Separating the Long and Short Term Perspective

We went through the four points from the McKinsey article as to why we should use the Research & Capabilities module for the long term perspective of the innovative oil and gas producer. We now want to revisit the first point of that article and highlight the significance of the opportunity that is presented by separating the long term perspective into the Research & Capabilities module, and the day to day into the Knowledge & Learning module. In the McKinsey article "The 21st Century Organization" it is noted;

The first design principle is to clarify the reporting relationships, accountability, and responsibilities of the line managers, who make good on a company's earnings targets, for all other considerations will get short shrift until short term expectations are met.

By making the Joint Operating Committee the key organizational construct of the innovative oil and gas producer. By aligning the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee with the compliance and governance frameworks of the hierarchy. By providing an extension of the governance structure over the partnership with the Military Command & Control Metaphor. We have isolated the Joint Operating Committee as the day to day operation of the oil and gas producer. This frees up the remaining portion of the producer to concern itself with the long term value generation of the firm.

Recall that these Joint Operating Committees are autonomous in the sense that they are focused on providing the greatest performance. They are driven through the Performance Evaluation module that allows them to determine where and how they can build the greatest value each month. Because they are operated by the partnership, which all the participants are motivated equally by financial gain, the producers will have faith that the “line managers will make good on a company's earnings targets.”

The Research & Capabilities module is looking at the interests the producer has in any number of Joint Operating Committees. This number may total into the thousands. To concern themselves with the operational performance of each would be a daunting and impossible task. And based on the previous paragraph their involvement is limited. However, there may be systemic corporate similarities that can be applied to each that bring value to the overall producer firm. Systemic similarities that can only be seen from the perspective of the firm, and in the long term. These are where the business value can be generated through the use of the Research & Capabilities module. McKinsey notes;

Dynamic management and improved collaboration, as we show later, are better ways of accomplishing the purposes of these ad-hoc structures. A company that aims to streamline its line management structures should create an effective enterprise wide governance mechanism for decisions that cross them.

It is through an iterative and collaborative approach to dealing with the various Joint Operating Committees that the users of the Research & Capabilities module is able to extract the value in the long term. By passing on new innovations or the results of experiments for the JOC to implement. The ability to influence any and all variables and to see any aspect of the firm and to analyze it is the domain of this application module. To define it as a set of fixed functionality will ultimately be the result of what the user community is able to provide, however, I am certain that they will also recommend that the application module remain open to analyzing any and all data.

If we reduce the business of the oil and gas producer down to the activities of the Joint Operating Committee. And concern ourselves only with the day to day activities of the property then we can generally be satisfied that we will know where our next meal will come from. But what about everything else. This is the classic conflict that a business must satisfy, the struggle between the long and short term horizon of the business. How much should be sacrificed in the long term and how much should be sacrificed in the short term? It should be noted that the name of the module is Research & Capabilities, this discussion focuses on the capabilities component of the module.

What is the firm capable of and how can that capability be enhanced? And more importantly since we are so dependent on our partners in the Joint Operating Committee and the service industry how is this apparent contradiction resolved? The traditional steps of the producer was to build the in-house capability. The assumption that is used in People, Ideas & Objects is that the resource constraints do not permit the luxury of each producer building these capabilities. The need to collaborate with partners to build the capabilities needed for the Joint Operating Committee is how these needs are met.

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.

An Introduction to Research & Capabilities

A quick pass through the Accounting Voucher brings us to what has to be my favorite module, Research & Capabilities. This module shares many similarities with the Knowledge & Learning module. The difference is that the Research & Capabilities is a firm, or producer, facing module and the Knowledge & Learning module is a Joint Operating Committee module.

We discussed how the Research & Capabilities module would be used to help build value by managing the transition from the hierarchy to the aligned producer organization under the People, Ideas & Objects software. Where the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee were aligned with the hierarchies compliance and governance. Making this transition will create opportunities for people to make changes to the work that they do in order to be more efficient and effective. What and how the software will do this little bit of magic is best described in a McKinsey article entitled “The 21st Century Organization”. In a four part recommendation McKinsey sets out in broad strokes what is required.

Streamlining and simplifying vertical and line management structures by discarding failed matrix and ad hoc approaches and narrowing the scope of the line manager's role to the creation of current earnings.

The process of using People, Ideas & Objects software will achieve these objectives by aligning all of the Joint Operating Committee and the hierarchies frameworks, imposing the military chain of command and having the financial interests of the producers drive the management of the Joint Operating Committee. We are “narrowing the scope of the line manager’s role to the creation of current earnings.” These are the focus of the Knowledge & learning, Partnership Accounting, Accounting Voucher, Petroleum Lease Marketplace and Performance Evaluation modules.

Deploying off-line teams to discover new wealth-creating opportunities while using a dynamic management process to resolve short and long term trade offs.

These are the critical new roles that are being discussed in these “new” modules “Research & Capabilities” and “Knowledge & Learning.” Providing valuable insight to their users about the business that is above the day to day noise. Where the long term vision of the organization can be set, executed and realized through these two advanced software modules.

Developing knowledge marketplaces, talent marketplaces, and formal networks to stimulate the creation and exchange of intangibles.

Within the Preliminary Specification, if we include the Research & Capabilities and Knowledge & Learning marketplace definitions, we have five marketplace modules in People, Ideas & Objects. Marketplaces are things that people will be doing more of in terms of participation in the future. Computers can assist, but again are generally very poor at making decisions, bargaining, knowing what to do, etc. The other three marketplace modules in the Preliminary Specification include the Petroleum Lease, Resource and Financial Marketplaces.

Relying on measurements of performance rather than supervision to get the most from self directed professionals.

Handing the Performance Evaluation module to the team that is running the Joint Operating Committee will enable them to manage the property in the best possible fashion. They are going to be able to figure out what it is that makes the most sense in terms of value, and begin to generate more of it. It is as simple as that. Except it is a very complex business. And that’s why you have your best earth science and engineering staff on the job. And the best business / geological / engineering minds running the Research & Capabilities module.

It should be coming clearer that it is no longer the 20th century. That to manage an enterprise requires a different approach, and the first thing that is needed to manage that enterprise is the software to enable that approach. With real shortages in the quality human resources necessary to maintain the markets demand for energy, it will be the producer that is able to maintain a high performing organization based on criteria such as these.

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.

Open Charges to the Accounting Voucher

Following on the Partnership Accounting module, the Accounting Voucher is unique to oil and gas systems due to the nature of recognizing the Joint Operating Committee (JOC) as the key organizational construct of the innovative and profitable oil and gas producer. One of the implications of using the People, Ideas & Objects system is that each partner will have access to the Accounting Voucher during the time that a Voucher is either open or closed. Each of the producers involved in the JOC are therefore able to access the Accounting Voucher and have costs / revenues distributed to the other partners involved in the Joint Operating Committee. This is one of the key differences that we had discussed in the Petroleum Lease, and Resource Marketplace modules. Partners are all contributing to the joint account as equal participants with the role of “operator” being relegated to a thing of the past. (Note too of course, that each participant is able to charge their own account with their own 100% charges. These charges are to their private accounts and therefore not seen by any of the other participants.)

Cost control becomes an issue when everyone is able to charge freely to the joint account. A careful reading of the previous paragraph reflects that I didn’t state “charge freely." Cost control comes about as a result of the traditional budgetary control of AFE and the Work Order system that is part of the Partnership Accounting module. Without pre-approval by the partnership nothing is able to be processed by the People, Ideas & Objects software applications. And as we have seen in the discussion of the Security & Access Control module, few will have the authorization to “charge freely” to the joint account in any form or fashion.

With the traditional ability to charge to an AFE or Cost Center, and possibly during the development of the People, Ideas & Objects Preliminary Specification, the user community determines the need to have a Purchase Order system, ensuring that an appropriate bidding and contracting process is in place, no unauthorized amount will be accepted in the system. There is also the fact that each voucher needs to be approved for payment before any money is expended and that approval would need to consider the authority of the joint account.

As one can envision these Joint Operating Committee - Accounting Vouchers can become large as they include all of the business of the property. Accountants would be frustrated at month-end trying to get these Vouchers closed if they had to seek approvals and close each of the transactions within the appropriate small window of time of their month end. Needless to say that each transaction within the Accounting Voucher is a small subset of the larger Accounting Voucher and can be dealt with as a stand alone individual item. Seeking its own approvals and authorizations that deal with just the domain of the specific transaction.

What is different in People, Ideas & Objects Accounting Voucher system vs what exist today is the elimination of the designation of operator. The capabilities for each producer to house the state of the art earth science and engineering resources necessary to run all of the properties within one oil and gas firm is believed to be beyond what is possible in the future. The solution prescribed in the Preliminary Specification is the further specialization of earth science and engineering skills and pooling of the resources of the partnership within the Joint Operating Committee. Therefore charges from each of the participants will need to be processed and paid just as if they were the operator in today’s systems. This will include not only internal costs but also for the field work being done on AFE’s and Work Orders. It may be that any one of the participants will be incurring charges on behalf of the partnership. Therefore the need to have the Accounting Voucher open to the partnership is a necessary evolution of the pooling concept that is part of People, Ideas & Objects Preliminary Specification.

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.

User Based Developments

The comprehensive accounting for the producer firm and Joint Operating Committee is conducted in the Partnership Accounting module of the Preliminary Specification. It is here that you will find the many traditional accounting reports, activities and information for the innovative and profitable producer and Joint Operating Committee. It will be this module and the Accounting Voucher that will be used by the producer, Joint Operating Committee and various service providers to carry out the accounting requirements for those concerns. Each will have access to their domain of information necessary to conduct their jobs whether that is at the producer, Joint Operating Committee or service provider. Security and access control being provided through the Preliminary Specifications Security & Access Control module.

In the high level discussion of the past few months we have discussed the material balance report and its automation of the production, revenue and royalty process once the production volumes are settled. We have also discussed the decentralized production model and how it enables the innovative and profitable producer to eliminate the overhead during times when production is shut-in. These are areas that are part of the Partnership Accounting module, and with the generic nature of the accounting, don’t need to be repeated here. There is one area that we haven’t discussed and that details the global scope of the accounting information of an ERP system. And that is the manner in which the developments have been approached in the industry before.

The myriad combinations of accounting possibilities that happen within oil and gas have to be captured and handled within the systems that are used in oil and gas. These combinations have not been captured in any of the existing ERP systems as of this date. The first aspect of solving this problem is to engineer the solution. Many have tried and have found their budgets to be too small for the job. Approaching this from the one producer perspective may seem like adequate funding, however, no one today is declaring success. If, as we have proposed in People, Ideas & Objects, aggregate the resources of the industry towards engineering the solution, this scope can be scaled, the costs to each producer will be incidental, and the results will be that each producer will realize the full scale of that software development effort.

When an individual producer has approached the development of an ERP system they have been granted a budget that is less than what is desired to deal with the potential issues. When the development begins, the issues become greater than what was expected and the need to simplify the application to meet the budget is the skill of the project manager. Users are rarely consulted as to their needs and are told as to what and when they will transition to a new system. Everyone grits their teeth until someone declares it a success and you hope for a better system next time. At least that is how I see most system integrations.

The first issue is the budget is inadequate to deal with the size and scope of the problems. Once the developers get into the problems, its time to quit and get out. What is needed is a concerted effort that is a quantum of size and effort to determine the issues and resolve them. Aggregating the budgets across the industry from like minded producers presents the possibilities that a budget can be presented to the developers to approach the issues and resolve them.

The second issue, and possibly the biggest is the fact that the user is not a member of the development team. People, Ideas & Objects are user community developments. Having the collective understanding of thousands of individual jobs that are present within the oil and gas industry can only be gained by the direct involvement of those users. To have developers spending time without the direction of users is a waste. They collectively do not understand, nor does any individual, the thousands of jobs that are done in the industry. Therefore the limited budgets that have been used in ERP systems development have been unable to deal with the user environment. And that has been to their detriment.

People, Ideas & Objects have put forward a vision of how the innovative and profitable producer and Joint Operating Committee can function in the future oil and gas industry. It is now for the user community to take that vision and build the systems that they need to make that vision real. This is their opportunity to have the systems necessary to do their jobs and provide the industry with the means to meet the future energy demands.

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.

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.