The Solution to Natural Gas Prices.

The most unsustainable element of the current producers business model has to be natural gas prices. Selling gas at well below cost is a fools game, yet it continues. The only solution that has been tried has been a decline in the number of wells drilled. And that has not had the desired effect on prices. Reducing capital expenditures is at best a very blunt instrument in the current natural gas business environment. So what is the solution. Information Technology is the solution to the Natural Gas Pricing problems. Specifically the Preliminary Specification will provide the producer with the ability to remove their marginal production from the marketplace until the prices return to the point where production would be profitable.

The Preliminary Specification uses the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. Operational decision making is one of the frameworks of the Joint Operating Committee and therefore making the decision to shut-in marginal production due to low natural gas prices falls within that framework. These decisions will have the effect of eliminating the operational losses that the producer incurs due to the fact that the Preliminary Specification also employs the decentralized production model. The decentralized production model allows for better matching of costs and revenues, and eliminates the production and associated overheads during periods when production is shut-in.

Eliminating losses from low natural gas prices will have the effect of increasing the value of the producers reserves. Increasing the fixed costs of the reserves, by the losses that are incurred, has a detrimental effect on the economics on the field. These losses can in many instances remove the expected return from the property. By using the Preliminary Specification and the decentralized production model, where production overheads are not incurred during times of shut-in production, only the costs of capital are uncovered, and will eliminate the losses during times of low natural gas prices.

If the Preliminary Specification was shared throughout the industry the potential declines in natural gas prices would be eliminated. If each producer were able to limit their losses on production by shutting in marginal production then prices within the industry would never drop below the marginal cost. As an industry the capability to remove the marginal production would ensure that prices remained at a point where producers remained profitable.

The solution to the natural gas pricing issues is Information Technology. The ability to remove the marginal production as described here in the Preliminary Specification on an industry wide basis is the only solution to the overproduction that can occur as a result of prolific multi-lateral and multi-stage fracing. Production discipline will need to be implemented by way of the marginal costs. The innovative oil and gas producer can innovate based on the lowest marginal cost. Unprofitable producers will need to be dealt with harshly by the marketplace. Competitive drainage by unprofitable producers will not be considered a risk. That will be the future of the oil and gas industry.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

The Use of Marketplaces.

In yesterday’s post I mentioned the Preliminary Specification has three marketplace modules. These consist of the Petroleum Lease Marketplace, Resource Marketplace and Financial Marketplace modules. In the future the oil and gas producer and the Joint Operating Committee will have a greater reliance on the marketplace for its needs. This is in contrast to today’s manner of having everything brought in-house and under the management of the producer. Having everything under the domain of the producer is part of the unsustainable business model that is the reason that the Preliminary Specification needs to be built. 

The reason that this current business model is unsustainable is the same as what we noted yesterday for the geologists and engineers. The division of labor and specialization, which are needed to increase the capacity and capabilities of the industry, would require the producer to expand the number of people they employ to cover off the scope and scale of their operation to the point where they would no longer be a viable going concern. The need to rely on service providers from the marketplace that are focused on the process and servicing the industry at large, which is what is needed. That way they can organize themselves in a manner that is the most efficient and effective, and at the lowest costs for their clients the Joint Operating Committees. 

In the Preliminary Specification I highlighted a few examples of the types of work that would fall under this category. These are only examples and it should be assumed that every position should be subject to the same process of determining whether it should be relied upon from the marketplace or can continue to be supplied internally. It is best to consider that the Joint Operating Committee will be populated by people who are seconded from the participating producers that own an interest in the property. And the producer firm will be a scaled down version of the existing structure focused on the earth science and engineering capabilities that are unique and a critical part of their competitive offering. Add a few other resources for finance and land; and that would make up the core of the producer with the majority of the producers processes being managed by service providers provided by the marketplace. 

One of the examples I used in the Preliminary Specification was the Production Accounting tasks that have traditionally been conducted in-house. Since these are processes that are recurring each month they are ideal for the marketplace to provide. And here it was noted that a service provider might establish their service in an area where there are a number of gas plants and service those gas plants in a “hands-on” manner. Conducting the production accounting tasks for all of the producers in that local area for those gas plants would be their area of specialization and they would be able to process and bill their services on the basis of some unit of work output. Therefore when wells were shut-in the production accounting service provider would have no production accounting service billing for those wells during that month. 

Another example that was used was Royalty Accounting that was specialized based on the jurisdiction that attracted a specific royalty. That service provider would be able to ensure their clients that they would process their production in the manner that ensured they paid the lowest possible royalties on their production. These specializations on local area for the Production Accountant and royalty jurisdiction for Royalty Accountant are not available to the producer in the current business model. The producers competitive advantage is in its earth science and engineering capabilities, and land and asset base. The more that it is able to focus on its core competitive advantage and less on the royalty nuances and production accounting requirements the more profitable it will be. That is the business model that will provide the oil and gas investor with the most profitable means of oil and gas operations. 

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And Merry Christmas to everyone.

Demand for Engineers and Geologists

Another area where the current producers business model is unsustainable is in the concept of designating one producer as operator. As a result of each producer obtaining the capabilities necessary to be designated as operator. A hoarding of these critical resources occurs. In the Preliminary Specification the manner in which work at the property is approached is through the partnership represented in the Joint Operating Committee. A pooling of the resources of the partnership is a necessity due to the high demand for earth scientists and engineers.

When the producer is designated as operator they have to build just in time capabilities to deal with all contingencies within their organizations. This creates a surplus capacity within the geological and engineering capabilities of the producer firm. Taken across the industry this surplus capacity is unused and unusable. At a time when these resources are in mid to long term shortages, due to the retirement of engineers and geologists, and the increasing demands of these sciences in each barrel of oil produced. And there is a third aspect of these professions affecting the ability of producers to “operate” all of their properties. That is the need for specialization and the division of labor. In order to increase the output of the industry the need to organize these professions in a manner that is more specialized and uses a higher division of labor. This will increase the throughput from the same volume of resources. This will require that the producer who desires to approach the needs of being “operator” to hire more bodies to ensure that they have the full scope and scale within their operation. A situation that will be uneconomic and highly impractical. Therefore the operator designation will become a feature that past producers were able to pursue and something that is impractical and uneconomic in the very near future. However, approaching the specialization and division of labor from an industry point of view will not be uneconomic or impractical.

An alternative approach to the building of independent silo’s of “operators” within each producer is therefore a necessity. The Preliminary Specifications “pooling” provides this alternative approach in the following manner. Each producer develops their capabilities consistent with the needs of the industry understanding for specialization and an enhanced division of labor. Within the Research & Capabilities module of the Preliminary Specification they document these capabilities and publish these capabilities to the pertinent Joint Operating Committees that they have an interest in. There the people who are seconded from the various producers to work within the Joint Operating Committee are able to review the various capabilities of all of the producers who are party to the property. Then they can select the capabilities that are required to enhance the property in the fashion that is determined by the Joint Operating Committee. In addition these resources that are seconded to the Joint Operating Committee are able to organize themselves through the Security & Access Control module’s Military Command & Control Metaphor. This designates roles and responsibilities that each individual will have within the Joint Operating Committee and provides a cornerstone of the means of command and control of the property. Other aspects of command and control include the AFE and its budget, the Work Order system, and the Job Order system.

Having all aspects of the geological and engineering scope and scale covered off as a result of this pooling might not have occurred. The need to augment additional resources from the marketplace of engineering and geological service providers will probably be a necessity in the future. The demands of an industry that is relying on an enhanced division of labor and specialization will require a higher reliance on the marketplace. That is why there are three marketplace modules in the Preliminary Specification. This will need to be an element of how the Joint Operating Committees work is completed in the future. The Preliminary Specification will be the tool that supports and defines the Joint Operating Committee and marketplaces in meeting the consumers demands for energy.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

More on Unsustainable Business Models.

When we were discussing the manner in which production overhead was to be incurred and charged in the environment created by the Preliminary Specification. The contrast to what exists today is striking. Each producer has to develop their organization with the capabilities to process lease rentals, production accounting, royalty accounting and the various other production related overhead expenses inhouse. These costs are incurred whether there is production or not. This is one of the reasons that the marginal production is not removed from the marketplace. The need to cover off these costs at all times is a necessity. Under the decentralized production model that is used in the Preliminary Specification the costs associated with shutting-in of production are the responsibility of the service provider. They will need to organize themselves in a manner where they ensure they are providing the producers with the lowest cost services. Something that will be possible through the leveraging of automation, specialization and division of labor.

If the majority of the accounting and production overhead that is incurred by a Joint Operating Committee is being provided by a service provider. Then the implications to a producer will be greater than just the direct costs of these services. What would be the purpose in having office space and accommodations available for these people located at the producer firm? Would it not be more efficient for the service provider to include the costs of their office space in the service fee? Then the costs of overhead for the producer would be sizably smaller from a square footage footprint point of view, and the associated costs that are incurred there. What we will see with the use of the Preliminary Specification is the reduction of the producer firm to key individuals necessary to focus on the competitive advantages of the firm. Those being the land and asset base, and the earth science and engineering capabilities of the firm. Anything else can be provided through a service provider where they are organized to bring the process to the Joint Operating Committee in an efficient manner using the tools of automation, specialization and the division of labor.

The manner in which today’s and yesterday’s post are combined to make the producer’s business model unsustainable are two fold. First the inability to remove the marginal production from the marketplace enables the losses on reserves to occur. Secondly the high fixed overhead costs must be covered by constant production.

By removing the high fixed nature of the production overhead, and other overheads, of the Joint Operating Committee and the producer. The ability to deal with the reality that volatile commodity prices will remain for the foreseeable future is provided to the innovative oil and gas producer. If all producers exercise production discipline then there will be limited need to be shutting-in production once prices stabilize. However, having the capability to deal with the marginal production must be a capability that remains throughout the industry. And that does not currently exist within the producer marketplace. If it did we would not have the current natural gas prices.

What the Preliminary Specification provides the producer firm is the ability to better manage their overhead costs. By using the division of labor and specialization, the overhead related processes are managed much more efficiently and effectively when they are managed across the industry and charged directly to the individual Joint Operating Committees. This enables the producer to control their costs during times of shut-in production by not incurring costs of overhead. Ensuring the costs of capital are the only costs that remain uncovered during times of shut-in production. Overall this provides the producer with the ability to ensure that they incur no loss of earnings on their reserves. In the current environment, losses on reserves are costs that are fixed and have the effect of making the entire field uneconomic. Losses on reserves should be avoided at all times. The Preliminary Specification provides the innovative oil and gas producer with the capability to better manage their reserves in this fashion.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Unsustainable Business Models?

In yesterday’s post I made the claim that the current producers are pursuing unsustainable business model’s. That’s a rather bold assertion and one that will surely be argued or dismissed by those that are currently invested in that generation of producer. So what is it that I mean when I say that they are unsustainable. To detail the difference between the status quo and the Preliminary Specification can not be done in one blog post and as a result this comparison or critique of the current producers business model will take several blog posts under the Unsustainable label.

2012 is over and the verdict in terms of profitability is going to probably read that some companies were profitable as the exception, but not as the general rule. The destruction of capital, as reflected in asset write downs continues with the natural gas business continuing with depressed prices. According to the firms models this was all to have turned around by now. Yet nothing is done to mitigate the over production and loss of reserves. An unsustainable business model can best be described by selling natural gas well below costs for significant periods of time.

In the Preliminary Specification the ability to remove the marginal production from the marketplace and maintain production discipline is one of the capabilities of the system. Through use of the decentralized production model and disposing of the high throughput production model currently used by producers. The Joint Operating Committee is able to shut in marginal production when the prices reach the point where the partners agree the production does not cover the costs of the operation. And since the producers are innovative and have their capabilities available to them through the People, Ideas & Objects Research & Capabilities module they can apply the latest innovative thinking to the property to bring those reserves back into production by reducing the costs of production. All the while the property is shut-in, the overhead that was incurred during production is stopped and these savings are realized during periods in which this or any property is shut in.

The ability to save the production overhead during times of shut-in production is one of the features of the Preliminary Specification. Through an advanced specialization and division of labor the administrative overhead of the industry is reorganized to be more efficient and effective. This takes the tasks and removes them from the producer and aggregates them and reorganizes them based on the processes across the industry. Therefore service providers are organized to provide lease rental services, production accounting services, royalty accounting services etc. In addition these services are not charged to the producer firm itself but to the Joint Operating Committee directly. Therefore during times when the production is shut-in the overhead costs associated with the service provider are not incurred and not billed to that Joint Operating Committee. Leaving the cost of capital as the only costs that are uncovered during times of shut-in production. This is the preferable situation as opposed to incurring a loss on the reserves.

Taken at the micro level the producer maximizes the value of their reserves. Taken at the macro level the market will not be subjected to the wild downward slides in gas prices that have been the norm in the past few years. By removing the marginal production from the marketplace in this manner the producers can employ production discipline and ensure that the marketplace remains healthy for future operations.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Doing the same thing, expecting different results...

… is a sign of insanity. One could argue therefore that our marketing program was a sign of insanity. Launched in September 2012 and focused on the CEO and CFO’s of the top 100 producers in the North American marketplace. This marketing program is similar to the ones that I have been involved in before. Whether that is through my efforts here in People, Ideas & Objects or my predecessor efforts in Genesys Software Corporation. Many times the industry has been approached and the result have been the same. There is a systemic and cultural predisposition for the oil and gas industry to summarily ignore Information Technology when it comes to ERP systems.

So why would we launch another marketing program to only run into the same systemic and cultural predisposition. The expectation, the purpose behind our marketing program, was to document the existence of this predisposition and therefore it was not a sign of insanity as it was not expecting to be fruitful from a funding point of view. We’ll get more into the logic that we would be doing such an illogical task in future posts, but stay with me until we get to that logic.

It is also at this point that IBM saw the writing on the wall in 2005 when they marketed a fairly significant development to their industry leading Qbyte application. When they were faced with the same predisposition in the marketplace from the producers they chose to leave the marketplace and sell the Qbyte application in absolute frustration over the inability of the producers to deal with this situation. I can appreciate their frustration and share their concern. The oil and gas producers will never involve themselves in any development of an ERP system, ever. That leads me to state that they also have an unsustainable business model, which we will also be talking about more in future blog posts.

People, Ideas & Objects face the same situation that IBM faced in 2005. People, Ideas & Objects have however two significant advantages in that we have a holistic vision as reflected in the Preliminary Specification, and we’re not quitting. This might seem futile however, remember the purpose in the marketing program was to document the predisposition of the systemic and cultural ways of the producers towards ERP systems. I now have that documentation. And we can as a result turn to our natural source of funding for the Preliminary Specification and its development, from the oil and gas investors.

Throughout the business community we have seen industries with unsustainable business models refuse to change. And those that have chosen not to change be disrupted by new technologies. People, Ideas & Objects are the technology that will disrupt the organizations that now operate within the oil and gas industry. They are operating in an unsustainable fashion. The alternative is the Joint Operating Committee owned and operated by the actual oil and gas investor. When we move the compliance and governance frameworks from the hierarchy to the legal, financial, operational decision making, communication, cultural, strategic and innovation framework of the Joint Operating Committee we achieve an alignment where speed, innovation and accountability are the result. We also obtain control over the operational concerns of the producer and are able to approach the issues of the day such as low natural gas prices and the shortages of key personnel such as geologists and engineers.

We will be talking more about the unsustainable nature of the current producers business model. We will also be talking about how People, Ideas & Objects provides the oil and gas investor with a means to manage their oil and gas assets. This series of blog posts will discuss the Preliminary Specification and the business model that the oil and gas investor will use, and why they should develop the Preliminary Specification as their alternative to the current producer firm. It’s a time of disruption. The producer will not change and the marketplace has changed.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.