The Preliminary Specification Part CLXXII (RM Part XXVI)

In terms of content, or point of discussion, we are bouncing around a bit. Our overall topic is capabilities, and we are moving from yesterday’s discussion of modularity to today’s topic of dynamic transaction costs. There is a point to all of this bouncing around and we’ll get to it some day. Dynamic Transaction Costs are somewhat of a unique area of research for Professor Richard Langlois. That is to say I think he is the leading researcher on the topic. It is a topic that affects us significantly as we operate in an environment where change is the one constant that we can rely on. Langlois’ definition of Dynamic Transaction Costs from “Transaction Cost Economics In Real Time” is as follows.

Over time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost - the cost of transferring the firm's capabilities to the market or vice-verse. These "dynamic" governance costs are the costs of persuading, negotiating and coordinating with, and teaching others. They arise in the face of change, notably technological and organizational innovation. In effect, they are the costs of not having the capabilities you need when you need them. p. 99

Clearly the oil and gas industry will have significant Dynamic Transaction Costs without People, Ideas & Objects Preliminary Specification. That is to say that they will not have the capabilities they need when they need them if they continue to use SAP in the structured hierarchy. Nonetheless, even with the use of People, Ideas & Objects there would be Dynamic Transaction Costs incurred as a result of the movement to full reliance on the market for its resources. Recall we are looking for “thicker” markets to develop as the Joint Operating Committees look to the market for all of its Resource Marketplace. Lets recall what capabilities are with a quote from Langlois’ paper, and the phrase from Harvard Professor Carliss Baldwin of “Knowledge begets capabilities beget action”.

Although one can find versions of the idea in Smith, Marshall, and elsewhere, the modern discussion of the capabilities of organization probably begins with Edith Penrose (1959), who suggested viewing the firm as a 'pool of resources'. Among the writers who have used and developed this idea are G.B. Richardson (1972), Richard Nelson and Sidney Winter (1982), and David Teece (1980, 1982). To all these authors, the firm is a pool not of tangible but of intangible resources. Capabilities, in the end, are a matter of knowledge. Because of the nature of specialization and the limits to cognition, organizations as well as individuals are limited in what they know how to do effectively. Put the other way, organizations possess a pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities. pp. 105 - 106.

In a previous post we noted that when a supplier / vendor was selected within the “Planning & Deployment Interface” of either the Research & Capabilities or Knowledge & Learning module. Then the associated key and operational staff c/w their positions in the Military Command & Control Metaphor would be populated into the interface from the Vendor / Supplier Contact Database. With this information that we have learned today about the Dynamic Transaction Costs. We could also populate the “Planning & Deployment Interface” with the capabilities information from the supplier / vendor when it is selected. This information would also become available when it was required from the Vendor / Supplier Contact Database and be maintained by the vendor, as all the information in that database is.

"In a metaphoric sense, at least, the capabilities or the organization are more than the sum (whatever that means) of the 'skill' of the firms physical capital, there is also the matter of organization. How the firm is organized - how the routines of the humans and machines are linked together - is also part of a firm's capabilities. Indeed, 'skills, organization, and technology are intimately intertwined in a functioning routine, and it is difficult to say exactly where one aspect ends and another begins' (Nelson and Winter, 1982, p. 104)." p. 106

There will be a significant amount of information that is made available to the users of the “Planning & Deployment Interface”. Certainly the information to determine what is required to mitigate the Dynamic Transaction Costs, define any deficiencies and to map out a successful project. We’ll be discussing more on this topic in the days to come.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CLXXI (RM Part XXV)

We have completed our review of how the Resource Marketplace module of the Preliminary Specification manages the boundaries of the firm and markets. Among the many areas of research of Professor Richard Langlois is modularity. Modularity builds on the boundaries between the firm and markets and is the reason that the Preliminary Specification has eleven modules. The primary advantage gained by using modularity is the ability to manage change. By isolating the impact of the change to one module, the impact of the changes are therefore manageable.

Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces - which can then communicate with one another only through standardized interfaces within a standardized architecture - one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections. p. 1

People, Ideas & Objects impact is beyond just the software that is proposed to be developed. Organizations such as the producer firm, the Joint Operating Committee and the service industries participants are all impacted as a result of the modules in the Preliminary Specification.

What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to modularity in the design of the organizations that produce such products. p. 1

and

Why are some (modular) social units governed by the architecture of the organization and some governed by the larger architecture of the market? p. 2

It is in the Revenue Model that People, Ideas & Objects assert that these software developments are not just for the oil and gas producers. They are for individuals, society, and the service industry as well. To focus only on the producers misses some of the “who” we are developing these systems for.

The set of design rules that guide social interaction are what we can generally call social institutions (Langlois 1986). These rules determine (among other things) the extent to which, and the way in which a society is a modular system. The desirability of modular design is a theme with a long history in the theory of social institutions. Adam Smith long ago proposed a decentralization scheme based on what he called "the obvious and simple system of natural liberty," by which he meant a system of private property regulated by common law and subject to minimal central administrative intervention. On the economic level, this approach would lead, he believed, to economic growth spurred by innovation, learning, and an ever increasing division of labor. pp. 14 - 15

and

if we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place," he wrote, "it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its order. We must solve it by some form of decentralization" (Hayek 1945, p. 524). p. 15

When a user is working in the Resource Marketplace module. Whether they are in an oil and gas producer, a Joint Operating Committee or a supplier / vendor. The scope of what they are dealing with are limited to the Resource Marketplace. Modularity provides interfaces to the other modules when necessary, however, dealing with just the data, processing and functionality of the Resource Marketplace enables the module to deal with many of the problems within that marketplace. The key variable that it is able to deal with is change.

Under some circumstances, the benefits of modularization may not be worth the cost. For example, a system whose environment never changes may not have to worry much about modularization. p. 8

and

In a world of change, modularity is generally worth the costs. The real issue is normally not whether to be modular but how to be modular. p. 11

These software development issues and opportunities fall within the scope of a producers General & Administrative costs. They are not core to their competitive advantages of their land and asset base, or earth science and engineering capabilities. Yet they are critical to provide the producer with what People, Ideas & Objects asserts in our Revenue Model as our core competitive advantage, as the most profitable means of oil and gas production. It is the business of the oil and gas business that needs to be focused on in order to move forward and provide for tomorrows earnings. Muddling through this time may not work.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CLXX (RM Part XXIV)

To suggest that the Preliminary Specifications interfaces and the methods of innovation that are used in the Preliminary Specifications Resource Marketplace, Research & Capabilities and Knowledge & Learning modules. Will operate in an environment that is similar to what the oil and gas industry operates in today misses the point of how the industry will have to reorganize itself to undertake the work loads of the future. It will be under an advanced division of labor and specialization that more work will be able to be done with the same resources. This applies most specifically to the earth science and engineering resources of the industry, however, it also applies to all areas of the oil and gas and service industries. How the task is completed today may be fundamentally different from how the task is completed in the near future. That is almost a given.

To coordinate this group of disparate individuals and organizations falls to the Joint Operating Committees. A reliance on the market is the only conceptual model that can be contemplated for the future innovative oil and gas industry. To approach this task without the software identifying and supporting the innovative processes will most certainly lead to failure. Professor Richard Langlois in his paper Capabilities and Governance noted the following two points.

Either way it boils down to the same common-sense recognition, namely that individuals - and organizations - are necessarily limited in what they know how to do well. Indeed, the main interest of capabilities view is to understand what is distinctive about firms as unitary, historical organizations of co-operating individuals. p. 17

and

In a world of tacit and distributed knowledge - that is, of differential capabilities - having the same blueprints [or software] as one's competitors is unlikely to translate into having the same costs of production. Generally, in such a world, firms will not confront the same production costs for the same type of productive activity. p. 18

The costs of coordination, and how that coordination is done are about to change. It will be those producers that participate in the People, Ideas & Objects user communities that will gain the greatest advantages. They will have their unique needs met, and will be able to reorganize themselves to accommodate the software, and optimize their role in coordinating their capabilities. In a working paper entitled “Organizing the Electronic Century” Professor Langlois states.

Moreover, by taking advantage of a range of capabilities far wider than the boundaries of what even the largest firm can encompass, a network of specialist suppliers and competitors is better able to exploit the value of a complex and potentially modular product architecture.

Tomorrow we will begin a review of how the Preliminary Specification handles handles modularity.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CLXIX (RM Part XXIII)

The competitive advantages of the innovative oil and gas producer. Are their land and asset base, and their earth science and engineering capabilities. What the Resource Marketplace module of the Preliminary Specification provides is the means for the producer and Joint Operating Committees to coordinate those capabilities from the marketplace. In today’s post we will introduce the interface within the Resource Marketplace module that will assist in making the supplier a key contributor to the firms or JOC’s capabilities.

At this point we have the suppliers and vendors maintaining the key contact information for their firms in the “Vendor / Supplier Contact Database”. This is done to increase the accuracy of the information and reduce the time required for each of the producers to maintain the vendor contact data necessary. What will be required is for the producer to select the vendor as being a supplier that the firm will use; either as a producer, or in one of its Joint Operating Committees. This tagging will be determined through a process that the People, Ideas & Objects user community will determine. Upon selection in the “Vendor / Supplier Contact Database” it will bring in a variety of other vendor supplied data that will assist the user in the “Planning & Deployment Interface” of the Research & Capabilities or Knowledge & Learning module. Data such as their key field staff, members of their operational staff and their roles that can be assigned within the Military Command & Control Metaphor etc. This will also provide access to their calendars and other information if the resources were selected in the “Planning & Deployment Interface”.

What this denotes, and so much of the Preliminary Specification requires, is that the People, Ideas & Objects system is not a stand alone software application for one firm. It is a holistic industry-wide solution that spans the oil and gas industry and the service industries that support it. In order to achieve this type of integration requires the level of cooperation that is reflected in the People, Ideas & Objects user community and Revenue Model.

The question also becomes how does the energy industry acquire its capabilities? For some time it has employed a hybrid market / integrated firm strategy, that has left it openly critical of its suppliers and vendors. Clearly its not working. Professor Langlois notes.

The organizational question is whether new capabilities are best acquired through the market, through internal learning, or through some hybrid organizational form. And the answer will depend on (A) the already existing structure of capabilities and (B) the nature of the economic change involved. p. 21

The consequences of economic change are clear, as to where they will fall I guess is at question.

If a profit opportunity requires a configuration of capabilities different from what already exists in the economy, the Schumpeterian process of creative destruction may be set in motion. p.21

It is stated clearly in the Revenue Model of People, Ideas & Objects that our core competitive advantage is that we provide the innovative oil and gas producer with the most profitable means of oil and gas production. So it would seem that Schumpeter is right!

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CLXVIII (RM Part XXII)

One of the areas of research of Professor Richard Langlois is the boundary of firms and markets. The Preliminary Specification relies on the Resource Marketplace module to provide the capabilities to the producer and Joint Operating Committee from the greater marketplace as represented by the oil and gas service industry. How this boundary is formed, and what its definition is, is important in determining the economic organization of the oil and gas industry.

[I]t seems to me that we cannot hope to construct an adequate theory of industrial organization and in particular to answer our question about the division of labour between firm and market, unless the elements of organization, knowledge, experience and skills are brought back to the foreground of our vision (Richardson 1972, p. 888).

We have briefly discussed the determining role that transaction costs have in how a firm operates. If transaction costs are high, then the firm will seek to mitigate the transactions by hiring employees to conduct the tasks and reduce the number of transactions to a few pay checks. If transaction costs are low, as we are now seeing with the aid of Information Technology, the ability to source the work from the market, from the lowest cost producer is the ideal choice. Professor Langlois notes.

Production costs determine technical (substitution) choices, but transaction costs determine which stages of the productive process are assigned to the institution of the price system and which to the institution of the firm. The kinds of costs are logically distinct; they are orthogonal to one another. As a result, issues of economic organization - such as the boundaries of the firm - cannot turn on considerations of production costs. Present-day theory has not only bought into this view but has arguably reinforced the separation. p. 10

In a nutshell, the boundaries of the firm can not be defined by production costs. The methods the industry will use to organize its production is through the ability of transaction costs to determine the origin of the production cost from either the market or the firm. With the makeup of the oil and gas industry. Conducting detailed, logistically complex, field operations in remote geographical regions. To conduct these operations internally has never been a choice, so for the Preliminary Specification to choose the boundary of the firm and market in this manner is not contrary to the culture of the industry. What we are attempting to do is to apply Professor Langlois’ theories to the culture of the oil and gas industry and determine the appropriate way forward. I think however, that the conceptual model of transaction cost economics considers that there will be “thicker” markets and a greater volume of transactions contemplated between the producer firms and Joint Operating Committees, and the marketplace. Thicker markets then what is represented in the current industry configuration. The Preliminary Specifications Resource Marketplace module considers these “thicker” markets would develop as a result of the changes in producers actions from using People, Ideas & Objects software.

Theoretically sound, but... That brings up the question of how are the capabilities that are needed to undertake the significant and complex work coordinated?

As we will argue in more detail below, there are in fact two principal theoretical avenues closed off by a conception of organization as the solution to a problem of incentive alignment. And both have to do with the question of production knowledge. One is the possibility that knowledge about how to produce is imperfect - or, as we would prefer to say, dispersed, bounded, sticky and idiosyncratic. The second is the possibility that knowledge about how to link together one person's (or organization's) productive knowledge with that of another is also imperfect. The first possibility leads us to the issue of capabilities or competencies; the second leads to the issue of qualitative coordination. p. 11

and

A close reading of this passage suggests that Coase's explanation for the emergence of the firm is ultimately a coordination one: the firm is an institution that lowers the costs of qualitative coordination in a world of uncertainty. p. 11

If we consider the Research & Capabilities and Knowledge & Learning modules “Capabilities Interface” as the starting document of how the firm is capable of achieving a task. The actual implementation is in either the Research & Capabilities or Knowledge & Learning modules “Planning & Deployment Interface” which brings in the capabilities from the “Capabilities Interface”, the Military Command & Control Metaphor for the resources seconded to the project, and what is not clear in the either of those modules, yet, the resources from the Resource Marketplace module that will be the elements that complete the work in the field. It is in the “Planning & Deployment Interface” that Coase’s qualitative coordination concern is resolved by the people directly employed by the producer firm or Joint Operating Committee.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification. 

The Preliminary Specification Part CLXVII (RM Part XXI)

It was during the Preliminary Research Report that I coined the phrase that “SAP is the bureaucracy.” Nothing turns your organization into cement like a good old fashioned SAP install. What the innovative oil and gas producer needs is an organization that will remain open and flexible to innovation, and a software development capability like that proposed here by People, Ideas & Objects. As we continue our review of capabilities, today’s discussion will focus on the need to have the organizational flexibility in terms of a capability to accommodate the innovations within the oil and gas producer and Joint Operating Committee organizations. A capability, much like yesterday’s blog posts capability to shut in production until prices recover, brought to the producer through the Resource Marketplace module of the Preliminary Specification.

Having the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer is the first point in this exercise. Having the legal, financial, operational decision making, cultural, communication, innovation, and strategic frameworks aligned with the compliance and governance frameworks is necessary. To have the Preliminary Specification built as software with a fully supportive user community, and Community of Independent Service Providers will ensure that the innovative producers needs for change are not left unmet. To have all of this available without a dedicated long term software development capability to accommodate the needed changes in the organizational structures of the innovative oil and gas producers would be wasteful in my opinion. And these software development capabilities are indeed necessary according to Professor Richard Langlois’ research in capabilities.

However, a new approach to economic organization, here called "the capabilities approach", that places production centre-stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization. p. 2

and

The legacy of this "path-dependent” history, we will argue, has been a tendency (albeit an imperfect tendency) to respect an implicit dichotomy between the production aspects and the exchange aspects of the firm or, to put it another way, between production costs and transaction costs. p. 5

In the Preliminary Research Report we noted Dr. Wanda Orlikowski's Model of Structuration, which is based on Dr. Anthony Giddens Theory of Structuration, and by extension software defines the organizational construct. Therefore, within Orlikowski’s Model of Structuration, I have asserted the existing software applications define, support and constrain the organization. Professor Langlois has prepared similar findings in his research with the following point.

Seldom if ever have economists of organization considered that knowledge may be imperfect in the realm of production, and that institutional forms may play the role not (only) of constraining unproductive rent seeking behavior but (also) of creating the possibilities for productive rent-seeking behavior in the first place. To put it another way, economists have neglected the benefit side of alternative organizational structures; for reason of history and technique, they have allocated most of their resources to the cost side. p. 6

If we want an innovative oil and gas industry then the first thing we should do is ensure that we have the capability to maintain the organizational flexibility. The flexibility necessary to ensure that we do not constrain ourselves unnecessarily, and define and support the behavior that we desire. This is the role of software in the 21st century. People, Ideas & Objects are bringing this capability to the oil and gas industry, and its time for the industry to act.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification.  

The Preliminary Specification Part CLXVI (RM Part XX)

We now turn to the capabilities view of the Preliminary Specification. Capabilities are such a critical part of innovation and we have the Research & Capabilities module that focuses on the firms capabilities. But what are they and where do they reside. We have shown how the Preliminary Specification would provide the capability to suspend production in the “Marginal Production Threshold Interface”, until the marginal costs of production are realized by the commodity price. By using the “decentralized production model,” the production and overhead costs, like the costs of Production Accountants, would not be incurred without any monthly production. Maintaining the firms profitability and saving the reserves for a time when prices are more favorable.

We have listed the capabilities of the firm in the Research & Capabilities module and they are accessed through the Knowledge & Learning module by the various Joint Operating Committees. We have used the football analogy to describe how they are formulated and deployed through a variety of interfaces but we have not discussed in any detail what the content of the pages of the “Capabilities Interface” are. Lets first of all be clear, it is the Joint Operating Committees that employ the engineers and geologists from their various firms that are running the show and that is why the modules are configured that way. The information that is contained within the “Capabilities Interface” is for them to project manage the service industry members in the Resource Marketplace module.

Lets take a brief walk down the differences between what exists today and what needs to change in the People, Ideas & Objects Preliminary Specification. One area of Professor Richard Langlois’ research is in what is called Transaction Cost Economics (TCE). The market model requires that “transactions” occur between separate economic units. These transactions create “friction” in terms of the resources necessary to process the transaction itself. Therefore in the past, to avoid the costly friction of transaction costs, firms hired people as employees to conduct a variety of tasks and only told them what was required in exchange for a paycheck. This mitigated the cost of paying someone $5.00 to type a letter each time you needed that task completed etc. Langlois et al states that with the automation of transactions through the current Information Technologies, transaction costs can be reduced to an immaterial level. This is happening at a time when coincidentally the scope of operations of the hierarchy have spanned to an impossible level. The hierarchy must now make a choice, either fully integrate and take control of all of the means of production, or decentralize and let the market provide for the means of production. The Preliminary Specification assumes the latter and the Resource Marketplace module will provide the capabilities for the producer firm and Joint Operating Committee to achieve those capabilities from the market. From Professor Langlois’ Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.

"However, a new approach to economic organization, here called "the capabilities approach," that places production centre stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization." pp. 1

and

"One of our important goals here is to bring the capabilities view more centrally in the ken of economics. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as complementary area of research" pp. 7.

We have captured some of the elements in the already mentioned interfaces of the modules of the Preliminary Specification. Additional interfaces would include the “Transaction Design Interface” of the Accounting Voucher module. And in the Resource Marketplace module we have discussed in past blog posts the three interfaces; the “Actionable Information Interface”, “Supplier Collaborative Interface” and the “Gap Filing Interface”. Each of these would be used in some fashion in discussion of moving to a “decentralized production model”. There are however, many more elements of this research that we will discover and develop as we continue.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification. 

The Preliminary Specification Part CLXV (RM Part XIX

In discussing the role of the Production Accountant and the scope of the changes that are contemplated as a result of the Preliminary Specification. I am reminded of the George Bernard Shaw quotation.

The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.

We continue today to discuss the revised division of labor and specialization that would be done through the Resource Marketplace module of the Preliminary Specification. Moving the Production Accounting role to the Joint Operating Committee, having a service provider focus on a specific geographical region to report on for all the producers represented there, and reorganizing the work to increase the throughput of the accounting function should be the objective of the analysis and process management of the Resource Marketplace module. This analysis will also depend heavily on the “Transaction Design Interface” of the Accounting Voucher module.

First of all what are we trying to do here. The idea that I have in mind is that which is referred to as an “Encapsulated Network”. Within this network which might represent a large gas plant that aggregates gas from thousands of wells from many miles and from many different producers with many different kinds of gas. Will be one Production Accounting service provider residing in the region providing services to all of the producers and gas plant and gathering system owners. They will be the ones who will be preparing the Material Balance Reports for all of the Joint Operating Committees in the Accounting Voucher of the People, Ideas & Objects system. Each molecule of gas, as it moves through the system of production on to its sale contract will be reported through the various Material Balance Reports and the associated other production related reports. And as it incurs a point where it can be, as we discussed yesterday, standardized, counted, valued, compensated in terms of a production accounting transfer, then the system will account for that transfer on behalf of the Production Accounting service provider. At the end of the month the billing of the systems Production Accounting will total up the various transfers for the Encapsulated Network and bill the individual Joint Operating Committees for their share of the Production Accounting costs for the month. Professor Langlois notes two important things with respect to these Encapsulated Network and transactions.

Encapsulated Network in a larger system of production is to facilitate complex transfers without making all of them transactions. p 28

and

The most significant fact about this system, is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on... Frederick Hayek (1945)

Now that each process within the Production Accounting role has been defined in terms of its revenue generating capabilities then the service provider can organize the service on the basis of where and how they earn the most profits. Either by providing those services at the lowest costs or by providing those services which are the most technically difficult will bring the highest profits. The point being that the service provider is free to reorganize the service in any way that they can in order to provide a better service at lower cost. That imputes a greater division of labor and further standardization. A process that they will become more expert in as time passes and as such will be the source of their future profitability.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CLXIV (RM XVIII)

In today’s post we want to carry on with the discussion of how the industry would transition to a “decentralized production model” from its current “high throughput production” model through the Resource Marketplace module of the Preliminary Specification. We will be using the example of the Production Accountant and the changes that would need to be made in order to make the transition from one model to the other. Using the type of analysis that will be needed to be made during the development of the People, Ideas & Objects software. And is one of the reasons for the high costs of this software development.

The Production Accountant will be primarily working with the Material Balance Report and associated reports contained within the Accounting Voucher module. Recall that the Material Balance Report is a Joint Operating Committee report that is prepared on behalf of all the participants in the various JOC’s that are captured in the report. That would denote that the Production Accountant would also work for the JOC. It is therefore asked why would they work for a specific producer? Since the Material Balance Report seeks to balance a facility or area that the JOC has their facility or interest in, then the Production Accountant can bill their services to the JOC. Taking this to the next logical step why doesn’t the Production Accountant work on all of the facilities in the region for all of the JOC’s. That way there would be an efficiency and understanding of the overall region in terms of what is happening. The Production Accountant could be responsible for handling the Material Balance Report and associated reports for the entire region. Then if the region were to grow into a large gas facility, then the Production Accountants could organize themselves into a service provider that could service their clients on the basis of a renewed standardization and division of labor. This process would also provide the producers with the desired transition to the “decentralized production model” in that no production accounting service fees would be incurred if no production came from the facility that month.

The method to analyse and organize the transition to the Production Accountant as a service provider is based on the following.

...objects that are transacted must be standardized and counted to the mutual satisfaction of the parties involved. Also in a transaction, there must be valuation on both sides and a backward, compensatory transfer - consideration paid by the buyer to the seller. Each of these activities - standardizing, counting, valuing, compensating - adds a new set of task and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction.

Although as we mentioned at the beginning, and noted in the quotation, this analysis is costly, however because it is being done once on behalf of the subscribing producers to People, Ideas & Objects. And assuming that we gain significant volumes of subscribing producers, the costs to each producer of this analysis is immaterial.

By standardizing, counting, valuing and compensating the tasks and transfers of the Production Accounting role and embedding the results within the Resource Marketplace and Accounting Voucher modules of the Preliminary Specification we can provide the value to the Joint Operating Committees in this fashion. If you believe that producers should have their own army of Production Accountants then we probably disagree on how the job should be done. It is in the Petroleum Lease Marketplace module that the selection of either the partnerships agreed to production allocation, or how do you say “factual” basis of production allocation should be made. We understand that there are these two methodologies. Usually the smaller plants follow the chemical facts. The larger plants usually follow the agreements. People, Ideas & Objects Preliminary Specification Accounting Voucher modules Material Balance Report can report in either fashion. Leaving the job of the Production Accountant to be politically inert as to how to allocate the production. Tomorrow we will discuss further the division of labor of the Production Accounting role.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification. 

The Preliminary Specification Part CLXIII (RM Part XVII)

We start our fourth pass through the Preliminary Specification in the Resource Marketplace module with a look at Chapter 4 “The Rise of the Corporation” of Professor Richard Langlois book “The Dynamics of Industrial Capitalism”. In this chapter he suggests that organizations developed “buffers” in order to mitigate the variances in markets. These buffers would include inventories and in oil and gas that would include commercial storage. These “buffers” help to offset the difficulties in the business and make the potential variances dissipate in terms of their magnitude and frequency. Langlois however, notes that buffers come with the cost of a lack of operational flexibility, and as it turns out a whole lot more. Commercial storage of natural gas is at record levels in North America and gas prices are at $2.52 / mmbtu. A price that would make most of the gas productions costs exceed the price received.

Professor Langlois states that there are two business models that we can chose from. The “high throughput production” model or the “decentralized production model”. Currently the industry is operating under the “high throughput production” model and through the choice of developing and using the People, Ideas & Objects software we can transform the industry model to the “decentralized production model”. This will be a theme that will be discussed throughout the fourth pass through the Preliminary Specification. Here is how the two models operate.

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p. 58

When difficult times arise, such as we are experiencing in the natural gas business today, the reaction is to cut back on capital expenditures. This is a blunt and ineffective tool to deal with the problem of overproduction and the real culprit, record storage. What has to happen is the marginal production has to be removed from the market until such time as the price realized covers its costs and a reasonable profit is earned. The decentralized production model will allow the producers to throttle back the production volumes and correspondingly cut back on production and overhead costs, until such time as the prices recover to cover the marginal cost of the production and an element of profit. Other wise we are going to see these violent over reactions in the prices of the commodities.

To achieve this removal of the marginal production the producers are going to need the restructuring around the “decentralized production model”. This will require the development of software to define and support these attributes in the organization first and foremost. You can’t restructure a fundamental change of this scope in the industry without first making the software that defines and supports that change. That is what we are doing here in People, Ideas & Objects.

The operational decision making framework of the industry is held with the Joint Operating Committee. Within the Petroleum Lease Marketplace module we will have the “Marginal Production Threshold Interface” where the partnership can agree to the volumetric decrease, or shutting in of production based on the point when the marginal costs exceed the revenues from production. If there is a commensurate drop in the costs and overhead of the shut-in marginal production, then the producer will not lose or gain any financial benefit from the drop in production. They will save those reserves for a time when they will be produced profitably. If the industry begins to drop their marginal production in this manner then the declines in prices will be limited on the downside and the record volumes in storage will be yesterdays news.

Within the Resource Marketplace module we will begin to discuss the necessary changes to the makeup of the service industry and resource marketplace. The division of labor and how the services are provided to the producers will need to be changed if in one month there may be no production at certain facilities. Otherwise the industry will have to make due with $2.52 gas.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification.