Anne Mulcahy at Xerox.

Anne Mulcahy the long term CEO at Xerox is finally being recognized for the leader that she is. She took on a very difficult job in the ailing Xerox and has made the firm stand on new and innovative product offerings, that resurrect the days of old. (Click on the title of this entry to get a summary from the Business Innovator.)

Quoting her words about being disruptively innovative:

"This is the pain of technology transitions. You can either sit and wait like Kodak or Fuji Photo and fall off a cliff when it happens. Or you can migrate. We're transitioning the light-lens [traditional copiers] out as quickly as possible. If you look at what that's cost us, this company would have been growing for the last three years very nicely. It cost six points of growth in 2003; four points last year. It will cost us probably a point and a half this year. So it's going away... It's always more attractive to stay in the old technology from a profit standpoint. Always. But you'll be going out of business."

It is too bad that here in Calgary the oil and gas industry chooses to treat me as a pariah for offering the opportunity to "migrate" to the new technologies. Now they have the same problems that I identified two years ago in the Plurality publication. Only these problems have manifest themselves to include accounting reporting issues, poor reserves replacements and related issues. To listen to the oil and gas producers they seem to think that higher energy prices are their biggest surprise! What business are they in?

The time to proactively start building the systems focused on the Joint Operating Committee is passing quickly. There remains very little time left to make the transition from the old energy industry to the new. As I have indicated here before, if we had the resources to start tomorrow, we would still take three years to complete the development.

No one can stand up to the concept of using the Joint Operating Committee and refute the logic. Everyone agrees that this is the manner that companies need to proceed with, yet the bureaucracies continue on in an attempt to reward themselves for their success in their businesses. Its the high commodity prices that are providing the "good" earnings guys, not any skill's you may lay claim too. Go back and recalculate what you would have earned at $25 / bbl prices. The sad fact is that many of the companies, like Petro Canada, would be run by court administrators if oil were at yesterday's prices.

Sun Microsystems is our key supplier...

Reading the technology entries of this blog will provide an understanding of the significance of Sun Microsystems in this development project. Sun has prepared an offering that I find compelling, complete and all within their one shop. Something that no other firm does. IBM uses Java and Linux, HP and Dell use Windows and Java.

Apple and Sun are my two favorite companies. This is primarily based on their understanding of providing the user with the entire environment. Sun offers Java, Solaris, Grids, Servers, Workstations and Storage. Everything a project like this needs. Not only do the offer these items, they own them, and they are the best offerings in the business. The only area they do not have a footprint is on the desktop. Apple's domain.

So here is to the fulfillment of the vision of Scott McNealy. I always looked to him more as a Chairman then as a CEO. Now as he hands the CEO position over to Sun's President Jonathan Schwartz we're seeing a continuity of the vision and the horses to take the market with their offerings.

I will leave the reasons why Scott McNealy has such a profound effect on the market place to his worthy successor Jonathan Schwartz. Click on the title of this blog for his entry recognizing that "The Network is the Computer".

Exploration vs. Exploitation the subtle differences.

What is the difference and why can't exploitationist make money as explorationists. There is a critical difference in comparing a firm that makes money exploiting oil and gas reserves and another firm that explores for reserves.

A funny thing happened when the oil and gas prices declined overall in the 1980's. Companies learned that to make money at $20 per barrel. The ability to exploit what was known within their properties was the key to their success. Larger firms were able to enhance their fields production through in-fill drilling and testing of what was known to exist. The time and the manner of making money in the manner of an exploitationist has expired.

The ability to earn profits at $20 required that an oil and gas company lay off the majority of their engineering and geological staff. They were not required in a world where it was determined that the drilling locations were between the two existing wells and the same depth as the others. This has been the successful oil and gas companies forte for the past 20 years or more. Accountants, businessmen, lawyers and "managers" began occupying the CEO's seat and these firms were run on risk profiles that projected windfall profits by controlling costs at $20 oil prices.

An explorationist determines where and how reserves are found on the basis of scientific theory. These theories are usually formulated over several years and take the geologist decades and sometimes lifetimes to prove their hypothesis. In a nutshell these are the very rare geologists that are generally credited with some major discovery. In Canada we have people like Arnie Nielson who discovered the Pembina field and eventually went on to run Mobil Canada, Dr. Hriskivich who found Rainbow pinnacle reefs and Ram River for Acquitaine, or smiling Jack Gallagher of Dome fame. This list is fairly long and all were handsomely rewarded for their discoveries. It is believed in the geological profession that only 3% of all geologists find any oil or gas in their career.

The explorationist was treated as a pariah and run out of the companies in the low cost environment of the 1980's. In many instances these "explorationists" sought refuge in smaller firms eking out marginal earnings competing in $20 oil. Or as consultants for relatively mundane tasks, compared to their training as rabid scientists.

The firm that made money exploiting in the 1990's at $20 per barrel in general terms can no longer make money at$75. Doesn't make sense I know, but using our marketing example of Petro Canada, I'll explain my point. After running the explorationists out of the firm in the 1980's the mindset became business as usual. The ability to find exploitable reserves was augmented by the abilities of the service companies that developed new "Horizontal Drilling", "Top Drives", "Coiled Tubing" and other innovations that provided value for the exploitationist. These technologies could be amortized over vast inventories of known reserves and profitably make money. It is fair to assume that the $20 oil, the world over, is gone for ever.

The service companies innovations that I mentioned also lead to the more rapid depletion of the reserves that were available. What used to produce for ever at 10 barrels a day is replaced by the horizontal well that produces 100 barrels per day for 6 years. Many of these exploited fields are now close to the end of their productive lives.

Here we are in 2006 with the following scenario.

1. The easy oil and gas reserves are gone.
   
2. The remaining reserves are being exploited too quickly for the markets needs. Creating a false sense of security as to the overall productive capacity of the world petroleum marketplace.
   
3. And all the geologists that could find oil and gas are twenty years older and generally have forgotten what the industry knew in the 1980's. Now in their pre-retirement years they have no desire to pick up the craft again.

So we leave the burden to the current population of recent university graduates that "may" be able to think like an explorationist and find some oil and gas reserves. I recommend we employ the shot gun approach of hiring as many as we can and setting them to their task.

In my opinion there has never been a more serious problem that the world has faced as the energy problem we have today. We are producing faster then we are replacing reserves, we have lost the ability to find new fields and do not have the intellectual talent to meet the needs of the marketplace in the next 10 years. How this gets resolved is with a lot of pain and $25 / gallon gasoline.

Companies such as Petro Canada are unable to operate in these environments and I think they have even given up trying. As I indicated here, here, and here they have systemically failed in every criteria of a successful oil and gas firm. Their inability to tell the truth covers the facts as I had revealed them. The accountants and lawyers are able to smooth over the issues and present a reasonable facsimile of an annual report. It will be interesting to see how the firm performs in the next 3 years, as it may be within that time frame that the firm runs aground permanently.

Google video of interest.

For many years I have described myself as an engineer wannabe. The science of math always got in the way and had to live with the fact that I couldn't make it. This video is of an A380 being built. The largest airliner in the world. The way that it is made makes the engineer wannabe in everyone scream out for more.

If this is the state of the art engineering, I am glad I found the math difficult. Truly one of the most impressive videos I have ever seen.

Dr. Giovanni Dosi, Sources Part IV, B & C

[Dosi]

Continuing on with the overall review of Dr. Giovanni Dosi's theories on innovation.

B) Appropriability of Technological Innovations.

Dosi defines appropriability as the:

"properties of technological and technical artifact's, of markets, and of the legal environment that permit innovations and protect them, to varying degrees, as rent-yielding assets against competitors imitation."

Companies that are innovative in their markets are able to secure a variety of intellectual property as a means of competitive advantage. The IP may consist of the traditional patents, trademarks and copyrights but should also include secrecy, lead times, learning curve capabilities and internal processes. Dosi suggests that these forms of intellectual properties form strong advantages when combined together.

The costs associated with imitating the competitive advantages of another firm become expensive. Dosi provides evidence that the cost of imitation is often higher then the original innovation! Noting that both innovation and imitation are creative processes that involve search. And imputing that a capability has to be built to be either innovative or imitative, with the latter being the more costly. It is at this point I would ask what the purpose of "best practices" is for?

C) The Driving Forces of Technical Change.

The various levels of innovativeness of each firm in an industry are derived through either exogenous scientific advances and / or endogenously accumulated capability within the firms. Dosi's general point is;

"the observed sectoral patterns of technical change are the result of the interplay between various sorts of market inducements, on the one hand, and opportunity and appropriability combinations on the other."

In terms of oil and gas this clearly sets the point that we are at. Oil hit $75 today and this is a major shift in the "market inducements" of the industry. Using Dosi's theory in oil and gas, it is clear that a producer that is able to establish higher levels of appropriability, as Dosi calls capability, would benefit from the higher commodity prices.

In the competitive market that exists today we see that each oil and gas company attempts to secure a competitive advantage based on the scientific capability built within the firm. In a related matter we are now seeing a projected shortfall in the number of qualified earth scientists and engineers. Universities will not be able to produce enough new graduates to fuel the prospective demand and replace the soon to retire baby boomers. This is where I think that Dosi's theories can be extended to communities, clusters, or ad-hoc self organizing teams.

If we continue to replicate the scientific and technical capability of each firm in an entrenched silo we most certainly will have failed in providing the marketplace with the energy required. These silo's of scientific capability mirror themselves in each large company. How wasteful of these critical resources is this? Smaller producers are less stringent on their use of outside assistance but could and should encourage greater sharing as well. What if we applied the theories of Dosi to the overall cluster of companies. Building the scientific and engineering capability from the larger pool of technical resources from each silo?

To arrange this pooling would be the simple part. The sharing of intellectual property and general mindset of the industry is that sharing is limited. I think that this is counter to the natural culture of most scientists who publish and submit their thesis and hypothesis to the community for critical review. What would happen if the Genesys system was able to:

• Manage all of the business attributes of the oil and gas operations.
• Provide market access to assets and resources for the producers.
• Including human, financial and technical resources.

I am unable to see how else we are to mitigate the issues of the market demand and the retirement of the knowledge base of the industry? Building independent silo's of capabilities higher is not the alternative.

Is this community the type of organizational structure and manner that the industry needs to gravitate too in order to rectify these issues? If so this blog should be seen as the main focal point of this reorganization. Building the systems to support this type of organizational structure and enable the community of oil and gas workers to get on with the job at hand.

The "Fifth" constraint.

The oil and gas producers are having a difficult time in keeping up with the demands for energy. I have attributed this problem to the organizational structure and named the hierarchy as the culprit. The resource constraints are serious and include human, technological, scientific, financial and lets name the fifth constraint "speed".

The problem as I see it is a deliverability one. The next ten years will see the productive capacity of the industry slowly adapt to the market demands. The time lines and capabilities are not in the supply of energies favor. Time is necessary to formulate scientific concepts, purchase land, drill and produce the oil or gas. This process is usually around ten years in terms of the beginning to production, especially for offshore and oilsands.

In terms of where the attitude and mindshare of the bureaucracies is at, it's 1996. When there were no such energy demands and a productive surplus of around 10 million barrels per day. None of the issues of the supply demand imbalance of today. Oil in 1996 is trading at around $20 per barrel and the capital budget of the large company is based on these criteria. These are the resources and production that are being brought to market today.

If you hear the large companies talk they fear a price drop to the 1996 levels. That there is no energy shortage and a sense of urgency doesn't exist. Why are they so calm? You have literally two billion plus people joining the industrial revolution and the large companies just blink at you in a stunned state of confusion.

The larger companies are experiencing information overload in addition to the lack of understanding of their market. They are completely engulfed in a paper world that has so confused them that they have no idea what year it is.

As these large companies will not be in existence in 10 years we should let them off the hook and let them die in peace. Anyone that would suggest the hierarchy will rise up to this challenge and solve it are being sarcastic at best. The effort necessary needs to be organized first, that is what this blog is about, defining the joint operating committee as the central organizational focus of the oil and gas producer.

This new organization needs to have the systems built to operate the new producer in the manner that the individual users need. Just as SAP defines the bureaucracy, this blog's developments will define the innovative producer, user and investor. So for those that have seen that blank stare of the large companies, join us here and help out where you can.

Web 2.0 based value propositions.

Google reported their quarterly earnings yesterday, boosting their market capitalization to $136 billion. This brings to mind the value proposition of Google, and for that manner, any and all Web 2.0 services. Not many people can say they ever paid any money to Google, I for one have never, even though I use all of their services.

Earning small advertisement revenues from the firms asking for exposure of their product on Google's sites doesn't sound like a great business. However, when the value generated produces multi billion dollar earnings for a ten year old company, this makes for interesting times.

Web Service companies that are Web 2.0 are able to aggregate users easily and share the costs and the load over far larger bases of customers. This site subscribes to this wisdom. If the usage of this Web Service (when built) charged as little as $1 / barrel of oil equivalent per year, the costs of systems to fuel the energy industry would collapse to the level that would parallel the value proposition of Google's.

Where we are...

It has been a long road to this point. I am not aware if the Calgary Herald will run a story regarding my criticisms of Petro Canada. I hope that they do as it would be a solid beginning for this blog to become the area of focus for our prototypical users, the people who earn their living in oil and gas.

This blog introduces a very disruptive innovation from the point of view of how organization's should be formed. To suggest that the hierarchy has failed is generally concurred with by most people, and feared at the same time. This has been a risky and controversial suggestion from the start. And that is the point, change is upon us, we either get with the changes or get out. I choose to challenge the old with the new.

There is a saying by George Bernard Shaw...

"The reasonable man adapts himself to the world; the unreasonable one persists to adapt the world to himself. Therefore all progress depends on the unreasonable man."

I am an unreasonable man.

Jonathon Schwartz and James Gosling in Brazil

[Technology]

I had the opportunity to attend a speech of Dr. James Gosling in Calgary. Firstly I am a big fan, and secondly, as both of us are Calgarians we share similar attitudes towards the large producers. The attitude being the oil and gas producers are not getting the new technologies, and are indeed resisting them.

Dr. Gosling stated some very interesting points regarding the status of the technologies employed in North America. Calling them third world due to the constraints of the legacy infrastructure. Noting that all Brazilians had cell phones which were used to access government services. And the high quality of the broadband in Asian countries.

The President of Sun was in Brazil with Dr. Gosling, and filed this entry on his blog. (Click on the title of this entry for the link to this article.) Reading this entry should concern those that reside in North America who think we are advanced in these technologies, we need to get with the program or we'll be left behind.

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.