Cisco's John Chamber's on MIT video

Subtitled "Building the Next Generation Company: Innovation, Talent, Excellence."

And we are back once again. I have not solved all of my technical issues, but I should be able to post every business day.

Outside of these technical issues my biggest problem is that it has become obvious to most people that addressing the organizational structures of companies is needed. The economic difficulties we are experiencing are providing the opportune time for the future leaders to implement the changes in their industries. The sheer volume of analysis being conducted on this topic has grown exponentially. Not only has the quantity increased, but the quality of the ideas being generated has improved. Much of this thinking is directly applicable to the work that I suggest we undertake in the oil and gas industry.

This current video from MIT promises to provide some valuable input to those people that are interested in this project. I previously reviewed an MIT video of Cisco's Chambers a few years ago, and was very impressed with this man's communicativeness, if that is a word. He is a truly impressive and articulate presenter. So lets dig in.

Not willing to hedge his bets and mitigate the consequences of what he says. Chambers fires his first comments with this sweeping declaration. Show me a leader in oil and gas that has the gumption to say these types of things.

What is exciting is what has changed and at the same time what has not. When you look at the future of companies, I think we are going to see the most fundamental changes in business and government. Moving from command and control to truly collaboration and team work.

Noting the recession is definitely taking hold, Chambers states that this is the opportunity to make the necessary changes. At around 6 minutes he states the following 3 points as his economics 101 prescription for addressing the economic impacts on your firm. 

1. Understand the effect on your company. Was the problem the consequence of your own actions.
   
2. How long do you think the recession will last and how deeply will it affect your firm.
   
3. The first action that should be taken is to prepare for the upturn.
   

Chamber's states governments role in the economy will be expanded. Something that I have noted in the business model of People, Ideas & Objects. Governments, and particularly those that have oil and gas production as part of their economy, have a vested interest in making this software development project go forward. The second point relates to all industries. Governments need to support the software industry much in the same manner and mindset in building the "Eisenhower Interstate". Software is the future's infrastructure, without it the future will not be as efficient as it could. 

Chambers goes on to comment that creating a change mindset scares people. Providing a vision  helps people to understand and to support the changes that are necessary. The vision I see for the oil and gas industry, as reflected in the Draft Specification, provides an understanding of how, by using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer, it will provide the producer with the mindset and higher performance necessary of the future economy.

@ 12:30 Chambers talks specifically about business model innovation. Throughout this time he talks about the volume of productivity growth. That the Information and Communication Technologies would provide the ability for economies to exceed the expected productivity performance of most economists. From Chamber's perspective IT is not a cost, but an investment that provides real returns.

@ 16:20 Chambers recalls a discussion he had with Alan Greenspan of the Federal Reserve. Talking about the possibilities of heightened productivity from IT he notes that Greenspan stated "A new generation of innovation would be around the corner". Chambers I think has been one of the largest proponents of using IT with new business models and organizational changes. I only state this to square the circle of how these enhanced productivity volumes are achieved.

@ 18:28 Chambers notes that Cisco has moved from 1 or 2 major initiatives up to 26 initiatives in a single fiscal year. Reflecting the volume of work that is truly possible by innovative firms. Might I say that the oil and gas industry needs to up its performance in a manner similar to what Cisco has achieved. 

@ 29:00 Chambers begins to talk about the way that he works today. He blogs. And that is how he communicates. Wikis are proliferating through the organization. And the majority of his meetings are held virtually through Cisco's use of their own "telepresence" products. I had previously wrote about these products here. Chamber's reflects on the dramatic impact Telepresence has made on his travel schedule compared to three years ago. 

To participate in building the types of systems that are needed for a highly productive future in the oil and gas industry. We need to build the software that identifies and supports the Joint Operating Committee in the manner that the Draft Specification describes. We can begin that by readers joining this community by following these instructions.

Towards the end of the video Chambers begins to sell the Cisco Telepresence product line.  I am one that certainly has drank the technological kool aid and include the value of face to face virtual meetings as a critical part of this software development project. But there is a larger point that I would be missing if I did not state the value of face to face virtual meetings of the representatives of the different producers sitting at the virtual Joint Operating Committee. If, in addition, these people were supported by the kinds of business tools that are discussed in the Draft Specification, then I think we can see how the industry could expand the number of initiatives it undertakes and the society as a whole be able to depend on the energy industry to fuel their imaginations of what is possible. 

Please, join me here.

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Technical difficulties...

Have precluded me from posting. With the loss of my third and last computer, posting will be light.

McKinsey, Strategy in a structural break.

I can see this is going to be an all McKinsey month. McKinsey have undertaken a comprehensive revision of their website, and have now followed on with an increase in their sites content. This series appears to consist of 19 articles and I will be highlighting the pertinent ones in a series of blog posts this month. Our first document, as typical of McKinsey documents, is topical to the work that is being done in oil and gas, innovation, and People, Ideas & Objects. The subtitle or introduction begins within the context of our current economic situation;

During hard times, a structural break in the economy is an opportunity in disguise. To survive—and, eventually, to flourish—companies must learn to exploit it. p. 1

The world is quickly realizing the depth of the current economic difficulties. Whether we are in a deep recession or depression is the debate currently taking place. We certainly have much to be concerned about and will need to be mindful of the economic difficulties. We also have a variety of opportunities. If we look at this time as a clean slate, our opportunities are magnified substantially. Now is the time to ask, "what can we do", with corporate accountability, organizational performance, innovation and a brighter future being what is possible. An opportunity that we can call ours, if we take the opportunity. That is what this McKinsey article is about.

By strategy, I mean a cohesive response to a challenge. A real strategy is neither a document nor a forecast but rather an overall approach based on a diagnosis of a challenge. The most important element of a strategy is a coherent viewpoint about the forces at work, not a plan. p. 1

The author rightly criticizes the "strategy" term to describe anything that may be happening with the firm. In that context this quote puts the strategy much clearer in my opinion. If we took the times that we are in and formulated a "real" strategy; and approached this depression from the viewpoint of a diagnosis of a challenge. We begin to see the People, Ideas & Objects software development project in line with this thinking of now being a great opportunity. The results of which will be going to winners and losers in the oil and gas game.

A structural break.

As I have stated here before, and based on the writings of Professor Carlota Perez, we are in a "turning" based on the developments brought on by the Information and Communication Technologies (ICT). Why do we get in the car to sit in the long line ups to get to work. It's not necessary, yet we are required to do so by the bureaucratic management of most firms. Is this sustainable? Or should we approach this structural break as an opportunity to make the changes to the oil and gas industry. Eliminating the structured hierarchy and replacing it with the Joint Operating Committee is what the 600,000 words on this blog are about.

A corporate crisis is often a sign that the company’s business model has petered out—that the industry’s underlying structure has changed dramatically, so old ways of doing business no longer work. In the 1990s, for instance, IBM’s basic model of layering options and peripherals atop an integrated line of mainframe computers began to fail. Demand for computing was up, but IBM’s way of providing it was down. Likewise, newspapers are now in crisis as the Internet grabs their readers and ads. Demand for information and analysis is increasing, but traditional publishing vehicles have difficulty making money from it. pp. 2 - 3

I point to the fact that the production and reserves of the oil and gas companies are in steep decline. The transition from the banking mentality of managing 10% returns on oil and gas investments has failed. The new basis of the innovative oil and gas firms business model is science. Where the earth science and engineering disciplines are enabled to fully exploit the current understanding and move the science and understanding forward. We know that a structural break has affected the production profiles of the producers, but did not create the corporate crisis that McKinsey suggests. The management of the producer firms were enabled in their ability to report record profits from higher prices. Therefore the corporate crisis that is needed is not as a result of the production and reserves decline, sad as that may seem, but the temporary 12 - 18 month decline in energy prices that we are currently experiencing. As it turns out I am frankly surprised at the scope of the decline in energy prices. Since this software development project was not developing the traction necessary for the producers to act, maybe now the oil and gas investor, who has been affected the most, will.

Based on the prior quote, the business model of the oil and gas producer has failed and a corporate crisis is what is necessary to clean out the industry. Here's hoping that I may find work in the oil and gas industry once again.

The wrong way forward in a structural break during hard times is to try more of the same. The break and the hard times are sure indications that an old pattern has already been pushed to its limits and is destroying value. p. 5

Here, here as they say in politics. Most of the producers have lost the ability to generate the profits their management needed to reward themselves, and their managements motivation is in question. The firms are in a state of crisis and are having most of their projects scaled down to preserve cash, something they should have a bounty of. However, are cash poor in the majority outside the international super majors.

Consider an analogy. When oil is cheap and plentiful, we create a vast infrastructure that works well if oil remains cheap and plentiful. When it becomes expensive, we wish we had a different infrastructure. Similarly, when economic opportunities abound, we invest in a management infrastructure that harvests them very well. When the field of opportunities becomes less verdant, we must change our management infrastructure. A system that requires companies to spend at least $300,000 a year in wages, benefits, support personnel, and systems to enable one educated person to do his or her job could be unsustainable in a less luxuriant world. p. 7

Doing things differently.

Enough discussion of what is plainly obvious to most outside the rarefied air of management. What do we do about this crisis. The second major point of my thesis was that software has taken on a much more important role in defining and supporting organizations. That to change anything, must first be reflected in the software. Coining the phrase "SAP is the bureaucracy" shows this thinking to be valid, and at the same time shows what would be necessary to make any changes.

So during structural breaks in hard times, cutting costs isn’t enough. Things have to be done differently, and on two levels: reducing the complexity of corporate structures and transforming business models. At the corporate level, the first commandment is to simplify and simplify again. Since companies must become more modular and diverse, eliminate coordinating committees, review boards, and other mechanisms connecting businesses, products, or geographies. The aim of these cuts is to provide lean central and support services that don’t require business units to spend time and energy coordinating their activities. Break larger units into smaller ones to reveal cross-subsidies and to break political blockades. You may think that coordination costs will rise if you fragment the business, but you must do so to expose what ought to be streamlined. p. 7

By adopting the Joint Operating Committee (JOC) as the key organizational construct solves all of these objectives. Review of the Draft Specification shows the effect of simplifying the business to its JOC culture has the effect of providing the innovative oil and gas producer with the means to move to the science based business model.

But these changes require more. Software has been around for several generations in the oil and gas industry. None of it has fully satisfied the needs of the industry. Primarily because of the rapid changes that are reflected in the base business. What is needed is a software development capability to ensure that the innovative oil and gas producer can move and benefit from the many industry changes. A systems development that puts the users in the forefront of defining their needs. One that addresses the high failure rate of software development projects, where project and development risks play a significant part of those failures.

In ordinary hard times, the traditional moves are reducing fixed costs, scope, and variety. But in hard times accompanied by structural breaks, you must rethink the way you manage. Companies that survive and go on to prosper look beyond costs to the detailed structure of managerial work. Several new issues come to the forefront:

• How much extra work results from the way incentive and evaluation systems relentlessly pressure managers to look busy and outperform one another?
  
• Which information flows can you omit? Information that doesn’t inform value-creating decisions is a wasteful distraction.
  
• Which decisions and judgments can you standardize as policy rather than make in costly meetings and communications?
  
• How can you work with customers, suppliers, and the government to simplify their processes so that you can simplify yours?

Recessions are neither good for the economy nor morally uplifting. But since we are diving into a period of neck-snapping change, we had better start the process of reformation before it’s too late. p. 8

For oil and gas that means People, Ideas & Objects, please join me here.

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Information and Communication Technologies (ICT).

Change is over estimated in the short term, and underestimated in the long term, so the saying goes. Technology had a number of days of reckoning in the early part of this decade. A time when the elevators were projected to fail, for a day, and the creation of technologies that appeared to solve the source of all the worlds dog food problems. I was still working in management in the oil and gas industry, and had no compelling reason to join these hysterical technological projects. This software development project is not about the technology for technologies sake.

Today our economy is going through the necessary transition to enable society to move to higher performance metrics. Much of these economic changes will be focused around the elimination of the bureaucratic processes and replacing them with new and more innovative business models and organizations. This transition is driven by the inefficiency of the old ways in which to organize and is contrasted to what is possible in applications like People, Ideas & Objects. Structural organizational changes with today's Information Technology (IT) provide real value generating capabilities and efficiencies.

The economic news continues to surprise on the downside. It now appears that the economy is actually going to slow quite substantially, with many people uttering the D word. If there is a depression, and that is what is necessary to instill the changes in the industries, we are looking at a 5 year turn around. The necessary time to make the changes to the industries to enable the more efficient means to be built and become operational.

The stimulus that governments are now applying is a covert "Quantitative Easing" by the Federal Reserve. This policy, I think, has been put into place to eliminate the possibility of deflation coming into the picture. The Fed has pumped cash, straight from the printing press, into the economy in an unprecedented fashion. The best reading on what is happening is provided by Rebecca Wilder (not her real name.) Her blog post provides two graphs that show the money multiplier is collapsing, and the bank reserves are surging. The latter appears to me to be attempting to make up for the loss of economic activity due to the multiplier effect's decline.

Many people have already been affected by the market meltdown. Reliance on a good job, your pension, mutual funds, stocks and your home now seem to be the wrong strategy. The safe road now seems to have been the most risky alternative. What should someone do in order to deal with this situation. Hedge your bets. If the economy does complete the expected transitions it will be in a new form. One that optimizes the potential of ICT. Where systems like People, Ideas & Objects are built to enable the new economy to prosper. Like this project, none of these applications are built at this time. In many industries there is not even a comprehensive vision of what is possible in the future. I believe I have provided a strong and coherent vision of how the energy industry could operate in the future. And have led the charge to make the systems available to the marketplace at the soonest possible moment. I am unaware of any other alternative to turn too at this time.

For people to change requires that they be disrupted in this violent of a fashion. If we could all realize and act to make the transition seamless we would, but we can't. We must be disrupted to the point where the decision is made not to go to work, and what to do next. For that is the only means of comprehensive change that can be put in place. The reason people will stop going to work is because they know there is nothing there for them. Their next question is "what will I do now." And that is where this project comes into play. People, Ideas & Objects is the future for the oil and gas industry. A place where you will log into work as opposed to drive to the office. A place where the systems based on the vision of the Draft Specification provide the means and manner in which people can do their job in the industry.

These are the facts of the situation today. It would be better if we didn't have to go through these changes but that is not an option. The bureaucracies are unable to provide us with a sustainable way of life. Therefore we must move to build higher performance organizational structures. The upside is that these new ways of doing business will provide for substantially better standards of living then what we were accustomed to in the past.

So we can either hide from the difficulties and ignore that they are happening, or proactively make the transition as seamless as possible by accepting that this is and will happen. And govern yourself in a fashion to optimize the upsides. For oil and gas it is as simple as following the procedure necessary to join People, Ideas & Objects, and limiting the damages to your world. Please join me here.

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Bloomberg is reporting

A little off topic but the scope of the economic difficulties is coming into focus. Bloomberg is reporting the Fed and Treasury are prepared to provide unlimited financial resources to the market to offset the threat of deflation. If you have read the Preliminary Research Report that I wrote in May 2004 I expressed a concern that if left unchecked, the economy could slide into a deflationary period that would be particularly brutal. It would seem that the Fed is in agreement that this must be avoided and is willing to spend up to $7.4 trillion to eliminate the risk. 

Are we not pushing on a rope? Having the value of money erode in the market is one thing. Having the governments contribute to its further erosion by dropping interest rates and bailing out potentially failed organizations just seems wrong. People need higher interest rates in order to encourage savings. The more logical solution to this problem is to get people motivated to invest by giving them a decent return for the risk they are taking in their investments.

We can generally agree that the source of this problem was the low interest rates of the early part of this decade. (See my entry on mis-allocation of capital.) When capital provides little to no returns, with high risks associated with those returns, money is considered cheap. If money had a cost, would it not allocate financial resources to the projects with the highest return. When money is worth little investments have little to compete with. When the government guarantees every and all transactions, a sloppiness in the capital allocation process starts us down the road to moral hazard. 

I know this is contrary to current economic thinking but I have to ask are we only making this problem greater by further diluting the already sloppy capital allocation that has been carried out? It seems to me to be the case.

Our current policies of expansive money supply were created in the great depression. They are assumed that these are the means in which to have the economy return to a normal operating environment. But is this assumption, which is based on the lone event of the great depression interpreted incorrectly? Stuffing the banks full of cash does not make them want to loan it out. Handing money to consumers does not make them want to spend. What motivation is there to take a risk?

One unforeseen consequence of this over-stimulated economy is the demand for energy was obviously significantly overstated. The current price declines are a reflection of the influence of deflation in a market and the long term capital deflation appears to be right around the corner.  To make matters worse, the decline in reserves and production are only exacerbated by the energy industries long term capital projects being shelved. How many times have we seen these big projects stopped and never return. It will be a gutsy investor who stands up and says their building a new offshore drilling rig. Making our future production horizons even more constrained.

There are serious distortions being introduced into the marketplace for energy. I think the dynamics of the industry are accelerating at a pace that many of us, and certainly myself, are only now realizing how fast paced this environment is. One last link to Bloomberg shows them suing the Fed in order to determine if the Fed has made an unannounced change in their policies and are targeting inflation; to eliminate the deflation by flooding the market with "printed money." If we already have the recession, why doesn't the Fed invert the yield curve to force the market interest rates to rise. Throwing cash around in a panic is only making everyone nervous.

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The three Applications of the Preliminary Specification.

I thought that I would mention the design of the three applications that will house the modules of the Preliminary Specification. These three Applications have been determined to be the applications that the users, the producers and the Joint Operating Committee's will access. Essentially different views of the data, different views of the modules and different application processing contained within each Application. Each Application will contain different perspectives of the different modules as defined in the recently completed Draft Specification.

This work of identifying the Applications needs to be done in the Preliminary Specification and is a critical part of the People, Ideas & Objects deliverables. I have left the design and development of these modules to the greater community, as it is the community who will be best able to design these applications. The remaining work that needs to be done is too comprehensive for one individual to comprehend, understand and implement. Recall the budget, which has not been finalized, may contain the B, as in Billion dollars of development costs.

My role, as I have mentioned before, is to remove myself from any further design and development of the applications and modules. This is for my own sanity and the fact that I could really end up getting in the way with a number of my own preconceived notions that don't have any bearing on the performance of the innovative oil and gas producers. I have committed myself to ensuring that the resources and needs of the community are provided for the business end of these software developments.

I have a sense, and I have not done any research in this area, that the design and implementation of these applications will need to have significant research and development of new and unknown attributes. Just identifying what these attributes are will be a difficult and exciting area of research. I am calling for 100 individuals to participate in the Preliminary Specification. Researching the Applications will be a critical area where I suspect much value can be added. Please, join me here.

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The next 30 years.

I frequently watch the video's from FORA.tv for the surprisingly good content contained on that website. Think of it as the YouTube for the thinking. It is a compilation of videos from a 115 governments, institutions, universities, and leading publications. One can be lost in the sites content for weeks.

I was watching an Australian Broadcast Corporation (ABC) broadcast of Rupert Murdoch, Chairman and Chief Executive Officer of News Corporation. His Boyer Lecture entitled "A Golden Age of Freedom." During the broadcast he states in the next 30 years the world will welcome an additional 2 - 3 billion people joining the ranks of the middle class.

I am an optimist, although my recent rants on the economy may make it seem that I am pessimistic, I can assure you that there is nothing further from the truth. As I mentioned yesterday, the future holds new disciplines, new opportunities, new ways of organizing and living in a far better world with a much higher quality and quantity of life.

I leave you with the thought as to what the world will be like in 30 years. With a design of the People, Ideas & Objects Application and Modules fully operational in the marketplace for many decades, how the energy industry will have developed. The work that is being done in physics, nanotechnology, computer sciences, bio-chemistry, robotics, space and many other areas. Conducted on a global basis with the greatest possible number of people living a middle class lifestyle.

Our one impediment to making this happen is the ways and means of how we have achieved what we have to date. The bureaucracy or its more antiseptic name the structured hierarchy is the reason we are being held back. Change is violent and upsets too many things to be undertaken in a constructive manner. We know we should have moved away from the bureaucracies many years ago. The reason that we didn't is that bureaucracies still provided enough value as to not attract the necessary attention to there inefficiencies.

Now we have entered a time in our lives where everything happens so quickly. Our organizations, which can not accommodate any change, especially at today's pace of change are failing. Failure is what eventually happens, and we see that failure happening in business today. And we should welcome this change and move to the new forms of organization that will optimize the next 30 years. Please join me here in designing and developing these applications.

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McKinsey Power Curves

This article discusses the distribution of an industry dynamics. An interesting topic that I have not studied too much of in the past. I think, as the author of the article asks, there are implications here that may need to be discovered.

In the Preliminary Research Report I discussed the performance of then laggards against those of higher performance oil and gas companies. I used Revenue Per Employee as the manner in which to determine these firms performance. I then discussed the ability of laggards to catch up to higher performing firms; and noted the ability to do so was almost impossible due to a the following two factors.

• Influence of the firms asset performance based on its historical cost, infrastructure and industry distribution. Noting that putting lipstick on a pig makes no difference to the pig.

• Secondly the ability to catch the leaders is difficult. Today I would suggest that the Chinese have a long and very hard climb to match the growth and performance of the U.S. economy. And that is the same type of difficulty that firms face in each industry.

It is possibly ironic that the high performing firm that I used in the Preliminary Research Reports analysis was none other then our stellar pig, Canadian Natural Resources Ltd. How times have changed. And it is in that example I think I have found that the dynamic of change is not so much in the hands of those that want to challenge the established leadership, but in the hands of the leadership to make the big mistakes. CNRL has proven they have the capacity to ruin what was considered a leader in the Canadian oil and gas industry.

The McKinsey author closes the discussion with the following quotation.

Unlike the laws of physics, power curves aren’t immutable. But their ubiquity and consistency suggest that companies are generally competing not only against one another but also against an industry structure that becomes progressively more unequal. For most companies, this possibility makes power curves an important piece of the strategic context. Senior executives must understand them and respect their implications.

Clarifying the nature of how industries change. And this is where I see this situation becoming doubly dangerous for those that are active in any industry. Your ability to compete has little to do with the competition. Focusing on the competition will provide you with products that look and perform very similar to what GM produces. The need to pursue your own strategy of how you will optimize the performance of your assets should be in the forefront of your companies focus. The risks are associated with the mitigation of tangible and intangible threats to your firm, and the upside is through optimization of your opportunities. But is this optimization and mitigation able to provide the firm with any ability to sustain a higher performance "Power Curve"? This question also takes on needed and important discussion about the role of re-organizing the oil and gas producer on the basis of the Joint Operating Committee (JOC).

The first implication that I see in applying Power Curves is that doing nothing becomes one of the most difficult and dangerous strategies. We have all used the do nothing alternative in most of our decision matrices and that is not what I am talking about here. But doing nothing from the point of view of not taking the enhanced risk in this high paced change business environment.

It may have been prudent to sit back and wait until the competition in your industry to explode and you reap all the rewards. However, that is not what I am thinking of in this discussion. What I am thinking is the pace of change will render a status-quo strategy to the dust bin in the quickest time frame. A company must be actively attempting to move up the Power Curve in order to ensure they are progressing.

If we think about the times that we live in today. It is easy to see that we are heading into a time period where man will progress the furthest and fastest. In the next 50 years, biology, physics, chemistry, bio-chemistry, molecular biology, economics, robots, computer performance, software capability will fundamentally change society. Not one of these scientific categories is outside the realm of the innovative oil and gas producer.

How can a firm sit and watch what is historic in terms of discovery, almost every day. Clearly the ones that will win in the future will be those that are able to match the demanding changes that society will dictate. Look closely at the environmental movement and I think we begin to see the societal demands of our organizations accelerating. Can China continue to asphyxiate their population in the long term? Of course not, but they appear to do very little about the problem. Therefore how long will China be able to compete?

I take great pleasure in highlighting the failures of the companies highlighted in the piggy series of blog entries. Considering the scope of the discussion in this entry so far, it is easy to see how the greed and satisfaction of oneself has become the prime focus of companies today. Is this sustainable? I'm not sure, either way. Should we wait and see if today is the time in which we should have acted? Of course not. You don't wait until you can determine if someone is going to get themselves out of a burning building. You do everything possible to get them out. And like Treasury Secretary Paulson's failed TARP program, without trying, you'll never know if it worked or not. This is a key discovery, just as if the TARP program would have worked beyond everyone's expectations.

These are the dynamics that we face in the business world today. I suggest we critically analyze the performance of the oil and gas industry based on these metrics. I fail to see how the structured hierarchy and their bureaucratically identifying and supporting relatives, SAP and Oracle, can be expected to exist in this future environment. Please join me here.

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Two groups who need People, Ideas & Objects.

AP is reporting that the large and small producers in the oil and gas industry are experiencing some systemic difficulties. The large producers are able to generate large cash flow, and indeed have large bank balances. However, recent declining and negative reserve trends are now causing their production to decline. These accelerating decline curves are a direct reflection on their ability to find and produce more oil and gas.

On the other end of the spectrum the small producer is challenged by the inability to generate or raise any cash to begin to address their growing needs. This of course is as a result of their small asset base and the current low oil and gas prices. On the positive side, reserves are able to be increased at will. The reverse of the situation of the larger strata of the industry. To me this is not news, but a reflection on the way things have operated in the industry for many decades. The scope and severity of the problem comes down to the large producers declining production profiles.

Another issue that the entire industry faces in the short term is the size of the asset write downs caused by the today's lower prices. Based on the prices of the commodities it is fair to assume that producers were able to capitalize 100% of their costs associated with exploration and production since 2004. These costs are now subject to the auditors testing of value, based on the reserves. Potentially we may see the industry reflect large losses on their write downs to fair value.

Over the past 20 years the small producer has struggled to keep the doors open. Just as many small enterprises in other industries experience. Testing the risk profiles of small producers would result in the conclusion they are at stratospheric levels. Leading to the skill and courage of the investors and management, just to survive. Small producers have the inability to provide any returns for their investors for many years. The simple act of building a producer has to consider the many millions of dollars needed to increase the production profile. Many of these millions go to the simple act of keeping the lights on. The overhead of the firms is notorious for getting in the way of the investors expectation of receiving some value from the firm. Granted their will always be the capital gains that the investor could make over the life of building the firm. But their capital gains are not that spectacular and they should expect and receive more of the value they provide.

I have always marveled at the discussions that are made around the companies reserve reports. Reports on the field activities that have no concept or consideration that those operations have to support the administrative and management of the firm. In a public company this discussion takes on a much larger concern as the overhead costs of a public firm push the administrative costs well beyond what is possible for the management of the firm from an engineering and earth science point of view. The Private Equity movement that began in the last decade is symptomatic of the huge compliance and governance costs that a small public producer has to offset before there is anything left for anyone else. Please review the Compliance & Governance module of the Draft Specification for further information in how the compliance and governance is handled.

How is it that People, Ideas & Objects can help in this area? From the perspective of a large producer I see the problem as an issue of focus. The firm needs to simplify their strategy to something that will make money for the shareholders. This blanket strategy may not be appropriate for all of the properties or Joint Operating Committee's (JOC's) they have an interest in. (I attribute this as the source of the firms lack of "focus.") To say that there is conflicting strategies of the producers representing the JOC is obvious, and one of the sources of how problems get resolved is through identifying and resolving these contradictions and conflicts.

One of the advantages of moving to the People, Ideas & Objects system is that the JOC is able to set the strategy irrespective of the individual producers "global" strategy. Enabling each and every JOC to be optimized for their best operating and performance strategies and tactics. Providing the much needed focus that the large producers can not find. This strategy optimization in the JOC is a direct benefit of aligning the legal, financial, operational decision making, cultural and communication frameworks with each of the producers compliance and governance frameworks.

The banks, investors and money markets may have an interest in the producer or the JOC itself. Securitization of the individual interests in oil and gas will be necessary to fully optimize the innovative stance and increasing reserves of the industry.

Therefore the mix of producers in the JOC will help to mitigate the producers size issues for the entire industry. The large producer can partner with the smaller producers to balance out the needs of the property. Recall that the Partnership Accounting module in the People, Ideas & Objects system is based on the contributions of the individual firms represented. If a firm has a specialty in a certain regional geography, it can then agree with the partnership that the costs of those specialties goes towards satisfying some of the commitment from the company to secure their interest. In other words. The small and large producers are able to earn their interest in the property through their contribution of capital, expertise and / or land position on an all in valuation basis. If a geologist were to prove their value in the marketplace by finding commercial volumes of reserves. Then their ability to secure elements of the interests in the producing assets he / she is directly involved in creating.

The last point of the previous paragraph violates the first order of all oil and gas managements oath of allegiance. (I'm trying to be funny.)  Recognizing Intellectual Property (IP) is the exact opposite of the situation that exists in the energy industry today. Particularly the large firms do not want anyone to hold any form of IP as it conflicts with their needs to find people to employ and is (incorrectly) believed to be a leakage of value from their organization.

This is the 21st Century. We have the manner of all economics being re-aligned on the basis of new and more effective organizational structures. Those that believe in the bureaucracy, of any industry, are effectively being cut down to nothing in this market. The current economic climate is the same situation that affected the Former Soviet Union in 1989. The methods of organization could no longer sustain the demands of the people and failure was the result. Our system of organization has reached its limits of growth based on the bureaucracies inefficient efficiencies.

So the sooner we say good bye and good riddance, the sooner we can achieve the multiples of our current standard of living. As Jonathon Schwartz at Sun Microsystems says, you have to stop to change direction. These points are addressed in the Resource Marketplace and Research & Capabilities modules. If we expect to deny people the rights they earn in thinking through the big problems of how we can solve the oil and gas industries problems, then we are eliminating ourselves from the entire economic equation of the future. Our choice, and those that don't want the People to hold the trademarks, patents and copyrights should research which way is the best for the oil and gas industry to continue. We're going this way.

This issue is also addressed in the People, Ideas & Objects system. The competitive advantage of a producer is their physical producing assets, land base and scientific and engineering capabilities and capacities. Ownership of the capabilities and capacities, (the current situation) I don't think provides the industry with the value they think they attain. Building huge, mutually exclusive capabilities in each and every producer has increased the level of redundancy in the industry to a ridiculous level. Note also the large producers effectiveness of using these capabilities and capacities in finding and producing oil and gas. People, Ideas & Objects is the better way.

The producer who researches, develops and manufacturers their own drill bits is at a distinct disadvantage to the other producers who have manufacturers providing drill bits based on a collective need across all producers. I don't see too much difference in this example from what a firm is doing today with their geological talent. The alternative is hiring from a pool of highly qualified and talented scientists for application to a specific issue in one JOC. This has advantages that are directly beneficial to the future oil and gas producer. Once the geologist has completed their work, there may be no more work from that JOC in that area for his specialty again. He will have to keep thinking of how better to get the oil or gas out of the ground, (his job) which will form the basis of his new, and far more valuable to him, IP. Why employ him for 35 years and promise a retirement benefit that Wall Street will only take away from him.

The most effective change that the People, Ideas & Objects system provides the industry is an alignment to the cultural basis of the business. The JOC is the business, and the business is the JOC. Recognizing these facts in the IT that identifies and supports the JOC is a necessary realignment of the industries interests. A realignment that will fuel the innovation and further development of the critical sciences that are underlying the business of oil and gas.

With respect to the large and small producers that I started in this post. The alignment removes the conflict that the industry has with the development and ownership of Intellectual Property. It enables the large producer to use their cash flow in a manner that is more consistent with the needs of their JOC's producing properties. And the small producer has the ability to sell more of the talent and capability that is a necessary part of the industry makeup to financiers and investors. Both sides appear to me to be winners.

From the investor point of view, the fact that the systems will be supported through the levying of a fee on the basis of $ / BOE / year means that the larger producers will be paying the largest part of the freight in terms of the People, Ideas & Objects software development costs. Producers that are small and have no production would be use the system for free and have the Community of Independent Service Providers, that are a key part of the People, Ideas & Objects community, available to help mitigate the large associated costs of running a start up oil and gas concern. Please see the Compliance & Governance module for further clarification of how this is implemented in the system. And recall, that ideally the investor is the one representing the ownership interest of his / her share at the virtual JOC table.

Now is the time for these ways and means of operating be adopted. What we are witnessing is economic history. Producers MUST become more efficient and begin the process of rebuilding the industry from a more efficient and effective means of organization. To say the industry is collapsing is best reflected in Canadian Natural Resources Ltd impending demise. Please join me here.

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The New Economics of Computing.

Professor Nicholas Carr is a Professor in the business faculty at Harvard. He is probably most famous for his controversial article "IT Doesn't Matter" and the follow on "Does IT Matter, an HBR Debate". June 2003. Since these publications he has written a few books on the topic of IT and writes a blog about the way he sees technology and technology trends influencing business.

He has been talking about the implications of "Cloud Computing" and what the paradigm change means to business, both technical and other businesses. In his recent post he makes some comments about the significance, and an example of how cloud computing does provide real value. (Recall the People, Ideas & Objects application will be accessed through the "Cloud Computing" method.)

My favorite example, which is about a year old now, is both simple and revealing. In late 2007, the New York Times faced a challenge. It wanted to make available over the web its entire archive of articles, 11 million in all, dating back to 1851. It had already scanned all the articles, producing a huge, four-terabyte pile of images in TIFF format. But because TIFFs are poorly suited to online distribution, and because a single article often comprised many TIFFs, the Times needed to translate that four-terabyte pile of TIFFs into more web-friendly PDF files. That's not a particularly complicated computing chore, but it's a large computing chore, requiring a whole lot of computer processing time.


Fortunately, a software programmer at the Times, Derek Gottfrid, had been playing around with Amazon Web Services for a number of months, and he realized that Amazon's new computing utility, Elastic Compute Cloud (EC2), might offer a solution. Working alone, he uploaded the four terabytes of TIFF data into Amazon's Simple Storage System (S3) utility, and he hacked together some code for EC2 that would, as he later described in a blog post, "pull all the parts that make up an article out of S3, generate a PDF from them and store the PDF back in S3." He then rented 100 virtual computers through EC2 and ran the data through them. In less than 24 hours, he had his 11,000 PDFs, all stored neatly in S3 and ready to be served up to visitors to the Times site.


The total cost for the computing job? Gottfrid told me that the entire EC2 bill came to $240. (That's 10 cents per computer-hour times 100 computers times 24 hours; there were no bandwidth charges since all the data transfers took place within Amazon's system - from S3 to EC2 and back.)

My experience with "Cloud Computing" has involved renting processors on Sun Microsystems network.com and Amazon's Web Service offerings. You should set up an account on one of these services to understand the full scope of the power that is offered to the user. If you have a processing problem that can take 100 hours of processing on your computer, hoisting it up on one of these services will not only allow you to process the problem far more cost effectively as Professor Carr points out. But you would also recieve the results for this 100 hour job within a matter of minutes. To me this was the intoxicating aspect of cloud computing.

Go ahead and try one of these web services. If you need help figuring out what type of problem to solve, use this Princeton University book. (Download the first chapter, its free.)

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