Showing posts with label Reference. Show all posts
Showing posts with label Reference. Show all posts

Friday, September 12, 2008

Edith Penrose on the development of oil and gas.

I am reviewing a paper that was written by Professor Edith Penrose. The title of the paper is "Limits to the Growth and Size of Firms." This paper was published in The American Economic Review in May of 1955. Her papers are available through the various Journals that published the articles. Unlike most of the current research these papers are accessible only through paid services. In this case I was able to download them from JSTOR.

While I was at JSTOR, I ran across two very interesting Penrose papers regarding the oil and gas industry. I highly recommend that you pull down a copy and read them both. They reflect the dynamics of oil and gas pricing on a global basis.

The two documents are entitled:

Middle East Oil: The International Distribution of Profits and Income Taxes. Published in Economica, New Series, August 1960
and
Importance in the World Oil Industry. Published in International Affairs January 1979

Anyone suggesting that our current high energy prices are a result of speculation should put these two papers on their must read list. The depth of analysis, the lucid and objective discussion of how energy prices were established during the industries "easy era" is impressive.

One of the key conclusions she makes is that OPEC was a necessary mechanism for the market to function correctly. It is difficult to recall the days when the abundance of energy conspired to ruin the business at any moment. Articles like the 1999 Economist cover story "Drowning in oil" when commodities were in surplus, just created more long term problems for the industry.

Although written in the early 1960's and late 1970's Professor Penrose' articles show the complexity of the information inherent in the pricing of oil. The articles also intimate the power that OPEC has in these times of reduced supply and very high demand, however, this week saw the Saudi's somewhat turn their back on the cartel.

Technorati Tags:

Thursday, October 18, 2007

Prophet of Innovation: Joseph Schumpeter and Creative Destruction.


Click on the title of this entry to be taken to the Google Book Search page for this book. I was introduced to the writings of Professor Richard N. Langlois, our key research author, through his being awarded the Schumpeter Prize in 2004, for his paper The Dynamics of Industrial Capitalism. I'll admit I have not read the Prophet of Innovation, yet, and even if I had read it, that would not have been the point of the blog entry. Harvard Professor Thomas McCraw has participated in two PodCasts in the past few months. His promotion of his book brings up a number of very interesting points about the times that we live in today. It will be worthwhile for the readers of this blog to put this book on their reading list, Professor McCraw is a Pulitzer Prize Winner and therefore, easy to recommend.

The August 9, 2007 PodCast is on "Bloomberg on the Economy" with Tom Keene. He opens the PodCast with the comment that the Prophet of Innovation is the "Publishing event of 2007, the definitive one volume of Schumpeter." The opening discussion reviews Schumpeter's life and some of the key term's of which he became famous for. Like Creative Destruction is what entrepreneurs do. Will and the "emotion of our will" in making change. How the charismatic leader is someone who is bound and determined to change things.

"Successful innovation is more a matter of will then of intellect." The shear effort necessary to carry out the tasks that face our energy industry are possibly the largest issues we have faced to date. Our way of life will be challenged by the reduction in energy production. I also think this is the point in time where mankind will stand up and prove that we can, through force of the will that Schumpeter comments on, make the necessary changes and prosper in a future that few can imagine today. This new world is right around the corner and promises to bring democratic freedoms to their highest levels attainable.
Professor McCraw's book shows how barriers that confront entrepreneurs have to be overcome, and hence this obsession or will has to be maintained throughout the adventure. Many new entrepreneur's, on the scale of Henry Ford will be needed to solve these problems. The entrepreneur's character and disposition are some of the things that Schumpeter identified and valued and McCraw has documented in his book.

The second podcast of Professor McCraw's is on October 8, 2007 on EconTalk with Professor Russ Roberts. Schumpeter was believed to be the one who first noted the role and value of vision in business. To see the future in a vision of what, where and how the changes could improve the efficiency and effectiveness of the business is a key attribute of the entrepreneur. But there is something more. Professor's Roberts and McCraw discuss the important difference between innovation and invention. Leonardo DaVinci never built an airplane. He invented it, or was at least the first to think about it. He never took the next step that is critical of the entrepreneur. "Doing the thing" is what McCraw describes that Schumpeter focused on as the key difference between innovation and inventions definitions.

The other key attribute noted by Schumpeter was the concept of the business cycle's influence in the innovative marketplace. Business fail and that is the natural way of economic progress. There was a time when people thought that businesses would never fail, however today we know that not to be the case. The difference is the founding entrepreneur is consumed by a feverish perseverance that drives the business further then the competitors. Succession of the business, whether through the family or size, can not capture this fever and therefore makes the business susceptible to failure.

Who will be the leaders and entrepreneur's in this new era in energy. We do not know. I am certainly doing all that I can to ensure the most efficient organizational structure is supported by a highly capable software development team so that those entrepreneur's can operate as efficiently as possible.

Technorati Tags: , , ,

Monday, March 05, 2007

The globalization of the Software industry: Perspectives and Opportunities for developed and developing countries

The title of this entry will take you to ideas.repec.org to download this interesting working paper.

Authors;

Ashish Arora
Heinz School, Carnegie Mellon University, Pittsburgh

Alfonso Gambardella
Sant' Anna School of Advanced Studies, Pisa, Italy

A quick review of this document reveals that the focus of the research is on developing countries software industries. Not really on topic with the research being done on organizations, however, it has provided some interesting academic support for the purpose of this project. Speaking in the conclusion of this document the authors note some interesting points of view that we may not have realized or found in our regular research travels.

The set of quotations are:

Some authors have argued that software is to the knowledge based economy what capital goods were to manufacturing - an input source whose importance for productivity and innovation was far greater than was reflected in revenues or share of GDP. Software does supply basic inputs to virtually every industrial sector. pp. 30
There may be some advantages to hav(ing) a domestic software sector which could tailor software to local requirements at lower costs. pp. 31
The software industry can act as an exemplar of a new business model that features flatter organizations, individual incentives, competition, and export orientation, particularly for other sectors that rely upon skilled workers. pp. 32
The study reviewed India, Ireland, and Israel (What it refers to as the three I's), China and Brazil against the American, German and Japan industries. A very good read for the purpose of better understanding the impacts of globalization on the software industry.

In terms of the three quotations, neither of these points, that I am aware of had been mentioned before. Yet these show clearly why the oil and gas industry must proceed with this project. Software is an effective tool for them to exercise new and innovative methods of finding and producing oil. Yet, I hear nothing with respect to the industry willingness or desire to proceed.

Technorati Tags: , , , ,

Sunday, March 04, 2007

Electronic Hierarchies and Electronic Heterarchies: Relationship-Specific Assets and the Governance of Inter-firm IT.

This article provides a brief description of the particular research area of each professor.

Professor Andrew McAfee
"His research investigates how information technologies from ERP systems to prediction market facilitate structured and unstructured multi party interactions, and the roles that general managers play in extracting the maximum value from their firms' IT investments.

Professor Marco Bettiol
"His research is focused on innovation processes and on the role of information and communication technologies in sustaining the competitiveness of small and medium enterprises.

Professor Maria Chiarvesio
"Her interest is to investigate how industrial districts SME's and local development systems are taking advantage of network technologies to face the challenges of internationalization and innovation in the new global competitive scenario.

January 2007

I had a lot of difficulty getting this specific post out, the only reason I can think of is the quality of the material. I think there is a lot of material here to build upon. My apologies for the length of this post, but reviewing it will help to understand the future of the energy industry and its Information Technology. It was in an attempt to be brief that I removed much of the analytical work around the three hypothesis of the authors. These did not necessarily fit in a clear and concise way, therefore, for brevity I removed those sections. Review of the actual document may be of value to all readers.

Abstract

This paper is directly in line with our discussion regarding the oil and gas industry. The use of the Military Styled Command and Control, as I have termed it, is necessary to offset the decline of the hierarchy. An organization requires structure to organize its resources. To eliminate the hierarchy, and not replace the command and control structures with something else would be highly and immediately destructive. McAfee et al state the following in their abstract;
"This argument introduces a contingency into the "electronic markets hypothesis, "which holds that greater use of IT is uni-directionally associated with reduced use of hierarchies."
and
"The paper therefore argues that when enterprise IT is required, so is an electronic hierarchy: a collaboration in which one member has all required decision rights over jointly used IT." pp. Abstract
Introduction
Recall our recent discussions on Winter's et al and Langlois' et al work regarding the boundaries of the firm, the division between markets and firms. How the capabilities and governance of a firm was being revised to optimize the technologies. To summarize that discussion I wrote this summary.

In this document, this conversation is being carried on and extended by McAfee et al with a predominant IT focus.
"Another important stream of research has focused on the boundary of the firm, analyzing whether greater diffusion of IT makes it more or less attractive to distribute economic activity across markets rather than within a hierarchy."
and
"This latter stream of work has largely converged to the conclusion that "By reducing the costs of coordination, IT will lead to an overall shift toward proportionately more use of markets - rather than hierarchies - to coordinate economic activity." (Malone, Yates et al. 1987). This has come to be known as the electronic markets hypothesis (EMH), and is broadly accepted; one review (Sampson 2003) found only a single conference proceeding that "queried the myth of diminishing firms." Variants of the EMH were articulated both before and after the explosion in business use of the Internet." pp. 1
"This paper aims neither to reinforce the EMH nor to refute it, but instead to introduce a contingency into consideration of IT's impact on the organization of work. (pp. 2) The appropriate governance mechanism for an IT facilitated collaboration, we argue, is contingent on the type of IT being deployed; when an enterprise technology is required, so is an electronic hierarchy". pp. 2
"So as enterprise IT becomes important, electronic hierarchies become the norm. This paper uses the term electronic hierarchy rather than simply hierarchy to convey that collaborators in such an arrangement do not surrender all (or even most) of their decision rights to a central authority. Instead, they surrender only a small subset, namely decisions about the configuration of jointly used enterprise information technologies. And to emphasize that this paper concentrates on governance rather than price-setting, electronic hierarchies are contrasted not with electronic markets but with electronic heterarchies, which are collaborations in which decision rights over jointly used technologies are not vested with any single party." pp. 3
I am going to continue using the Military Styled Command and Control Structure metaphor in this blog. The "Electronic Hierarchy" as McAfee calls it does not provide that much of a visual or rich environment for the future user of this software. The MSCC.

The precursor to this software's development is the success of SAP in most industries outside of the energy industry. SAP provides that "electronic" hierarchy, and command and control, such that SAP is the bureaucracy." (Cox, 2004). The validity of the McAfee et al argument is the difference between success or failure. A system built on the Joint Operating Committee without the hierarchy being recognized and built into the system would not provide the energy producer with the command and control necessary to operate. It is therefore important at this point that we quickly re-introduce the Military Styled Command and Control (MSCC) structure that is an inherent part of this software solution. With a collective industry wide ability to recognize and adhere to the command and control structure offered to us by the MSCC, this application provides the underlying speed and innovation of the producer in a controlled manner.

The Electronic Markets Hypothesis

Not to be confused with the Efficient Market Hypothesis, McAfee et al define the EMH as
"By reducing the costs of coordination, IT will lead to an overall shift toward proportionately more use of markets - rather that hierarchies - to coordinate economic activity." (Malone, Yates et al, 1987).
This definition resonates with this projects purpose and builds support for the use of the MSCC. In the table provided, the segregation of items between the market and the firm helps to understand why and how the future oil and gas producer will operate and function. Here, in this comprehensive quote, McAfee states that markets provide better opportunities for enhanced economic activity.

  • "IT reduces coordination costs"
"Malone, Yates et al. 1987, however, maintain that "An overall reduction in the "unit costs" of coordination would reduce the importance of the coordination cost dimension (on which markets are weak) and thus lead to markets becoming more desirable in some situations where hierarchies were previously favored. In other words, the result of reducing coordination costs without changing anything else should be an increase in the proportion of economic activity coordinated by markets". pp. 4
  • "IT assets have low relationship specificity."
"In contrast, the circumstances under which IT favors hierarchies over markets, as articulated by previous research, seem comparatively limited. They include situations where. Network externalities exist and monitoring is available."
"However, the increase in monitoring capabilities brought by IT is an improvement along a dimension where hierarchies are comparatively weak. All other things being equal, then, this improvement thus makes hierarchies comparatively more attractive. Baker and Hubbard 2004 found that US trucking firms became more likely to own trucks and employ drivers, as opposed to contracting with individual truck owners, after improved driver monitoring technologies became available." pp. 5
I need to list this as a direct call to action. The future is uncertain, however, the manner in which the future unfolds needs to be defined in appropriate organizational structures. The Joint Operating Committee is that coordinating structure, McAfee et al state that it needs to be explicitly recognized in the information systems used by the producer. Enabling these coordinating capabilities within the software will allow improvements in economic performance.

The "Move to the Middle Hypothesis".

Not satisfied with the first part of this document, McAfee et al take on some more with this move to the middle hypothesis of theirs. Operational Decision Making in oil and gas on a global basis is on the participants represented by the Joint Operating Committee. This is a global culturally induced fact. The inherent nature of the risk profiles of companies and the areal extent of oil and gas operations are the primary reasons that most oil and gas wells, gathering systems and facilities are jointly owned and represented by the JOC.
...other considerations intervene and lead to organizational forms that are less fluid than spot markets. pp. 5
The "move to the middle" hypothesis concerns the size and stability of IT based multi firm collaborations, and does not address their governance. This paper meanwhile, focuses on governance, in particular the allocation of decision rights within IT enable multi firm collaborations. This focus appears to be unique in the literature on inter organizational IT. pp. 5
I have imputed before that the oil and gas industry has a distinct advantage in moving towards the JOC. The advantage is the JOC exists and is culturally, financially, legally and the source of operational decision making. This is also the reason that the SAP, Oracle and IBM styled solutions have failed to provide the systems that producers need. Those systems are not even aware of the JOC.

"Empirical support for the EMH"

McAfee then draws an explicit and relevant example to support the EMH.
The emergence of the Linux operating system is perhaps the clearest example that complex and economically significant products no longer need to be developed within single firms or traditional industrial alliances. The can instead result fro the collaborative, voluntary, and minimally directed efforts of individuals around the world who use IT both to execute their work and to discuss it. pp. 7
Today the Windows Operating Systems has been one of the largest software development ventures every undertaken. Billion of dollars have been invested and as this video shows, failed. Yet Linux and Mac OS X, a derivative of the Berkeley Development Systems Unix are more robust, cheaper, and safer. Yet these two competing operating systems are developed by users that have a passion and a drive to get what "they" need from an OS. The oil and gas industry producer needs a comparable capability to develop the software that it needs.

"Empirical anomalies"

Looking to define the EMH can also be derived from other situations and experiences. McAfee et al do this effectively with the two examples that they cite.

  • "Of the 1500 B2B exchanges founded, the great majority no longer exist. This hypothesis, however, does not explain the paucity of some kinds of electronic link between customer firms and their small, stable supply networks." pp. 8
    • "The failure of public eMarketplaces could be interpreted as support for the move to the middle hypothesis. pp. 9
  • Finally, a dedicated empirical evaluation of the EMH yielded equivocal results. Hess and Kemerer 1994 studied the impact of computerized loan origination systems and concluded that "despite a decade of experience with these systems... the industry has not been fundamentally change"and conclude that "the [electronic markets] hypothesis will require augmentation in order to fully explain [our] results..." pp. 9

The implications of relationship specificity

McAfee et al, to my possibly biased opinion, I think have highlighted an appropriate success of the EMH in the operating systems available today. The B2B exchanges and markets should have worked, as there is really no new technology that was since available to the developers of the B2B exchange. But with all things technology, this time it's different. The use of XML as the appropriate means to integrate the hierarchy and structure of a transaction was not well used or implemented in the late 1990's. McAfee points to the type of relationship that B2B exchanges were attempting to conduct. And, if I understand him correctly, the transactions needed to be built within the exchange "and" the (in this instance) the producer.
This paper argues that the mitigating phenomenon is the relationship specificity of some types of inter-firm information technology. While certain technologies are easily redirect-able from one use to another, others are not. The relationship specificity of information technologies is an important consideration, and is proposed here as the required augmentation of the EMH, because it appears to be impossible to write complete contracts of IT.
The authors continue on with the logical argument that IT based transactions are attempting to emulate complex human environments. This ability I would argue is now possible and is one of the clear reasons that I am pursuing these possibilities.
High rates of innovation among IT producers and high levels IT investment among rivals combine to create a complex, dynamic, and uncertain environment. pp. 10
...but it can be done, and should be done in my opinion. This next quotation (verbatim) gives one of the reasons why.
If a shared asset is not redirect-able, however, the theory of the firm holds incomplete contracting to be a critical consideration, and has a clear prescription. As Hart 1989 says "one thinking I can be sure of is it ...assets are sufficiently complementary, and initial contracts sufficiently incomplete, the two sets of assets should be under common control." Asset complementarity and asset specificity are, for the present purposes, equivalent concepts. An EDI connection between two firms, for example, is a relationship - specific asset. Equivalently, the configured hardware and software requires at each end of the are complementary assets. The link as a whole, in other words, it a specific asset; the endpoint are complementary assets. pp. 11
Recall the works of Winter's and Langlois' and the table above. The complexity of interactions becomes the problem in that transactions can not be defined to the level necessary to conduct all of the possible permutations and combinations of them. This is where the JOC, which "IS" the legal and operational decision making frameworks of the energy industry, succeeds in providing value to the IT enabled producer. The codification of these explicit ways and means of operation are dependent upon those key attributes defined within the JOC. The Penalty clauses, the Overhead Allowances, the Decision making frameworks have all been defined by the industry over its history. The ignorance of these points by my competitors SAP and Oracle is they are essentially trying to retrofit a transaction within the firm, when the transaction should be made by the market.
The prescription articulated by Hart is widely accepted (see, for example, Williamson 1985, Grossman and Hart 1986, Hart 1988, Hart and Moore 1990, and Klein, Crawfor et al. 1978) because scholars have identified failing in both the formation and the adaptation of non-hierarchical organizational forms when both asset specificity and incomplete contracting apply. pp. 11
The failing that is being spoken of in this quotation points to the difficulty in this area. Hart points out the failure in industry in general, and with respect to the energy industry which has asset specificity and incomplete contracting represented in the JOC, the failure that has occurred in oil and gas is the inability of the systems vendors to explicitly recognize the JOC as the key industry construct. Or in other words the failure for the producer occurs not because of the difficulties of asset specificity and incomplete contracting but the lack of recognition of the JOC.

Formation
To provide some further support for what I have just indicated in the previous section. McAfee et al note the following;
"Initial scholarship on the theory of the firm (Coase 1937) highlighted that complex transactions among peers in a market were characterized by high levels of haggling and learning. When negotiating about a relationship-specific asset peers might attempt to define a complete contract even when one is not possible, or might engage in extra-contractual "side bargaining". Extensive haggling and learning delay the point at which a shared asset is put to productive use." pp. 12
Those with direct experience in oil and gas will now completely understand my point of view on this difficult topic. The JOC, because of its asset specificity and incomplete contracting, have defined contracts to this level. Pick up a CAODC "Drilling Contract and one can see the codification of the entire efforts of the industry over its lifetime. This codification inherently identifies the assets specificity, its deficiencies regarding incomplete contracting and implicitly the JOC. The IT systems recognition of these critical points does not exist, and that is why I call SAP and Oracle's solutions failures in the market.

Adaptation
If a group of peers overcomes the obstacles to forming a collaboration that makes use of a shared IT asset, they face another set of challenges as they attempt to adapt over time to disturbances in the environment. Williamson 1991 segments such disturbances into two categories: those for which prices serve as sufficient statistics, and those that "...require coordinated responses lest the individual parts operate at Cross - purposes or other wise sub-optimize." pp. 12
According to Williamson, hierarchies are better at adaptations where price is not a sufficient statistic: "As compared with the market, the use of formal organization to orchestrate coordinated adaptation to unanticipated disturbances. pp. 13
The unambiguous prescription from the theory of the firm is that if an inter-group information technology is a relationship - specific asset over which complete contracts cannot be written, it should be governed by a hierarchy with a single decision-making authority. pp. 13
A priori the JOC and the price system of markets.

A Technology Categorization

So which inter-group information technologies, if any, are relationship specific? Email, instant messaging, and Web browsers seem to their users to be almost infinitely redirect-able - which technologies aren't? pp. 13
The same is not true for the technologies listed at levels 2 and 3 in Table 1. They require complete and precise ex ante agreements about the data that will be exchanged and , if a multi-step process is to be executed, the "flowchart" of the tasks, sequence, and possible branches and termination points of the process. These complete agreements are required because the technologies at levels 2 and 3, which are referred to here as enterprise information technologies (EITs), involve the exchange of data between information system or modules. As the mythologist Joseph Camble remarked, "Computers are like Old Testament Gods: all rules and no mercy." pp. 14
implementations required an average of 21 months ( Configuring an EDI or XML link means determining the family of transmission that will be sent across the link and the exact syntax and structure of each. Configuring ERP involves defining the data the system will contain and the business processes it will facilitate, then "populating" the system to reflect these choices. Configuration is detailed and time - consuming work. A study found that ERP Hitt, Wu et al. 2002), and a case study revealed that 19 months were required to establish a single XML link between a large manufacturer and its distributors. (McAfee 2004) pp. 15
This is because the two car-makers are virtually guaranteed to have very different internal information systems and data structures, a phenomenon referred to as the "corporate household" problem (Hansen, Madnick et al. 2002, Chen Funk et al. 2001. Some scholarship on technologies such as EDI appears to assume that the definition and promulgation of level 2 standards by industry-level and inter-industry bodies will eliminate or at least reduce the household problems, thereby allowing redirect-ability. Detailed investigation of how EDI is actually implemented, however, reveal high levels of standards fragmentation and idiosyncratic configuration (Swatman, Swatman et al, 1991, McAfee 2003) and the exercise of power to force compliance with a convenient, rather that a universal, standard (McNurlin 1987). pp. 16
Not to highlight my competitors SAP and Oracle, (oops Oracle is listed as just joined) but note the Public Petroleum Data Model that is summarily ignored by ERP vendors. This latter point of Oracle now being a member of PPDM. 

Electronic Hierarchies and Electronic Heterarchies

Table 1 provides a basis for defining an electronic hierarchy:
"An Electronic Hierarchy is a groups of participants desiring collaboration, one of which has enforceable level 2 and or level 3 decision rights." pp. 38
In this work the term "market" appears to have two meanings: a forum in which buyers and sellers come together and the forces of supply and demand affect prices (the primary meaning of the word in many dictionaries) and demand affect prices (the primary meaning of the word in many dictionaries) and a group of peers without any controlling authority.
Which is consistent with the point of view of this software development.
An Electronic Heterarchy is a group of participants desiring collaboration in which level 2 and level 3 are not vested with any single party." pp. 18.
A pretty clear definition, I think, of the differences between operator and non-operator in oil and gas, and of how using the JOC would mitigate many of the administrative issues within the oil and gas community.
A groups of peer firms transacting on a spot basis, or the set of firms that make up an industry, on the other hand, constitute an electronic heterarchy. pp. 19
and
It is important to stress that these definitions for electronic heterarchy and electronic hierarchy concern only decision rights over level 2 and level 3 IT. pp. 20
Standards Bodies

I have spoken of the PPDM organization and I should mention the numerous other organizations that provide standards within the oil and gas industry. In Canada the, Petroleum Accountants Society of Canada (PASC), The Canadian Association of Petroleum Landman (CAPL), Association of Professional Petroleum Engineers, Geologists, Geophysicists of Alberta (APEGGA) and many other organizations provide standards for use in the oil and gas industry. These standards make up a large portion of the culture of the industry, and due to the unique nature of the industry, as noted in this entry, these provide substantial value to a system integrator such as this project. However McAfee et al also point out one of the possible pitfalls.;
A number of standards bodies, some governmental and some industry-financed propose level 2 and or level 3 standards. If such as standard were to be widely accepted with 100% fidelity, that at least some enterprise technologies could move from relationship-specific to redirect-able. Two factors, however, mitigate against this vision. First, standards bodies are themselves fragmented, overlapping, and proliferating (Chari and Seshadri 2004) so a single pure standard is unlikely to emerge. Second, firms in practice appear to take work of standards bodies as a starting point for their integration work, modifying proposed standards as required to suit their idiosyncratic needs (for a case study of this, see McAfee 2004). As long as this is the case, configured enterprise technologies will continue to be relationship-specific investments. pp. 34
Conclusion
This paper presents a continent theory of the impact of IT on the organization of economic activity. In contrast to the EMH, the theory hold that in some circumstances electronic hierarchies will predominate. The theory, however, is silent about when enterprise IT (EIT) is required. It is not yet clear when, if ever, electronic heterarchies using network IT (NIT) alone are at a competitive disadvantage vis-a-vis electronic hierarchies using both NIT and EIT. pp. 35
The two categories of electronic hierarchy and electronic market clearly do not capture all of the existing modes of governing IT-based collaborations. pp.36
This paper was recently published by the Harvard Business School. Recently means February 13, 2007. It is a very topical and timely discussion of the many things that were being actively discussed in this blog. Markets and firms, Production and Transaction costs, Capabilities and Governance to mention only a few. If the energy industry is to glean any value from this body of research work, it will occur forthwith and immediately as a result of my efforts over the past 15 years. Recall that serendipity and luck are two attributes that I am grateful for. However, should industry pass on the proposal I have submitted regarding this software development proposal, then I would be hard pressed to determine a more appropriate time and opportunity then now to provide to the CEO's and CFO's of the major oil and gas producers. Since the deadline for the subscription deposit has passed, I would think that a reasonable period of time be provided in terms of grace, and then I will have to make another more comprehensive proposal to those that have signed their lives away through Sarbane's Oxeley.

Technorati Tags: , , , , , ,

Photos Courtesy Troels Myrup

Tuesday, January 23, 2007

Revised Final Research Report Abstract.

Preliminary or "Peer" review of the Final Research Report has been completed. The purpose of the peer review is to capture many of the attributes and issues that the industry sees in the report and to assimilate it here. Therefore I am submitting this Revised Abstract as a precursor to approaching the appropriate decision makers in industry. The results of the peer review include the following points.

"What does the industry get."

I am asserting a revised business model then what exists in the marketplace. Investment capital is unavailable for the software developments purposes. Looking at the long-term aspects of this software solution I have concluded it requires a strong revenue stream. This revenue stream starts with the subscription deposits noted below.

"Sticker Shock"

The costs mentioned in the Final Research Report are the total project costs to develop a Canadian oil and gas application. These development costs are amortized over the overall number of producers that subscribe to this development. Ideally this should be the industry at large. Discussion of these initial upfront costs being subsequently equalized over the industry is something that I would support. These costs are allocated over the life of the development, with well over half the costs being incurred in the last fiscal year of development. This provides a decision / stage gate point in time over the 4 cash calls.

"The Joint Operating Committee is the appropriate organizational construct."

This involves moving the "Accountability" framework, consisting of the "reporting", "regulatory" and "compliance" sub-frameworks, over to the "Financial", "Legal", "Operational Decision Making" and "Cultural" frameworks of the Joint Operating Committee. This re-alignment of the oil and gas producers organizational focus will have the material effect of increasing the scientific and engineering capability to a higher overall industry capacity. This is based on much of my current research in Professor Langlois, Dosi, Perez and others. This will also facilitate a faster speed of implementation of corporate policies. These concepts are proven in my research noted on http://innovation-in-oil-and-gas.blogspot.com. These concepts have substantial support from the academic community, as noted under the calls to action in the Final Research Report. And it can now be said has tangible industry support.

"The myriad of permutations and combinations of a facility."

Review of the Partnership Accounting module reflects how this system could be built to accommodate the needs of the industry. How this has been handled in the past is poor. I suggest in this research report that the methods and means are at our disposal to provide the CO&O Farm-in / out, Pooling, Lease and associated mail ballots, AFE's etc. The Partnership Accounting module will have the influence on the accounting either through a strict application of the chemical makeup of the product produced, or the legal agreement, or any point in between these two extremes. This is the nut that is being cracked through the development of this software.

Review and comment on the competitive landscape.

CGI was granted a production accounting development on a shared basis between a number of the senior producers. This applications delivery is now in excess of 14 months late and is rumored not to be able to meet its requirements. The limited scope of the application and focus on the linking to each and every ERP vendor makes this a still born project in my opinion. I am also concerned with the level of expectation that these developers would therefore be available to this project. This project will hire the necessary people to make the application function in the market as expected. The people therefore who are coming to this clean slate approach, I will ensure are the best available. I also have methods and means that I can use to increase the overall capacity of the development community in Calgary.

There is now a definitive mindset in the industry regarding the packaged applications provided by SAP and Oracle. There is a general agreement that the oil and gas industry is poorly understood and represented by these vendors and their offerings. It is also agreed that these vendors consider the Canadian oil and gas industry as a niche market, not worthy of any new development investments.

IBM has now sold Qbyte, their oil and gas solution in the market. 140 producers use this solution. Many feel they were buying IBM, and hence no one ever lost their job recommending IBM. Many producers feel the current offering, which will not be supported by the purchaser in this transaction, will have ripple effects throughout the industry. These ripple effects include having an ERP system that is not supported is inconsistent with the requirements of Sarbane's Oxeley. It also makes the demand for IT services during the next 3 years seriously over subscribed.

I want to highlight the point I made in the Final Research Report regarding the copyright I hold. This is a unifying point for the industry to rally around. I am only licensing one company to develop the software and there will not be this scattered or "Venture Capital" approach to developing many solutions at the same time. All the energies of the development community and energy industry are focused on getting it "right". I can state this as no developer will be able to develop alternative systems based on the joint operating committee without a license from myself. This will disable the Venture Capital approach through the fact that Sarbane's Oxeley and general prudence would not permit producers’ employees to use a system from a pirated venture.

Development needs.

The four stage-gate cash calls are calculated on the basis of 10 subscribing producers to this offering. (Based on the minimum budget of $87.7 million.)

* Deposits of $1,000,000 ($100,000 per producer) on or before February 28, 2007
* $10.6 m / # of subscribing producers ($1,06,000 per 10 producers). Due September 30, 2007
* $19.6 m / # of subscribing producers ($1,96,000 per 10 producers). Due September 30, 2008
* $57.5 m / # of subscribing producers ($5,750,000 per 10 producers). Due September 30, 2009

An additional request for 4,000 sq. ft. in the downtown core to September 30, 2008 is required.

Contact Information

Paul D. Cox
403-467-7971
Access my email address through the profile on this blog.

Technorati Tags: , , , , , ,

Photo courtesy troels

Monday, January 22, 2007

Capabilities and Governance Part II

Revisiting Langlois and Foss' "Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization" article. There were a number of other worthwhile points that I would like to comment on. In the last entry I discussed mostly the Governance attributes of the article, I would now like to focus on the Capabilities. I unfortunately need to quote extensively from the article and will probably violate the fair use doctrine of Dr. Langlois' and Foss' copyright. I have been in contact with them and will make them whole based on their determination of these writings.

Previously I wrote my opinion that the energy industry had developed as a competitive resource, and asserted that I thought there was a need to develop an industry-wide based capability. Today many of the companies that are of size in oil and gas are also the respective Chairmen of the joint operating committees for the properties they have interests in. This requires each producer to develop the capability to conduct those operations primarily through in-house staff. With the move to a stronger innovation mindset the industry would need additional capabilities and capacities, particularly in the science and engineering areas. This has become evident in today's marketplace. I have suggested in this blog that a pooling of the industries resources would enable a greater overall industry-wide technical capability. One that would eliminate the need for the high level of capabilities that each producer currently holds in its "siloed" corporation. The reason that companies would do this is to ensure that the company was able to continue to conduct all the operations they are involved in. The average engineering and geological work necessary for a barrel of oil increases annually and this trend is rapidly accelerating.

Today, this has already begun with a large portion of the industry operates on the industry wide capability basis. The large engineering firms are employed and indeed do the majority of the bullwork for the producers. What I want to assert is; with the industry transformed from "transfers" to "transactions" as discussed here, capabilities need to be expanded further to reach the potential of the industry. This to enhance the producers production profile under the revised organizational construct, the Joint Operating Committee. This thinking is consistent with Langlois et al.
"However, a new approach to economic organization, here called "the capabilities approach", that places production centre-stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization." pp. 2
I also want to assert that in dealing with the Joint Operating Committee's four frameworks (legal, financial, cultural, and operational decision making) leads me to Langlois' definition of production costs. And the regulatory, administrative and compliance frameworks lead me to what Langlois' describes as "transaction costs".
"The legacy of this "path-dependent history, we will argue, has been a tendency (albeit an imperfect tendency) to respect an implicit dichotomy between the production aspects and the exchange aspects of the firm or, to put it another way, between production costs and transaction costs." pp. 5
In my May 2004 proposal I successfully asserted the joint operating committee is the appropriate organizational construct for innovative oil and gas producers. And in particular I noted Dr. Wanda Orlikowski's Model of Structuration, which is based on Dr. Anthony Giddens Theory of Structuration, that software defines the organizational construct. Therefore, within the Model of Structuration, I have asserted the existing software applications define, support and constrain the hierarchy. And I went further to state that SAP is in fact, the bureaucracy. Langlois notes in his paper that Economists neglected organizational changes as benefits, and I would assert for the same reasons that they have been neglected by management, through their choice of their ERP software solution.
"Seldom if ever have economists of organization considered that knowledge may be imperfect in the realm of production, and that institutional forms may play the role not (only) of constraining unproductive rent seeking behaviour but (also) of creating the possibilities for productive rent-seeking behaviour in the first place. To put it another way, economists have neglected the benefit side of alternative organizational structures; for reason of history and technique, they have allocated most of their resources to the cost side." pp. 6
In my previous entry reviewing of Langlois et al theory, I noted how the transition from "transfers" to "transactions" could benefit the energy industry and provide enhanced performance through essentially defining new boundaries of the firm, and division of labor. From the Langlois et al article, the dovetailing of the governance issues meet the capabilities issues. And they go on further to suggest
"One of the important goals here is to bring the capabilities view more centrally into the ken of economists. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as a complementary area of research." pp. 7
Here we have further evidence of the point that I have made in my thesis. That software defines the organization. Or as I like to say SAP is the bureaucracy. The definition and implementation of the bureaucracy is what SAP does best, and may I assert is the primary reason for its success. We have now come a long way from the SAP styled organization in oil and gas to a point where new and better means of organization are not luxuries but necessities. The demands and constraints of the industry to produce more with less have only begun to be heard. Will SAP continue to support the petroleum producer in the near future? From what I hear through my current marketing efforts, apparently not.

More to come on this interesting topic.

Technorati Tags: , , , ,

Tuesday, January 16, 2007

Collaboration as an effective exploration tool.

One of the most difficult areas that needs to be approached is the secretive culture of the energy industry. This has always confused me. As most of the earth scientists and engineers involved in oil and gas have had some exposure to the academic world with its "publish or perish" and "peer review" methods of establishing and securing intellectual property. Why is there a hesitancy to publish what you know to earn the copyrights to what you discover? It might be suggested that the producers policies are the reasons for the secretive nature.

I read an interesting story in Canada's National Post this past weekend about Don Tapscott's new book, (no online version of this article can be found, the book on Amazon is here). The book is co-authored by Anthony D. Williams and is entitled "Wikinomics; How Mass Collaboration Changes Everything." An interesting title, however the story from my point of view is almost too good to be true. Apparently the CEO of GoldCorp Inc. Rob McEwen published all of the intellectual property information he and his small firm had on a certain mine that he owned. The small Toronto based miner was "struggling, besieged by strikes, lingering debts and an increasingly high cost of production." Sounds kind of familiar to me.

The short version of the story has McEwan hearing the story of Linus Torvalds and Linux during a visit to MIT in 1999. This brought McEwan to think:

"If Goldcorp employees couldn't find the Red Lake gold, maybe someone else could. And maybe the key to finding those people was to open up the exploration process in the same way Mr. Torvalds open-sourced Linux."
He then published all the data that was available about the mine and shared it with the world.
Turning the situation into a bit of a lottery with the best proposals being motivated to the challenge by $575,000 in prize money. The response to the challenge was significant. "Prospectors" from around the world got involved. The surprising thing was the entries came from disciplines that are not normally associated with geology. Students, consultants, mathematicians and military officers all contributed, representing applied math, advanced physics, intelligent systems, and computer graphics.

The results were surprising.
"110 targets were identified on the property 50% of which had never been identified by the company. More then 80% of the new targets yielded substantial quantities of gold. In fact, since the challenge was initiated, an astounding eight million ounces of gold have been found. Mr. McEwen estimates the collaborative process shaved two to three years off their exploration time."
and
"It catapulted the under performing $100 million mining company into a $9 billion juggernaut."
The conclusion to this excerpt is a difficult lesson, and one that takes a long time to learn.
"The Goldcorp story flies in the face of much conventional wisdom about how to run a business. Companies seek to protect their intellectual property, and through hiring and retaining the best people they generate new ideas, make new discoveries, compete and grow their business lines. Mr. McEwen saw things differently. He realized the uniquely qualified minds to make new discoveries were probably outside the boundaries of his organization, and by sharing some intellectual property he could harness a powerful new force - mass collaboration. In doing so, he stumbled successfully into the future of innovation, business and how wealth and just about everything else will be created."
Technorati Tags: , , , ,