Eliminating the Conflict

In the Preliminary Research Report, in addition to the advantages of using the Joint Operating Committee (JOC) we listed the disadvantages of the conflict between the JOC and the traditional hierarchy. What becomes clear in listing these disadvantages, is the overriding focus on compliance and governance by the hierarchy. Tax, SEC and Royalty requirements at times appear as the sole focus of the organizations. The operations within the JOC are a distant second in terms of dealing with the business of the producer.

I am speaking of course from the business perspective dictated by the use of the ERP system of the producer, not the technical perspective of the earth science and engineering production operation. The separation between the administration and the earth science and engineering focus within the producer is something that is being eliminated in the Draft Specification. Lets call this well known phenomenon of “no one reading from the same page”.

Oil and gas operations are unique based on their geographic and geological makeup. Applying blanket corporate strategies to these operations was possible in the easy energy era. In today’s marketplace the need to have unique operational strategies for each oil and gas property is a necessity and is accommodated in the Draft Specification. What is not needed is the conflict and confusion within the producer that is as a result of no one reading from the same page.

One of the breakthroughs from the research People, Ideas & Objects has conducted is that the differing operational strategies that are employed by each of the producers in a JOC are possible and appropriate. Each producer has a unique make up of assets and strategies and those can be enabled through the use of People, Ideas & Objects Draft Specification. Without the systems needed to support these differing strategies, the confusion and conflict will only grow, potentially in exponential ways.

The conflict between the separation of the compliance and governance of the hierarchy and the five frameworks of the JOC are reflected in each of the following points.

Introduces political and bureaucratic conflict.

This is the first and most damaging aspect of no one reading from the same page. When strategy, operations and administration are all moving in different directions within the organization, conflict is the result. The solution in the Draft Specification is provided by moving the compliance and governance from the hierarchy and aligning them with the legal, financial, operational decision making, cultural and communication frameworks of the JOC.

Compromises and muddles internal decisions.

What may be ideal strategy to optimize the property may be unknown to many of the decision makers within the producer firm. The operational decision making resides with the JOC. The decisions made by these organizations are not communicated effectively through the producer firm. Time necessary to make decisions and the bureaucracy have the effect of slowing the capacity of the producer.

Lacks the direct support from the hierarchy.

When no one is reading from the same page, it seems that the administration is moving in different directions from the technical groups. For cost reasons, having everyone reading from the same page isn’t a luxury but a necessity.

Successes and / or failures are not identified, shared or learned explicitly by any of the participating organizations. Knowledge is held tacitly, limited amounts of knowledge is codified or make explicit.

As decisions and strategies are confused, the ability to learn from the decisions is lost. Innovation is an iterative process based on the success and failure and the history of the property. In a science and applied engineering business that requires more scientific effort for each barrel of oil produced, the decision history and understanding of the underlying knowledge of the property become necessities.

Eliminates initiative and innovation. No tolerance for risk taking or experimentation that is required for innovation.

Building on the previous point regarding success or failures, when no one is held accountable for the decisions that were made, initiative and innovation fall to the sidelines.

No regulatory or internal financial reporting requirements.

The standard reporting of an interest in a JOC is fairly standard. People, Ideas & Objects have published a Technical Vision of how Information Technology will change in the near future. This Technical Vision foresees a substantial increase in the volume of data that is available to a producer. With the Performance & Evaluation and Analytics & Statistics modules, the producer can expand their use of this data in innovative ways.

The hierarchically based organization is an impediment to future progress.

This has been discussed by many. Although People, Ideas & Objects subscribe to this thinking, we are offering a viable solution by recognizing the Joint Operating Committee and developing an alternative governance structure in the Military Command & Control Metaphor in the Draft Specification.

Capacity to replace reserves has become logistically, operationally and organizationally constrained.

The long term perspective of a producer firm is reflected in their reserves. To expand their reserves a producer has a scientific capability, that in addition to their reserves, are its critical competitive advantages. These capabilities are the differences between success and failure.

Capacity to meet the market demand is diminishing.

The overall effect of these points is that the ability of the industry to expand its productive capability has stalled. As the world has more people entering the middle class, the lack of market supplies of energy will bring significant societal issues to all concerned.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

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Military Command & Control Metaphor - Innovative?

Last week in research question # 1 we asked if the hierarchy’s value had expired. Suggesting that elimination of the hierarchy would require an alternative governance framework to replace the tried and true hierarchy. Recall that the alternative framework we developed in the Draft Specification is what we call the Military Command & Control Metaphor (MCCM). It might seem a contradiction to suggest that the military chain of command enables innovation at the producer level. The military is known for its strict adherence to command and control, how is this going to assist the innovative producer? And isn’t the use of the MCCM going to cause the Joint Operating Committee to be less responsive as a result?

First is the fact that the strict level of adherence is a reflection of the command and control that is implemented. We are attempting to impose an organizational structure on to the various members of the producer firms that have been seconded to the specific Joint Operating Committee. These resources are being sourced from a multitude of organizations, they also continue to have responsibilities to the individual producer that they represent. Therefore imposing this structure allows them to interact, respecting the equivalent military chain of command used, in a manner that is expected of them in both the JOC and at the producer firm that employs them.

Second is the innovative footing that we are striving to provide to both the producer and the JOC. This innovative footing seems counter to the military command and control expectations. Victor Davis Hanson is a well known military historian. In this video at around the 33:00 minute mark, he makes the interesting comment noted just below the video.

I still can’t believe as a military historian that we came up with the idea that a flying fortress was going to go over daylight at about 200 miles an hour and supposedly at 30,000 feet knock out the strategic capability of Germany. And depend on a few 50 calibre machine guns to save this lumbering plane that had as few as nine crew members and they were going to be fighting against the finest fighter pilots in the world in ME-109’s and they think they can pull it off when the British had tried it and had already assumed that it was impossible. And we did that of course and we lost 25,000 Americans, six times more then in the Iraq war, on that flawed concept. But that's the nature of war, live and learn. And out of that we learned what. You could stack formations to increase fire power. You could create drop tanks and have Thunderbolts and Mustangs escort them. You could use radio signals, you could use chafe. And by that trial and error counter response, response, counter response by 1945 the B-17’s were taking a lethal toll on German society and industry. And that is what usually happens in war.

And at 1:01 minutes, based on his experiences Professor Hanson states;

There is more free speech in the military then there is in a university campus.

In this example I see two characteristics at play. The first is the ability of the higher command to maintain the focus on a difficult and costly job for the long term. Secondly, the ability to innovate in the use of the resources to achieve the long term goal, success in its mission. Compare this, or any other military operation, against the capabilities of the hierarchy and I think we can see the use of the Military Command & Control Metaphor will enhance the JOC’s and producers that use, prospectively, People, Ideas & Objects software applications.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

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Research Question # 4

In our fourth and final installment of the Preliminary Research Report’s research questions. We asked “Does the industry need to change from a “banking” to a “science and engineering” based mindset?”

Much of current infrastructure of the oil and gas industry has been developed during a time when the costs associated with exploration and production were reasonable. A time when the efforts of the producer firm could be quantified by determining a reasonable return on investment in oil and gas. This generated what could be considered to be a “banking” mindset that sought to exploit a resource based on a specific return on investment.

That of course is the reasonable approach that any industry will take to the business at hand. To do anything other then approach the business from the return on investment would be foolhardy. What the question being asked is, will the approach of a guaranteed return on investment be capable of dealing with the complexity of a science based business in a resource constrained environment.

With the earth science and engineering disciplines expanding at a significant pace, where each barrel of oil produced requires progressively more science and engineering. With the supply of scientists available to producers being somewhat fixed. To expect this environment to produce a reasonable return on investment with no change in approach from the “easy” energy era will lead to disappointment.

I think the answer to the question is clear. The industry needs to change in order to meet the markets demand for energy. Since the time the Preliminary Research report was published and today, the world energy production has remained static. At a time when a large percentage of the worlds population is moving towards the middle class, the static or potentially declining world oil production is a serious problem for society. It is therefore reasonable to assume that high commodity prices will be with us for the long term. Prices are the reallocation of financial resources to facilitate innovation. Therefore it is also reasonable that the producers with the most innovative capability will have the highest return on their investments.

But lets be clear, changing the stripes on a Tiger is not easy. As we progress into this review we will see that this level of change may not be able to be managed by the current oil and gas producers. Some times the changes occur from an attrition of the existing firms and replaced by new and innovative producers. Either way, People, Ideas & Objects and our Draft Specification are designed to identify and support the successful innovative oil and gas producers.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

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Research Question # 3

The Preliminary Research reports third research question builds on the probable positive outcome of the second question. That being, if innovation can be reduced to a quantifiable and replicable process “Will the Joint Operating Committee facilitate the means to innovate?” In addition to having the scope and understanding of the processes of innovation quantified and replicated. The breakthrough from this research question is that the Joint Operating Committee is the ideal organizational construct to facilitate innovation. I will highlight two key points in this post, and follow up with much more detail throughout our ongoing review.

The two key points are simply ideas and decisions. Two elements that can not be handled by computers. Ideas and decisions are the higher level work that humans need to be involved in, with computers taking over the repetitive and transaction oriented activities.

When we consider the changes in the oil and gas industry, particularly from the point of view of an expanding understanding in the earth science and engineering disciplines. The Joint Operating Committee is designed to generate ideas and make the decisions for the producers represented, making it the ideal organizational construct to support the successfully innovative oil and gas producers. Building ERP systems like People, Ideas & Objects Draft Specification that identify and support the JOC are what’s required to facilitate that innovation.

In terms of idea generation, collaboration is the ideal means in terms of identifying and solving problems. Contrasting the difference between collaboration and consensus is an important point. Consensus is when the majority can agree on a certain decision or direction. Collaboration is when the best solution is being sought by those with a mutual interest. I see the JOC using collaboration as a means to find the innovative solution and making the decisions based on a consensus of understanding.

The operational decision making framework of the industry is with the Joint Operating Committee. What becomes very clear in reviewing Professor Dosi’s paper is that decisions play a critical role in innovation. Professor Dosi states that not all efforts are successful, many fail, and from the failure sometimes the most important lessons are learned, and everyone inherently understands this. The ability of an industry to learn through their collective efforts will mitigate the subsequent similar failures and their costs, and enhance the success over a larger population of companies.

Some of the advantages of using the Joint Operating Committee that were listed in Preliminary Research report were;

• All participants are motivated equally. Financial opportunity drives consensus.
• The JOC is the legal, financial, operational decision making, cultural and communication frameworks of the oil and gas industry. All the internal processes tacitly support this fact.
• The participants in the JOC hold significant technical and managerial capabilities.

The scope of the operational authority of the JOC is constrained by the participants financial interest in the property. The JOC’s formation is traditionally formed around a geographical area, is traditionally limited in its geological and areal extent. This naturally limits the focus of the committee to that facility. The JOC is therefore financially motivated, has the appropriate level of focus, has the operational decision making authority and brings together the collaborative idea generation and consensus building needed of an innovative organization.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

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Research Question # 2

The second research question within the Preliminary Research Report was, Can the scope and understanding of the process of innovation; be reduced to a quantifiable and replicable process?

The short answer to this question is yes, most definitely. Which is significant news to most people. People, Ideas & Objects has consistently stated that high commodity prices are the reallocation of the financial resources to enable innovation. We stand at a point in time where the oil and gas industry will change to an innovation based and focused industry. Fascinating times.

It would be difficult to summarize the entire answer to this research question in one post. During the next few months of our review we will be better able to answer this question. Readers in the mean time can also review the Preliminary Research report.

The paper that was used to answer this research question was Professor Giovanni Dosi’s “Sources, Procedures and Macroeconomic Effects of Innovation” September 1988, Journal of Economic Literature, Volume XXVI pp. 1120 - 1171. If you have access to JSTOR or other databases I would highly recommend that you download and review the paper.

Professor Giovanni Dosi makes the statements that,

“The search, development and adoption of new processes and products in market economies are the outcome of the interaction between”:

• “Capabilities and stimuli generated with each firm and within the industry of which they compete.”

The capacity to enhance reserves of oil and gas is significantly more challenging than as little as five years ago. Exploitation is generally expected to continue, however, an enhanced role for various degrees and types of exploration is expected to commence. The energy frontier brings many new risks and complexity in the area of technical, political and the environment. These account for much of the changes in stimuli and capability that Professor Dosi states are required to facilitate further innovation.

Secondly, the microeconomic trends associated with changes in the relative prices of outputs. Oil and gas prices are beginning to reflect the scarcity, importance and value of these commodities to society.

Dosi notes the second influence to enhanced innovation is;

• "Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.”

Innovation and science are iterative upon each other. As the pace of development in earth science and engineering innovations increase, these will have an accelerating effect on the development within the sciences which of course, will lead to further innovations.

These points are only the tip of the iceberg. Professor Dosi’s 1988 paper is renowned for its impact on business innovation. Over the next few months as our review of the Preliminary Research Report and Draft Specification progresses. We will be spending a significant amount of time in Professor Dosi’s paper.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

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Research Question # 1

In addition to the Preliminary Research Reports hypothesis and conclusion, noting the Joint Operating Committee is the “natural” form of organization, there were a handful of research questions that were answered in that report. The four questions and their updated answers will be posted here over the remaining part of this week.

The first question was simply, “Has the hierarchy’s value expired?”

This may seem to be an unfair question, but one that most people will have firm opinions on. Alan Murray, Deputy Managing Editor of the Wall Street Journal wrote an interesting piece on the topic in Saturday’s Wall Street Journal. Within the article he documents many of the issues that organizations face. However, it’s the quantity and quality of the comments to the article that show the scope of the debate on the hierarchy’s future. One can clearly see the two camps forming and the ability to influence each other is at somewhat of a stale mate. Opinions are well formed with differing perspectives of the same facts, note the discussion regarding the development of Boeing’s 787 aircraft. This argument has only begun.

Those who believe that we will continue with the hierarchy number in the minority at this point in time. Those that support the hierarchy would assert, correctly, that their needs to be some form of replacement governance model. You just can’t eliminate the well defined model that governs the oil and gas producers organizations. Although we had not developed an alternative in the Preliminary Research report, we eventually did publish the Military Command & Control Metaphor (MCCM) that provides the replacement governance model for both the Joint Operating Committee and producer firms.

By adopting the well understood military chain of command. Applying it over the producer firms involved in a JOC. Allows teams comprised of members from different firms to operate as required within the specific JOC. This pooling of the available technical resources replicates in many ways the manner in which the NATO countries military resources are able to operate.

The ability to pool technical and scientific resources from several of the producers participating within one JOC is critical. Each firm currently have dedicated technical resources and capabilities built within each producer firm. The luxury of having each firm with mutually exclusive technical resources may be over. With each barrel of oil requiring progressively more earth science and engineering, the demand for these resources may begin to outstrip supply. Additionally the time required to train new earth scientists and engineers does not provide for the potential retirement of the brain trust. These resource constraints can be resolved through the use of the MCCM and pooling of the technical resources of the producer firms.

Therefore, the answer to the question for the oil and gas producer is the hierarchy’s value has expired. It is a model that deals with the firms needs, but ignores the JOC. What the successfully innovative producer needs is a governance model that deals with both the producer firm and the JOC’s that they have an interest in. (Particularly when the operational decision making framework resides with the JOC.) For further reading on this topic please review the MCCM of the Draft Specification.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

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The Joint Operating Committee is Critical

Starting with today’s post we will begin a process of reviewing the data, information and ideas that makes up People, Ideas & Objects and the Draft Specification. This will provide readers with a thorough understanding of the elements that make up this project. These posts can be aggregated by selecting the Review label.

People, Ideas & Objects began with the Preliminary Research Report’s hypothesis asking “if the Joint Operating Committee (JOC), modified with today’s information technologies, provides an oil and gas concern with the opportunity for advanced innovativeness.” The critical breakthrough in the research’s conclusion is the “industry standard JOC is the “natural” form of organization for oil and gas where the participants of the committee are supported and augmented through the diversity and availability of the remaining organizations team members. A greater alignment to this conceptual model would facilitate the desired innovation.”

So if this is how the industry operates why does it need People, Ideas & Objects Draft Specification, its software development capability and associated user communities? The difficulty is that today’s ERP systems do not recognize the existence of the Joint Operating Committee. This stands in contrast to the fact that the JOC is the legal, financial, cultural, communication and operational decision making framework of the industry. Every internal and external process of a producer tacitly recognizes these frameworks. However, the organizational focus has become centered on the compliance and governance frameworks of the royalty, tax and SEC requirements of the producer firm. What the Preliminary Research Report determined, and the Draft Specification implements, is the movement of the compliance and governance frameworks into alignment with the five frameworks of the JOC.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

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2009 Year in Review

Starting off 2010 it's important to highlight some of the 2009 developments of this project. 2009 was our first full year of community development. It is clear that using the Joint Operating Committee resonates with many of those who work in oil and gas. Through analysis of the numbers of subscribers to this blogs feed. Shows the community is large and engaged with the content. Another point that is clear is the risk of being seen to be active and committing to this process. We are well aware of the consequences of being too early and too closely affiliated with these ideas. Management of the oil and gas companies want nothing to do with this development, or with the people associated with it. Keeping the community anonymous, in addition to its further development is our number one priority for 2010.

Our second priority for 2010 is to secure our budget and implement our plans for the development of the Preliminary Specification. The budget and plan will be posted here in the next few days. Securing the financial resources to proceed with tangible developments is necessary for further community development.

Highlights of the past year.

• A general understanding the issues in oil and gas production and exploration are substantial. Over the next 20 years, companies such as Exxon, have quantified the scope of these issues as being an additional $20 trillion. This requires a different approach.
  
• Oracle Corporation released their Oracle Fusion product offering. Oracle's activities in this area have been an unknown in the oil and gas ERP marketplace. This unknown has had the effect of freezing the decision making process of producers. Two things stand out in Oracle's offering. One is Oracle's comical desire for the oil and gas producer to get closer to it's customers. And possibly fatally, Oracle has spent $39 billion in capital in the Fusion investment. Both of these points show that Oracle needs further development to meet the needs of the innovative oil and gas producer.
  
• Professor Oliver Williamson's winning of the 2009 Nobel Prize in Economics. Much of the Draft Specification uses the theories and ideas of Williamson and others. I find the awarding of the prize brings substantial credibility to the Draft Specification, and hence to it's community of users.
• Clarification and confirmation of the targeted market for these software applications and communities services. Through the development of this community it has become clear that the software offerings and services appeal to International Oil Companies (IOC's), National Oil Companies (NOC's), Independent Oil and Gas Companies and Start-up producer firms.

People, Ideas & Objects future is bright. We understand that people who are interested in joining this Community might only be able to contribute a few hours per week, so please join us here.

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Profit from the Peak.

The end of the oil game and the greatest investment event of the century.

Profit from the Peak is a book that I've been wanting to review for a while. An interesting premise is suggested in the sub-title. From some of the blogs that I follow it sounded like it may provide for an interesting read.

A little background on myself. With over 25 years of experience in the oil and gas industry I could see this "Peak Oil" energy train wreck starting. In August 2003 I came up with an idea on how to solve it. And in September 2003 started the research into using the oil and gas industry standard JOC (Joint Operating Committee) as the key organizational construct of the innovative oil and gas producer. If we moved the compliance and governance that the hierarchy managed, with the legal, financial, operational decision making and cultural frameworks of the JOC. We would achieve an alignment in all five frameworks that would enable the science and engineering needs of the industry to be the focus, and mitigate the effects of Peak Oil.

What does this mean. As most people know oil and gas is made up of partnerships between companies. This is to reduce the risks inherent in the business, and because the aerial extent of many of the properties, multiple owners work together. Since its beginning this has been the culture of the industry. And as one can imagine their are legal documents, financial distributions and operational decisions made with the input of the producers in the JOC. What isn't done is the competition to this software development project, SAP, Oracle and Qbyte, haven't a clue what a JOC is. Their focus is on the compliance and governance and therefore only provide the producer with at best 20% of the functionality.

The other major finding that I published was the software defines and supports the organization. Noting that SAP is the bureaucracy. To change an organization, one must first change the software. If we want innovative oil and gas producers, we need to build the software first. Or be relegated to manual systems. So this is what I have written about since the publication of my research in May 2004 and the posts in this blog. But enough about me lets review this book.

The first point I want to make is based on the following quotation in the Introduction and its associated implications. And regarding this graph entitled "Worldwide Oil Production".

For the past 50 years, we have explored the entire earth intensively looking for more oil. But despite the latest technology and the most elaborate efforts, global oil discovery peaked in 1962 and has declined relentlessly ever since. Generally we are finding less and less oil each year, and for the past 25 years, we have consumed more oil than we have found. In 2006 we found about 6 billion barrels of oil, but we consumed 28 billion, and the trends continue in the direction of increasing demand and decreasing supply. pp xvi - xvii

Although Peak Oil accurately captures where I think we may be in the history of the industry. My opinion is that we have established a high water mark that may be permanent. The graph clearly shows the discoveries peaked in 1962 and have declined since that time.

My question to the authors and everyone interested in this topic. Does this graph mean all the oil was discovered by 1962? Or did the industry stop looking for more oil after 1962. Now this is not an accusation that they purposely stopped exploring. But consider the world had an abundant volume of energy. Prices were in the very low single digits, and the need to "develop" these resources became the focus. This situation was followed by the 1980's and 1990's where low oil prices were causing no end of greif to the producers. The industry more or less cannibalized itself to survive over those two decades. To say that technologies in 1965 discovered all of the oil is an assumption that the Peak Oil theorists may have incorrectly assumed. Based on my current understanding of the oil and gas industry. And the process necessary to explore for oil and gas. The industry generally doesn't have a clue on what exploration is. The generation of oil and gas workers that started in the 1980's and 1990's never experienced an exploration mindset.

The next incorrect assumption of the authors is stated on page 4 of the book.

"Matthew Simmons, the top oil investment banker in the world" p. 4

Now I have read Matthew Simmons for many years and overall he is correct in many things that he states. However he is the worlds top investment banker in the oil and gas services industries. Based on Mr. Simmons comments about the need to publish the worlds reserves data. So that it can be pointed to as the gospel truth of the Peak Oil situation, unfortunately disqualifies himself from making any comments about reserves.

I have now worked in the industry for over 30 years and have gone through the accounting, audit and systems areas extensively. I have been a CFO of small producers and I have looked at my fair share of reserves reports. I can't tell you if the reserves are the greatest thing since Ghawar, or the latest scam. Looking at reserves reports is the same at looking at art. Why would someone pay that much for those reserves, or art, reflect the beauty is in the eye of the beholder. And indeed oil lives in the minds of oilmen.

The same criticism can be leveled against Dr. Daniel Yergin. He claims he and his 220 PhD's on staff have the best global oil and gas reserve data. This prompted him to make the claim in 2005 that "the world would soon see an unprecedented increase of 16 million barrels of oil". If I were you I would dig out some of those paintings your kids made in elementary school, I think I see a market for them.

Some minor criticisms as to the accuracy of some of the claims made in the book. On page 42 of the book it is claimed that "hydrogen sulphide (sour gas)" is in injected into oil formations. H2S is one of the most toxic substances known to man. One breath of it and your dead, instantly. I'm sure the safety concerns of injecting H2S are adequate to assure that no one is doing it.

Enough criticism of this book now lets get on to many of the jewels. On page 49 "Its as though the adults of the oil industry have been forced to sit and watch as the children take control." In reference to the industry being knocked aside by the National Oil Companies (NOC's) desire for control. I can't agree more with that statement, and I'll comment on this later in the review.

On page 67 the authors suggest "Essentially, it looks as though oil majors are running a shell game here, no pun intended. The question is: When will investors figure it out?" They have hit the pile driver on the pile with this one. As I have mentioned many times the management of the producers are acting in their best interests, not the investors or societies in general, with their muddling attitude toward the energy business. One has to take a jaded look at the stock options that are being distributed in many of these companies.

The first knock your socks off comment that is made by the authors, and I have not seen anything like this analysis before, but intuitively believed it to be so. And is the underlying reason why I blame the companies for the risks we now face. Is reflected in this quote;

"A strong man, working hard all day long, can do less work than an electric motor can with 10 cents worth of electricity." and "A barrel of oil contains the equivalent of 18,000 man hours of energy." p. 72

If the fact that the physical labor equivalent of energy is now static or declining doesn't scare you, then you must be a different type of animal. It was in 1870 when mechanical leverage exceeded the labor output of man. The reason we live in such a prosperous world is the fact that we have figured out how to mechanically leverage one barrel of oil so extensively. This however does not mean that we should consume most of it by hurtling a 4,000 lb. vehicle down the highway at 60 miles / hour. I'll have more to say on this point later.

I am not a believer in the scare tactics of the Al Gore's et al. To me climate change is real when the news of the day has video reflecting strange weather occurrences we only ever heard of before. Much in the way that the world thought the Japanese economy would rule the world in the 1980's; when the majority of people saw the world through a Japanese TV. Turn off the TV and go outside, notice any change? Nonetheless, that should not preclude us from coming up with solutions. The authors ring the bell with this next set of suggestions.

"The ultimate culprit is the American consumer culture that is responsible for most consumption in the world. At the end of the day, the culture of consumption must change." p. 88

and

"To heavily invest U.S. tax dollars in renewable energy production in China. Why? Because the Chinese have a chance to build their burgeoning economy on renewables from the beginning." p. 92

Brilliant! Although I would suggest not just the U.S. but the western world should subsidize renewable energy production in China. Not only does it limit the production of the highest levels of CO2 (China), but provides immediate value (reduction in CO2). Changing the western worlds infrastructure is not going to happen as quickly. These two authors should win an Academy Award and a Nobel Prize each for these comments. Its this out of the box type of thinking that we need a lot more of, if there is a climate change problem.

One of the key characteristics of this book is its focus on the facts. When it comes to the renewables, I find the activities in the U.S. so focused on keeping people in their cars that they can't see or think straight. Here the authors note that the value generated by ethanol is approximately equivalent to the inputs of oil. Therefore if the U.S. stopped producing ethanol. People would be able to afford food and a bunch of bureaucrats in Washington would lose their jobs. That's it, you'd have just as much energy. The facts are clear this is a foolish and dangerous game.

I have suggested in my blog many times that the oil and gas industry is in need of a desperate transition. One in which the survival and cannibalizing of the industry in the 1980's and 1990's be replaced by an exploration mindset that hasn't existed since 1962. A move to a science based industry and away from the banking mentality that pervades the incumbent management. The reason this hasn't happened is as I suggest. An organization today that doesn't have the software systems in place to make the transition, will be reduced to manual systems. Something that I know the incumbent management readily appreciate. I have also suggested many times that the investors will need to fund this software development project to ensure that there is an alternative method for them to manage their oil and gas assets.

This transition is necessary and time is wasting. What the industry did learn in the 1980's and 1990's was how to draw down the reserves of a field much quicker then they did in the 1960's. So not only are we not exploring, we don't know how to explore, can't get organized to explore, and, the past exploitation methods are the proverbial brick wall we are about to crash into.

I therefore disregard the comments of the authors made in chapter 6 "Twilight for Fossil Fuels" and suggest that oil lives in the minds of oilmen. On page 120 they note;

Ironically, one of the causes of the receding horizons problems is the very success of the oil and gas industry. Record oil revenues being raked in by oil producing countries of the Middle East are causing a boom in building and expanding their infrastructure.

Imputing, I think correctly, that the U.S. based oil and gas industry has not been welcome in the Middle East, Russia and China. I think it was reflected clearly around the time that Halliburton moved their head office from the U.S. to the Middle East. But was this transition away from western based capabilities a mistake? I believe it was. Since then the industry has had their head stuck in tar. The tar sands I mean. Their herd mentality is noted by the authors.

"In some cases the price of oil itself is stifling oil projects. For example, at Shell's Alberta oil sands project, the cost of producing a barrel of oil, after a planned 100,000 bpd expansion, will be six times higher than the cost when the project first started." and "Depending on a host of factors, the total net energy gain for tar sands production is in the range of 5 - 10 percent." p. 121

But hell, it is seen as the thing to do.

I think the energy executive, if that's not an oxymoron, is beginning to wake up to a brighter future. I note the following from Thursday July 10th's news. The Calgary Herald on Russia's changing attitudes towards western technology. ASPO International notes BP CEO Tony Hayward stating "He said the problem was a failure of supply growth to match demand growth." "Pemex oil output fell by 10% in May." And Total pulling out of Iran due to their fireworks.

The Russians are considering tax incentives for the western based companies! Is this an admission that the western technologies are superior? Russian production certainly leaped when they were invited in, now with Shell and BP more or less financially abused by the Russians the production declines. With Mexican production in steep decline it is fair to assume that the world could benefit from more western based producers and service industries. Iran wasn't expecting to be on the losing side of their missile launches, but western technology walked on a critical investment in Iran.

I would recommend this book to any and all oil consumers where ever you may be. It provides an understanding of the industry and its difficulties. But also educates them to use energy more wisely. In a globalized world we need everything that we can think of. If Ludwig von Mises correctly noted that the industrial revolution was the solution to hunger and over population, IT needs to be the solution to today's problems. Albert Einstein said, that today's problems are not solved by today's thinking. These authors give you the facts so that new thinking can begin to address these problems. I personally think that IT and Segway's are two of the real solutions.

On the topic of alternatives the book provides excellent information about the changing economics of some alternatives. On page 137 they note;

The portion provided by solar and wind energy -- what most people think of when they think about renewable energy -- is a fraction of 1 percent of the total mix.

And bio-diesel has the potential of producing;

400 million gallons a year of bio-diesel. p. 143

Or 26,000 barrels / day. We've probably wasted more energy thinking and talking about bio-diesel then it will ever produce. There are three good alternative energy sources noted in this book. Unfortunately none of these alternatives has the ability to propel a 4,000 pound vehicle down the road at 60 miles / hour. But they are commercial, have huge potential and as the authors note, companies are making money.

Chapter 9 Endless Energy: "Here comes the sun." Starts with a quotation of Thomas Edison "I hope we don't have to wait till oil and coal run out before we tackle that." The future is solar, but the issues are daunting and much research should be put into the field.

The price of solar power has fallen to less than 4 percent of what it was in the 1970's. It is already economically competitive in states where electricity is expensive, including Hawaii, Massachusetts, and New York, and states with good solar exposure and lots of land, like California, Nevada, and Arizona. p. 156

The entire chapter provides the comprehensive review of the solar industry with some very good recommendations on how to get in on the ground floor of this industry. Making Chapter 9 a must read for everyone who lives in a house.

The same can be said about Chapter 10 "Pressure Cooker: Tapping the Earth's Heat" on geothermal energy. And Chapter 11 "Nuclear's Second Act". Nuclear, solar and geothermal energy are now commercial, clean and available to be used in areas where gas and coal are used today. An opportunity to replace the electricity produced from gas and coal and leave those commodities to support industrial mechanized labor, or the 18,000 man hours per barrel.

Chapter 12 "What's Needed: A Manhatten Project for Energy. President Bush is quoted as saying "we need an energy bill that encourages consumption." and Vice President Dick Cheney "Conservation may be a sign of personal virtue but it is not a sufficient basis for a sound, comprehensive energy policy." Then the authors note the result of big government science based programs.

While both projects were famous for unprecedented technical achievements -- the Manhattan Project cracked the secret of the atomic bomb, and the Apollo Project put a man on the moon -- we need to do more than come up with new technology to solve the problems we now face. We also need to rethink and remake our entire infrastructure, our economies, and even our culture. p. 180

A Manhattan Project will only boost the bureaucrats in Washington. This is a global problem. As a part time wanna be economist, I would suggest the market price mechanism is motivating the forces necessary to solve this problem. There was no market for the Manhattan or Apollo projects, I suggest we leave these energy problems to the market to solve.

I therefore disagree with the authors on their call for a Manhattan styled project. And fundamentally agree with the President and Vice-President. If 18,000 man hours of effort are contained in each barrel of oil, then we should encourage its use at any cost. Its a competitive advantage to those who use it most effectively, which happens to be the U.S. The alternative is to hire 18,000 people to do the work of one barrel. Therefore the President and Vice President are absolutely correct.

If we look at the numbers of the oil dollars flowing to the Middle East we will be distracted into believing that we should reduce our consumption. I suggest we start using our heads here and employ the Information Technologies and stop waisting the energy hurtling vehicles down the road at 60 miles an hour. I repeat get a Segway as a supplement to your vehicle. Use it for the short trips (24 mile range on most models) and cut your costs substantially. (Segway's cost less then $1.00 of electricity for that 24 miles). Secondly the Segway runs at 12.5 mph which is 4 mph faster then a car stuck in grid-lock. I repeat, IT and the Segway are the solutions to the problems of today.

On page 193 Carbon Taxes and Cap-and-Trade Systems are introduced by the book;

Carbon taxes are probably the simplest, most effective, and least economically damaging option, because they let the market decide what the best solutions are.

July 11, 2008 the Wall Street Journal wrote an article entitled "Kyoto's Long Goodbye" which addresses these mechanisms silly and wasteful ideas.

The irony is that Kyoto has handed them every reason not to participate. Europe knew all along that it couldn't meet its quotas, so it created an out in "offsets." A British factory, say, buys a credit to pay for basic efficiency improvements in a Chinese coal plant, like installing smokestack scrubbers. This is a tax on the Brits to make Chinese industries more competitive. Sweet deal if you can get it.

and

It gets worse. The offsets are routed through a U.N. bureaucracy that makes them far more valuable in Europe than the cost of the actual efficiency improvements. So far, Kyoto-world has paid more than €4.7 billion to eliminate an obscure greenhouse gas called HFC-23; the necessary incinerators cost less than €100 million. Most of the difference in such schemes goes to the foreign government, such as China's communist regime.

Lets not chase any bunny trails that lead us down this ridiculous waste of money and energy. Recall that Al Gore hasn't reduced his personal large "carbon footprint", he just offsets his abundant use of energy with these bureaucratic Cap-and-Trade Systems. Enough said?

Gasoline taxes are are also recommended as deterrents to people using too much energy.

Most observers agree that the best, and possibly the only, way to achieve a reduction in the amount of oil used in this country is through the price mechanism, particularly in transportation fuels. It seems a pinch in the pocketbook is necessary to make consumers drive less.

It is well known that the U.S. has the lowest taxes on gasoline in the western world. This is the motivation in the authors desire to raise more taxes. I would assert this is the wrong direction on two fronts. Increasing the cost of fuel will impede the productivity of the U.S. economy. Taxes at high levels, such as in Europe certainly deter driving, however, the U.S. out performs Europe by a substantial margin. This is why China chooses to subsidize the use of fuel in their economy. At 18,000 man hours per barrel, the lowest cost producer will ultimately win. That is China in the developing world and the U.S. in the western world. For example France currently has a per capita GDP that is lower then Mississippi's, the poorest state of the union.

It seems the authors are on the other side of the political fence in terms of how and where the solution to these problems will come from. Thankfully they debunk the Hydrogen fuel source as an alternative. Through their calculations they show that Hydrogen requires 5 energy inputs for each energy output. Not a smart direction to turn. What the authors don't mention is the cost of building an appropriate delivery system that can scale to what gasoline is now distributed as. Hydrogen requires stainless steel in all of its pipelines, tanks everything that it touches. And the cost of that is beyond what we are able to calculate with modern computers.

But then again, maybe the authors and I are not so far off in our expectations. On page 239 under the heading "Never Sell Short Humanity" the authors note;

And that's the true moral of the story: Every crisis -- no matter how dismal it looks -- contains the blueprints for its own solution.

And with that I highly recommend this book. For the average consumer, little is known about the complexity and difficulty in bringing the abundant and valuable energy resources to their door, and place of work. This fact-based book refutes many myths on its own and I have pointed out some of where I think they may be a little short. Given the price of the commodities today. And given the volume of words that are being consumed by the energy issues. The solutions will soon be at hand and society as a whole will be able to profit from the peak.

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