Innovation for Profit.

As the fourth element of our competitive advantage of providing the innovative oil and gas producer with the most profitable means of oil and gas operations. We focus on innovation as the way in which to enhance the profitable nature of the producer. Innovation for profit, particularly from the science basis of the business, is the successful perspective for the 21st century oil and gas producer. From Professor Giovanni Dosi.

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

The Preliminary Specification has been designed to capture the “what” and “how” of innovation within the software that is used by the innovative producer. Throughout the modules the principles and understanding of innovation were researched and incorporated into the software. Our research included the works of many but most particularly Professor Giovanni Dosi and his paper “The Sources, Procedures, and Microeconomic Effects of Innovation” (1988). It was there that we learned many of the fundamental aspects of what is necessary for the oil and gas producer to focus on innovation. Recall that it was in our Preliminary Research Report (2004) that we learned that innovation can be reduced to a defined and replicable process.

To highlight a few of Professor Dosi’s work, in this next quotation he notes the opportunities, the processes of innovative search, and incentives to investments in innovation.

Thus, I shall discuss the sources of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search, and the nature of the incentives driving private agents to commit themselves to innovation.

To capture all of the research within one blog post would not be possible. I am only highlighting the fact that the Preliminary Specification was designed and developed with these principles in mind. Reference to the pertinent research of Professor Dosi and other researchers is presented throughout the eleven modules of the Preliminary Specification.

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

1) Capabilities and stimuli generated with each firm and within the industry of which they complete.

2) Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.

3) Additional issues include the conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulation, tax codes, patent and trademark laws and public procurement.)

Innovating for profit as the fourth element of People, Ideas & Objects key competitive advantage of being the most profitable means of oil and gas operations. It is within the DNA of the software how the processes of innovation are identified and supported that enhance the ability of the innovative oil and gas producer. We are beginning to see the substantial nature of People, Ideas & Objects competitive offering. With our value proposition of being the lowest cost ERP system provider, using specialization and the division of labor to reorganize the administrative and overhead resources of the industry, to use the decentralized production model to remove the marginal production from the marketplace, and today’s innovation for profit. No wonder the bureaucracy is so upset with me.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Organizational Constraints

At People, Ideas & Objects we state that organizations are defined and supported by the Information Technologies that are used by that organization. This post will discuss this point further and detail the nature of the constraints that the current oil and gas producers are experiencing as a result of the poor quality Information Technology they are using.

First of all it is necessary to state that the organization is going to be enabled and constrained by the IT that it uses. That is the nature of IT in that it does limit the organization in certain ways, even though it enables it in others. This is why it is important that the industry adopt the Preliminary Specification which includes the People, Ideas & Objects software development capability to ensure that these organizational constraints are removed through further development of the software.

In the current environment of the oil and gas producer I see a number of similarities in both the Canadian and U.S. marketplaces. And that is an incapacity to deal with the same old issues that have been dealt with before. Its like we have been here before, but the same players are executing the same difficulties over and over again. These issues are the inability to effectively plan for the appropriate takeaway capacity, and the inability to scale back production during pricing difficulties. These old issues are systemic in their application because they have no systems in place to deal with them. What is the producer to do. They have nothing to change to. Change requires that the systems be built to deal with the situation first, and then the change can be implemented. We live in a time and a place where the use of Information Technology is that important to our lives. Organizations don’t change when SAP or any other system doesn’t change.

The other aspect is the ability to deal with the future issues of the industry. Such as we mentioned a few days ago of how the unconventional reserves were going to be produced. Or how the relationship with the service industry was going to develop so that the reserves could be developed in a more cost effective manner. If the industry were to rely on the current systems then the expected outcome would have to be on the basis of the fact that the current systems would return the same outcome. There can be no change in outcome from the status quo until you change the systems to reflect the changes that you want in the organizations first and foremost. Dealing with the same old routine of the day to day is the only way that the current bureaucracy can deal with it because that is the only the thing that the system is programed to do and that is the only thing in terms of software development capability that the industry has developed.

Until such time as the industry has adopted and developed the Preliminary Specification and the software development capability that People, Ideas & Objects is offering. It should expect more of the same. It is that simple. Otherwise we are in this endless programming loop without an exit.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Commodity Prices Above the Marginal Cost

We have been discussing how use of the Preliminary Specification provides the innovative oil and gas producers with the most profitable means of oil and gas operations. Last Thursday we mentioned how People, Ideas & Objects were the lowest cost ERP system provider. And on Friday we discussed how the administrative and overhead costs of the industry would be reduced through the specialization and division of labor that are defined and supported through the Preliminary Specification. Today we want to discuss the manner in which higher profits are attained through the use of the Preliminary Specification by way of ensuring oil and gas production is sold only when its marginal costs are recovered.

It's been eighteen months since natural gas prices have declined. And its not that the prices that were being realized before then were all that spectacular. With the costs associated with exploration and production, its no surprise that producers are reporting losses on operations. What is surprising is that producers have done nothing to mitigate the overproduction that has caused the decline in pricing. The reason for this chronic overproduction is the producers have to generate the revenues to cover the overheads they incur in the “high throughput production” model they employ. This model has the overhead costs of the producer firm being incurred whether there is production or not, and as a result, makes their operation a high cost operation even at full production. At lower production volumes it skews their earnings and overhead costs which appear out of place.

In the Preliminary Specification the “decentralized production” model is employed. As we mentioned on Friday the service provider charges for their services directly to the Joint Operating Committee the costs of their service. In most cases if there is no production, there is no charge for the overhead item and neither the producer or the Joint Operating Committee is incurring any of the overhead during times of shut-in production. Therefore the only costs that are not covered during times of shut-in production are the costs of capital. The producer can therefore shut-in production that is not meeting the marginal cost and save those reserves for a later time. And keep that production off the market until the prices rise to the point where they cover the marginal cost.

If producers across the industry follow this process then prices would not have the significant declines that we have experienced in the last eighteen months. If the downswing in natural gas prices were averted by way of a ten percent reduction in production volumes, the total revenues of the industry would have been substantially higher than what they have been. Making the production that would have continued exceed the marginal cost and be profitable, and for that production that was shut-in, no loss on operations would have been incurred because there would have been no overhead or production costs.

Adding the ability to shut-in production on marginal operations to the ways in which People, Ideas & Objects provides the innovative oil and gas producer with the most profitable means of operations. Is a substantial part of our competitive advantage. Shutting in production is the logical thing to do but producers refuse to do it due to the impact on their performance. The method used by People, Ideas & Objects would actually improve the profitability of the producer, retain the reserves for the future when prices rise, and reduce the costs of operation.

Whereas today’s continued unprofitable production maintains high cost operations, and adds the losses on operations to the cost of the reserves to be recovered from future operations, requiring even higher prices. Yet the bureaucracy is happy with the status quo, so there is that. Instead of doing what it needs to do, the bureaucracy will continue to do what it know’s how to do, particularly when it lacks strong leadership. But lets be honest, maybe their strategy of hoping for a cold winter will come through this year.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Making Oil and Gas Profitable.

We continue our discussion of how People, Ideas & Objects provides the most profitable means of oil and gas operations. Today’s discussion will focus on the areas of specialization and the division of labor and how these tools will be highly effective in reducing all of the costs incurred in the producer firm. Bold claims, but that’s my job.

What we do know is that today we stand on the shoulders of giants and benefit from a very sophisticated and complex specialization and division of labor. Everyone in oil and gas has attained skills from education and training, and gained experience from years of working within their chosen field to conduct very select and highly specialized work. To disrupt this in any fashion without a full understanding of the global aspects of how specialized this work has become would be a failure. At the same time, with the corporate model proving to be unsustainable, the focus will be on cutting costs. Cutting too deep could have greater implications than what were intended. The point is to move to higher level of specialization and division of labor will not be done, and can not be done without significant forethought.

Secondly we have to consider the role of software in our society. If we intend to move to a high level of specialization and division of labor. Then the software that we use, and particularly the ERP software, is going to have to define and support those changes. Therefore we are not only going to have to deliberately plan the next level of specialization and division of labor, we will need to build the systems that define and support it first, before the implementation of any changes or benefits will be seen. This is one of the defined benefits of having the software development capability which is proposed by People, Ideas & Objects.

If we review the Preliminary Specification there is a defined restructuring of the industry that takes place throughout the modules. The oil and gas producer is a stripped down version of itself that has the C class executives, earth science and engineering resources, a bit of legal and minor support staff. And that’s it. The rest of the producers needs are provided by service providers. And each of these service providers are focused on one process, or one element of a process, that is organized and specialized across the industry. So for example there would be a lease rental payment processor that handles all of the industries lease rental payments. Where the cost of the lease rental payment, and the billing for the lease payment processor is billed directly to the appropriate Joint Operating Committee. Not to the individual producer.

What are the advantages of moving to a system or methodology such as this. Cost and efficiency are the reasons. The costs associated with the lease payment processor would be a small percentage of what is incurred by the industry today. By focusing on the most efficient way to process lease rental payments, and only lease rental payments the processor would become so specialized as to reduce the time and effort in administering these tasks as to be a small component of the costs today. In Adam Smith’s pin factory, his research yielded a 240 fold increase in productivity from the changes that he made in the process of making pins. Having the lease rental payment process and other processes in the industry subject to this type of analysis, complete with a software development capability as proposed by People, Ideas & Objects, similar results in productivity could be attained.

When we consider the current corporate model attempts to provide the producers administrative needs for all that falls within their domain. And the understanding that is necessary to support those administrative tasks. The ability to build that administrative capability is costing each and every oil and gas producer their profitability. What will become to be seen as an archaic business model will be the way in which the industry is operated today. It has to because it is unsustainable. And a more effective and efficient business model based on a higher definition of specialization and division of labor will become the norm through the adoption of the Preliminary Specification. The industries survival requires it. And this assures our targeted market, the oil and gas investor that we do indeed offer the most profitable means of oil and gas operation. As without the software to define and support this higher level of specialization and division of labor, it will not happen.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Unconventional Oil and Gas Reserves

The Oil and Gas Journal reports the following unconventional reserves information.

BP’s latest energy outlook, which it released on Jan. 16 in London, said that worldwide, there are an estimated 240 billion bbl of technically recoverable tight oil resources and 200 trillion cu m (tcm) of shale gas. Asia’s resources total an estimated 50 billion bbl of tight oil and 57 tcm of shale gas, compared with North America’s 70 billion bbl of tight oil and 47 tcm of shale gas, it indicated.

That is certainly a lot of oil and gas. Add the 70 billion bbl of tight oil to the 170 billion bbl in oil sands and North America has adequate supplies to meet its needs. Conversion of the North American gas reserves brings in 1,659 tcf of gas which is mind numbing. To give some context, the amount of estimated conventional gas reserves for all of Canada was at one time around 153 tcf with cummulative production of approximately 80 tcf, leaving 73 tcf remaining. The amount of remaining U.S. gas reserves is estimated at 317.6 tcf. What these numbers show is the value of the shale revolution in meeting the demands of the energy consumer.

What is also apparent is these reserves will not be produced inexpensively. If anything the discussion around the Preliminary Specification in terms of the relationship with the service industry and the profitability of the oil and gas producer are or should be the primary concern of the industry. Approaching the development of these reserves should be the topic of discussion, but it isn’t. The way we approach the development of these reserves should be based on the new organizational and market basis as presented in the Preliminary Specification. This is the first step in developing these reserves.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Our Value Proposition

It is People, Ideas & Objects claim that we provide the most profitable means of oil and gas operations. And we do. This is through a variety of means and we’ll detail them here in the next few blog posts. The first aspect of our claim is that our Revenue Model provides the lowest cost of obtaining an ERP system in the industry. And that is by charging for the costs of software development, plus an element of profit as our fee structure. Therefore the industry is only paying for the one time costs of software development. A fundamentally more efficient value proposition than any of our competitors.

We can do this because we are not focused on the traditional software company concerns of code and customers, but are oriented to the changing business dynamics of an innovative oil & gas, and service industries. This difference determines the motivation of the software developer over the long term. In People, Ideas & Objects instance we generate revenues on the basis of the changes that industry desires. Our motivation becomes the constant improvement of the software. In the traditional software vendor’s case they are motivated by their code and customer bases. The larger their code base the more difficult it becomes to change, which coincidentally does not generate revenue. And the larger the customer base the more costly the changes that need to made to each customer. Which coincidentally these changes to the customer software do not generate any revenues. What you have is a contrast in the dynamic nature of the software itself. In terms of its cost to the industry and the motivation behind the developer.

Within our Revenue Model we have an annual fee and penalty structure for those who have not participated on a timely basis. Isn’t the penalty, when paid, a benefit to the software developer above their regular fees? No, it is not. The penalty structure is designed so that each producer pays an equal share of the total costs of all of the development. There are no free riders in this program. If a producer were to wait until the fifth year to start to participate in the user community and use the software that was built by others; then they would have to pay the fees for those past five years plus the associated penalties as well. These fees and penalties would then be used to offset the following years costs before the calculation of the next years fee assessment. So the next years fees would be proportionally less the amount of any fees and penalties that were paid by producers who decided to join the community and use the software. We call this the participation bonus.

When we aggregate the fees across the industry. The revenues for People, Ideas & Objects fall within the scope of what is necessary to undertake the kind of work that is described in the Preliminary Specification. These fees remain incidental to each producer on a comparative basis to the total costs of the software purchased from other ERP vendors. Producers / investors will be receiving an application that was developed with the full budget of the project. These costs, which will include the cloud computing infrastructure, will be a small percentage of those Information Technology costs that it replace. And as we will detail in the next few blog posts, these costs paid to People, Ideas & Objects will provide one of the elements of our claim that we provide the most profitable means of oil and gas operations.

Each year we specify the amount that each producer's share of costs will be. These will be on the basis of estimates of our understanding of what is required to maintain and develop the software to meet its competitive advantage of providing the most profitable means of oil and gas operations. So there is an inherent level of trust in the work that is done through the community, and the financial support that is provided. The research and software development necessary to make this happen can be significant and needs to be undertaken in a timely fashion. With today’s tools it can be done in a commercial fashion with remarkable speed. The real inhibition will be the communities ability to think fast enough. The producers are a critical part of the community. What can not happen is to have the funding for this development terminated as a result of a lack or fading interest by the producers. It is therefore inherent upon me to provide a compelling reason for that not to happen and that is through the fact that we provide the most profitable means of oil and gas operations.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Authority and Responsibility in Oil and Gas

One area that we have not discussed in terms of capabilities in the Resource Marketplace module of the Preliminary Specification. Is where the authority and responsibility for any field operations falls as a result of the revised boundaries of the firm and market. If we have dynamic markets providing innovative products and services to the producers and Joint Operating Committees. How does this affect the authority and responsibilities that are established in the business today.

The clearest example to provide direction to this issue is the BP Gulf of Mexico well blowout. The findings established that BP was 100% responsible for the cause of the well blowout, and that clearly is the way that the business is run. The earth science and engineering resources are within the producer firms, and Joint Operating Committees, to design and engineer the operations to meet the safe and profitable operations of the oil and gas facilities. Without an appropriate engineering design there is little that a vendor can do in the field with a program that is destined to fail. With the changes being made in the Preliminary Specification, where reliance on an innovative Resource Marketplace for the service industry products and services, nothing will change in terms of this responsibility. The engineering staff at the oil and gas producer or Joint Operating Committee will have more choice in terms of products and services in terms of what they can do in the field. A second point on this discussion, is also the changes within the producer firm in terms of the reduction in the bureaucracy. From Professor Richard Langlois book “The Dynamics of Industrial Capitalism.”

History is never kind to historicists, of course; and the facts of the last quarter century have made life uncomfortable for those who would project the Schumpeter-Chandler model into the present. It has become exceedingly clear that the late twentieth (and now early twenty-first) centuries are witnessing a revolution at least as important as, but quite different from, the one Berle and Means decried and Schumpeter and Chandler extolled. Strikingly, the animating principle of this new revolution is precisely an unmaking of the corporate revolution. Rather than seeing the continued dominance of multi-unit firms in which managerial control spans a large number of vertical stages, we are seeing a dramatic increase in vertical specialization — a thoroughgoing “de-verticalization” that is affecting traditional industries as much as the high-tech firms of the late twentieth century. In this respect, the visible hand, understood as managerial coordination of multiple stages of production within a corporate framework, is fading into a ghostly translucence. p. 7

Management having less influence in the day to day of an oil and gas producer does not affect the authority or responsibility either. The engineers are qualified and regulated in terms of their qualifications and certifications. If they are signing their programs then they have their career on the line which to me is worth substantially more than the controls a manager may have established.

In highly developed economies, moreover, a wide variety of capabilities is already available for purchase on ordinary markets, in the form of either contract inputs or finished products. When markets are thick and market-supporting institutions plentiful, even systemic change may proceed in large measure through market coordination. At the same time, it may also come to pass that the existing network of capabilities that must be creatively destroyed (at least in part) by entrepreneurial change is not in the hands of decentralized input suppliers but is in fact concentrated in existing large firms. p. 14

Substantial change, creative destruction and innovation throughout the service and oil and gas industries. That is what is required to resolve the problems of the day. It's important to remember that doing so is as Professor Langlois states “Economic growth is about the evolution of a complex structure (Langlois 2001).” p. 6. For the last number of posts we have been discussing the desired changes in the makeup of the various marketplaces that provide services to the innovative oil and gas producers. These changes are necessary and ongoing throughout these industries. It is imperative that the oil and gas producer build the market supporting institutions, of which People, Ideas & Objects Preliminary Specification are part of, to identify and support these service industries. What is also necessary, and what will be detailed in the Research & Capabilities and Knowledge & Learning modules is that there is a time for change and there is a time when things need to remain static. Such as during specific field operations. And that is provided in those two module through the tools that are provided there for operational control. We won’t get into them now, I only want to mention that a changing marketplace is desired to configure innovative solutions for the oil and gas industry. And there is the need for tight operational control which is provided in the Preliminary Specification. What we have learned in our research is that an innovative footing is not inconsistent with tight operational control. In fact it is difficult to have one without the other. Using the Preliminary Specification provides that innovative footing and tight operating control, and therefore is the appropriate model for the innovative oil and gas producer.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

A Transition From Banking To Science

One of the conclusions in the Preliminary Research Report (2004) was that the oil and gas industry was transitioning from a “banking” mentality of earning guaranteed returns on investments, one that was based on the cheap energy era where financial survival was the key to success. To a scientifically based industry where innovating on the earth science and engineering disciplines would become the determining factors in a producer's survival and success. Today those two cultures are clashing as the relics of the cheap energy era attempt to restructure to compete in the scientific frontier. Adding to this transition is the bureaucracies last ditch attempt to assert its purpose in life. Is it any wonder that a producer reports losses on their operation?

We have been discussing the capabilities of the producer, the Joint Operating Committee and the service industry and how the Resource Marketplace module of the Preliminary Specification works to coordinate these marketplaces. We have put the responsibility for the service industries market supporting institutions squarely on the producers. The reasons for that are for the obvious ones in that they are the primary benefactors, and they are the primary industry that collects the revenues that ultimately will be used to support the service industry. It is therefore necessary that the oil and gas producers use this money to encourage this market to grow and develop as thick and as responsive as possible. The oil and gas producers are the ones who will benefit from the innovative and competitive service industry. What is known about the future of the oil and gas producer is there are high levels of uncertainty. Developing thick markets in the service industry will mitigate some of this uncertainty. From Professor Richard Langlois paper “Economic Institutions and the Boundaries of the Firm: The Case of Business Groups.”

The second hypothesis, which has resonances at least as far back as Gerschenkron’s famous “backwardness” thesis (Gerschenkron 1962), is that the way an economy responds to the problems of coordinating economic development depends not only on its own institutions and capabilities but also on institutions and capabilities elsewhere. It depends not only on an economy’s own history but on the history of other economies as well. The force of this observation is that an economy at the frontier of economic development (however we care to define that) is likely to respond to the coordination problem differently than an economy lagging behind that frontier. Specifically, an economy at the frontier is arguably more likely to rely on decentralized modes of coordination. This is so because uncertainty is greater at the frontier — uncertainty about technology, organizational form, market direction. p. 18

And what we need are people thinking their way through the uncertainty. I have been a strong critic of the “best practices” phenomenon that has developed over the past few years. Copying others “best practices” reminds me of this quote from Professor Langlois paper.

Indeed, traditional command-style economies, such as that of the former USSR, appear to be able only to mimic those tasks that market economies have performed before; they are unable to set up and execute original tasks. The [Soviet] system has been particularly effective when the central priorities involve catching up, for then the problems of knowing what to do, when and how to do it, and whether it was properly done, are solved by reference to a working model, by exploiting what Gerschenkron . . . called the “advantage of backwardness.” (Ericson, 1991, p. 21).

Best practices reflect the staleness of the methods of the bureaucracy. If not for the increase in commodity prices over the past few years, you wonder what these bureaucracies would have relied upon for earnings. Financially driven operational strategies will not provide value for the shareholders. Focusing on the earth science and engineering capabilities of the firm, and leveraging those in new and innovative ways will be the way in which value is generated. Follow on strategies will be as effective as the former Soviet Union’s economic performance. Producers and Joint Operating Committees need to configure themselves for innovation by adopting the Preliminary Specification and building the software it defines.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Dynamic Transaction Costs

We have been discussing the way in which the innovative oil and gas producer and the Joint Operating Committee will source the capabilities they need from the marketplace. The last few blog posts have discussed how the marketplace has to be the source of those capabilities, and that modularity provides a means to deal with the changes that occur throughout the marketplace. It is important to remember that when we are discussing the marketplace what is pertinent to the Resource Marketplace module of the Preliminary Specification. Any and all resources that are available from the marketplace are accessed through the Resource Marketplace module by the producer or Joint Operating Committee. A simple definition would include the field, administrative, and other services they might use.

Today’s topic of discussion is Dynamic Transaction Costs. Dynamic Transaction Costs are somewhat of a unique area of research for Professor Richard Langlois. That is to say I think he is the leading researcher on the topic. It is a topic that affects the oil and gas industry significantly as we operate in an environment where change is the one constant that we can rely on. Langlois’ definition of Dynamic Transaction Costs from “Transaction Cost Economics In Real Time” is as follows.

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

It is therefore reasonable to assume that an innovative oil and gas industry will be incurring dynamic transaction costs. As we move to a more defined marketplace for our capabilities, and as those capabilities continually evolve, dynamic transaction costs will be incurred. Recall we are looking for “thicker” markets to develop as the Joint Operating Committees look to the market for all of its capabilities. Let's recall what capabilities are with a quote from Langlois’ paper, and the phrase from Harvard Professor Carliss Baldwin of “Knowledge begets capabilities, and capabilities beget action.” And then add to that this quote from Pablo Picasso "Action is the foundational key to all success."

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

And it is with that definition of capabilities that we begin to understand the role of the producer firm and Joint Operating Committee in coordinating the marketplace. It is not the ownership and operation of the machinery in the field operations, or the ability to file the appropriate production accounting reports that provides the value to the producer or Joint Operating Committee. It is the ownership of the appropriate mineral lease and knowledge of the earth science and engineering disciplines. Dependence on the marketplace to make up for the other areas, where value is not earned, can be coordinated by the producer and Joint Operating Committee. Applying some tools and knowledge towards the makeup of those marketplaces is what the Preliminary Specification has done. Tools such as automation through Information Technology, specialization and the division of labor, modularity, capabilities definition and dynamic transaction costs make for an innovative and dynamic Joint Operating Committee and oil and gas industry.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Modularity in Software and Organizational Design

Among the many areas of research that went into the Preliminary Specification is Professor Richard Langlois’ modularity. Modularity builds on the boundaries between the firm and markets and is the reason that the Preliminary Specification has eleven modules. The primary advantage gained by using modularity is the ability to manage change. By isolating the impact of any change to one module, the impact of the changes are manageable.

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

People, Ideas & Objects impact is beyond just the software that is proposed to be developed. Organizations such as the producer firm, the Joint Operating Committee and the service industries participants are all impacted as a result of the modules in the Preliminary Specification. Dynamic change within each area is a desired characteristic that is necessary for the innovative oil and gas industry.

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

and

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

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

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

and

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

Change is the one constant throughout the Preliminary Specification. Modularity in the software, and the organizational design of the oil & gas, and service industries is a means in which to deal with change. By moving the compliance and governance frameworks of the hierarchy into alignment with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee. We set in place significant levels of change where producers, service industry providers and individuals all move closer to the cultural, or natural way of the oil and gas industry. Around the Joint Operating Committee. Adopting modularity within our software and our organizational structures will provide us with the appropriate architecture to deal with change.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.