just one document exists is not only satisfying but highly productive.

We have discussed many times that the People, Ideas & Objects application modules are moving the compliance and governance frameworks of the hierarchy into alignment with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee. By doing so we are recognizing and adopting the culture of the industry in its many forms. The change that we are exercising is the removal of the bureaucracy. When it comes to the AFE process there is little in the current process used by companies that is not representative of the culture of the industry. It is optimal that People, Ideas & Objects and the user communities capture that culture in these software developments when developing the AFE process.

One area that we will provide an enhancement to the AFE process is through the elimination of the “operator” designation. People, Ideas & Objects operates on the concept of a pooling of the resources of the partnership represented in the Joint Operating Committee. This is done to help mitigate the technical resource shortfalls, particularly in the earth science and engineering areas. As a result of this pooling an AFE will be open to any one of the participants in a Joint Operating Committee to post charges to. Those charges could be for their staff who are working on the project or for costs they incurred on behalf of the project.

With each producer potentially contributing unequal shares to the joint account or AFE during a month, or over the course of an AFE’s term. The possibility that an over or under contribution of their participation might occur. Therefore monthly equalization's will need to be a necessary part of the reconciliation of the accounts of the AFE. For example, if one of the partners was to pay for the drilling day rate, and their working interest share was only fifteen percent, then they would have paid in excess of fifteen percent of the budgeted AFE. In a case such as this, the producer should be compensated to the point where their contribution does not exceed the approved budgeted amount.

All of this is consistent with the culture of the industry as it operates today. What we are proposing is aligning this culture within the Joint Operating Committee with the other eight frameworks. We are not resisting this well ingrained highly functioning “inertia” as Professor Langlois would call it.

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

I began with a discussion of the culture of the industry and how the inertia of the industries routines and capabilities made for formidable obstacles to change. Thankfully we are not focusing on changing any of the cultural inertia in the oil and gas industry. We are trying to change the bureaucracies and the systems to recognize the routines, capabilities and inertia of the Joint Operating Committee. This does however require the retirement or fading of the bureaucracy in its current form.

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

Thankfully the bureaucracy does not sustain its own inertia. It is a forced or contrived existence that serves the purposes of a few within the organization, and these needs can be replaced by the Joint Operating Committee. I’m thinking of the command and control, budget and finance functions. What we have said we are doing with the Preliminary Specification is moving to the natural form of organization of the oil and gas industry, the Joint Operating Committee. I don’t foresee difficulties in making the transition from the bureaucracies forced ways to the more natural way of doing things with the Joint Operating Committee.

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

And the proposition that this transition will occur has been threatened by the bureaucracy. They hold the budget and have exercised it in not providing any funding towards People, Ideas & Objects. In this fashion the bureaucracy has been self-serving and looking after its own interests and has abandoned the future of the industry. What will the situation be like in five or ten years. Will their ways still be the methods in which the industry functions? What if they fail?

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

McKinsey Consulting suggest that large populations will be joining the middle class in the next 20 years. This will have a dramatic effect on the levels of demand for energy. If the oil and gas industry fails to respond to these demands due to the bureaucracies lethargic ways, will anyone note that there were alternatives proposed?

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

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

The Decentralized Production Model

Traditional oil and gas accounting systems have sought to identify and record the costs of operations and allocate those costs to the rightful owners. And these of course will be some of the objectives in the Partnership Accounting module of the Preliminary Specification. We are also seeking to transform the producers from a “high throughput production” model to a “decentralized production” model where the costs of operations decline in line with revenues. Then during periods of low commodity prices, if the marginal costs of the property are not covered by the revenues, production is shut-in. And when the property is shut-in the operating, administrative and accounting costs will track revenues. That is they will be zero and the property will not report a loss or a profit. This is necessary in the highly volatile pricing situations the commodity markets get themselves into. As Professor Langlois describes the model.

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p.58

Recall in the Petroleum Lease Marketplace we have the “Marginal Production Threshold Interface” that enables the partners within a Joint Operating Committee to agree on a pricing point where production would be curtailed. We have also discussed in the Resource Marketplace module the use of the Production Accountant and other roles in terms of how the costs of those resources would be reduced to zero in the case of shut-in production. What we haven’t discussed in detail is the need to charge the Joint Operating Committee directly for the charges of the Production Accountants service provider. This will be a change as a result of using the Joint Operating Committee and the elimination of the “operator” designation for any one specific producer.

Many of these costs would have traditionally been incurred by the “operator” as administrative overhead; and were to be covered by the various provisions of calculating overhead allowances for the operator. These overhead allowances will be eliminated in the future as a result of using the Joint Operating Committee. These administrative and accounting costs may be incurred by any one of the producers in the Joint Operating Committee. Either directly by their staff or through a service provider. Either way they should be directly chargeable to the Joint Operating Committee. Costs such as production and revenue accounting, or partnership accounting in general is a cost of doing the business of the JOC. There would also be costs associated due to the administrative areas of the production and exploration activities done on the property.

What we have learned from our review of Professor Richard Langlois is that markets are the ideal situation in which to source the capabilities the producers need. That would be the case for these administrative roles as well. By hiring individuals in a dedicated fashion incurs the costs during the time production is shut-in. By hiring service providers the costs associated with these administrative duties would be reduced to zero when the production was shut-in. Attaining the “decentralized production” model in terms of the operating and administrative costs of the property.

As we noted in the transition to a “decentralized production” model, it would enable the innovative oil and gas producer to match the operational and overhead costs to any decline in revenues due to the shut-in of production. By using accounting and administrative service providers the various Joint Operating Committees would be able to control their costs in the event that commodity prices were unfavorable. We want to discuss the configuration of those accounting and administrative service providers and how they will fulfill the needs of the innovative oil and gas producers.

When we talk about the Service Providers we are highlighting their independence from any one specific producer. With the elimination of the designation of “operator” from any one specific producer in the Joint Operating Committee no accounting, production administration or exploration administration is provided to the Joint Operating Committee in a dedicated manner as it is today. This creates a fundamental change in the manner of how the work is approached in the industry. It is liberating when we consider the use of technology that is available today and the standardization of the processes that has occurred in the oil and gas industry. A Joint Operating Committee is therefore free to engage a service provider to fulfill these administrative duties, independent of any one of the specific participating producers in a Joint Operating Committee.

From the accounting perspective we have already talked about the Production Accounting role and how that could be specialized to the point where a service provider is working in one geographical area for a large number of Joint Operating Committees. That is the most logical manner in which to organize that type of work. We have also discussed the royalty accounting requirements. And how a service provider would be able to specialize on that specific royalty legislation enabling the producers that use that service provider to pay the lowest possible royalty obligations. And we have talked about an accounting service provider that specializes in the compliance requirements to the SEC. The point being that we are seeing a further break down in the types of accounting service providers that are specializing on a variety of different criteria for the oil and gas producers. This is the required next step in the evolution of the economic output of the oil and gas industry. The further division of labor and specialization are the only means in which an economy can expand its output.

With the specialization of individual service providers based on unique accounting specialities. [I’m not familiar with production or exploration administrative needs and therefore can’t comment on those.] A Joint Operating Committee would engage these service providers to provide for the services that are required for their property. There they could choose a Production Accountant who is located in the region. A revenue and royalty accountant who is known for their ability to keep royalties down. And if the price of natural gas drops to the threshold price determined by the Joint Operating Committee, to where the facility will be shut-in, these accounting service providers are not engaged during that time and incur no billings for the property.

The alternative is for each producer to hire the necessary accounting staff as they do now. This is bureaucratic and wasteful in that it builds capacities in each firm to handle x contingencies. The problem is that each firm only needs those capabilities for a few hundred hours a year. These capabilities are recreated within each producer firm and are unshareable between producers. Capturing unused and unusable capacity within each producer firm. It's time to look at alternatives, and the time to look is when we are designing systems for the Joint Operating Committee.

We have now conveniently reorganized the administrative and accounting services provided to oil and gas producers. Such is the way of the 21st century technologies. Closer to the practical realities of the day we find that many of the administrative and accounting functions are driven by standards of practice. These standards of practice are critical elements in the market supporting institutions necessary for the administrative and accounting firms to operate in the manner that was recently described here. It is the capabilities of the administrative and accounting marketplace, the skills, knowledge, experience and ideas that the Joint Operating Committees will acquire through what Professor Richard Langlois and others call Transaction Cost Economics. A good summary of the concept is provided in Professor Carliss Baldwin and Kim Clark’s paper “Where do Organizations Come From? A Network Design Perspective of the Theory of the Firm.”

...objects that are transacted must be standardized and counted to the mutual satisfaction of the parties involved. Also in a transaction, there must be valuation on both sides and a backward, compensatory transfer - consideration paid by the buyer to the seller. Each of these activities - standardizing, counting, valuing, compensating - adds a new set of tasks and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction.

However, within a system such as the Partnership Accounting module of the Preliminary Specification. The costs associated with standardizing, counting, valuing and compensating a new set of tasks and transfers into a transaction are minimal due to the advanced use of Information Technologies. These costs are incurred by both the service provider and the Joint Operating Committee and are for their mutual benefit. If the accounting service provider is posting a journal entry for this month's revenue for a number of JOC’s, then the costs for that transaction are minimal once the initial engineering of the systems are complete. The value comes about for the service provider in having their billings being generated for these transactions processed in an automated fashion during the month.

The user and Producer need to deploy knowledgeable in their own domains, but each needs only a little knowledge about the other's. If labor is divided between two domains and most task-relevant information hidden with each one, then only a few, relatively simple transfers of material, energy and information need to pass between the domains. p. 17

and

Placing a transaction - a shared definition, a means of counting, and a means of payment - at the completed transfer point allows the decentralized magic of the price system to go to work. p. 22

We have discussed how the People, Ideas & Objects Preliminary Specification is designed to accommodate the needs of the producers, the suppliers and vendors in the service industry, society and individuals. These administrative and accounting service providers will need special interfaces in order to process their work with the producer firms and Joint Operating Committees that employ them. For instance, if a Production Accounting service provider is providing services to all of the Joint Operating Committees at three major gas plants then they might want to have special interfaces that display the information in different formats to what any one of those individual JOC’s or producers might want to look at the information. These types of interfaces will be to support the further division of labor and specialization that is a founding principle of the way in which the service providers were organized. To expect that they will fit within the generic system configuration of what a “producer” needs would be probably incorrect. This being another reason that People, Ideas & Objects provides a dedicated “software development capability to the innovative oil and gas industry” as a necessity.

We have also discussed in the Accounting Voucher module the design of transactions. This work of determining where the point of the transaction should occur is part of that process. It is more complex and detailed then it appears and if done appropriately it can have significant process efficiencies on both the producer or JOC, and service provider sides of the transaction.

The most significant fact about this system, is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on... Frederick Hayek (1945)

Through the process of moving the industry to a “decentralized production” model as we are proposing in the Partnership Accounting module of the Preliminary Specification. We have been able to match the operational and the actual overhead costs of the Joint Operating Committee to the production and revenues of the property. Now we have achieved a dynamic whereas, conceptually, no production would occur in the industry that was not profitable. As the prices declined production would be moved off of the market as it became unprofitable. And as prices rose production would return to the market when it was again profitable. It would be at this point that the market would achieve a certain dynamic that is not present in the marketplace today. And the oil and gas producers would be able to claim that their operations were capable of providing the returns to their investors that were real.

In today’s marketplace the management's focus on cash flow is designed to deceive those that will believe they are productive. However, it is only management that believe that cash flow reflects any value. It is simply a factor of how much cash the firm has generated. Included in that cash is an invisible amount of investment needed to maintain the assets. So although cash flow can be a big number it comes with big commitments as well. Sometime those commitments can exceed the amount of cash that is generated. Yet that never stopped management from promoting their cash flow numbers.

What is needed is for the producer and Joint Operating Committee to focus on the earnings, that is the real earnings of the property. Those based on the revenues less royalties less operating and overhead expenses, after tax. When a firm focuses on those and leaves the Wall Street analysts to go play by themselves then good things can happen to the value of a property or a producer. The valuation of a property could be based on the present value of its earnings. Having a lot of production with no earnings has no value to anyone. It's an exercise in activity. Anyone can drill a well and produce oil or gas. It takes an oil man to make money. That’s the tough part of the business, making some money, despite what the Wall Street analyst might think of you.

If our focus is on the properties ability to generate a profit. And based on the shutting in of any unprofitable production, the property will only produce a profit. Therefore, how do we ensure the property always produces? By lowering the costs of the properties operations. That is the next step in the ability of this “decentralized production” model to make the Joint Operating Committee the innovative framework of the oil and gas industry. With this understanding and operation the engineers and earth scientists will be able to turn to the Knowledge & Learning module of the Preliminary Specification to determine what capabilities exist within the producer population represented in the Joint Operating Committee to see if there is any operation that they can conduct to enhance the profitability of the property. In essence each property is standing alone as its own unique cost centre. Being evaluated as its own separate business based on business values and expectations.

In recent discussions we saw that the accounting costs that are prepared for each Joint Operating Committee are the actual accounting costs incurred for that property, not an overhead allowance as it is today. By moving the accounting and administrative functions to the market, we are able to identify the exact costs to each of the Joint Operating Committees. The other implication is that neither the producer firm nor the Joint Operating Committee has to directly employ or house these accountants within their offices, only accommodate them when and where it's required. These are some of the advantages of the Partnership Accounting module of the Preliminary Specification, and modularity in general.

When we have discussed modularity it has been in the context of the eleven module Preliminary Specification. However, it could easily be that we are discussing the concept of the Joint Operating Committee. Each JOC is isolated and exclusive to all other JOC’s. As Professor Richard Langlois noted in his paper “Modularity in Technology, Organization and Society.”

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

To have the entire accounting provided by accounting service providers who are not present in either the producer firm or the Joint Operating Committee seems too great of a stretch. Dare I ask when was the last time you saw someone from accounting in an operations environment? Aren’t these people sequestered on their own floors or in other buildings for most of the time? A revenue and royalty accounting service provider operating on behalf of several dozen Joint Operating Committees and representing fifty producers would need their own office space to organize themselves in a manner that would provide for the most efficient way in which to do their job.

These accounting services are not core to the producers or Joint Operating Committees core competitive strategy. Focusing on the land and asset base, the engineering and earth science capabilities which make up the value proposition is where the time and energy should be expended. Accountants can complete their work through meetings, emails and telephone calls no matter where they are located. The producers objective is to have these accounting overhead items match the revenues within a Joint Operating Committee when the production is shut-in. The decentralized production model will ensure that the operational and overhead costs are reduced during times of shut-in production.

In order to achieve the specialization and division of labor that will provide the efficiencies in their accounting services. The accounting service providers will need to organize themselves in a manner that provides the best service to their customers. These configurations will in no way represent the way the work is done today. In addition People, Ideas & Objects and the user community are designing systems to be as highly automated as possible. That’s not to suggest the role of the accountant is diminished in this environment. Their role will be more high level value added work, not transaction oriented. And they will have the support of the People, Ideas & Objects software development capabilities available to develop new and innovative systems interfaces. Enabling them to innovate and evolve their services to the producers.

We’ve uprooted the accountants from their homes within the comfortable hierarchy. And expected them to develop their own businesses with their own self sustaining revenue streams. In the movement of the administrative functions from the firm to the market there will be the generation of what Professor Richard Langlois in his paper in the Journal of Industrial and Corporate Change describes as “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-verse. These "dynamic" governance costs are the costs of persuading, negotiating and coordinating with, and teaching others. They arise in the face of change, notably technological and organizational innovation. In effect, they are the costs of not having the capabilities you need when you need them. p. 99

Recall in other modules, we established an account to collect the charges for Dynamic Transaction Costs so that they can be identified and controlled. These costs will be incurred in the beginning stages of the transition from the firm to the market configuration.

"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

What I would imagine will happen will be the accounting staff of an oil and gas firm will be cast adrift to find its own footing. Based on unique specializations and Service Level Agreements they will be free to organize and approach other producers for similar services and attempt to discern where their specializations exists. Sounds pretty dramatic but should this not have happened a long time ago?

It will be during this time when the Dynamic Transaction Costs are high. It will need to be determined within the Service Level Agreement how these costs are recovered. And as time passes and the work that is undertaken by the various accounting service providers that provide services to the producer fall into a routine, then we will know the transition to the market is complete. Professor Langlois notes.

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

and

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

and

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

To remove ourselves from the detail of the Partnership Accounting module we find that the real value is gained by the oil and gas producer. There are three elements that are affected in very positive ways by using the decentralized production model. Having the option of removing the marginal production from the marketplace enables the producer to attain the following three attributes.

The first attribute is the ability to avoid the financial losses that occur as a result of producing the property when the commodity prices are below the properties marginal costs. The fact that today the properties marginal costs exceeds its commodity price, and the property continues production has significant downward influence on the current market prices for the commodity. In addition, losses on operations can become quite significant as a result of the large overheads that companies are required to carry to meet the demands of their organizations at full production. Therefore they are compelled to produce at full capacity to justify their high overheads. Moving to the decentralized production model will enable producers to shut-in production on any property that is not meeting its marginal costs. Under the decentralized production model of the Preliminary Specification the associated administrative and accounting overhead, and operating costs will match the revenues of the property, and the property while shut-in will neither report a profit or a loss on operations.

As a result of the property being shut-in the reserves of the property will be saved for a time when they can be produced profitably. Instead of producing the reserves at a loss, as they are today, the shutting-in of production will save those reserves for the time in which they will produce profits. Reducing the capital costs of those reserves as the operating losses that might otherwise have been incurred are not added to the capital costs of the reserves.

By shutting-in production the commodity pricing will find a floor around the marginal costs. There will no longer be dramatic declines in commodity prices as experienced in the past few years. Commodity markets will be healthier and provide appropriate returns for the risks taken by producers. Producers will have to impose a capital discipline that sees only profitable operations are carried out. Unprofitable producers should be dealt with harshly by the investment community.

These three attributes are significant in terms of the value they provide the oil and gas producer. For 2012 People, Ideas & Objects calculated that if the Partnership Accountings decentralized production model was available. The opportunity costs for the year would total $94 billion in additional revenue and profits for the North American producers. This is based on removal of 15% of the annual natural gas production volumes which leads to what is believed to be an increase in the commodities price towards the expected marginal cost of $6.70 / mmbtu.

With the high costs and prolific nature of the shale formations the need for the decentralized production model is a necessity. The oil and gas industry is currently run by a bureaucracy that has no idea how to produce the shale formations. Other than at significant losses. But they don’t care about that. They still get paid either way. They are entrenched and will fight People, Ideas & Objects Preliminary Specification with everything they have. Theirs is a comfortable and convenient life that doesn’t want to be disturbed. With so much to be gained, we can be sure that this fight will be a long one.

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

The Work Order System

We discussed how the Joint Operating Committee was able to manage who was available to work for the property. The ability to pool the earth science and engineering resources from the partnership is something that is asserted as being a necessity in the future of the oil and gas industry. It should be stated here as well that the Military Command & Control Metaphor would not be limited to just the earth science and engineering disciplines, but would include everyone that is employed within the producer firms and service industry. So this would help us to deal with the who, now we need a mechanism to deal with what it is they will be doing.

The next part of the Partnership Accounting module deals with the operational side of how the field work within the Joint Operating Committee gets completed. Partnerships have always had AFE’s and operations budgets to deal with how much will be spent on an annual basis at a facility etc. And those continue in their traditional ways in the People, Ideas & Objects application. This discussion deals with how the Military Command Control & Metaphor can deploy the resources and authorize the spending of budgets in a manner that provides for the governance of the Joint Operating Committee. Simply we are talking about the collaborative Work Order System that is part of the Partnership Accounting and other modules. (Compliance & Governance, Petroleum Lease Marketplace, Resource Marketplace modules).

Deployment of the people within the Joint Operating Committee, with the budgets that are agreed to are not enough to satisfy any interpretation of adequate governance. Proper authorization and responsibility needs to be assigned to ensure that plans and budgets are executed successfully. Without a Work Order system within the People, Ideas & Objects application the governance of the property would not be possible. The ways and means of successfully controlling costs and deploying the resources in a manner to complete the tasks at hand are what the Work Order system is designed to complete.

The manner in which the Work Order system will be deployed will be as follows. If someone asks you to work on a project, your first question should be is “what’s your Work Order number.” Then you immediately start charging your time to the code. It doesn’t matter if you're an employee of the producer where the request came from, a partner in a Joint Operating Committee or a vendor or supplier. If they don’t have a Work Order number you hang up the phone. If they have a number, you key the Work Order number into your device or keyboard and continue talking. The Work Order system will aggregate and bill your time while working on that project. The details, chain of command, tasks and deliverables are all delivered within the Work Order system that was provided when you keyed the Work Order number into your computer.

Note that one of the benefits of this system is that no work gets done without a Work Order. Assigning budgets from either an AFE or from internally sourced overhead accounts will be a matter of selecting from budget accounts or from pre-approved allocations. The ability to approve a Work Order would therefore be at an appropriate level within the chain of command of the Joint Operating Committee designated through the Military Command & Control Metaphor (involving multiple producers). If a Work Order were to exceed its budget it is reasonable to assume that it was exceeding its AFE or account budget(s if it involved multiple producers) as well, which could trigger action from the Compliance & Governance module of the People, Ideas & Objects application, if that is what management desired or deemed necessary and established in that module.

Let's be clear, what People, Ideas & Objects are proposing in the Preliminary Specifications Partnership Accounting module is nothing like any other joint venture accounting system. When we begin to account for the Joint Operating Committee as the key organizational construct. Align all of the frameworks of the producer and the Joint Operating Committee together. And then unleash the innovativeness in both the producer and the Joint Operating Committee, the accounting and systems used by the producer becomes an enabling capability.

Some of the processes that we have described in the Preliminary Specification have been comprehensive and involve multiple organizations, over multiple accounting periods. Whether that’s the development of capabilities that begins in the Research & Capabilities module, touches on the Resource Marketplace and Financial Marketplace modules, and passes through to the Knowledge & Learning module. Some of these processes carry transactions that are as complex and as difficult to quantify as the process. Some will be for the joint account, some will be for the producer to incur on their own and as we learned in the Financial Marketplace module some transactions might be as a result of an investment being made by an investment group.

Discussing the Work Order system that will be able to control the costs associated with a project. The projects contained within a Work Order might be funded by an AFE or a budgeted account, and as a result will be able to control the costs of the project, monitor them and maintain a governance through the use of the Military Command & Control Metaphor of the People, Ideas & Objects system. The Work Order system will be able to designate the ability to charge out the costs to the appropriate owners of the projects at the initialization of the Work Order. Since the Work Order is a multi-organizational system, that is members of a Joint Operating Committee or members of the field services industries will be able to participate in a Work Order, which means they will then have the ability to pre-approve and participate in the project. The accountant working within the Partnership Accounting module won’t therefore be running around trying to seek approval from partners to approve the expenditures to projects that didn’t get approved properly. If everyone within the industry only works to a chargeable Work Order, and all Work Orders are pre approved by those who will be financially responsible for the charges, then the accountants job in chasing their tail is over.

The point of the Work Order system is hopefully not lost on others in the industry. Some may feel that the Work Order duplicates the attributes of the AFE, and I would argue that they are fundamentally different. The AFE approves spending for field level and construction projects of a capital nature. The Work Order system is a means to deploy the capabilities of the producer or JOC in an authorized manner. When we are able to extend the Work Order system across multiple producers, JOC’s and suppliers, the ability to deploy the capabilities of multiple organizations will facilitate the innovativeness that we are seeking in the oil and gas industry. The Work Order may take budget dollars from multiple AFE’s and assign them to a team of engineers that are asked to develop the process necessary to make their firm more capable. Or, departmental budget dollars from two producers may be contributed to a Work Order for their Geologists to attend a conference and conduct research on some promising development. The simple point being that no one does any work without a Work Order to charge their time to, and no Work Order can collect charges that hasn’t had their budget pre-approved.

This will make the Partnership Accounting module workable from the point of view of controlling the costs of the multitude of different arrangements being made within the organization. If the accountants are tasked with trying to put together the costs and determine who is to be charged after the fact, it's generally too late to fix in a cost effective manner. By imposing the Work Order system in this fashion, within the Partnership Accounting module, the arrangements are pre-made and the authorizations are required before the charges can be incurred. Making the accounting for the deployment of capabilities systematic as opposed to problematic.

We are discussing  the role that the Work Order system would have in clearing up the administrative minutiae of the accounting related issues of the Partnership Accounting module in the Preliminary Specification. I want to continue on with that discussion and ask what that has to do with innovation? Lets look at the Work Order system from the perspective of a successful producer who is active in the marketplace and has developed an earth science and engineering capability that scores well in terms of Revenue Per Employee. The CEO is approached by one of the engineers who hears of several other producers who are conducting a study on something of interest to your firm. They are looking for other participants to join in and you want the engineer that brought the news to participate in the project. Assuming everyone of the producers was using the Work Order system they would be able to pool the resources they have within the Work Order that was setup to manage the project. You were able to commit to a 10% share of x costs and would offset those costs with your engineers time and use of office space and some computer resources. (Note all costs are pre-approved and budgeted from other accounts.) With the Work Order you were able to make these commitments subject to the other 90% being committed to, and then your approval would be automatic.

We have here the means of which the people who are working within the industry to commit to programs and projects in a manner that is natural to their business. This is the way that the systems should be working today. What we have is an impediment to the operator in the industry who feels that participation in the study with the other producers would be worthwhile, however, the accounting and approval nightmare will haunt him for the next three quarters and subject him to such regulatory oversight as to question his moral integrity. So instead the project doesn’t get proposed, funded, participated in or done.

In Professor Dosi’s paper “The Sources, Procedures and Microeconomic Effects of Innovation” he discusses the role that such administrative minutiae have on innovation.

The discussion will aim to identify (a) the main characteristics of the innovative process, (b) the factors that are conducive to or hinder the development of new processes of production and new products, and (c) the processes that determine the selection of particular innovations and their effects on industrial structures. 

In our example the financial resources are there. The motivation exists within the organization to do a spectacular job on the project. What happens is the bureaucracy gets in the way and slows things down and makes it a task that requires superhuman effort to even try. And maybe one or two projects will get done each year on the basis of sheer will. But what is needed is the ability to conduct a volume of projects that is far in excess of one or two, and that is beyond the scope of the organizational context as the producers are organized today. Without the ERP systems to define and support these innovative processes, these processes will not spontaneously appear.

The emphasis is once again on the ability of these producers to innovate. The collaborations and interactions between producers and participants in the industry will be the source of many of the innovations that occur in the future. The impediment to doing these are as a result of the bureaucracy and the current suite of accounting systems in use in the oil and gas industry is what I want to draw a contrast to in this scenario using the Work Order. Its time in this day and age that the systems become as complex and as sophisticated as what is being described here so that the innovation in the earth science and engineering disciplines can occur. Professor Giovanni Dosi expands on this point further in the following quotation.

Additional issues include the conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulation, tax codes, patent and trademark laws and public procurement.)

Within the project that the producers want to participate in. Some want to contribute a variety of different resources, some have specialized capabilities that are critical to the project and others are more or less along for the ride and are willing to participate by paying cash. Some have an AFE that has been approved that can direct the funds to pay for their participation. Some will incur the costs as part of their annual payroll budget for engineering. Still others have a working interest partner that are willing to share the costs over a number of Joint Operating Committees. The combinations and permutations of how a Work Order gets financed and funded are unlimited when we consider the number of different ways producers can participate.

Now to have a Work Order system that takes the information from these various parties and assimilates the understanding of the deal from the five or six people who have the “meeting of the minds” to initiate this project is the critical point in which to start. Each needs to codify their understanding of how their participation of the costs are funded and costed to their People, Ideas & Objects Partnership Accounting modules Work Order. All of the participants are using the one Work Order that is shared across all of the producers. This agreements understanding needs to be captured within the Work Order system prior to its approval by all of the producers. Much like an Accounting Voucher the costs need to be coded, but also the sources of the funds need to be identified. This way the system can process the charge within the firm in the manner that it was expected to be. For any charges that are above the threshold that a firm was willing to commit to, that imputes that another firm's cash commitment would be provided to cover those costs. The Work Order should make these cash transactions between these producers as a result of the approval of the document. The point of the exercise is that once the Work Order is approved, the understanding of the deal, as captured by the interface, is executed.

As I indicated the ability for an accountant to follow on with the necessary accounting for these transaction requires significant recreation of the “deal” and time of the parties who conceived of the deal in the first place. A bureaucratic waste of time. The interface of the Work Order should be sophisticated enough to be able to capture the substance of the deal in whatever permutation and combination that is conceived of by the originators. I understand the myriad ways that these can be done and the difficulty in making an interface that captures these. That I don’t think is the difficult part. What I think would be the difficult part would be to make an interface that provides these services in a manner that is simple and easy to use, and captures the deals substance. I, however, know it can be done, and the reason it hasn’t been done is that the budget for software developments like these have not been set out. Its at times like these that people should revisit our revenue model and rethink People, Ideas & Objects approach based on our projected budget.

Continuing on with the scenario of using the Work Order system across multiple producers. I will use this scenario to show how the Partnership Accounting modules integrated nature with the other modules of the Preliminary Specification provides value to these ad-hoc working groups. Also why they are such an important element of innovation in oil and gas.

We used the scenario in the context of engineering, however it could just as easily be used in the area of geology or any other area of oil and gas interest. It could also include the supplier or vendor marketplace to form a working group in that area. The importance of the way the Work Order works is that the producer or participant is able to designate how they are going to participate in the working group. Prior to their approval they are to allocate the source of the funds and where the costs will ultimately go as a result of their participation. This being conducted by each participant or producer in the working group, all within the same interface for the same Work Order in the People, Ideas & Objects Partnership Accounting module.

One of the most obvious areas that this interface will interact with the other modules is the Security & Access Control module. Access to the Work Order will need to be unlimited for a certain point in time and then need to be closed to everyone but the existing members of the working group. This will need to be an interesting point in time when the search for participants reaches a threshold and the people feel the substance for a working group exists. Then only those who are within the working group, or are subsequently granted direct access are able to participate directly in the working group.

With the Security & Access Control module we also inherit the Military Command & Control Metaphor that allows the people to impose a chain of command across the working group. This might be something that they want to do if they have a difficult task or a large group of people. The opportunity to do so is available to them if they so desire as this is part of the Security & Access Control modules core functionality.

The designation of the source of the funds and where the costs will go is coded directly to those accounts. This has the Work Order taking on elements of the Accounting Voucher module in terms of how it operates. Each producers accounting system will be charged, upon approval of the Work Order, according to the way in which they have coded the Work Order. Therefore in that instance it will take on many of the attributes of the Accounting Voucher module.

I see these working groups, as we have called them here, as an important element of how an innovative oil and gas industry identifies and solve the problems that it faces. Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or “tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.”

It is therefore asked specifically, how can the knowledge, information and capability of oil and gas firms solve the technical and scientific problems of the future? How can a firm more effectively employ its capability to solve problems and facilitate the discovery of new problems and creation of their solutions? Clearly some companies are more effective at this process than others, but this research in oil and gas asks, is there a means for an organization to provide a quantum increase in its ability to innovate that leads to higher trajectories of performance based on production revenue per employee?

Having these working groups spawn at will without the bureaucratic and accounting logistical nightmare that they instill today will be an important first step in making the industry more innovative.

The complexity of the relationships within the Joint Operating Committees has to be captured and accounted for in the Partnership Accounting module of the Preliminary Specification. Whether we are talking about the various forms of contribution that a producer may make to the joint account, or how they may participate in a working group, the bureaucratic machinations of the accounting for these transactions can’t stand in the way of innovativeness of the producers.

The freedom to participate is inhibited by the fact that the business arrangements are difficult to capture and account for. What is needed is the ability to develop software that captures the substance of the manner in which the contributions are being made, and then the manner in which they are accounted for. That is the purpose of the Partnership Accounting module, to support the innovative oil and gas producer in the innovative actions they need to participate in. Once again Professor Giovanni Dosi points out specifically the need for the business aspects to support the technical aspects of the business.

Internalization and routinization in the face of the uncertainty and complexity of the innovative process also point to the importance of particular organizational arrangements for the success or failure of individual innovative attempts. This is what was found by the SAPPHO Project (cf. Science Policy Research Unit 1972 and Rothwell et al. 1974), possibly the most extensive investigation of the sources of commercial success or failure of innovation: Institutional traits, both internal to the firm - such as the nature of the organizational arrangements between technical and commercial people, or the hierarchical authority within the innovating firm - and between a firm and its external environment - such as good communication channels with users, universities, and so on - turn out to be very important. Moreover, it has been argued (Pavitt 1986; Robert Wilson, Peter Ashton and Thomas Egan 1984) that, for given incentives and innovative opportunities, the various forms of internal corporate organization (U form versus M form centralized versus decentralized, etc.) affect innovation and commercial success positively or negatively, according to the particular nature of each technological paradigm and its stage of development. p. 1135

Capturing the context of the deals made in both the Joint Operating Committee and working groups as described here in the Preliminary Specification can’t be done on an historical basis. What is needed is for the software to be sophisticated enough for the dealmakers to be using it while formulating the deal, to capture the substance of the deal, so that it will be used to allocate the costs and charge their accounting systems for these costs when they are incurred. Then and only then will the accountants have a chance of keeping up with the speed and innovativeness of the industry as it is contemplated here.

This is the necessary part of the People, Ideas & Objects software development team and most importantly, the user community. It won't be too difficult to capture the multiple and myriad ways in which a deal can be formulated. The algorithm will be complex but with time and money it can certainly be done. The real difficult aspect of making this critical part of the Partnership Accounting module work is the user interface. Having the ability of the user to intuitively use the module to capture their understanding of their part of the deal, capture it in the People, Ideas & Objects system and account for it on that basis. That is what is necessary to make this innovation possible.

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