Introduction
The Partnership Accounting module is a pure “accounting” module from the traditional sense, however, I think there are many attributes and concepts in this module that make it unique and of interest to everyone in the industry.
So for the accountant in all of us, why don’t we start off with the statutory list of required functionality and output. And then get into some of the new concepts and differences that are as a result of using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. So here we go, great stuff!
- General Ledger
- Account Payable and Receivable Detail
- Payments
- Revenues and Royalties (Gross & Net)
- Capital and Operating (Gross & Net)
- Statement of Operations
- Statement of Expenditures
- Gas Cost Allowance (Unique to each participant in a JOC)
- Trial Balance
- Balance Sheet
- Income Statement
- Statement of changes in financial position.
- Field data capture.
- Material balance c/w inventory control.
- Nomination and contract fulfillment.
- And many, many more
This is standard fare for any software provider in oil and gas. And the user community will fill this list with much more. As we will see in subsequent discussion the difference in the People, Ideas & Objects software application is substantial in that the Joint Operating Committee is treated as the partnership that it is. It also recognizes that the costs of the property for each of the producers within a Joint Operating Committee are as unique as the strategies that are employed.
When we talk about the scope of operations that would be managed under the Partnership Accounting module I would say that it includes just everything. Simply the cut-off would be the inlet to any refinery. Therefore the total scope of any upstream oil and gas operation. Let me be more specific about that from the point of view of geography and type of operation managed by the People, Ideas & Objects application.
If we look at the North American oil and gas infrastructure we see a variety of oil and gas installations designed to serve both producers and consumers of oil and gas. Wells, gathering systems, gas plants, pipelines, storage facilities etc. At each point along these systems there may be additional deliveries of product, or sales of product or products inventoried. What seems to be an obvious and simple business becomes incredibly complex when it's realized that each asset may be owned by a Joint Operating Committee itself and hold product on behalf of owners of other Joint Operating Committees. This summary glosses over the incredible complexity of this business when the volume of transactions that occur in these businesses make it an important part of the oil and gas operation.
Critical to controlling the business is the Material Balance Report that is part of the Preliminary Specification. It is the central document that so much of the subsequent process activity is based upon. If someone is to be charged for storage of butane for example, or if someone is to be charged a marketing fee for delivery of product to a customer. Or simply if a sale of a raw gas stream is deemed to have occurred at the wellhead. The Material Balance Report captures these transactions and initiates the flow of documents that need to be generated. It is these documents that also need to be captured and generated in the People, Ideas & Objects Preliminary Specification. To state this as simply as possible is that the scope of the Partnership Accounting module captures all of these activities for all of these facilities as its purpose. Each Material Balance Report must balance. And each reports inputs and outputs balance to other Material Balance Reports. Many of these Material Balance Reports are from one company to another.
As we explore the Partnership Accounting module further we see the reasons why we are taking such a broad scope of operations into considerations. It would be an understatement to state that this area has been poorly served by IT. To approach it from a global perspective that includes production operations, accounting and the other areas that depend on this information would be “ideal,” however, the complexity of the business has always been in the way. The engineering of software has never been available to approach the type of problem that this area presents. I think it exists now. And I think that the Partnership Accounting and Accounting Voucher modules of People, Ideas & Objects provides the vision of how this engineering solution solves this problem.
Pooling of Technical Resources
The first Partnership Accounting issue is related to the fact that the earth science and engineering resources that are of such value in the industry are of a finite number. It is asserted here in People, Ideas & Objects (PI&O) that the “operator” classification may become a thing of the past as firms will find it difficult to staff the engineering and earth science capabilities necessary to meet all of the needs of their firm. PI&O enables producers in a Joint Operating Committee to pool their human resources to ensure they have the required technical needs. The pooling won't be a convenience or nice to have at the Joint Operating Committee level. It will be a necessity for the partners within a property to ensure that adequate staffing of the technical resources are secured. That it will become commonplace that each of the partners are contributing technical resources to the property.
If partners are contributing human resources to the Joint Operating Committee then the systems that the partners use should be able to cost these resources, charge them to the joint account, and have their costs recovered by the firm providing the resource. This also brings up the point that if the operator classification has ceased to be valid, the charges for operator overhead, where the recovery of these costs are realized today, the operator overhead charges should also cease to be valid. If three different producers are providing engineers and geologists to the Joint Operating Committee each should be able to recover the direct or standard costs of these individuals for the time they spent working on the property.
What has been included in the Draft Specification and will be discussed here later in the Preliminary Specification is the Military Command & Control Metaphor (MCCM). The MCCM provides a means in which the resources within the producer companies represented within the Joint Operating Committee, can organize a chain of command through these pooled resources to deal with the governance of the property. This governance along with the ability to cost these resources enables producers to allocate the finite earth science and engineering resources more efficiently. This also assumes that during the building of the Preliminary Specification, that the community is able to determine a somewhat standard chain of command for all members of the industry, standard rates for the people in the industry, and detailed job descriptions for the work that each role within that chain of command are responsible for.
The first point is the most controversial and suggests an alternative way to how the bureaucracy manages their technical capabilities today. Today the bureaucracy builds silo’s of engineering and earth science capacities that are capable of dealing with any and all contingencies that the firm may face. This is a reasonable approach to a difficult business, with the inherent risk profile that oil and gas has, safety is a priority which can be handled in this manner. The problem arises as a result of each and every producer replicating the same capabilities within their organizations. As a result the industry has unused capacity that is unavailable for use at any time and at any place in the industry. At a time when the engineering and earth science talent is at a premium in terms of demand, this hoarding of resources will only continue to escalate.
What if there was a way in which firms could release the surplus earth science and engineering capacity and alleviate the market demand on these resources. Yet still have that surplus capacity available to them. Do this at a lower overall cost and have a higher throughput at the same time. Sounds impossible but that is what is required to solve the problems the industry is faced with today.
If we were able to pool the technical resources from each of the producers who represent the Joint Operating Committee. Then we begin to break down the individual silos and the hoarding problem. One of the key advantages of using the Joint Operating Committee is that all of the partners are financially motivated. Consensus is easily achieved because of this and that will continue.
Now I know the difference between a good engineer and a super star. The perception that “our” capabilities are better then “theirs” type of comparisons. The problem will however come down to, in the hoarding situation, no one is left to do the bread and butter engineering that should have been done two weeks ago. Life is one percent inspiration, ninety nine percent perspiration. The bread and butter issues are what need to be taken care of. How the majority of the bread and butter work gets done is the focus here.
And there is another issue. Using standardization and the division of labor as the solution to the limited technical resources. The enhanced productivity from standardization being the objective of the exercise would require that each producer would need to hoard even more resources in order to cover the entire scope of earth science and engineering effort. Making the manner in which oil and gas producers are organized today archaic and obsolete.
The solution to where the enhanced engineering and geological throughput comes from is where the division of labor and specialization come into play. But first let me reiterate that in this day and age, to manage a process, or to change a process requires that the software to manage that process be built first. People, Ideas & Objects are proposing to build these processes for industry so that these changes can be made. It is not enough to attempt to make the changes in the business without the software. That should be painfully obvious. It was in the Preliminary Research Report that I stated this, and the bureaucracy have interpreted this to mean, by ensuring no changes take place to the software, ensures they are unchallenged in their current role.
To approach the mountains of earth science and engineering work that needs to be done will require a new approach based on the tried and true division of labor and specialization principles. By breaking down the jobs into smaller more specialized components the process can be managed in a way that is faster and more efficient. The productivity of this process would be an order of magnitude more efficient than what is done today. This process would be managed through the Partnership Accounting module with the Military Command & Control Metaphor to maintain the chain of command and authority from the producer firms. What may have taken 6 engineers and geologists on a full time basis may now be done by 35 part time engineers and geologists. These engineers and geologists may be assigned to over 100 properties or Joint Operating Committees. Management of the process, as one can see, is the key to productivity. The point of the exercise would be to get the bread and butter engineering and earth science work completed.
The need to have a system that can cost these resources is what we need to discuss. How the industry ultimately organizes the bread and butter engineering and earth science that needs to be done, whether in-house, or outsourced is unknown. However, the ability to manage the process and cost them to the joint account will be necessary.
We discussed the manner in which the division of labor and specialization could increase the throughput of the engineering and geological capabilities of the oil and gas industry. How the mountains of this type of work could be approached by pooling the technical resources of the producers represented in the Joint Operating Committee. We now want to talk about how the cost of those resources would be recognized and recovered in the Partnership Accounting module of the Preliminary Specification. What this discussion is also about is the multitude of equalization's that need to be taken into consideration each month for each producer in order to calculate their working interest share of the property. And how the Joint Operating Committee authorizes these funding requirements.
The first issue that needs to be dealt with is who is going to charge for work done at a Joint Operating Committee and why? For that we need to revisit the Work-Order system that is part of the People, Ideas & Objects application modules. Recall that these are based on the AFE, lease of the partnership or overhead accounts of the producer and are therefore a pre-approved means of controlling the costs. Without a valid work-order no one can be charging any work to an AFE, lease or overhead account. And with a work order, only the work that is authorized through an AFE, lease or overhead account will be completed.
For the purposes of this discussion, we have an example that assumes your firm has contributed two engineers and two geologists to a property that is producing a positive cash flow in the current month. The part-time costs associated with the authorized work was part of an AFE approved by the partnership, and the work order was prepared by one of the producer firms. The hourly costs of these employees is captured in the work order and calculated based on standard costs. These standard costs are then charged to the joint account as represented in the Partnership Accounting module with an appropriate revenue offset for your firm for providing the engineers and geologists. For the purposes of accounting lets suggest we process this accounting entry. The reason for the $900 is the standard costs vs. the actual costs of $1,000.
Dr. Salaries 1,000.00
Cr. Payroll
1,000.00
Dr. Joint Account 900.00
Cr. Revenue Offset 900.00
Now when the clearing of the accounts at month end occurs there is also an equalization so that any contribution that any producer made to the joint account can be taken into consideration. These can take the form of whatever is agreed to by the partners and this example assumes that technical resources have been agreed to. The case that we are assuming here is going to distribute the $900.00 in engineering costs to the partners. If you had a 25% working interest share then you would therefore be responsible for and charged $225.00 of these costs. And the Revenue Offset would be processed at 100% or $900.00 as a revenue item. Therefore the net proceeds in the joint account of this transaction would be revenue of $675.00.
Now this example was a cash flow positive scenario and the question needs to be asked what happens when the Joint Operating Committee is in the very familiar situation where it doesn’t have any revenue. This situation remains the same. The net $675.00 in the above example is derived through the payment of the costs by the other partners and that remains the same. This producer would still show a Revenue Offset of $900.00 on their Statement of Expenditures and the net balance would, since it has no revenue, be for a cost, not an income.
How these equalization’s are handled is proposed to be automated through the Work Order system of the People, Ideas & Objects application modules. Capturing the time of the individuals as they worked on the specific approved project would generate the above accounting entries. Then the clearing of the accounts would account for any subsequent equalization’s at month's end.
The Beginning of Automation and the Material Balance Report
The best way to describe the similarities and differences between Partnership Accounting and the Accounting Voucher is to pick up the discussion of the Material Balance Report. (This discussion assumes that you have read the Material Balance Report material in the Accounting Voucher module.) When we last discussed the report in the Accounting Voucher we noted that the voucher needed to balance the debits and credits as well as volumetrically for material, system and partnership balance. Note that these are all the monthly variables that have to do with either financial transactions or production volumes for the current month. Therefore these monthly variables would be processed through the Accounting Voucher.
We also discussed a “template” that contained information that was used to process the monthly variables. The wells that production was from. The contracts production was sold to, and the functional units that process fees may have been charged on, etc. These 100% share constants are part of what are contained within the Petroleum Lease Marketplace module and represent the whole contracts. They are pulled from the Petroleum Lease Marketplace module, or elsewhere, to populate the “template” that reside semi-permanently in the Accounting Voucher.
Now the Accounting Voucher, in the instance of the Material Balance Report, is a Joint Operating Committee voucher. Therefore the clearing of the accounts will be to each of the producers and they will each have access to the Accounting Voucher. The Partnership Accounting working interest share constants, which is similar in its makeup to the “template” in the Accounting Voucher, are a check and a balance for the Accounting Voucher calculations and each individual producers share to ensure that their interests are being calculated correctly in the Accounting Voucher. Since they are based on their understanding of the agreements as represented in the Petroleum Lease Marketplace module, there should be no variances. However this is oil and gas, if there was a variance then the producer would be notified before the voucher could be closed.
I think that to have a variety of systems checks and balances on the calculations are a necessary part of the Partnership Accounting module. In the hands of the People, Ideas & Objects software development team, and user community I think this area of the module could become quite sophisticated, and as opposed to just tripping up the closing of the Accounting Voucher, be quite helpful in determining a number of accounting related difficulties to focus on.
If a variance should arise in any area there would be a reason for it and upon further investigation probably lead to some adjustment. Any changes to an agreement that your firm was not made aware of would show up immediately. The data within the producer firms could not get out of line for more than the current month without large variances showing up somewhere. This system of checks and balances working in an automated fashion, if the data was updated appropriately, then the various instances of the data would be updated in the “template,” therefore leading to no variance. Once the “template” was setup, the user would only need to deal with any variances and work to resolve them. Ensuring that the producers accounting was being processed appropriately and the focus of the accounting resources was only on the issues that were of material concern.
It is at this point in the exercise that each producer within the Joint Operating Committee will have factual, subject to the usual amendment process, volumetric information. It is with this factual information that we can begin the follow on processes that are based on the volumetric information that is provided. If there is an amendment that is processed we can assume that it will also be of the same factual quality and be able to process it in the same automated fashion. Once we have been able to settle the volumetric information into a quality that is impeachable in the ERP system then the rest of the system can be automated based on those volumes.
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. 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 number.
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 JOC together. And then unleash the innovativeness in both the producer and the JOC, the accounting becomes a torrent of activity where no transaction is the same as any other. A little poetic license helps my writing style.
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 was 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 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, this is how they become the annoying bothersome people they can become. 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 join 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 set up 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.
Let’s continue on with the scenario that we have been discussing regarding the Work Order system in the Partnership Accounting module of the Preliminary Specification. We discussed how one producer could participate in a study with other producers by setting up a Work Order to capture their involvement. Their contribution involved one engineer, some office space and computer time. That they would contribute some cash was also a possibility as they signed on for a total of 10% of the projects projected costs. I want to talk about the other producers involvement and how the Work Order system, being a multi-organizational system, is able to capture the different ways in which each producer will participate and account for these differences within the People, Ideas & Objects Partnership Accounting module.
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 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 what ever 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 then 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 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.
There was one area that I thought that we needed to go back and clarify. It was in the area of budgets for the work that might be done in various projects through the Work Order system or in AFE’s. I thought that we should add another data element to the budgeted information, an “Unallocated Budget $” which reflects the amount of the budget that has not been spoken for.
We discussed previously how a number of producers would collaborate on a project to conduct some research. The Work Order system of the People, Ideas & Objects Partnership Accounting module enabled the producers, who may not have been affiliated in any form or fashion until this working group was formed, to be able to form and contribute to the project. The capturing of the meeting of the minds was the objective of the Work Order system, in that it would capture the manner of each producer's contribution and method of payments at the time the project was being formed. This enabled them to be free of the bureaucratic difficulties that come along with participating in these types of working groups. The accountants have a capacity to make participation in these more difficult then they are worth, and therefore, the working groups are avoided. The reason that we have to cut through the bureaucracy and encourage the use of working groups is that participation in these types of activities are critical to an innovative oil and gas industry.
The way that the interface for the Work Order will work is there will be two elements to the accounting interface. One will be the accounting for the costs. This will list the costs of the working group and your working interest share based on your participation rate. Fairly simple so far. The second element is where the problems come about. The participation can be funded from a variety of different sources and contributions. Some will have a key piece of research that is the foundation of the project. Some will contribute time and some will be able to contribute cash. The combinations and permutations are really unlimited. The one constant in these contributions is that they all have budgets. The second element will identify the source of funds or contribution that is to make up your participation in this working group. It will need to be determined if that means cash will be transferred from your firm to others by simply clicking on a box in the interface. Once all of the producers have completed their interfaces the balancing of the Work Order will be attempted with any variances worked out to determine who will make up any shortfalls. Once all the shortfalls are resolved the work can begin.
The issue of the budget is the point of this discussion and remains somewhat outstanding. How does the user know that the account that they want to draw from still has budget dollars available? We need to have some numbers available to the user that tells them the amount that is in the account, the budget for the account, and the amount that has been committed to other working groups but has not been expended yet. Enabling the user to not overextend that account and find that they can not use it when the time comes to pay the bills. And once they have made a claim on those resources, by selecting that account for use in a Work Order, that their Work Order will have a priority claim on those budgeted resources. Therefore when the user in a Work Order or AFE in a manner such as described here, sources a budgeted amount for use in a working group, that budgeted amount, upon approval of the Work Order, is allocated to that working group.
The Decentralized Production Model
Traditional oil and gas accounting systems have sought to identify 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 if production is shut-in, the costs incurred will track revenues. 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 Accounting role 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 Accounting service provider. This will be a change as a result of using the Joint Operating Committee and the elimination of the “operator” designation on any one specific producer.
Many of the costs that might have been incurred by the “operator” as administrative overhead and were to be covered by the various provisions of calculating overhead allowances for the operator will be eliminated in the future as a result of using the Joint Operating Committee. These 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 account. 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 transaction costs and the 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 would incur the costs during the time that production might be 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, predominantly through People, Ideas & Objects Community of Independent Service Providers (CISP), 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 Community of Independent 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 specific producer.
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 legislation enabling the producer 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.
The recording of operating and capital costs for the joint account will not take too much of a specialization for a service provider to acquire. Most smartphones can now code an invoice to a fairly high level of detail. The interaction between vendor and producers is something that can capture the high levels of detail that are needed in an ERP system. Particularly one in which we are setting out to design. The real value for a service provider might be in the area of transaction design which falls under the Accounting Voucher module. Another area might be in Audits and reviews.
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. 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 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 accounting functions are driven by standards of practice. These standards of practice are critical elements in the market supporting institutions necessary for the accounting firms to operate in the manner that was recently described here. It is the capabilities of the accounting marketplace, the skills, knowledge and experience 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 by these transactions being processed 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 accounting service providers will need special accounting 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 accounting firms 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. Besides they could always visit. If you wanted them to.
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. Now we’re going to get them to ask themselves how best to address the industries accounting needs? Imagine that, accountants considering how best to address the industries accounting needs. It’s not that we’re being mean to the accountants, it's just in their nature. 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 a Service Level Agreement they will be free to organize and approach other producers for similar services and attempt to discern where their specialization 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
The Hard Sell on Specialization and the Division of Labor
If we now think how the industry could be organized in a manner to specialize the accounting to better handle the accounting requirements in the Partnership Accounting module we see many opportunities. The Material Balance Report requires seriously advanced accounting skills. The understanding of the industry, and the understanding of the property has to be well understood to correctly account for all of the aspects of the property. Another element that makes this accounting perspective differ is that there is no real operator designation in the future. With each producer contributing what they can to the joint account, the ability for one company to be designated operator, particularly from an accounting overhead point of view, may be too onerous to consider. Instead, the more reasonable approach might be for the Joint Operating Committee to hire a service provider to conduct the accounting on behalf of the partners in the JOC. This service provider could be organized to manage the Material Balance Report for a variety of producers who have interests in a certain geographical region.
Within that service provider they may have people organized in a manner that focuses on the process and prepares the accounting in a fundamentally different manner then it would be done if it were done at one producer firm. Other specialized accounting firms may specialize in accounting for the Work Order process, or even just accounting for currencies. The point being that the specialization necessary to have the accounting requirements “on staff” at each producer firm will also be seen as too great of a luxury for any one producer. The ability to access these talents through other means will have to be provided. And the demand for these talents will grow as the volume of activity in the industry accelerates as it is expected to do. Therefore the need to expand the supply, with the somewhat fixed resources that we have today, and to provide a better quality of service, can only be provided through the further division of labor and specialization.
It is here in the Partnership Accounting module of the Preliminary Specification that we find the competitive advantage of the People, Ideas & Objects application modules. We have discussed in the Partnership Accounting module the Work Order system and briefly the division of labor and specialization. I want to highlight these two points and show how they relate to the innovativeness of the oil and gas producer, People, Ideas & Objects value proposition and the competitive advantages we offer the oil and gas industry.
As a producer, your competitive advantages reside in your land and asset base. They also reside in your earth science and engineering capabilities that you can apply to your land and asset base. In terms of the capabilities that you have developed in handling the accounting nuances of foreign currencies. Capabilities such as these don’t provide too much in terms of your competitive advantage or overall value to the firm. They are however, a necessity and a cost of doing business, but not a core capability. They can best be attained through the Community of Independent Service Providers that are affiliated with People, Ideas & Objects. And in that sense these accounting services provide an enhancement to the competitive advantages of the oil and gas producer.
It is through the enhanced division of labor and specialization that is at the core of People, Ideas & Objects software modules that we find the realization of the producer firms competitive advantages. Without the enhanced division of labor, that requires the software to identify and support the processes, the producer would not be able to approach the larger volumes of oil and gas production. In addition to providing this strong competitive advantage to the producer firms, use of People, Ideas & Objects software applications also provides the most profitable means of oil and gas operations. The most profitable means of oil and gas operations is achieved through our value proposition of allocating the one time costs of the software development across the subscribing base of producers. Therefore, being the lowest cost software provider, and secondly, enabling each producer to have the highest probable production output through specialization and the division of labor; lays the foundation to our claim that we provide the most profitable means of oil and gas operations.
But there’s more. In addition to the controversial claims that I have already made. The way that the eleven module Preliminary Specification enables and unleashes the innovativeness in producer firms is evident in many ways. Here in the Partnership Accounting module, in the Work Order system we see how it provides producers with the ability to collaborate and seek knowledge. These, as you may recall, are what Professor Giovanni Dosi calls technical trade-offs. And these trade-offs facilitate the ability for industries to innovate on the changing technical and scientific paradigms. Crucial to the facilitation of these trade-offs is a fundamental component that spurs the change and is usually abundant and available at low costs. For innovation to occur in oil and gas, People, Ideas & Objects asserts that the ability to seek and find knowledge, and to collaborate are two “commodities” that are abundant today. With their inherent low direct costs, knowledge and collaboration are the triggers for a number of technical paradigms which will provide companies with fundamental innovations. The Work Order system as described in the past few days eliminates the bureaucracy as an impediment in making these working groups form. Unleashing the collaborations and seeking of knowledge.
This discussion is a hard sell of the attributes of the Preliminary Specification. What so much of our organizations and the people that work within them do from now on is defined and determined by the software that is used. We need to take control of the production of the software, to take control of the means of production. That is what People, Ideas & Objects is about.
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.
I had mentioned previously that at no time should any of the staff at a producer firm or Joint Operating Committee be working and not having their time charged to a Work Order. The People, Ideas & Objects system will have the ability to charge your time to a valid Work Order and it is incumbent on the employee or contractor to ensure that they have their time charged to a valid Work Order number. These statements were made earlier on in the Preliminary Specification and now I can state that this also applies to the AFE. So the statement should read that it is incumbent on the employee or contractor to ensure that they have their time charged to a valid Work Order or AFE.
Some may wonder what is the difference between a Work Order and an AFE? AFE’s within the Partnership Accounting module are fundamentally no different then the industry understanding of an AFE. And that is, it's a means to deploy the Joint Operating Committees capital within the Joint Operating Committees domain. A Work Order is different in that it is not affiliated with any formal partnership model. It is an informal group of producers that have come together to participate in a small project that is a one time event. Which will require the need to aggregate and distribute costs and revenues based on a working interest distribution. It has a formal approval process, but not as rigid as the AFE’s in that it requires budgetary approval only. They can be internal or external and are used to control the deployment of the budget of the firm / Joint Operating Committee.
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
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 dependence on using Joint Ventures more 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 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 or 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.
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 talked 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. However, 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 measures vs. metric reporting standards. How gas is nominated (daily) and marketed (annually). Finally the royalty holders and the ownership of the properties expect to earn something for their efforts. And each of these variables could generate their own amendment processes.
The myriad combinations of possibilities that happen within oil and gas have to be captured and handled within the systems that are used in oil and gas. That has not happened 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 oil and gas producer. What we are doing is adopting the Material Balance Report as a function of the Joint Operating Committee. Which in reality it is. If however we separate it from other Joint Operating Committee’s from an accounting perspective then we can begin to deal within just that JOC as its own autonomous legal entity, which it is. This discussion may initially not make sense until we get into the Accounting Voucher module, and we get into the final aspect of this solution which is where we encapsulate all of this reporting within the accounting system itself.
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 then 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 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 to. 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 oil and gas producers.
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 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 JOC 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, that each producer within a major area pursuing their own unique strategy irrespective of each other's strategy.
Lastly we most recently noted that the JOC 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 the existing ERP systems that operate in the oil and gas industry today. People, Ideas & Objects (PI&O) is the only system to recognize, identify and support the Joint Operating Committee’s frameworks. In addition, PI&O 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 and accountability 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.
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 and Joint Operating Committee. 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. 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 Applications.
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 and Joint Operating Committee, no matter their size, with the mission critical capabilities of the industry leader in all of these product categories.
We have discussed how the Material Balance Report would be built using the Oracle Fusion Middleware layer of the Oracle stack of technologies. The Material Balance Report ties together so many of the internal processes of the producer firm and Joint Operating Committee. The production and royalty accounting, sales contracts, nominations, to name just a few, all of which have to match the throughput of the facility or the point of production, and all have to match to other systems within the firm or Joint Operating Committee. Any change in one system will have to be dealt with by designating some other action to bring the system back into balance. The Material Balance Report is a key part of how the production and operations of the oil and gas industry manages their production and product delivery. And to achieve this, it assumes that the industry is willing to actively participate in the development of People, Ideas & Objects Preliminary Specification.
Technically this is one of the more difficult areas of the Preliminary Specification in terms of risk. It would also be one of the areas where value would be gained by having the production properly accounted for in an automated fashion. Should this be done? That depends on the user community and their determination through the remaining part of the Preliminary Specification. A large part of that community is the producer community itself. If the producers see value in this then they will have to be the ones that push through and make the Preliminary Specification real. I can only write about what is possible. And the Material Balance Report as I have expressed here is technically possible.
The next twenty years in the oil and gas industry will be the most dramatic we have ever seen. The demand for energy will ensure that prices remain high. And with so many people joining the middle class, should we really be debating who will fund and drive People, Ideas & Objects forward? The financial recession has us locked in a perception that is backward looking and we can’t see the opportunities that will soon be upon us. Does that future involve an Information Technology perspective that is just a cost, or should it be a vision such as the Preliminary Specification as it stands today.
Staying on the topic of the Material Balance Report and the technical risk that is associated with that element of the Partnership Accounting module. We find that the access privileges to give the right people, the right information at the right time would be nightmarish in their scope. I agree, particularly from the point of view of having the participating producers who are members of the Joint Operating Committee reviewing the information contained in the Material Balance Reports. In addition with our zeal to have the industry operate more efficiently we have opened these interfaces to the production and royalty accounting service providers who need access to the Material Balance Report to do their job on behalf of the producers in the Joint Operating Committee. Why can’t we just print out a Statement of Operations for each producer and be done with it?
In answer to that last question, its automation. With so much of the production process subject to amendment, much time and effort is expended in making the corresponding changes in the subsystems that rely on the processes in the Material Balance Report. If the Material Balance Report reflect fact, although it would still be subject to multiple amendments, then the subsystems that operate off of the Material Balance Report could use its information to compile their data. Royalty volumes might change, and the royalty calculations would change as a result. All without user involvement, etc. As long as the Material Balance Report remained in system, partnership and material balance, everything that depends on that data can be relied upon from a volumetric point of view. Any of the volumetric amendments would be populated through the system immediately.
What we have also learned is that the information contained within a Joint Operating Committee is not of the confidential nature to any one producer. The reserves, accounting, strategy formulation and internal discussions of the producer firm are held within the firm and are not party to the Joint Operating Committee. The only information that is held in the Joint Operating Committee is of a semi-private nature that is shared amongst the partnership. Information such as production, costs, well file and other data that is usually available from public sources as well. Therefore, having the producer firms, and the service providers accessing the Material Balance Report does not expose any one of the producers to any material risk of any highly confidential information.
Turning to the Oracle Fusion Middleware stack we look at the Business Process Management Suite to help us understand how the Material Balance Report can be built. How we can take a unit of production through the various gathering and functional units on to the ultimate point of sale. Having the balancing of each functional unit consider that unit of production and the activities associated with it. Noting for the producer or the owner of the gas plant the costs and revenues of processing and gathering, and the disposition of the product to the contract it is sold under. Each of these processes and activities triggering actions within the General Ledger and creating an invoice and sales records for both the producer, the plant owners and the holder of the gas contract. Automation of the process based on reliable volumetric facts.
Let's turn now to the comprehensive nature of the accounting that is done in the Partnership Accounting module of the Preliminary Specification. What ever kind of accounting that is done in the Preliminary Specification, whether it be for the producer firm or the Joint Operating Committee, the Partnership Accounting and Accounting Voucher are the two modules that capture everything the accountant user 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 this 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. We have also talked about the royalty systems during the discussion in the Petroleum Lease Marketplace module and that discussion would apply to the Partnership Accounting module as well. It would be the determination of the user community if those calculations are done here or there. And the Gas Cost Allowances and how they are potentially unique for each owner in the Joint Operating Committee, and as such make the royalties unique for each producer.
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 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 an automated system from field data capture to financial statement is a broad scope, and one that should motivate everyone to participate in this worthwhile endeavor.
It has been the tradition in the oil and gas industry that people who work in the field are charged directly to the Joint Operating Committee or joint account. When people are located in the head offices, such as the geologists and engineers, they are covered by the overhead allowances that the operator is able to charge to the joint account. What is different in the People, Ideas & Objects Preliminary Specification is that we have addressed the long term shortage of the technical resources of the engineers and geologists. We have done this through what we call the pooling of these resources by the participants in the Joint Operating Committee. Requiring that we charge these resources directly to the Joint Operating Committee irrespective of which producer firm the resource originated from. This enables the costs of the operation to be accurately captured, the producer to recover their costs and the resources needed for the property to be sourced from any of the producer firms that has the appropriate geologists or engineers for the task.
In the Partnership Accounting module we will have the ability of any producer within a Joint Operating Committee to charge a resource for the hours they have spent on a task. We have also developed the means in which the Joint Operating Committee can manage these resources once they have been made available. It is here when the Military Command & Control Metaphor (MCCM) comes into play that these resources are adopted when and where they are required. There has to be someone who is designated in command of the work that is being done and the resource can be put to good use immediately. Otherwise some producers would just charge their staff out all the time. Review of the Security & Access Control module will show the extensive use of the Oracle Identity and other products that are used there. These are the base in which we will build the MCCM.
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 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 MCCM.
The ability of each producer to have the just-in-time capabilities to deal with all of their earth science and engineering demands in-house is diminishing. Building individual silos of capabilities was possible when there was an abundance of these resources. Now with a diminishing supply the ability for each producer to maintain their own silo creates unused and unusable industry wide capacity that needs to be unleashed. This is also creating overall shortages of these key resources. With this proposed solution, and with each producer pooling their resources, this unused capacity is freed up and used enabling the overall industry capacity to increase from the same resource base. The impediment to this happening is the ability for the costs to follow the producers commitments, and command & control of the Joint Operating Committee. By using these technologies, in this manner, the innovative oil and gas producers and Joint Operating Committees are able to pool their technical resources and increase the volume of work conducted within the industry.
Our discussion turns to the Work Order system contained within the Partnership Accounting module of the Preliminary Specification. We have different elements of the Work Order system working within the Partnership Accounting module. One is to ensure that no work is being done within the producer firm or Joint Operating Committee that is not authorized by a Work Order. And the other is the ability to form working groups with other producers, who may or may not be partners, to study and research areas of interest. Both of these elements contain similar objectives of cost control and reporting, however have differing stakeholders.
With respect to the internal reporting you want to make sure that all of your staff are charging their time to an authorized Work Order. A Work Order can source its budget from either an internal departmental account or an AFE and be for any purpose that the originator desires. Each employee needs to ensure that their time is being charged to a Work Order at all times.
The other element of the Work Order system involves multiple producers working together in a project or working group. These are formed to study or research items of interest in the geological or engineering disciplines and are critical to an innovative oil and gas industry. The difficulty in these working groups is the complexity and cumbersome administration in dealing with the accounting for them. This has led to the situation where few working groups are being participating in. The industry needs an abundance of these working groups to increase the knowledge and understanding of the underlying sciences and therefore we need to remove the bureaucracy from impeding their being formed.
People, Ideas & Objects will develop an interface that enables the producers, who may have had no working relationship, to form and contribute any manner of consideration towards a working group. As long as the producer has a budget in which they can allocate resources to the working group the interface will enable the producer to commit to the other producers these resources and the working group can form. The key to the working groups formation is to have the system capture the “what and how” of the agreement when it is formed, and not try to recreate it two months down the road.
What we will use to develop the Work Order system will be the Oracle Fusion Middleware Business Process Management Suite. It will provide us with the ability to work with the user groups to detail all the permutations and combinations of what these working groups might look like. From there we will be able to develop the application to meet the needs of the user groups and make sure that the user interface provides the working group with the ability to capture the deal as it is conceived. This will also involve the use of the Oracle Fusion Applications Financial Management Suite General Ledger, Accounts Payable, and Accounts Receivable which are already part of the Preliminary Specification.
Whether it is an internal or external study, the innovative oil and gas producer needs to participate in increasing their knowledge and understanding of the underlying sciences. We learned that “knowledge begets capability, and capability begets action.” How these working groups are formed is the easy part. It's the bureaucracy that gets in the way. We need to eliminate that bureaucracy with these systems and have the sciences expand.
This topic of discussion is about one of our favorite tools, specialization and the division of labor. We have used these to carve up the traditional oil and gas producer to a slimmed down earth science and engineering focused team. It is here in the Partnership Accounting module that the implications of many of these changes are managed and dealt with. It is also here where we have the Oracle Financial Management Suite of modules open to providing accounting service providers access to the producers and Joint Operating Committees systems to process their data.
The reason we are using specialization and the division of labor so extensively in the Preliminary Specification is that it is the one proven method of expanding the economic output of a given resource base. By reorganizing the accounting, land, production and exploration administration functions. And by enabling the producer to specialize on their earth science and engineering capabilities, more can be done from the same resources. And we are not talking about small changes, we are talking about very large volumes of increases that are possible as a result of relying on these tools.
We have discussed the need to have a variety of accounting service providers who replace the traditional accounting department in the oil and gas concern. Having all of the capabilities, from an accounting point of view, necessary to meet the needs of the producer is difficult to do. Possibly Exxon can achieve this scale. The rest of the industry needs to make do with what they have and in the complex accounting regulatory environment that exists, that may be an unwise strategy. The ability to hire accounting service providers who specialize in certain domains to undertake the specific tasks of the producers is the manner that specialization and the division of labor suggests that we approach the problem. The two examples we have used are the production accounting service provider who is located at the gas plant, and the royalty accounting service provider who has specialized in Texas state royalty administration. Other examples could include tax administration, accounts payable processing, accounts receivable collection, SEC regulations and many more. The volume in the number of service providers generally offsetting the need to source these services within the firm at some point. Assuming healthy markets for these service providers, a reasonable assumption given that producers are no longer directly employing accountants, an abundance of service providers would be available to meet the demands of the producers and Joint Operating Committees.
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.
Access privileges regarding these service providers is therefore a must have in order to make this situation productive and worthwhile for the producer and the service provider. The Security & Access Control module considers these remote access considerations and the user community should be involved in making certain that this need becomes reality. Don’t come to me after the Preliminary Specification and say the security system is not strong enough, this is your system and you have to make it what you need for it to be. The access requirements of the service provider would be limited to their domain of specialization. For example if the royalty accounting service provider was working only in Texas then they could be limited to those accounts and Joint Operating Committees that are pertinent to their domain. The CFO of the producer firm, in the process of hiring the service providers, would enable the access to the service provider. This contract could then be managed on the basis of a service level agreement and provide both parties with a clear understanding of what is required.
One of the key differences in the use of the Joint Operating Committee is the ability to use the “Decentralized Production” model and discard the “High Throughput Production” model that has been traditionally used throughout the industry. When the partnership represented in the Joint Operating Committee is able to agree, and subsequently decides to implement the plans to scale back production due to commodity price declines. Having the production and overhead costs associated with that production to also decline is a necessary part of the innovative oil and gas producers capabilities. People, Ideas & Objects Preliminary Specification provides this opportunity to remove the marginal production from the market until market prices recover. Allowing the producer to limit their losses and indirectly control the prices that the markets attain.
Managing price declines through reductions in capital expenditures is a very blunt instrument. The impact of reducing your spending plans on the natural gas prices might make changes years from now, however, the need to change the natural gas prices in the current market is sometimes necessary. Having the ability to agree and curtail production through the Joint Operating Committee is something that is possible today, yet it is not done due to the bureaucratic ways within the “operator.” Who is going to make the decision? Let me be clear that the need to reduce capital expenditures in a market that is similar to the current natural gas marketplace is sometimes necessary. What is also required is the need to have the ability to curtail the production. And to have this done on an industry wide basis.
Through the specialization and division of labor that we recently discussed. The costs associated with the production and royalty accounting service providers, as with all the service providers, is dependent on there being production. Without any production the overhead costs of production and royalty accounting costs are not incurred. Leaving the costs of capital as the only cost that is incurred during times of shut-in production for the innovative oil and gas producer. And if it can be found that there are ways in which the Joint Operating Committee can apply new capabilities through the Knowledge & Learning module, to reduce the overall costs of production, then the shut-in production might be able to return to production sooner due to having the lower costs of production.
The Partnership Accounting module has a role in this process. First to determine if the production has become nominal and should be a candidate to be shut-in until market prices return to a higher level. Operational decisions of this nature are made at the Joint Operating Committee and each partner will be receiving the same bad news regarding their property from their statements in the Partnership Accounting module. Included in the monthly reporting for each Joint Operating Committee is a complete set of financial statements of the property. These include Balance Sheet, Income Statement and Statement of Changes. Recall that banking may be represented as a claim against a specific property. And please note that because the royalties are unique to each producer only the partners share of these reports are calculated. These financial statements will include the detailed overhead charges and other accounts that were once charged as overhead items. In all, the Joint Operating Committee looks more like a stand alone enterprise, which is what it truly is.
When these reports show that the property is marginal the decision can be made through the “Marginal Production Threshold Interface” of the Petroleum Lease Marketplace module. There the partners in the Joint Operating Committee can make the decision to curtail the production. The subsequent reports through the Partnership Accounting module would show what would be required in terms of commodity prices and volumes of production to make the property profitable again. Looking at this situation in terms of what new capabilities were available through the various working interest partners, as represented in the Knowledge & Learning module of the Preliminary Specification, could trigger some additional work be done in the Joint Operating Committee to enhance its profitability and return it to production sooner.
Conclusion
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. More is detailed in the Introduction of Partnership Accounting. It is also the source of the Material Balance Report that it and the Accounting Voucher are involved in preparing. Recall that the Material Balance Report is comprehensive in the People, Ideas & Objects Preliminary Specification. In that it balances all production and facilities material each day and month for all products. It must balance from a material, partnership and system point of view each month within the Accounting Voucher. It relies on the same integrity that the accounting systems debits and credits relies upon. Make a change in one area and it has implications in many other areas that need to be considered before the systems will resume its overall balance.
Pooling of the earth science and engineering resources of the producers need to be chargeable directly to the Joint Operating Committee. This is a replacement for the overhead allowances that are provided for in today’s marketplace. With the shortage of these critical resources pooling of the technical resources in order to make up any shortfalls will be the means in which producers ensure each Joint Operating Committee is adequately resourced. Therefore any and all of the producers within a Joint Operating Committee need to have the capacity to charge their resources to the joint account and recover these costs. In addition, once the Joint Operating Committee is adequately resourced a means in which to govern those resources is necessary and that is provided through the People, Ideas & Objects Military Command & Control Metaphor.
The innovative oil and gas industry needs to increase its overall level of knowledge to become more innovative. We have learned that “knowledge begets capability, and capability begets action.” The ability for producers to participate in working groups with other producers on a ad hoc basis will be one way in which to increase the knowledge of the industry and the producers who participate in these working groups. The ability to form and participate in these groups is difficult due to the complexity of the way they are organized. The Work Order system of the Partnership Accounting module details a method in which these groups can be formed and contributions can be made on a variety of different basis. As long as a producer has budgeted resources in some form then they are able to commit to the working group and participate. The objective of the system is to remove the bureaucracy and nightmare accounting from these so that the Working Group can form and the innovation of the industry can proceed.
And we have talked about some purely accounting related matters here in the Partnership Accounting module. Things like how the accounting cutoffs are handled, currencies and some of the special requirements that some jurisdictions have with respect to accounting months and production months. We also talked about how the system will have only one electronic copy of any document or voucher. Then users will be viewing only the latest in terms of the status of that document.
Who would be conducting most of the accounting for the producer and Joint Operating Committee would be different in the People, Ideas & Objects system. Through the application of specialization and the division of labor the accounting needs will be completed mostly by service providers. Production accounting service providers who are resident within a gas plant area and service all the producers who use that gas plant. Revenue and royalty accounting service providers who specialize in specific royalty jurisdictions exclusively, etc. This application of specialization and division of labor would also extend to the production and exploration administration areas. All of these costs would be charged directly to the Joint Operating Committee as the designation of operator is a concept that is relegated to history in the People, Ideas & Objects system.
It is that direct charging of the administrative costs to the Joint Operating Committee that enables us to move from the “High Throughput Production” model to the “Decentralized Production” model. The “Decentralized Production” model provides us with the ability to match the production and overhead costs to the revenues of the property. Therefore, when the property is shut-in, there would be no overhead incurred and the property would not incur any operating losses. It is through the “Decentralized Production” model that the producers would be able to indirectly establish a market floor for the oil and gas prices they would receive.
