McKinsey on Risk

McKinsey Consulting are providing a 14 minute video of Peter L. Bernstein talking about risk. This is a fascinating and valuable video that I promise you will learn one or two things about risk. It's unfortunate that the video marks the passing of Mr. Bernstein, but I have put his book "Against the Gods: The Remarkable Story of Risk" in my library.



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What's holding the project back?

Well there is that budget. We currently stand with no commitments to proceed with the development of these applications. I have established December 31, 2009 as the start date for the Preliminary Specification, however, this will be delayed if the funds are not secured by September 30, 2009. Delayed for approximately one year, or the end of 2010. I see the producers, and particularly ExxonMobil, Shell, BP and Chevron having a role and responsibility to ensure this project does not get delayed any further. I will continue to impress upon them, and other producers, that they have the most to lose and the most to win in the new energy era.

 

The budget has been set for the Preliminary Specification at $30 million. This represents 30% of the study or definition phase of the project and 3% of the proposed preliminary budget of $1 billion. Companies may argue that these costs are too prohibitive. I would point them to the People, Ideas & Objects business modeland value proposition to show them how these costs are actually the least expensive IT expenses they've faced in many years. I would then ask them how efficient are their organizations today. Give them a copy of Adam Smiths "The Wealth of Nations" and highlight the division of labor and specialization theories. And lastly ask them how, in the near future, are the most efficient organizations going to spontaneously appear in a global economy?

 

Tying together the role and responsibilities with the budget needs is the plain hard facts. If we want to skip portions of the Preliminary Specification, then we can increase the overall developments time, accuracy and costs to accommodate that. The point being the most effective time and energy to get it right is at the beginning. Skimping on the costs here is the wrong direction to take. And what are we talking about, if we were to source funds from only the four companies mentioned this would be a one time cost of $7.5 million each.

 

And for that there is no guarantee. If we subsequently choose to travel further down the development road. The value for these producers will exist in the applications ability to meet their unique organizations needs and asset requirements. What I am saying is, the onus falls on the producer firms that commit to this project; to not limit their contribution just to capital. The effort and understanding of their operations must be represented and operational within the finished software. I see this responsibility being the subscribing producers as much as it is the user groups. Success will be a matter of the collective will of many people. Please join us here.

 

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Exxon's Annual Meeting.

On MasterResource, "a free market energy blog", the author Robert Bradley has a summary of the ExxonMobil Annual Meeting. First of all it is satisfying to see an energy company that doesn't indulge in the politics of climate change or the folly of alternative forms of energy. Those within the industry that are in the know, know that the exploration and development business has entered a more scientific level of complexity.

The metrics of success and failure in the oil and gas industry have therefore changed. Metrics that will determine the winners and losers on a far different basis then the metrics that brought the industry leaders to their lofty heights. ExxonMobil's, BP's, Shell's and Chevrons. The Draft Specification is based on the understanding that I gained from over 30 years of oil and gas experience, the research into innovation and organizations that has been published on this blog, and a passion for Information Technologies.

If we approach the energy problems that we have today with yesterdays organizations and approach. Then it is reasonable that we will fail in this "new" business. If however, we understand that software defines and supports the organizations, then we need to build a software application that will enable the oil and gas producer to achieve the speed and innovativeness necessary to continue to succeed in this business.

I find ExxonMobil's CEO Rex Tillerson's comments in the Annual General Meeting refreshing. Comments that reflect his concern, focus and understanding of the energy business is consistent with the Draft Specification.

Comments such as;

Petroleum as a primary energy source is the future, not only the recent past. (Comment: renewable energies once had a 100% market share, corresponding to mankind’s energy poverty era.)

Although renewables and alternatives are growing, their overall piece of the energy mix will remain small until they reach the massive scale at which fossil fuels are used. And Exxon won’t invest beyond research until renewables are profitable without subsidies, Tillerson said.

The situation before all of us is very difficult. The solution starts with action, action by individuals who join this user group, and producers such as those mentioned in this article, working together to solve these problems. On a related note I am reminded of Ray Kurzweil's comments of how we solve large problems through exponential developments. Please join us here.

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Google's Wave

With Google Wave I think we have a clear direction where the future of Information Technology is headed. There is an hour and twenty minute video of the Google Developers Conference announcement of their Wave product. Although it is early, I do not see to many hurdles to having the product shipping. Clearly the technology is not the key attribute of the value of the Wave product, its the implementation.

Lets quickly dispatch the techno speak with this one paragraph. Wave is open source, Java and uses the Google Web Toolkit. (Renders browser based code from Java.) All within the technology stack used by People, Ideas & Objects. The one technology that is not available is the W3C's HTML 5. I do not foresee HTML 5 having too much difficulty in being implemented quickly. HTML 5 provides some persistent data storage which is provided by the able Google Gears in the product demonstration.

So why is Google Wave an important technology for users and producers of People, Ideas & Objects. I will be augmenting the Draft Specification to include the video and this text. If we go back through this blog and the ideas that were used to build the Draft Specification. We focus on three key areas and some minor additional points. The three key areas in descending order of relevance are the Accounting Voucher Module, Military Command & Control Metaphor and Security & Access Control Module.

Recall in the Accounting Voucher we are capturing the changes in the business on a month to month basis. As "things" happen they are captured and recorded in the Accounting Voucher for future use. If this isn't making any sense then please review the Accounting Voucher part of the Draft Specification to better understand what it is that I am saying. The accounting changes that are captured in the Voucher are the discussions, documents and decisions that are made. The Accounting Voucher is capturing and recording the financial impact of these changes. It is the Google Wave infrastructure that we inherit, by using its open source code, and enhance it to incorporate the ability to capture these financial changes.

As the video reflects, we acquire these in a unique interface provided by Google. Representatives of the various producers on the Joint Operating Committee (JOC) interact on the topics of interest in the JOC. These are in documents, asynchronous communication, synchronous communications and in all the media available. The mode of these interactions are person to person, person to process, process to person and process to process as I noted in the Preliminary Research Report. A rich environment that provides the media, mode and method of communications that are necessary to support the innovative oil and gas producer.

The Military Command & Control Metaphor is used throughout the Draft Specification as the means to provide the dynamic resources provided by the producer members of the JOC. Much as the pooling of military resources is done by the NATO forces, the People, Ideas & Objects application is able to dynamically assign the corporate governance, authority, role and responsibility necessary to efficiently and innovatively manage the Joint Account. This Metaphor is used throughout the application, but most importantly one that controls the interaction of the communication and documentation contained within the Google Wave open sourced code.

Lastly I want to reiterate the importance of the Security & Access Control Modules use of Sun Microsystems Federated Identity software as the means to ensure these corporate governance needs are maintained in such a dynamic manner. I would encourage readers to spend some time in these elements of the People, Ideas & Objects application. It is an area that I think the innovation could and will prosper and is ripe for the users to exploit for their advantage; and please join us here.

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Changes at Shell.

A number of articles are appearing about the announced changes at Shell. A new CEO Peter Voser takes over July 1, 2009 and has announced a major overhaul of the firms operations. Fox notes:

Oil giant Royal Dutch Shell on Wednesday announced a series of changes to senior management roles and responsibilities, which it said were aimed at creating a sharper focus on operating performance and technology.

I interpret these changes as an admission that the engineering and earth sciences necessary for each barrel of oil produced are increasing. The Calgary Herald reported that Voser said:

"Organisationally, we are too complex, and our culture is still too consensus-oriented. Our costs are simply too high," Voser said in an email to staff, excerpts of which were seen by Reuters.

Details of the changes include the consolidation of divisions into operating units around geographical locations. North America being one in which I would assume Houston will take the lead role in. It is also reported that many lay offs will occur throughout the company. 

The Calgary Herald notes many of the differences between Shell, Exxon and BP's announced reorganizations. These are all ongoing and reflect different characteristics and management styles. 

Exxon is renowned within the industry for its strict management practices and insisting employees do not deviate from standard operating procedures. BP, on the other hand, had a risk-taking culture that allowed considerable freedom to managers of units or fields, and Shell had a culture of making decisions by consensus.

What does People, Ideas & Objects offer firms such as Shell, Exxon and BP.

• The Preliminary Research Report provides:
  
• A focus on the expanding earth science and engineering demands of each barrel of oil.
• A focus on innovation and its iterative impact on science. 
• How a firm can adopt an innovative footing.
• A greater focus on the business of the business through the five frameworks of the Joint Operating Committee.
• Providing the innovative footing and science based strategy.
• The legal, financial, operational decision making, communication and cultural frameworks of the industry. 
• A global dedicated oil and gas software development capability.
  
• Unconstrained by the paradox of code and customers. 
• Draft Specification.
• Eleven modules based on the research contained in the Preliminary and Final Research Reports.
• Firm focused application modules.
• Compliance & Governance 
• Research & Capabilities 
• Analytics & Statistics 
• Marketplace focused application modules.
• Petroleum Lease Marketplace 
• Resource Marketplace 
• Financial Marketplace 
• Joint Operating Committee application modules.
• Knowledge & Learning 
• Performance Evaluation 
• Accounting application modules.
• Accounting Voucher 
• Partnership Accounting 
• Generic
• Security & Access Control 

It's interesting the three methods that are used by Exxon (Strict Management Practices), Shell (Consensus) and BP (Risk Oriented.) Neither of these management practices or strategies are precluded in the People, Ideas & Objects. It is very clear that a unique strategic identity is enabled in each producer through this system. This also does not preclude a strong governance structure. With the reduction of the hierarchy an alternate form is required and one has been developed. That is the Military Command & Control Metaphor used within the Joint Operating Committee affording the pooling of resources and reducing the redundant capabilities built within each silo'd oil and gas firm. 

Lastly I would point to how this project is a commercially viable one by pointing out the business model of People, Ideas & Objects and the Community of Independent Service Providers. And the Technical Vision  of where the Information Technologies promise the greatest value and how this product is supported technically. 

These firms are a part of the global oil and gas industry and therefore part of the focus of this development. I encourage you to forward this post to the people you know at Shell, Exxon or BP and have them read for themselves what is possible. I would also encourage you to get involved in moving this vision forward by joining in this process. 

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For the last time.

This royalty "debate" in Alberta has to stop. We consistently are told by the Calgary Herald, who for some reason are beholden to the venture capital groups, that the Provinces royalty regime is the reason for the economic difficulties. Are we to assume then, that the Alberta Governments royalty regime is the source of the global meltdown. 

The issue is there's money on the table. Billions and it belongs to the resource owners, the people of Alberta. It goes back to the battle of Alberta in 1972. Our Premier Peter Loughheed was not going to allow the Federal government, represented by Canada's version of Obama, Pierre Trudeau to abscond with the resources that belonged to the people of Alberta. Trudeau mania, as the Obama nation will do for the U.S., destroyed Canada. Loughheed was successful and the bitter Trudeau in retaliation changed the tax laws to disallow Alberta royalty payments as deductions from income taxes. Never before has a tax been implemented is such an unfair and unreasonable basis. 

Fast forward to today, our new Prime Minister Stephen Harper from Calgary quietly reversed this injustice two years ago. The tax deduct-ability of Alberta Royalties was brought back in line with all other industries and jurisdictions. Therefore creating a huge after tax benefit for the producers. What is not remembered is that the Alberta government had to reduce their royalty take in order to remain competitive in the industry. Not reducing the royalty take would have left Alberta a ghost town.

Enter the 1980's and Trudeau is up to no good again. This time implementing the national energy program. This much hated program disallowed producers from selling their production at world prices, and received a regulated price dictated by Ottawa. A wellhead tax of 12% and the discriminatory ownership rules that disallowed anyone but Canadians owning oil and gas producers. Lougheed countered this, again, with the Alberta Government granting up to 35% of capital costs to producers that remained active. This also stopped the province from housing only ghost towns. 

In the 1990's we found ourselves in debt and had a budget deficit of mammoth proportions. Our new Premier Ralph Klein implemented an austerity program that enabled us to live with in our means and indeed reduce our debt. Note at no time were the producers subjected to any changes in the royalty framework or taxes in order to balance the budget. This was done on the back of taxpayers who went without education and health benefits. Civil servants by the truck load were laid-off and eventually the government finances recovered. 

In this past decade the province has prospered due to their fiscal house being in order. We became debt free and were the benefactors of an appropriate fiscal discipline and increasing energy prices. What throughout this period back to the 1970's provided was a stable royalty regime for the industry that existed since 1972. My math may fail me but that is 37 years ago. Has the industry changed? Does the Alberta government have to keep its hands off the windfall the producers are realizing from the federal tax changes? I wouldn't think so either. 

What the Calgary Herald seems to be unable to comprehend is the royalties are the fair value consideration the producer pays to earn title to the product. It is not a tax. Royalties belong to the people of Alberta and the producer must purchase those commodities from the people of Alberta. The Alberta Government acts as an intermediary to administer and distribute this value back to the rightful owners. I have repeatedly made comments to the Calgary Herald over the past year about these points and have never seen any of these facts appear in the paper. I find it ironic and typical of the Herald is not permitting any comments on this point in today's' on-line version. 

The Canadian Association of Petroleum Producers have been running this campaign for the industry. Recent defections of their members are showing that cracks are appearing in this facade. Husky and Paramount have both ceased to be members of the association. It is not clear why they declined their membership, but the "rumor" is it's over the handling of this royalty situation. Paramount' founder and leader is on record as saying the royalty changes are positive. Therefore, I think the Calgary Herald, who are soon to meet the great printing press in the sky, will have the Calgary people cheering their demise for their representing only CAPP's point of view to the real owners of the oil and gas resources. 

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Sources and costs of energy.

Reason Magazine have published a summary of the various costs, advantages and disadvantages of the various forms of energy. This summary is very educational and shows in stark terms the energy problems we face. It makes it clear where we should putting our capital and our efforts. It also shows that when man attempts to best mother nature, it usually turns out bad. Have a look here.

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Welcoming Jeff Rubin to the club.

Today's Calgary Herald has an article on Jeff Rubin former Chief Economist and Strategist at CIBC World Markets. He has been prescient in his predictions of oil prices over the last two years. Accurately predicting both the rise and recent fall in the prices. The statement that he makes is as follows:

Everything we have taken for granted is about to change. Our cars, our homes, our whole world has been getting bigger in the cheap-oil era. Now it is about to get smaller - and, greener. Much greener.

Rubin's problems, and his joining the "club", is as a result of the recent publication of his book.

Why Your World is About to Get a Whole Lot Smaller: Oil and the end of globalization. 

Seems his employer didn't want to have anything to do with the book!

Rubin, who spent 20 years at the Canadian Imperial Bank of Commerce unit, said he quit to publish his book after the Bay Street firm didn't want to be associated with it. 

I went through the same process in May 2004 when I published the Preliminary Research Report. The report that is the basis of this software development project; and is where it was proven the Joint Operating Committee is the natural form of organization for the innovative oil and gas producer. As a result of the publication of this report, I have not worked in the oil and gas industry for five years. I know what it's like to be ostracized for your ideas. It's not the most enjoyable process, it is however, very liberating. 

As more voices start down the difficult road that I, and now Jeff Rubin have taken. It's important that the people who join this development are not subjected to this archaic and destructive process at the hands of the vested interests. I have set up the system here in such a way that the only way your employer can know you are participating in this development, is that they are here too. So please follow this process and join us here. 

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A Failure of Capitalism.

A fascinating debate is taking place over on Professor / Judge Richard A. Posners second blog . I mention his "second" blog as his first is a weekly debate between himself and Nobel Prize winner Gary Becker. Each week they debate a finer point of economic interest on the well read Becker-Posner blog. Posner's second blog is an extension of his recent book "A Failure of Capitalism: The Crisis of 08 and the Descent into Depression."

In this blog he has solicited some interesting commentary and dialogue. Recently he received a comprehensive reply from former Federal Reserve Chairman Alan Greenspan. Greenspan's points are here, here and here. Posner responds to Greenspan here . 

I highly recommend that you subscribe to both of Posner's blogs and read the debate that is taking place around this fascinating time of economic renewal. 

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Exploration facts.

There's news from Reuters and the Calgary Herald that Canadian oil and gas companies costs of finding and producing oil are expected to fall this year. What has to be record prices is the announcement that the cost of replacing one barrel of oil rose to $22.72. It does not mention whether this was attributable to the higher level of engineering and earth science per barrel of oil, or, the lower volume of discoveries of reserves from exploration and production activities.

Irrespective of the specific reason why the price is rising, the same costs in 1999 were only $4.38. (All prices are reflected in Canadian dollars.) What the two articles subtly suggest is the costs associated with drilling and field work were up substantially. I have mentioned many times that the oil and gas company manager operates more as a Seal trainer then someone interested in developing the business they are in. They are only more interested in making themselves look more important by doling out the fish food to the service companies based on a "what have you done for me lately" basis. Between holding their captive audience over lunch to hear how wonderful they are, and talking to the press about how greedy the service industries have become, these oil and gas company managers pretend to have a full slate of work. Nothing could be further from the truth and I would suggest, again, that these people be shown the street as soon as possible. 

I have addressed these issues in the Draft Specification. The ability to develop the service industry is a critical part of an innovative oil and gas industry. The constant boom and bust cycles, and the "this quarter closing" ritual have made it difficult for service companies to develop any long term vision. Make hay while the sunshine's and hunker down when the storms role in are the only two operational strategies. To move forward from an engineering and earth science point of view. The oil and gas companies must approach the service industries with an eye to developing usable and innovative technologies together. The companies receive 100% of the revenues associated with producing oil and gas. When it comes to paying the royalties for those that are entitled to them, or the service companies that help in the exploration and development, the oil and gas company manager treats them as if they are a leach on their otherwise unearned fortune. The Resource Marketplace Module and Research & Capabilities Module address these issues and offer a solution of how the oil and gas and service industries can achieve greater throughput, innovation and capabilities. 

To speak to the elements in the main part of the Reuters and Herald articles. I suggested in the Preliminary Research Report that the engineering and earth science costs per unit of production were going to escalate as a result of the lapsing of the cheap energy era. This difficulty is showing itself in the five fold increase in costs over one decade. If anyone believes this trend will continue, that would bring a $110 / barrel of oil cost within the next decade. I happen to believe the number will be substantially more then five fold, although I have given up my gambling and fortune telling careers.

The power hungry primates that serve as managers at the Canadian oil and gas companies will have much larger budgets to play with. People, Ideas & Objects research shows that oil and gas companies are organizationally constrained. For them to increase their throughput requires more resources. Consistent throughout the Draft Specification is an understanding that re-organization is the only proven method of increasing productivity. Adam Smiths pin shop proved this in the 1700's and we have benefited from specialization and the division of labor since. The need is evident to me. Please join me here.

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