Users, the focus and the key

The visions that are part and parcel of People, Ideas & Objects Draft Specification provide the "User" with an interesting "mainstream" business opportunity. User based development is the critical link in making this or any software development successful. I may now start stating this project is "mainstream" based on the ideas of Professor Oliver Williamson and his winning the Nobel in economics.

We have seen in the past few weeks the discussion turn to the hundreds of thousands of jobs that make up Exxon, and by assumption there are hundreds of thousands of different jobs in the industry. This knowledge is held tacitly in the minds of those that work in the industry. To hold the understanding of a handful of the roles is available to many who have an abundance of experience in the business. But that's about it. The collective knowledge of how this industry operates and runs on is unknowable, and that's the point. The only way we are going to be able to understand this tacit knowledge is by having the community of Users detail what it is they know.

Ask SAP how it processes the delivery of propane to a new customer and they will provide you with their understanding of how to bill for a product. What the User knows is how to use the SAP module to achieve the results that are desired. The User has the tacit knowledge of how the industry works and retrofits that understanding into SAP's version of best practice. What is the best or optimal way of doing the job is never asked, until now.

Users have to be the individuals that work with the developers to build the applications that they know can be better. Until such time as the User is the focus of the development, we will not see the optimal or most effective solution. We will continue to be presented with applications that the developer or a single producer needed. Not what is known to be possible. People, Ideas & Objects is the Users opportunity to have the applications they need, built.

It's also an area where the User can build a business. By bringing their ideas of how best to do a job in the industry, they are paid by People, Ideas & Object's. This is not just a one time event, or something they can be involved in for a few years. I see the applications changing constantly as the underlying industry and business changes. These Users will be involved with the developers on a somewhat permanent part time basis. But that's not all. The User has to have hands on understanding of what is happening at the producer firms.

As members of the Community of Independent Service Providers they also have free use of the People, Ideas & Objects applications at their producer clients. Ensuring that the needs of the producer are met by the applications they have had a significant hand in defining and developing. Being intimately involved in bringing the applications to their producer clients. Where their role with the producer being the defining part of their work with People, Ideas & Objects.

This is not a small undertaking and the amount of work being done by the Users is a large multiple of the volume of time that the developers spend in writing the code. To expect that these people would not be compensated for doing this work doesn't pass the laugh test. They need to be compensated for the advanced skills they bring to this project.

User driven developments are proven to be the only successful method of building quality software. With this project we are taking on the entire scope of the administration and management of the Joint Operating Committee and producer operations. Including compliance and governance. This is not a small task, and although the costs have not been tallied, our focus on the User communities development is the only means of software development that is  considered. Please join me here.

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Nobel to Oliver Williamson

The Nobel Prize was awarded to Elinor Ostrom and Oliver Williamson this morning. I can't think of anything that puts the People, Ideas & Objects community inline with the current thinking of the economic community. I am elated. I am not aware of the work of Elinor Ostrom and I will look into her work to see if it applies as directly as Professor Williamson's does. I have two blog posts on Oliver Williamson's work and the one paper I reviewed "Introduction to Transaction Cost Economics" which provided strong grounding for the Draft Specification. I also have 7 other papers of his sitting in the hopper waiting to be reviewed. I'll certainly bump these up in terms of priority as to when I will approach them.

Noteworthy among today's accolades are the following.

From CATO

Both Ostrom’s work on governance institutions and common-pool resources and Williamson’s work on governance institutions and the transactional boundary of the firm contribute meaningfully to our understanding of how individuals coordinate their plans and actions in decentralized, complex systems.

From The Wall Street Journal

“According to Williamson’s theory, large private corporations exist primarily because they are efficient. They are established because they make owners, workers, suppliers, and customers better off than they would be under alternative institutional arrangements. When corporations fail to deliver efficiency gains, their existence will be called in question,” according to information on the research released by the Royal Swedish Academy of Sciences. “Large corporations may of course abuse their power. They may for instance participate in undesirable political lobbying and exhibit anti-competitive behavior. However, according to Williamson’s analysis, it is advisable to regulate such behavior directly rather than through policies that limit the size of corporations.”

and

Ostrom’s work also has something to say about regulation: “The main lesson is that common property is often managed on the basis of rules and procedures that have evolved over long periods of time. As a result they are more adequate and subtle than outsiders — both politicians and social scientists — have tended to realize. Beyond showing that self-governance can be feasible and successful, Ostrom also elucidates the key features of successful governance. One instance is that active participation of users in creating and enforcing rules appears to be essential. Rules that are imposed from the outside or unilaterally dictated by powerful insiders have less legitimacy and are more likely to be violated. Likewise, monitoring and enforcement work better when conducted by insiders than by outsiders. These principles are in stark contrast to the common view that monitoring and sanctioning are the responsibility of the state and should be conducted by public employees.”

From the Calgary Herald

"Since we have found that bureaucrats sometimes do not have the correct information while citizens and users of resources do, we hope it helps encourage a sense of capacity and power," the professor told a news conference via telephone.

and this quote that takes People, Ideas & Objects to the mainstream and away from the "fringe".

"Over the last three decades, these seminal contributions have advanced economic governance research from the fringe to the forefront of scientific attention," it said in a statement.

and

"Are there relationships between the Fed and the banking sector, on which it has such a significant influence, that haven't been thought through as fully as they might in organizational terms?" he asked.

Much of their theories were used to prove the Joint Operating Committee is the key organizational construct of the innovative oil and gas producer. Specifically noting that the natural "boundary of firm and market" is best represented in the JOC being the market. I'm dissapointed that I was only able to review one of Williamson's papers. My favorie quote from his paper is as follows.

Ronald Coase's 1937 paper on "The Nature of the Firm"expressly confronted an embarrassing lapse: whereas the distributing of activity between firm and market had been taken as given by economists, the boundary of the firm should be derived from the application of economic reasoning to the make-or-buy decision. pp. 15 - 16

Please join me here in this worthwhile, and now "mainstream" project.

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James Hamilton on Exxon Production

I have highlighted the work of University of San Diego Professor James Hamilton on this blog before. He writes this weekend on the changing face of the oil and gas industry. Focusing on the difficulties Exxon has experienced this past decade in moving their daily production volumes higher. Exxon has stated on two occasions, 2001 and 2006 they will increase production 3% each year. Only to experience an overall small decline.

This is in many ways last weeks news and something that was known by most "in the know" in the industry as early as the mid 1990's. With the commodity pricing being so bullish in the past decade, it is reasonable to assume that all was done by all the producers to bring on as much production as was possible. Nonetheless the overall deliverability of the global industry has been somewhat stable at around 85 million barrels per day.

What I find interesting in Professor Hamilton's article, is the range of Exxon's risk profile. Spending $4 billion for a 25% interest in Ghana's offshore Jubilee oil field.

...it still seems to signal a change in philosophy for a company that has historically been extremely careful with its investments in order to maintain its position as a very low-cost producer.

It is suggested in the article that Exxon needs a price greater then $100.00 per barrel of oil in order to provide a return for that investment. I would suggest that the ways and means of managing this investment in Ghana is not any different then what a groups of start up producers would face in a low risk onshore play in North America. The Joint Operating Committee is the systemically global method of managing oil and gas assets.

Exxon did not spend $4 billion to have the "operator" take operational control of the property. They will influence what they want to see in the property and participate effectively through the Joint Operating Committee. A form of organization that SAP is not even aware it exists! The members of the JOC are able to pursue their own independent strategies as to what they want and need from the property. The conflict and contradictions only arise when Exxon Mobil should attempt to apply a global corporate compromised strategy. These corporate compromises are unable to extract the value that properties like the Jubilee oil field provides. Each JOC needs to be managed in the best interests of the property. A critical change to the way things need to be done in oil and gas today.

Corporate strategies can be developed on what is done with the value of the proceeds from the Jubilee field, and that is where the large International Oil Companies (IOC's) and the start up producer may differ. I recall my many days when I was auditing Imperial Oil the Canadian arm of Exxon. I was reviewing the firms gas royalty operations on behalf of my client the Alberta Government. This was between the years 1988 to 1994 and I accumulated the knowledge of how the firm was designed.

It was brilliant and awe inspiring. The times were different then today, the commodity prices and oversupply of the market were the two overriding concerns. Looking at how the firm extracted value from each property, granted under a standard corporate strategy, and used their "might" to make the operation the most impressive accumulation of assets that I had ever, and still had the opportunity to see.

What I am suggesting is that today Imperial would need to be run in a different manner. A manner where each property is designed to maximize the return and minimize the risk of each individual property. You can not do that with the bureaucracies that are in play, and the software they use, such as SAP. 

Whether a producer is a local startup or ExxonMobil I don't think makes a difference. The innovative oil and gas producer, the National Oil Company (NOC), or IOC will need to make these changes to this fundamentally different oil and gas marketplace. The world is in a deep recession, except for oil and gas. The pricing has never been better and the upside more dramatic to those producers that can innovatively use their earth science and engineering capabilities against their asset bases. With demand for energy from China and India, the future of the industry looks to be the best it ever has. I would challenge the thinking that SAP, conceived in the 1970's, and bureaucracies, conceived of in GM by Alfred Sloan in the very earliest part of the 20th Century, is the solution to the industries needs today.

As I am one to suggest, you should never expect a mouse to run like a horse, do not expect a bureaucracy and SAP to meet the challenges of this industry on a go forward basis. Please join me here.

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Pushing the Envelope

A lot of change is considered in the Draft Specification. Much of it difficult to assume is correct. What has been researched, and is represented in this blogs 700,000+ words, hangs together in its entirety. In other words it works on paper.

It can be frightening to view the Draft Specification and its impact in oil and gas. I know that people are ready and willing to change. The demand for change being driven by the difficulties in the economy. The escalating oil and gas prices and the financial crisis provides the realization that the old ways need to be looked at. People are looking at this point in time; from the point of view that the old ways are not providing the value we need.

How the future unfolds will not be by happen stance, in my opinion. In other industries some products are assembled in many different countries. They have components and parts that contact dozens of different countries. Organization is more by design then by chance. If, as I believe is happening, the large bureaucracies are unable to continue building value, their difficulties and decline will soon become obvious. That being so, what replaces the ways and means of the oil and gas industry from an organizational point of view.

The point I'm trying to make is that the ways and means of the oil and gas industry will not happen on their own. We need to take what proven ideas we have and start building them to ensure the transition from the old ways, the bureaucracies, is not interrupted to the new, the Draft Specification.

Looking at this problem another way, Exxon Mobil employs hundreds of thousands of people around the world. What do these people do, where do they do it and how do they do their jobs? In many ways we have lost the ability to know what our organizations do. And, if they are failing what does that mean. Can the world afford a decline in energy output? Or do we have an obligation to do something to ensure that there is a transition.

If the bureaucracies have taken the division of labor and specialization to the point where Exxon Mobil employs hundreds of thousands. What will the future need in terms of the division of labor of future organizations. To grow 90 million barrels of oil per day requires innovative, faster organizations. We think we know we can't get their with our current organizations, but we can certainly go backwards into what I will leave to your own imaginations. The choices we make today are therefore critical in making our future.

How this is done is through the people that are a critical part of this industry. Their ideas to make it better and the objects that make up the People, Ideas & Objects software. Please join me here.

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Where do shareholders fit

Yesterday I made the comment that venture capital and industrial capital would not play a role in the future of the oil and gas industry. It is difficult to see how they could begin standing from where they have fallen today, but I need to address another assumption in the Draft Specification.

Where does the money come from that will be used to start the developments within the teams. The teams are the CEO, CFO and COO who are primarily responsible for the discovery and production of the 90 million barrels per day we need by 2030. The shareholders are also critical members of the team as represented by the CFO and through the Board of Directors.

The systemic problems in the financial markets have been with the intermediaries. The banks, brokers, funds and the like. I believe the separation of management and ownership was a good idea, poorly implemented. Interventions by the owners of the businesses have fallen on deaf ears and the implementation of stronger rules like Sarbane's Oxeley have only further entrenched the management.

Direct ownership and representation in the producers is made possible and more effective by, dare I say, Information Technology. This would be a material change in the ways and means in which the oil and gas industry is funded. I agree, the commodity prices are reallocating the financial resources to support innovation and reward sound management. The need for constant infusions of capital will not be as necessary.

Secondly, and here is the point that makes the shareholders involvement possible, if these same shareholders were involved in funding People, Ideas & Objects software development. they would be involved in both the definition and support of the organization. The type of organization that is reflected in this blog.

Recall that Adam Smith developed the concepts of Division of Labor and Specialization. These  have proven that economic growth is a result of reorganization. In the next five to ten years we will face a decline or retirement in the knowledge base of the industry. The volume of work in each barrel of oil will continue to increase as well, particularly from an earth science and engineering point of view. How can this come about if we don't have these changes in the ways and means of the industry?

In this post I have attempted to separate the financial resources between equity and debt. To better understand the role of debt, please review the Financial Marketplace Module.  There is a constant theme throughout these blog posts of the past few weeks. That constant is the need for people to take action. We are challenged by these issues and opportunities, please join me here.

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We need to organize

Yesterday we noted the comments of Mohammed Al-Qahtani of Saudi Aramco. Ninety million barrels of oil are needed to be discovered and brought on to production by 2030. I don't know if he has calculated what that would cost, lets assume its a big number. That's only 21 years, not a lot of time.

Does anyone believe we should leave this task to the current bureaucracies to figure out? How about we leave this ominous task to the likes of SAP to define and support those bureaucracies? It doesn't make much sense does it.

Another assumptions inherent in the Draft Specification is the role that finance capital takes in achieving these 90 million barrels. The short answer of course is absolutely nothing. With the current financial crisis pretty much on full boil it is difficult to see how they could fund the capital requirements for such a Herculean task. Going back to Professor Carlota Perez we find that financial capital is of limited value in the future. Its role was completed in financing the groundwork for the next great surge. The building of the Information and Communication Technologies was the job they were to have done and that is what they completed. As we can see, no one needs their services anymore.

Commodity prices will provide the reward to those producers that are successful. What better motivation is there for the teams, unconstrained cash flow. Failure will also be distributed fairly and equitably. No more need to have the ear of the biggest venture capitalist to endow you with success by granting you an equity influx. Those days are over and the earth science and engineering capabilities are the competitive advantages in the industry, and the determinants of success.

In the world where we are tasked with achieving a 90 million barrel per day increase in production. I can't think of a more exciting place to be then at People, Ideas & Objects. We have a job to do, and its a big one. In terms of the scope of the opportunity, I think that Duvernay's and BlackPearl's left a lot on the table. Please join me here.

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Collaboration is a necessity.

The Oil and Gas Journal have a comment from Mohammed Al-Qahtani, Executive Director, Petroleum Engineering and Development, of Saudi Aramco. He stated simply,

Recovering the world’s remaining oil resources will require a collaborative effort of national oil companies, international oil companies, and service companies.

This quote resonates with a number of assumptions that went into the Draft Specification. How the service industry and the producer companies are able to work closely in this most difficult of tasks. The Resource Marketplace Module is the collaborative medium in which the resource industry is able to market their offerings and contract with the producers that need them. Having an electronic marketplace that enables these connections, and facilitates the contracting is a necessity in my opinion.

The Research & Capabilities Module also provides the producer with a window on the work being done in the service industry. As I mention in that module, the producer receives 100% of the revenues from the sale of oil and gas. These financial resources need to be allocated to the service industry to conduct the research the producers will need in the long run. Funding these activities directly are what will be necessary for the producer and service providers to achieve what Mohammed Al-Qahtani also says in the article.

In addition, he noted that the world would need an additional 90 million b/d to offset declines in existing oil fields to reach a 125 million b/d level by 2030. Current world production is about 80 million b/d.

Finding 90 million b/d will be tough without the ability to collaborate in this manner. Another assumption that I have mentioned before is that the National Oil Companies will become active partners in making these plans real. Their nations reserves could best be developed in collaboration with producers from other nations. Much as Saudi Arabia has always done.

These assumption need to be incorporated in the systems that producers will use from now to 2030 and later. Systems built with the full involvement of its users. Please join me here.

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Framework Alignment

One of the attributes of an SAP system is the ability to maintain the corporate entities compliance and governance. When a firm needs reporting to the SEC or the various tax authorities, SAP provides a solid foundation or framework for that requirement.

In oil and gas the Joint Operating Committee is the legal, financial, cultural, communication and operational decision making framework. It is the business of the business of the oil and gas industry and SAP knows nothing of its existence.

What People, Ideas & Objects is developing is a replacement for the SAP ERP system. One that is purpose built and designed by its users for the oil and gas producer. A system that aligns the compliance and governance frameworks with the five frameworks of the Joint Operating Committee. An alignment that eliminates the conflict between operational authority and accountability. An alignment that identifies and supports the key attributes of an innovative oil and gas producer.

In my opinion SAP provides the compliance and governance that is necessary for the public oil and gas producer. But these are not the drivers of the business. The Compliance & Governance Module of the People, Ideas & Objects Draft Specification provide the same compliance and governance that SAP provides, however, with several differences. Instead of being the driving reason of the administration of the firm, the compliance and governance are processes that fall out of the actions and processes conducted within the Joint Operating Committee.

One of the major issues that is presented by using the Draft Specification is the governance model. With the Joint Operating Committee taking a larger and more prominent roll in the day to day management of the asset. Influence and contributions come from many different corporate entities. What is needed is a governance method that can appropriately manage the asset and meet the compliance and governance needs of the producers who make up the JOC. These are the reasons that the Draft Specification has developed and introduced the Military Command & Control Metaphor governance model.

Although moving to identifying and supporting the JOC brings issues like the compliance and governance model into question. Methods to overcome these issues are sound and are enabled for one reason, in my opinion. And that is the natural way that the JOC operates within the industry. The Draft Specification is simply aligning itself with not only the five frameworks of the JOC, but the natural way in which the industry operates. This is also the reason why SAP fails in oil and gas, please join me here in building this worthwhile system.

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Industry Management of Intellectual P...

I want to stress or highlight a key point of the Draft Specifications assumption about the producers competitive advantage. The physical assets, reserves, leases and the capabilities in exploiting those assets are the sustainable competitive advantage that producers are interested in. A producer organization focused on building value, using the Joint Operating Committee (JOC) as the key organizational construct, can employ the right strategy for that JOC. There is no need to have a corporate strategic compromise now practiced in most firms. The strategies of the various producers within the JOC do not have to be, and probably never will be the same. Many producers have different asset mixes, costs and dynamics within each JOC. They are each free to pursue their strategy without creating conflict within the JOC.

In addition the energy producers need not own can not own the intellectual property of how the industry conducts its operations. The service industry is best able to work with the producers to innovate and develop the tools and methods necessary to optimize the discovery and production of oil and gas. Does it provide Duverney or BlackPearl with any value to have developed and patented the most innovative drill bits? Of course not, if they had developed their own drill bits they would probably be in bankruptcy instead of sold for many billions of dollars.

Is the CFO of a producer firm going to come up with the next great innovation in drilling technology. How about the CEO, will he finally prove his theory about the physics of oil and gas accumulation? No. If they were they're not doing their jobs. And as Duverney and BlackPearl have shown. Their job is in applying their understanding of the science to the assets they own, and building their production and reserves.

Who is going to "break their pick" on the next drilling technology. Who is going to discover the next organizational structure that supports the innovative producer. These innovations can only be discovered and built based on the scale that has the entire energy industry benefiting from them. To have them within one producer does not provide the motivation for the individuals to break their pick doing so. This is why the Draft Specification has developed the Research & Capabilities Module and the Knowledge & Learning Modules.

I see Canadian producers involving themselves in the business of their suppliers and service operations. When Encana purchases its own rigs when there is a rig shortage, that only stops anyone taking the risk of building new rigs. The message is the oil and gas company will involve itself in direct management when the service industry is unable to provide the needed services. This too is a direct symptom of the attitude that the Intellectual Property of the oil and gas industry is not developed or owned by any group or individual. This is the wrong type of thinking and it needs to stop. Please join me here.

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MGI on Global Financial Markets

The McKinsey Global Institute is the research and development arm of McKinsey Consulting. (Registration Required) They have published "Global Capital Markets: Entering a New Era".

MGI’s mission is to help leaders in the commercial, public, and social sectors develop a deeper understanding of the evolution of the global economy and to provide a fact base that contributes to decision making on critical management and policy issues.

To suggest that I am overwhelmed by the scope of the economic problems that we face. Is something that I would never have believed possible. I'll leave it to those that want to review the paper to do so, however, it is stark. My "job" here at People, Ideas & Objects is to make the ideas compelling for like minded individuals to organize and act. I call on the shareholders of the existing oil and gas firms to build the software discussed in this blog. To act in financing the building of the application modules in the Draft Specification. As Paul Romer recently said in terms of his Charter Cities initiative, "All that holds us back is a failure of imagination."

After 12 months of the global credit crisis, it is easy to see the difficulties that continue in the marketplace. In reviewing this MGI document it is clear that serious problems remain. My own opinions are not of importance, but it really seems that we have been using debt to fuel the western lifestyle for the past 20 years. To find the value that should have been generated during this past 20 years, is a lonely and difficult task. I see the bureaucracy as being the main culprit here. Accusing the bureaucracy is somewhat self serving for me to say, but I don't see any value being generated through this archaic form or organization. Continuing on in the fashion that we are, shows me that we will be challenged in keeping the global economy moving forward. 

I leave you with a few select and sobering quotes.

Going forward, our research suggests that global capital markets are entering a new era in which the forces fueling growth have changed. For the past 30 years, most of the overall increase in financial depth—the ratio of assets to GDP—was driven by the rapid growth of equities and private debt in mature markets. Looking ahead, these asset classes in mature markets are likely to grow more slowly, more in line with GDP, while government debt will rise sharply. An increasing share of global asset growth will occur in emerging markets, where GDP is rising faster and all asset classes have abundant room to expand.

Given the decline in asset values and growth in debt, we see that leverage in the global economy has increased during the financial crisis rather than declined. This is true for many households, governments, banks, and some segments of the corporate sector. In aggregate, the global debt-to-equity ratio nearly doubled, jumping from 124 percent in 2007 to 244 percent by the end of 2008. This raises the vulnerability of the global economy to further shocks. It also indicates that the long process of deleveraging in the private sector has at best only just begun, and in the public sector has yet to begin.

One of the most striking consequences of the financial crisis was a steep drop-off in cross-border capital flows, which include foreign direct investment (FDI), purchases and sales of foreign equities and debt securities, and cross-border lending and deposits. These capital flows fell 82 percent in 2008, to just $1.9 trillion from $10.5 trillion in 2007 (Exhibit 7). Relative to GDP, the 2008 level of cross-border capital flows was the lowest since 1991. This created turmoil in the global banking system, causing severe liquidity crises and hurting borrowers dependent on foreign loans. It is unclear at this writing how quickly these flows will recover.

Although the crisis started in the United States, it followed multi-year borrowing expansions in many other countries as well. Total global borrowing—comprising all loans, forms of credit, and debt securities—rose by 70 percent from 2000 through 2008, to $131 trillion. Not only has the recent credit market turmoil nearly stopped this growth, but it has set the stage for a long process of debt reduction going forward.

Many parts of the economy will need to be rebuilt. Oil and gas is rebuilding around the Joint Operating Committee and the vision of the Draft Specification. Please join me here.

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