Peak Oil, and what I think it means to the petroleum industry.

I have scrubbed this entry please see the information in the previous entry "A Quick Summary of Where We're at".

A quick summary of where we're at.

The concept of peak oil has finally attained the attention that it should. Now is the time that we do something about it. The National Petroleum Council's report provides the undisputed evidence of the situation that the energy industry faces. I think our first order of business should be to organize the energy industry to achieve greater speed and innovativeness. A new organizational structure based on the industry standard Joint Operating Committee (JOC). An organization that is able to address the issues of peak oil and retire the structured hierarchy from its 100 year reign. But how? In my research I have found that organizations are constrained and supported by the software that is used. This has prompted me to state that "SAP is the bureaucracy." And if a firm wants to change the organizational structure, it needs to build the software to support that new organizational construct first.

For too long the energy industry has suffered with the likes of Oracle Energy and SAP as their solutions providers. Applications that were built for the manufacturing sector, not for the oil and gas industry. What producers need is an application that ties the unique, and difficult, aspects of risk mitigation and the expanding aerial extent of their properties. In other words, the need to deal with other producers who share common interests in a property. If the producer had IT systems that recognized and supported the legal, financial, operational decision making and cultural frameworks of the Joint Operating Committee. And then combine the JOC's frameworks with the Compliance and Governance structures of the hierarchy, with today's collaborative Information Technologies, the alignment would provide the organizational speed and innovativeness that is needed. Innovations are especially needed in the earth science and engineering disciplines where they will lead to new science. Asking the current bureaucracies to keep up with the future changes in the sciences is asking too much in my opinion.

Speed and innovativeness are the highlighted benefits of identifying and supporting the key frameworks of the Joint Operating Committee. Now is the time for the industry to embark on a purpose built system, which identifies and supports the Joint Operating Committee. And unleashes the resources of the industry to solve or mitigate the effects of Peak Oil. Systems that can be used by the smallest to the largest of producers. Would anyone argue the bureaucracies of today will be the solution to Peak Oil?

What would a system based on these changes look like, how would it be different, and could it make the difference?

Lets start out with some fundamental re-thinking in how the problems could be solved. The world's first economist Adam Smith and his theory of the division of labor. What Adam Smith was able to prove in his reorganization of a pin factory can be implemented and provide similar benefits in the energy business. The theory identifies that economic growth is achieved through further divisions of labor and enhanced forms of organization. Smith's application of his division of labor theory increased production 240 fold at the pin factory. The energy industry can expand its capabilities and capacities through a more precise and enhanced division of labor. The other theory of Adam Smith, "The Invisible Hand" of the market will provide the industry with what it needs, when it needs it more effectively then the silo'ed hierarchy of today. A third element of this different thinking is today's Information Technologies (IT) can enable a virtual environment that supports the transactions and interactions of the producers and people involved in the industry.

In a comprehensive review of the theory of markets and firms. I have conducted research based on Professor Richard N. Langlois' writings into the boundaries of the firm and identified a new division between the market and the firm. Through the enhanced and modern information technologies, the market will provide the best solution to the problems that we face in oil and gas. The firm will hold the Compliance and Governance, Knowledge and Learning, Access Control, and Research & Capabilities modules. Whereas the market, or in this instance, the Joint Operating Committee will provide the firm with the necessary resources contained within my module definition of Petroleum Lease Marketplace, Resource Marketplace, Financial Marketplace and Partnership Accounting. Modules that make sense, where the average oil and gas user will inherently understand which module they should use to achieve their work. Gone are the generic categorizations of General Ledger, Accounts Payable and Receivable. These functions remain within the module definition, only as subsystems that support the user activity.

In order that 2030 achieves all that it has to offer. I propose we build systems on the basis of the natural form of organization of the energy industry, the Joint Operating Committee. It is my opinion that the era of cheap oil has allowed our exploitation capabilities to exceed our exploration capability. We need to rebuild the industries exploration capabilities back to the level where the resources and capabilities are able to sustain the market demand. Without these exploration capabilities we will not succeed in what the market demands of us.

The earth scientist and engineers are the key resources necessary to achieve our objectives. Much has been written about the current shortage and their future retirement. At the same time the hierarchy within the corporation has constrained these resources by building similar internal capabilities within each firm. We need to address how the organizations Compliance and Governance is addressed in any new system that we build. Innovation and speed are two attributes of the information technologies current infrastructure, and the module specifications I have described below.

I propose we build systems to solve these issues. Based on the Joint Operating Committee and organized in the following modules;

Petroleum Lease Marketplace

Consider a virtual environment that provides the firms with market access to public lease data and information in a search-able and transaction supported systems. To a large extent what is currently resident as a land departments functional domain would be managed by this module. Critically this is where the majority of lease, agreement and partner variables are captured in this system. Readers interested in further exploring this module can review it here.

Resource Marketplace

How a producer could find the right employees or contractors to assist in the work of the firm. How suppliers and contractors would have agreements recognized by the systems and have the appropriate accounts payable and transaction processing be a natural fallout of work that is done. Human resource and payroll functionality will also be subsystems of this module. This module will provide the firm with a window on the marketplace resources.

Financial Marketplace

A marketplace where users, producers and suppliers within the industry can source the capital and operating needs of the industry. Where banks compete for the producers business, brokerage companies providing their services to the people and firms that are operating in the oil and gas industry.

Partnership Accounting

Or as I am wanting to call it "the algorithm from hell". This module manages the unique characteristics and transaction processing of the Joint Account and the various stakeholder interest's in a property. Consider the differences in reporting requirements between Calgary, Houston and Aberdeen. Currency valuations in both accounting for income statement and balance sheet items, production measured in metric or U.S., daily and monthly production values, nominations, penalties, casing point elections, before and after payout and other related oil and gas accounting system requirements that are handled appropriately in each company. But lets now consider how the energy industry may need to operate, at the Joint Operating Committee level.

I think the redundant duplication of capabilities built within each firm will need to be addressed in order to solve the energy problems we face. And particularly the shortage and retirement of the brain trust of the industry. Instead of each firm building up what they need to operate the properties that they are designated as operator of, the industry will need to pool the resources necessary for the individual joint accounts. Each company providing the available resources they have to each Joint Operating Committee. This brings the difficulty of managing and reporting to a higher level of complexity. Where a JOC may now receive 8 seconded employees from 8 different producers. The costs of these resources being incurred, probably not in proportion to their interests, will need to be recognized in the costing structure of the joint account. Particularly since the earth scientists and engineering efforts necessary for a property may grow in terms of labor input per barrel of oil.

These are the types of issues that are addressed and managed through the Partnership Accounting module. Please read the entire entry that I wrote about Partnership Accounting here. The other 800 pound gorilla in the room is how these people interact. Who has the authority, and what structure is recognized from these 8 different companies, with different professional backgrounds. This is solved through the Military Command & Control Structure that is the Governance element of the Compliance and Governance module noted below.

Access Control

This application will be unique in that it is a software service. The application will be accessible anytime and anywhere which brings a significant level of security requirements to conduct properly. Key to the transparency of all aspects of this system, the source code for the systems will be available to any and all users of the system for their perusal. Taking the "Given enough eyeballs, all bugs are shallow" comment of Linus Torvalds about how source code should be reviewable by as many people as possible.

Compliance and Governance

Compliance being the sole reason of the bureaucracy today, the needs of the SEC and accounting for Sarbanes Oxeley have driven the organizations into making the organization all about compliance, in my opinion. The business of the business has been lost as a result. Companies have become reporting entities that have lost sight of what the energy business is. Compliance is a necessary part of any organization and this module will allow the management to maintain their status is in compliance of the regulations. The key differential is that the compliance is a fallout of the process of doing the business. I wrote about SEC Chairman Christopher Cox's introduction and development of a system that will mirror the companies compliance. This compliance framework will be built with the Governance mentioned below, and the financial, legal, operational decision making and cultural frameworks of the JOC.

Under the Governance module we need to approach the use of the scarce human resources in a more holistic manner. All member firms of a Joint Operating Committee should provide resources that are designated to specific properties. The concept of an operator can not last if we are to independently build and duplicate capabilities within each firm. The role of the Market has to provide some elements of these capabilities. Many of the accounting and land procedures will need to be amended to achieve this pooling of resources within the member firms of the Joint Operating Committee. How does a group of people committed to a JOC participate and recognize the order and structure of the people employed there.

I have proposed a solution for this by implementing an element of Military Command & Control structure. Where people are designated at a certain level within their profession and like a Captain in the U.S. Army may find himself reporting to a British Major with a variety of other NATO forces under his command. The effective pooling of all JOC participants resources can then enable the structure to be deployed, and each individuals role and responsibilities are assigned appropriately. The costing and associated issues are part of the Partnership Accounting Module noted above. I believe this is one of the critical means of addressing the National Petroleum Council's dual problems of the shortage and retirement of the industry brain trust.

Research and Capabilities

Innovation is a critical component of the capabilities of this reorganization. It is at the Joint Operating Committee level that these innovations are expected to rise. However, my research has discovered that the risks to the firms in terms of its capabilities will fall into jeopardy. That to capitulate all of the science and innovation to the JOC would be a mistake similar to the problems diagnosed of Chrysler. The scientific advances and the implementation of the new sciences and innovations have to be managed by the firm, otherwise it will fail in its ability to provide the overall direction of where it should be heading. Research in the firm will take on a new role in this type of organizational structure. I foresee most of the engineers and earth scientists being employed by the firms and accessing the most advanced tools and research capabilities. This is what will be required to build the exploration capabilities back to what they were prior to the cheap oil era.

Knowledge and Learning

This will be the repository for the firms capabilities and research. It will also be a window to the public data that is associated with the industry. Companies will search and discover what is publicly available by other firms and seek out the information regarding what is possible.

I am throwing another paradigm in here and am asking the industry to dispatch its secretive ways and begin to use the legal means of securing their intellectual property. Copyrights are earned through publication. Patents are the most sound manner to ensure your invention and innovation hold value in the industry. The ability to submit ideas in a safe environment benefits the firm in securing its intellectual property, and allows the rest of the industry to benefit from those ideas immediately. This module is for that purpose.

User Participation

I would recommend anyone who has an interest in these topics review the archives of my blog at http://innovation-in-oil-and-gas.blogspot.com or contact me at paul dot cox at gmail dot com if you would like to participate. Without active user participation, this project will never happen, so please lets get started.

This proposed application will of course be the largest, purpose built system for the energy industry. Costs are projected on a preliminary basis in the hundreds of millions. A very costly project, but one that only has to be paid for once. If we amortize the building and maintenance of this system over the entire industry, I believe the costs to each producer will fall within the single digit percentile of what producers are currently paying SAP and Oracle.

I am also asking if any producer or investor wants to donate or sponsor this project, please push the PayPal button on the website and make a contribution so that we can begin to make 2030 real.

Finally I would like to mention that over my thirty year career in oil and gas. I have found the industries resilience and ability to address tough issues has impressed me many times. Now is the time to take that inherent capability of the industry, organize it and make 2030 a reality.

Technorati Tags: Genesys, Peak-Oil, Ideas, People, Modularity

The Facts of the Case.

The graph presented above has been prepared by both the International Energy Agency and The National Petroleum Council. And both are listed as the source. This graphic spells out what has to be said about the energy industry. We are in deep difficulty.

The existing reserves seem to reflect the current production profile of the global oil industry. And this will achieve a significant decline in the next three years. From providing what appears to be 73 million barrels per day (mmb/d) currently. The decline in the latter part of 2007 until 2010 will drop over 25 mmb/d to approximately 48 mmb/d.

I don't dispute the sources of additional deliverability in "Known Reserves", "Enhanced Oil Recovery", "Unconventional" and "Exploration Potential" exist, they are just not in any condition to be able to start pulling such weight as what is expected / demanded in this graph. More or less the cupboards are bare.

Yesterday I made the comment that the exploration costs may total $12 trillion. This was on top of the National Petroleum Councils mention of $20 trillion in infrastructure. My $12 trillion comes about as a result of some analysis that was done in the late 1990's. Someone had allocated the industries costs of exploration over the various years increase in production. They came up with the figure of $300,000 in capital costs for each incremental barrel of oil. Not a replacement for depletion, but a certifiable increase in the global oil production capacity. Since it is 40 mmb/d in incremental production that we need by 2010, these values are accurate in my opinion.

At $300,000 for each incremental barrel, imputing a return on investment of 10% would create a financing cost of $30,000 / year. Take the financing costs and divide it by the 365 daily barrels of incremental oil production for the year. And you need $82.19 / barrel just to finance the necessary investment.

Until the market response to these values is reflected in the current commodity prices, we are in for a heap of difficulty. Based on the amount of press coverage received by the NPC's press release, I think we will need to realize this disaster before any action is taken. Was Dr. Daniel Yergin cowering during that presentation, I think he was, which I guess means that his 16 mmb/d in incremental production is not going to materialize. One should go back and read the excellent paper that Major Daniel Davis wrote. This information is not foreign to Dr. Yergin, he has access to maybe the best data available. I wonder why he said those stupid things back two years ago until yesterday? He should be embarrassed and looked at as the reason that the world waisted two critical years in attempting to avoid this disaster. Despicable.

Technorati Tags: Genesys, Yergin, Peak-Oil, Simmons, Call-to-action

National Petroleum Council Report

This morning I watched the Webcast of the National Petroleum Council's report. Well mark me surprised. I find the efforts of the National Petroleum Council to be a refreshing look at the problem of energy supply and security. More then that, its a plan on how to address the issue of where the energy is to be sourced from in 2030. In 2030 GDP is expected to be $80 trillion, and demand to be in the region of 120 million barrels of oil / day. My concern is how the momentum and the sustained effort to meet this level of demand, over many decades, can be captured and moved forward.

The one thing that this report should do, is eliminate the discussion as to whether there is a problem in terms of sustainable energy. Energy infrastructure alone was noted to have a prospective budget of $20 trillion. To increase the volumes of energy from this point, in my estimate, will require $12 trillion in exploration expenditures alone. A massive effort by any measure. An effort that has to be approached from a new point of view and organized in a manner that is optimal for the energy consumer.

To organize this task, I suggest we take the approach that I have written about in this blog. To approach the scope of the problem in the same fashion as the last centuries hierarchical solution would be wrong. Can anyone legitimately argue the bureaucracy will be an alternative organizational construct in 2030? How about 2020? Lets organize the industry around the optimal solution that it has created for itself. The Joint Operating Committee, which is the legal, financial, cultural and operational decision making frameworks of the oil and gas industry, and make the energy demands of 2030 real.

Technorati Tags: Genesys, Energy, Peak-Oil, Research

Energies importance.

I have a very interesting paper that is being published today. The paper is entitled

"Special Report: On the Precipice: Energy Security and Economic Stability on the Edge."

By Daniel L. Davis

July 17, 2007 (Click on the title of this entry to downlaod the .pdf)

This paper is unique in that it is written by someone who only has an interest from the point of view of how the lack of energy may affect people. Being that he is a Major in the U.S. military provides him with really little first hand knowledge of the energy industry. What prompted him to start researching and writing this paper is unknown, but it he does a spectacular job in framing his concerns, concerns that should be shared by all. In the final part of his paper, Major Davis reflects on many of the governmental failures that have occurred in the 21st century. How these failures reflect that in today's environment there is little in terms of warnings, and if you choose to ignore the warnings, the results can be catastrophic.

I will highlight the key points in Major Davis' paper and tomorrow will have a quick report on the National Petroleum Committee's report.

"That's why it is so critical that we recognize the potential scale of the problem today and take immediate action. As pointed out by Dr. Hirsch, if we begin taking action before the onset of the peak, the damage done and the pain incurred will be mitigated; if we fail to act until production at the wellhead announces the decline has begun, the pain endured will be markedly worse, and the risk of global instability will increase to a dangerous level. Dr. Hirsch clarified the scope of the problem in remarkably clear but sober terms in his February 2005 report when he wrote: p. 17

Mitigation will require an intense effort over decades. This inescapable conclusion is based on the time required to replace vast numbers of liquid fuel consuming vehicles and the time required to build substantial number of substitute fuel production facilities. Our scenarios analysis shows: p. 17

• Waiting until world oil production peaks before taking crash program action would leave the world with a significant liquid fuel deficit for more than two decades.
  
• Initiating a mitigation crash program 10 years before world oil peaking helps considerably but still leaves a liquid fuels shortfall roughly a decade after the time that oil would have peaked.
  
• Initiating a mitigation crash program 20 years before peaking appears to offer the possibility of avoiding world liquid fuels shortfall for the forecast period.
  

The obvious conclusion from this analysis is that with adequate, timely mitigation, the economic costs to the world can be minimized. If mitigation were to be too little, too late, world supply / demand will be achieved through massive demand destruction (shortages), which would translate to significant economic hardship. There will be no quick fixes, Even crash programs will require more than a decade to yield substantial relief." p. 17

"If we are hit with a peak flat footed, having taken none of the mitigating measures recommended in the Hirsch reports, the cost to the United States will be extraordinary by any measure." p. 17

"The Logic for Action"

"No serious scientist, geologist or economist believes that the cheap crude oil upon which our society runs will last forever; all believe it will someday end. Since it is clear that an effective transition will be measured in decades, given that all agree the world has pumped approximately on trillion barrels of oil from the ground thus far, it is an imperative that we begin immediately to analyze, conceive, and then implement a plan to transition to alternatives before being forced to do so as a result of a supply in terminal decline." p. 17

"Impediments to Action"

"In a telephone interview Dr. Campbell made a point to clarify an important fact covering his projection of a 2010 peak: "There's only on thing I can tell you with certainty regarding my assessment: it's probably wrong! The question is, by how much. He explained that because there exists no globally enforceable single standard for reporting individual reserves, each nation and / or oil company is free to choose their own definitions of what they report, and to report whatever numbers supports their economic or political purposes." pp. 17 - 18

"Compulsion for Action"

"After playing out three disruption related scenarios, the group arrived at two key conclusion. In the 2005 report summary Dr. Gates wrote:" p. 20

"First, the economic and national security risks of our dependence on oil - and especially on foreign oil - have reached unprecedented levels. The threat is real and urgent, requiring immediate and sustained attention at the highest levels of government.

Second, if we wait until a crisis occurs to act, the nation will have to few, if any, effective short term remedies. To protect ourselves, we must transcend the narrow interests that have historically stood in the way of a coherent oil security strategy and implement policies that will meaningfully address both the supply and demand aspects of our current oil dilemma." p. 20

"This study was not conducted by some fringe group or obscure participants: it was carried out by individuals with premier levels of education and direct experience serving the government at the highest levels. And yet, despite their stark warnings of our country's vulnerability to reductions in oil supply and their clarion call to action, two years after the publication of this report nothing has been done. Whether the drop in supply comes as a consequence of disruption above ground or as a result of declining supplies below ground, the result on the global economy is the same. It is beyond question that immediate action to mitigates this vulnerability is require. But as hard as it might be to imagine, the threat to the economy may not be the greatest danger we face." p. 20

Dr. Gates of course being the president of Texas A & M, one of the premier engineering schools in the world, and is now Secretary of Defence.

"Unexpected Danger"

"But there is one other significant issue to take into consideration when contemplating the impact of a terminal decline in fossil fuels: the danger to food production." p. 20

"But in fact, without petroleum, we would only be able to produce a fraction of today's crop yields." p. 20

"The report begins by explaining that from the settlement of the US until the 19th Century, virtually all increases to crop production came as the result of increasing the cropland used. But of the quadrupling production since then, it states:" pp. 20 - 21

"As manufacturing developed, production of chemical fertilizers like super phosphates and, later, urea and anhydrous ammonia replaced most fertilizers produced from recycled wastes. Commercial fertilizers provided low cost nutrient to help realize the yield potential of new crop varieties and hybrids (Ibach and Williams,1971). Since 1960, yields per unit of land area for major crops have increased dramatically. For example, average corn yield has increased from 55 bushels per acre in 1960 to 139 bushels in 1994 and average wheat yield from 26 to 38 bushels per acre. If nutrients were not applied, today's crops would rapidly deplete the soil's store of nutrients and yields would plummet." p. 21

"The nutrients cited in the foregoing are almost all petroleum derived. The importance of those inputs was made even more clear in an updated version of the USDA publication in 2003." p. 21

"Large shifts occurred in particular inputs over 1948 - 96. Although intermediate inputs (fertilizers, pesticides, energy, feed, seed, and livestock) as a groups increased 1.42 percent per year over the period energy inputs increased less than 0.9 percent while pesticides increased at nearly 5 percent per year. Synthetic pesticides were just beginning to be used in the late 1940's, but adoption occurred rapidly, and by the early 1970's most acres in major crops were being treated. total pounds of pesticides applied peaked in the early 1980's, and have been relatively stable since then." p. 21

"It is crucial to note that energy inputs increases almost one percent per year, and pesticides increases an average of 5% per year for the 48 years of the study. What would happen if those inputs were suddenly curtailed one to two percent per year? What about a decade later when they were reduced 10 - 20%? 40 - 50%? The 1996 report explicitly stated that if the inputs were not applied, "yields would plummet." When we likewise consider the compounding issues like the impact of decreasing fuel supply to power the irrigation pumps - or fuel for the tractors and combines, the for transport rigs, the delivery trucks, and other declining - fuel supplies issues - it becomes clear that food production would become severely crimped by declining oil production. To further compound the situation, while the production of crude oil declines, the population will continue to rise." p. 21

"Population Effects"

"Consider that from the year zero until 1850 the global population increased from about 300 million to 1.5 billion – an average increase of about 65 million per century.59 From 1850 to 2006, the increase was from 1.5 billion to 6.5 billion – an average of 32 million per year. But in just the 12 years from 1987 to 1998, the population increased from five to six billion for an average of 83 million per year, or 18 million more than previously increased in a century."

"As seen on the below graph,60 the global explosion of population since 1900 has roughly tracked the rise of the oil age, and since the mid 1980s, has exactly mirrored the growth in crude production. Why are these facts significant when discussing peak oil? Because far and away the primary driver for the “Green Revolution” have been its petroleum-based inputs; without these inputs it would be impossible to generate the volume of produce per acre of ground we currently enjoy. If petroleum inputs decline, so too will the ability to produce food, and at a correlation comparable with the ascension." pp. 21 - 22

"Next, notice the graph below depicting the oil depletion curve presented by Dr. A.M. Samsam Bakhtiari, former senior executive at the National Iranian Oil Company, at the International Oil Conference in Copenhagen, Denmark on December 10th, 2003.62 Particularly note the barrels of oil projected for the year 2020 – approximately 55mbd. Now look back up at the World Oil Production and Population graph, and read down the right hand column and find 55mbd, which last occurred in 1985. Next read over to the left hand side of the graph to ascertain what the population was the last time the world saw production of 55mbd: approximately 4.75 billion. Again, note that from 1985 through 2006 the line of population increase and million barrels per day of oil production have been virtually identical. Now lets look forward again to the year 2020." p. 23

"Dr. Bakhtiari projects global production of 55mbd in 2020. Looking back to the UN population projection for the same year we find the expected population is 7.5 billion people – three billion more people to feed as the last time the world produced this amount of oil. I chose this model to demonstrate (though there are many others with similar projections) because of the location of the peak: the year 2006. When one considers that in 2003 Dr. Bakhtiari predicted that the peak would occur in 2006 and at approximately 83mbd – and then combined with the fact that since June of 2004 global production has plateaued at approximately 85mbd63 (more on that in a subsequent section) – his projections of future production must also be given serious consideration." p. 23

"While these facts portend a dire future, a bit of encouragement might be in order: man’s capacity to solve challenging problems. As has been the case since the dawn of mankind, when faced with overwhelming problems, man is capable of great feats: there’s nothing like the prospect of one’s death to focus the mind. There is little doubt that when the reality of the decline of oil begins to soak into the public consciousness, the best efforts of our finest minds, national governments, and billions of dollars of investment will materialize and mitigating solutions will be found. However, even the good news is tempered: the longer we wait to begin that intensive effort and significant investment, the narrower the gap between discovery of the problem and the onset of its consequences." p. 25

"The IEA now expects demand for oil to rise by 1.7 m barrels a day this year compared to last year – an increase of about two per cent.”69 But as shown on the above graph, there has been no increase for almost three years." p. 26

"Less than a month later another Financial Times article reported that a combination of tightening supplies and faster-than-expected depletion in existing fields was causing alarm among many in the oil industry. “In its starkest warning yet on the world’s fuel outlook, the International Energy Agency said ‘oil looks extremely tight in five years time’ and there are ‘prospects of even tighter natural gas markets at the turn of the decade’. The IEA said that supply was falling faster than expected in mature areas, such as the North Sea or Mexico, while projects in new provinces such as the Russian Far East, faced long delays. Meanwhile consumption is accelerating on strong economic growth in emerging countries.”69.4 If demand is increasing faster than expected, supplies are being used up quicker than predicted, and existing oil fields are depleting faster than predicted, it is possible the peak of oil may already have been reached." pp. 26 - 27

"The oil majors (ExxonMobil, Shell, Texaco, etc) do not have to view this process as antagonistic to their interests – though they presently do." p. 29

"Conclusion"

"The consistent factor in all the above was the inability of Government officials at all levels to properly assess the seriousness of the issue when time was available to take appropriate action. Had FEMA Director Michael Brown realized the magnitude of the problems associated with a Category 4 hurricane plunging into New Orleans, he would have mobilized his assets much earlier, in larger volume, and more quickly after the storm than he did; Had George Tenet really believed that Al Qaeda was preparing an attack within the United States, he would not have remained silent when Condoleezza Rice allegedly ignored his warnings; had Donald Rumsfeld listened to those that predicted the US would not be welcomed in 2003 Iraq as liberators but rather opposed as occupiers, he would have put a great deal more effort into Phase IV planning and an entirely different outcome might have played out." p. 30

"But in all cases, key officials grossly underestimated the gravity of the impending problem, even when credible information was given them that argued to the contrary. We are in just such a situation now." p . 32

"Presently there is sufficient information available warning that a problem exists, but too little detailed information upon which decision-makers could act. It is critical, therefore, that the recommendations to conduct detailed analysis previously cited be initiated immediately. We must have the most qualified experts in various fields ascertain the consequences that would occur if the global supply of crude oil began to decline as a result of depletion. Only if our leaders – and the American people – are armed with facts and information can we make the rational decisions necessary to prepare for what lies ahead." p. 32

"It is a documented fact that we failed in adequately preparing for the September 11 attacks; we failed in adequately preparing for the Katrina hurricane; we failed in our appreciation of the difficulty of post-war Iraq: we can not fail to prepare for post-peak oil." p. 32

"In closing, I include the following quotes from two reports issued this year; the first from the latest of the three Hirsch Reports, and the second from the GAO. Both of these reports will be useful to the post-peak commission that will be formed to determine how we so badly missed the warning signs before the onset of the peak. These two reports will be used as evidence that reports were conducted, measures recommended, but no action taken:" p. 32

"Hirsch 2007: It is our sincere hope that readers will look beyond the conflicting forecasts and focus on the consequences of underestimating the enormity of the peak oil problem. Effective mitigation means taking decisive action well before the problem is obvious." p. 32

"GAO 2007: While public and private responses to an anticipated peak could mitigate the consequences significantly, federal agencies currently have no coordinated or well-defined strategy either to reduce uncertainty about the timing of a peak or to mitigate its consequences. This lack of a strategy makes it difficult to gauge the appropriate level of effort or resources to commit to alternatives to oil and puts the nation unnecessarily at risk."p. 32

This leads me to think that if Major Davis can see these points, how come Daniel Yergin can't?

Technorati Tags: Genesys, Failure, Peak-Oil, Yergin, Call-to-action, Vision

Aberdeen has it right.

I want to firstly go back and review what Professor Langlois' said in his ESNIE slides. It is contained in the first slide and I would like to emphasis an important point of it. The quote is;

"He (the master gun maker) purchased material from the barrel makers, lock-makers, sight-stampers, trigger makers, ramrod forgers, gun furniture makers, and if he were engaged in the military branch from bayonet-forgers. All of these were independent manufacturers executing the orders of several master gun-makers. Once the parts had been purchased from the "material makers", as they were called, the next task was to hand them out to a long succession of "setters-up", each of whom performed a specific operation in connection with the assembly and finishing of the gun. To name only a few, there were those who prepared the front sight and lump end of the barrels; the jiggers, who attended to the breech end; the stocker's, who let in the barrel and lock and shaped the stock; the barrel strippers, who prepared the gun for rifling and proof; the hardeners, polishers, borers and riflers, engravers, browner's, and finally the lock-freer's, who adjusted the working parts." Slide no. 1

The individual is the key to the organization of the market. No companies, hierarchies, corporations or bureaucracies. Just individuals and markets. This is how I see the energy industry developing further in the future. More of a movement away from the silo'ed BP, Shell, and Exxon's to rely on the individual capabilities of the market. Certainly there will be BP, Shell and Exxon, however, their ownership and development of their reserve and land base will be their key concern, and how to employ the market towards their objectives will be how they achieve them. They key to their capability will of course be through their participation in the Joint Operating Committee of each property.

What we have here in the barrel maker example is a division of labor that is very fine. And this division of labor would provide the gun making industry with production volumes that would exceed the productive ability of the group of individuals acting independently. A further division of labor is how the oil and gas industry will increase its capability, throughput, and growth necessary for the commodity markets demands.

Reading now from the Economist about the state of affairs in British oil and gas, they note the following regarding the headquarters of Aberdeen.

"Yet even though oil and gas output is declining the local businesses that have sprung up to support it have bright prospects. The North Sea was one of the earliest offshore oil basins to be developed. Many of the technologies needed to produce oil from underwater wells - especially in the difficult, gale prone waters off the British coast - were developed in Scotland. Around 90% of oil industry workers are employed not by the big international companies such as BP or Total that operate the fields but by local businesses."

I want to state, what I see for this software development project is this software being built for the industry that includes Calgary, Houston and Aberdeen. These three centers will provide the European and North American industries with both the supply and demand for energy on a go forward basis. Houston has had a traditionally more global role in the energy business, but I am of the opinion that they have seen their people, assets and capabilities somewhat repatriated through the variety of nationalizations, in Venezuela and Russia, and China and the Arab countries adopting a more progressive attitude. An attitude that they will develop the capabilities to manage their industries for themselves. That American technology is better, but they choose to use their own resources for the long term.

Aberdeen is seen in this example as more capable, as the Economist article points out, in offshore operations, Canada in EOR, Heavy Oil and remote gas, and Houston filling in where its size and capabilities, particularly financially, are required. These three cities will operate in the Atlantic, Pacific, Gulf of Mexico, Mexico, Canada, the U.S. and the Arctic as their base. Versus Russia, China and the Arab countries will co-exist with little or no transfer of knowledge or capabilities between the two disparate groups, yet both will market their commodities to the highest bidders.

As the Economists article best reflects, Aberdeen may be the most able of the three to meet their needs through the "market" and less through the "firm". The latter two cities, Calgary and Houston, needing a more radical reconfiguration towards the market. Markets made up of individuals.

Technorati Tags: Genesys, Firm, Market, Langlois, Cluster, Capabilities, People

Houston we have a problem.

Clicking the title of this entry will take you to the Energy Bulletin's summary of the International Energy Agencies (IEA) report. Much is currently being written about this report as it recognizes the problem the energy industry is facing. For the purposes of this post I will state what my opinion of the situation is.

• Demand is growing due to the effects of globalization.
• Supply is constrained by the nature of the reserves that exist today.
• After almost 30 years of aggressive exploitation of petroleum reserves, current deliverability is not sustainable in the mid and long terms. (We need new discoveries, and lots of them.)
  

The point of this blog is;

1. The energy industry is constrained by the size of its work force. This is a long term problem that will accelerate as time passes and the current brain trust retires.
2. The organizations are driven by the demands of compliance and regulatory regimes. The business of the business, oil and gas, has become the second priority of the bureaucracy.
3. SAP and Oracle build systems that enable producers to move "closer to their customers". This inane statement reflects they, and their software solutions, haven't got a clue about the energy business.
   
4. Systems define the organization. Or as I like to say, "SAP is the bureaucracy". The systems vendors and the bureaucracy have a self defining, symbiotic relationship that has stifled any and all innovation or initiative.
   
5. The management of the industry boasts healthy profits, yet has done nothing to earn them. The profits are 100% attributable to pricing, not management. The profits have enabled management to ignore any concern for the industries health beyond their planned retirement party.
   
6. The earth scientists and engineers need to get to work in earnest to provide the commodity markets demands for energy.
   

I have lived with the implications of saying these things for forty six months. Being ostracized is liberating. I can say this today because I know the current management has had every opportunity to rectify the situation and has chosen to do nothing. They have been given the opportunity to deal with the problems and they have failed in their duty. The IEA report is a summary of this management failure, and it's time for a change.

I propose that we build systems that meet the unique and well established ways of how the industry operates. To build software that aligns the "business" with the legal, financial, cultural and operational decision making frameworks of the industry. The Joint Operating Committee is the natural form of organization for the upstream oil and gas industry. And that is stated on a global basis. This blog has shown the academic and logical support for this concept. The time, as defined by the IEA, is now.

Based on these points I will be preparing a summary of this blog and propose we move forward on the building of these systems. I will publish this document in September 2007. The energy business has fundamentally changed in the last 5 years, its now time to deal wih these changes. To my way of thinking, the only other alternative is to give the bureaucracy and its symbot's, Oracle and SAP, another chance, and that is fundamentally unacceptable.

Anyone that is interested in these ideas can keep up, and participate, with this blog. If you would like a copy of the proposal just email me (paul dot cox at gmail dot com) and I will forward a .pdf when it is published in September 2007.

Technorati Tags: Genesys, Failure, IEA, Software, Call-to-Action

ESNIE update, 5 down 6 to go.

I have now completed the review of the materials for both Professor Sidney G. Winter and Professor Richard N. Langlois. There are a few more documents that I will be reviewing and those are as follows, after that, I will return to the LEM Working Paper series and any other works of Professor Langlois' that I find. The documents that I will be reviewing are;

The first one is a non ESNIE file of Professor Langlois that he co-authored with Professor Paul Robertson of University College in New South Wales in 1994.

• Institutions, Inertia and Changing Industrial Leadership. This document appears to be related to the March 2007 "Organizing the Electronic Century" that I have reviewed.

After that the next review is of Professor Oliver Williamson of the University of Berkeley. His ESNIE presentation was after Langlois' and as Langlois states in his lecture summary, his lecture was a precursor to the lectures of Williamson and Winter.

• I am unable to source the paper that may be the topic of Professor Williamson's lecture. I am assuming that his March 2007 document "Transaction Cost Economics: An Introduction" captures the context of his lecture.

The final review I will do on the ESNIE presentations (2007 Conference) is three documents and one set of slides of Professor Giovanni Dosi. As you may recall, Professor Dosi was the primary source of material for my thesis, which is the precursor or base of understanding of this blog. The documents are listed as; (download them from this site.)

• Hierarchies, Markets and Power: Some Foundational Issues on the Nature of Contemporary Economic Organizations.
• The institutional embeddedness of economic change: an appraisal of the 'evolutionary' and 'regulationist' research programmes. Benjamin Coriat and Giovanni Dosi.
• Institutions and Markets in a Dynamic World. Giovanni Dosi.
• Slides, "Hierarchies, markets and power structures: some foundational issues on the role of institutions."

Technorati Tags: Genesys, Langlois, Winter, Dosi, Williamson

The Sistine Chapel of software.

Time Magazine's comment regarding Apple's new iPhone.

The user interface is crammed with smart little touches — every moment of user interaction has been quietly stage-managed and orchestrated, with such overwhelming attention to detail that when the history of digital interface design is written, whoever managed this project at Apple will be hailed as a Michelangelo, and the iPhone his or her Sistine Chapel.

I don't think Time magazine is known for overstatement, and we will have to wait and see what the final outcome of the iPhone will be. What can be stated today is this software development for oil and gas must implement this level of quality of interface. Nothing less is acceptable.

The days of when Microsoft pretended to emulate the Mac, and provide user interfaces to the bulk of users is over. The amount of time and effort that both Apple and Google spend on the user interface seems over the top for most of their competitors. The user interface is the reason for Google and Apple's success.

Technorati Tags: Genesys, User, Apple, Google, Development, Interface

Langlois ESNIE Slides

Continuing on with our review of the European School on New Institutional Economics conference. Professor Langlois' three ESNIE documents which I have reviewed are referenced here. There is a fourth, his slide presentation entitled "Dynamic Transaction Costs". These appear to be a subset of Lanlgois' University of Connecticut Economics 486 class slides.

On the ESNIE Personal Page Professor Langlois introduces his lecture as;

"This lecture will have two main objectives. First, it will introduce the two principle approaches to the economic organization of the firm: the transaction cost approach and the capabilities or knowledge based approach. The lecture will thus serve as an introduction to the lectures of Oliver Williamson and Sidney Winter. Second as the title suggests, the lecture will set forth the theory of dynamic transaction costs, which one can think of as an attempt to bridge the gap between transaction cost and capabilities approaches."

Firstly, I recommend downloading the file for future reference. There are many worthwhile points in the presentation. Professor Langlois starts with a simple example of a master gun maker in the 19th Century. This example shows how complex and sophisticated markets are, and accurately reflects Adam Smith's division of labor, and the extent of that division in the 19th Century.

On slide number 22 Langlois introduces two different scenarios, "The Visible Hand" of Chandler, and "The Vanishing Hand" of Langlois. Scenario 1 supports Chandlers "Visible Hand" in which "organizations" needed to approach scale. The "management" then used vertical integration to reorganize the capabilities necessary to mitigate the "Dynamic Transaction Costs". (The costs of negotiating, teaching, coordinating etc. through the market.) Slide 28 is where Langlois introduces the second scenario. A scenario that accurately replicates the situation in the energy industry.

Scenario 2

• Creative destruction of existing internal capabilities.

Although I may be the only one declaring the destruction of energy corporations existing internal capabilities, I would find it difficult for anyone to justify a 250% increase in relative activity, with an associated 17% production replacement, a success. I think calling it an "activity" accurately reflects my concern for the long term needs of the energy marketplace.

• Modularity and a high level of external capabilities.

Through my review of Langlois' "modularity" papers (here and here) I have been able to define the necessary software modules that should be built. Modules like the "Resource Marketplace", "Petroleum Lease Marketplace", and "Compliance and Governance" modules. Langlois noted one of the key benefits of modularity was the users ability to clearly see "what" and "how" they could accomplish there needs. And modules also provide interfaces for interaction between these users and other modules.

External capabilities is the primary if not the only method the energy industries acquires its capabilities. These capabilities are accessed by the firms use of contracts. Drilling a well may set in motion up to 100 different vendors operating in various capacities to drill the well for the producer. Little outside of supervision and application of the scientific theory (the key competitive advantage) is conducted by the firm. This was the only viable way in which the industry could have developed, and to facilitate this reality the industry created the Joint Operating Committee, the primary organizational focus of the "market" in this software development proposal.

• Development of institution to support market exchange.

Standards and the culture of the industry have developed as a result of the Joint Operating Committee. Agreements are culturally systemic, data models are standard, accounting and operating procedures are implemented through industry associations dedicated to the unique needs of, one more time, the Joint Operating Committee. As I have claimed and determined in my thesis, SAP is the bureaucracy, organizations are defined and supported by the software systems they use. For the energy industry to move to a more innovative footing requires that the industry make this blog's software development proposal, be made real.

On slides 31 - 34 Langlois introduces his "Vanishing Hand Hypothesis".

"The Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets. But the components of that process - technology, organization, and institutions - change at different rates."

"The managerial revolution was the result of an imbalance between the coordination needs of high throughput technologies and the abilities of contemporary markets and contemporary technologies of coordination to meet those needs."

"With further growth in the extent of the market and the development of exchange - supporting institutions, the central management of vertically integrated production stages is increasingly succumbing to the forces of specialization."

And on slide 35 Langlois notes what I think is the key to the oil and gas' future competitiveness;

"Extent of the market is about learning."

Learning about the changes in the earth sciences and engineering disciplines. Disciplines that are the key competitiveness of the future of the industry. If our knowledge of x is doubling each y years, how will the hierarchy maintain an understanding of the changes in the science. How will the firm innovate and apply these new findings, and in turn assist in the sciences further development?

Finally on the last slide Langlois provides a summary of the three phases of Smith's "Invisible Hand", Chandlers "Visible Hand" and Langlois "Vanishing Hand". Again I recommend reviewing these slide to capture the full extent and significance of these concepts. Therefore, I will not recreate the slide here and only refer to his description in "The Vanishing Hand: The Changing Dynamics of Industrial Capitalism".

"More or less arbitrarily, I have labeled 1880 as the point at which the path crosses the firm-market boundary. This is the start of the Chandlerian revolution. Equally arbitrarily, I label as 1990 the point at which the path crosses back. This is the vanishing hand. Far from being a general historical trend, the managerial revolution - in this interpretation - is a temporary episode that arose in a particular era as the result of uneven development in the Smithian process of the division of labor." p. 56

How much longer will the industry be held captive to the hierarchies management, is the only question I have. It has now been fourty six months since I first proposed these concepts! The necessity to reorganize the energy industry to approach the commodity markets demands for more is clear to me. Doing more "activity" as I have labeled the doubling of drilling activity, may become known as more of the same thing but expecting different results, and runs the risk of not being classified as a failure, but as insanity.

Technorati Tags: Genesys, Langlois, Ideas, ESNIE, Markets, Firm, Failure, Energy