What Innovation Provides the Investor

In our review of Professor Giovanni Dosi’s paper, “Sources, Procedures, and Microeconomic Effects of Innovation“ we should ask what are the incentives for the financial marketplace to invest in the producers discovery of innovations and their development? Will these depend on incentives that interested and motivated investors perceive in terms of expected economic returns? Professor Dosi calls “appropriability those properties of technological knowledge and technical artifacts, of markets and the legal environment that permit innovations as rent yielding assets against competitors imitation.” Previously we have documented that producers have lead times and learning curves as process innovations. Are these incentives enough of a market inducement for profit motivated agents?

The competitive advantages of the producer are its land & asset base, and its earth science & engineering capabilities. To develop its capabilities it has been suggested here in the Financial Marketplace module that the financial community will have an incentive in funding the development of the producers capabilities. These competitive advantages, the capabilities, when applied to their land & asset base will generate the rent yielding assets the financial community is seeking. To hold the land & asset base is the alternative the investor has to consider. However, without the capabilities to develop the properties the assets are of little use. The investor must acquire the capabilities in some fashion and that will cost them. To develop them through a producer may be the most effective and lowest cost alternative available to them.

Another aspect of the understanding that we have learned about innovation is that innovation is the result of a quantifiable and replicable process. Taken from the perspective of an investor, the value this understanding provides is that the means of production, the scientific capability is within the scope of his / her undertaking. The risks still exist. However, the ability to develop the innovation from a known capability exists and is a possibility based on quantifiable and replicable process.

Money is not necessarily the determinant of innovative success. If it were there would be more innovation occurring in the large firms. Innovation can and does come from anywhere and does not necessarily require the vast financial resources that are believed to be necessary to make them real. From the financial marketplace perspective this would provide them with the evidence they don’t need to throw a lot of money around to make the producers innovative. A lot of the capabilities that are needed can and will be developed in innovative ways as a result of not having an unlimited capital budget. This might be the key point that draws the capital marketplace into the Financial Marketplace module and participates in the development of the capabilities and innovations of the producer.

What we have learned about innovation is well summarized by Professor Giovanni Dosi in the following quotation.

...businesses commit to innovation stemming from exogenous scientific factors and endogenously accumulated capabilities developed by their respective firms.” His general point is that “observed sectoral patterns of technical change are the result of the interplay between various sorts of market-inducements, on the one hand, and opportunity and appropriability combinations, on the other.” p. 1141

The manner in which the oil and gas investor earns a return on their investment will be on the basis of the producers earth science and engineering capabilities and innovativeness applied to their land and asset base. From the investors point of view, using the public interface of the People, Ideas & Objects Financial Marketplace module they can quickly determine whom has the highest trajectory change in terms of Revenue Per Employee. They will then be able to engage with that producer in terms of what their team is capable of in the earth science and engineering disciplines. And then commence collaborations with those producers that are of interest to the investor on the basis of what they have seen in the Financial Marketplace module. Then the producer and the investor can discuss how the financing of the “interplay between various sorts of market-inducements, on the one hand, and opportunity and appropriability combinations, on the other” can come about.

The efficient financing of innovation on an industry wide basis should be the result of the overall processes managed by the Financial Marketplace module. As described here the ability to focus on the producer with the highest level of innovation, as reflected in the trajectory change in Revenue Per Employee, will be quick. The pace of change in the science will need to be mirrored in the pace of change in the producers. And the pace of change in the producers will only be matched if the investment community is able to respond to the market changes at the same speed as the producers are able to. Therefore in order to accelerate the producers it is necessary to accelerate the pace and speed of the financial community in terms of their capabilities in understanding the producers business. This is the focus of the Financial Marketplace module.

In terms of what the capabilities of the producer are, and what they are able to achieve, I can see some producers unwilling to document and publish this material for reasons that they will leave themselves exposed to competitive exploitation. That’s always possible, however, as with any competitive advantage they can be actively developed and marketed or hidden and atrophied. The ability to market these competitive advantages to the investment community and in turn develop them further is the opportunity being discussed here. The paradox of Revenue Per Employee is the area where the difficulties really lay and where the producers and investors attentions should really be focused.

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.

Revenue Per Employee as a Key Financial Metric

We asked an important question of what role will the capital markets play in the future of the oil and gas industry? More specifically, we should ask what role will they play in funding innovation? Will they value the capabilities of the innovative producer and fund them as was suggested earlier? Will the demand for capital be diminished as a result of the high commodity prices allocating the financial resources towards an innovative producer? What role will banks fill in this costly science and engineering based environment? These are all difficult questions that have to be asked in funding the oil and gas producer.

Recently we discussed in the Petroleum Lease Marketplace module the factor that was developed in People, Ideas & Objects Preliminary Research report of Revenue Per Employee. The Financial Marketplace module will publish the producers Revenue Per Employee factor for the current and past periods, and include some of the future projections of where the producers factor is heading. This would provide the investors and bankers with an understanding of the innovative standing that the firm has and its future expectations over the next few periods.

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 in terms of what the comparison of the variable meant.

Does Revenue Per Employee reflect a more innovative footing. That is debatable. 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 will have its own interface in the Petroleum Lease Marketplace, and be published as well in the Financial Marketplace module.

One of the attributes of Revenue Per Employee is that a producers history becomes a significant part of the calculation. If a producer has a poor factor then the performance of those fields will continue to affect the performance in the calculation from that point forward. Laggards remain laggards. To change requires significant and radical changes to the way the firm operates. Those firms that have a high factor are those that are able to truly state that they are innovative. And they have the benefit of that history in which they will be able to live off those high factors for the short and medium term. This factor can be a significant selling point, or alternatively, highlight the real stinkers.

The variance in the marketplace of the factor of Revenue Per Employee is truly remarkable. To have a variance of fivefold is not uncommon. When a producer has five times as much revenue per employee as its competitor then it reflects that something is fundamentally different in terms of what theyre doing. As we stated in the Petroleum Lease Marketplace module, although Revenue Per Employee itself is not necessarily an overall reflection of innovativeness, the trajectory of the factor over a period of time is definitely a reflection of innovativeness, or the lack of it.

We have discussed the promotion of the producers team of earth science and engineering capabilities on the Financial Marketplace module through the publication of their Revenue Per Employee factor. 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 module, 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. It is the capabilities that make the determining difference.

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.

Selling the Team

We now focus on innovation and review Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation.” 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 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 their costs of capital would be lower than its competitors, and with their innovations being on a steeper trajectory, they would therefore be more effective causing them to be less costly 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 land and asset base, and earth science and engineering capabilities. 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 cumulative investments. In answer to the question posed earlier as to what role will the capital markets play? It will be to make the investments in your capabilities. Your capabilities are what provide you with your highest return on investments.

We noted that the producer firms engineering and earth science team was being highlighted in an interface on the Financial Marketplace module. Isn't 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 should be considered in this new energy era.

To facilitate that possibility the 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.

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.

Speed is Nothing Without Control

The first item of information that a marketplace should tell a producer is what is an acceptable rate of return for an investment in oil and gas. This is the criteria that all producers should use to evaluate their oil and gas investments. If the rate of return and capital allocation does not exceed the producers expected rate of return then the project should not proceed. There is no more important factor or information that a producer needs to know. The producers discipline and methodology in its capital allocation is how the successful producers succeed. This is how the Financial Marketplace module incorporates the calculations of return on investment and capital allocation in the Preliminary Specification.

First of all there are no more confidential, in my opinion, information then these calculations. Particularly the capital allocation can be a complex algorithm that is usually contained within multiple spreadsheets. Centralizing these calculations within the Financial Marketplace module would be opportune as it's managed by the Security & Access Control module and has general access to the historical accounting data. Data elements would therefore be live and provide real time performance. There is however much more to the decision making process than just the numbers. The management's discussion, based on the calculations is sometimes the important feature. Therefore having robust features for discussion throughout the calculations of return on investment and capital allocation will be necessary. This might best be represented as a blackboard feature of the module.

There is more to the process then just blue sky thinking and number crunching too. What I am suggesting here is that the process of capital allocation is an art as much as it is a science. The process needs to be rigorous and thorough enough to ensure that every rock has been overturned and inspected. That process can and should be automated to the highest level in the Preliminary Specifications Financial Marketplace module. It is up to the individual producer to either follow the process or to ignore it, as much as they do the capital allocation process today. These facilities will be built within the module.

Astute readers will note the obvious contradiction that is inherent in the Financial Marketplace module. Doesn’t the speed we discussed contradict the deliberate pace of the capital allocation process described here? No, that is to say it shouldn't, or they should be one in the same. Having the speed that was described earlier was desirable only if you had some measure of control. The control is attained through the capital allocation process that is described here. These two forces, speed and control, are in the hands of the management of the firm and are reflected in the performance of the assets. The marketplace will see this performance and respond appropriately and that will be reflected through the Preliminary Specifications Financial Marketplace module.

Another contradiction might be suggested that with banks funding Joint Operating Committees on a semi-autonomous nature, this will interrupt the capital allocation process and affect the return calculations of the firm. That is correct, however they will disrupt it in a good way. Banks funding the Joint Operating Committee as opposed to taking general claims against the individual producers would be more motivated and aligned to develop the individual property. Since the producers are using borrowed money to invest in that Joint Operating Committee they are leveraging the investment of the producer. An investment that had previously attained the acceptable rate of return of the producer. Therefore the actual return to the producer would be leveraged to the point that it would most certainly exceed the producers expected return.

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.

Speeding up the Process

In a capital intensive industry, financing is a critical issue for any producer. In an industry where innovation is providing significant value add, and with escalating capital and operating costs the relationships with your investors need to be of premier concern in your business. Speed will become a major criteria on how you will be evaluated in the marketplace. If you as a producer are unable to perform in terms of competing, or participating at the speed of the marketplace, you will be left behind, very quickly. Reputation has a permanence to it that is difficult to change. The speed in which you conduct your financing can give you a head start and provide you with the ability to participate at the speed of the marketplace, and maybe even set the pace for those to try and follow. The speed at which a producer is able to execute would be reflected in the Financial Marketplace module. Transparent marketplaces are a two way street. And it is here that the Financial Marketplace module will enable those producers with superior performance to attain a real speed advantage.

Our discussion of how one bank would finance all the producers within a Joint Operating Committee as opposed to today’s method of each producer having their own banker. Provides a focus for the bank that is unconstrained by any of the other properties of the producers, or concerns other than the property at hand. We also discussed, with the technology automation that is available today, that both the producers and the banks could automate most of the increased logistical banking requirements that this would cause. I also suggested that the disenchanted oil and gas investor might be better served by providing them with the ability to invest directly in the property, giving them the opportunity to circumvent the bureaucracy. A bureaucracy that has provided no upside on 400% energy price increases. And lastly that these changes, made through the Financial Marketplace module, provide a focus for the alignment of the financial interests to the Joint Operating Committee to achieve some of that speed, innovative capability, accountability and profitability.

Now let's explore that speed aspect. The Financial Marketplace module is one of three of People, Ideas & Objects marketplace modules. Which imputes a line of communications is open between the financial marketplace and the producer firm that is above and beyond that of the statutory compliance requirements. It is therefore going to have to be authored by the senior people of the firm who know what it is that they are authorized to state. Some of these current investors who have a direct investment interest with the producer would be able to source historical accounting data and information on their Joint Operating Committee from the producer from the Partnership Accounting module. Future plans and investments, the difficult situations to discuss, could be published and promoted in the Financial Marketplace and meet the regulations requirements for full disclosure. Thereby giving no investor or group any unfair advantage in terms of quality of information.

The point of the marketplace is the opportunity to establish significant and rich relationships with investors and bankers of all shapes and sizes. Make no mistake, the ability to attract capital will be on the basis of performance, for that there is no alternative. However, the speed and effort at which a producer is able to raise the funds necessary to develop their assets depends on the quality of those assets and the quality of the relationships they have with the investment community. The Financial Marketplace module helps to establish a stronger relationship with the investment community, raise the required capital, align the stakeholders interests and account for these investments. Therefore in a significant way increasing the speed at which you can approach the oil and gas business.

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.

Alignment and its Benefits

I want to briefly discuss the logistical implications of having relationships with many banks operating in an oil and gas firm. To suggest that this would make the financial aspects of a producer firm simpler would be contrary to the reality of a system that is providing these types of opportunities. Simply the legal and financial reporting and logistical requirements would be an order of magnitude more voluminous. It is fair to assume that the producer firm would need to maintain a banking relationship with most of the banks that had a presence in the oil and gas business. That relationship would include loans, accounts and all of the banks services. Managing for each of the loans financial requirement would become unbearable. Causing all kinds of administrative and management burdens that would otherwise not be incurred in today's systems.

All of these are done today, albeit on a smaller scale, in most companies. Adding a multiple of volume through automated systems such as what is being discussed in the Preliminary Specification makes the prior discussion a mute point. What is not realized is that the Joint Operating Committee is the key organizational construct of the innovative and profitable oil and gas producer. By enabling the financial constraints of the property to be just the financial constraints of the property and the only financial constraints of the property. The participants in the Joint Operating Committee are free to deal with those that are financially motivated in dealing with the issues of that Joint Operating Committee. There are no more discussions about “them,” who are never in attendance at meetings anyway. When it comes time to make a decision, a decision can be made.

Its not that the decisions are made in the Financial Marketplace module. What this module is doing is aligning the financial interests of the Joint Operating Committee so that the decision rights are in alignment with the operational decision making authority. The financial, legal and operational decision making authority resides in the Joint Operating Committee and the alignment of these interests makes the ability to decide the best course of action possible. Currently, the muddling of these frameworks by general assignments to banks by each producer, and some nameless and faceless investor, limit the flexibility of the decision making authority of the engineers and earth scientists who are responsible for the performance of the property. By focusing the ownership and operating resources on the assets of the Joint Operating Committee, the consensus can be achieved and decisions can be made.

Our discussion of the costs of administering high levels of banking due to using the Joint Operating Committee as the key organizational construct of the innovative producer is an important consideration in this discussion. We have two choices to deal with these potentially higher administrative costs. We can hire a lot of people, or alternatively we can highly engineer the software that the industry will use to deal with the potentially higher administrative burden. A highly engineered software solution, backed up with a software development capability such as is proposed by People, Ideas & Objects would earn, I think, the general consensus as to how to deal with the issue.

Understanding the marketplace metaphor and the discussion regarding bankers and investors, the module would include, but in no way would be limited to, the following.

Joint Operating Committee perspective.

• Banking deposit and payment processing.
• Account reconciliation and analysis.
• Short term asset reconciliation and management.
• Dynamic working capital determinations.
• Short term liabilities accounts and management.
• Long term liabilities accounts and management.

From the producer perspective.

• Banking deposit and payment processing.
• Account reconciliation and analysis.
• Short term asset reconciliation and management.
• Dynamic working capital determinations and allocations.
• Short term liabilities accounts and management.
• Long term liabilities accounts and management.
• Shareholder equity accounts and management.
• Consolidated JOC working capital.
• Uncommitted consolidated JOC working capital.

People, Ideas & Objects are moving the compliance and governance frameworks of the hierarchy into alignment with the Joint Operating Committees legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks. We are doing this to achieve greater speed, innovative capabilities, accountability and most importantly profitability. Speed is achieved by reducing the financial constraints and the time required that financing has traditionally taken in oil and gas.

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.

A Certain Dissatisfaction

It is the Financial Marketplace module in which I really throw the cat amongst the pigeons when I talk about the redundancy of the bureaucracy. Yet when I reflect on the past five years, I see the investment marketplace holds the oil and gas producers bureaucracy in not much better esteem. There is a general dissatisfaction within the oil and gas investor community. How much of this dissatisfaction is to do with the overall financial crisis, and how much is to do with a general dissatisfaction with the oil and gas industry itself is unknown at this time.

The fact of the matter is that with the run up in the commodity prices there has been an even greater run up in the costs of production and operations. The bureaucracy have provided no upside from the price increases. A bureaucracy that has provided no upside on 400% commodity price increases will not provide any upside on any further price increases. And it is quite probable that significant financial losses will arise as a result of any price declines. So there is much to be concerned about when it comes to the current state of affairs in the manner in which the oil and gas industry is managed.

I’m glad that I am on record for being critical of the bureaucracy, and that I am the one that they have been kicking with such vigor. It’s one thing to be right, another for them to have been so wrong for so long. Nonetheless, the industry is going through a fundamental change. One in which the earth science and engineering resources needed to discover and produce the base commodities are under increasing demands. We therefore need to organize ourselves first and foremost for this new challenge. And in today’s marketplace that begins with the development of the software that defines the organization, that being People, Ideas & Objects Preliminary Specification. The question that should be asked at this critical time is what is the bureaucracies plan for the future?

The Financial Marketplace module provides a window for the producer to deal with the bankers within the Joint Operating Committee. Whether a producer chooses to have each participant maintain their own bank representative. Or, each Joint Operating Committee has one banker for all the producers represented in the Joint Operating Committee is a choice provided by the Financial Marketplace module.

Our discussion now shows the critical role of the investor in the long term health of the oil and gas industry. I think in order to have them participate in the industry, again, will require they are provided with new tools and opportunities to invest in oil and gas. Earlier it was suggested that possibly the working interest share might be a securitized investment. I think on the basis of the past five years history, that it should be considered that the investment community might have some enhanced tools and interfaces to the producer through the Financial Marketplace module of the People, Ideas & Objects software application. After all it's a marketplace.

The interfaces and tools that I am thinking of are not of the statutory type that are required by various regulatory agencies. These are provided through the Compliance & Governance module of the People, Ideas & Objects application. The type of interfaces that I am thinking that may be used in the Financial Marketplace module would be more of the marketing style. Where the producer is out selling their investment to the “financial marketplace” in order to secure future capital investments. Ways to initiate dialog and for information and discussion to start the relationship between the investor and the producer.

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.

Introduction to the Financial Marketplace

The financial crisis has had a tremendous effect on the capital intensive oil and gas industry. Capital structures and lower demand for the commodities have been the two issues that have caused significant management upheaval. Times appear to be improving and moving to a more normal basis of economic performance. However that will bring higher interest rates with the higher expectations of performance and no guarantee of higher commodity prices. Producers remain stuck in a business model that sees them produce at full capacity and have no capability to deal with any underlying changes in the business. The Preliminary Specification works to provide the producer and Joint Operating Committee with an innovative and profitable business model. The Financial Marketplace module provides the means in which the capital structures are managed.

The primary point that the Financial Marketplace module is making is that there are competing interests and motivations in the industry in attempting to get things done. With different strategies being deployed by different partners within a Joint Operating Committee, is it any wonder that the financing of a project can ever fall into place. What the Financial Marketplace module proposes is that instead of the property being funded by several different company bankers, each taking a working interest share claim against the firm. The Financial Marketplace module would see one bank, or one consortium of banks fund the property in its entirety on behalf of the partners represented in the property. Aligning of the bank financing to the innovative oil and gas producers and Joint Operating Committees legal, financial, operational decision making, cultural, communication, strategic, innovation, compliance and governance frameworks.

Today that may or may not be an objective or opportunity worth pursuing. However, I think that the freedom of having the attributes of the Financial Marketplace module still reside within the oil and gas market, and possibly even more as a result of the financial crisis of 2008. Why? The demand for capital will continue to be strong, and the supply will continue to be tight. What we seek to prove in this module, is that through its use we can provide the innovative and profitable oil and gas producer and the Joint Operating Committee with the ability to ensure that their capital structures are more efficient than what can be attained in any other system.

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.

$94 Billion With a B

I want to take a moment between our review of the Petroleum Lease and Financial Marketplace modules. To go through how the Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. The value of People, Ideas & Objects solution for 2012 alone was an incremental revenue stream of $94 billion. It is the solution to profitable operations of oil and gas, and particularly a solution to the unique characteristics of shale gas reservoirs. The value difference that is calculated here is a result of the ability of the producers to shut-in 15% of the marginal production, raising the prices to a point where gas begins to return a profit. A price which they claim is $6.70 / mmbtu. This is applied to the production profile of North America. This is done through the Preliminary Specifications use of the decentralized production model.

The issue with shutting in production is the associated costs of administration and accounting are fixed. The Preliminary Specifications use of the decentralized production model converts the producers fixed administrative and accounting costs to the variable administrative and accounting costs of the Joint Operating Committee. We do this by first of all making some changes to the profile of the prototypical oil and gas producer. That is the producer is configured with the c class executives, earth science and engineering resources, land and legal and some support staff. The remainder of the people are reorganized into service providers who are focused on the process and are using the entire industry as their client base. These service providers will be using specialization and the division of labor to enhance their services to their clients, the Joint Operating Committees.

When a property is unable to cover its marginal costs from the revenues from production. The associated losses can be more costly than having the property shut-in. These costs as a result of any losses have to be added to the reserves costs to be earned from the future and will require higher prices to make up for the losses that are being incurred. In today’s environment the producer has a fixed capability in terms of their administrative and accounting capabilities. And these must be maintained. The ability to cut these costs with their production profile doesn’t exist due to the unique specialized nature of the capabilities. What the Preliminary Specification will do will be to move the administrative and accounting capabilities from the producer firm and make them the administrative and accounting capabilities of the industry. Then the ability to charge for the services that are rendered by each service provider to each Joint Operating Committee can be made.

If the property is shut-in due to the marginal costs not being covered. The service providers will not have the work for that property cross their desks and their billings for that month will not include that property. Therefore no Joint Operating Committee that is shut-in will have any administrative or accounting costs charged during times of shut-in production. Leaving the property with no profit or loss situation. Saving those reserves for a time when the prices rise to a point where profitable operations can be achieved. And removing the marginal production from the marketplace so that the commodity prices can find the real market price.

With the high cost, prolific nature of the shale gas reserves this provides a business model in which to profitably produce those reserves. To continue to produce at capacity, and at a loss, is a fools game. However, one in which the bureaucracy seems content to play. Then again its not their money, and either way they still get paid.

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 Petroleum Lease Marketplace

The Petroleum Lease Marketplace is the second of three “Marketplace” modules of the Preliminary Specification. As with the Resource and Financial Marketplace modules it too employs the “Marketplace Interface” as the ultimate collaborative interface. It is within the Petroleum Lease Marketplace that the majority of the producer firm and Joint Operating Committee data and information is developed, recorded and stored. Many of the other modules will be sourcing their primary data from the Petroleum Lease Marketplace.

The innovative oil and gas producer relies on their competitive advantages of their land and asset base, and their earth science and engineering capabilities. The Petroleum Lease Marketplace is the module that provides the producer and Joint Operating Committee with the tools to build their land and asset base. The Petroleum Lease Marketplace provides the producer with the competitive advantages to compete in the 21st century.

The division of labor and specialization plays a large role in this module as well. As in the Resource Marketplace module, service providers are relied upon to provide for the management of processes like lease rental payments and other areas of land administration. These aid in the conversion of the producer firms fixed overhead costs to the Joint Operating Committees variable overhead costs. This conversion is a critical part of People, Ideas & Objects ability to provide the oil and gas producer with the most profitable means of oil and gas operations.

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.