Petro Canada's accountability framework.

As was intimated in the top ten excuse list, the accountability of Petro Canada is broken. The self - serving management are only interested in what they can get away with and boosting the value of their options. The problem now becomes how do you deal with it? The problem as I see it is there has been a clear separation between operational decision making, which is done by the joint operating committee, and the accountability framework that is the bureaucracies only claim to justify their existence.

The accountability framework consists of reporting to the SEC, Tax, government and other accounting related areas. It is the sole domain of the bureaucracy. Where the hierarchy seeks and defines itself and the needs of the bureaucracy.

When I say that it is in conflict with the operational decision making framework of the joint operating committee, I mean the following. With respect to an oil and gas property, the methods and decision making processes are defined and codified in the operating agreements. (and at larger facilities the Construction, Ownership and Operatorship agreements.) If you want to participate, then you will incur the % allocation of any costs of that decision. If you don't want to participate, then the agreement deals with participants that elect not to participate by incurring penalties should they subsequently decide to return.

Further down the line the definition of who has voting control and what threshold of concurrence must be achieved to implement the decisions are contained in the standard operating procedures. If a joint operating committee is the benefactor of a significant find then the associated costs of gathering systems, batteries and gas plants may automatically fall within the decision making formula's. These agreements may also define a large area of land to be part of an "Area of Mutual Interest" and govern all the partners dealings on those lands that may be purchased by any party to the agreement.

My question here today is how is it that a CFO, and lets take the Petro Canada example, Mr. Harry Roberts of Petro Canada, can stand in front of Wall Street and say he will be raising the production profile of the firm by 10% in the next fiscal quarter. Based on the plans that are set in place by the joint operating committees, of which he is a member of, he can say it, however, the influence that he has in making these decisions is more or less, zero. He like any of his counterparts is literally speaking through his hat.

And as for the remainder of the management team, how can they assert that their management skills are attributable for the results that are being reported and budgeted. They have no influence! If they did not have an interest at the committee level, would the production have ceased? I think not. The sole domain of the management team are to report the results to the various regulatory and government bodies that they are required by law to report to. That's it. When it comes to oil and gas, they could be manufacturing widgets for all they know, and can influence.

In reality these organizational constructs are conflicted and obstruct the natural form of oil and gas, the joint operating committee. If SEC Chairman Christopher Cox can implement the regulatory framework of the SEC within XML tags, what will the bureaucracy then do. With the SEC's XML tags and tags that are developed through this software venture. The decisions of the joint operating committee will govern the various regulatory compliance frameworks and the reporting would fall out of the process naturally. So why have I such a difficult time in gaining concurrence? The hierarchy controls the budget for administrative operations, and therefore a sale to SAP occurs.

Now it has been pointed out to me many times that the reason that firms go to SAP for their systems is due to the "integrity" the application has with the investment community. And I agree that the investment community's perception is real. However, I would argue that just as the tax tail should not wag the dog, the compliance tail should not dictate the organizational construct. You do not need a bureaucracy to run a company in this day and age.

Technorati Tags: Petro-Canada, Innovation, Accountability

The perfect job.

For me that is. If I die at my keyboard writing another blog entry, I will have lived my dream. I can't think of any way to make this more enjoyable. The prototype blogger for me is Tom Peters who mixes his blog with speaking, consulting and books. If I could aspire to be like him, I would have been a very content blogger.

Speaking of Peters I downloaded one of his slides that has a quote from Dr. Peter Drucker.

"The corporation as we know it, which is now 120 years old, is not likely to survive the next 25 years. Legally and financially, yes, but not structurally or economically."

Ties nicely into the theme and purpose of this blog doesn't it.

Technorati Tags: Tom Peters, Consulting, Innovation, Energy

The oil and gas reserves of Petro Canada

At least that is what the companies calls them. The theme of these Petro Canada posting is to highlight the broken nature of the bureaucracies accountability and transparency frameworks. To me the reserves calculations of this firm push Petro Canada's management above and beyond the Enron's and WorldComs in terms of brashness. These people have guts.

Petro Canada wants its shareholders to believe that $11.8 billion in oil and gas assets are fairly valued. That these reserves are sound and that no missallocations or miscalculations would have occurred. Traditionally the company would hire an engineering firm to critically review the reserves of the firm. These independent engineering firms are standard fare and represent an industry and profession with a long tradition. Find me a geologist who likes the reserves engineering report and I'll show you a scam. I am fairly certain that their are a number of very happy geologists in Petro Canada.

First of all Petro Canada opens themselves to these types of criticisms due to the fact that they prepare the reserve report themselves! This from the 2005 annual report.

"The Company's reserves data and reserves quantities are determined by Petro-Canada's staff of qualified reserves evaluators using corporate-wide policies, procedures and practices. The Company believes that these reserves policies, procedures and practices conform with the requirements in Canada, the U.S. SEC and the Association of Professional Engineers, Geologists and Geophysicists of Alberta's Standard of Practice for the Evaluation of Oil and Gas Reserves for Public Disclosure. Petro-Canada also employs independent third parties to evaluate, audit and/or review its reserves processes and estimates. In 2005, 30% of North American and 39% of International proved reserves were assessed by independent reserves evaluators. The independent reserves evaluators concluded that the Company's year-end reserves estimates were reasonable." p. 32

Well if you tell me so, it must be true. If the firm has had these reserves estimates done, why not spend the extra few hundred thousand dollars to have the whole company evaluated? And what exactly are these policies, procedures and practices. Let's check it out.

The top review, I would assume, would be the board of directors. People with the names at the top and the first out the door when the fan gets dirty. Apparently Petro Canada has a committee of Directors reviewing the reserve report. We should also note that these are the same directors that said "no" to the managements request for more stock options. None of these directors are either engineers or geologist's.

Now I have personally read many reserve reports and I can show you the ins and outs of the documents with the best. But I can not tell you weather the report is the greatest find in the history of time, or a pile of crap. I suggest that anyone without a science degree in the two disciplines is in the same boat.

To be on the safe side, Petro Canada has hired the firm of PriceWaterhouse Coopers as internal auditors to review the process of how the reserve calculations are done. Well now I feel better. The Accountants will have the boys straightened around. I am going to make a suggestion to the management. Take the money that you pay PriceWaterhouse Coopers for their review and give it to Sproule & Associates to do a proper reserves evaluation. There I saved the company a few hundred thousand dollars.

Progressive explorers such as Talisman Energy have over 80% of their reserves evaluated each year, and I would assume not the same 80%. I see no reason for Petro Canada to hold on to such a flimsy basis of reporting transparency and accountability, unless they have something to hide. And since I have predicted that the company will lose money in the second quarter of 2006. These loses should be the cornerstone of truth about the real value of those reserves.

Technorati Tags: Petro-Canada, Innovation, Reserves

Petro Canada Depreciation, Depletion and Amortization.

One area that I think Petro Canada has been pushing the profits up is in recognizing the cost of their production. The recording of Depletion, Depreciation and Amortization are as subjective as the reserve estimates they are based on. But Petro Canada has taken the science of recording depletion to a whole new level.

During the past 4 quarters Petro Canada has recorded $1,557 million in Depletion, Depreciation and Amortization. This represents approximately 9.5% of the fixed assets of the company being written down. However, 12% of the Oil and 13.75% of the Natural Gas was produced in 2005. If we assume they average at 12.5% then the company should have recorded $2,048 million in depletion! That's a whopping $491 million in overstated earnings and capitalization. There must be something more here that I am missing.

For the past twelve quarters the company records an estimate of around $300 million in Depletion, Depreciation and Amortization per quarter. Yet oddly enough during this time Petro Canada spent over $9.7 billion in Capital Expenditures. Their policies support my calculations, they use the more conservative method of successful efforts and record Depletion on the basis of unit of measure. Why has the depletion calculation not kept pace?

Now I know that Petro Canada is an integrated company with refinery and marketing operations. However, only $143 million in Depreciation was recorded for these items in 2005. What I think has happened is really simple. The clerk that records the Depletion decides to record the same amount for each quarter. Not thinking that the dynamics of the calculation require them to review the situation each quarter.

I think it is time for the company to adjust their financial statements for this clerical oversight. Record the difference of $491 million in depletion as a prior period adjustment, and recalculate the more accurate amount for the second quarter of 2006. Then I think the shareholders will have a fairer perception of the earnings capability of this management.

Technorati Tags: Genesys, Petro-Canada, Financial, Accounting

The Genesys development model.

Recently I completed the discussion regarding the technical vision that supports these software developments. And noting how this model of technology is fundamentally different from the client server model that's in place today. I also highlighted the importance of Java in making this vision real, and how important it is for everyone to have an understanding of the advanced concepts that Java brings to the table. With out hands on Java training, the future innovativeness of individuals will be approximately equivalent to their familiarity and comfort with Java.

I have also commented before that Genesys is the core processing engine. With applications providing the unique attributes of each local region being owned by separate developers. The purpose of this is to have the system deal with the unique naming conventions and terms in use for each area of operation around the globe. (Lease numbers, field codes, government id's, etc.)

Today I am suggesting that the engineers and earth scientists are joined by a software developer that fully understands their needs and can enhance the code for them to meet the specific needs of each and every joint operating committee. After all these are business units that are long lived. Any development costs would be amortized over the long life of the JOC. The primary role I foresee for these developers is to support the Joint Operating Committee with the unique capabilities of the systems. Their ability to communicate and make the system work the way that users want and need it to operate.

What I am proposing is not so much "custom development" but custom implementation. Making the system do what it is designed to do and represent the users of the joint operating committee, to the core and local development groups.

The level of communications that these tiers of users / developers will be extensive. The developers are driven by users needs. To understand what the developer can do, a user will need to at least understand many of the advanced Java concepts. It is these concepts that provide the power for the users to have what it is they want and need. It is not a luxury item that most of the IDE's like NetBeans are now chat and voice enabled. Providing the ability of the user and developer to be virtually across the table from one another. This is the future of software development.

Technorati Tags: Genesys, Development, Innovation, Java

Petro Canada, the garage sale continues?

I suspect a garage sale attitude may be on management's mind. Reviewing the 2005 Annual Report and first quarter of 2006, Petro Canada appears to me to have more then just an earnings problem, but also a severe cash problem. If they are selling an asset it would be for the cash and to boost the second quarters earnings.

The seriousness of the situation leads me to think that last years sale of Syria may have been "forced" to earn enough cash and earnings to continue the pretence. Selling the Syrian property would have otherwise never happened. Think of Skilling and Lay selling to make the profits as opposed to shuffling.

So lets keep our eyes and ears open for any large property sales out by our favorite company.

I can't seem to find any reason why the company is hemorrhaging so much cash. In the last 4 reported quarters they have increased their debt by $2,091 million. Most of this coming from long term debt to finance capital expenditures. Additional sources of cash have been through the discounting of accounts receivables, to the tune of $480 million.

Hold it, I think I might see where some of the money is going. There's a normal course issuer bid. In the last 4 quarters Petro Canada management have spent over $1 billion in share buy backs. Now to be fair I don't like share buy backs, particularly when the company has to go into debt to do them. It's dumb, very dumb. Instead of buy backs, companies should think special dividends if you have the money.

Technorati Tags: Genesys, Petro-Canada, Financial's

Petro Canada's first quartile operations.

As I read the 2005 Petro Canada annual report I find that management holds itself to the rather high standard of "First Quartile Operations". It's good to see they strive to be amongst the best in the business.

But wait! What's this footnote?

"Reference to first quartile operations in this report do not refer to industry wide benchmarks or externally known measures. The company has a variety of internal metrics which define and track first quartile operational performance."

That's like having your kids grade themselves in school! Dad I got straight A's. Again.

Lets revisit some of the fine work that Petro Canada does do.

• Does not have their reserve estimates reviewed by independent engineers. This task is left to the vice president in charge of production, or whom ever has the highest number of stock options.
• Doesn't use outside metrics of performance evaluation.
• Uses hokey calculations such as "195% reserve replacement" to obfuscate the truth.
• Can't buy a small company because they won't give it away.
• Can't make money at $70 / bbl.
• Can't make money on confiscated assets. (Those that were nationalized and given to Petro Canada)
  
• Management have endowed themselves with over $350 million "in the money" stock options.

I have to ask what is this company worth? This is a festering sore on the Canadian oil and gas industry. It should be dealt with quickly.

Technorati Tags: Genesys, Petro-Canada, Bureaucracy

A coincidence? I think not...

Today's Calgary Herald reports two items of interest. First T. Boone Pickens has now stated that the energy system is at 100% capacity and there is no more. Essentially declaring for the Peak Oil theorists that this day is the highest attainable production volume, ever. I fundamentally believe he is right. 85 million barrels a day is lot of production. If you add the natural gas equivalent, its over 120 million barrels a day. (That's over 5 billion gallons per day, or, almost one gallon for each person on earth).

The second point the Herald notes is the vast number of career openings for engineers and geologists. Seems like the bureaucracy needs more of these people to push the paper around.

The point of course is that these are saying the same thing. The productive capacity of the oil and gas industry is dependent on the human resources available. The number of engineers and geologists is rather limited in the whole scheme of things. What is needed is a new form of organization that will enable the geologists and engineers to work faster, and more effectively.

As it stand today, just as T. Boone Pickens has called the Peak, I can assure my readers that the bureaucracy is on the verge of choking on the paper, and quite frankly, never been happier.

Technorati Tags: Genesys, Peak Oil, Innovation, Bureaucracy

Military command, part III

I want to follow up quickly on my military command entry and concepts. The points that I want to establish today are:

• Allies = Other producers, or members of the joint operating committee, or service based organizations.
• Each army can be parsed into further classifications such as Navy, Marine, Army and Air Force.
• Each participant in the joint operating committee organizations may have several roles, several tasks and several "superiors" and / or underlings reporting to them from various organizations.

First up are allies. Many military commands expand beyond the scope of the current army. In WWII the entire allied forces were under the command of General Eisenhower. The English and Canadian militaries, although separate from the Americans, were engaged in similar exercises and were coordinated as one. This is the type of application that I think is needed to solve the current and prospective energy issues. Working for a company you may be seconded to work for several different joint operating committees that your company has an interest in. This military analogy is only a more formal method of recognizing the loosely coupled nature of the missions, tasks, physical resources, and personnel.

Second separate tasks or specialty roles are segregated between certain military disciplines. In this analogy the Navy, Airforce, Marines and Army are replaced by the Geological, Engineering, Administrative and Field disciplines. As with the individual disciplines the military chain of command remains in tact through the various disciplines. As an Army Captain would have superior rank to a Navy Private, the Senior Geologist would also have a recognized authority and superior rank over a junior Engineer.

Each worker within the oil and gas industry is therefore tasked in many different situations with different rank and roles. The producer that is his / her employer will have the opportunity and latitude to second each individual to work in any capacity and area that they are authorized in. This dynamic component being actively managed through the Genesys system identity management. Each worker in turn may have several different producers, which is almost a given, to be assigned tasks from.

Lastly I want to raise a point that dovetails nicely with what Susan Hockfield, MIT President and Professor of Neuroscience has stated. Noting that the situation in energy was in a "Perfect Storm" and I quote.

"President Susan Hockfield unveils MIT's grand-scale initiative to confront the urgent challenge of our time: clean, affordable energy to power the world. In much the same way that MIT played a decisive role in the Allied victory in World War II, she calls for the Institute to muster its formidable forces to speed a transformation of the global energy landscape."

Note her tie in to the level of effort equivalent to MIT's in WWII. I share the concern and strongly recommend everyone to watch the MIT video of Professor Hockfield to understand better our concerns.

The analogy to the military has unfortunate connotations. However, it is by far the best manner of layering a component of command and control over the joint operating committee. The systems that we develop here are best suited for these interactions. So much of what we discussed here would be transparent and seamless to the user.

Nonetheless I think it is generally agreed that the hierarchy that is now in full command and control is not the organizational structure that will marshal a solution to energies "perfect storm." After all they don't even believe there is a problem.

Technorati Tags: Genesys, Military Command, Innovation, Energy

Dr. Giovanni Dosi, Sources Part IV, F & G

Part F. Determinants and Patterns of Investment in Innovation: Toward a Sectoral Taxonomy.

Up until this point Dosi has laid some groundwork for future classification of business types of which he describes in four sectors:

• Supplier dominated sectors: "innovations are mainly process innovations, embodied in capital equipment and intermediate inputs and originated by firms whose principal activity is outside these sectors proper." (Agriculture, Printing, etc.) p.1148
  
• Specialized suppliers: "Innovative activities relate primarily to product innovations that enter most other sectors as capital inputs." (Mechanical and instrument engineering.) p. 1149
  
• Scale sensitive Sectors: "Innovation relate to both processes and products and production activities generally involve mastering complex systems." (Transport equip, electronic durables, food, glass and cement.) p. 1149
  
• Science based sectors: "Innovation is directly linked to new technological paradigms made possible by scientific advances: technological opportunity is very high, innovative activities are formalized in R & D labs." (Chemical industries, drug companies, bio-engineering.) p.1149
  

In my thesis I suggested that oil and gas industry was moving from the Supplier Dominated Sectors to the Science Base Sectors. That this change is due to the demands of finding and producing oil and gas in remote areas with higher risks and smaller reserves. An era where the engineering and geological effort is substantially higher then what had been experienced before. Dosi suggests this leads to new and better methods. Methods that require the capability of the firm to learn and keep up with the changes in the underlying sciences and other innovative producers.

I believe it is fairly evident in this era of high commodity prices that their will be a new basis of leadership in oil and gas. One where the science of geology and applied science of engineering dominate the organizational decision making and competitive capability. Moving from one sector to another may or may not have happened in other industries before. One thing for certain is, that it won't be easy.

Technorati Tags: Dosi, Science, Innovation, Energy