A Plan to Deal With the Natural Gas Business

We have now ended what is the financial season in oil and gas. A time when the past years performance is reviewed, the years budgets are approved, audits are conducted, the annual report is issued to shareholders and the annual general meeting has been taken care of. So what’s the plan for the natural gas prices in terms of removing the marginal production off of the marketplace. Or alternatively, how will the bureaucracy deal with the losses that were incurred on the natural gas side of the business. We had calculated that the Preliminary Specification would contribute $67 billion in additional profits in 2012 if it were operational. Most of this was from natural gas pricing. So what’s the plan to stem the loss of this value in 2013. Anyone, Anyone.

Once again the bureaucracy has no plan. It is proposed however, that Christmas 2013 will be very cold and other delusions. How is this a business. Its not its daycare where the bureaucracy receive a warm office, a salary, retirement and other benefits while they participate. Without any challenge to the existing status quo you can be sure there will be no activity that is undertaken to change the afternoon nap. Another year will pass much like last year and hope will rise with the inevitable rising natural gas prices as the temperatures dip in November. It’s the bureaucrats perfect dream.

The only problem of course is the inevitable downturn in prices that begin around this time of the year and continue on until November. This is where the majority of the money is lost during the year. And the remainder of the year's operations are not good enough to earn any money either so they can’t alleviate these losses. Losing money is nothing to a bureaucrat. There is always more capital that can be found if needed to keep the daycare afloat. If not, there are other daycares in which to participate.

What is needed is the adoption of People, Ideas & Objects Preliminary Specification. Through a variety of interfaces the partnership representing the Joint Operating Committee is able to make the operational decision to suspend production when it reaches its marginal costs. Therefore mitigating the downside losses of any operations due to low natural gas prices. These losses are mitigated due to the fact that no production or overhead expenses are incurred during times when the production is shut-in. This is done through the Preliminary Specifications use of the decentralized production model.

What the decentralized production model does is reduce the producer to a small footprint of their current operations. Consisting of the C class executives, earth science and engineering resources, some support staff and legal resources. The remainder of the resources are reorganized into service providers who are organized around processes that have the entire industry as their client base. These service providers conduct their operations for their clients and bill for their services directly to the Joint Operating Committee. So for royalties there will be a charge for royalties and a charge for the royalty accounting directly to the Joint Operating Committee.

This provides the opportunity for the producer, should they decide to shut-in the marginal property, to not incur, in this instance, the royalty or the royalty accounting charges for the months when the property is shut-in. And that would be the case for any of the other overhead items that are being managed by the service providers. No production, no production or overhead charges and hence no losses on operations and the natural gas prices will have limited downside during the summer or other times when the market is well supplied.

In short a plan to deal with the nature of the natural gas business. One in which we need to adopt the Preliminary Specification as the method of operations for the oil and gas industry. The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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.

Critical Resource Shortages

Speaking of the qualifying aspects of the Preliminary Specification. There is also the ability in which the producer firm is able to better manage their earth science and engineering resources. What is known is that there is a general shortage of geologists and engineers in the marketplace today. What is also known is that the demands for these skills will be growing and the numbers of retirements will exceed the number of new recruits. A solution to this issue is a necessary part of any ERP system and one has been included in People, Ideas & Objects Preliminary Specification. One that relies on the toolset of specialization and the division of labor as keys to solving these problems.

The key issue is that each producer firm in the current corporate model is having to build just-in-time earth science and engineering capabilities for each and every contingency that their firm may be faced with. This overbuilding of capabilities within each producer, on an industry wide basis, creates unused and unusable capacity in these critical resources. Taking this strategy into the future, where it would be expected that further specialization of these resources would require more specialized skills. And would demand that each producer bring on more resources to meet the just-in-time requirements of the corporate model. The scope and scale of their earth science and engineering operations would become such a burden as to be inoperable and unprofitable.

What is needed is a simpler solution that provides for that specialization and a division of labor to ensure that the needs of the industry are met. Using the division of labor in an effective way can help to mitigate the demand issues of these resources. Organizing these resources in different ways will increase their productivity and alleviate the critical resource constraints. The specialization arise at the producer level. That is each producer will specialize in an area of earth science and engineering disciplines that they have a distinct advantage. This advantage will then be pooled with the other members of the Joint Operating Committee, and with their specializations, it will be determined within the Knowledge & Learning module what areas of the operations they have the appropriate specializations for. Any deficiencies can be made up through the marketplace either through other producers or service providers offering the capabilities that are needed by that Joint Operating Committee.

This pooling concept releases the unused and unusable capabilities and resources that are locked in by the current corporate model to the marketplace. There they will be made available to be reorganized on a specialization basis within each producer. Having service providers handling some of the common processes on a industry wide basis will also help to increase productivity and reduce the demand for these key resources.

For several hundred years specialization and the division of labor were naturally occurring activities in the marketplace. Then software became a big part of our lives and ERP systems have locked our organizations into concrete. Disabling the organizations ability to develop specializations and further define increases in the division of labor. People, Ideas & Objects provides the Preliminary Specification and a software development capability designed to support specialization and the division of labor so that our organizations can evolve again. Without this software development capability the current corporate model is as broken as the former Soviet Union’s. Everyone complaining about shortages, and nothing being done about it.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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.

Qualifying the Preliminary Specification

We have been discussing the quantifiable aspects of the Preliminary Specification in the last number of posts. The opportunity costs of $67 billion for the 2012 calendar year are hard not to discuss. But there is more. The qualifying aspects of the Preliminary Specification are as significant as well. People, Ideas & Objects usually highlight these in three categories as the speed, innovativeness and accountability of the oil and gas producer.

By removing the ways and means of the bureaucracy. By orienting the industry and the producer towards the natural and cultural ways of the industry, the Joint Operating Committee. We attain a speed in our organizations that is substantially quicker than that of the current bureaucratic corporate model. By recognizing the Joint Operating Committee as the key organizational construct that it is and then building systems that define and support that organizational construct People, Ideas & Objects Preliminary Specification provides a speed in the operations of the oil and gas producer and the Joint Operating Committees it participates in.

The Preliminary Specification is built around innovation. Using the research of Professor Giovanni Dosi we have determined what is necessary and required for a producer and industry to be innovative and have included those elements within the Preliminary Specification. The emphasis on capabilities, their development and deployment are critical to a science based business. The inclusion of marketplaces within the specification help to broaden the focus to the service industry. All of these activities come together in the two modules designed to deal with innovation. For the producer there is the Research & Capabilities module and for the Joint Operating Committee there is the Knowledge & Learning module.

As we know the Joint Operating Committee is the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. What the Preliminary Specification does is move the compliance and governance framework from the hierarchy into alignment with the seven frameworks of the Joint Operating Committee. By aligning operational decision making with compliance the result is accountability. If you dare to ask who is accountable for the decisions in the bureaucracy today you’ll probably get a blank look. When operational decisions and compliance are separated as they are today, accountability is muddled and no one knows who’s responsible for the failure, and maybe more importantly, the success. Having compliance as a framework in alignment with the operational decision making framework will ensure that accountability is maintained and enforced. No more muddling about and the people who are responsible for the success in your firm can finally be identified and better utilized.

These are just highlights of some of the qualifying aspects of the Preliminary Specification. Adding them to the discussion of the quantifiable opportunity costs rounds out the discussion. The business model that the Preliminary Specification defines and supports in its eleven module specification orients the industry to its natural ways and means, the Joint Operating Committee.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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.

Another Critique of the Bureaucracy

Granted the current upturn in natural gas prices are as a result of a technical market analysts call that prices would go higher. Anyone who listens to technical market analysts will be familiar with their 50 day and 200 day moving averages, their anomalies and phenomena that they continually predict. The interesting thing about technical market analysts is that they never speak about the history of their calls accuracy or the fact that markets, at times, are stable. Hanging ones hat on the technical markets analysts is a big step up in terms of the bureaucracies faith in the natural gas markets. Seeing that it is May it is a long way away to be praying for a cold winter.

Management of the business of the oil and gas business comes with some pretty slim opportunities these days. This is why the opportunity costs for 2012 between the status quo and the Preliminary Specification were $67 billion in additional profits. The bureaucracy has lost all manner of even thinking of what to do. They are leaderless and unable to construct a solution to a problem regarding the natural gas price situation. People, Ideas & Objects Preliminary Specification deals specifically with that problem, and a whole host of other issues. It also eliminates the bureaucracy from the industry and therefore they are not making that phone call to solve the natural gas problem. Such is the game of politics.

The investors are disenchanted with the performance of the industry. They see the losses that are being incurred on the natural gas side of the business and ask themselves, what if? They also ask themselves how are they going to economically produce those trillions of cubic feet they’ve discovered recently. They are heavily invested in a business that is uneconomic, non-performing and with a management that could care less. A management that is focused on “cash flow” which enables them to pay the bills. Bills which include on a priority basis their salary and pensions.

The investors see this discussion of cash flow and the related discussion of the write down of assets being regarded by management as not pertinent to the real performance of the firm. You should really look at cash flow or operating profits the bureaucrats will say. In a world where capital is free and requires no return. Where investors are dupes who can be fleeced of their money repeatedly and abused often, then yes look at only cash flow and operating profits. For the real money and the real capital will continue to look at the net profits and the real performance of these firms and hold them to perform against what they have invested. Anything less than that doesn’t pass grade school.

The bureaucracy are in control of the industry today for that there is no doubt. They are doing what they wish and how they want to do it with little regard to performance or accountability. We saw in 2012 a few of the CEO’s get bounced from their seats in the surprising retirements the day of the announcements. But that doesn’t solve the problem. The investors need something more, something that attacks the DNA of the bureaucracy and roots them out at the place they live. Something like People, Ideas & Objects Preliminary Specification. But then I am biased.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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 vs. Computers

In yesterday’s post we discussed the shifting of the cost control from the producer firms to the service providers on the various overhead costs incurred in oil and gas operations. Within that discussion was the role of software automation as one of the means to control those costs. Some may think or believe that that diminishes the role that people will have in the administration of the oil and gas producer, and that computers will be relied upon to a greater extent than they are currently. And I suggest that we certainly hope so.

One of the areas that People, Ideas & Objects Preliminary Specification deals with is the division of labor between the people and the computers. Leaving the mundane storage, processing and process management tasks to the computers and freeing the people to pursue the higher end tasks that will grow in the future to take a larger percentage of our time. If we don’t begin to deal with this division of labor in a more appropriate manner, then we are going to be left with the lower level tasks of the mundane and be swamped with the trivial and obscure. This is a choice that we have to make, and I think it is a conscious choice where we make the handoff to the systems for their management of greater volumes of work to free ourselves for the difficult work ahead.

And we can see that the marketplace needs these skills already and the ability for the people to fill them is limited due to the mundane aspects of the business slowing us down. The type of skills that are needed are leadership, thinking, research, innovation, the creative aspects of the business, developments of the earth science and engineering aspects of the business, collaboration and many others. The only way these are going to be enabled is that the business of the business is being taken care of in a way that is efficient and effective.

Now some may argue that all is fine and would take offense to many of the points that are made in this blog. I don’t see it that way when you put the future of the industry into context. Examples of the manner in which the natural gas business is currently handled are indicative of an inability to change, of an inability to respond to markets. We have seen industry after industry disintermediated as a result of technology. I would suggest that People, Ideas & Objects is disintermediating the oil and gas industry with the Preliminary Specification. We have seen what happens to those that try to stand in the way of the technology that is disintermediating an industry. I think our appeal to the investors of the oil and gas industry, based on the opportunity costs presented by the Preliminary Specifications business model are compelling.

And there’s value in moving to this new business model / future. With the calculated opportunity costs of an additional $67 billion of profits for North American producers. Bringing their profits for 2012 to $213 billion makes this transition not an exercise for the purpose of technology. It is for the business. To make the business more profitable and efficient and effective for all concerned. What will the situation be like in 2020, or in 2030. Will the bureaucracy still be flat footed in its response to another dip in commodity prices? Or will we have the wisdom to take control of our future and deal with it in an appropriate manner.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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 Shifting Costs to the Service Provider

When we look at a scenario such as the one that we listed yesterday. Where the need to shut-in production for the summer months was necessary to mitigate the losses on the property. One might argue that the costs or the burden is being shifted from the oil and gas producers to the service providers who provide the royalty administration and other services to the industry. This post discusses that point and shows that in a dynamic and profitable industry, these costs need to be variable and the service providers remain flexible to the demands of the producers.

First of all lets put the situation in some context. The amount of production that needs to be shut-in throughout the year may be as little as 10%. Operating at full capacity 100% of the time is the anomaly. Service providers will need to plan for this in their budgets and govern themselves accordingly. Savings can come from the ability to organize themselves in a more efficient and effective manner based on the tools of software automation, specialization and the division of labor.

By specializing on the process across the oil and gas industry the service provider will be able to leverage these benefits over a broad scope and scale. Subtle improvements to productivity and effectiveness will generate substantial benefits to the industry when applied to the client base of the service provider. The further division of labor will provide these improvements but they will also enhance the quality of the service.

What People, Ideas & Objects provides with the Preliminary Specification is a software development capability. When industry uses this capability to enhance the software, such as through its service providers expanded specialization and division of labor. It enables the innovation and dynamic nature of the earth science and engineering capabilities within it. The business of the business of the oil and gas industry can be an enabler or a constraint to the science of the business, with the Preliminary Specification it is designed to be an enabler.

In the past when someone wanted to change part of an ERP system, well they’ve learned better not to ask. The systems have become concrete that have locked the organization in a status that is unmovable and inflexible. In order to change an organization you must first of all change the software that defines and supports the organization. With People, Ideas & Objects we provide a software development capability for this purpose.

In the service provider example we have been discussing if they wanted to make a change to the software it can be easily accommodated for a variety of reasons. First of there will probably be one or maybe a small number of service providers of the software that calculate royalties for producers. Specializing in the Railroad Commission of Texas would, I think, be a single vendor pursuit. Therefore to make the change you are only changing one installation. Secondly, you are making the change for the entire user base. Therefore the efforts will be of value to all those that deem some value from the service provider and the People, Ideas & Objects services. There would be no need to go around and make changes to hundreds of installations and train staff within each producer company. To make these changes People, Ideas & Objects focus would be on the service provider. And since the service provider originated the requested change, the demand for training will be diminished.

So yes, there is a shift of the costs of overhead from the producers to the service providers. However, the service providers are able to deal with those costs. They have at their disposal a variety of tools to deal with these costs and a means in which to control them.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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.

Seasonal Earnings in Oil and Gas Properties

What if natural gas prices remain somewhat marginal in North America for the next few years? Will the bureaucracy continue to produce at capacity irrespective of the impact to the producers earnings potential? I think after 2012 we know the answer to that question. The bureaucracy doesn’t care whether the shareholders make a competitive return on their investment, just that they make a return. As long as the bureaucracies salary and retirements are maintained for another year, that’s the big issue as far as anyone should be concerned about. So if the natural gas prices should dip below the marginal costs for three or four months of the year, each and every year, that’s just something that the shareholders will have to learn to live with. That’s the nature of the business the bureaucracy will say. And I say that we know otherwise.

It is highly probable that the summer season will continue to see natural gas prices dip below the marginal costs for most producers. Should this mean that producers continue to take that price or should they begin to take steps to make the price more in line with what they need to maintain their business. I think they should become price maker’s and leave the role of price takers behind. That is what they could do by adopting the Preliminary Specification and building the systems that support the Joint Operating Committee.

Lets look at a likely scenario that a property produced the same volume each month of the year. During eight months of that year the profit was $0.50 / mcf. And for four months the price dipped due to market dynamics and the property lost $0.50 / mcf. At the end of the year, at full capacity, this property only returned a profit for essentially four months as it took an additional four months to eliminate the losses incurred in the four months when prices were low. Now if the Preliminary Specification was available to be used by the producer, the four months where the prices were low would actually be shut-in and those losses would not have been incurred. Therefore the property actually produced a profit for the full eight month period as there were no losses that had to be offset.

This scenario of price volatility is highly likely. Producing at capacity throughout the year will be looked upon as an anomaly in a few years time. The reason it’s done today is to offset the high overhead costs in the “high throughput production” model employed by the bureaucracy. No matter what the volume of production, the overhead that is incurred remains the same high value, no matter what. This model has met the end of the road in terms of its practicality and purposefulness. There are no more efficiencies that can be obtained from the model. They were all obtained in 1966. It requires a producer to be proficient and specialized in every aspect of administrative minutiae and yet unable to realize or use that knowledge other than to their own small sample of administrative tasks. This is replicated hundreds of times in the offices next door without any benefit or value being generated for anyone other than the bureaucracies and the pension plan managers.

The Preliminary Specification would have the specialization and division of labor develop from that point in 1966. Take for example a service provider who would specialize on one jurisdictions royalty administration. Have unique and specialized knowledge of the legislation that is the Railroad Commission of Texas they could provide their services to the many producers and hundreds of Joint Operating Committees that would subscribe to that administrative process. Having their royalty administration handled in this way would provide assurance that it was the lowest possible royalty under the legislation due to the heightened specialization of the service provider. And the administrative efficiencies provided by the division of labor the service provider could employ by applying their services across the process which was used across the industry. The added feature would be that during those four months that the property was shut-in in the scenario mentioned above. The service fee for royalty administration for the Joint Operating Committee would not be billed as their was no royalty to be processed. The same situation would be for all of the service providers that were providing services to the innovative and profitable oil and gas producers.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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.

Revisiting Natural Gas Prices

The natural gas prices have recently been showing some strength. This strength will diminish the opportunity costs that the Preliminary Specification would have provided to the industry for 2013. The bureaucracy will use the decline in opportunity costs to assert that there is no need for change and that the status quo will provide adequate earnings to the shareholders of the producer firms. That may be the case for 2013, however what about the future of the business. Will the bureaucracy be able to meet the next challenge? Or will their flat footed approach to the natural gas prices be repeated again and again over the next few years? I think the answer to these questions are obvious and the approach, or the solution to them should be obvious.

With the prolific nature of the shale gas reserves. That is with multi-lateral fracing exposing large areas of the formation to production at the same time. Each shale gas well’s production profile is as handsome as one could imagine. Bringing on large volumes of gas to the market at any time will have an impact on the natural gas marketplace and the natural gas producers need to have a solution for this new problem. For if everyone with conventional and unconventional production produces at capacity, which is the common mode of operation in the industry, the natural gas prices will remain depressed. What is needed is for a method to remove the marginal production from the marketplace at any and all times. Even during times, such as now, when the prices are looking somewhat promising.

The Preliminary Specification provides the innovative and profitable oil and gas producer with the ability and capability to remove their marginal production from the marketplace. The Joint Operating Committee is the key organizational construct of the Preliminary Specification and the innovative and profitable oil and gas producer. It is the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. Through a variety of interfaces contained within the Preliminary Specification members of the Joint Operating Committee are able to execute the operational decision to suspend production when the marginal threshold has been reached.

These decisions are made with the understanding that incurring losses on operations are contrary to good industry practices and damage the expected return on the reserves of the property. Producing at a loss is contrary to good industry practice because it causes natural gas prices, or oil prices, to decline further than they otherwise would. And the losses on operations are added to the reserves costs making the return on investment poorer and requiring the property to perform at a higher metric than what it was in order to offset the additional costs of those losses. By suspending production before the losses are incurred, mitigates the downside of the price decreases, and through use of the Preliminary Specifications “decentralized production model,” only the costs of capital are uncovered during the time the properties production is suspended.

The decentralized production model reduces the innovative and productive oil and gas producer to a smaller footprint in terms of its staff. Consisting of primarily the earth science and engineering resources, the C class executives, some legal and support staff the producer is a highly focused and science oriented producer. The remainder of the staff are reorganized across the industry on a specialization and division of labor that is focused on each individual process. Therefore a Royalty Accountant is able to specialize on one jurisdiction of royalties and apply their knowledge to a process that is specialized across the industry. The billing for their services is charged directly to the Joint Operating Committee that the royalty is attributable. The same would be for the Production Accountant who may have specialized within a local region where they and a few gas plants are located. Further there may be Revenue Accountant who specializes in butane revenues. Each of these individuals working for processes that would involve dozens of producers and hundreds of Joint Operating Committees.

The advantage of this methodology is that the producer is not carrying any of these overheads at any time. The Joint Operating Committee is being billed for the direct costs associated with the overhead item. With the specialization and division of labor focused on the process, the costs will be reduced to the lowest possible costs attainable. The real advantage is when the producers decide within the Joint Operating Committee to suspend production. None of the charges for Production, Revenue or Royalty Accounting will be incurred when production is suspended. And no charges will be made to the Joint Operating Committee during times when the property is suspended. And that would also apply for any of the other production and overhead costs that would not be incurred during a period of production suspension. Leaving the property in a state where the losses on operations would not be incurred, and the downside in prices would be mitigated.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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.

Conclusion to the Knowledge & Learning Module

As with the Research & Capabilities module, I am very satisfied with the content of the Knowledge & Learning module. It is through this module that we are moving the knowledge to where the decision rights reside, the Joint Operating Committee. In the latter part of the modules specification we take the opportunity to isolate and berate the management of the current oil and gas companies. The bureaucracy have a unique characteristic that is easily identified and criticized. I for one am only happy to be the one that offers up the discussion. But the larger point of discussion is the war that rages between the bureaucracy that exists in every industry and the Information Technologies as represented by the Internet. As I have stated I’ve placed my bet on who will win this war, as I would suggest everyone else should determine which side they are on.

The role of software in society is becoming more pronounced. We are still in the beginning stages of what can be done. For an industry such as oil and gas to continue on without the software development capabilities that People, Ideas & Objects is proposing, and the organizational structure focused on the Joint Operating Committee, the prospects look dim. It is our claim that we provide the oil and gas producer with the most profitable means of oil and gas production. And we do. First by providing our software through the most cost effective manner. That is charging our subscriber base for the costs of developments once. And secondly, that in order to attain a higher level of economic output requires that the industry employ higher levels of specialization and division of labor. In order to organize that specialization and division of labor requires the use of the software specified in the Preliminary Specification. There is no other means in which to organize a higher level of specialization and division of labor. The bureaucracy is tapped out. Therefore our claim is valid.

When it comes to undertaking a large project such as People, Ideas & Objects Preliminary Specification. And we have costed the total software development project in the area of $1 to 2 billion in its first commercial release. Is the need to maintain a sense of urgency for the people involved through to the end of the project. As we know, most of the people will remain motivated as long as the money keeps flowing. So how do we ensure that the money keeps flowing? It is through the fact that we provide the most profitable means of oil and gas production that we can motivate the producers to maintain their sense of urgency in keeping this project funded and moving forward to its conclusion. Their alternative is the bureaucracy and we see how well they’re doing. In the future it may not be enough to own the oil and gas asset. It will also be required to access the software that makes the oil and gas asset profitable, that is the importance of software in tomorrow’s society.

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

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

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

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

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

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

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

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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.

Industrial Structure in the Innovative Producer

If we go back to the previous modules we recall the discussion around moving from the “high throughput production” model to the “decentralized production” model that was being conducted in the Preliminary Specification. Essentially the “decentralized production” model has all of the costs, production and overhead, matching the revenues. So when there was no production, there would be no costs associated with any shut-in production.

The “high throughput production” model has the overhead costs of the producer as fixed. These costs remain fixed despite the volume of production and are difficult to adjust to any change in the underlying business. The “high throughput production” model is something that the bureaucracy can do. It is their means of managing and is how they are able to provide value in the organization. That “high throughput production” is incapable of providing value today is a matter of the time and place that we find ourselves in. Using the “high throughput production” model requires the bureaucracy to summarily ignore the Joint Operating Committee as the key organizational construct of the oil and gas industry. It can not do both, “high throughput production” requires the designation of operatorship be granted to one partner for control over the property.

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

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

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

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

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

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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.