The Preliminary Specification Part CCXXVIII (R&C Part XXXVIII)

What could only be described as a breakthrough, yesterday’s post documented the Preliminary Specifications coordination of capabilities through the “Capabilities Interface” of the Research & Capabilities module. This relieving the incentives problem that contracting of the service industry is presenting to the oil and gas industry. As we learned yesterday, coordination will provide oil and gas producers with the control over field operations. Coordination through the “Capabilities Interface” provides the alternative means in which to ensure the science of the oil and gas business is effectively controlled as opposed to motivating the service industry through incentive clauses in the contracts. We will continue today with this concept of the “incentive problem” and test it further with Professor Richard Langlois paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.”

More generally, we are worried that conceptualizing all problems of economic organization as problems of aligning incentives not only misrepresents important phenomena but also hinders understanding other phenomena, such as the role of production costs in determining the boundaries of the firm. As we will argue, in fact, it may well pay off intellectually to pursue a research strategy that is essentially the flip-side of the coin, namely to assume that all incentive problems can be eliminated by assumption and concentrate on coordination (including communication) and production cost issues only.

It is through the producers documentation of the capabilities in the “Capabilities Interface” of the Research & Capabilities module that the “knowledge, experience and skills” are captured. From the engineers and geologists that are part of the Joint Operating Committee to those that are in the field, each should have an understanding of what is required of them from the capability that is listed in the “Capabilities Interface”. Recall that in the Knowledge & Learning module these capabilities are called like plays in the football analogy. Everyone on the team knowing what is happening and what their role and task is. That is what needs to be documented in the “Capabilities Interface” for each of these roles, for each of the capabilities that are captured there.

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

And that becomes obvious when we consider that the capabilities that are available to each Joint Operating Committee, and the Military Command & Control Metaphor that is used, is going to be unique to each situation it is applied to. Using the same team to apply the same capability over and over again however should yield the same results. Therefore, if you were running a ten well drilling program then the consistency of the capabilities and the MCCM would provide the same precision and the same results.

This in turn, implies that the capabilities may be interpreted as a distinct theory of economic organization. p. 18

and

... while transaction cost consideration undoubtedly explain why firms come into existence, once most production is carried out within firms and most transactions are firm-firm transactions and not factor-factor transactions, the level of transaction costs will be greatly reduced and the dominant factor determining the institutional structure of production will in general no longer be transaction costs but the relative costs of different firms in organizing particular activities. p 19

This is inherently and simply true. The key to the successful implementation of any program is the level of documentation of the capability and the level of control during the operation. The “Capabilities Interface” combined with the Military Command & Control Metaphor provide the producer firm and Joint Operating Committee with the means for successful operations. Remember that “knowledge begets capability and capability begets action”. And contrast this to the current situation where the producers throw more money at the service industry to incentivize them to succeed.

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 (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXXVII (R&C Part XXXVII)

In yesterday’s post we noted how the information detailed in the “Capabilities Interface” of the Research & Capabilities module would provide the “knowledge, experience, and skills” of the operation. That these details were provided to all of the members of the temporary organization that was put together for the purpose of that specific operation. From the lease hands on the drilling rig to the engineers and geologists of the participating producers of the Joint Operating Committee. Everyone would be on the same page in terms of what and how the capabilities of the firms and market were being deployed. In today’s post we want to discuss these points further and relate how the People, Ideas & Objects Preliminary Specification enables the innovative producer to successfully complete these field operations.

[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).

Before we get too much further into this discussion let us also bring in the Military Command & Control Metaphor that was developed by People, Ideas & Objects. The MCCM provides a means for the “pooled” technical resources within a Joint Operating Committee to immediately adopt a command and control structure that is recognizable. It is expected that this command and control structure would also extend over the field personnel from the field contractors that were hired for the operation being conducted. This would therefore provide a level of control to the engineers and geologists that would attain the precision necessary. Such that once the engineer gave the order to drill to a TD of a certain depth, then that would be achieved at exactly the  point where the engineer expected it.

Here in the next quotation Professor Langlois raises an interesting point about “incentive alignment”. We’ll be talking about this more in tomorrow’s post as well. But in essence he is saying that at a certain point its not about a matter of incentives that motivates a team to succeed.

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

Reading of this next quotation shows that we have a job to do here in the “Capabilities Interface” of the Research & Capabilities module. That is we need to replace this critical function that was done by the “firm” in the previous organization. As much as I want to criticize the current management they are doing the job to a certain level. And to not respect that level would be a failure on our part. What we need to do is to capture what the firm does now by “lowering the costs of qualitative coordination in a world of uncertainty.”

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

Going back to the incentives issue for a moment. Lets put in context the conflict between the service industry and the oil and gas producers. They have been in disagreement for a number of years as to the pricing of the services for field operations. Read this next quotation with this in mind.

All recognize that knowledge is imperfect and that most economically interesting contracts are, as a consequence, incomplete. But most of the literature considers seriously as coordinating devices only contracts and the incentives they embody. It thus neglects the role- the potentially far more important role - of routines and capabilities as coordinating devices. Moreover, the assumption that production costs are distinct from transaction costs and that production costs can and should always be held constant obscures the way productive knowledge is generated and transmitted in the economy. p. 14

Professor Langlois is 100% correct. The producers are relying on contracts to incentivize the contractors and its not working. What is required is better coordination. And that begins with systems like the People, Ideas & Objects Research & Capabilities module that details the capabilities of the producers and field staff in a manner that constructively deals with the problems of a scientific based business.

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 (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXXVI (R&C Part XXXVI)

It was during the Preliminary Research Report that we determined two important elements that we should point out here in the Research & Capabilities module of the Preliminary Specification. The first was the oil and gas industry was moving away from an “easy” energy era where producers were able to provide for bankable returns on investments. And moving to a much more difficult scientific basis of the business based on the earth science and engineering capabilities as the key determining competitive advantages. The other element that was determined in the Preliminary Research Report was that organizations are defined and supported by the software that they used. And we coined the phrase that SAP is the bureaucracy to reflect this fact. Therefore in order to change the organization it is necessary to first change the software that defines the organization.

It is in the Research & Capabilities module that we are defining and supporting the science basis of the oil and gas business. How the earth science and engineering capabilities of the firm are acquired and deployed are the roles of this and the Knowledge & Learning modules. It is with that in mind that we begin our review of Professor Richard Langlois paper “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. p. 1

It is by way of a scenario that a producer was able to document the internal and external components of the capabilities needed to conduct multi-lateral and multi-frac shale gas operations. Through a series of tests and trials they have been able to secure these processes to the point where the capabilities are deployed successfully with minimal interruption. These processes documentation in the “Capabilities Interface” is subsequently populated to all of the shale gas zones of all the Joint Operating Committees they participate in and are available to be deployed at any time. The Joint Operating Committees know they can rely on a fully tested process based on their publication in the “Capabilities Interface”. By selecting the code in the “Capabilities Interface” everyone from the engineers and geologists from the Joint Operating Committee participants to the lease hands on the drilling rig can see their role and responsibilities in making the operation a success. It is through the Knowledge & Learning’s “Planning & Deployment Interface” that the individual codes of each of the capabilities are accumulated and the program is designed to be executed.

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 p. 7.

What we had not discussed, until now, in the previous entries of the Research & Capabilities or Knowledge & Learning module is an important element of the “Planning & Deployment Interface”, the AFE. It will naturally be the AFE that is a large part of how the business and operational end of the deployment is initiated. Therefore the AFE template is a simple part of the “Planning & Deployment Interface”.

In sum, whether we see it from the perspective of the capabilities perspective or from the perspective of the modern economics of organization, there is an exciting theoretical frontier ahead. p. 31

The obvious comment that I want to make at this point is for clarity. And that is that the marketplace is the source of the capabilities, with operational coordination coming from the producer firm and Joint Operating Committee. If the business is a science, having everyone read from the same, unique in each instance, hymn book will not only be necessary, but will be the only way in which to be successful.

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 behaviour but (also) of creating the possibilities for productive rent-seeking behaviour 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

You have a unique, one time, temporary organization which is derivative of the Joint Operating Committee. Isn’t it worthwhile to make sure that that organization is able to understand everything that it is working to accomplish.

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 (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXXV (R&C Part XXXV)

Starting off with our fourth, or capabilities, pass through the Research & Capabilities module of the Preliminary Specification. For background I went through the thirty four posts to date and have to say that I am very pleased with the content so far. We have much more to document, however the substance of the module is becoming quite strong. What I expect that we will be able to do is to detail what a capability is within the “Capability Interface” and many other things by reviewing Professor Langlois research material. But for today I thought I would highlight some of the areas that stood out for me when I was reviewing the module.

There are a couple of “big” things that the module does. The first is to divide the labor between the research and development processes and the execution of those processes. These are separated in the Research & Capabilities and Knowledge & Learning modules. The other “big” thing that is done is to move the knowledge to the area where the decision rights are held, the Joint Operating Committee. Professor Richard Langlois notes in the following.

The question then becomes: why are capabilities sometimes organized within firms, sometimes decentralized in markets, and sometimes coordinated by a myriad contractual and ownership arrangements like joint ventures, franchisees, and networks? Explicitly echoing Hayek, Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 9

Another point that jumped out at me was the quote from Professor Carliss Baldwin of Harvard University. That “knowledge begets capability and capability begets action” seems to capture the objective of what it is we are after in the module. We need to remember to keep this focus in mind when we are working in the “Capabilities Interface”. That the data elements that we bring in to the interface are designed to initiate action.

During our review of Professor Giovanni Dosi we learned of technical trade-offs. And how these trade-offs facilitate the ability for industries to innovate on the changing technical and scientific paradigms. Crucial to the facilitation of these trade-offs is a fundamental component that spurs the change and is usually abundant and available at low costs. For innovation to occur in oil and gas, People, Ideas & Objects asserts that the ability to seek and find knowledge, and to collaborate are two “commodities” that are abundant today. With their inherent low direct costs, knowledge and collaboration are the triggers for a number of technical paradigms which will provide companies with fundamental innovations. There are many knowledge and collaborative interfaces in the Preliminary Specification, making the People, Ideas & Objects ERP system the ideal candidate for the innovative oil and gas producer.

Lastly we should note that when markets such as oil and gas are asymmetric, research & development are the ways in which to differentiate capabilities and build an innovative oil and gas producer. Tomorrow we will begin our review of Professor Richard Langlois work in the Research & Capabilities module of the Preliminary Specification.

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 (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXXIV (AV Part XV)

We have been discussing the Accounting Vouchers “Transaction Design Interface” and its purpose as a tool to coordinate the use of the market. We want to ensure that the efforts in coordinating the market are consistent with the objectives of the firm or the Joint Operating Committee and don’t conflict with the objectives of those who are initiating the work in the Research & Capabilities or Knowledge & Learning or other modules. As we will see in this post the work in the coordination through the Accounting Voucher of the Preliminary Specification is focused on the business end of the transactions, not on the operational side.

The first question that most people will have is why are we concerned with the coordination of the markets in the Accounting Voucher. Here Professor Richard Langlois made the following comment in response to a question on his “Vanishing Hand” paper.

Here again, I think the problem is one of conceptual imprecision. It is perfectly common, and often unobjectionable, to contrast a market and an organization, that is, to contrast the institution called a market and the institution called an organization (such as, notably, a firm). But the opposite of “organization” in the abstract sense is not “market” but disorganization. More helpfully, the opposite of conscious organization is unplanned or spontaneous coordination. In this sense the market-organization spectrum (and similar spectra one could imagine) are arguably orthogonal to the planned-spontaneous spectrum. One could well wonder, as I have (Langlois 1995), whether large organizations do not in fact grow far more as the unplanned consequence of many individual decisions than as the result of the conscious planning of any individual or small group of individuals. And it is certainly the case that, as Alfred Marshall understood, both firms and markets “are structures for promoting the growth of knowledge, and both require conscious organization” (Loasby 1990, p. 120).

In this day and age, with such large distances, geographic, size, language and other, between vendors and producers leaving the coordination of the markets to “spontaneous order” is asking too much of human ingenuity. Particularly with the focus of the industry to a further division of labor and specialization, where the risk and reward of oil and gas operations are so great, market coordination or transaction design will be a critical and necessary task to be carried out. Each operation may be the result of more people being involved. Once again it is not from an operations point of view that we are attempting to influence the operation, it is from the business point of view. How will the transactions and business be captured in such a manner that the firm and Joint Operating Committee are incurring the lowest possible costs of the most efficient methods of these business transactions.

As Harvey Leibenstein long ago pointed out, economic growth is always a process of “gap-filling,” that is, of supplying the missing links in the evolving chain of complementary inputs to production. Especially in a developed and well functioning economy, one with what I like to call market-supporting institutions (Langlois 2003), such gap-filling can often proceed in important part through the “spontaneous” action of more-or-less anonymous markets. In other times and places, notably in less-developed economies or in sectors of developed economies undergoing systemic change, gap-filling requires other forms of organization — more internalized and centrally coordinated forms. p. 6

and

Let’s take a closer look at the nature of the “gaps” involved. Adam Smith tells us in the first sentence of The Wealth of Nations that what accounts for “the greatest improvement in the productive power of labour” is the continual subdivision of that labor (Smith 1976, I.i.1). Growth in the extent of the market makes it economical to specialize labor to tasks and tools, which increases productivity – and productivity is the real wealth of nations. As the benefits of the resulting increases in per capita output find their way into the pockets of consumers, the extent of the market expands further, leading to additional division of labor – and so on in a self-reinforcing process of organizational change and learning (Richardson 1975; Young 1928). p. 7

If we recall in the Resource Marketplace module the vendors and suppliers are maintaining their own contact data. Within that data is there key personnel that include their field staff. They should also be including their key business people for the purposes of the “Transaction Design Interface” to collaborate on these interfaces. In addition their billing information and banking data, as well as other critical data and information that will help the producer firm or Joint Operating Committee efficiently coordinate and process the transactions they are involved in should be included. Lastly a collaborative interface should be provided for everyone within the Accounting Vouchers vendor pool to discuss how the transaction is designed.

Tomorrow we will begin our fourth pass through the Research & Capabilities module.

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 (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXXIII (AV Part XIV)

We continue today with our discussion of designing transactions in the Accounting Voucher module of the Preliminary Specification. The role of the Accounting Voucher in defining the source of the market or the firm as the originator of the transaction is minimal. However, it has a role in ensuring the costs of these transactions are minimal and are a source of the firms profitable operations. We can all envision a power mad accountant with an entourage of underlings going off to solve the next great accounting issue. These costly nightmares occur every once in a while, maybe People, Ideas & Object is the latest manifestation of this sickness. Having the ability to design transactions should be a value added process, not an exercise with no purpose. If there was a simple way to describe this purpose it would be as a tool to coordinate the firm or Joint Operating Committees use of the market.

This conceptually falls between transaction costs economics, capabilities and transaction design. All three are areas that Professor Richard Langlois has included within his area of research. We have also used Professor Carliss Baldwin for her work in transaction design. Professor Richard Langlois in his paper "The secret life of mundane transaction costs."

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. 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.

It is the Accounting Voucher module of the Preliminary Specification that takes the accountant away from the benign score keeper role to the role of active participant in the operation. One that looks at the market from the point of view of how best to coordinate the various elements to provide the greatest value add to the firm or Joint Operating Committee they are employed by. In Richard Langlois “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization"

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

And this is maybe one of the important considerations of the work that we do here in People, Ideas & Objects. Is the realization that each producer firm and each Joint Operating Committee are going to be unique. That due to their makeup they are going to be different in material ways. Innovation will have a dramatic scale in how it is measured against each firm or JOC. The approach will be anything but cookie cutter.

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

Therefore, according to the research of Professor Langlois the transaction costs will be an immaterial item in comparison between firms or Joint Operating Committees. That is to say that they will be the same in all instances. And People, Ideas & Objects have asserted that they will be immaterial due to the application of Information Technologies. However the differentiating costs between firms and JOC’s will be these costs of coordinating the market. Making the Accounting Voucher module a critical tool in the ability to offer the producer firm the most profitable means of oil and gas operations.

... while transaction cost consideration undoubtedly explain why firms come into existence, once most production is carried out within firms and most transactions are firm-firm transactions and not factor-factor transactions, the level of transaction costs will be greatly reduced and the dominant factor determining the institutional structure of production will in general no longer be transaction costs but the relative costs of different firms in organizing particular activities. p 19

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 (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXXII (AV Part XIII)

One area of the Accounting Voucher that we have not been very clear in getting our point across is the concept of designing transactions. With this fourth pass through the Preliminary Specification we should be able to spend some time on defining what it is that we are speaking of. What accountants will be spending their time on in the future is the designing of transactions and leaving the processing of transactions to the computers. If you have been reading the Preliminary Specification you will have an understanding of the methods of organization of the marketplace and the producer firm. And how the Joint Operating Committee interacts with these. It will be with that understanding that we can begin to understand the concept of designing transactions. So let us begin with a simple description of the transactions makeup. From Harvard Professors Carliss Baldwin and Kim Clark.

...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.

Lets use a scenario where a group of small producers have four producing wells of natural gas with some liquids production. They are situated next to a large gas plant that processes their gas in exchange for the liquids and markets their gas on the spot market. In this scenario we are evaluating these properties from the perspective of including them in the Preliminary Specification. And we begin by analyzing the production accounting elements in the Accounting Voucher with the Production Accounting Service Provider in the area.

The Production Accounting Service Provider assesses their fees on the basis of a unit of work incurred during the production month. For example this might include reading a gas chart, meter reading, material balance report etc. At each point they assess a standard fee for service. This then goes to their billing process and at the end of the month is billed to their clients based on the work output. This imputes that someone has designed their billing and work flow from a transaction design point of view. Professors Baldwin and Clark.

The user and Producer need to deploy knowledgeable in their own domains, but each needs only a little knowledge about the other's. If labor is divided between two domains and most task-relevant information hidden with each one, then only a few, relatively simple transfers of material, energy and information need to pass between the domains. p. 17

and

Placing a transaction - a shared definition, a means of counting, and a means of payment - at the completed transfer point allows the decentralized magic of the price system to go to work. p.22

Again if there is no production there is no basis for the Production Accounting Service Providers billing. Fulfilling the decentralized production model objective. This scenario shows how the Production Accounting Service Provider had designed their transactions to produce their billings. Their accountants were not concerned about the processing of transactions, but the processes of billings in a fully automated manner. This is the role of the Accounting Voucher for the producer firm and Joint Operating Committee. Automation of the business processes of the innovative oil and gas industry through transaction design.

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)

The Accounting Voucher has the “Transaction Design Interface” that provides a worksheet for accountants to design transactions. There is a defined process of analysis of how to break down these transactions and we will get into that as we proceed through the Preliminary Specification. It is important to recall at this point that each Accounting Voucher can be used as a template for subsequent months. So once a transaction is designed, it can be reused through the implementation of it as an Accounting Voucher template.

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 (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXXI (AV Part XII)

When we talk about the capabilities of the innovative oil and gas producer. The Accounting Voucher module of the Preliminary Specification doesn’t necessarily come immediately to mind. Yet it is an important element in the capabilities that we have been detailing here in the Preliminary Specification. Particularly when we are moving to the “decentralized production” model from the “high throughput production” model that the industry is currently configured as.

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

In other modules we have detailed how the overhead costs of production, revenue and royalty and other accounting related costs associated with the property would not be incurred during periods when the facility was shut-in. The accountants these costs are representative of, are part of service providers and not directly employed by any of the specific producers. As such their service offerings were based on billings that were transaction driven, and therefore without production, no transactions were created to drive their billings. Hence no overhead, like accounting costs, would be incurred at the facility where the production was shut-in. The Accounting Voucher can be a further check and balance on the “decentralized production” model by ensuring that no overhead charges for the months are incurred if no production occurred.

Recall too that we have the Material Balance Report that balances the Joint Operating Committees volumetric inputs and outputs. Encapsulating these volumes within the Accounting Voucher itself as a means of enforcing the integrity of the systems balance. Where the “Material” balance, the “System” balance and the “Partner” balance for each of the participants in the Joint Operating Committee are as integral to the Accounting Voucher as debits and credits.

And the Purchase Order system that provides a means in which to control the costs for large projects. Ensuring that the contracts that govern these projects are adhered to in terms of payments, with-holding's and discounts. I think the Purchase Order capabilities provided, through an effective user interface, in the Accounting Voucher will provide significant value for the Joint Operating Committee.

We have also introduced the concept of costing the earth science and engineering resources of a producer firm to the joint account. These are in replacement to the overhead allowances that are provided for today. To charge these resources through the Accounting Voucher as a cost recovery and return on investment of the producer firms capabilities. With the elimination of the operator designation and the pooling of technical resources this charging of these resources to the joint account will be a necessary element of the pooling concept.

Lastly we have also discussed the concept of designing transactions in the Accounting Voucher. There are two different concepts here, and both are captured in the Accounting Vouchers implementation. The first is the same as the determination of who, for example, the drilling contractor, a third party or the producer will provide the product or service in the drilling contract. And the second concept is the determination of the thin crossing point of where the transaction should occur between the two firms. Although we want to select the “thinnest” point, with today’s Information Technologies we can also populate the transaction with a variety of data that makes for a much more valuable interaction between firms.

That brings to a close a quick high level review of the points to date in the Accounting Voucher module of the Preliminary Specification. We will commence our fourth, or capabilities, pass tomorrow.

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 (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

2012 Funding Update

The results of our 2012 first quarter funding campaign can now be reported. As was expected, none of the oil and gas firms chose to participate in the funding or support of People, Ideas & Objects. From our perspective, as with 2010 and 2011, we see this as evidence that management are too conflicted to participate in this project. The only way forward through this deadlock will be from the explicit direction of the ownership class of the oil and gas firms. It is therefore anticipated that this project will proceed on a somewhat brick-by-brick and stick-by-stick basis. Stay tuned.

It is now time for producers to act. Review of our Revenue Model will inform producers how they can participate in the development of People, Ideas & Objects Preliminary Specification. Producers can contact me here for further information, or to begin the process of their participation.

The Preliminary Specification Part CCXX (PA Part XXX)

Yesterday’s post began a discussion of the culture of the industry and how the inertia of the industries routines and capabilities made for formidable obstacles to change. Thankfully we are not focusing on changing any of the cultural inertia in the oil and gas industry. We are trying to change the bureaucracies and the systems to recognize the routines, capabilities and inertia of the Joint Operating Committee. This does however require the retirement or fading of the bureaucracy in its current form.

And institutional change, we argue, can often take place through the more or less slow dying out of obsolete institutions in a population and their replacement by better-adapted institutions - rather than by the conscious adaptation of existing institutions in the face of change. p. 6

Thankfully the bureaucracy does not sustain its own inertia. It is a forced or contrived existence that serves the purposes of a few within the organization, and these needs can be replaced by the Joint Operating Committee. I’m thinking of the command and control, budget and finance functions. What we have said we are doing with the Preliminary Specification is moving to the natural form of organization of the oil and gas industry, the Joint Operating Committee. I don’t foresee difficulties in making the transition from the bureaucracies forced ways to the more natural way of doing things with the Joint Operating Committee.

Another aspect of capabilities that has recently received a great deal of attention is organizational culture. In practice, not all organizations may be equally able to cope with change, as existing patterns of behavior involving both executives and subordinates may be resistant to change. Organizations develop collective habits or ways of thinking that can be altered only gradually. To the extent that a given culture is either flexible or consistent with a proposed change in product or process technology, the transition to the new regime will be relatively easy. If, however, the culture is incompatible with the needs posed by the change and is inflexible, the viability of the change will be threatened (Robertson, 1990; Langlois 1991; Camerer and Vepsalainen, 1988). p. 9

And the proposition that this transition will occur has been threatened by the bureaucracy. They hold the budget and have exercised it in not providing any funding towards People, Ideas & Objects. In this fashion the bureaucracy has been self-serving and looking after its own interests and has abandoned the future of the industry. What will the situation be like in five or ten years. Will their ways still be the methods in which the industry functions? What if they fail?

Teece... fails to note that the inflexibility, or inertia, induced by routines and the capabilities that they generate can raise to prohibitive levels the cost of adopting a new technology or entering new fields. Such inertia can develop to the extent that existing rules are both hard to discard and inconsistent with types of change that might otherwise be profitable. p. 10

McKinsey Consulting suggest that large populations will be joining the middle class in the next 20 years. This will have a dramatic effect on the levels of demand for energy. If the oil and gas industry fails to respond to these demands due to the bureaucracies lethargic ways, will anyone note that there were these alternatives proposed.

Whereas major competence enhancing innovations may, in time, be assimilated, the creation of entirely new organizations may be needed to deal with innovations that undermine the capabilities or competences of existing firms. p. 11

Tomorrow we will begin our fourth pass through the Accounting Voucher.

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 (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.