Two Distinct Lines of Business

We move now to the Partnership Accounting module of the Preliminary Specification. Our first topic of discussion relates to the recent discussion in the Financial Marketplace module regarding the funding of the development of the capabilities of the producer firm. In today’s post we are discussing the second line of business of the innovative producer firm and that is the billing of the earth science and engineering capabilities to the various Joint Operating Committees that it has an interest in. These direct charges are in replacement to the overhead allowances that have been the standard in the industry. And are a result of the “pooling” concept that has been developed in the Preliminary Specification to meet the shortfall in supply of geologists and engineers. There is also the secondary issue of dealing with the specialization and division of labor as it applies to the earth science and engineering work that is conducted in the industry.

If partners are contributing human resources to the Joint Operating Committee then the systems that the partners use should be able to cost these resources, charge them to the joint account, and have their costs recovered by the Joint Operating Committee the resource was provided to. This also brings up the point that if the operator classification has ceased to be valid, the charges for operator overhead, where the recovery of these costs are realized today, the operator overhead charges should also cease to be valid. If three different producers are providing engineers and geologists to the Joint Operating Committee each should be able to recover the direct or standard costs of these individuals for the time they spent working on the property.

The ability to contribute technical resources from each of the members of the Joint Operating Committee and have their costs recovered by the producer firm will help to offset the costs in maintaining their capabilities. In addition the excessive costs of maintaining the capabilities of meeting any and all contingencies as firms do today, are not carried on any specific producers payroll. The bread and butter geological and engineering work can be conducted by specialized service providers in a division of labor that bills these services directly to the Joint Operating Committee as and when required. Understanding that genius is 1% inspiration and 99% perspiration, the 1% can be conducted within the producer firms and be focused on the generation of ideas, and the 99% can be focused on the work of developing those ideas and charging the Joint Operating Committee for the work in a highly specialized, and hence lower cost, manner.

The Partnership Accounting module provides the innovative and profitable producer firms with the ability to capture the time their resources spent on projects within the Joint Operating Committees. We have discussed the Work Order system and its ability to capture the time spent on any AFE or Cost Centre. This time will be automatically aggregated, calculated based on actual payroll burden or alternatively standard costs depending on how industry determines, and bill the Joint Operating Committee for the costs. During the monthly distribution these costs will be equalized and the net contribution will be a revenue stream as an offset for the producer firms capabilities.

This second revenue stream will never cover the costs of the capabilities of the producer. But it will go a long way to providing a base in which to support the firm in terms of the costs of its capabilities. In developing a producer firm it may be possible to rely on the revenues from its capabilities before the revenues from oil and gas begin. The Partnership Accounting module of the Preliminary Specification provides the ability for this charging out of capabilities, capturing the costs, billing and recovery within the system as a base feature of the module.

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.

The Friction Between Capital and Innovation.

Within the Financial Marketplace module we are creating lines of communication between the producer firm and the investment community. This is to aid in the objectives of speed and control that we set out earlier in this module. Much of this communication can be focused around the publication of the Revenue Per Employee calculation that we have discussed in the Petroleum Lease Marketplace module. A factor that reflects the innovativeness of the producers earth science and engineering capabilities, and also as a result of the expanded division of labor and specialization that is available as a result of using the People, Ideas & Objects Preliminary Specification.

Revenue Per Employee is therefore a reflection of value. When we discussed the factor in the Petroleum Lease Marketplace module it was for internal consumption purposes. The purpose of using Revenue Per Employee in the Financial Marketplace module is to publish it and allow the investment community to compare your performance against your peers. As we discussed in the Petroleum Lease Marketplace module there would be three types of variances that could be calculated on the comparisons between periods. There would be the volume, price and number of employees variance. Each would impute a different result, or trajectory, in terms of what the comparison of the variable meant over time.

Does Revenue Per Employee reflect a more innovative footing. That may be debated for some time. I think it clearly does, and I can’t think of a more effective means of answering how innovative a producer is. Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or “tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.” The net result of this, in a laboratory setting would be great experiments. The net result of this in a commercial setting like an oil and gas firm would be increased revenue over the period without the additional burden of increased overhead. Therefore Revenue Per Employee, in my opinion should have its own interface in the Petroleum Lease Marketplace, and be published as well on the Financial Marketplace module.

With such a focus on the earth science and engineering capabilities of the innovative oil and gas producer we run the risk of becoming too focused on the science. Revenue Per Employee will go a long way to keeping the producer focused on the business end of the calculation. But there has to be more. And sometimes that “more” comes from the cold hard slap in the face from the money markets telling you that you’ve been wrong about something for a long time. How can we incorporate some feedback within the Financial Marketplace module of the Preliminary Specification, so that it doesn’t get to the point where the producer has to sustain that humbling cold hard slap from the financial community.

We have discussed the promotion of the producers team of earth science and engineering capabilities on the Financial Marketplace module. It is through that interface the producer communicates to the financial marketplace the capabilities that they have assembled and what they as a producer are able to accomplish. I see the long term development of the producer as an extension of this capabilities development. The application of the capability and its development to a geographic area where the risks are of a certain nature and are unknown and unknowable for the foreseeable future. This is the nature of the oil and gas business and to embark on such an adventure without the financial marketplace committed to your team would be unwise and certain to fail. What is needed is a means to communicate on top of the “Dynamic Capabilities Interface” of the Research & Capabilities and Knowledge & Learning modules, and include what Professor Giovanni Dosi states here.

Internalization and routinization in the face of the uncertainty and complexity of the innovative process also point to the importance of particular organizational arrangements for the success or failure of individual innovative attempts. This is what was found by the SAPPHO Project (cf. Science Policy Research Unit 1972 and Rothwell et al. 1974), possibly the most extensive investigation of the sources of commercial success or failure of innovation: Institutional traits, both internal to the firm - such as the nature of the organizational arrangements between technical and commercial people, or the hierarchical authority within the innovating firm - and between a firm and its external environment - such as good communication channels with users, universities, and so on - turn out to be very important. Moreover, it has been argued (Pavitt 1986; Robert Wilson, Peter Ashton and Thomas Egan 1984) that, for given incentives and innovative opportunities, the various forms of internal corporate organization (U form versus M form centralized versus decentralized, etc.) affect innovation and commercial success positively or negatively, according to the particular nature of each technological paradigm and its stage of development. p. 1135

It sounds simple, and reasonable, to include “good communication channels” as a necessary part of any relationship between an innovative producer and its financial backers. To include these within the ERP systems is the key to making them effective. What originates as a result of these “good communication channels” is defined by Professor Dosi.

In general, each organizational arrangement of a firm embodies procedures for resource allocation to particular activities (in our case, innovative activities), and for the efficient use of these resources in the search for new products, new processes, and procedures for improvements in existing routines; however, the specific nature of these procedures differs across firms and sectors. For example, the typical degrees of commitment of resources vary by industry and so do the rates at which learning occurs. I now turn to the interpretation of these phenomena. p. 1135

Professor Dosi states that profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives.” (p. 1135) Professor Dosi introduces the theory of Schmookler (1966) and asked “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both”? (p. 1135) Schmookler believed in differing degrees of economic activity derived from the same innovate inputs. One would assume that this is the calm guiding hand of the capital markets providing leadership to the producer.

If the role of capital in the innovative oil and gas producer is going to change as we suggested in yesterday’s post. Then the influence of the investment community will need to be present in terms of the earth science and engineering capabilities of the firm. The risk that ideas become a self-serving science project with no commercial grounding is something that I think the investment community can safeguard against. The enhanced communication provided through the Financial Marketplace module, and particularly the focus on the factor of Revenue Per Employee will aid in making the investors returns from the capabilities, and the oil and gas properties continue to accelerate.

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.

What Role Will Capital Play?

It has been argued throughout the writings in the Preliminary Specification that commodity prices are allocating the financial resources to fuel the innovative oil and gas producer. If that is so, then what role will the capital markets play in the future of the oil and gas industry?

Taking this thinking to its extreme then the most innovative firm would also be the most profitable. As the costs of capital would be lower than its competitors, and with their innovations being on a steeper trajectory, and therefore more effective, and would be at less cost than the competitions. The investment in science and technologies is with the implicit expectation of a return on these investments, but also, to provide the firm with additional structural competitive advantages by moving their products costs and / or capabilities beyond that of the competition. Professor Dosi notes:

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.

What you are capable of achieving as an innovative oil and gas producer is possibly the most valuable asset that you have in the very near future. This capability is what you are investing in and how you expect to earn a return on your investments in oil and gas. Although much of your capability may be funded by the day to day of your operation, it represents a critical part of your firm's investments. In answer to the question posed earlier, this investment in your capabilities is a future role for the capital markets to make investments in.

Let me restate what has been said for clarity purposes. The costs of field operations will be offset, both from a capital and operations point of view by the higher commodity prices. The investment in capabilities, the earth science and engineering resources of the firm, will be augmented through capital investments made by the capital markets.

We noted that the producer firms engineering and earth science team was being highlighted in an interface on the Financial Marketplace module. Is it time that the producer was able to financially leverage these capabilities in the capital markets? If innovation is the result of the team that is put together, then the ability to fund that team and earn a return on the basis of their performance might be something that should or could be considered in this new insatiable energy era.

To facilitate that possibility an interface in the Financial Marketplace module could have performance metrics that reflect the results of their efforts. These could be quantified over a certain period and verified by reserve reports prepared by independent engineers. The point of the exercise would be to increase the value of the producer firm based on the intangible value of its capabilities. In a world where ideas matter, the ability to quantify them and qualify them within a marketplace brings real value to the oil and gas producer and investor.

To make dedicated investments in the firms capabilities, and to expand on their current capabilities will take significant efforts. Muddling along over a number of years will see the reserves and possibilities pass before an inexperienced team. That will be the cost of failure, the price for success will be the highly capable team.

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.

Objectives of the Financial Marketplace Module

We move now from the Petroleum Lease Marketplace module to the Financial Marketplace module for a review of its features. There are a couple of overall objectives that the Financial Marketplace module provides the innovative oil and gas producer and Joint Operating Committees. Those are the alignment of the financial interests with the legal, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee, and the compliance and governance frameworks of the hierarchy. The second objective is to make the capital structure of the innovative producer more efficient than that which is achieved under any other ERP system.

Recognizing and leveraging the Joint Operating Committee in our systems in the manner that the Preliminary Specification does is a substantial breakthrough in terms of our research. Significant value is gained by the innovative and profitable oil and gas producer by using People, Ideas & Objects Preliminary Specification and its recognition of the Joint Operating Committee. One of the keys to that value is the alignment of the seven frameworks of the Joint Operating Committee. Alignment is a key buzzword in systems integration. However, by using the Joint Operating Committee in the manner that we have in the Preliminary Specification we have achieved an alignment that is fundamental and to the core of the producer.

Within the Financial Marketplace module the alignment of the financial interest across the participants in the Joint Operating Committee is the alignment that we are seeking. To have a bank finance each of the participants working interest share, and therefore aligning the interests of that one bank with the participants of that Joint Operating Committee is the alignment that we are discussing. When banks, as they do in most instances today, take a general claim against all of the assets of the producer firm, and that occurs with each participant in the Joint Operating Committee, it is difficult to reach a consensus in terms of the banking issues for one specific property.

In terms of the second objective of the Financial Marketplace module of making the capital structure of the producer more efficient, this is provided in the following manner. There are a number of assumptions made about the way that business will be done in the future of the oil and gas industry. The Preliminary Specification makes these assumptions based on a reasonable trajectory of the manner in which “things” are progressing today. We can safely say that the level of work or activity in the production of one barrel of oil will be substantially more tomorrow then it is today. The demand for energy will be higher and the production volumes from the industry will be necessarily much higher as a result. It is also reasonable to assume that the volume of earth science and engineering resources will not materially change over this period of time. Doing more with the same resources is therefore somewhat of a given. The same could therefore be stated for the capital structure of the producer firm as well. Much more capital will need to be raised to fuel the increase in production volumes, and those volumes will require greater capital investments to be made.

It would therefore be incumbent upon us to include these assumptions in the designing and delivery of our ERP systems that we will use during this period of time. And that is what the Preliminary Specification has done. We will discuss these points more in the days to come but the two points that have to be considered are speed and control. The producer must have the ability to turn over larger volumes of capital in shorter periods of time if they want to be successful. And having speed is nothing without having the control necessary to deal with that speed. Having an ERP system that enables the producer and Joint Operating Committee with the speed and control in the capital markets are what will be necessary for the innovative and profitable oil and gas producer to deal with the marketplace in the future.

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.

People, Ideas & Objects and Oracle Corporation

The base of functionality of all eleven of the Preliminary Specifications modules is Oracle Corporation’s database, Fusion Middleware and Fusion Applications. We have chosen Oracle’s applications to support the Preliminary Specification as they are the leader in the Enterprise Resource Planning marketplace. Particularly from a technical point of view. Oracle’s technologies are the most advanced in terms of the database, and their Fusion product offerings are the most current in the marketplace. We have chosen a foundation in which to build the Preliminary Specification that is consistent with the needs of the innovative oil and gas producer.

When you review the Preliminary Specification there is a section within each module that discusses the products that Oracle provides. Use of the individual Oracle products is very high level and only provides a flavor of how the technology will be used. The Preliminary Specification is about the business of the oil and gas producer and Joint Operating Committee. The capabilities and constraints of the Information Technology are not to be considered during the further development of the Preliminary Specification. I have only mentioned the Oracle technologies to give the user an understanding of the direction in which People, Ideas & Objects is moving in terms of the product that the users will be working to develop.

As our marketing program is currently seeking commitments from producers and investors to fund the development of the Preliminary Specification. And the development costs associated with the Preliminary Specification are estimated at $100 million. This process may take some time and there is no urgency in making any contact with Oracle Corporation. They will have little to add to this and are more oriented to applying the technology and booking our business. What I am saying is they don’t have the patience to wait for the market to develop. And therefore its best to let them do their own thing while we do ours and we’ll contact them when we are ready with a handful of producer commitments.

Within the Petroleum Lease Marketplace module I have included some comprehensive discussion regarding the Oracle technologies. This includes the adoption of the Professional Petroleum Data Management Associations (PPDM) data model. How the service providers that we have discussed throughout the Preliminary Specification and are a key to the productivity of the innovative oil and gas industry. And these service providers are able to interact with the producers and Joint Operating Committees by also using People, Ideas & Objects systems, software and particularly our software development capabilities to meet the users needs.

I also use a scenario that is common in the industry to describe how the Preliminary Specification and Oracle Fusion Applications will provide value to the producers in the development of some properties. Touching on the various modules and features within the Preliminary Specification it provides an understanding of “how” and “what” the innovative producer and Joint Operating Committee could be using the software.

Lastly there is a detailed description of the Royalty Accounting process that will be used in the Preliminary Specification. Using service providers that are organized and specialized based on one royalty jurisdiction, a producer will rely on them to ensure that their royalties are consistent with the regulations and provide the lowest possible royalty costs of this, the highest cost item of an 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 Critique of Current Management

The key deliverable that would be the outcome of the development of the Petroleum Lease Marketplace of the Preliminary Specification. Would be the removal of management control by the current bureaucracy and replace it with the “vanishing hand” as Professor Richard Langlois describes the marketplace. The representation of the marketplace would of course be through the “Marketplace Interface” in the Petroleum Lease Marketplace and also in the Resource and Financial Marketplace modules. In this quotation, taken from Professor Richard Langlois’ book “The Dynamics of Industrial Capitalism” he reflects on this point.

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. The unavoidable flip-side of seeing firms as possessed of capabilities, and therefore as accretions of habits and routines, is that such firms are quite as susceptible to institutional inertia as is a system of decentralized economic capabilities. Economic change has in many circumstances come from small innovative firms relying on their own capabilities and those available in the market rather than from existing firms with ill-adapted internal capabilities. Chapter 5 will reconstruct the New Economy of the late 20th and early 21st centuries along exactly these lines, once again adding nuance and historical texture. If the antebellum period reflected the Invisible Hand of market coordination, and if the late 19th and early 20th centuries saw the rise of the Visible Hand of managerial coordination, then the New Economy is the era of the Vanishing Hand. p . 14

One could certainly accuse me of being anti-management. They and I have had an interesting battle since the breakthrough of using the Joint Operating Committee was the key to administrative efficiency in the innovative oil and gas producer. Our other key breakthrough, that software defines and supports the organization, and therefore to change the organization requires that we change the software first. Management have distorted this knowledge by realizing, if they never changed the software, their domain would never be challenged. Using this knowledge to seal their future. But we know many things from our review of Langlois, Coase and Chandler; specifically.

• Management have no stake in the firm. 
• If a crisis were to strike a firm, the management would resume elsewhere. 
• It is the investor and debt holders who will shoulder the costs.
• Management currently hold the reigns, and are mindful that their options may lay elsewhere. 
• Ownership, in the same fashion as the Merchants needs to start over. 
• Starting over begins with supporting People, Ideas & Objects and the Community of Independent Service Providers.
• Chandler noted that management have failed before. 
• During the great depression. 
• A time when government had to increase its involvement in the economy.
• Management may not see the more global picture, and therefore, may fail again.

The knowledge that management have in not changing the software is an extension of their monopoly on the tacit knowledge of how to get things done. They know that the tacit knowledge can be held by bureaucracies or markets and have ensured that no tacit knowledge capable markets gain a foothold to challenge their franchise. Making the entire People, Ideas & Objects idea an exercise in futility, or a call to action for the ownership class of the oil and gas industry.

Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. p. 359

Management’s assertion that vendors and suppliers are greedy and lazy is as much self serving and designed to ensure that a market doesn’t develop and compete with management. What is needed is the market supporting efforts of an innovative oil and gas industry that depends on a dynamic and effective “Marketplace Interface” in the Petroleum Lease, Resource and Financial Marketplace modules.

I think that what we have learned about capabilities is valuable and applies to the “Marketplace Interface” that we have detailed here. That “knowledge, skills and experience” are the basic ingredients of capabilities and these fit in well with the Petroleum Lease Marketplace module. If we at People, Ideas & Objects could be so bold as to assert that we include “ideas” with knowledge, skills and experience then we are starting to really build on these concepts.

The other aspect of what we have discussed is the role the oil and gas industry has in making the market supporting infrastructure. This includes standards and, as we have discussed, software like People, Ideas & Objects to support the markets and the marketplace. The choice between the marketplace and the management as to who will control the industry in the future has already been made. The Internet demands the decentralized methods of the market will rule the day. Just don’t tell the current management as they fight to hang on to their last few moments of control.

When a modular product is imbedded in a decentralized production network, benefits also appear on the supply side (Langlois and Robertson 1992). For one thing, a modular system opens the technology up to a much wider set of capabilities. Rather than being limited to the internal capabilities of even the most capable Chandlerian corporation, a modular system can benefit from the external capabilities of the entire economy. External capabilities are an important aspect of the “extent of the market,” which encompasses not only the number of possible traders but also the cumulative skill, experience, and technology available to participants in the market. Moreover, because it can generate economies of substitution (Garud and Kumaraswamy 1995) or external economies of scope (Langlois and Robertson 1995), a modular system is not limited by the weakest link in the chain of corporate capabilities but can avail itself of the best modules the wider market has to offer. Moreover, an open modular system can spur innovation, since, in allowing many more entry points for new ideas, it can create what Nelson and Winter (1977) call rapid trial-and-error learning. From the perspective of the present argument, however, the crucial supply side benefit of a modular production network is that it provides an additional mechanism of buffering. p. 70

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.

The Marginal Production Threshold Interface

We have discussed the People, Ideas & Objects competitive advantages of providing the oil and gas producer with the most profitable means of oil and gas operations. One of the components of our competitive advantage is the ability for the innovative oil and gas producer to suspend marginal production until the commodity prices return to the point where their operations are profitable. In today’s post we’ll discuss the Marginal Production Threshold Interface in the Petroleum Lease Marketplace module.

Firstly, let us recall that any shut-in production does not incur any additional losses due to the fact that People, Ideas & Objects Preliminary Specification uses the decentralized production model. By using service providers for production, royalty and revenue accounting, and lease rental payments etc., the charges for these overhead costs are charged directly to the Joint Operating Committee. If there is no production for the current month then there will be no activity to account for in these overhead accounts and hence no charges to process to the Joint Operating Committee. Therefore during times of shut-in production only the costs of capital are uncovered.

The manner in which it is determined if production should be shut-in is based on the financial criteria of whether the property is contributing to the profitability of the Joint Operating Committee. In order to make that determination the accounting for that property would need to reflect that, and those reports are included in the Partnership Accounting module. Upon determination that the property was not contributing then it becomes a part of the Joint Operating Committees operational decision making framework as to whether or not to shut-in production. This is where the Marginal Production Threshold Interface comes into play.

The ability to predetermine at what point the Joint Operating Committee would suspend production is an option in the Marginal Production Threshold Interface. For instance if the property was in a loss situation for two months then at the beginning of the third month production would be suspended until pricing resumed a more normal course. This would be pre-approved by the members of the Joint Operating Committee and implemented at the beginning of the third month of losses.

The ability to collaborate and agree among the partnership falls within the functionality of the Petroleum Lease Marketplace. Having all of the Joint Operating Committees that you have an interest in located within one interface in the Petroleum Lease Marketplace will provide you with an understanding of what your production profile will be at various price scenarios. This can be provided through a “what if” scenario page within the interface. Extensions of the prices and volumes will also calculate what your pro-forma revenues will be. Determinations can also be made on the overhead and production costs and therefore what your returns from all of your operations will be.

The objective of the Marginal Production Threshold Interface is to have the pre-approved operational decision made. The Joint Operating Committee is the operational decision making framework of the innovative oil and gas producer. If the oil and gas industry were to conduct their operations in this manner then the fall in commodity prices would be very limited in both scope and time. It would be necessary to remember that any production that was taken off the market would have to remain off the market for the entire month, or alternatively the partial months production would have to carry a whole months overheads cost. If the price dropped precipitously and large portions of the industries production profile were taken off the marketplace then the natural gas storage business could make up for any shortfall in the demand. This latter situation might be a good thing in the long run as a means to eliminate the storage providers influence from the natural gas markets pricing.

If each producer within the industry was able to manage their production in this manner there would be less destruction of capital and less volatile commodity prices. The industries current method of managing prices by reducing capital spending is a very blunt instrument that leads to over and under production at the extremes. The Marginal Production Threshold Interface will enable the producers to stop producing the marginal production and save the reserves for the day when they can be produced at a profit. A little faith in markets is all that is required.

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.

Leveraging the Capabilities of Others

In yesterday’s post we discussed how producers might form partnerships based on their earth science and engineering capabilities. Using the Revenue Per Employee Interface in the Petroleum Lease Marketplace module to find other producers of similar capabilities. In today’s post we want to discuss how the Petroleum Lease Marketplace, the Research & Capabilities and Knowledge & Learning modules work to leverage those capabilities within your Joint Operating Committees.

Recall that we have used specialization and the division of labor to deal with the shortages of geologists and engineers. For each producer to build the capabilities necessary to deal with all of the possible situations they may face within their firm was a “nice to have” that was maybe possible in the past. With each producer pursuing this strategy it creates unused and unusable surplus capacity in these needed resources. In addition, in the future, by using specialization and the division of labor the broader scope of the range of duties necessary to cover off all of the tasks will consume all of the producers financial resources. Therefore the need to specialize in specific areas will become a necessity for each producer. And therefore a reliance on these partnerships based on technical capabilities that are complementary to those that are developed internally. This is what is called the pooling concept in the Preliminary Specification.

Within the Petroleum Lease Marketplace there needs to be an interface that lists the areas where the capabilities of other producers are being leveraged. These listings need to be based on the agreed to and documented exchanges of capabilities that are part of the CO&O or other agreements that make up the Joint Operating Committee. This same report could detail the commitments that the producer firm has made in terms of its capabilities to the partners in future years. This "Capabilities & Commitments" interface would of course be organized based on the Joint Operating Committee and would give them an understanding of their contractual position in terms of their capabilities and commitments.

Within the Research & Capabilities module is the area where the producer firm documents its own capabilities. These capabilities are documented for the purposes of deployment through the Knowledge & Learning module. The process of the capabilities development proceeds through the research, testing and ultimate documentation in the Dynamic Capabilities Interface of the Research & Capabilities module. Deployment of the capabilities for its own account are possible for the producer through the Research & Capabilities module, however most deployments will be conducted through the Knowledge & Learning module.

Within the Knowledge & Learning module the perspective is from the Joint Operating Committee. Each capability is sorted based on its type, for example if it was a capability that was geological in nature and associated with shale then it would only be available to Joint Operating Committees that had that same criteria. Those capabilities that met the criteria for the Joint Operating Committee would be available for review by each member of that Joint Operating Committee. And therefore the full scope of the partnerships capabilities would be made available to the Joint Operating Committee in terms of what the available capabilities of the partnership were.

A last point to make is the manner in which to organize these disparate resources is done through the Security & Access Control’s Military Command & Control Metaphor. Which provides the partnership with a means to impose a temporary structure over the resources that are assigned to conduct any operation. These resources would include the resources from any of the members of the Joint Operating Committee and the service industry representatives. It would also include the Work Order system in which to accumulate the costs and the Job Order system in which to execute the programs that are necessary. In essence an entire command and control system is made available to these temporary organizations that is tailored to the needs and the types of work that is carried out by the innovative oil and gas producers.

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.

Calculation of Revenue Per Employee

Traditionally the selection of your working interest partners is a result of the fact that they hold financial interests in the same regions and properties that you have an interest. This and the financial capability are the two primary reasons for the formation of the various Joint Operating Committees. But what if there was another way in which to strike a partnership in the oil and gas industry? One based on the similar earth science and engineering capabilities that you have. In an innovative oil and gas industry, a partnership founded on the basis of the capabilities of a number of producers would provide some strategic advantages.

What would be the determining factor in establishing these partnerships. Certainly everyone would want to partner with the most attractive producers, but how does the industry pair off in a meaningful way where there are various strata of partnership being formed and competitive strategies being made by producers of very similar capabilities. People, Ideas & Objects research have developed the Revenue Per Employee Interface within the Petroleum Lease Marketplace to provide that understanding.

Clearly the factor of revenue per employee would reflect many factors other than the innovativeness of the firm. However, would the comparison of revenue per employee over multiple periods be a determining factor of innovativeness? I think it would. That the increase / decrease in the factor would be as a result of an increase or decrease in price and volume, with the volume being particularly affected by the changes and innovations that occurred over the period in the firm. The one other critical determining factor is the number of employees the firm employs. Changes in the number of employees would skew the results significantly. Calculations for the industries population of producers would be one element of the Revenue Per Employee Interface.

So what have we got? We have run some elaborate calculations that “might” prove that one producer is innovative. What does that prove? That depends on what is imputed by being innovative. Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.”

Clearly Revenue Per Employee and its trajectories would impute a capability that the producer has achieved in terms of their earth science and engineering skills. Their trajectory in terms of the production volumes over time would impute the capacity to identify and resolve the issues present in the oil and gas business. Either that or its just plain old luck that makes some companies successful. Other considerations would have to be taken in the calculations such as any material acquisitions or divestitures etc., however, the factor and its trajectories would have material meaning in the selection of partners with similar earth science and engineering capabilities.

If I have not convinced you of the validity of the argument you’ll need to run some of the calculations yourself. Take a few producers that you know and determine their Revenue Per Employee by reading their annual report. What you will find is the diversity in terms of the range of Revenue Per Employee between producers. The leaders are substantially far ahead of the laggards. Having this information as detailed in the Preliminary Specification Petroleum Lease Marketplaces Revenue Per Employee Interface. Where the producers analysis would be augmented by detailed analysis of each and every Joint Operating Committee that you participated in, I think builds value for the innovative oil and gas producer.

The grouping together of like minded and technically capable producers will be a means in which to approach some of the inherent risk in the industry. Whether you're a group of industry leaders or a group of laggards, together you’ll be much stronger and more capable and will be able to grow and prosper faster and stronger in a more dynamic and innovative 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.

Managing Data and Information in the Petroleum Lease Marketplace Module

We move now to take a quick look at the Petroleum Lease Marketplace module of the Preliminary Specification and its attributes over the next few days. The objective of this module is to replicate virtually what the physical oil and gas marketplace is. And that begins of course with Petroleum Leases.

When we are replicating the physical oil and gas marketplace, the Petroleum Lease is the source document that is the common denominator of all activity and ownership within the industry. Any physical oil and gas assets will be attached to some lease, agreement, rights or concession granting the holders the rights and privileges of ownership, lease or rental. These are the things that are contained within a marketplace. They are what are purchased and sold, bargained and traded for. They are the things that people are recruited to provide services for. Generally a marketplace is a dynamic and evolving commercially oriented hub of activity. That is what we are replicating in the Petroleum Lease Marketplace.

When we look at the types of work that are carried out in the Petroleum Lease Marketplace we see a large group of administrators working within different areas within a producer firm. Whether it be the Land or Legal department, Production or Exploration Operations staff or Accounting people; all of these groups have an interest in the information, people, assets, documents, processes and functionality contained within the Petroleum Lease Marketplace.

The types of documents that are generated within the Petroleum Lease Marketplace are somewhat self-evident. Most of them are created in collaboration with the participants of the Joint Operating Committee and include: Authority for Expenditures (AFE"s), Capital Budgeting (Firm and JOC), Construction Ownership and Operating Agreements, Mail Ballots, Daily Drilling Reports, Lease Bonus, Lease Rental, Lease Taxes, Areas of Mutual Interest are some of the forms, processes and attributes of the Petroleum Lease Marketplace Module. A more detailed specification will be the result of the user communities contribution and commitments.

Included in the data elements of the Petroleum Lease Marketplace are the working interest distributions that make up the partnership representing the Joint Operating Committee. And since the Construction, Ownership & Operating (CO&O) agreements are part of the Petroleum Lease Marketplace module. They include the production allocation for any facilities that are owned and operated by that Joint Operating Committee. This brings into play the manner in which the production allocation algorithm is managed, and this will include the Material Balance Report that we discussed earlier this year.

The issue comes down to the fact that there are two different ways in which to calculate the working interest distribution of the throughput of the product through the facilities. One is to take the literal chemical reality of the situation, the other is to take what is agreed to by the owners and operators of the facilities in the Construction, Ownership & Operation (CO&O) agreement. The two worlds could not be more different. As you can imagine the agreed to situation has to rule the day. The facts of the agreed situation are very dynamic and create variances that are unique and depend on the situation that is in play that day. What the situation is at issue with, is the owners or the producers who have production processed through that plant or facility will have either sold or purchased product or had done some transaction with their production at that facility that needs to be accounted for.

Now to handle that day-to-day activity there needs to be an ability for the plant owners to account for the transactions that are occurring within the plant based on the CO&O. Relying on the Partnership Accounting module will be part of what they will use for the handling of the plants accounting. However, because they can’t take a literal working interest distribution and they have to rely on a dynamic distribution based on the CO&O, a special algorithm will need to be built within the Petroleum Lease Marketplace to deal with the CO&O. This algorithm will capture the agreements production allocation methodology. This algorithm will be dynamic based on the gas composition, production factors and activities at the plant, but it is also not fixed. There are changes to the algorithm on a month to month basis. As new wells are brought on, new functional units are brought on, new products are sold to new purchasers etc. these need to be taken into consideration into the algorithm. It will be necessary for the user community that develops the Petroleum Lease Marketplace captures the full scope of the needs of this particular element of the oil and gas business. It has been poorly handled by the software vendors to date and there is much that can be improved upon and the Material Balance Report is a good start.

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.