The Preliminary Specification Part CCCX (FM Part XXX)

Once the producer has made the decision to invest in a property it is at that time they agree to participate in a Joint Operating Committee. Depending on how that JOC is structured will determine how the investment is managed from that point forward. If the producer has significant influence in the voting rights then they will be able to assert their ways otherwise they will have to work within the framework of the structure that is set up. That operational decision making framework is one of seven framework in the Joint Operating Committees which also includes the legal, financial, cultural, communication, strategic and innovation frameworks. Alignment of these frameworks to the compliance and governance of the firm is achieved through the eleven module People, Ideas & Objects Preliminary Specification. This alignment provides a speed, innovativeness and accountability that is not otherwise achievable in the current bureaucracies.

In an ideal world, the initial investment of the producer can be leveraged with debt. As we have already discussed this debt can be undertaken with a general assignment of the property itself. Therefore further aligning the equity and debt holders within the frameworks that we mentioned. So what does that mean. Making the reasonable assumption that all of the participants within a Joint Operating Committee are there to earn a reasonable return. Everyone has the same objective. Financial reward drives consensus. Everyone at the table has made the same percentage share investment, and with debt encumbering the property and only the property the scope of the decisions are within the domain of the property. In this ideal situation the resulting speed and focus of the decision making is consistent with an innovative oil and gas industry.

Not all investments will be able to be undertaken with bank debt or revenue from the property. Some will have to be sent back through the decision making process of being evaluated by the producer in the “Capital Allocation Interface” of the Financial Marketplace module. However, due to their low risk profiles they usually have a higher probability of being invested in. There is also the fact that the performance of the property is enhanced by the leveraging of the property by the debt. The return and risk profile that was used to evaluate the property in terms of investment worthiness by the producer did not assume any debt would be taken on. The debt is assumed once the property is successful and is producing. The debt is leveraging the return that the producer used in making their decision to proceed with the investment in the property. Therefore with much higher returns the property most certainly will be evaluated for further investment. At which time this new investment will be turned over to the Joint Operating Committee to manage further.

Tomorrow we will start with our fifth pass through the Partnership Accounting 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 is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decisions. The development, release, and timing of any features or functionality described for People, Ideas & Objects products remains at the sole discretion of People, Ideas & Objects. 

The Preliminary Specification Part CCCIX (FM Part XXIX)

In previous posts we had discussed how the innovative producer would need to balance their speed and performance with control over some decision making processes to ensure they maintained the appropriate investment balance within their organization. This post will discuss in more detail how the Financial Marketplace module of the Preliminary Specification provides these sometimes contrasting objectives.

The speed and performance come about as a result of the demands from the capital markets. Investors want to deploy their capital at the critical moment when the results are about to be achieved. Such is the way of their business. Having their capital turnover quicker is a means to making it more effective. The innovative producers that are able to replicate this turnover within their organization will gain market recognition for their speed and performance. Let's call this the gas pedal. Speed is good but not at the expense of performance. Drilling a series of dry wells quickly doesn’t impress anyone. It is easy to understand what a reasonable approach involves when it comes to making this tradeoff.

There also needs to be a means to control what the firm is involved in in terms of investment criteria. This can be managed through the “Capital Allocation Interface” of the Financial Marketplace module. All investments are assessed based on their expected returns and providing for certain risk profiles. It is imperative that the firm evaluate every opportunity and critically review the results to ensure their investment selections are appropriate and within the framework of what the producer is able to carry out. Let's call this the brake.

And let’s be clear, most if not all the producers have these processes operating within their organizations. And not within the financial domain. What is proposed here in the Financial Marketplace module is controversial because of its administration of these processes within the financial jurisdiction of the organization. One in which this falls under the responsibility of the Chief Financial Officer and is administered in the Financial Marketplace module. It is my opinion, that the CFO will continue to move away from the financial to a more technical background. Having a geologist or engineer as the CFO will become the norm in the future. The CFO will have the technical accounting aspects provided to them by their accounting firm, the service providers and the staff that they employ. Their ability to discern which projects to proceed with will be as a result of the collaborations conducted within the speed, performance and control decision processes and their participation in the senior management or C class executive meetings. However, having these decision processes managed by a CFO who is an accountant would be the same as giving the keys to your Ferrari to a teenager, what positive outcome would you be expecting.

To manage these processes we turn to the Oracle Middleware layer and specifically the Oracle Business Process Management Suite. We need to take these from the spreadsheet and ad hoc nature that they are currently managed under and put them through a defined and rigorous process that meets the organization's needs. From the C class executives to the people who are grinding out the calculations. The decision process needs to be defined and managed by the software within the organization. It also needs to be highly collaborative with the decision making process well documented. It will be in this way that a firm can then learn from what its doing wrong, maybe most importantly. But also from what it is doing right. Right down to the detail of who came up with the idea and who pushed it through. And then you’ll begin to be able to answer who it is that is responsible for that last big success in your firm.

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 is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decisions. The development, release, and timing of any features or functionality described for People, Ideas & Objects products remains at the sole discretion of People, Ideas & Objects.

The Preliminary Specification Part CCCVIII (FM Part XXVIII)

Let’s get to the real issue that has to be dealt within the Financial Marketplace module of the Preliminary Specification. The cash. With each Joint Operating Committee being funded and operated through its own bank the cash of the producers will be scattered through a variety of accounts that are held within the various Joint Operating Committees they have an interest in. Or will they. Through this post we will trace the cash that is generated through the properties and the various operations that occur in the day-to-day of an oil and gas operation. What we will find is that from a cash balance point of view, the balances that the producer holds will be fundamentally unchanged between the People, Ideas & Objects method of conducting business and the way in which it is done in the majority today.

What happens today is the net proceeds from the operation of the property are determined, each working interest share of those proceeds are calculated, and depending on if the property is generating or consuming cash a check or invoice is sent. The difference in the People, Ideas & Objects system is that in the case where the property is generating cash instead of issuing a check, the balance will be transferred. In the case of where the property was consuming cash it would still send an invoice, and there would have to be some operating advance provided for the Joint Operating Committee to deal with the short falls while these invoices were being processed by the producer firms. In times when there are capital expenditures cash calls will offset the demand for cash.

One of the other key differences in the People, Ideas & Objects application modules is that the Joint Operating Committee is open to contributions from all of the participants. Producers are pooling their resources in order to fulfill the requirements of the property and that demands that everyone participate in some form or fashion. Each month these contributions are equalized in the process of determining the net cash payable or receivable and will be accounted for in the joint venture billing in that manner. These equalized amounts will affect the cash balance in terms of the size of the payment and a producer could be compensated for the two components through the joint venture billing process. One would be the net proceeds of the property. And the second aspect would be the amount of their contribution in excess of their working interest.

We have specified the Oracle Fusion Application Financial Management Suite as part of the Preliminary Specification in previous modules. For purposes of these cash management activities we will of course again be using the Suite for these purposes. I would caution readers that the manner in which these accounts are cleared have not been worked out. That is the purpose of the Preliminary Specification. These are still early days and it is problems such as these that need to be resolved with the $100 million budget. Today, the optimal method of dealing with clearing the balances in the joint account is through clearing accounts in the general ledger. There is no reason that we can’t modify that concept to allow for the contributions of all of the producers within a Joint Operating Committee to contribute to the joint account, be equalized and then cleared.

From another perspective, the interfaces to the variety of banks and producers accounts for deposits and withdrawals will be an area that will need to be worked through. Although this is not offering a technical issue as all of this is being done today, the volume of transactions will be high in comparison to today’s traffic. Banks are well prepared for this. Producers not so much. Particularly in the area of Compliance & Governance. Having automation of this type and at this level will make many people wince. They can continue with the paper based systems if they choose, the practical solution is that we build these systems with the appropriate internal controls to ensure that the process is managed efficiently and effectively and without the risks associated with this type of activity.

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 is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decisions. The development, release, and timing of any features or functionality described for People, Ideas & Objects products remains at the sole discretion of People, Ideas & Objects. 

The Preliminary Specification Part CCCVII (FM Part XXVII)

We invoke the “Marketplace Interface” with the technologies that are provided to us from Open Wonderland. The open source Java toolkit that creates the collaborative environment we call the “Marketplace Interface”. Sitting on the Oracle Fusion Middleware layer, this toolkit provides our users with simultaneous interaction for the Resource, Petroleum Lease and Financial Marketplace modules. The “Marketplace Interface” simulates a market where buyers and sellers engage, buy, sell and trade products and services. It is the ultimate collaborative environment. The user will have at any time the opportunity to option click to create a transaction, an AFE or some other form of business based on the interaction they are simulating in the marketplace. This post is to detail some of the activities that will be carried out within the Financial Marketplace module of the Preliminary Specification.

We fast forward a few years to where the demand for energy is very strong. Therefore the demand for capital in a capital intensive business is even more difficult. The need to promote the performance and speed of your company's capabilities is one of the necessary elements of the innovative oil and gas producers toolkit. What you want to do is engage the investment community in a discussion around the various elements of your performance. To do that you turn to your location within the “Marketplace Interface” that you have set up for selling / promoting oil and gas assets and the producer firm itself. It is here within the oil and gas property district that you have acquired some real estate to house the distribution and promotion of your properties and company. (Please review the video below.)

When you have engaged a qualified and interested buyer you are able to provide them with and execute a confidentiality agreement. Then you begin the presentation of the properties that you have in the package without leaving your desk or travelling anywhere. Next, an investor wants to know more about your team and what is the performance over the past three years and their current capabilities. All of this information can be easily compiled from within the “Marketplace Interface” as they are all part of the People, Ideas & Objects ERP system. Whether it be from the Oracle Fusion Middleware, Oracle Fusion Application Financial Management Suite or the People, Ideas & Objects application modules themselves, all of these application features interact and operate as one.

Or maybe the shoe is on the other foot, sort of speak, and you're in the market to acquire some properties. The ability to shop around the oil and gas property district in the “Marketplace Interface” gives you the opportunity to find the right property with a lot less time and cost involved. Having producers from around the world located in the district enables you to search globally as well as locally on all the criteria that meet your needs. Reviewing hundreds of reserve reports and evaluating the porosity of every formation has its rewards, but sometimes in a marketplace, it's something that someone says that piques your interest in a property. Having this open on your desktop and available all day would open a new world of opportunity to the innovative oil and gas producer.

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 is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decisions. The development, release, and timing of any features or functionality described for People, Ideas & Objects products remains at the sole discretion of People, Ideas & Objects. 

The Preliminary Specification Part CCCVI (FM Part XXVI)

Turning now to the Financial Marketplace module. We find that it has been a while since we have posted anything to the module. A high level review would therefore be worthwhile to refresh everyone’s memory. The Financial Marketplace is the third marketplace module of the Preliminary Specification and relies heavily on the “Marketplace Interface” that we have developed for these three marketplace modules. It is also the module that we introduce some significant changes in how the banking and investment communities interact with the producer and Joint Operating Committee so lets begin.

The first point to make is that the Preliminary Specification enables the producers within a Joint Operating Committee to have a bank take a general assignment on the specific assets within a Joint Operating Committee. To deal with the partnership as its sole customer in the relationship and align its interests to the legal, financial, operational decision making, cultural, communication, strategic, innovation and compliance & governance frameworks within the Joint Operating Committee. By doing so the decisions regarding finance are to do with the financing of the property exclusively. You are dealing with one banker representing all of the producers and they are not constrained by the issues and opportunities that the producers have with other properties. The general assignment is to do with the Joint Operating Committee alone.

One of the implications of doing this is that the producer firm is going to have relationships with many banks. If not all of the banks within the marketplace. However, the logistical nightmare this would have caused in terms of handling the situation in the 20th century doesn’t exist in the 21st century. Having bank accounts for each Joint Operating Committee is possible when the automation of deposits and payments are at the level that they are today. These will be managed in the “Advanced Cash Management Interface” of the Financial Marketplace module. The key advantage is of course that the decision making process is fully aligned with the other frameworks. When a decision is needed, everyone is motivated by the financial gains of the specific property.

The objective of the Financial Marketplace module is to provide the producer with the speed and performance necessary to compete within the marketplace, however to maintain control over all of the firm. With the future demands for energy demanding more, and each barrel oil equivalent requiring more earth science and engineering effort, the speed and performance of the producer will become more prevalent in the marketplace. How the producer competes on the criteria of how quickly they can turn an investment into a return will attract the investment community. On the other hand employing the capital discipline of evaluating each and every prospect will be as important as ever. Turning over every stone to find the right investment for your team is how the control will be exercised in this prospective environment. These elements are handled in the collaborative “Capital Allocation Interface”.

It will also be a more personal connection that is made with the investment community. The capabilities of the producer firm are one of the key competitive advantages of the innovative oil and gas producer. How your firm performs is highly dependent on the quality of the team that you have put together. The need to promote that team within the constraints of the compliance and governance requirements will be a necessary part of the day-to-day of the producer firm. The “Technical Team Interface” is an investment community facing interface that provides a window to the investment community of your performance and capabilities in the earth science and engineering disciplines. This will be nothing more than what can be determined from other public sources however it will be focused on selling and promoting the team’s capabilities and innovativeness to the investment community. Included with that interface will be the firm's Revenue Per Employee variables and trajectories to offer direct comparisons to other producers.

Lastly there is the “Marketplace Interface” the ultimate, in my opinion, collaborative tool. The marketplace for financial service is very robust. No producer provides any of the services that are provided by a bank or investment house. All of the banks and investment houses provide their services based on a fee. What is needed is for the People, Ideas & Objects “Marketplace Interface” to be built to support this market and have the people interact and collaborate. Unlike the Petroleum Lease Marketplace where the service providers have to be created, they already exist in the Financial Marketplace module. Tomorrow we will begin on this point with the technology that supports the “Marketplace Interface”.

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 is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decisions. The development, release, and timing of any features or functionality described for People, Ideas & Objects products remains at the sole discretion of People, Ideas & Objects. 

The Preliminary Specification Part CCCV (PLM Part XLIV)

Reading some of the past posts I noted that the fifth pass was to be about the Oracle technologies and some of the more day to day aspects of an ERP system. We have been filling in some of the larger holes here lately, most recently with the royalties. And we will continue to work towards these two goals during this the fifth pass through the Preliminary Specification. Today we want to highlight one of the Oracle technologies that will be used to support the royalty infrastructure. As these will be from the Middleware layer, they will accommodate the unique attributes of the oil and gas industry.

So far we have used the Oracle Fusion Applications Financial Management suite in unique ways within the Petroleum Lease Marketplace. It provides for the accounting and billing services to the producers, Joint Operating Committees and service providers that are involved in the Petroleum Lease Marketplace module. The Oracle Database is fully employed as well as there are many attributes, or data elements, that are stored within the Petroleum Lease Marketplace module. From the unique strategy of the Joint Operating Committee, the Lease, the agreements with all of their variables, the royalty information and data about the service providers. What is needed now is an understanding of how the unique attributes of a royalty infrastructure for an oil and gas system will be put together.

In Oracle Fusion Middleware there is Oracle’s Business Process Management Suite (BPM) which is a collection of tools and previously defined processes that developers use to configure for specific processes. The royalty process is an ideal candidate for the use of these tools. Based on the Oracle Database, Java and XML Oracle BPM is a front end, or high level graphical user interface that users can relate to in terms of the process that is mapped. Using data models provided from PPDM and the Oracle Fusion Application Suites, augmented by the People, Ideas & Objects data model, data storage and integrity will be the highest that can be achieved.

Key to the Oracle Fusion BPM tools is the dependence on the user. People, Ideas & Objects being user based developments need to have tools that can interface directly with the user community. Having them learn Java, XML and SQL just won’t work. Reviewing a process from the business logic point of view, ensuring it is consistent with their needs and seeing a step by step basis of that logic assures them of the accuracy and the possibilities of what more they could have. All of this would sound like the end product would be bloated and slow. That’s not the case as the technologies used are the same as if the process was being hand crafted. The result is that BPM output is fully scalable and appropriate for a cloud computing distribution model, and the manner in which People, Ideas & Objects intends to use these processes.

Calculating royalties for multiple jurisdictions, each with their own nuance of how those royalties are calculated are well within the scope of what the People, Ideas & Objects application development objective are. This becomes a simple if-else-then statement to calculate the royalty on the basis of the specific jurisdiction. One of the important determinations in this is what jurisdictions are we developing for. This question is answered in our scope, and is one of the reasons producers should subscribe to this software development. To make sure we are covering all of your royalty jurisdictions. Maintaining the up-to-date requirements of each of the royalty regimes will be an ongoing part of our responsibilities. However, I would reiterate our value proposition is that we would be doing this on behalf of all of the producers in the industry. The one time cost allocated over our entire subscribing producers will make these changes incidental to the innovative oil and gas producer. Specialization and the division of labor works in terms of your software development team as well as your service providers.

Tomorrow we will begin our fifth pass through the Financial Marketplace 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 is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decisions. The development, release, and timing of any features or functionality described for People, Ideas & Objects products remains at the sole discretion of People, Ideas & Objects.

The Preliminary Specification Part CCCIV (PLM Part XLIII)

In yesterday’s post we used a simple example of how the costs were netted back to determine the price used for royalties. Today we are going to show how the Preliminary Specification handles Gas Cost Allowance (GCA) and the costs of operations. This example will apply when a producer has a financial interest in the gathering or processing facilities that are used to carry the gas they produce. The GCA allows for the costs of capital and operations of those facilities to be charged based on its annual throughput.

Operation of those assets whether they are a gas plant or a gathering system will have their own Joint Operating Committee. However, the first thing to determine is what is an eligible capital item for GCA purposes. Not all the capital is necessarily allowable to be charged as a deduction for GCA purposes. There needs to be within the accounts of a producer a way in which you can tag an AFE with the designation that these costs would be eligible for GCA. Either that or through the chart of accounts, globally select the accounts that are eligible. From there the costs of capital, both a return on investment and depreciation, can be calculated for the year.

The operating costs associated with those assets will have been aggregated under that Joint Operating Committees accounts as well. These costs are eligible to be deducted and are included in the total costs of the facility. Each facility has to be accounted for on its own. A gathering system will be calculated so that there is a cost factor for the gathering system alone. If there are separate functional units within a gas plant then each of the functional units should be accounted for as separate calculations for GCA purposes. Calculations for throughput need to be based on the gas or liquid equivalent value. If the functional unit in a gas plant is a deep cut facility then the output will be in liquids and a gathering system will be based on the gas volume. The results of these calculations provide you with an amount of GCA to deduct from the royalty price for any product that is processed or gathered through that facility in a month.

Automation of these calculations is the purpose in the Petroleum Lease Marketplace module. The calculations of royalties for the current year are based on estimates of GCA using last year's factors. However, that does not mean they are not a labor intensive activity. All of the factors that go into a calculation are already stored within the People, Ideas & Objects applications. The Material Balance Report being the key to providing the production volumes and throughput at each functional unit. What is needed is the “Gas Cost Allowance Worksheet Interface” that aggregates these variables for the Revenue and Royalty Accountant for them to prepare their calculations for actual GCA, equalizations and estimates.

The “Gas Cost Allowance Worksheet Interface” provides the accountant with the ability to look at each functional unit as a separate facility. The interface will pull in the the producers variables of the AFE’s and cost centres that are pertinent to that facility and the throughput information from the Material Balance Report. Then the accountant can organize the information in the manner that the calculation is automatically populated with the current information from the system. The accuracy and timeliness of this information, and the format of the data would be such that the production of GCA values for each month of the year would be possible. The outcome of the “Gas Cost Allowance Worksheet Interface” would be the value that is used to deduct for royalty purposes.

Now each producer's working interests in the various gathering and processing facilities are possibly different then their working interests in the producing property. Therefore these calculations are not done on a Joint Operating Committee basis but at the level of each producer. This will continue to be one of the areas where time is spent by the royalty accounting service providers. Having people who specialize in the administration of royalties will help to ensure that the producer pays the minimum correct royalties.

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 is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decisions. The development, release, and timing of any features or functionality described for People, Ideas & Objects products remains at the sole discretion of People, Ideas & Objects. 

The Preliminary Specification Part CCCIII (PLM Part XLII)

We continue on today with our discussion of royalties in the Petroleum Lease Marketplace of the Preliminary Specification. The prices that the royalties will be based on is what we will be discussing today. It is critical that the producer pays the royalty on the net price at the wellhead for all of the commodities that are produced. How these prices are calculated in the People, Ideas & Objects application is the point of discussion for today’s post.

The first point I should make is that some jurisdictions use their own pricing scenarios. Provinces in Canada calculate the average gas and NGL prices for each producer to pay royalties on. They also use standard costs for gas processing. These are excluded from this discussion as they are unique to the Canadian oil and gas producer and require substantial software development commitments from the Canadian producers that may preclude them from participating in the Preliminary Specification. Please review the July 28, 2011 blogpost “Budgets and Canadians”.

In most other jurisdictions it is the net realized price that is used for calculating the royalty. We’ll use a gas contract to describe the scenario that we are using here. For simplicity we will assume there are no liquids. Going back to the Material Balance Report we see that the gas that is sold under the contract is all of the gas that is produced by company A in the region that is serviced by gas plant B. This gas is aggregated from over 50 wells and is collected over, in some instances, a substantial distance. None of the gathering or facilities is owned by the producer and they pay custom processing and gathering fees for these services. The gas contract is to an industrial consumer who is situated across the state and the point of sale is the delivery into their facility.

The need therefore is for this producer to pay for the transportation and processing of this gas to the point of sale, the consumers front door. The royalty price will be what the consumer pays less the costs of the processing and transportation to get it to them, netted back to the wellhead. Turning to the Material Balance Report each production stream must have a sales contract and transportation contract from the point of origin to the point of sale. This is a requirement of the system. Each of these contracts support the production stream within the Material Balance Report, without a contract the Material Balance Report will not balance, just like in the real world. Therefore all of the information that is needed to determine the royalty price is going to be available from the various Material Balance Reports, where they should be available.

Taking the production from a well by well perspective the prices that will be received at each wellhead might be slightly different since the distance that some of the wells gathering might be materially different and therefore would pay more in gathering. The royalties are going to take the calculations from the point of view of the wellhead and begin the royalty calculations on that basis. These prices are derived from the Material Balance Report based on the contracts that are necessary to make that document operate and balance. Changes in prices and volumes do occur and that will lead to an amendment process within the Material Balance Report. Recall that the Material Balance Report is part of the Accounting Voucher module in the People, Ideas & Objects application. Any changes in the material balance must also correspond to the changes within the Accounting Voucher, and an Accounting Voucher can be for a producer or a Joint Operating Committee. So a volumetric change will recalculate the total custom processing and revenue receipts and a change in custom processing fees will affect total custom processing and net pricing to all the producers in that system. Making a change in one of the systems has an effect in the other. To change the price the producer received in the month can’t be done in the general ledger, it can only be done through the gas sales, custom processing or gathering contracts.

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 is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decisions. The development, release, and timing of any features or functionality described for People, Ideas & Objects products remains at the sole discretion of People, Ideas & Objects. 

The Preliminary Specification Part CCCII (PLM Part XLI)

The act of paying royalties is an individual producer's responsibility. I believe this holds true in the majority of jurisdictions. Therefore the royalties are calculated on the producer's share and not on the Joint Operating Committee’s production. Nonetheless the production is derived from the Joint Operating Committee and that involves the Material Balance Report. Today’s post will deal with the production end of the royalty calculation and the tie in to the Accounting Voucher and Partnership Accounting modules Material Balance Report.

First let's revisit the manner in which production accounting is handled in the Preliminary Specification. It is through our favorite tools of specialization and the division of labor that we have looked to service providers to provide these production accounting services to the Joint Operating Committees. Being specialized in a geographical region the production accounting service provider is possibly located within the region to have a hands on interaction with the operation. Working for the many Joint Operating Committees that may be located in the region the service provider may as a result work indirectly on behalf of many producers production accounting.

Therefore looking at this situation from a reasonably large producers point of view. They may have upwards of a few hundred geographically based production accounting service providers and twenty to thirty royalty accounting service providers depending on the number of jurisdictions they operate in. The complexity in dealing with these many providers is not the issue as much as the size of the producer. It should be restated here that the basis of the billing of these services should be on some positive action based transaction. In the case of the production accounting service provider it would be on the completion of the filing of a report for the month. Then if there was no report for that month, then no charges would be incurred, etc. The same situation should hold for the royalty accounting service provider, however, you do not want it to depend on the calculation or payment of a royalty.

Within the Accounting Voucher and Partnership Accounting modules resides the Material Balance Report. It is a report to provide for the material balancing of any facility for oil and gas purposes. We have discussed in those modules how the volumetric information is reported and managed within the Preliminary Specification. To review the discussion to date please review the Material Balance Report label. Royalties is one of the areas that will be using the outputs of the information from the Material Balance Report. Production for each producer is allocated through the report as one of the outputs of the process. Therefore this is the input into the royalty calculations for the various jurisdictions that apply to that production. Taking note of any swaps or inventory this volume should be the final production volume for royalty purposes. Ha!, the endless process of amendments begins and will no doubt carry on for at least 30 - 60 days before everything settles down. The royalty calculation being a nature of revenue less costs times royalty rate equals royalty, these production volume changes do not require any human interaction until such time as the point the royalties are due.

In terms of paying royalties on the appropriate volume of production, the Material Balance Report will be a key aspect of this control. Tomorrow we will discuss the Pricing, Gas Cost Allowance and other costs associated with royalty calculations.

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 is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decisions. The development, release, and timing of any features or functionality described for People, Ideas & Objects products remains at the sole discretion of People, Ideas & Objects. 

The Preliminary Specification Part CCCI (PLM Part XL)

I thought that we would spend the next few days discussing the management of royalties in the Preliminary Specification. It is here in the Petroleum Lease Marketplace along with the Accounting Voucher and Partnership Accounting modules that the royalties are calculated, paid and processed. One of the key determinants of the Preliminary Specification will be the geographical scope of the application. That will determine which jurisdictions the People, Ideas & Objects application modules will calculate, pay and process royalties. If you participate in a remote area and you want all of your areas covered by the application then participation in the community is the manner in which you need to make this happen. If you have production or leases in Alaska then you should assert that Alaska be part of the scope. Don’t assume someone else will do this for you.

When we talk about royalties we have a myriad different ways in which they are calculated and processed. Although over time many have adopted what could be called generally accepted royalty principles, there are still differences that need to be accounted for. On top of these differences are the systems that are used to calculate the royalties themselves. And let’s be honest Excel does a pretty good job. But that is not the way in which many of these royalty frameworks were designed to be handled. Excel is very labor intensive. From a Gas Cost Allowance (GCA) point of view, no one has implemented an ERP process anywhere within any of the systems in the industry. These royalties are the producers largest cost items. With high commodity prices significant value can be attained by ensuring that the correct royalties are calculated and paid.

It is within the Petroleum Lease Marketplace that the Lease document is stored and therefore the royalty information is captured and stored. The jurisdiction, whether that is Crown, Federal, Freehold, Private or State will have its methods and procedures to calculate royalties on its lands. In most cases these are comprehensive and impose significant levels of Information Technologies be used. Some use the prices that were realized and some use their own pricing models. There are a variety of different ways a unit of production can attract a royalty. Nothing however that can not be handled by a software development capability like that proposed by People, Ideas & Objects. Lets also look at how that compliance is achieved.

Using the division of labor and specialization we will have within each royalty jurisdiction a royalty accounting service provider, or several providers, who specializes in the management of royalties for, in this example, the state of Texas. The only thing these people know is Texas production and Texas state royalties. They operate on behalf of the hundreds of producers that produce oil and gas in the state of Texas and pay royalties. Using specialized software developed specifically for the service provider by People, Ideas & Objects they are able to calculate the royalties and ensure that the producers pay their minimum correct royalty. The service provider is also able to keep up with the changes in the Texas royalty administration and ensure that these changes are reflected in the software at the appropriate time on behalf of their clients. Consider that there would be royalty specialist service providers located in each jurisdiction for each royalty that falls within the scope of the Preliminary and subsequent Specifications of the People, Ideas & Objects application modules.

We have certainly reduced the footprint size of the oil and gas producers square footage requirements for office space. Through the process of specialization and the division of labor we have handed off everything from an administrative basis to these service providers to increase the quality of the service, and reduce the overall costs. This is the only proven method of increasing the economic performance of the industry. The alternative is that we continue to build individual silo’s of fully capable oil and gas producers. A scenario in which only the managers will be happy, and more of a myth than reality.

Tomorrow we will continue on with the discussion of royalties and how the modules of the Preliminary Specification deals with the largest costs of the innovative oil and gas producer.

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 is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decisions. The development, release, and timing of any features or functionality described for People, Ideas & Objects products remains at the sole discretion of People, Ideas & Objects.