A summary for the press.

[Marketing]

I recently submitted a comprehensive summary of this blogs activity to the Calgary Herald and wanted to highlight what the point is / was. Firstly I would like to think that this blog provides a strong opportunity for anyone interested in innovation in oil and gas to actively participate in building the future. A Herald article would be very valuable for this blog and those readers.

Another point is that I wanted to show that the major oil and gas companies are now jeopardizing the future of the industry and the people that rely on it. This is quantified and qualified in the example I have made of Petro Canada. In summary this shows the following:

• Inability to find economic replacement reserves.
• Fudging the replacement reserves with;
• longer amortization on heavy oil assets
• restating as economic, formerly uneconomic reserves based on today's prices.
• Employing questionable independent and objective review of all reserves.
  
• Have participated in "lottery" style compensation of its managers.
  
• I'm all for rewards for performance, but have to ask where is the performance?
• Skewed earnings by not recognizing the costs of those reserves.

These managers have handsomely rewarded themselves for what can only be described as comprehensive failures. Covering up the problems with rosy numbers that don't correlate with the truth. This failure extends beyond the control of management to all those that were party to releasing the financial statements. So here are some questions.

• Mr. Brennaman did exercise 180,000 shares in 2005, but how many of the 4+ million shares options did he receive? For that matter what was the distribution of those share options?
• What are the actual reserves based on an independent review? Why did the company find only 26 million barrels of oil after spending over $2.4 billion? (Independent implies they did not receive share options.)
  
• What are the actual costs of the depletion, depreciation and amortization? If Petro Canada drew down 12% of its reserves, why recognize only 6% of property plant and equipment as the costs of those reserves?

The old hierarchical way isn't working, and that is clear to me. The only manner in which the industry can continue is through participation here and reorganization to new organizational models. These are more or less my words in 2004, and those that are now being echoed by Harvard, McKinsey and Strategy & Business. The justification to proceed and reorganize is there.

To continue will be the managers vain attempt to maintain the hierarchy and their stock options. These organizations will continue to function as they always have until the failure is admitted by them in bankruptcy court. I only hope that there is time as this system will need several years of development.

It is my hope that the Calgary Herald takes the opportunity to ask these questions of Petro Canada's management before their annual meeting on April 25, 2006. If so we will see the beginnings of the replacement to the hierarchical organizations.

Genesys' GUI technical definition.

I want to mention that there are a few unique characteristics of the Genesys system, particularly from the user interface point of view. First as discussed in the previous entries regarding the technical infrastructure and partnership accounting, the global scope of the core application, in my opinion, demands the strong "typing" offered by the Java Programming Language.

The system needs to be reliable and predictable. It is predictability that is particularly difficult to attain in the browser / Ajax world. When we consider the number of potential users and the exponential number of interactions between those users. Reliable and predictable can only be attained by taking the strict approach to how the systems will be built.

To define the user elements of the system, the following tools will be added to the technical architecture of the Genesys system. (For a more detailed description select the following links to Wikipedia.)

• Java Web Start
• Java Applets
• Java Swing
  

These Java components and tools make the development more difficult, however, in exchange, developers have greater control over the development of the system. These component's provide an unlimited tool kit in terms of what the developers and users can think of. But most important of all the reliability and predictability of the system will be what the users and developers need. Therefore we need to specify these as basic requirements for all components of the system and include the reliability and predictability with the other Java foundations of security etc.

The new energy economics...

[Energy]

A few housekeeping items that I wanted to comment on. These provide a bit of a common thread I'll summarize at the end.

Firstly, the price of gasoline continues to rise due to the seasonal consumer demands and the overall global demand for oil. (Click on the title for an interesting gas price summary in the New York Times.) Understanding energy is the fuel of the economy, we have seen that India and China have been able to sustain a labor based energy advantage in the globalized economy. This labor advantage has many countries concerned for their long term ability to compete. The U.S. has significant competitive advantages to sustain their economy in the face of these challenges, their key advantage may be the low gasoline prices their consumers enjoy.

With Europe's small population base, their ability to compete with China and India are limited. Europe also has a poor ability to compete in the horsepower, or industrial economy, due to the high taxes they assess on gasoline. The U.S., I think, has it right. By limiting the amount of taxes on gasoline provides the U.S. with an overall lower cost associated in generating horsepower.

I expect to see this will become a competitive advantage that most western governments will realize they are hurting their industrial infrastructure by assessing gasoline taxes. The gasoline tax cuts would be attributable to a further increase in demand for oil, hence further oil price increases. Could this thinking become the manner in which labor and energy is valued? Where the 8 hour shift of one man in China being the basis of the same value of one gallon of gas? Therefore to generate 1 horsepower for 2 hours (the cost of gas) vs 8 hours manual labor (the cost of food, tools, training, etc) being approximately the same.

Secondly, I wanted to create a new analogy to the saying that "If a tree falls in the forest...". And revise this to read, "If a natural gas compressor detonates in the field, will the commodities traders in Chicago hear it?"

Third point to make today is Einstein's calculation of E=MC2. This may be the most profound innovation in the oil and gas industry. If the mass of one atom is multiplied by the square of the speed of light, then one atom of C (Carbon) has the potential to power one person's needs, maybe for a lifetime. The source of the energy issues that we have today could be mitigated by the acceleration of our ability to more efficiently use each molecule of energy.

Since the 1960's we have seen how we produced 200 bhp for the average "Pony" car, and today provide the same 200 bhp in the family car that is longer lasting, more fuel efficient, and much smaller in displacement and pollutants. Does the aggressive exploitation of E=MC2 provide real competitive, and structural advantages for the North American automobile manufacturer?

Finally, this past weeks death of Casper Wienberger has started a variety of reflections of the 1980's energy pricing policies. Long lines of consumers at the gas pumps in the 1970's was quickly replaced by collapsed oil prices in the 1980's. Casper Wienberger was defense Secretary in the Reagan administration. History shows that he and Reagan were successful in breaking the Soviet Unions back by bankrupting it through spending for the alleged "Star Wars" initiative. At the same time the administration was dealing with the Saudi's who willingly flooded the market with oil and orchestrated the collapse in prices during the mid eighties.

The Soviets needed hard foreign currency to fuel their "Star Wars" level defense. Initially this was easily attained through the abundance of energy of the Former Soviet Union (FSU). However, when the energy prices collapsed, so did the bankrupt and corrupt communist regime of the Former Soviet Union. The Saudi's went along with the plan because they were in direct energy competition with the FSU. The house of Saud was also concerned with Iran and Iraq being supported by the FSU and the Saudi's wanted them out of the region.

Lastly putting these disparate threads together, by having producers drill more wells is the mindless (Petro Canada) solution to our energy problems. Energy problems that have been with us since the 1970's and are far worse as a result of the unintended consequences of the aggressive removal of the FSU. Don't get me wrong, I am as pleased as punch the FSU is gone.

We are however, behind the eight ball in terms of where the energy market should be, and the next decade will deal with these issues in remarkable ways. I certainly am doing my part here for the producers that need appropriate software built for these new market realities. I for one hope that Petro Canada's management can stop lining their pockets with shareholders money and start dealing with these issues as a responsible and practical organization. But don't get me wrong here either, I doubt the management can. Like the FSU in the 1980's their days are numbered.

Capturing the technology...

[Technology]

The title of this blog entry will lead you to an article in today's New York Times. This article captures the state of the technology marketplace today and should create a sense of urgency for all users. Users, particularly business' should heed the warnings contained within the article. The technology revolution is here and very capable.

To argue that this is the same as the technology bubble that burst in 2000 is fundamentally incorrect. These technologies are able to automate human thought and therefore provide real value. The only solution, in my opinion, is to fully immerse oneself in the technology in order to ride this very fast and extremely complicated trend.

Dr. Giovanni Dosi, Sources Part IV, A

[Dosi]

Part IV Opportunities incentives and the intersectoral patterns of innovation.

Dr. Dosi notes that the purpose to involve an industry in innovative activities is based on incentives and opportunities. Noting this Dosi starts his analysis with the key question.

"Are the observed intersectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both."

A. Technological opportunities: Exogenous Science and Specific Learning.

To state the oil and gas industry is heavily dependent on the sciences is an obvious comment. The issue that I am raising is not so much the use of science but industries ability to keep pace with the changes in the current and prospective earth sciences and engineering disciplines. Scientific changes will be the fuel of innovative producers in the near to long term. Producers that are able to interpret these scientific findings will be rewarded with higher levels of revenue and earnings. A difficult statement to support, yet something that is well understood and generally agreed to in the industry.

How can a bureaucracy, built on the basis of command and control, keep up with the changes in the sciences that are developing exponentially faster? I suggest they can't and have suggested a new method of organization needs to be adopted. An organizational structure who's focus is the industry standard joint operating committee. The severity of this innovativeness capability in oil and gas is leading to a substantial failure in the supply of energy to the market. A serious and detrimental issue for one of, and possibly the most important primary industries, energy.

Dosi asserts two important qualifications to this discussion. That technology is a derivative of science and science is dependent directly upon the technology that defines it. We first discussed the theory of communicative action with Dr. Jurgen Habermas. Dr. Habermas theories were first published in the 60's and Dosi is tacitly reflecting these as pertinent to the science and technology in general. The best way to state this simply may be to impute a symbiotic relationship between science and technology.

Dosi notes an important point as well. That science usually spawns "a widening pool of potential technological paradigms." p. 1136.

Based on this information, Dosi then draws an extremely pertinent point about the science and technologies associated within an industry. The point arises out of the fact that the organizational structure has a limited or defined capacity of knowledge and understanding of both science and technology.

Dosi states the following;

"the idea that technological opportunities are paradigm-bound is also consistent with the historical evidence and interpretive conjectures... stemming from the gradual exhaustion of technological opportunities along particular trajectories." p.1137.

and,

"New paradigms reshape the patterns of opportunities of technical progress in terms of both the scope of potential innovations, and the ease with which they are achieved." p. 1138.

It is my assertion here the failure of the oil and gas firms to manage their technology and keep pace with the changes in science are now organizationally and paradigm constrained. They can not keep up to any of these changes.

What can only be described as a failure of industry is glossed over with the immediate response that their is lots of oil remaining. Well if that is the case then provide the market with its demands! There is plenty of oil left for the remainder of the century, however, at fundamentally different economic values then they are willing to acknowledge publicly. These economic values require that new scientific and technological paradigms be introduced to enhance the capacity of the industry. Why has this not happened?

It is my opinion that the management of these firms require time for their pensions and stock options to vest before they will even begin to address these issues. This is the failure that I attribute to the organizational mess that they have created. They are well aware of the problems, they just don't have solutions and are in no urgent financial need to get to work on these issues.

This latter point is evidenced in the fact that since 1997 the companies based in Calgary have tripled their annual capacity to drill wells. Despite this tripling of wells drilled, the provinces overall deliverability is down from 2003. Evidencing, in my opinion, that the level of creative thinking in finding more oil and gas is equal to the number of wells drilled. An industry that has no capacity to think outside of this capability due to the organizational constraints discussed.

As I visualize the industry, I see a large rat running ever faster in the wheel in anticipation that the faster it runs the quicker it will get there. The ability of the industry to stop and think, as opposed to do, is zero due to this level of activity. And as with the rat in a wheel ultimately meets its demise, a similar fate awaits Petro Canada.

Partnership accounting Part III.

[Partnership accounting] [Java programming language]

In previous entries, located here and here, we discussed some of the accounting related issues of using the joint operating committee as the organizational focus. In Part I we discussed the ability for each partner to contribute time, effort, intellectual property, and capital in disproportionate amounts compared to their interest. In Part II discussion of the specific issues regarding billing was raised. This involved an enhanced method of equalization, or capacity utilization to be calculated individually for each producer on a frequent basis.

In Part III I want to expand the scope of the discussion to include a few characteristics that bring additional programming issues to deal with, and they are:

• Penalties, Casing point elections, Before and after payout. (Points in time when the working interests of the producer changes, and therefore, imposition of an accounting cutoff.)
• Accounting for the traditional concept of "accounting" month and "production" month.

The number of possible scenarios that a property may have is unlimited. There are many established traditions and cultural influences in oil and gas that are systemic the world over. These relate to not only working interest owners but also to royalty interest owners and lease holders. When we combine the additional layer of complexity of the accounting for interests over top of the discussion in Part I and II we begin to see another level of complexity. I want to reiterate the innovative producer will use more creative means to structure a deal and the need to have these complexities mirrored within the system adds a dimension that we have discussed elsewhere.

The second element that I want to discuss in this entry is the traditional accounting and production months and the differences in the timing of certain costs and revenues. In Canada, and specifically Alberta, the reporting process for reporting volumes requires that a long lead time is necessary to ensure the accuracy of the production data. The marketing process may also take some time. These lead to the deferment of the actual production month reporting for a later time in the accounting system. This lag in timing has to be dealt with in the system and the appropriate production reported in the appropriate month requires that there be an accounting month and a production month.

Of course I would be remiss at this point if I did not state the numerous amendments to the recording of the actual data may go through many iterations. These changes are created through a myriad of different justifications that are systemic through the industry and have to be addressed. Revised pricing, allocations, nominations and distributions are not uncommon.

What these two additional criteria for accounting in oil and gas do is complicate the calculation and reporting for this data. To model the possible outcomes of what may or may not happen in a specific property becomes conceptually difficult. The ability of the Java programming language is designed to deal with this level and style of complexity. I frequently think that Java can model data in up to ten different dimensions, and therefore Java provides the capability to address these type of programming problem easily. For this I have strong opinions as to how they should be managed, however, I will leave the technical decisions to the developers when they join. Needless to say I can see how the Java environment, based on the technical environment I stated here, can deal with this level of complexity.

I will close the discussion at this point and pick it up again in Partnership Accounting Part IV.

Technorati Tags: Energy, Genesys, Intelectual-Property, Partnership-Accounting, Technical Vision

March Business Report

[business report]

Marketing
As reported last month, March was our first month of actively marketing the Genesys project. A target selection process was undertaken, with specific marketing deliverables and objectives being defined. We selected our target, Petro Canada, and began the slow process of revealing that bureaucracies capabilities. With three months of budgeted time remaining we should be able to complete our overall marketing objectives.

For the month of April specific tasks will include participation at Petro Canada's Annual General Meeting on the 25th. This will be one of the many highlights for the month of April. Other activities will be reported on as they occur and within the specific months business report.

Technical Architecture
I am extremely pleased to report that Genesys was accepted as a project in the incubator of java.net. This accelerates our developments by allowing us to join the community and access the resources of the Collabnet software and the large population of independent Java developers.

Licensing has also been finalized for the development of the code. Using the Sun Community Source License as the base, we have published the Genesys Community Source License and created a business model that will motivate the community of developers to join. I believe these were significant developments in the project. Recruiting of specific developers will begin when the funds have been secured.

There has been an increase in the amount of donations being sought. First we are half way through the first six months of 2006, and even though we have not been able to secure any funding, we are ahead of schedule. Secondly we have increased the budget to accommodate the securing of the code development as a paid project. The business model proposed sees the payment of the code by Genesys from the individual developers whom are contracted to write the technology. This will ensure that their are no residual intellectual property issues.

• Revenue to the end of March: $0.00
  

April 1, 2006 budget items. (All costs are in U.S. dollars and include the 33% premium for the development copyright fee.)

• Sun Grid The first thing we need is a home for the code. The grid provides everything we need in this instance, and the Grid that I selected was Sun's. At $1 per processor hour, a very affordable way to secure the resources we need. I think that our first years requirements would be amply satisfied with 10,000 hours of processing for the remainder of 2006 calendar year. Total requirement = $13,300
• Ingres Open Source database and part time DBA, Total requirements = $57,500.
• Collabnet. I would like to have a generous budget for this critical tool. Provides the code management, community process, project management and issue management. Budget includes tools, appropriate setup and consulting services. Total requirements = $34,500
• General and Administrative, first 6 months of operation Total requirements = $69,000
• Membership in W3C Total requirements = $9,500
• Project management and development = $300,000
  
• Total Capital and Operating budget, 2006... $484,000
  

Notes:

• Sponsors, producers, and user contributions are accepted.
  
• Please recall that this community is and will be supported by the producers. Based on an annual $ assessment per barrel of oil. For 2006 the assessment was fixed at $1 per boe per day per year.
  
• A company such as Encana in Canada would therefore be expected to support the community to the tune of $700,000 for the 2006 calendar year.
  
• These Monthly Business Report budgets are being proposed on a pay as you go basis for 2006 to support the community and ensure the community develops in the manner that is expected.
  
• Your donations are greatly appreciated, no donations means minimal work is being done.

Dr. Thomas C. Schelling

Professor Schelling won the Nobel Prize in 2005 for his cumulative work in game theory. Generally credited with the strategy of Mutually Assured Destruction, or MAD, used during the cold war. The title of this blog entry will provide you with a summary of his works.

I am always of the opinion that rules apply in war fare, his work's go a long way to defining these concepts. One particular point that Schelling notes is that you have the right to be sued. Considering this, provides a lot of leeway in ones strategy.

Ms. Peggy Noonan of the Wall Street Journal.

Following up on the fine words of John F. Kennedy, Ms Peggy Noonan, Contributing Editor of the Wall Street Journal writes a fine article that strikes at the heart of the times that we now live in. That one has the courage to undertake their responsibilities is lost in the day to day of modern society. Ms. Noonan is writing about an opportunity she had recently to attend a meeting of the men who had recieved the United States Medal of Honor.

I quote from her article.

"I met Nick Oresko. Nick is in his 80s, small, 5-foot-5 or so. Soft white hair, pale-pink skin, thick torso, walks with a cane. Just a nice old guy you'd pass on the street or in the airport without really seeing him. Around his neck was a sky-blue ribbon, and hanging from that ribbon the medal. He let me turn it over. It had his name, his rank, and then "1/23/45. Near Tettington, Germany."

Tettington, Germany. The Battle of the Bulge.

When I got home I looked up his citation on my beloved Internet, where you can Google heroism. U.S. Army Master Sgt. Nicholas Oresko of Company C, 302nd Infantry, 94th Infantry Division was a platoon leader in an attack against strong enemy positions:

Deadly automatic fire from the flanks pinned down his unit. Realizing that a machinegun in a nearby bunker must be eliminated, he swiftly worked ahead alone, braving bullets which struck about him, until close enough to throw a grenade into the German position. He rushed the bunker and, with pointblank rifle fire, killed all the hostile occupants who survived the grenade blast. Another machinegun opened up on him, knocking him down and seriously wounding him in the hip. Refusing to withdraw from the battle, he placed himself at the head of his platoon to continue the assault. As withering machinegun and rifle fire swept the area, he struck out alone in advance of his men to a second bunker. With a grenade, he crippled the dug-in machinegun defending this position and then wiped out the troops manning it with his rifle, completing his second self-imposed, 1-man attack. Although weak from loss of blood, he refused to be evacuated until assured the mission was successfully accomplished. Through quick thinking, indomitable courage, and unswerving devotion to the attack in the face of bitter resistance and while wounded, M /Sgt. Oresko killed 12 Germans, prevented a delay in the assault, and made it possible for Company C to obtain its objective with minimum casualties.

Nick Oresko lives in Tenafly, N.J. If courage were a bright light, Tenafly would glow.

I met Pat Brady of Sumner, Wash., an Army helicopter medevac pilot in Vietnam who'd repeatedly risked his life to save men he'd never met. And Sammy Davis, a big bluff blond from Flat Rock, Ill., on whom the writer Winston Groom based the Vietnam experiences of a character named Forrest Gump. Sgt. Davis saved men like Forrest, but he also took out a bunch of bad guys. And yes, he was wounded in the same way as Forrest. That scene in the movie where Lyndon Johnson puts the medal around Tom Hanks's neck: that's from the film of LBJ putting the medal on Sammy's neck, only they superimposed Mr. Hanks.

I talked to James Livingston of Mount Pleasant, S.C., a Marine, a warrior in Vietnam who led in battle in spite of bad wounds and worse odds. I told him I was wondering about something. Most of us try to be brave each day in whatever circumstances, which means most of us show ourselves our courage with time. What is it like, I asked, to find out when you're a young man, and in a way that's irrefutable, that you are brave? What does it do to your life when no one, including you, will ever question whether you have guts?

He shook his head. The medal didn't prove courage, he said. "It's not bravery, it's taking responsibility." Each of the recipients, he said, had taken responsibility for the men and the moment at a tense and demanding time. They'd cared for others. They took care of their men."

Words to live by...

A man does what he must - in spite of personal consequences, in spite of obstacles and dangers and pressures - and that is the basis of all human morality.

John F. Kennedy