Exxon, Shell, Apache...

The issue of declining production has struck the majority of producers in the oil and gas industry. The New York Times suggests total production declines may reach over 600,000 boe / day. Exxon, Shell and Apache, just as many others have reported, are showing a trend that supports the hypothesis of this blog's preliminary research report. That being;

• The corporate hierarchical organizational structure is an impediment to progress and most particularly innovation.

• Determine if the industry standard Joint Operating Committee, modified with today's information technologies, provides an oil and gas concern with the opportunity for advanced innovativeness.

Producers have also been spending record amounts on capital projects. Much of this increased funding is diluted by the costs associated with too-much-money chasing too-few-skills. Nonetheless producers are involved in a record number of projects. How often in life has doing more of the same; worked to mitigate fundamental changes in an industry?

Within the interpretation section of the preliminary report I suggested;

It is suggested in this research that the speed that a bureaucracy can adapt and change is inadequate for the operational demands of a future oil and gas operation. Innovation within the oil and gas industry will be required in order to keep up with the natural and increasing rate of decline in production. Where the sciences of geology and applied sciences of engineering, which cover a broad range, will need to progress substantially in the next 10 years in order to achieve the demand requirements of the North American energy consumers. p. 71

This claim of mine seems to have a tenuous hold on the legitimacy of me asserting my hypothesis is correct. What evidence is there that the dynamics of the underlying earth science and engineering disciplines have expanded to a higher level of understanding? A level of understanding that a bureaucracy, however large, is unable to comprehend or implement.

Possibly one of the most appropriate statements that has developed in 2008 is "the easy oil is gone". Captures the entire situation very well in my opinion. I'll be the first to agree that the contents of the preliminary research report were only extensions of my "sensing" that the demands of the business were accelerating beyond the bureaucracies capabilities. After 30 years in the business it was generally known that things were getting tougher, much tougher.

And not to discount the research that was done in the preliminary report. That of Professor Giovanni Dosi clearly defining what innovation is and what is necessary to be innovative. Or Professor Anthony Giddens Structuration Theory. A theory that suggests People, Society and Organizations move in lockstep, or failure will occur. I think we clearly see the current demands of society and people being ignored by organizations. Although no failure has occurred, one does not have to look too far. And Professor Wanda Orlikowski's Model of Structuration which suggests technology is a defining and reinforcing component of society. A model in which I coined the phrase "SAP is the bureaucracy".

The subsequent discovery of Professor Richard Langlois research on Transaction Cost Economics, The Boundaries of the Firm, and Market definitions. Dare I forget McKinsey Consulting's grounding of these theories in the current business environment. That the hypothesis and conclusions are based on this academic foundation prove that the Joint Operating Committee is the key organizational construct of the innovative oil and gas producer. At least that is what is proven on paper. As we know the ability to subject a field of study to a paper document provides proof of the concepts contained within the written word. People are still trying to test the theories of Albert Einstien's, theories that he published in the very early 1900's.

Professor Thomas Davenport has also contributed to this research. His blog (his feed ) is frequently highlighted for some of the current thinking he has in business today. In the preliminary report I quoted him from "Strategy and Structure of Firms in the Attention Economy" stating;

Strategy and structure are mental constructs, important not in themselves, but for their impact on people in the organization. Strategy and Structure are also the vehicles for focusing attention. p. 51

But what tangible proof is there that these hypothesis, conclusions, research and concepts are valid? I sarcastically suggest two alternatives;

1. We continue the debate of these "theories" with industry for another five years.
2. We begin building the systems based on these concepts.

I naturally conclude that point two is the choice I would recommend. Producers are being allocated the financial resources to fuel the innovation that commodity markets are demanding. Since these financial resource's are being distributed to managements pockets, I ask what's the risk?

Still not satisfied? I suggest that you select the "Call-to-Action" label of the blog to review the 45 posts that provide even more grounding for these theories validity. Or, review the Draft Specification for this software development and see how fundamentally different and capable the JOC is to enabling innovation in the oil and gas industry. I have also posted the Preliminary Research Report on Innovation Within Oil and Gas in three knol pages here, here and here.(Editing not complete.)

Lastly, please join me here.

Technorati Tags: People's Research Call-to-Action Plurality Strategy

Filthy Rich Clients

Sun Microsystems have released the "Preview SDK of JavaFX". This is Sun's response to the various development frameworks involved in web based user interfaces. Microsoft's Silverlight, Adobe Flash, and other rich media application frameworks. These frameworks are able to provide what is expected by users when they demand Rich Internet Applications. The best video on the site is SunEVP Rich Green demoing many of the capabilities of this addition to the Java language. (No Link)

JavaFX provides audio, video, 2D and 3D rendering on the Java Virtual Machine (JVM). JavaFX provides developers, designers and users with the ability to have the most visually rich interfaces to their applications. In my opinion this is one of the most important developments to the Java language. That is for a variety of reasons but for users of oil and gas ERP styled systems such as People, Ideas & Objects, rich media is critically important.

Just as no one would provide a green screen textual interface to a user today. The time has come for users to demand much more from their systems interface. More information about the actions that are happening of the users interest. What do I mean? Providing subtle hints in audio, visual and textual clues that certain actions are starting, running or completing. Maybe a user is in the Analytic & Statistics Module and wants to know when a complex algorithm is finished. The information is of critical importance to some urgent work been done by the user for an oil and gas producer. But the user also has over 50 other tasks that are overdue for other producers. The system should provide a subtle, but definitive, indication of when the users attention is required over the noise of the other 50 tasks.

Defining the need for this type of interface in the People, Ideas & Objects application modules is difficult to articulate. What I expect to see through the development of these systems is an iterative increase in the productivity of the oil and gas user. Quantum increases over the performance of today. If man can develop their mechanical leverage of one barrel of oil to offset the labor equivalent of 18,000 man hours. We should be able to achieve similar leverage metrics from an intellectual point of view. As much as computers have enabled our lives and increased the productivity of workers, I am certain that I would have concurrence that we have not attained anywhere close to the 18,000 fold increase in leverage that we should expect from computers.

JavaFX is an important component in implementing the systems interface to the level of these expectations.

Technorati Tags: People's Sun Java Development Architecture

I knew this was the right path.

Were traveling down a dark and unknown path in this software development project. Much of what has to be discovered and learned is determined by feel more then any blueprint or map. I think this project is 100% on target to be successful in making the oil and gas producer execute its plan's faster and more innovatively. Today we have some proof that we are in the right place and time to achieve the success we desire.

Some research was carried out on the Service Oriented Architecture (SOA) type of software delivery model. Click on the title of this entry to be taken to the research web page. This article suggests the odds are against us with only a 20% success rate in the SOA business model. It also provides a guide as to what we are doing correctly. And I think a clear understanding of where we need to move to in order to achieve the success that we are expecting.

What are we doing right;

Failed SOA projects get too focused on the means rather than the end. The failure to focus on business goals is a problem and focusing on them is the solution. There is sometimes a failure to ask the most basic questions in building the business case for SOA. Why should we be building services? What does it mean at the end of the day?... While one of the business drivers for SOA is reducing costs and achieving return on investment (ROI), ROI for SOA remains an elusive goal and SOA project leaders frequently take a leap of faith where ROI is concerned.

People, Ideas & Objects is about identifying and supporting the industry standard Joint Operating Committee (JOC). Aligning of its financial, legal, operational decision making and cultural frameworks with the compliance and governance framework. Compliance and governance being the sole domain of the bureaucracy, the separation of operational decision making and compliance and governance is a recipe for disaster. Nonetheless, the stated objective of this software development project is to enable;

"This community, using this software in their own service business offering, will be the method and means that the oil and gas producer will conduct its most profitable commercial operations."

This is not about the technology. It is not about project management. Although this project uses these two disciplines to achieve the stated objective. This is about getting the business of the oil and gas producer in alignment with the rapidly changing earth sciences and engineering disciplines. This alignment facilitates innovation and enables the oil and gas producer to keep pace with the changes in the underlying sciences.

and

1. Business and IT reorganization, usually with a new CIO coming on board
2. Sponsorship at the C-level or by the Board of Directors
3. Agile/iterative development methodologies put into place
4. Projects tied to and measured by business goals, not IT drivers
5. Well-defined funding and maintenance models that balance the needs of service providers and consumers
6. A simplified architecture, making it easier to access and manage quality data
7. A culture of trust between business and IT

Here we have a mixture of opportunities and problems. Item #'s 3, 4, and 6 are in place in my opinion. Item # 1, 2, 5, and 7 are hitting on the one area that has caused this project to struggle, money and trust. This may be a short term problem as the community involved in this software development continues its logarithmic growth in the U.S. I fundamentally mis-trust the companies I highlighted in my review of stock based compensation. These little piggies attempt to steal this project from me during September 2003 and April 2004 has left a bad taste in my mouth. As such I will not miss them. I however am willing to fully participate with the U.S. and British based industries and any other region that wishes to participate. We have much to do, and as you may have guessed, I have a driving passion for this project.

With that in mind I am frankly grateful for this next set of recommendations.

• Define the business cases clearly. If you can’t, don’t do SOA
• Empower those who need to drive the systemic change that SOA requires, typically, with the money and the authority to do something. Else, don’t bother. You need to control the money and be able to fire people if this is to work in a reasonable amount of time. Otherwise, you’re in endless meetings with people who have agendas that don’t include rebuilding the architecture for agility and reuse.
• Think long term and strategic, not short term and tactical. It’s okay; things won’t collapse as you move from a reactive to a proactive mode. Indeed, that’s how companies win their markets.
• Start small, but keep the momentum going. Small battles win the war, and little by little the architecture will get better if you just keep moving the ball forward

I have a fear of the issue that these points intimate. We don't need to follow any blind bunny trails and desperately need to keep the focus and tract of development in-line with the needs of the producers. However, we need the resources to build this project. If as I suggested a few weeks ago the scope of this project might be in the billion dollar range, over probably four years. The smooth application of the financial resources over the life of the project is the obligation of the collective group of project sponsors. This project needs to be managed on a basis that delivers the application with these constraints and difficulties in mind. This I will diligently work toward.

Which leads me to reiterate the value proposition of this software development project. The costs of development are allocated to the producers on a "per barrel of oil / day" basis. These costs are incurred plus a percentage of those costs for the project. The costs therefore are a small percentage of what the license costs of SAP or Oracle. Once the project is released in a commercial offering the costs of supporting and further developments will be handled on the same basis.

This article brings out another point that was assumed but never identified or communicated. The SOA model within an oil and gas company doesn't provide the value an industry focused SOA solution does. Does this mean an SOA denotes that it is an industry focused solution? I think it does and it seems this research indicates that conclusion may be valid.

Technorati Tags: People's Architecture Knowledge Learning Research

But can this project scale?

Many people look at a start-up such as this project and say, it'll never work, they can't scale. I look at the existing infrastructure of SAP and Oracle and say, it'll never work, too much code and too many customers. How's that for different points of view.

The constraints of organizations are quickly becoming the impediment to growth. That is by removing the constraints, growth will accelerate. Look at what has happened in the technology marketplace in the last ten years. Apple reacquainted itself with Steve Jobs and restarted the organization essentially from scratch. New designs, new processors, new operating system with 5 major upgrades, invented the iPod, iPhone and who knows what else exists in the man's mind. It's now 3 times the size of Dell.

Google has started as two PhD students with some fancy search algorithms. Ten years later they have built one of the most prolific cloud based product producers. And Microsoft continues to spawn vaporware in every product category as a means to sew Fear, Uncertainty and Doubt (FUD). The performance of the start-ups in the last ten years vs. the industry behemoths has created more value then the behemoths have lost.

Sun Microsystems have two projects Project Hydrazine and Project Caroline. There is a very informative (technical) podcast that you can listen to on Project Hydrazine here. These two projects provide People, Ideas & Objects with the ability to scale better then SAP and Oracle.

Lets look at the Draft Specification - Security & Access Control Module of the People, Ideas & Objects application. This module uses the Federated Identity products of Sun Microsystems. (I recommend you watch the four minute video with the perspective of a JOC in the forefront of your mind.) I take these tried and true applications and implement them in what I believe to be the greatest level of security and user friendliness. I do this development on Project Hydrazine and then deploy it their as well. Suddenly the users of this application have a state of the art Security & Access Control module capability. I provide the major accounting firms with the necessary access for compliance and boom, the job is done.

Well maybe not that easy, but far easier then the two ERP vendors I mentioned earlier. They have a lot invested in their code. They can't, and won't, throw that code where it belongs, even it is not up to the quality necessary for compliance. The reason they don't want to change is that it will take them the better part of this century to change the user base over to the better product. Constraints of code and customers for a software firm are the impediments of growth. I'm certainly pleased that I have neither code or customers at this point in time.

And that is the point. When I do commit to the code, it will have to be in such a fashion that I am not undertaking a huge infrastructure that needs to be built to support it. I hire Sun through Project Hydrazine to deploy the application and run it on their servers. I think they know a few things about that, and they sure are motivated to be the best.

So can this project scale? You tell me. And don't tell anyone but I feel like I'm cheating.

Technorati Tags: People's Sun Software Strategy Specification

The Draft Specification has moved.

I have moved the Draft Specification from the old wiki to two Knol pages. The Draft Specification is no longer accessible from the wiki. The first part is here and the second part is here. Knol makes it much easier to read and navigate.

Most of the text has been edited, Modules like the Security & Access Control are being rewritten and / or heavily edited so check back frequently for new information.

Technorati Tags: People's Specification

In a word, Whiplash.

U.S. Energy Secretary James R. Schlesinger (1977 - 1979) once stated that energy is framed by two emotions, complacency and fear. There is an air of complacency since the oil price has fallen over $20. How distant the problems of earlier this month seem. It almost makes sense to fill the tank again.

How much of this price change is the result of the inventory builds in the U.S. is unknown at this time. Over the past two weeks we have seen exceptionally large builds as it is rumored that U.S. consumption dropped substantially. The two weeks of inventory build was preceded by an unusually large draw down of inventories the week before. I hope this is a sign of the effect of higher prices on consumer demand, but I think we may also be in for a bit of a surprise.

In Supply Chain Management there is a phenomenon known as whiplash. It is an appropriate phrase as the analogy to whiplash is appropriate. You learn the intricacies of this phenomenon by conducting a simulation of a beer supply chain. The retailer, distributor, warehouse and brewery are each represented by four individuals. The objective is to keep the appropriate amount of beer in stock to satisfy your companies needs.

Starting off the game with minimal supply in each location you begin by passing information confidentially from one area of the chain to the immediate neighbors. What happens is as the supply demands fluctuate the effect on inventory begins to switch between the two extremes. One moment you have an excess, which reduces your next order, then you are faced with a draw down of inventory and the supply never recovers. The phenomenon once it is in the supply chain is very difficult to remove. The variance in inventory at all four locations are providing absolutely useless information.

If as I suspect, whiplash has entered the U.S. inventory of energy, then we may see the resumption of demand and a significant draw down in inventory. Leading to price increases and so on...

Technorati Tags: People's Market Data Failure

The End of IT As We Know it

Click on the title of this entry to view an interesting Sun Microsystems Net Talk that was produced in October 2007. It has some interesting statistics and opinions on where the Information Technologies (IT) are headed.

For instance, the number of people that Sun employs is 34,500 and over 25,000 of those are not assigned a permanent office or working environment. Many work from home or work occasionally in meeting rooms. This is how I see most industries operating and particularly the oil and gas industry. The mandatory attendance in your office from 8:00 to 5:00 will change to a more flexible schedule. The oil and gas industry operates 24 hours a day and this will be reflected in people's schedules. Another reason will be the time zone changes in the area of operations of the producer. Fuel costs on the daily commute may also become a primary reason for this change.

Java has 6 million developers. One for every thousand people in the world. Java has been the number one programming language for a number of years so this is not surprising. The ability to source the numbers of developers that are necessary for this project should, as a result, be easily accommodated.

Other comments in the presentation were around the concept of the "Enterprise computing in the open network." The costs associated for each company to build the appropriate data-center for their needs is quickly outstripping what is reasonable from a cost point of view. The reason is the demand for processing during peak loads is causing the companies to source additional processing capabilities. This is the beginning of a trend that is discussed in this video. A trend that is the reasoning behind Sun making the claim that a firm will have 100% of its processing, applications and networks provided by service providers. This is also the basic assumption in the People, Ideas & Objects application.

In oil and gas having the hardware, applications and network in-house does not provide any competitive advantage. The innovative producer has the land base and physical assets augmented by their understanding and application of earth sciences and engineering capabilities. IT is a cost that is best handled on a service basis. And as the Net Talk points out, services hosted by providers on the Internet. The presenter, Bob Worrall, Sun's CIO points out that this trend will be the end of the traditional Intranet and Data-center. The role of IT within the firm will involve aggregating the relevant services and distributing them. IT will be involved in management of the service providers.

An area that Sun is addressing at this point in time is the area of access control and security. You can watch a good summary provided by Craig MacDonald. Sun Federated Identity is a component of the first module in the People, Ideas & Objects, the Draft Security & Access Control Module. A module in which we are layering the Military Command & Control Metaphor over the Joint Operating Committee participants and those that work for them. This module provides access to the IT resources necessary for People to do their jobs. Providing the producer with access and assurance that data and information are provided to only users that are authorized. This area is a key differentiating point of all other systems providers and the key reason that I have used Sun Products exclusively in the Security & Access Control Module.

Sun suggests that billing is the issue or impediment to full deployment of this changed IT environment. It is difficult to quantify and value every transaction in a service level offering. What I think is needed is an overall service that is billed, based on the size of the producer, that covers the associated costs that are incurred by People, Ideas & Objects in providing that service. This will have to be something that is discussed when we move toward the deployment of this application.

On a related theme, Cisco has a number of videos on YouTube about their new "Tele-Presence" product. Although expensive in comparison to video chat, I think Cisco has identified a market here. When you have large numbers of people needing to sit down in a meeting on a regular basis, the services of Tele -Presence would help in facilitating that communication. Although costly from the point of view of an unproven technology, I think it may pay for itself in reducing flight and accommodation costs, and increase productivity through better communications. Have a look.

Cisco Tele-Presence

Technorati Tags: People's Sun Development Security Trends

McKinsey Managing Capital Projects.

This is number 38 of the long list of McKinsey articles. They are clearly making the organizational implications of Information and Communication Technologies (ICT) their specialty. Nonetheless this article talks about the managing of capital projects in the oil and gas industry. In the Draft Specification there are many new and innovative ways that capital expenditures are handled. A few key points are;

1.  Petroleum Lease Marketplace - The aggregation of the producers five year capital expenditure budget by geographical area. Such that suppliers and vendors can see where the industry is headed in terms of their needs. Providing the supplier with a window on the producers long term needs. 
2. Accounting Voucher - The best description of this module is that we are moving away from people managing the processes of transactions. And taking the higher level work of designing transactions. Tactical Project Management is the area within the Accounting Voucher module that handles these.
3. Compliance & Governance Module - This is where for a variety of reasons the Strategic-Project Management function is managed.

These modules work together to provide the tools for the industry. Both producers and suppliers, will work together on determining the project size, sourcing and tactical project management of the overall industry resources needed to satisfy the producers needs.

One criticism of the industry is that they overuse a handful of suppliers, and under use the rest. In essence they are holding a higher expectation of performance from their primary suppliers and the rest satisfy themselves on the bits left over. This has led the industry to the current situation where the volume of work being done exceeds the capability of the service industry. What is needed is a different approach. One in which the producers work to increase the overall capacity of the service industry. Then they will be able to effectively deal with the cost overruns and scheduling delays.

In the Draft Specification the modules mentioned provide the opportunity for the producer to plan the contract with the supplier and work with them to offset their weaknesses and build on their strengths. The majority of this transaction design is done through the Joint Operating Committee, as it is the "market" definition in this software application. In the McKinsey article this is the focus of the discussion and therefore lets begin.

Subtitled "Investments in capital projects is rising. First-rate contracting will help companies to get a leg up on their rivals." With most people consider the energy industry needs to invest up to $20 trillion in capital expenditures in order to meet the markets demand for energy. I don't think there is any doubt that the current state of capabilities of the companies is unable to approach even today's capital expenditure volume. Chronic cost overruns and project delays are symptoms of the low level of capability. Commodity prices have adjusted to make the investments profitable. Things need to change from an organizational point of view and the producers need to undertake a greater Project Management capability, and, begin working with the suppliers more closely in terms of developing their capacities and capabilities. McKinsey reflects on the issue;

Many of these undertakings are larger and more technological complex then ever. The result is heated competition for the basic materials, equipment and talent that all asset-intensive industries need to deliver multi-billion-dollar capital projects successfully. p. 1

and

Many asset owners are however struggling. Some companies approach every capital project as an isolated, individually tailored undertaking and fail to align the contracting efforts of individual project teams with their long term capital strategy. Others hastily lock themselves into agreements; choose inappropriate contracting models; or misjudge the risks, organizational resources, or skills that capital projects involve. Such mistakes generate missed opportunities, significant delays, and cost overruns in the hundreds of millions of dollars. p. 1

As is the case in many industries today the advanced economies have the additional problem of aging infrastructure. China and India are able to build with modern more efficient methods unconstrained by "the way it's done". The advanced economies infrastructure is rusting, as Matthew Simmons suggests, and will compete for the capital of the producer companies. Add to it the largest regulation and engineering requirements and you have a situation that's complexity is not being addressed by the producers current capabilities. In addition, McKinsey notes, that capital expenditures of all industries will increase from $54 Trillion in 2002 - 2007 to $71 Trillion in 2008 - 2013. Demand for the skills that are currently in short supply must be developed by the industry itself. Blaming the cost overruns on the service industry is the wrong approach.

Two of the biggest problems that I deal with in this project is how to break the mindset of the user and developers from what are called the motivational and cognitive paradoxes. These two paradoxes were discussed in the preliminary research report and are derived from the work of Sir AnthonyGiddens. Professor Professor Wanda Orlikowski defined them as follows;

"Based on extensive studies of user's experience with word processors, Carroll and Rosson (1988) identified two significant paradoxes; The motivational paradox arises from the production bias. That is, users lack the time to learn new applications due to the overwhelming concern for throughput. Their work is hampered by this lack of learning, and consequently productivity suffers. The cognitive paradox has its root in the assimilation bias. People tend to apply what they already know in coping with new situations, and can be bound by the irrelevant and misleading similarities between the old and new situations. This can prevent people from learning and applying new and more effective solutions." (Cox, Delisle 2003)

In other words change is not in our genes and clearly change is in the cards. I believe that systems are a big part of breaking these things down. If we use SAP we are constrained by the views of the developers who made that application for GM. If we ask the users what it is they do and in turn learn the entire scope of the industry understanding and apply that to the development process I think we have a chance of approaching the issues that McKinsey states in this article.

Heightened competition can increase the damage caused by poor decisions and, in some cases, make them more likely. p. 3

We see this phenomenon playing itself out in the tar-sands of Alberta. Too many producers attempting to do too many things all at once. The result is heightened competition, cost overruns and systemic project delays. These projects have a remaining work in progress capital budget of another $200 billion. If the industry is to achieve the level of market demand for energy it must approach this capital spending problem before the brain trust retires.

Another definition of the same problem is provided by McKinsey;

Meanwhile cultural factors -- notably many asset owners' strong focus on engineering -- shape an environment that doesn't value commercial skills highly. p. 3

This is an oil and gas business that is generally operated by the earth scientists and engineers. Commercial criteria don't necessarily get considered as McKinsey states;

At one industrial company, for instance, engineers defined the parameters for a new plant so narrowly that a critical piece of equipment could be obtained from only 2 suppliers rather than the 50 that might have been possible with a more sensible approach. p. 4

The solution that I propose to this problem is contained within the modular Draft Specification. Designing transactions to consider the elements that McKinsey raises in this article is the area where much of the research that was done in defining the Draft Specification. Professor Richard Langlois' research in understanding the component costs of transactions helps to understand where the costs of transactions occur. McKinsey addresses the same issue with a recommendation of three methods.

   1. Creating optimal delivery models for their deal.
   2. Orchestrating contract-award processes to ensure strong competition among the suppliers.
   3. Structuring supplier contracts to align the suppliers' incentives with their own. p. 5

These issues are projected to become critical in the next five to ten years as the brain trust of the industry retires. I have suggested, and defined within the Draft Specifications, that companies can no longer afford to build individual silos of capacity and capabilities within each firm. Companies need to pool their resources and talent through the cultural form of the Joint Operating Committee. Doing so will enhance the industries overall capability by reducing the duplication inherent in the development of each silo'd company.

With the demand for project management skills developing as noted in this article. It would seem prudent to ensure that the right approach be taken. The oil and gas industry is currently suffering with project delays and cost overruns. I would assert that they are not pursuing all the areas that need to be addressed due to shortages in these areas. It seem unreasonable in this day and age that the ability to expand the capabilities of the industry doesn't include organizational design and systems development. Join me here.

Technorati Tags: People's McKinsey Organization Innovation Collaboration

New Institutional Economics, A Guidebook.

This may become mandatory reading for the users of this software development project. That's all that I can say after I read the table of contents of this book. (Click on the title of this entry to go to the editors website.)  I can't wait until its published. (Some time in August.)  In fact I think I will buy one for each of the users that are signed up for this development.  Just reading the chapters makes me drool. Here is the introduction from the editors website.

Institutions are today recognized as the main drivers of differences of performances among industries, nations, and regions. Thanks to Ronald Coase, Douglas North and Olivier Williamson, New Institutional Economics has been developing a comprehensive and consistent knowledge about the infrastructures required for the performance of an economy. The field is burgeoning with researches on firms’ organizational strategies, the reshaping of industries, the design of markets, alliances and networks to manage innovations, the interplay between private self-regulation and public ordering, the performances of alternative legal systems, the respective role of formal (e.g. legal) and informal (e.g. beliefs, customs) institutions, the design of political and constitutional systems, the management of reforms, development and transition policies, etc.

and

To carry out such a program, multi-disciplinarity stimulates cross-fertilization among political sciences, anthropology, sociology, management sciences, law, and economics. The goal of this book is to provide theoreticians, practitioners and advanced students in economics and social sciences with a guide to reconcile these many developments and better grasp the underlying methodologies. Based on contribution of recognized scholars, it draws a synthesis of the current knowledge and identifies the most relevant questions to be explored.

Kind of makes you feel we are on to something here.

Technorati Tags: People's Books Organization Change

Something's not right.

As expected Encana announced their second quarter earnings. I'm having problems reconciling what my expectations were with what is reported. These are the points that I can't resolve.

Earnings were down slightly on higher revenue from prices and some production increase. Revenue was up 37% over the first quarter. The first quarter recorded a $1 Billion hit to revenue reflecting the losses from their derivatives. If prices are up, why would the second quarter hit for derivatives be only 25% of what was recorded in the first quarter. For Encana to experience a 37% increase in revenues would require them to experience a 62% increase on the 60% of production that is not covered by the derivatives contracts. How did the company experience that?

Secondly, the amount of text that is written about the actions of derivatives trading is voluminous. Pages of notes detailing in every conceivable table the present situation. With realized and unrealized losses from derivatives trading. What is however different here is that the financial statement treatment between the first quarter and second quarter, for derivatives is changed. The first quarter has the $1 Billion hit from derivatives listed as an offset to revenue. In the second quarter that is changed with a note to the statements that the change in reporting is due to the splitting of the company in two in December 2008. A split that has not been approved by the shareholders. And a cryptic comment that the derivative losses when realized would be allocated to the appropriate operation.

I don't honestly understand the situation that I detailed here. I used an average gas price of $11.00 for the quarter. Encana experienced gas prices of $10.93. The derivative loss for each unit of gas is $2.53. Calculating that on 1.6 BCF / day for 91 days production is $368 million not including the royalty effect. For the oil derivative on 23,000 bbls / day for 91 days at $70 equals another $105 million. The royalty effect is only on gas and that would have added another $103 million for an overall total of $576 million just for the second quarter.

It was my assumption, maybe incorrectly that the mark to market required the calculation for the remainder of the derivative contract. Why would you continue to mark to market the second half of 2008 on the basis of the contract price when the market price is so much higher?

It is of course always possible that I am incorrect in my calculations. I don't have enough information to fully reconcile the effect on earnings but I will certainly keep my eye on it.

Technorati Tags: People's Management Failure