Peak Oil, and what I think it means to the petroleum industry.

I have scrubbed this entry please see the information in the previous entry "A Quick Summary of Where We're at".

A quick summary of where we're at.

The concept of peak oil has finally attained the attention that it should. Now is the time that we do something about it. The National Petroleum Council's report provides the undisputed evidence of the situation that the energy industry faces. I think our first order of business should be to organize the energy industry to achieve greater speed and innovativeness. A new organizational structure based on the industry standard Joint Operating Committee (JOC). An organization that is able to address the issues of peak oil and retire the structured hierarchy from its 100 year reign. But how? In my research I have found that organizations are constrained and supported by the software that is used. This has prompted me to state that "SAP is the bureaucracy." And if a firm wants to change the organizational structure, it needs to build the software to support that new organizational construct first.

For too long the energy industry has suffered with the likes of Oracle Energy and SAP as their solutions providers. Applications that were built for the manufacturing sector, not for the oil and gas industry. What producers need is an application that ties the unique, and difficult, aspects of risk mitigation and the expanding aerial extent of their properties. In other words, the need to deal with other producers who share common interests in a property. If the producer had IT systems that recognized and supported the legal, financial, operational decision making and cultural frameworks of the Joint Operating Committee. And then combine the JOC's frameworks with the Compliance and Governance structures of the hierarchy, with today's collaborative Information Technologies, the alignment would provide the organizational speed and innovativeness that is needed. Innovations are especially needed in the earth science and engineering disciplines where they will lead to new science. Asking the current bureaucracies to keep up with the future changes in the sciences is asking too much in my opinion.

Speed and innovativeness are the highlighted benefits of identifying and supporting the key frameworks of the Joint Operating Committee. Now is the time for the industry to embark on a purpose built system, which identifies and supports the Joint Operating Committee. And unleashes the resources of the industry to solve or mitigate the effects of Peak Oil. Systems that can be used by the smallest to the largest of producers. Would anyone argue the bureaucracies of today will be the solution to Peak Oil?

What would a system based on these changes look like, how would it be different, and could it make the difference?

Lets start out with some fundamental re-thinking in how the problems could be solved. The world's first economist Adam Smith and his theory of the division of labor. What Adam Smith was able to prove in his reorganization of a pin factory can be implemented and provide similar benefits in the energy business. The theory identifies that economic growth is achieved through further divisions of labor and enhanced forms of organization. Smith's application of his division of labor theory increased production 240 fold at the pin factory. The energy industry can expand its capabilities and capacities through a more precise and enhanced division of labor. The other theory of Adam Smith, "The Invisible Hand" of the market will provide the industry with what it needs, when it needs it more effectively then the silo'ed hierarchy of today. A third element of this different thinking is today's Information Technologies (IT) can enable a virtual environment that supports the transactions and interactions of the producers and people involved in the industry.

In a comprehensive review of the theory of markets and firms. I have conducted research based on Professor Richard N. Langlois' writings into the boundaries of the firm and identified a new division between the market and the firm. Through the enhanced and modern information technologies, the market will provide the best solution to the problems that we face in oil and gas. The firm will hold the Compliance and Governance, Knowledge and Learning, Access Control, and Research & Capabilities modules. Whereas the market, or in this instance, the Joint Operating Committee will provide the firm with the necessary resources contained within my module definition of Petroleum Lease Marketplace, Resource Marketplace, Financial Marketplace and Partnership Accounting. Modules that make sense, where the average oil and gas user will inherently understand which module they should use to achieve their work. Gone are the generic categorizations of General Ledger, Accounts Payable and Receivable. These functions remain within the module definition, only as subsystems that support the user activity.

In order that 2030 achieves all that it has to offer. I propose we build systems on the basis of the natural form of organization of the energy industry, the Joint Operating Committee. It is my opinion that the era of cheap oil has allowed our exploitation capabilities to exceed our exploration capability. We need to rebuild the industries exploration capabilities back to the level where the resources and capabilities are able to sustain the market demand. Without these exploration capabilities we will not succeed in what the market demands of us.

The earth scientist and engineers are the key resources necessary to achieve our objectives. Much has been written about the current shortage and their future retirement. At the same time the hierarchy within the corporation has constrained these resources by building similar internal capabilities within each firm. We need to address how the organizations Compliance and Governance is addressed in any new system that we build. Innovation and speed are two attributes of the information technologies current infrastructure, and the module specifications I have described below.

I propose we build systems to solve these issues. Based on the Joint Operating Committee and organized in the following modules;

Petroleum Lease Marketplace

Consider a virtual environment that provides the firms with market access to public lease data and information in a search-able and transaction supported systems. To a large extent what is currently resident as a land departments functional domain would be managed by this module. Critically this is where the majority of lease, agreement and partner variables are captured in this system. Readers interested in further exploring this module can review it here.

Resource Marketplace

How a producer could find the right employees or contractors to assist in the work of the firm. How suppliers and contractors would have agreements recognized by the systems and have the appropriate accounts payable and transaction processing be a natural fallout of work that is done. Human resource and payroll functionality will also be subsystems of this module. This module will provide the firm with a window on the marketplace resources.

Financial Marketplace

A marketplace where users, producers and suppliers within the industry can source the capital and operating needs of the industry. Where banks compete for the producers business, brokerage companies providing their services to the people and firms that are operating in the oil and gas industry.

Partnership Accounting

Or as I am wanting to call it "the algorithm from hell". This module manages the unique characteristics and transaction processing of the Joint Account and the various stakeholder interest's in a property. Consider the differences in reporting requirements between Calgary, Houston and Aberdeen. Currency valuations in both accounting for income statement and balance sheet items, production measured in metric or U.S., daily and monthly production values, nominations, penalties, casing point elections, before and after payout and other related oil and gas accounting system requirements that are handled appropriately in each company. But lets now consider how the energy industry may need to operate, at the Joint Operating Committee level.

I think the redundant duplication of capabilities built within each firm will need to be addressed in order to solve the energy problems we face. And particularly the shortage and retirement of the brain trust of the industry. Instead of each firm building up what they need to operate the properties that they are designated as operator of, the industry will need to pool the resources necessary for the individual joint accounts. Each company providing the available resources they have to each Joint Operating Committee. This brings the difficulty of managing and reporting to a higher level of complexity. Where a JOC may now receive 8 seconded employees from 8 different producers. The costs of these resources being incurred, probably not in proportion to their interests, will need to be recognized in the costing structure of the joint account. Particularly since the earth scientists and engineering efforts necessary for a property may grow in terms of labor input per barrel of oil.

These are the types of issues that are addressed and managed through the Partnership Accounting module. Please read the entire entry that I wrote about Partnership Accounting here. The other 800 pound gorilla in the room is how these people interact. Who has the authority, and what structure is recognized from these 8 different companies, with different professional backgrounds. This is solved through the Military Command & Control Structure that is the Governance element of the Compliance and Governance module noted below.

Access Control

This application will be unique in that it is a software service. The application will be accessible anytime and anywhere which brings a significant level of security requirements to conduct properly. Key to the transparency of all aspects of this system, the source code for the systems will be available to any and all users of the system for their perusal. Taking the "Given enough eyeballs, all bugs are shallow" comment of Linus Torvalds about how source code should be reviewable by as many people as possible.

Compliance and Governance

Compliance being the sole reason of the bureaucracy today, the needs of the SEC and accounting for Sarbanes Oxeley have driven the organizations into making the organization all about compliance, in my opinion. The business of the business has been lost as a result. Companies have become reporting entities that have lost sight of what the energy business is. Compliance is a necessary part of any organization and this module will allow the management to maintain their status is in compliance of the regulations. The key differential is that the compliance is a fallout of the process of doing the business. I wrote about SEC Chairman Christopher Cox's introduction and development of a system that will mirror the companies compliance. This compliance framework will be built with the Governance mentioned below, and the financial, legal, operational decision making and cultural frameworks of the JOC.

Under the Governance module we need to approach the use of the scarce human resources in a more holistic manner. All member firms of a Joint Operating Committee should provide resources that are designated to specific properties. The concept of an operator can not last if we are to independently build and duplicate capabilities within each firm. The role of the Market has to provide some elements of these capabilities. Many of the accounting and land procedures will need to be amended to achieve this pooling of resources within the member firms of the Joint Operating Committee. How does a group of people committed to a JOC participate and recognize the order and structure of the people employed there.

I have proposed a solution for this by implementing an element of Military Command & Control structure. Where people are designated at a certain level within their profession and like a Captain in the U.S. Army may find himself reporting to a British Major with a variety of other NATO forces under his command. The effective pooling of all JOC participants resources can then enable the structure to be deployed, and each individuals role and responsibilities are assigned appropriately. The costing and associated issues are part of the Partnership Accounting Module noted above. I believe this is one of the critical means of addressing the National Petroleum Council's dual problems of the shortage and retirement of the industry brain trust.

Research and Capabilities

Innovation is a critical component of the capabilities of this reorganization. It is at the Joint Operating Committee level that these innovations are expected to rise. However, my research has discovered that the risks to the firms in terms of its capabilities will fall into jeopardy. That to capitulate all of the science and innovation to the JOC would be a mistake similar to the problems diagnosed of Chrysler. The scientific advances and the implementation of the new sciences and innovations have to be managed by the firm, otherwise it will fail in its ability to provide the overall direction of where it should be heading. Research in the firm will take on a new role in this type of organizational structure. I foresee most of the engineers and earth scientists being employed by the firms and accessing the most advanced tools and research capabilities. This is what will be required to build the exploration capabilities back to what they were prior to the cheap oil era.

Knowledge and Learning

This will be the repository for the firms capabilities and research. It will also be a window to the public data that is associated with the industry. Companies will search and discover what is publicly available by other firms and seek out the information regarding what is possible.

I am throwing another paradigm in here and am asking the industry to dispatch its secretive ways and begin to use the legal means of securing their intellectual property. Copyrights are earned through publication. Patents are the most sound manner to ensure your invention and innovation hold value in the industry. The ability to submit ideas in a safe environment benefits the firm in securing its intellectual property, and allows the rest of the industry to benefit from those ideas immediately. This module is for that purpose.

User Participation

I would recommend anyone who has an interest in these topics review the archives of my blog at http://innovation-in-oil-and-gas.blogspot.com or contact me at paul dot cox at gmail dot com if you would like to participate. Without active user participation, this project will never happen, so please lets get started.

This proposed application will of course be the largest, purpose built system for the energy industry. Costs are projected on a preliminary basis in the hundreds of millions. A very costly project, but one that only has to be paid for once. If we amortize the building and maintenance of this system over the entire industry, I believe the costs to each producer will fall within the single digit percentile of what producers are currently paying SAP and Oracle.

I am also asking if any producer or investor wants to donate or sponsor this project, please push the PayPal button on the website and make a contribution so that we can begin to make 2030 real.

Finally I would like to mention that over my thirty year career in oil and gas. I have found the industries resilience and ability to address tough issues has impressed me many times. Now is the time to take that inherent capability of the industry, organize it and make 2030 a reality.

Technorati Tags: Genesys, Peak-Oil, Ideas, People, Modularity

Aberdeen has it right.

I want to firstly go back and review what Professor Langlois' said in his ESNIE slides. It is contained in the first slide and I would like to emphasis an important point of it. The quote is;

"He (the master gun maker) purchased material from the barrel makers, lock-makers, sight-stampers, trigger makers, ramrod forgers, gun furniture makers, and if he were engaged in the military branch from bayonet-forgers. All of these were independent manufacturers executing the orders of several master gun-makers. Once the parts had been purchased from the "material makers", as they were called, the next task was to hand them out to a long succession of "setters-up", each of whom performed a specific operation in connection with the assembly and finishing of the gun. To name only a few, there were those who prepared the front sight and lump end of the barrels; the jiggers, who attended to the breech end; the stocker's, who let in the barrel and lock and shaped the stock; the barrel strippers, who prepared the gun for rifling and proof; the hardeners, polishers, borers and riflers, engravers, browner's, and finally the lock-freer's, who adjusted the working parts." Slide no. 1

The individual is the key to the organization of the market. No companies, hierarchies, corporations or bureaucracies. Just individuals and markets. This is how I see the energy industry developing further in the future. More of a movement away from the silo'ed BP, Shell, and Exxon's to rely on the individual capabilities of the market. Certainly there will be BP, Shell and Exxon, however, their ownership and development of their reserve and land base will be their key concern, and how to employ the market towards their objectives will be how they achieve them. They key to their capability will of course be through their participation in the Joint Operating Committee of each property.

What we have here in the barrel maker example is a division of labor that is very fine. And this division of labor would provide the gun making industry with production volumes that would exceed the productive ability of the group of individuals acting independently. A further division of labor is how the oil and gas industry will increase its capability, throughput, and growth necessary for the commodity markets demands.

Reading now from the Economist about the state of affairs in British oil and gas, they note the following regarding the headquarters of Aberdeen.

"Yet even though oil and gas output is declining the local businesses that have sprung up to support it have bright prospects. The North Sea was one of the earliest offshore oil basins to be developed. Many of the technologies needed to produce oil from underwater wells - especially in the difficult, gale prone waters off the British coast - were developed in Scotland. Around 90% of oil industry workers are employed not by the big international companies such as BP or Total that operate the fields but by local businesses."

I want to state, what I see for this software development project is this software being built for the industry that includes Calgary, Houston and Aberdeen. These three centers will provide the European and North American industries with both the supply and demand for energy on a go forward basis. Houston has had a traditionally more global role in the energy business, but I am of the opinion that they have seen their people, assets and capabilities somewhat repatriated through the variety of nationalizations, in Venezuela and Russia, and China and the Arab countries adopting a more progressive attitude. An attitude that they will develop the capabilities to manage their industries for themselves. That American technology is better, but they choose to use their own resources for the long term.

Aberdeen is seen in this example as more capable, as the Economist article points out, in offshore operations, Canada in EOR, Heavy Oil and remote gas, and Houston filling in where its size and capabilities, particularly financially, are required. These three cities will operate in the Atlantic, Pacific, Gulf of Mexico, Mexico, Canada, the U.S. and the Arctic as their base. Versus Russia, China and the Arab countries will co-exist with little or no transfer of knowledge or capabilities between the two disparate groups, yet both will market their commodities to the highest bidders.

As the Economists article best reflects, Aberdeen may be the most able of the three to meet their needs through the "market" and less through the "firm". The latter two cities, Calgary and Houston, needing a more radical reconfiguration towards the market. Markets made up of individuals.

Technorati Tags: Genesys, Firm, Market, Langlois, Cluster, Capabilities, People