1) "Contains the fixed costs of establishing and maintaining a system of property rights."Including the basic laws of the land, and the Alberta Governments royalty and mineral rights development laws and regulations, Petroleum Accountants Society of Canada, Canadian Association of Petroleum Landman, Public Petroleum Data Model and other standards bodies. The point in this categorization is to determine what the real fixed costs of establishing and maintaining the standards of operations of oil and gas are in Alberta and Canada. Needless to say many of these organizations are representative of larger global groups that have influence through out the global oil and gas industry.
2) "Contains costs that are paid periodically. These depend on time, but not on number or volume of transactions."Langlois interestingly takes this categorization and classifies items like salaries of police, costs that are a function of time, in application to oil and gas, this would include the SEC, FASB, Auditors, Engineering appraisals and other compliance costs to regulations as the variable or time dependent costs of establishing and maintaining property rights in the oil and gas industry.
3) "Contains all the costs that come with the number of transactions or volumes of transfers."The last grouping of costs Langlois sets out is the definitive variable costs of production. Based on the level of activity is the criterion that establishes the volume of costs and what Lanlois describes as "Neo-Classical T-Costs." These would include the royalties actually paid, the investment dollars spent, the costs associated with the revenue from the production of oil and gas.
"The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. ...The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information passed on and passed on only to those concerned. It is more that a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more that is reflected in the price movement." (Hayek 1945, pp. 526 - 527)The architecture of the industry is what I have asserted is broken. Represented by the hierarchy, the oil and gas industry has been able to establish the appropriate standards and therefore maintain the property rights that are so critical to the development of the oil and gas industry. What is now redundant is the level of capability that is built up within each of the producers. Hierarchies have focused on their own needs and capabilities within the firm itself. Building extensive capacities to accommodate all of the needs that are associated with the category 1) 2) and 3) cost. What is needed is to conduct the analysis on the standards such that the efficient point of each transaction becomes the point of transfer. The tools to use are contained within these two documents of Langlois, Baldwin and Clark. This in a nutshell is the purpose and desired outcome of the development of the Genesys application. A reorganization, and a re-architecture of the oil and gas industry on a global basis.
"Indeed, as the field of object-oriented programming has taught us, these hidden design parameters generally must not be communicated to others. This is the principle of encapsulation and information hiding. To allow another module knowledge of an access to one's inner workings is to invite those other modules to tinker - and thus to invite butterfly effects.""The secret life"
"With a larger extent of the market, and in the absence of any other kind of transaction costs, it starts to pay not only to subdivide tasks further but also to turn more transfers into transactions." pp. 26And provides a necessary caution;
"But this is not the same thing as saying that we should observe vertical disintegration in a growing industry. Growth takes place in disequilibrium. And disequilibrium can lead to dynamic transaction costs, especially when the increase in the extent of the market calls for a systemic reorganization of the task-and-transfer system." pp. 27As time passes, the volume of transactions increase, and the volume of dynamic transaction cost decrease. This makes inherent sense in that the ability to build an industry would require more transfers to mitigate the costs of un-standardized transaction costs. However, after time the reverse becomes the norm in that "thick markets will increasingly come to supplant management as a mechanism for buffering uncertainty". pp. 30 This phenomenon is what Langlois has called "The Vanishing Hand".
First, yes I want an iPhone as soon as possible. The networking and Mac OS / X underpinnings will make the "tool" usable by everyone and anyone.
Secondly, yes I will develop unique applications that employ the iPhone in the many ways the oil and gas users will want. Using Cascading Style Sheets, Ajax and JavaScript limit the scope of the applications that can run on the iPhone to ones imagination.
And thirdly, yes, I want to reiterate a concern that I mentioned last summer. As with any new technology the security and access privelages are becoming much more difficult to have under even reasonable control. My concern about wifi enabled pod slurping can and will be one of the greater risks to corporate security.
Technorati Tags: Security, Software, Innovation
Photo Courtesy of Apple.
Clicking on the title of this entry will enable you to download an article from the Social Science Research Network. This article was noted on Professor Langlois' guest blogging posts on Organizations and Markets and is a continuation of my research into his thinking. The article is written by Carliss Y. Baldwin and Kim B. Clark and is entitled:"Where do organizations come from? A network design perspective of the theory of the firm."The article discusses transactions and transfers of value in the business setting. A rather boring topic however, I think this article is of value in defining a tool for a company such as Genesys, with the means to analyze and develop new divisions of labor in oil and gas.
"...objects that are transacted must be standardized and counted to the mutual satisfaction of the parties involved. Also in a transaction, there must be valuation on both sides and a backward, compensatory transfer - consideration paid by the buyer to the seller. Each of these activities - standardizing, counting, valuing, compensating - adds a new set of task and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction."The authors provide us with an appropriate definition. I would also assert the makeup and origin of these transactions might change due to the available information technologies. Oil and gas will have new more efficient means and methods to conduct transactions, and that is where the focus and value of this blog’s concepts are concerned. Does it make sense that a "Production Accountant" focus only on their employer’s production, or would it be more valuable to have the "Production Accountant" work for a variety of Joint Operating Committee's in a specific geographical area? "What would the revised job consist of..." is how we could analyze the changes with this tool.
"The user and Producer need to deploy knowledgeable in their own domains, but each needs only a little knowledge about the other's. If labor is divided between two domains and most task-relevant information hidden with each one, then only a few, relatively simple transfers of material, energy and information need to pass between the domains." pp. 17Using the example of the "Production Accountant" we can now analyze whether the transactions of his / her efforts should be conducted at the simplest point. This is because the transactions that are involved are standardized, counted, valued and compensated on the basis of (here in Canada) the EUB, the Accounting and Operating Procedures as defined and agreed to by the Joint Operating Committee.
"Placing a transaction - a shared definition, a means of counting, and a means of payment - at the completed transfer point allows the decentralized magic of the price system to go to work." pp.22Intuitively Langlois was correct in his assertion that the decentralized production methods were more efficient then the high throughput production methods the industry is configured around. Therefore this last quotation provides a very detailed tool to determine the division of labor of the "revised" oil and gas industries. From this process the authors note:
"The most significant fact about this system, is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on..." Frederick Hayek (1945)The authors provide another definition and concept:
"Encapsulated Network in a larger system of production is to facilitate complex transfers without making all of them transactions". pp 28Which to my mind shows where the real value in this entire process is not only would the encapsulated network achieve the greatest efficiencies in the transfer and transaction. It would enable the participants to focus on their unique competitive advantages. I have suggested in previous postings and the research documents that the oil and gas industries competitive advantages lie in the oil and gas leases in which they own. The ability to find, develop and produce those reserves are the critical activity that the company is evaluated on. The producer should consider these assets and skills as the key point of where their competitive advantages are. The direct employment of production accountants within each company does not provide any value to the producer.
"In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered." pp.58
"Economic growth occurs at the hands of entrepreneurs, who bring into the system knowledge that is quantitatively new - knowledge not contained in the existing economic configuration." pp.27.
New Idea Engineering publish a monthly newsletter that discusses the difficult topic of enterprise search and security. They have recently published a series of articles under the heading "Enterprise Search: Mapping Security Requirements to Enterprise Search." The three articles are available here, here and here.
In terms of the technology used in this application, I have stated the architecture that will be used here. Two major additions being added to the Genesys architecture are;
During December of 2006 I added the books that I have found of interest and feel provide some value to the readers who may share my passion for this topic. Another area that I think I will add some value for the reader is a listing and my justification for readers to go out and secure documents that are published in a variety of journals.
There are three authors that provide the stimulation for many of the ideas here. They are Dr. Paul Romer at Stanford, Dr. Giovanni Dosi at the Sant'Anna School of Advanced Studies and Dr. Carlota Perez who is a guest researcher at Cambridge University. These three have formed a topic that is of much interest to me and I would like to point out the individual documents that are currently being research by myself.
In the past I would post many of their thoughts and ideas, however, I believe that to be a violation of their Copyright. I therefore will only point them out and suggest that many of the documents are hard to source and in most cases, require access to the major academic database services.
So for this first installment I want to highlight three documents that combine to form a series of discussions about the changes that are happening in the business and technical worlds. They reflect the changes will be some of the most radical that we have faced in many years and will be difficult for people and organizations to adapt. Much of the writing notes a transition to a different time where the fundamental basis of the economy has changed. We are in this period now and it seems timely to review these three documents.
It seems somewhat appropriate at the beginning of the new year to discuss what might be a good measurement of innovation in oil and gas. What criteria can an oil and gas company use to determine their level of innovation year over year, and in comparison to other producers. To me innovations purpose is to enhance the productivity of the oil and gas worker. Therefore, understanding there are reasonable exceptions, I would propose we use annual revenue per employee.
I have seen companies that have been able to achieve high metrics in terms of their productive capacity per employee. Mapped over a period of many years, revenue per employee would reflect on the producers ability to secure land, find commercial reserves and produce them profitably. Reflecting on the entire history of the facilities and fields the company owns and operates. Comments?
Technorati Tags: Innovation, Measurement, Strategy
