Profit from the Peak.

The end of the oil game and the greatest investment event of the century.

Profit from the Peak is a book that I've been wanting to review for a while. An interesting premise is suggested in the sub-title. From some of the blogs that I follow it sounded like it may provide for an interesting read.

A little background on myself. With over 25 years of experience in the oil and gas industry I could see this "Peak Oil" energy train wreck starting. In August 2003 I came up with an idea on how to solve it. And in September 2003 started the research into using the oil and gas industry standard JOC (Joint Operating Committee) as the key organizational construct of the innovative oil and gas producer. If we moved the compliance and governance that the hierarchy managed, with the legal, financial, operational decision making and cultural frameworks of the JOC. We would achieve an alignment in all five frameworks that would enable the science and engineering needs of the industry to be the focus, and mitigate the effects of Peak Oil.

What does this mean. As most people know oil and gas is made up of partnerships between companies. This is to reduce the risks inherent in the business, and because the aerial extent of many of the properties, multiple owners work together. Since its beginning this has been the culture of the industry. And as one can imagine their are legal documents, financial distributions and operational decisions made with the input of the producers in the JOC. What isn't done is the competition to this software development project, SAP, Oracle and Qbyte, haven't a clue what a JOC is. Their focus is on the compliance and governance and therefore only provide the producer with at best 20% of the functionality.

The other major finding that I published was the software defines and supports the organization. Noting that SAP is the bureaucracy. To change an organization, one must first change the software. If we want innovative oil and gas producers, we need to build the software first. Or be relegated to manual systems. So this is what I have written about since the publication of my research in May 2004 and the posts in this blog. But enough about me lets review this book.

The first point I want to make is based on the following quotation in the Introduction and its associated implications. And regarding this graph entitled "Worldwide Oil Production".

For the past 50 years, we have explored the entire earth intensively looking for more oil. But despite the latest technology and the most elaborate efforts, global oil discovery peaked in 1962 and has declined relentlessly ever since. Generally we are finding less and less oil each year, and for the past 25 years, we have consumed more oil than we have found. In 2006 we found about 6 billion barrels of oil, but we consumed 28 billion, and the trends continue in the direction of increasing demand and decreasing supply. pp xvi - xvii

Although Peak Oil accurately captures where I think we may be in the history of the industry. My opinion is that we have established a high water mark that may be permanent. The graph clearly shows the discoveries peaked in 1962 and have declined since that time.

My question to the authors and everyone interested in this topic. Does this graph mean all the oil was discovered by 1962? Or did the industry stop looking for more oil after 1962. Now this is not an accusation that they purposely stopped exploring. But consider the world had an abundant volume of energy. Prices were in the very low single digits, and the need to "develop" these resources became the focus. This situation was followed by the 1980's and 1990's where low oil prices were causing no end of greif to the producers. The industry more or less cannibalized itself to survive over those two decades. To say that technologies in 1965 discovered all of the oil is an assumption that the Peak Oil theorists may have incorrectly assumed. Based on my current understanding of the oil and gas industry. And the process necessary to explore for oil and gas. The industry generally doesn't have a clue on what exploration is. The generation of oil and gas workers that started in the 1980's and 1990's never experienced an exploration mindset.

The next incorrect assumption of the authors is stated on page 4 of the book.

"Matthew Simmons, the top oil investment banker in the world" p. 4

Now I have read Matthew Simmons for many years and overall he is correct in many things that he states. However he is the worlds top investment banker in the oil and gas services industries. Based on Mr. Simmons comments about the need to publish the worlds reserves data. So that it can be pointed to as the gospel truth of the Peak Oil situation, unfortunately disqualifies himself from making any comments about reserves.

I have now worked in the industry for over 30 years and have gone through the accounting, audit and systems areas extensively. I have been a CFO of small producers and I have looked at my fair share of reserves reports. I can't tell you if the reserves are the greatest thing since Ghawar, or the latest scam. Looking at reserves reports is the same at looking at art. Why would someone pay that much for those reserves, or art, reflect the beauty is in the eye of the beholder. And indeed oil lives in the minds of oilmen.

The same criticism can be leveled against Dr. Daniel Yergin. He claims he and his 220 PhD's on staff have the best global oil and gas reserve data. This prompted him to make the claim in 2005 that "the world would soon see an unprecedented increase of 16 million barrels of oil". If I were you I would dig out some of those paintings your kids made in elementary school, I think I see a market for them.

Some minor criticisms as to the accuracy of some of the claims made in the book. On page 42 of the book it is claimed that "hydrogen sulphide (sour gas)" is in injected into oil formations. H2S is one of the most toxic substances known to man. One breath of it and your dead, instantly. I'm sure the safety concerns of injecting H2S are adequate to assure that no one is doing it.

Enough criticism of this book now lets get on to many of the jewels. On page 49 "Its as though the adults of the oil industry have been forced to sit and watch as the children take control." In reference to the industry being knocked aside by the National Oil Companies (NOC's) desire for control. I can't agree more with that statement, and I'll comment on this later in the review.

On page 67 the authors suggest "Essentially, it looks as though oil majors are running a shell game here, no pun intended. The question is: When will investors figure it out?" They have hit the pile driver on the pile with this one. As I have mentioned many times the management of the producers are acting in their best interests, not the investors or societies in general, with their muddling attitude toward the energy business. One has to take a jaded look at the stock options that are being distributed in many of these companies.

The first knock your socks off comment that is made by the authors, and I have not seen anything like this analysis before, but intuitively believed it to be so. And is the underlying reason why I blame the companies for the risks we now face. Is reflected in this quote;

"A strong man, working hard all day long, can do less work than an electric motor can with 10 cents worth of electricity." and "A barrel of oil contains the equivalent of 18,000 man hours of energy." p. 72

If the fact that the physical labor equivalent of energy is now static or declining doesn't scare you, then you must be a different type of animal. It was in 1870 when mechanical leverage exceeded the labor output of man. The reason we live in such a prosperous world is the fact that we have figured out how to mechanically leverage one barrel of oil so extensively. This however does not mean that we should consume most of it by hurtling a 4,000 lb. vehicle down the highway at 60 miles / hour. I'll have more to say on this point later.

I am not a believer in the scare tactics of the Al Gore's et al. To me climate change is real when the news of the day has video reflecting strange weather occurrences we only ever heard of before. Much in the way that the world thought the Japanese economy would rule the world in the 1980's; when the majority of people saw the world through a Japanese TV. Turn off the TV and go outside, notice any change? Nonetheless, that should not preclude us from coming up with solutions. The authors ring the bell with this next set of suggestions.

"The ultimate culprit is the American consumer culture that is responsible for most consumption in the world. At the end of the day, the culture of consumption must change." p. 88

and

"To heavily invest U.S. tax dollars in renewable energy production in China. Why? Because the Chinese have a chance to build their burgeoning economy on renewables from the beginning." p. 92

Brilliant! Although I would suggest not just the U.S. but the western world should subsidize renewable energy production in China. Not only does it limit the production of the highest levels of CO2 (China), but provides immediate value (reduction in CO2). Changing the western worlds infrastructure is not going to happen as quickly. These two authors should win an Academy Award and a Nobel Prize each for these comments. Its this out of the box type of thinking that we need a lot more of, if there is a climate change problem.

One of the key characteristics of this book is its focus on the facts. When it comes to the renewables, I find the activities in the U.S. so focused on keeping people in their cars that they can't see or think straight. Here the authors note that the value generated by ethanol is approximately equivalent to the inputs of oil. Therefore if the U.S. stopped producing ethanol. People would be able to afford food and a bunch of bureaucrats in Washington would lose their jobs. That's it, you'd have just as much energy. The facts are clear this is a foolish and dangerous game.

I have suggested in my blog many times that the oil and gas industry is in need of a desperate transition. One in which the survival and cannibalizing of the industry in the 1980's and 1990's be replaced by an exploration mindset that hasn't existed since 1962. A move to a science based industry and away from the banking mentality that pervades the incumbent management. The reason this hasn't happened is as I suggest. An organization today that doesn't have the software systems in place to make the transition, will be reduced to manual systems. Something that I know the incumbent management readily appreciate. I have also suggested many times that the investors will need to fund this software development project to ensure that there is an alternative method for them to manage their oil and gas assets.

This transition is necessary and time is wasting. What the industry did learn in the 1980's and 1990's was how to draw down the reserves of a field much quicker then they did in the 1960's. So not only are we not exploring, we don't know how to explore, can't get organized to explore, and, the past exploitation methods are the proverbial brick wall we are about to crash into.

I therefore disregard the comments of the authors made in chapter 6 "Twilight for Fossil Fuels" and suggest that oil lives in the minds of oilmen. On page 120 they note;

Ironically, one of the causes of the receding horizons problems is the very success of the oil and gas industry. Record oil revenues being raked in by oil producing countries of the Middle East are causing a boom in building and expanding their infrastructure.

Imputing, I think correctly, that the U.S. based oil and gas industry has not been welcome in the Middle East, Russia and China. I think it was reflected clearly around the time that Halliburton moved their head office from the U.S. to the Middle East. But was this transition away from western based capabilities a mistake? I believe it was. Since then the industry has had their head stuck in tar. The tar sands I mean. Their herd mentality is noted by the authors.

"In some cases the price of oil itself is stifling oil projects. For example, at Shell's Alberta oil sands project, the cost of producing a barrel of oil, after a planned 100,000 bpd expansion, will be six times higher than the cost when the project first started." and "Depending on a host of factors, the total net energy gain for tar sands production is in the range of 5 - 10 percent." p. 121

But hell, it is seen as the thing to do.

I think the energy executive, if that's not an oxymoron, is beginning to wake up to a brighter future. I note the following from Thursday July 10th's news. The Calgary Herald on Russia's changing attitudes towards western technology. ASPO International notes BP CEO Tony Hayward stating "He said the problem was a failure of supply growth to match demand growth." "Pemex oil output fell by 10% in May." And Total pulling out of Iran due to their fireworks.

The Russians are considering tax incentives for the western based companies! Is this an admission that the western technologies are superior? Russian production certainly leaped when they were invited in, now with Shell and BP more or less financially abused by the Russians the production declines. With Mexican production in steep decline it is fair to assume that the world could benefit from more western based producers and service industries. Iran wasn't expecting to be on the losing side of their missile launches, but western technology walked on a critical investment in Iran.

I would recommend this book to any and all oil consumers where ever you may be. It provides an understanding of the industry and its difficulties. But also educates them to use energy more wisely. In a globalized world we need everything that we can think of. If Ludwig von Mises correctly noted that the industrial revolution was the solution to hunger and over population, IT needs to be the solution to today's problems. Albert Einstein said, that today's problems are not solved by today's thinking. These authors give you the facts so that new thinking can begin to address these problems. I personally think that IT and Segway's are two of the real solutions.

On the topic of alternatives the book provides excellent information about the changing economics of some alternatives. On page 137 they note;

The portion provided by solar and wind energy -- what most people think of when they think about renewable energy -- is a fraction of 1 percent of the total mix.

And bio-diesel has the potential of producing;

400 million gallons a year of bio-diesel. p. 143

Or 26,000 barrels / day. We've probably wasted more energy thinking and talking about bio-diesel then it will ever produce. There are three good alternative energy sources noted in this book. Unfortunately none of these alternatives has the ability to propel a 4,000 pound vehicle down the road at 60 miles / hour. But they are commercial, have huge potential and as the authors note, companies are making money.

Chapter 9 Endless Energy: "Here comes the sun." Starts with a quotation of Thomas Edison "I hope we don't have to wait till oil and coal run out before we tackle that." The future is solar, but the issues are daunting and much research should be put into the field.

The price of solar power has fallen to less than 4 percent of what it was in the 1970's. It is already economically competitive in states where electricity is expensive, including Hawaii, Massachusetts, and New York, and states with good solar exposure and lots of land, like California, Nevada, and Arizona. p. 156

The entire chapter provides the comprehensive review of the solar industry with some very good recommendations on how to get in on the ground floor of this industry. Making Chapter 9 a must read for everyone who lives in a house.

The same can be said about Chapter 10 "Pressure Cooker: Tapping the Earth's Heat" on geothermal energy. And Chapter 11 "Nuclear's Second Act". Nuclear, solar and geothermal energy are now commercial, clean and available to be used in areas where gas and coal are used today. An opportunity to replace the electricity produced from gas and coal and leave those commodities to support industrial mechanized labor, or the 18,000 man hours per barrel.

Chapter 12 "What's Needed: A Manhatten Project for Energy. President Bush is quoted as saying "we need an energy bill that encourages consumption." and Vice President Dick Cheney "Conservation may be a sign of personal virtue but it is not a sufficient basis for a sound, comprehensive energy policy." Then the authors note the result of big government science based programs.

While both projects were famous for unprecedented technical achievements -- the Manhattan Project cracked the secret of the atomic bomb, and the Apollo Project put a man on the moon -- we need to do more than come up with new technology to solve the problems we now face. We also need to rethink and remake our entire infrastructure, our economies, and even our culture. p. 180

A Manhattan Project will only boost the bureaucrats in Washington. This is a global problem. As a part time wanna be economist, I would suggest the market price mechanism is motivating the forces necessary to solve this problem. There was no market for the Manhattan or Apollo projects, I suggest we leave these energy problems to the market to solve.

I therefore disagree with the authors on their call for a Manhattan styled project. And fundamentally agree with the President and Vice-President. If 18,000 man hours of effort are contained in each barrel of oil, then we should encourage its use at any cost. Its a competitive advantage to those who use it most effectively, which happens to be the U.S. The alternative is to hire 18,000 people to do the work of one barrel. Therefore the President and Vice President are absolutely correct.

If we look at the numbers of the oil dollars flowing to the Middle East we will be distracted into believing that we should reduce our consumption. I suggest we start using our heads here and employ the Information Technologies and stop waisting the energy hurtling vehicles down the road at 60 miles an hour. I repeat get a Segway as a supplement to your vehicle. Use it for the short trips (24 mile range on most models) and cut your costs substantially. (Segway's cost less then $1.00 of electricity for that 24 miles). Secondly the Segway runs at 12.5 mph which is 4 mph faster then a car stuck in grid-lock. I repeat, IT and the Segway are the solutions to the problems of today.

On page 193 Carbon Taxes and Cap-and-Trade Systems are introduced by the book;

Carbon taxes are probably the simplest, most effective, and least economically damaging option, because they let the market decide what the best solutions are.

July 11, 2008 the Wall Street Journal wrote an article entitled "Kyoto's Long Goodbye" which addresses these mechanisms silly and wasteful ideas.

The irony is that Kyoto has handed them every reason not to participate. Europe knew all along that it couldn't meet its quotas, so it created an out in "offsets." A British factory, say, buys a credit to pay for basic efficiency improvements in a Chinese coal plant, like installing smokestack scrubbers. This is a tax on the Brits to make Chinese industries more competitive. Sweet deal if you can get it.

and

It gets worse. The offsets are routed through a U.N. bureaucracy that makes them far more valuable in Europe than the cost of the actual efficiency improvements. So far, Kyoto-world has paid more than €4.7 billion to eliminate an obscure greenhouse gas called HFC-23; the necessary incinerators cost less than €100 million. Most of the difference in such schemes goes to the foreign government, such as China's communist regime.

Lets not chase any bunny trails that lead us down this ridiculous waste of money and energy. Recall that Al Gore hasn't reduced his personal large "carbon footprint", he just offsets his abundant use of energy with these bureaucratic Cap-and-Trade Systems. Enough said?

Gasoline taxes are are also recommended as deterrents to people using too much energy.

Most observers agree that the best, and possibly the only, way to achieve a reduction in the amount of oil used in this country is through the price mechanism, particularly in transportation fuels. It seems a pinch in the pocketbook is necessary to make consumers drive less.

It is well known that the U.S. has the lowest taxes on gasoline in the western world. This is the motivation in the authors desire to raise more taxes. I would assert this is the wrong direction on two fronts. Increasing the cost of fuel will impede the productivity of the U.S. economy. Taxes at high levels, such as in Europe certainly deter driving, however, the U.S. out performs Europe by a substantial margin. This is why China chooses to subsidize the use of fuel in their economy. At 18,000 man hours per barrel, the lowest cost producer will ultimately win. That is China in the developing world and the U.S. in the western world. For example France currently has a per capita GDP that is lower then Mississippi's, the poorest state of the union.

It seems the authors are on the other side of the political fence in terms of how and where the solution to these problems will come from. Thankfully they debunk the Hydrogen fuel source as an alternative. Through their calculations they show that Hydrogen requires 5 energy inputs for each energy output. Not a smart direction to turn. What the authors don't mention is the cost of building an appropriate delivery system that can scale to what gasoline is now distributed as. Hydrogen requires stainless steel in all of its pipelines, tanks everything that it touches. And the cost of that is beyond what we are able to calculate with modern computers.

But then again, maybe the authors and I are not so far off in our expectations. On page 239 under the heading "Never Sell Short Humanity" the authors note;

And that's the true moral of the story: Every crisis -- no matter how dismal it looks -- contains the blueprints for its own solution.

And with that I highly recommend this book. For the average consumer, little is known about the complexity and difficulty in bringing the abundant and valuable energy resources to their door, and place of work. This fact-based book refutes many myths on its own and I have pointed out some of where I think they may be a little short. Given the price of the commodities today. And given the volume of words that are being consumed by the energy issues. The solutions will soon be at hand and society as a whole will be able to profit from the peak.

Technorati Tags: People's Peak-Oil Review Energy Books

Google Eclipse day.

Users who are interested in working with developers may be interested in viewing the state of software development tools available today. Google recently hosted a "Eclipse Day" which showed some of the more interesting developments of that tool.

Eclipse is a free software download. The product was originally donated by IBM. I use NetBeans which is a competitor to Eclipse, and is provided by Sun Microsystems. These tools are competing aggressively and provide an unbelievable level of software development capabilities, for free.

One area that will be of interest to Users is the collaborative nature of development today. We have all heard of software that is developed by people who have never physically met one another. That will be the case for the users and developers of the People, Ideas & Objects applications modules. Both will be able to communicate through the tool, the users not having to read or write any code, necessarily, maybe, but can share many different aspects of their work through the tools themselves.

I prepared a YouTube playlist of the five videos here. Each with about 50 minutes of viewing time. Enjoy.



Technorati Tags: People's Video Google Development

Interesting research at Intel

We are all heading towards cloud based computing. Billions are being invested in centralized processing and storage facilities to offer processing and storage on demand. For Google to run their services requires them to own the most processing and storage power in the world. And has anyone stood up and asked if this an effective way to conduct computer based functions? Well Intel has and the results are surprising.

In a document released yesterday, Intel documents the research they did on the processing and network bandwidth demands of the two prominent methods of computing. Comparing "Virtual Hosted Desktop" with "Embedded Application" which relies on remote processing on a virtual server, to "Stream OS" with "Stream Application" which relies on streaming of operating system software to hardware client platforms.

The results show that streaming the operating system and application to the client platform for user based actions was, from a server perspective, far more efficient. 20 clients accessing the server for these services used only 1% of the servers performance. Whereas the "Virtual Hosted Desktop" solution took up to 45% of the server processing requirements for the same 20 clients. Intel even crippled the script of the test for the Virtual Hosted Desktops to remove the high processing required for graphics. I assume that the network bandwidth of data would be small and therefore incidental to the performance of either method.

Sun Microsystems has moved in this direction with their SPARC based offerings, Solaris and Java products. Using the "Stream OS and Application" method provides us with a reduction in processing requirements, and, an increase in performance on the client desktop. The only caveat that Intel mentioned was the initialization of operating systems on the client side could cause momentary increases in processing and network demands. Suggesting that "if" all 20 clients logged on at the same time, the systems may have performance issues.

This "Streaming" architecture provides the People, Ideas & Objects application with the performance and reliability that is necessary for the users. This architecture also allows us to control all the required software necessary for the user to do their jobs. Such that if there were a bug in the systems we would know about it, and who to fix it.

Technorati Tags: People's, Development, Research, Sun, Specification,

Tailor's to the Emperor

I have not been kind to the Emperor's (the oil and gas companies) in this high energy price era. I more or less follow the money in situations like these. And with the energy companies receiving 100% of the revenues from oil and gas, they are the ones that should have done something about it. With the industry leadership meeting in Spain last week, unaware of how this problem came about, I am reluctant to give them any slack at this point. However, in this entry I will provide the energy companies with a temporary benefit of the doubt, and focus on the SAP and Oracle applications, and more broadly the technology community.

To call these Information Technology companies the designers and tailors of the Emperors new clothes makes for the perfect analogy. Particularly SAP and Oracle who command such fees and mind share in the oil and gas market. These firms are complicit in providing systems that are woefully inadequate for the innovative oil and gas producer.

Being the "big" suppliers of systems to oil and gas does not provide their firms with an excuse to sell systems that are inadequate and inappropriate for the market. No one was ever was fired for recommending these big applications, does not give SAP and Oracle a license to sell something that doesn't fit. It is my opinion that you should at least try to understand the market you are selling to.

If the producers where provided with systems that supported the Joint Operating Committee and innovation in general, would the firms have been able to explore and maintain production for the markets demands? Instead they have provided systems that identify, support and entrench the bureaucracy.

There has been a technological revolution in the past 5 years. Has any of these new technologies been integrated into the oil and gas firms? Not that I am aware. It's Stampede week here in Calgary and I can assure you that the marketing arm of these "suppliers" have a good understanding of where their next meal is coming from. Role in another server or two and database licenses for all.

Witnessing this festival of greed during Stampede makes me think I am the only one out of step. Don't solve problems, just sell.

Technorati Tags: People's, Call-to-Action, Failure, Tradition, Trends,

People's value proposition.

In last weeks entry I noted three items that were causing our software development budget to increase substantially. They are;

• Paying the user.
• Undertaking a global scope.
• Employing a 36 hour work day.

This entry will note why these costs are not as onerous as they would be under past software development methodologies. And in turn defining our business model's value proposition.

I am critical of the software development methods used in the past. The SAP and Oracle model have proven successful for their companies, but recall they are applications from prior technology era's. And no one would suggest that the model of "build it and they will come" is relevant today. The two major constraints of an innovative software developer are the code of the application, and the customers that use it. Users that are looking at new and innovative ways of deploying either SAP or Oracle are met with a bureaucratic process that makes changing organizations a much easier task. Upgrading the software comes with high costs and many promises that do little but entrench the vendor further in your organization.

If SAP and Oracle were to spend the required budget to build this People, Ideas & Objects type of application, the producers would end up paying for this code several times over. There has to be a better way.

Why doesn't the oil and gas industry as a whole pay for the ERP system code just once. Why not share the costs of development over the entire industry on the basis of costs plus a percentage for the developer. A developer on this basis would only interest themselves in what makes the software better. And that is the ability to interpret the users demands and build the software they want. If the user wants to scrap a module and replace it with two new ones, based on this proposed business model the developer would be most pleased with that.

This is how I have proposed the People, Ideas & Objects application from the very beginning. An industry wide software development capability, designed and defined by its users, supported by distributing the costs of development across the global producer population. Has their been a software developer that has used this model today? I think Google does it this way and therefore this comparison imputes the development will never stop. The innovative process is iterative and it never stops, why does software development?

It is my opinion that using the Joint Operating Committee in the manner that is defined in the draft module specifications provides me with the competitive advantages that I need to build this software development capability. This advantage is not open to any other software development firm as I have the rights to the ideas secured. This IP based competitive advantage is necessary to ensure that a series of competitive look-a-likes to this development don't dilute the focus to get this right.

In summary this is the value proposition of this software development project.

• Establish an innovative footing for the oil and gas producer.
• Eliminate the constraints of code and customers.
• A "software development capability" based competitive advantage.
• User driven and focused developments.
• Determining and interpreting User needs.
• Charge the oil and gas industry on a software development cost-plus basis.
• Focus the industries actions through management of Intellectual Property.

Join me here.

Technorati Tags: People's, Development, Innovation, Proposal, User,

The IEA gets it.

The IEA has as their guiding principle "Energy Security, Growth and Sustainability through cooperation and outreach." This is the appropriate position for every energy consumer or producer. As consumers we should not limit ourselves in any manner. Acceptance of a lower standard of living, or a future that is constrained by energy, is a defeatist attitude and capitulation of the benefits of globalization.

As a producer the efforts to fulfill that promise to the consumer now comes with extremely attractive financial incentives. Isn't it too bad that the industry, which is at record levels of capital expenditures, is moving backwards in their production volumes. As is painfully obvious to most, the organizational methods of the industry do not enable them to participate in this market for much longer. This is not a job for the bureaucracy.

You can however mark me as surprised when I read the following in the Australian Business;

The IEA's outlook resonated with the views of oil company executives at an industry conference in Madrid, who said the red-hot oil market reflected deep-seated pessimism about the industry's ability to open the spigot to satisfy rising demand.

The industry actually kind of admitted they understand the problem. I have certainly made it clear that the producers management lack the motivation to do anything about it. And it will be the investor class that needs to fund these software developments in order to provide them with an alternative form of organization for their oil and gas assets. This quotation from a number of faceless executives at a conference is the first tangible recognition that a problem exists. We however, do not have the time to wait for these companies to do something about it. Our first act should be to axe the management of these failing firms.

Perhaps one of the most disappointing figures to emerge from the IEA report was its assessment of oil production by nations outside the OPEC cartel. Non-OPEC supply was "paltry to say the least", said Mr Eagles, the IEA's head of market analysis, and had been revised down since last year's market report. He said crude supply from non-OPEC countries would remain at or below 39 million barrels per day over the next five years, though it would rise after 2013.

The Wall Street Journal noted the following in their blog;

Project delays averaging 12 months, coupled with global average decline of 5.2% - up from 4% last year – are the factors behind these revisions. Over 3.5 mb/d of new production will be needed each year just to hold global production steady. “Our findings highlight again the need for sustained, and indeed, increased investment both upstream and downstream — to assure that the market is adequately supplied,” stated [IEA Executive Director Nabuo] Tanaka.

And Yale comes in with the following;

Global leaders fret about climate change and economic growth, throwing out blame in many directions. But finding fault or inequities does little to solve the problem of rising demand for energy and a declining supply, argues Chandran Nair, founder and CEO of the Global Institute for Tomorrow. The bottom line is that the world economy has become too dependent on fossil fuels.

It is tiresome to be reading these quotes about the problem. If you read the 2007 annual reports the companies could not be happier with the situation. They had the opportunity to do something about this almost five years ago. When I proposed this software development solution in September 2003, an idea that they clearly understood, and an idea they stole from me and handed over to Daniel Yergin's company, Cambridge Energy Research Associates to research. Isn't it also ironic that Daniel Yergin's "unprecedented 16 million barrels" of new production never showed up? Good thing CERA's 220 PhD's were'nt as quick as I was in publishing.

If the producers management thought it was such a good idea to spend money on the idea of using the Joint Operating Committee as the key organizational construct in September 2003 with CERA, doesn't this prove they are guilty of allowing this situation to occur? I repeat the management are not realizing this situation in a conference today. Matthew Simmons has been warning about it for almost a decade. These companies are not acting in anyones interest but the self-absorbed managements. Take any companies stock options and calculate the amount they "are in the money" and you'll see how effectively the scam has worked.

For example taking our favorite company in Canada, Petro-Canada, has options that "are in the money" for $410 million. And total 2007 option based compensation (Using $53.62, their end of year price) was $82 million. Just to make sure they don't seem too greedy, they did issue $255 million in dividends. (Note this was a topic of discussion on this blog in 2006, so it is fair to say the management did know about this.).

Technorati Tags: People's, Organization, Failure, Governance, Yergin,

Uh, actually it's three applications.

I was running through the options in how the People, Ideas & Objects application modules can be implemented with Solaris 10 and Java. What has quickly become obvious is that the application that we are building is actually three different applications. Categorized on the basis of either a Producer, a Person or a Joint Operating Committee (JOC). Each category having access to the eleven modules of the People, Ideas & Objects through different interfaces.

The Solaris operating system provides containerized virtual instances of the operating system. For all intents and purposes these virtual instances of Solaris are as separate and distinct to the two operating systems running applications in ExxonMobil and ChevronTexaco. A virtual instance of Solaris is created for each person, JOC and producer company. This provides the separation and access of resources to only those who are authorized. Interactions between instances is through the Java enabled transaction management capabilities.

This provides enhanced security flexibility to each person, JOC or producer company. With each virtual instance of Solaris accessible by the owner they can grant access privileges based on Solaris' 50 user definable roles. Root access is available to be granted to a variety of people who need that access, yet it only provides root access to those areas. Audit, compliance and others will be able to access what they need to do their jobs without the risk of granting global root access to people who need it.

Each of these virtual instance will provide a server side MySQL database that manges the data model for their type of user, a person, JOC or producer. I believe this helps in avoiding much of the complexity and confusion that "might" occur if we ran this application as one monolithic instance. One might assume that the hardware requirements would explode in terms of cost and complexity, and this is where Sun has obviously spent some engineering time. And why this will be run on Sun's network.com or cloud computing platform. Each processor could handle 16 virtual instances, and, are able to scale dynamically to use the number of processors any application may demand. Making the decision to use Sun's cloud computing the equivalent of a "doh!" as Homer Simpson would say.

Technorati Tags: People's, Sun, Software, Development, Specification,

Optimists and Pessimists.

Does anyone still believe there is no problem in terms of our energy supply? Other then the companies themselves, I don't think anyone would assert that all is well, carry on. $140 oil and $13 natural gas are telling the market, "Houston, we have a problem."

Now the level of discussion of the problem is increasing substantially each day. Supply and demand focused discussion contrast the optimists point of view, others document the pessimistic scenarios. What this discussion doesn't provide is any focus on a solution.

Organizational changes, supported by the Information Technologies will provide a solution to the painfully slow, bureaucratic oil and gas producer's. Based on the producers comments over the past few years, that all is well, one can clearly conclude they haven't got a clue. What was reasonable performance for any firm in the 20th Century pales compared to the Global expectations of the 21st Century.

The Information Revolution is the solution to the problems of today, just as the Industrial Revolution was the solution to the over-population and hunger of its day. From an energy consumption point of view having x million drivers stuck in gridlock twice a day becomes one of silliest things that we humans do. From an energy consumption point of view, the car whether it is hybrid, electrical or hydrogen (all pipe dreams) is not the solution. The car died with the cheap energy era, get a Segway. Hauling 200 pounds is much more economical and energy efficient then hauling 4,000 pounds.

What are the potential results of a reorganization of the industry? Many times in my career I have been surprised by the collective capabilities of the industry. Several times they have been able to achieve and exceed the impossible in terms of their collective abilities. We need to tap into this collective capability and accelerate it to a speed that will provide the energy marketplace with reasonable volumes of petroleum. Reasonable volumes that a Segway rider could appreciate.

Technorati Tags: People's, Change, Peak-Oil, Capabilities, Organization,

What a difference a day makes.

I have quoted on several occasions the number of words that are "consumed" in this weblog. Previously I quoted 400,000 and most recently 350,000. Either one of these numbers is impressive in terms of the expression of the idea of using the Joint Operating Committee.

Google is always making changes to the Blogger service that I use. Recently I upgraded to their "Blogger in Draft" service and was able to download the .xml file for the entire blog. To my surprise there are now over 692,000 words in the blog. That's the equivalent of seven books! So much for my previous attempts to calculate this number.

The important aspect of this is the fact that this idea has created such a rich and fertile ground for new ideas in the oil and gas industry. What will be really surprising will be the volume of ideas that the global User and Developer community generates.

Technorati Tags: People's, Ideas, User, Development, Collaboration,

I swear, a day has 36 hours.

Going over the budget numbers for this software development project. In doing so I want to bring back a term that was used in the pre-2000 era technology. That is "burn-rate". Not something that you necessarily want to brag about but this project may have one of the largest "burn-rates" in technology history.

First off I want to note the costs of development in the May 2004 proposal was detailed at $70 - 85 million. Two changes have made these previous development numbers pale in comparison to what they will be in the future. A third change works to expand the number of hours in a day, which leads to even higher annual costs.

As I have mentioned on many occasions, the Users need to be involved in this software development. I have argued that SAP knows nothing of drilling wells and NGL operations. And as a result SAP doesn't work for oil and gas. The need to have the Users involved in development from the start is necessary to get this system right. There is no other way to deal with the issues of determining who, what, where, when, why and how the software has to work then asking the people who hold this tacit knowledge collectively.

OK so the users need to be compensated. Asking them to volunteer their time is an excessive request that extends well beyond the reasonable or even surreal. I have also noted here before that the oil and gas industry is headed towards an annual turnover of $4.5 trillion. I'll bet even Dr. Evil would choke on those numbers. The cost increase that I am talking about here is that the user-to-developer ratio will range from a low of five-to-one and an upper factor of ten-to-one. That's up-to ten User hours for each developer hour.

The second aspect of the original proposal was that it was just for Canadian operations. Back then my thinking was limited to that market, and rather quickly realized that the global audience needed to be targeted. Having only one geographic location being serviced by this application is a reduction in the real value of using the Joint Operating Committee. Besides the supply of energy is a global problem. Therefore, the royalty, tax and compliance requirements of the total population of global producers needs to be considered on top of just the Canadian operational environment.

Lastly I want to add fuel to the fire of my adversaries by noting that the compression of time is something that will be implemented in this application. Instead of budgeting for four years, I think it can be done in two and half years to initial commercial release. (Maybe even less!). We are approaching a systems use that may start the day in Russia and China, move to the Middle East, Europe and then the United States. Users from these regions will be able to collaborate in an asynchronous manner. Hence providing for potentially a "day" of user driven development that totals 36 hours.

To deal with this wealth of information we need the developers to be writing code at approximately the same pace. I have thought about this and have come up with a one-third, one-third, one-third solution. Each third of the time allocated to developers will be sectioned off in the following manner. Open-Source developers, Sun Microsystems and Indian based development houses.

Open-Source developers will be welcomed in this development and be able to add this project to their client list. These people are generally doing what they are doing because their recognized skill set is exceptional. The type of developers that are able to produce ten fold what other developers can do.

Sun Microsystems developers. And here we are accessing the Solaris, Java and MySQL developers. Sun has hired many of the best developers in the world. I also believe that this project will be the first test of Sun's integrated environment, and it is therefore incumbent upon them to prove to the world that it is a viable environment. Essentially setting the bar as high as has been attained in terms of technological risk and implementation.

Lastly I am a fan of the Indian based model of software development. That these are offered at a discount is only gravy for this projects budget. Although they may be fairly new to the overall development world (in terms of the fifty year history of computing) they have inherent advantages in that they speak on average 7 different languages and communication becomes their forte. After all Java is only another form of communication. Secondly they are able to fill in the gaps of time in our 36 hour clock. Lastly they will be a quick and efficient resource in terms of taking many of the boiler plate technological frameworks that exist today and implement them in our code. What I mean is the PPDM, (Petroleum Producer Data Model), XBRL, (Extensible Business Reporting Language) of the SEC, Alberta Crown Royalty frameworks etc. These have become the building block of many companies and we will be able to leverage heavily off this infrastructure.

That in a nutshell is how we will develop the eleven modules in the People, Ideas & Objects application. Anyone want to guess what the total cost will be? I think the annual costs are quoted in the B (Billion) range. This also does not impute the Users and Developers are chained to a desk for 8 hours a day. Some Users, and some developers may only contribute a total of eight hours to the project and some will find life-time employment with this project. Life time employment, as Google has shown, development never stops.

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