McKinsey, Averting the Next Energy Crisis.

Let me make it clear. The reason that I have pursued this issue over the past five years is due to the extensive nature of the threat. Our energy supply and demand balance is in serious jeopardy of becoming the biggest issue man has ever faced. When I look around I see a handfull of people at People, Ideas & Objects and McKinsey working on this problem. We have received no support and have consistently been kicked to the curb as a lunatic Cassandra, Chicken Little, Boy who cried Wolf or what have you. Now our lone voice is joined by a chorus of people calling for action.

First up is McKinsey, (Click on the title of this entry to be taken to the report.) At 150 pages this article deals with tthe demand side of the equation. This should be mandatory reading for the many reasons captured in this quotation.

It would be all too easy to respond with complacency to a short-term easing back of energy-demand growth. Once the global economy begins to recover, energy demand will bounce back too, imposing costs on consumers and businesses and on the climate in the form of CO2 emissions. There is even potential for oil market demand to grow more quickly than supply, risking another oil market shock. In these circumstances, losing the momentum on action to rein back energy demand could turn out to be a high-risk strategy -- particularly given early evidence that policy to boost the economy's energy productivity is already having an impact. p. 18

Fair comment from a demand point of view. For an understanding of the supply side concerns, the pre-eminent authority on that topic is Matthew Simmons of Simmons Consulting. He has a 49 page slide presentation that reflects the appropriate concern. On slide 45 he calls for the need to go to an "immediate war footing" with the following actions. 

• Step one: Enact genuine "data reform" on all key producing oil and gas fields. 
• Step two: Begin blue prints for rebuilding our energy infrastructure. (Where I think the Draft Specification fits in.)
• Step three: Get oil and gas prices high and create a floor. 
• Step four: Adopt global Plan B to reduce our oil and gas use ASAP. 

Here we have the number one consulting group in McKinsey, and arguably the number one oil and gas consulting group in Simmons both warning in the most dire terms regarding the situation that we find ourselves in. 

Who else is warning us about the concern for the energy industry? Bloomberg reports that oil executives tell the Obama administration "to get real on energy independence". Rigzone quotes the CEO of Chesapeake that we are;

Current low natural gas prices are setting the stage for a dramatic price rebound that should begin this fall or winter, Chesapeake Energy Corp.'s chief executive officer told analysts Tuesday. 

I hold the CEO of Chesapeake in high esteem. Recall he is the individual who,in three days last September, lost his $2 billion fortune in a cascading series of margin calls. An individual driven by more then just the financial rewards of the business. 

The prices of oil and gas have only recently collapsed, however, we see the long term damage this has done. Many projects are cancelled and will return slowly. Here Reuters reports that Shell has shelved their Beaufort exploration program. As I have mentioned before, I'm a Shell brat, and I recall when my dad was seconded to an industry joint venture to build a pipeline to bring this gas to market. This was during the mid seventies, and we're replaying this history again. 

Where is this all leading? To a very dire situation with tragic consequences for society. Those are my words and the motivation that has fueled this desire to reorganize the industry around the Joint Operating Committee. As the chicken little who has been squawking about this issue for over five years, I am pleased to see the quality and quantity of similar calls to act on this critical issue. I'll leave you with one more voice that should be considered. This one is from The Rand Corporation. Yes, that Corporation. Which is described as the "original non-profit think tank helping to improve policy and decision making through objective research and analysis." On Monday they released a report regarding the scope of the energy issue. Here's what they have to say. (From Reuters).

HOUSTON (Reuters) - The greatest threat to the United States from crude oil imports is a long-term disruption of world supply and the higher costs associated with that loss of imports, according to a RAND Corp study issued Monday.

"The fact that the United States imports nearly three-fifths of its oil does not pose a national security threat," said Keith Crane, the study's lead author and senior economist at RAND, a nonprofit research organization.

"There is an integrated world oil market, and embargoes do not work. But a large, extended drop in the global supply of oil would trigger a sharp rise in oil prices and significantly affect the United States, no matter how much or how little oil the United States imports," Crane said in a statement.

If we believe that the same ideas and approach that brought us to this point is the solution to this problem, then I leave you with that task. If however, you agree that this is an issue that can be solved by first re-organizing our approach to the business of energy, then please join us here.

Technorati Tags: People's Call-to-Action Energy Leadership McKinsey Simmons

Exclusively oil and gas.

I've been spending some time thinking about the competition and their offerings. Specifically SAP and Oracle who are the predominate software systems used in oil and gas. There is also a large number of boutique software developers that have provided small numbers of producers with niche offerings. I don't normally spend time evaluating the competition, however, these are my thoughts regarding the impact our current economy is having on the software development business.

Capital expenditures are being reeled in at most if not all the oil and gas producers. This therefore applies to the software development groups that provide products and services to the oil and gas industry. Many are small vendors and will be unable to sustain any decline in revenues operations for long without continued support from the producers. That support is / will be waning as the lay-offs and losses continue to pile up in the industry. 

Generally unlike the large international software companies, the small software vendors are unable to rely on other industries, not that other industries are any better off in this economy. Suggesting that whether a vendor chose to focus exclusively on oil and gas or not, the effect in this current market is the same irrespective. 

SAP and Oracle have pursued the one solution fits all industries. This strategy leaves many in the oil and gas industry wishing they would build some functionality for energy. I doubt they will be able to address the unique needs of the industry as it exists today. Oracle is having difficulty in offering the many solutions they have purchased to customers. Oracle is not offering an integrated solution. Its integrating previous acquisitions. 

So much of these current economic difficulties are as a result of the "old" ways to sustain and provide for societies needs. Currently a bear market rally has everyone believing the good old days will soon be back. Nothing could further from the truth. This next downswing will be quick and decisive in communicating the scope of the economic damage that has occurred. It will also be dramatic enough for people to permanently change their expectations of the future. One in which they will begin to look for the things that will sustain them in the future. New projects and businesses like People, Ideas & Objects . 

Spending any more time on the competition is a futile exercise. I prefer to highlight the advantages the producers will attain by joining the community here. 

• A dedicated software developer working exclusively with oil and gas.
  
• Focused on the Joint Operating Committee to facilitate speed and innovativeness.
  
• Unconstrained by the traditional software paradox of code and customers.
  
• Providing a competitive value proposition and business model .
  
• Offering a compelling vision of how the industry could operate more efficiently. 

Technorati Tags: People's Capabilities Development Economics Strategy Value-Proposition

Auditor comments on royalties.

An article appeared in last weeks Calgary Herald that shows that all is not well with Alberta Royalties. The Auditor General will be reviewing the systems that collect oil and gas royalties.

Alberta's auditor general is examining the province's new royalty structure to ensure it's delivering desired results, after the old regime didn't collect a fair share of revenue and failed for six consecutive years to reach the bottom end of government's targets.

Fred Dunn told the legislature's public accounts committee Wednesday his office is hoping to report in October the results of a systems audit on the new royalty framework that will identify whether the structures are in place to en-able Albertans to collect the royalties they're due.

I can tell you that the report in October 2009 will reveal one gaping whole that the Alberta Government should close to ensure royalty compliance is achieved. It is this gaping whole that leaves an industry to scream blue bloody murder when changes are introduced. A situation where the opaqueness of the industry only frustrates dealings with the government.

I have first hand experience with this situation. In 1992 I started Genesys Software Corp to address the governments Royalty Simplification initiative. A new and comprehensive system that would ease the royalty calculations and simplify the administration for both government and industry. The problem with this system is the same as the Auditor General will be talking about in October. And that problem is the industries refusal to spend any money on developing in-house systems to meet the royalty obligation.

This situation is also the reason that I am turning to the various governments to fund the development costs associated with meeting their royalty compliance frameworks. I as a software developer was expected in 1992 to raise sufficient capital to implement the regulations on behalf of government for industries compliance. In retrospect I do some very dumb things. I can look back on this in hindsight and say that industry expected someone to build it and they will come. What I have learned is this scenario meets the industry needs for royalty compliance. Knowing that no one will be able to meet the industry expectations; companies can rest assured they will never have to implement any system of royalty compliance.

I may have periods where my intelligence is questionable, however, I do not tend to make the same mistakes more then once. My current thinking is that in the virtualized Joint Operating Committee, the royalty holder(s) will have a seat at the table. This transparency will show the extent of the efforts producers take to explore and produce oil and gas, and provide a better means of discussion between royalty holder and producer. Discussions that are based on the facts involved in each JOC. Discussions that involve the innovative oil and gas producer and the royalty holder who wishes to better understand the business they are in, and the specific nature of the JOC.

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Some time off.

I will be taking some time off for the next two weeks. I'll resume posting on May 12, 2009.

Operational Control with Accountability

In an April 16, 2009 podcast on Bloomburg, Nobel Laureate Joseph Stiglitz said;

... I think the depth of the problems remind us of how badly the system functioned before 2007. I mean I think this is the real lesson here, the lesson is not that we've had a little trauma today, the lesson is the system didn't work before the trauma, and it was the failures that were working before the trauma that have lead to the trauma. 

A certain eloquence is the liberty of economists who win the Nobel Prize. We have been in a very backward economy from at least the mid 1990's, in my opinion. If you can imagine trying to raise funds to eliminate the bureaucracy when employees homes were hitting the stratosphere along with there stock options. Some guy suggesting failure of the oil and gas firms. And the need to build systems to support a more innovative and scientific focus; received the old heave-ho. 

But times are changing, people are not so much sold on their home, stock options, retirement and other pipe dreams. The security that was attained by having shortages of eligible workers in the industry, provided a false and diversionary motivation. They now see the writing on the wall and it is here at People, Ideas & Objects where they see a more realistic future by participating in the Community of Independent Service Providers. This is at least an alternative future they are now willing to consider. 

The number of issues that were clearly evident to Joseph Stiglitz will be captured in many of his future papers. One of the issues that I was seeking to resolve is the separation of accountability and operational control. Once you remove the accountability for decisions, you lose the ability to learn from the success and failure of those decisions. Learning is the key to innovation. Where are the decisions made in the energy sector?

If we recall, it is the Joint Operating Committee (JOC) which holds the authority for the operational decisions. For the past number of years I have marvelled at the skill and audacity of the CFO's of the producer firms standing up and stating that the firm would grow production by 10%. This always struck me as comical as the individual generally has no authority to make that promise come true. How is a CFO going to increase production by 10% in the current fiscal period? If they were legitimately able to attain what they boasted, why have they stopped the bravado? We certainly could stand to have a number of CFO's stand up today and state, unequivocally, that production would increase. Please join me here. 

Technorati Tags: People's CISP Failure Accountability

What's expected.

It's important that I revisit the status of the project now and then for a quick update. Particularly for those that may have joined recently. As of today the Draft Specification has been reviewed by over 500 people. I consider this quite remarkable considering the topic of discussion, oil and gas systems is rather obscure. We are now just past 9 months from the point in time that I published the specification and the ideas inherent within are being broadcast across a very large community.

The scope of the People, Ideas & Objects application is truly global. Through LinkedIn I have been able to discover many like minded people that may be recruited to define the Preliminary Specification. This recruitment will continue for the remainder of 2009 with the objective of securing the 100 people necessary to make the Preliminary Specification as diverse and well documented as possible. 

Therefore effective January 1, 2010 we will be in full development of the application. I now want to detail some aspects of the budget and reiterate my involvement in the definition of the software from this point forward. I have no intention or capacity to further details the scope, functionality or anything to do with the application. This project is well beyond the ability of one person to comprehend each and every aspect of the oil and gas industry. This is a collaborative project for the simple reason that it must be. It is far better for me to step aside in terms of what can and will be done by the application and its modules. The application will be left to the community to determine the ways and means that their input is necessary and required. 

The key role that I can provide is the generation and distribution of the resources necessary to keep the development moving forward. That is a task that will be more then enough for any one individual, and one that can determine the success or failure of the entire project. The budget for this project is declining as the costs in the industry become more affordable through the lack of demand. How long this will last is probably short lived. Primarily as I think the lack of either equity or debt to fuel the producers efforts will be replaced through the reallocation of the market prices to fund these desperately needed energy resources. Therefore I am hesitant to suggest that the project will require less resources than what is originally estimated. That being in the area of $1 billion U.S.

In order to define this project I have detailed four stages of the specification. I completed the Draft Specification last July 2008. The Preliminary is set to start at the end of the 2009, with the Detailed and Final Specification to be determined by the community of users that is forming. The total costs associated with these phases of the specifications will be set at 10% of the total budget. Therefore $100 million will need to be raised to support these activities. 

This application is unique in that using the Joint Operating Committee (JOC) necessitates the global scope of functionality of the application. Hence the large nature of the project. Something of this scope is only possible during a time when organizational and business models are being revised through economic changes. Of the $100 million allocated to determine the specification, $30 million will be allocated to the Preliminary phase.

I expect to have at least 100 people involved in defining the Preliminary Specification. Participants should expect to incur approximately 500 hours on average. That is a total of 50,000 man hours that I am now setting the compensation for at $125 / hour or $1,000 / day. This work can be undertaken as soon as we have the financial resources established. 

I know these numbers are frighteningly large. The justification for these costs is based on reviewing the Draft Specification and the unique nature of using the Joint Operating Committee. Review of the business model of People, Ideas & Objects will show how this development is truly the most cost effective and appropriate means to continue. 

Our two defined groups of financial support are the governments involved in collecting royalties and the producers themselves. As this is an industry wide approach, we see these large costs allocated over the involvement of the government and industry. Making this a cost efffective solution. What I think is also paramount to consider. Is that this is the first and only user based development. It is the oil and gas users that know how to do there jobs that make up the community in the Preliminary Specification. 

The only deliverables that I have set for the Preliminary Specification is the determination of the geographical scope and functionality of the application. Other then these, the entire process of development is being handed over to the community through the Preliminary Specification. Please join me here.

Technorati Tags: People's Specification Development Users Collaboration

No regulation here!

Yale University Professor Robert Shiller raises an interesting point in this video. Shiller is famous for the Case - Shiller housing index. And by the way, this is another McKinsey document, # 52 in a long list of top quality articles and commentary. The video and article are here, registration required, click on the title for the url.


The forces pushing to increase regulation today are potentially creating further difficulties down the road. The ability and desire to catch the Bernard Madoff and Conrad Blacks while their in the middle of planning their dirty deeds is a compelling justification. No one likes to see illegal acts being exercised on innocent victims. But are these crooks symptomatic of the entire marketplace? Or are they high profile and in the news because the Ponzi scheme could not be sold without cash.

Obama wants to completely redesign the marketplace. Good luck with that. I figure he is about 3 months away from being a mere shadow of a president. He doesn't have a clue about what it is that he is talking about, doesn't have ideas or foundation of which to build a new system on. Or the political capital to undertake such a task.

Professor Shiller notes many good points in the video presentation. Essentially laying a strong foundation that regulation is the anti-innovation. We don't need more rules to keep the criminals in-check. We need People, Ideas & Objects to make the energy industry keep the global economy fueled well into this century.

Professor Shiller makes the following comments supporting the work that is being done here at People, Ideas & Objects.

I think the government has to take an attitude that it is the sponsor of innovation, both of scientific innovation and of financial innovation. The government learned that years ago, just after World War II, when they created the National Science Foundation—and the government aggressively supports scientific innovation. We have to have the same attitude toward financial innovation.

This project seeks to support and provide the earth sciences and engineering disciplines. I stated in my thesis that the industry needs to move away from the banking basis of predictable returns to a basis of innovation and science. That will not happen on its own, we need to be build the systems to support the organizations first. No software no organization.

I don’t want to see us killing off innovation, and this is what may get lost—and I hope it doesn’t get lost—in the current crisis. Ultimately, let’s not forget that we’ve learned lessons that a capitalist economy is an economy that promotes entrepreneurship, and entrepreneurship is not the province for government bureaucrats.

Therefore we have to keep this project moving forward with an eye to ensuring that unnecessary regulation begins to influence the decisions that are made.

I don’t want to say that I don’t think there will be a turnaround soon, but I think that many of us are too much expecting that it might come tomorrow or the day after. And this volatility is evidence of that. So I think it is quite possible that the stock market and the housing market, five years from now, will be close to where they are now.

Professor Shiller's timing seems accurate to me. Five years is also a good time for the community to have this software operational. Providing the innovation that the oil and gas industry needs for the next 25 years. I wonder what SAP and Oracle have in store for the industry?

We need to act, now. Join me and this community in building this software for the golden age of oil and gas.

Technorati Tags: People's McKinsey CISP Innovation

Follow on to yesterday's post.

Google's new tool, the Google Insights for Search was highlighted yesterday. I was thinking all through the day what a tool like that would be like in the oil and gas industry. I felt as a result, I didn't attach enough emphasis on the implications of having the data available for the type of analysis that is available with the tools I described in the Draft Specification .

First lets go back to the situation at hand today. Data is scattered throughout the organization in a number of informal and unknown spreadsheets, databases and file cabinets. Their are production departments, accounting departments and exploration departments that use very similar data and store this data in their own file cabinets and electronically. As we know departments only speak to each other at the higher levels of the organizations. Hence the lack of communication and shared data remains an unfulfilled promise.

A lot of this data is not structured or captured in a centralized database. The advantage of using a database is that it allows different users to perceive the data in different ways. Much of this problem has been addressed by the various POSC and PPDM data models. However, not many of the software vendors or companies have been able to implement the data models in the optimal way. Consider also that polymorphic behavior which is a cornerstone of the Java Programming Language. Allows users to perceive different methods or ways of processing the data. You begin to see the flexibility and opportunity that is missing with these poor data implementations.

When we talk about the Security & Access Control Module in the People, Ideas & Objects we begin to see the importance of getting all of this data organized and accessible by the right people.

Imagine what it would be like if People were able to access the same data in the same format for the entire Joint Operating Committee. And this would apply to the entire industry. Where the employees and contractors that are authorized access to the data are all trained in the generic industry data models. Everyone would know where the data they need is, and would be able to access it from their clients in an authorized fashion and analyse it effectively for new information.

Lastly, the Technical Vision of People, ideas & Objects. Essentially laying out for the means to have an explosion of data in every corner of the producer's domain. This is not as a result of the application being built, this data will become real on its own. The tools to make it so are now readily available and a matter of time before its generally available. If the data is not organized today, when and how will it be organized in the future with exponentially more data, risk and complexity.

Technorati Tags: People's Data PPDM Specification Security

Google Insights for Search

Google recently released a new service called Google Insights for Search. (Click on the title of this blog post to be taken to the announcement on the Google Research blog). Once you go to the site (http://www.google.com/insights/search/#) it will subsequently show up as an application in your Google Account. There is a related .pdf written by Hal Varian and Hyunyong Choi that details how to use this new and interesting tool.

In the Draft Specification we have two modules that are somewhat related to this product. Both the Analytics & Statistics Module and the Performance Evaluation Module are user defined tools that allow detailed analysis of the data in People, Ideas & Objects. The data is the key attribute to these modules. With the People, Ideas & Objects Technical Vision expecting the data volumes to explode through IPv6, Java and Wireless access to the data in a known format. Data analysis tools like Analytics & Statistics and Performance Evaluation Modules will be the key to obtaining value from it. That is essentially what Google has done with the Google Trends data, published it through a known API and interface.

The purpose in allowing users to access formatted data is the key to the value in using the tools and understanding the data. How many firms have data scattered across many departments and on individuals machine? How much of this data is available through known and trusted access mechanisms? What tools are available for people to interpret and analyze the data. We have the opportunity to embed the R application into the Modules and other opportunities.

I highly recommend downloading the R application, the .pdf from Google on how to use Google Insight for Search and Google Trends data. Experimentation with this opportunity will provide you with the beginning of understanding the opportunities we will make available to our users. And please, join me here .

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Energy declines

Calgary's Herald newspaper has an article in Thursday's issue that supports the many initiatives inherent in this software development project. My actions have been to convince the industry that the need is great for the delivery of an ERP styled application such as People, Ideas & Objects. This began in February 2003 with a proposal that dealt with the two significant constraints of any software developer, code and customers. In September 2003 I then proposed a comprehensive research proposal. This proposal would test my hypothesis of an ERP system that identifies and supports the Joint Operating Committee; would provide the producers with a more innovative footing.

All well and good but it was at this time the producers turned against any idea of using the JOC. Or so I thought. Throughout the months of 2003 my proposals were steadily moving up the chain of command of the large intermediate producers. Reaching most of the CEO's in these firms was a reflection of the effort and the scope of the idea. Or so I thought. The one comment that in retrospect resonates with me is the comment that "we don't hire small research firm's." When none of the producers were interested in spending any money on this idea, I decided to conduct the research my self at my own cost.

In March 2004 I was informed that my thesis was complete and passed. I then set out to rewrite the document in commercial form. This was completed in May 2004 as the "Preliminary Research Report." Upon publishing this I was approached by some one in the industry who gave me two documents from Cambridge Energy Research Associates. These research documents were obviously on the same track as I was on in establishing the JOC as the key organizational construct. Their problem was it was well behind my completed work. I therefore won the right to the copyrights of these ideas. This also brought to mind the comments about "not using small research firms". I concluded this was a deliberate attempt to steal what was now mine. Understand the proposal I made in September 2003 was to conduct the research. The intellectual property was to be for the industry as they would be the ones that financed it. And since I financed it, the IP was mine.

Nonetheless it was around this point that I knew I was now an outsider to this industry. Any attempt to find work became useless and frustrated. Resigning myself to this fact I sought employment in other businesses and industries. And began writing this blog. After over 600 entries and 700,000 words I have been able to take the initial concept of using the JOC and detailed the research and results of the Draft Specification. An overall vision of what the oil and gas industry would look like and operate as by using the JOC.

I mention this bit of history as the basic need for People, Ideas & Objects was evident in the difficulties of finding and producing oil and gas. Finding energy was becoming substantially more difficult. Instead of developing these ideas and applications the industry chose to remove me and my ideas from the marketplace. Instead of doing anything constructive the industry has done nothing about their business but line their pockets with inappropriate levels of compensation.

That is a strong indictment of the brain trust of the Canadian oil and gas industry and particularly its management. And today we see the evidence that they are challenged by the difficulties in finding and producing oil and gas. From the Calgary Herald article.

Natural gas makes up two-thirds of all activity in the oilpatch and production has fallen almost 15 per cent over the past two years, taking the biggest contributor to the government’s revenue stream down with it. From a peak of about 14 billion cubic feet a day in 2001, Alberta’s gas production has steadily slid to a little more than 12 billion cubic feet at present. That figure is widely expected to fall as much as a billion cubic feet a day in 2009 as a result of spending cutbacks by big producers such as EnCana Corp. and Canadian Natural Resources Ltd., which are the two biggest drillers in the province.

It is important to remember that it was during this past two years that record activity in the field was taking place. More money was spent then in any prior period, and a 15% decline is the result? If doing all that activity lead to a significant decline in production what will doing nothing bring?

Herring was poring over numbers that showed only seven per cent of available rigs were drilling in Alberta.

Now granted some of that activity is attributable to road bans. But nonetheless budget cuts have been deep and systemic through out the producers involved in Alberta. In order to resolve this the solution that is suggested is;

The only way to increase production is to punch more wells to offset declines, said Don Herring, president of the Canadian Association of Oilwell Drilling Contractors.

The only way? Doing more of the same thing, expecting different results reflects a mental disability, not a solution.

Its time for the independent actions of people who are concerned about the effects of these irresponsible, selfish and criminal people. The CEO's of the major Canadian independent firms who were party to the discussion of using the JOC should be held accountable for their actions. The opportunity to do otherwise has passed, the damage is done and they are responsible. The road these producers are heading is towards their ultimate decline. Based on their performance in the province of Alberta, they will be out of business fairly soon. Please join me here.

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