More text for the proposal that is being written for the energy industry.
Traditionally the Chairman of the Joint Operating Committee operated the joint account much as a limited partner would. In the past the company that the Chairman represented would have built up the capability to manage the joint assets effectively with the help of a few key suppliers. As operator it was predominately up to them to implement the budget and programs which were agreed to amongst the other non-operating partners. Outside of the financial contribution, little would be asked or expected from the partners involved in the joint operating committee.
In the future, I believe, the engineering and geological expertise residing within all of the organizations represented by the joint operating committee will need to be called upon due to the complexity of the operation and advances in the sciences. An anticipated shortfall in human resources will be the secondary reason that each producer will actively participate. It has become progressively more difficult for a producer to have the internal capability to conduct all the operations they as operators of the joint operating committees are required to possess. This trend will continue for the foreseeable future. With the partners’ motivation being driven by their financial interest, sharing in the forms of learning and contributing in many other ways is a solution to the increased demands for engineering and earth scientists, the shortfall in human resources that all industries are facing, and the retirement of the workers in the next ten years. Will a more open and active sharing by the partnership expand as the exploration focus becomes more predominate in oil and gas? And will this provide indirect solutions to these human resource demand related issues?
It is also necessary to ask, is it worthwhile to have essentially duplicate, non-cooperating and non-collaborating technical capabilities developed to this level within each company? Would a looser coupling of qualified capabilities, assembled and disassembled in self-organizing teams for each specific technical task be possible? Where management is able to emulate the hierarchy’s command and control structure by use of the military command structure. Enabling management to maintain the focus and direction of the producer. What type of enterprise business oriented software would be required to support that type of team? That is the question that needs to be asked, and what follows is a description of the partnership accounting module that needs to be built to accommodate this scenario.
The key component of the system will be the ability to represent the understandings and operations of the engineering and geological team as they conduct those operations. I foresee that each producer will be able to subsequently account for the joint transactions based on their individual policies and standards. This includes the differing international accounting standards, FASB, SEC and other regulating bodies of the accounting world. This required capability is inherent in two of the underlying technologies of this proposal. The technologies are the relational models sharing of data and the Java programming environment.
I can attest that the ability to follow the business has been a traditionally difficult area of accounting. Geologists and engineers are very creative deal makers when left to their own devices. This has created accounting issues which caused problems for accountants in representing the business arrangement. The inexperience of the accounting staff to represent the deal within the constraints of the accounting system is the problem in my experience. I believe that self-organizing technical teams, and creative deal making are all part of an innovative producer, and the accounting system should accommodate that greater flexibility.
I also believe that anything that can be represented mathematically could and should be adopted within the accounting system. Additionally a system built exclusively by oil and gas people, for oil and gas people, to be used on oil and gas operations is something that has never before been undertaken. SAP was built to handle complex supply chains, primarily in manufacturing settings, and in my opinion it has no purpose in an oil and gas setting.
Revisiting partnership accounting.
Contributions made by the staff of a producer must be costed and added to the joint account. This has traditionally been done for the field staff, but what about the head office staff? I would suggest as opposed to overhead allowances, a means of capturing these costs in the charge out rates of the field and head office staff is a requirement of this system. With the increased load on the operator to conduct high levels of engineering and earth sciences, and in turn earn marginal overhead allowances is a conflict that is being raised here and suggested is an issue that will be resolved through the discussion of the solution. Would this also imply that the costs of capital be valued? Increased contributions by many of the producers that are traditionally designated as "non-operator". Non-operated partners becoming equally active and contributing their time, effort, intellectual property and capital, in disproportionate amounts compared to their earned interest.
Another point that I will make here is the issue of how freelance workers are recorded and compensated. Ideally the system should have a collaborative work order system to deal with the potentially large volumes of people that work within a joint account. For example, how many employees are currently active in each joint account today, 100's, 1,000's?
These people are the highly specialized engineers and geologists that I noted before. Referring to the fact that their specializations require them to work for a large number of producers, representing many joint operating committees. Adam Smith noted that specialization was a requirement to expand economies and I am suggesting that another substantial level of specialization is needed and possible in the oil and gas industry.
I want to raise one of the major problems that I see that Genesys seeks to solve. The issue, I think, is unique to the accounting for operations in the joint operating committee. The issue is the partnership or joint venture accounting, and focuses on the way the functionality and process is written. The way the system needs to be designed will use concepts that are not present in today's oil and gas accounting systems. I also assert that these issues could not be addressed in prior programming languages but that Java opens up many opportunities to handle and solve these types of problems, and I can see how it would be very effective and mandatory in solving this issue.
The current systems, SAP in particular, focus almost exclusively on the accounting of the company of interest. The joint account is cleared monthly to the appropriate working interest owners, and from that point, little if anything is done other then from an internal perspective. With the change in organizational focus to the joint operating committee, this internal focus is maintained, and, from an accountability point of view, increased. However the partnership focus begins to take on a more substantial component of the interests of the collective organizations as represented by the joint operating committee.
I have discussed that many of the participants of the JOC will be more active in the day to day of each JOC. Micro Specialization is something that will have to come about as a result of the demands for so much work to be done by the existing and possibly declining population of oil and gas workers. I have also detailed here the use of personnel from various participants will be called upon to conduct activities, whereas currently, the operator undertook most of these tasks.
This point will help to mitigate the redundant and unproductive duplication of capabilities of the competitive oil and gas marketplace today. As Dr. Giovanni Dosi has suggested, the capabilities and qualities of each individual producer are currently being mirrored and this mirroring is constraining the understanding of the advancement of the sciences and engineering and their application in innovative ways. A more cooperative mindset amongst the producer population is required to fulfill the markets demand for energy.
The issues involved in Partnership Accounting.
Currently the direction of data and information is from the operator to the non-operators. This by nature was a simple programming issue to overcome, and there will be some elements of this simple method in the Genesys system. The difficulty comes when all participants of the joint operating committee have each been contributing people, financial and technical resources, and direct costs on behalf of themselves, and / or, other members of the joint account. All the producers’ collective resources are pooled to attain the highest level of technical capability, management and tactical deployment available.
These costs and resources are being incurred on each producer’s behalf or, their own behalf and possibly not shared initially, but may be eligible to offset their obligations to other partners or need to be recognized irrespective of which producer incurred the cost. This is further complicated by the fact that many of the internal charges and overhead allowances that have been traditionally charged to the joint account also become redundant. These overhead style of costs are replaced by the specific costs and attributes that were directly incurred by each producer represented in the joint operating committee. The Genesys system will capture these components as they are incurred by the employee / worker / investor / consultant in an active job costing state as the user / worker is logged on.
Therefore what is required in order to determine the 100% costs attributable to the JOC is a "pooling" of all the eligible associated costs and revenues involved in the property by any and all partners. Once these costs have been aggregated from each producer, then and only then, can the appropriate costs of each producer be determined, recognized and billed.
To make things more complicated for the developers, this cost data should be compiled into its usable form at least daily and ideally on a live basis. The elimination of the month end process is one of the objectives of this system, and things need to be dealt with on a more current basis. Cash redistribution based on contributions would remain on a clearing basis at the end of the month or when reasonable.
When a cost is incurred, the system is required to be able to denote that transaction is an operated or non-operated cost and if it is eligible. These two attributes are telling the system that these costs are incurred on behalf of all of the participants of the joint operating committee, or on behalf of the producer itself and if it should be recognized in the joint account or not. This reflects that there may be unique costing components of each producer represented by the joint operating committee. Essentially involving an enhanced method of equalization, or capacity utilization to be calculated individually for each producer on a relatively frequent basis.
I want to expand the scope of the discussion to include a few characteristics that bring additional programming issues to be dealt 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), and 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 not only to 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 the previous paragraphs 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 can not be accommodated within the systems that are available today.
Of course I would be remiss at this point if I did not state the numerous amendments to the recording of the actual data which may go through much iteration. 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 environment to deal with this level and style of complexity is possible. I believe that Java can model data in up to ten different dimensions, and therefore Java provides the capability to address these types of programming problems.
Additional issues involved in partnership accounting.
It is also necessary to raise the issue of currencies. The operation of a facility may be in a remote area of the globe and be owned by two or more producers located in other countries. This may be a likely scenario considering today's makeup of producers. For example, a producer in Texas may have partners from Canada and Great Britain involved in a large facility in the capital of Turkey. To represent the involvement of each partner in the currency they are regulated to report in is a new and difficult task in this era of large currency fluctuations.
Currency translations can take on two distinct characteristics depending on the type of account which are generally defined as balance sheet accounts and income statement accounts. This definition denotes a cumulative balance vs. a point in time transaction. The assets need to be reported at the lower of cost or market value. What is the impact on each producer if the currency in use by the partner is the U.S. and the Turkish dollar declines precipitously? What happens to some debt or obligation if your home currency declines and your debt is denominated in U.S. dollars? And the contra of this would be any values that had been collected through cash calls. The second type of currency translation involves revenue and expense type of accounts. These could also disrupt the makeup of the partnership accounting, particularly for example, if the U.S. dollar were to decline. Does this make the property present a disproportionate value to each one of the partners?
The purpose in raising these points in partnership accounting should be clear. The number and types of transactions are taking on a multitude of exceptions that need to be addressed. To make this system functional and useful in this environment will be a test of the technologies. Difficult at this point, but I am confident that given the right amount of time the Java developers will have made the system be able to accommodate all these various data elements. I therefore assign the technical risk of this system as low.
Daily and monthly volumes defining a period of time. Spec vs. raw, products and by-products. Processing and gathering fees based on (non) ownership. Imperial vs. metric reporting standards. Nominations, commingling of gas. Working interest owners earning different production values. I suggest that adding these requirements to an already elaborate Production Accounting algorithm is going to be a challenge for the entire information technology world. However, it is also something that can be done. The only impediment is money.
Some history of how the industry has developed and the influence that these historic attributes play is in order. Once an agreement has been put in place by the partners a general framework of understanding how the operation works is then established. These frameworks are legal agreements that are explicitly supported by the norms and culture of the oil and gas industry, both locally and internationally. These organizations in Canada include the Canadian Association of Petroleum Landman (CAPL) and the Petroleum Accountants Society (PAS).
Once these agreements and frameworks are in place, this is the precise point in time that real life conspires to make things complicated. These frameworks have also placed a number of processes in the hands of the companies to deal with these real life anomalies. Mail ballots, Construction, Ownership and Operation (CO&O) agreements define in detail what exactly the operation is. Company A will use Company B's gathering facilities for $4.50 / 103M3 etc. Sales agreements are defined between each individual producer with nominations being a process of balancing the sales and production processes. These also create unique accounting requirements for the property in the long run.
The influence of management here is significant. Each company has differing strategies for the area and each is attempting to optimize their assets. In other words, differing perspectives of the same data and information is an area where relational theory can help. The compromise and details of each partner in each issue creates the unique accounting requirements for each partner for each asset. This system is being built to accommodate these needs.
By way of an example, I as an operator in a major area have the desire to expand the throughput of my gas plant. This is done by drilling in other regions and zones and gathering of additional gas that may now be commercial. The land is held by another firm that has no facilities around the area and is beginning the process of searching for partners. A few years later our new partnership has made a significant gas find. The production is a rich gas stream that also happens to be sour. One company has an invested infrastructure to deal with their production, the other partner has only his production. These two firms will realize substantially different metrics regarding their investments in these properties. The partnership accounting for the joint operating committee has to consider these issues and attributes in a never ending evolution of the accounting requirements. Can you say Java?
What this Genesys system will do is provide the richest environment for managing these issues. In documentation regarding the Accountability Framework with SEC Chairman Christopher Cox it is noted that he is using XML to create a metadata standard for managing the accountability of companies reporting for SEC regulations. This is in essence using the power of the computers today to enforce compliance as opposed to the human influenced methods today.
If the facility needs to account for the literal chemical composition of its aggregate production, almost impossible in a large facility, then that could happen. Or alternatively the legal framework could override the requirements of the actual production, very common in large facilities and less so in small ones. Most likely, the joint operating committee (JOC) will need to select a hybrid solution from the Genesys systems two alternatives mentioned in order to deal with the unique strategies and production requirements of each producer represented at the JOC.
Technorati Tags: Proposal, Genesys, Partnership-Accounting
technorati tags: 
