The Preliminary Specification Part CCLXIX (C&G Part XVIII)

One of the key changes that is made in the Preliminary Specification is the move away from the “high throughput production” model to the “decentralized production” model. We have discussed this throughout the various modules and now we want to discuss the governance aspect of producing oil or gas when it is known to be unprofitable. Through the changes that we have made in the Preliminary Specification. Shutting in of production causes the production and overhead costs to drop in line with the revenues from the well so that a lack of production does not create a loss. Producing at low price scenarios does however a create a loss. Therefore the firm should have in the Compliance & Governance module a strong governance model that enforces a discipline to ensure that production is curtailed when pricing drops below the margin. Professor Richard Langlois defines the two models in his book “The Dynamic of Industrial Capitalism: Schumpeter, Chandler and the New Economy.”

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

The amount of value that is destroyed during times when the natural gas or oil prices decline is significant. The response of the North American producers to this “phenomenon” is both amusing and startling. They have within their power to fix the situation, yet do absolutely nothing to mitigate the source of the problem or the severity of it. They are natural gas producers, don’t bother them with prices or pipelines or customers, or for that matter the business of the business. This is management’s way of listening to the market and acting accordingly.

What is needed is a new method to deal with the volatility in the oil and gas marketplace. This is only the beginning of price variances. The producers need the ability to curtail production when the prices drop below the margin as is proposed in the Preliminary Specification. This may run against the best interests of those that are charged with operating the firm. And therefore the decision may need to be made by those that are responsible for the governance of the firm. If you can limit the losses. Save the reserves for the day in which the prices will return a profit. The periods in which losses will occur will be less frequent and of less intensity.

But let's look at the larger picture. If everyone in the industry adopted this new discipline then there would be no downward spikes in pricing. If all of the marginal production was removed from the market, the prices would respond to the upside almost immediately. Placing a floor on prices at the higher costs of production. Producers like to think they have employed a high level of capital discipline in terms of their spending. What if they employed a high level of production discipline as well. Then they could assert that they were not reckless in incinerating capital through operating losses in the fashion the capital markets have come accustomed to.

In the Petroleum Lease Marketplace module we have the “Marginal Production Threshold Interface” which indicates which production is at the threshold of becoming marginal or is not earning a profit. In addition this is a collaborative interface that allows the producer to interact with the other participants in the Joint Operating Committee who collectively hold the decision rights to suspend production. It is there that the decision will be made. We will also establish an interface in the Compliance & Governance module and also call it the “Marginal Production Threshold Interface”. It will include a section where the CEO or COO has the authority, in cooperation with the partners in the Joint Operating Committee, to shut-in some production. Taking the decision out of those in operations and placing it in the executive is probably how most of the decisions will have to be made. It certainly isn’t being done in any form or fashion today is it.

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 CCLXVIII (A&S Part XV)

When users are in the Performance Evaluation and Analytics & Statistics modules they will be able to look at a new type of cost that we have recorded in the accounts of the firm and Joint Operating Committee. That is the costs associated with “Dynamic Transaction Costs” which are the unique costs that are incurred during times of change. Professor Richard Langlois described these costs in his article “Transaction Cost Economics in Real Time”.

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

The types of these costs will be varied and not necessarily be the same in all instances. To break these down into their types may be overkill from an accounting point of view when just putting them into an account called “Dynamic Transaction Costs” will do. And we have done that in all of the other modules of the Preliminary Specification. However, having the ability to further analyse these costs when the time comes, from the Performance Evaluation and Analytics & Statistics modules could lead to further insight and learning into the organizational changes that might, or should, be occurring.

Indeed, in cases in which systemic coordination is not the issue, the market may turn out to be the superior institution of coordination. In general, the capabilities view of the firm suggests that we look at firm and market as alternative and sometimes overlapping institutions of learning. p. 99

and

Economic progress, then, is for Marshall a matter of improvements in knowledge and organization as much as a matter of scale economies in the neoclassical sense. We can see this clearly in his 'law of increasing return,' which is distinctly not a law of increasing returns to scale: 'An increase of labour and capital leads generally to improved organization, which increases the efficiency of the work of labour and capital' (Marshall, 1961, IV. xiii,2 p. 318) p. 101

And maybe we need to have a page or screen in each of these two modules dedicated to breaking down these costs. Then a producer or Joint Operating Committee will have some point of reference to determine the state of change and its impact in terms of the costs, and types of costs, to the organization.

F.A. Hayek (1945, p. 523) once wrote that 'economic problems arise always and only in consequence of change.' My argument is the flip-side: as change diminishes, economic problems recede. Specifically, as learning takes place within a stable environment, transaction costs diminish. As Carl Dahlman (1979) points out, all transaction costs are at base information costs. And, with time and learning, contracting parties gain information about one another's behavior. More importantly, the transacting parties will with time develop or hit upon institutional arrangements that mitigate the sources of transaction costs. p. 104

Tomorrow we will begin our fourth or capabilities pass through the Compliance & Governance 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 CCLXVII (A&S Part XIV)

We should also mention, with yesterday’s discussion of the accounting and administrative costs being charged to the Joint Operating Committees. That these accounting and administrative service providers would need to have extensive software built as part of the People, Ideas & Objects Preliminary Specification. They too are a critical part of the efficiencies and effectiveness of the producers and Joint Operating Committees and therefore need to be included in the definition of this software. Today we are going to discuss the overall nature of the Preliminary Specification and how the Performance Evaluation and Analytics & Statistics users will need to look upon the data that is stored within the applications. The method that users will access this data is through ad-hoc queries and general inquiries that they will formulate over time. There will of course be opportunities for users to save and deploy those queries in a more structured approach within the module.

We are focusing the producer firm and Joint Operating Committee on its key competitive advantages. Those are its land and asset base and the earth science and engineering capabilities it holds. These are the things that differentiate them from other producers and how they produce value for their shareholders. Everything else is secondary. We have adopted what Professor Richard Langlois calls the “capabilities approach” in his 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

And we feel this can bring about a new level of competitiveness, one based on innovation, within the industry. As Professor Langlois notes in “Competition through institutional form: the Case of the Cluster Tools Standards”.

Industrial economists tend to think of competition as occurring between atomic units called "firms." Theorists of organization tend to think about the choice among various kinds of organization structures - what Langlois and Robertson (1995) call "business institutions.” But few have thought about the choice of business institution as a competitive weapon. p. 1

And it must be in the hands of the user. Whether that is the CEO of the producer, the Chief Engineer of the Joint Operating Committee or the accountant preparing the financial statements for the property. A decentralized and empowered workforce is the only manner in which to approach the future demands of the energy consumer. From Professor Langlois “Organizing the Electronic Century”.

… “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

Lastly we have used modularity to deconstruct and simplify both the Information Technology and the organization. This provides us with an efficiency of data between the modules and encapsulation of the roles and responsibilities within one module. For example all of the “land” is within the Petroleum Lease Marketplace module.

What makes decentralization economically effective is the possibility of a standard interface that allows the modules to coordinate with one another without communicating large volumes of information. This interface is the price system. 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 and passed on only to those concerned (Hayek 1945, pp. 526 - 527) pp. 15 - 16

We have come a long way for a relatively precise point. In the Preliminary Research Report which was entitled “Plurality Should Not Be Assumed Without Necessity” or Occam’s Razor. I also went on to describe it as Knoop & Valor [1997] did as “It’s not what you know that you do not know that hurts you. It’s what you do not know, that you do not know that will. It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to bring about a new order of things.” I should have heeded my own warning. But the point is that the unknown unknowns are what need to be discovered and the tools for doing that are the Performance Evaluation and Analytics & Statistics modules 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 CCLXVI (A&S Part XIII)

We have combined the Performance Evaluation and Analytics & Statistics modules into one discussion stream for purposes of the Preliminary Specification. The difference between the two modules is that the Performance Evaluation is a Joint Operating Committee facing module and the Analytics & Statistics module is a producer firm facing module. Both are inherently the same in terms of functionality and process management, however, the data and collaboration elements are fundamentally different. It will also be in these two modules that the move away from the “high throughput production” model to the “decentralized production” model that the Preliminary Specification is conducting will have an effect. In Professor Langlois book “The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy” he defines the differences between the two models.

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 previous modules we have discussed how the overhead costs of production and royalty accountants, and for that matter any accounting to do with operations, land administration, production administration and exploration administration would become variable costs that would only be incurred if there was production. How the further specialization and division of labor of these traditional departments provided a means for the oil & gas industry to have their accounting and administration prepared by service providers. This was an example of how the industry could have all of their production and overhead costs allocated to the revenues from production. When the wells were shut-in then these administrative and accounting costs would not be incurred and the decentralized production model would therefore be in place.

Both in the Analytics & Statistics and Performance Evaluation modules each Joint Operating Committee becomes a stand alone reporting entity. Each property should have financial accounting reports that are prepared monthly. These could be generated here in these modules. Having a balance sheet, income statement, and statement of changes prepared for the Joint Operating Committee and for the producers interest would provide real value for those trained in reading financial statements.

With the fine granularity of the data. That is to say the charges for the accounting and administrative services will be very precise, as will all the variable charges that will be charged under the “decentralized production” model. The assurance that all the accounting and administrative service providers have billed, and billed correctly for a month, will need to be automated to a certain level and that too can be done in these modules.

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 CCLXV (K&L Part XXXIII)

This will be the last post of our fourth or capabilities pass through the Knowledge & Learning module. It has been in the Research & Capabilities and the Knowledge & Learning modules that Professor Richard Langlois work has been of most value. We will continue on with the review of Professor Langlois in the Performance Evaluation, Analytics & Statistics and Compliance & Governance modules and then in the fifth pass we will be taking a different perspective on the Preliminary Specification. The fifth pass will combine two elements during its review. The first will be the application of Oracle’s Fusion technologies which are the base technologies of the Preliminary Specification. The second element is some of the more common components of an ERP system. We have covered off what an innovative ERP system looks like, we need to include how that innovation interacts with the day-to-day of an ERP system. So those will be the focus of the fifth pass through the specification. I am tentatively scheduling the sixth pass to be a deeper dive into the same elements as we may not be able to make sense of everything in the first pass and will need two runs through to be coherent.

If we go back to the previous modules we recall the discussion around moving from the “high throughput production” model to the “decentralized production” model that was being conducted in the Preliminary Specification. Essentially the “decentralized production” model has all of the costs, production and overhead, match the revenues. So when there was no production, there would be no costs associated with any shut-in production. The “high throughput production” model is something that the bureaucracy can do. It is their means of managing and is how they are able to provide value in the organization. That “high throughput production” is incapable of providing value today is a matter of the time and place that we find ourselves in. Using the “high throughput production” model requires the bureaucracy to summarily ignore the Joint Operating Committee as the key organizational construct of the oil and gas industry. It can not do both, “high throughput production” requires the designation of operatorship be granted to one partner for control over the property.

Industrial structure is really about two interrelated but conceptually distinct systems: the technology of production and the organizational structure that directs production. These systems jointly must solve the problem of value: how to deliver the most utility to ultimate consumers at the lowest cost. Industrial structure is an evolutionary design problem. It is also a continually changing problem, one continually posed in new ways by factors like population, real income, and the changing technology of production and transaction. It was one of the founding insights of transaction-cost economics that the technological system does not fully determine the organizational system (Williamson 1975). Organizations — governance structures — bring with them their own costs, which need to be taken into account. But technology clearly affects organization. This is essentially Chandler’s claim. The large-scale, high-throughput technology of the nineteenth century “required” vertical integration and conscious managerial attention. In order to explicate this claim, we need to explore the nature of the evolutionary design problem that industrial structure must solve. p. 50

With the Preliminary Specifications adoption of the “decentralized production” model and the recognition of, and technical support of the Joint Operating Committee. The elements of change are in place. It is the culture of the industry to use the Joint Operating Committee, it is an industry that is based on partnerships and the closer we move to that culture the greater alignment (speed, innovation, and accountability) we will achieve. This next quote should be read twice with either the hierarchy or the Joint Operating Committee in mind.

And there are certainly examples of this. But it is also possible that a structure of organization can persist because of “path dependence.” A structure can be self-reinforcing in ways that make it difficult to switch to other structures. For example, the nature of learning within a vertically integrated structure may reinforce integration, since learning about how to make that structure work may be favored over learning about alternative structures. A structure may also persist simply because the environment in which it operates is not rigorous enough to demand change. And organizations can sometimes influence their environments — by soliciting government regulation, for instance — in ways that reduce competitive rigors. p. 58

This discussion elevates the importance of the Research & Capabilities and Knowledge & Learning modules in defining how the industry operates. These modules remove the task of how the industry is operated from the hands of the bureaucracy and moves the operations to the Joint Operating Committee. It is therefore a critical module.

Over time, two things happen: (a) markets get thicker and (b) the urgency of buffering levels off and then begins to decline. In part, urgency of buffering declines because technological change begins to lower the minimum efficient scale of production. But it also declines because improvements in coordination technology — whether applied within a firm or across firms — lower the cost (and therefore the urgency) of buffering. p. 78

As a point of interest when I read that last quote I became concerned for the Natural Gas business in North America. The size of the Natural Gas storage business has become so large as to dwarf any real purpose for its existence. The other aspect is, the storage business is no longer in the hands of the producers. How in a market economy will the producers ever get market prices for their product again?

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 CCLXIV (K&L Part XXX

We talk a lot about Joint Operating Committees here but always in the abstract. I just wanted to note that they come in all sizes and shapes and would note that they can be quite large, some with seven hundred dedicated staff. Irrespective of their size and shape they are the focus of this software development and are the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. By moving the compliance and governance frameworks into alignment with the seven Joint Operating Committees frameworks we will achieve a speed, innovativeness and accountability in the operations of oil and gas.

That is the innovation that People, Ideas & Objects places everything on. The eleven module Preliminary Specification takes that innovation and is a further reorganization of the oil and gas producer and Joint Operating Committee around the principles of specialization and the division of labor. The value of the Preliminary Specification is the result of using the innovation of the Joint Operating Committee. From Professor Langlois book “Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy.”

The first, and most obvious, point is that it was an outside individual, not an organization, who was responsible for the reorganization of the industry. Lazonick is right in saying that genuine innovation involves reorganizing or planning (which may not be the same thing) the horizontal and vertical division of labor. But it was not in this case “organizational capabilities” that brought the reorganization about. It was an individual and not at all a “collective” vision, one that, however carefully thought out, was a cognitive leap beyond the existing paradigm. If SMH [a case he is discussing] came to possess organizational capabilities, as it surely did, those capabilities were the result, not the cause, of the innovation. p. 46

We are critical of the bureaucracy for a variety of reasons however there may be one benefit from their centralized point of view. Although they have fought to eliminate People, Ideas & Objects from the marketplace. And they have done nothing in terms of adopting new Information Technologies. IBM was the last to attempt any significant investment in oil and gas systems and their exit in frustration was almost a decade ago. According to Professor Richard Langlois book, the bureaucracy may be ideal for deciding it is time for change. One could hope that a change in the attitude towards People, Ideas & Objects could happen, but I’d just be dreaming.

As I have argued elsewhere (Langlois 1992b), the benefit of centralization lies in the ability to bring about change, not in the ability to administer existing structures. p. 47

I have always asserted in my battle with the bureaucracy that we ignore them and deal with the C class executive and shareholders of the oil and gas industry. They have it on the line and will be the ones that pay the price if things don’t go well. Management will just saunter off to the next job if something bad happens. And it's here that maybe Professor Langlois and I are thinking of the same people who are the appropriate decision makers.

Nonetheless, innovativeness requires more than mechanistically searching for new routines. In Hamel and Prahalad, it essentially involves forcing the firm to take on more of the characteristics of a market: it must develop the kind of genetic diversity Friedrich Hayek praised. “In nature,” they write, “genetic variety comes from unexpected mutations. The corporate corollary is skunk works, intrapreneurship, spinoffs, and other forms of bottom-up innovation” (Hamel and Prahalad 1994, p. 61). In the end, however, they, like Crozier, realize that the most radical kind of change must come from the top down: it requires a Schumpeterian entrepreneurial vision. “Top management cannot abdicate its responsibility for developing, articulating, and sharing a point of view about the future. What is needed are not just skunk works and intrapreneurs, but senior managers who can escape the orthodoxies of the corporation’s current ‘concept of self’” (Hamel and Prahalad 1994, p. 87). Example? Nicolas Hayek’s “crazy” vision that the Swiss could manufacture cheap watches competitively with the Japanese (pp. 98-99). p. 49

The Preliminary Specification is the vision that “top management” can use to “articulate and share a point of view about the future.” What is unknown at this point is if they will do what is required.

Indeed, one might argue that, the farther an innovation is from the ken of existing firms, the more likely it is that the innovation will be instantiated in new organizations. p. 49

The Joint Operating Committee is closer to the oil and gas industries conceptual model then the bureaucracy is. We are resonating with the culture of the industry on a global basis. I don’t know if that means we will be instantiated in new organizations or adopted by the existing ones?

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 CCLXIII (K&L Part XXXVI)

People, Ideas & Objects is derivative of Professor Paul Romer’s “New Growth Theory”. That is that economic growth is the result of People, Ideas and Things. We just exchanged “things” with “objects” as we are object based software developers. I highly recommend reading his interview on “New Growth Theory” it will provide you with a good understanding of the theory and how it pertains to the Preliminary Specification. It states that we need to structure the right institutions. “This new theory says technological change comes about if you have the right institutions.” Oil and gas being of course one of the most technical of all industries.

Within the Knowledge & Learning module we have the capabilities of the producer firms that are participants in the Joint Operating Committee. Each capability contains the knowledge, skills, experience and ideas of the people who are part of that producer firm and the service industry representatives. As we have learned “knowledge begets capability, and capability begets action”. Quotes for today’s blog post are from Professor Richard Langlois book “The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy.”

Indeed, the job of the entrepreneur is precisely to introduce new knowledge. The “Circular Flow of Economic Life” is a state in which knowledge is not changing. Economic growth occurs at the hands of entrepreneurs, who bring into the system knowledge that is qualitatively new – knowledge not contained in the existing economic configuration. p. 27

Here we begin to see the role that people take in the makeup of the oil and gas industry. And to sum it up is to state that it is everything. One also needs to consider the role of computers in these “actions” and that it amounts to not very much. People, Ideas & Objects divides the jobs between what people do well, the thinking, generation of ideas, leadership, collaborating, deciding and learning and leaves the memory and processing to the computers.

There has to be a mechanism by which new knowledge enters the system. And that mechanism cannot be rational calculation, for as David Hume (1978, p. 164) long ago observed, “no kind of reasoning can give rise to a new idea.” p. 27

There is much to be done in the industry and a lot of it involves blazing new trails. The hard work is what the people will need to be involved in doing. The challenges and opportunities are of historical significance and will require the dedication of a lot of people.

What has been done already has the sharp-edged reality of all things which we have seen and experienced; the new is only the figment of our imagination. Carrying out a new plan and acting according to a customary one are things as different as making a road and walking along it. p. 27

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 CCLXII (K&L Part XXXV)

We see with the decline in the natural gas prices that management are not attuned to the market or the “price” system. Management are more familiar when they have control of everything and it operates as it should. Well unfortunately for them the scope of their authority is not as a broad as it once may have been. What other areas has the market been sending price signals that the management refuse to hear? We can only imagine. The fact of the matter is that the oil and gas producer and the Joint Operating Committee need to be attuned to the marketplace in order to better understand the business. They also need to have better Information Technologies so that they can know that they are not making any money on any natural gas that sells below $5.00. We can in the last item of this next quote learn that management's lack of hearing is symptomatic of their species. Quotations for today’s post are from Professor Richard Langlois book “The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy”.

As Chandler tells us on the first page of The Visible Hand, two characteristics set the managerial corporation apart from earlier modes: (1) it is overseen by salaried professionals rather than by owners, and (2) it comprises multiple units or stages of production each of which could in principle have stood on its own as a separate organization. The last characteristic is really the essential one. In the large corporation, management supersedes the price system as a method of coordinating stages of production. p. 8

It is then within management’s character to not listen to the market. When natural gas prices hit $2.15 just ignore these signals and keep producing. That’s the solution. That Deer in the headlights look about the earnings is intended to solicit sympathy. It is Professor Langlois thesis that the Visible Hand of management is being replaced by the Vanishing Hand of the marketplace. I would suggest in oil and gas the transition hasn’t happened fast enough.

The question, then, is clear: why did managerial coordination supersede the price system? Why did “managerial capitalism” supersede “market capitalism” in many important sectors of the American economy beginning in the late nineteenth century? p. 9

In this next quote Professor Langlois percolates the entire essence of what is necessary for the oil and gas industry to grow and prosper. It is these elements that we have captured in the Research & Capabilities and Knowledge & Learning module of the Preliminary Specification.

Economic growth is fundamentally about the emergence of new economic opportunities. The problem of organization is that of bringing existing capabilities to bear on new opportunities or of creating the necessary new capabilities. Thus, one of the principal determinants of the observed form of organization is the character of the opportunity – the innovation – involved. The second critical factor is the existing structure of relevant capabilities, including both the substantive content of those capabilities and the organizational structure under which they are deployed in the economy. p. 13

It seems so simple now. When an earth scientist or engineer can deploy a capability with the ease of calling a play, as in our football analogy, to the opportunity that has presented itself. Economic growth is the result. Having a listing of the capabilities that are available from the participating producers of the Joint Operating Committee. Accessible within the Knowledge & Learning module provides for its own economic opportunity as well. Seeing that producer x has developed a new capability to conduct y operation may motivate that Joint Operating Committee to deploy the capability and enhance its production.

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 CCLXI (K&L Part XXXIV)

Yesterday we had discussed the coordination of the markets or the service industry during a field operation. How it is up to the Joint Operating Committee to organize the markets to ensure the performance they desire is attained. Today we want to discuss the changes in the roles and responsibilities within those markets and the Joint Operating Committee itself. How those changes come about and the manner in which they are implemented within the JOC. Specifically how innovation is introduced into the field operation through further specialization and the division of labor. The Knowledge & Learning module of the Preliminary Specification uses the Military Command & Control Metaphor (MCCM) to coordinate the markets, it will also show the “gaps” that need to be filled with new innovative positions.

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

In each of the marketplace modules (the Resource, Petroleum Lease, Financial) there is a “Gap Filling” interface. These are for the purposes of identifying and publishing “gaps” in the markets offerings, and, publishing of ideas as to where “gaps” exist within the producer firm and Joint Operating Committees. Each of the “Gap Filling” interfaces is essentially the same interface and that interface can be viewed to determine its effect on the current Joint Operating Committee. Once these “Gaps” are filled they need to populate the MCCM and be assigned the roles and responsibilities within the chain of command for the field operation. This is a manual and deliberate process, it is not spontaneous as we might think that it is. It is as Professor Langlois stated in the previous quote “or in sectors of developed economies undergoing systemic change, gap-filling requires other forms of organization -- more internalized and centrally coordinated forms.”

The underlying assumption, normally unspoken, is that relevant background institutions — things like respect for private property, contract law, courts — are all in place. Whatever transaction costs then arise are thus the result of properties inherent in “the market” itself, not of inadequacies in background institutions. There is generally a tacit factual or historical assumption as well: that the relevant markets exist thickly or would come into existence instantaneously if called upon. p. 3

There is only one way in which the oil and gas industry is to become more productive. That is through specialization and the division of labor. Particularly in the earth science and engineering disciplines. People, Ideas & Objects have approached the issue of the insatiable demand for energy and the somewhat constrained resource base of earth sciences and engineers through specialization and the division of labor. To approach this issue without the use of software in this day and age would be the same as using tools from the stone age. The effect of pooling the technical resources of the participants in the Joint Operating Committee is the beginning of the specialization and division of labor necessary to expand the industry's overall output.

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

Knowledge & Learning is the name of the module. Although it seems to be pursuing conflicting goals of operational excellence and innovativeness at the same time. There is a time element where the operational control fixes all of the variables and locks them down. That is a time when the operation is conducted for its efficiency. Other times and in other ways the module remains open and flexible to change to allow for the second major process of innovation within the People, Ideas & Objects Preliminary Specification to occur.

But even in “developed” economies, novelty and change creates the sorts of gaps that call for business groups, including less-formal sets of “intermediate” relationships, as, for example, in geographic (or, increasingly, “virtual”) industrial districts. In this sense, the economics of organization generally can learn from the literature on business groups outside the developed world. The problem of gap-filling in highly developed economies differs from that in less-developed economies because the path ahead is cloudier, which suggests that more-decentralized organizational structures may be more successful at the cutting-edge of technology. p. 29

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 CCLX (K&L Part XXXIII)

A recent McKinsey Newsletter begins with “In a world of unprecedented volatility, the unprepared will be sorely tested.” Lets hope that no oil and gas firms are caught unprepared without an innovative oil and gas ERP system like People, Ideas & Objects. As we enter the era of insatiable demand for energy. With fixed earth science and engineering resources, reorganization is the only manner in which we can approach the situation at hand. “Unprecedented volatility” will provide remarkable opportunities for those that are users of the People, Ideas & Objects Preliminary Specification. I believe it will be necessary to not only own the oil and gas asset but to also have access to the software that makes the oil and gas asset profitable. Such are the times that we find ourselves in.

In his paper “Innovation Process and Industrial Districts” Professor Richard Langlois discusses Industrial Districts (ID’s). Which are small geographically located groups of vendors that work together to produce products and services. They are for all intents and purposes the same as what we have been describing as the service industry or marketplace that a Joint Operating Committee would access during an operation in the field.

As we have shown, much of the attractiveness of compact, highly-localized areas of production results from their ability to reduce search costs, but this is accompanied by the risk that the knowledge available in any given district may be substandard. But new information and communications technology (ICT), may make it possible for firms to draw more cheaply and effectively on diverse sources of knowledge and therefore to increase their access to innovative ideas (as well as their ability to market their own innovations if they wish) (Langlois, 2003; Christensen, 2006). This may not undermine all aspects of the operations of IDs because differentiation and specialization retain their importance, and proximity is useful in just-in-time and other lean ways of organizing production. For innovation, however, an ability to tap wider sources of knowledge quickly and cheaply can reasonably be expected to allow firms all along supply chains to consult more broadly than in the past. Improvements in ICT and new search techniques, many of them associated in one way or another with the Internet, not only increase access to knowledge but may force innovation on firms that in the past could shelter in IDs. Because their customers can be better informed, firms in IDs need to keep up to date in order to maintain competitiveness. p. 20

In the previous quote the customer is the Joint Operating Committee. The expectation through the Research & Capabilities and Knowledge & Learning modules is that the marketplace or ID’s will be state of the art in terms of their capabilities. That may not be the case, and most probably will not be the case. There are a lot of international firms that operate within the service industry. And these form the foundations of what these ID’s are. But in most cases they are local and to assume that they are able to organize themselves in a manner that will optimize the Joint Operating Committees needs is incorrect.

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).

Expecting the service industry to provide the Joint Operating Committee with “conscious organization” of disparate firms and organizations is wrong. The Knowledge & Learning “Planning & Deployment Interface” use of the Military Command & Control, AFE, and Job Order systems provides the means in which to put some organization within the ID. And in turn provides the Joint Operating Committee with...

Charles Sabel and his collaborators have begun looking into the nature of the relationships that characterize the New Economy (Gilson, Sabel and Scott 2008; Jennejohn 2007; Sabel and Zeitlin 2004). And what they find is not common ownership or hierarchy but rather a “form of contracting [that] supports iterative collaboration between firms by interweaving explicit and implicit terms that respond to the uncertainty inherent in the innovation process” (Gilson, Sabel and Scott 2008, p. 3). The New Economy may be highly organized. But it is fundamentally contractual, in a way that large Chandlerian multi-unit enterprises are not. These latter, properly understood, are indeed fading away in a world of extensive, capable, diversified markets.

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.