Control of the Process of Production
One of the significant differences between the Preliminary Specification and current industry practices lies in how control over the production process is maintained. A striking example of this difference is the LNG issue that People, Ideas & Objects discovered last year. Producers were selling their natural gas at Henry Hub prices to unknown buyers who then refrigerated and shipped the gas to the global market, capturing the majority of the available profit. How did this happen? Is this a common occurrence, and are there other instances where value is leaking out of the industry?
Over the past decades, producers have been obsessively focused on cutting costs. While cost control is crucial, especially during tough times, this myopic focus has had counterproductive consequences. The oil & gas industry is capital-intensive, with the majority of costs falling within that category. Consequently, the service industry, which plays a crucial role in extending producers' capacities and capabilities, has borne the brunt of these cost-cutting measures. This has led to diminished and rapidly declining capacities and capabilities within the industry, and the attitude seems to be one of indifference.
As a primary industry, oil & gas producers have the luxury of controlling the production process. Traditionally, the engineering discipline has dominated the industry, with a natural focus on achieving objectives in the most cost-efficient way. Control over the production process would logically be a part of this thinking. However, producers' thinking often extends only to the physical control of production. If involved in exporting LNG, they assume they must build and operate the facility, a task outside their capital budgets and competitive advantage. Consequently, they pass the title of the product at the inlet to the LNG facility.
Typically, Petroleum and Natural Gas Leases transfer the title of produced products once royalties are paid. Producers should adopt the attitude and responsibility of ensuring that their title is passed to the customer at the point of sale to the end user, not any time before. In the Internet era, this does not require producers to have the necessary infrastructure for these operations. Their core business is exploration and production, and it will always be. However, contractually maintaining control of the title until it is sold to the end user ensures that all the product's value is realized. Intermediaries can handle the product on the producer's behalf, either "free on board" with "net back pricing" based on the cost of moving the product to the customer.
This difference is monumental. It distinguishes developed nations from undeveloped ones. The current approach by producer officers and directors has relegated the North American oil & gas industry to the role of "hewers of wood and drawers of water," effectively turning it into a third-world, valueless, and incapable industry. This is metaphorically and literally the quality of the current leadership. Evidence of this is provided in the $4.1 trillion revenue loss due to the differential between traditional natural gas prices and what producers received. All the while, they have ground the service industry down to the point of no return, expecting them to be available when needed later.
Investors had enough of this in 2015 and suspended the annual allowances granted to these spendthrift, out of control organizations. Meanwhile, those offering solutions to these issues were deemed "persona non grata" and ostracized. Perhaps discussing business from the perspective of a developed nation was too much for the officers and directors to comprehend. On second thought, the scale of damage is so significant that they should have realized it on their own. Nudging from investors and People, Ideas & Objects should have at least provoked some thinking, however I can assure you that it didn’t.
Creative Destruction
Over the past twenty years, People, Ideas & Objects have demonstrated that the economic principles of creative destruction, spontaneous order, and serendipity have become less effective in the 21st century. The mechanisms that once drove economic renewal in North America are now hindered by the development and sophistication of software, particularly ERP software. Once implemented, organizations face significant challenges in making changes without first addressing software issues. They must define their needs, develop the required software, and deploy it to achieve any desired changes or improvements.
What seems like a simple process of change management becomes complicated due to two main issues: the lack of a software development capability to implement changes and the resistance from organizations due to the potential for disintermediation resulting from these changes.
To modify software, several questions arise: Who has the authority to make these changes? Who will execute the changes? And most importantly, who will bear the costs? If changes are to be made in-house, they might proceed if the right people are available and authority is granted. However, if the software is from a vendor, the process becomes more complex. The vendor may resist changes unless they benefit the entire user base, and questions about cost allocation and contract terms arise.
In the “muddle through” environment prevalent in the oil & gas industry, administrative processes often incur high costs with little value, making change difficult to justify. As a result, the business suffers. In the case of oil & gas, these issues have led to global challenges that now require an industry-wide rebuild. A reorganization based on the vision of the Preliminary Specification offers a proven value proposition worth trillions of dollars over the next 25 years. This model emphasizes our user community-driven and change-oriented software development approach.
Serendipity and Spontaneous Order
Globalization has pushed specialization and the division of labor to unprecedented levels, enabling seamless collaboration between firms located thousands of miles apart. However, this has also reduced the chance for serendipitous discoveries that can drive business growth and foster competition. The emergence of alternative solutions to meet new market demands is hindered by the complexity of regulations, financing, and the necessary capacities and capabilities. The status quo has never been more rigidly defined than it is today.
Adam Smith “Man of Systems”
At the same time when firms are faced with an inability to move forward and change with markets. We need to understand the difficulties caused by those who believe in the “man of system” concept. The “man of system” is a concept introduced by Adam Smith in “The Theory of Moral Sentiments.” It refers to someone who is overly confident in their ability to design and control social systems according to their own ideals, often ignoring the complexities and unpredictabilities of human behavior. Such a person tries to impose their plan without considering how individuals might react or how their actions might disrupt existing social arrangements. Smith warned that this approach is often misguided and can lead to negative consequences. From the "The Theory of Moral Sentiments."
The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it: he seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board; he does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder. Some general, and even systematical, idea of the perfection of policy and law, may no doubt be necessary for directing the views of the statesman.
But to insist upon establishing, and upon establishing all at once, and in spite of all opposition, every thing which that idea may seem to require, must often be the highest degree of arrogance. It is to erect his own judgment into the supreme standard of right and wrong. It is to fancy himself the only wise and worthy man in the commonwealth, and that his fellow-citizens should accommodate themselves to him and not he to them. It is upon this account, that of all political speculators, sovereign princes are by far the most dangerous.
This arrogance is perfectly familiar to them. They entertain no doubt of the immense superiority of their own judgment. When such imperial and royal reformers, therefore, condescend to contemplate the constitution of the country which is committed to their government, they seldom see anything so wrong in it as the obstructions which it may sometimes oppose to the execution of their own will. They hold in contempt the divine maxim of Plato, and consider the state as made for themselves, not themselves for the state. The great object of their reformation, therefore, is to remove those obstructions—to reduce the authority of the nobility—to take away the privileges of cities and provinces, and to render both the greatest individuals and the greatest orders of the state, as incapable of opposing their commands, as the weakest and most insignificant.
I may therefore be guilty as charged. However, oil & gas needs to deal with the glaring conflict and contradiction of the status quo failure to proceed forward productively and profitably in the past decades. Which of these now ancient concepts should we adhere to? Creative destruction has not occurred as bankruptcy, government bailouts and “muddle through” maintain the living dead for decades while their replacements never get a chance. Spontaneous order and serendipity may be somewhat enabled through the Internet however it is the Internet that has enabled globalization to be realized to such an extent. The forces of comparative advantage will continue to expand on trade and globalization. How will today’s organizations deal with unknown and unseen competitors appearing overnight on the horizon.
Is People, Ideas & Objects Preliminary Specification an arrogant proposal as Adam Smith’s “man of systems” suggests or a solution to a new problem we’re faced with? What we’ve called a modern day software bug. A rational solution that proposes an overall vision of how, what and why the industry and producer firms would operate in a dynamic, innovative, accountable and profitable manner? One where our empowered user community has the authority and capabilities to define and support the industry and producer with its needs and objectives on an iterative basis? One driven by “real” profitability for all concerned?
Or are we now to remain in the position that we are with the software definitions that have brought the industry to its knees. Due to believing that those who have a vision of what is necessary are misguided, dangerous and arrogant? I think we have the answer in the continuing deterioration of oil & gas over the past two decades and more. The extinguishing of any value from shale and future prospects due to the elimination of trust, faith and goodwill of all those that had built the industry before. Adam Smith warned the “man of system” would enable designs of government or those in authority who would design systems that support their authority. It is for that reason I can boldly state that it is not I who is arrogant or am the one who should be accused of being a “man of system.” It is the producer officers and directors themselves who are guilty.
