The AFE

One area that we have not discussed in any detail are the processes around the Authority for Expenditure or AFE. I am going to break the AFE discussion down into two parts, one here in the Partnership Accounting module and the other in the Research & Capabilities and Knowledge & Learning modules. What we will discuss are the partnership accounting aspects of the document, and later we will discuss the “capabilities deployment” elements in the other modules.

As with any interface in the Preliminary Specification the user has the opportunity to right click on an item and pull up a menu item called “Create an AFE.” The system will have intelligence and be able to populate elements of an AFE template with the information that you right clicked from. For the purposes of this scenario, lets suggest that you clicked on a well description. The system will then populate the AFE with the information for that well and the partners that are in that Joint Operating Committee. The suggestion was made that another lateral and fracing job be done to increase the production from the shale gas zone. And you populate the AFE with the appropriate account codes that would be used to account for the costs. Note: due to the extensive work done in the Preliminary Specification it should be anticipated that the industry would have access to a global chart of accounts. Budgeted costs were worked out with a number of vendors that you were working with who have developed some enhancements to the re-entry and fracing of multi-lateral wells. You think these are significant innovations and the costs make it a potentially valuable enhancement to the wells production profile.

To present the AFE to the partners you have asked them to join you in the “Marketplace Interface” at the vendor's facility to view a presentation of their new tool. All having confirmed their attendance. At the end of the presentation you digitally sign the AFE which releases the document to the other partners. (All with the data elements that are consistent with their data naming conventions. Global AFE #’s, account #’s, etc.) You indicate the cost estimates and time frame that this can be done to the one well, the poorest performer in the facility. You also submit the engineering and geological analysis of why you think the formation will perform well to the work that is proposed.

Within the AFE document itself there is a collaborative interface for the partners to discuss issues and opportunities related to the document. During the month this discussion focused on how the existing lateral could be protected from any damage during the drilling and fracing of the second lateral. Several partners expressed concern that the program did not do enough to ensure that no damage occurred so a supplemental was raised. After the supplemental there seemed to be a consensus amongst the members of the Joint Operating Committee that the risk was certainly worth the effort and the AFE was digitally signed by all the participants.

During the collaboration it was determined who was available from the producer firms to work on the project and a team was set up to manage the engineering and geological aspects of the program. These peoples time, as well as the accounts for the vendors for that AFE were now able to accept the charges for them. Cost overruns were not expected as an arrangement with the vendor for a fixed price was agreed.

This is a simple scenario of how the firm will raise an AFE and have the members of a Joint Operating Committee approve / disapprove of it. In larger firms there would be an automated routing of the document to the various internal departments for approval. This could be done simultaneously as multiple people can be reading one electronic document at the same time. Therefore accounting, production and exploration could each be approving the AFE all on the same day with none of the paper shuffling that normally goes on. Even within each department the various people who need to see and sign off on the information can do so at any time.

This routing of the document will of course be conducted at each of the producers who are party to the Joint Operating Committees. Each also having access to the collaborative interface of the AFE document between the partners.

In this discussion I want to clarify some of the similarities and differences between the AFE and Work Order in the Partnership Accounting module of the Preliminary Specification. And to point out an important difference in the People, Ideas & Objects systems documents that is different than those that operate today.

Another aspect of how both the Work Order and AFE are different in the People, Ideas & Objects system in comparison to other systems that exist today is the manner in which documents are stored. Everyone is familiar with multiple copies of files that have been edited by different people. A disappointing and troubling problem when it comes to electronic files, a disaster when it comes to documents. No one can have different electronic versions of a document. Therefore there can only be one copy of the document that is used by everyone. (Exclusions for backup etc.) Since its electronic, multiple people can be using the same document at the same time.

The best example of a system that uses this exact manner of file management is Google Docs. Where users have access to a list of files in which they or others they grant access to can edit the same file. Any conflicts in the editing of those files are resolved by the users while editing and the file stays as one complete edited file at all times. There is no need for someone to take edits from many files and put them into one file as is the case with Microsoft Word or Excel.

Instead of files People, Ideas & Objects will present the user with documents like AFE’s and Accounting Vouchers that they have authorized access to. They and others will have the ability to view, edit and delete based on their authorization level and be assured that only those documents exist. No other more advanced copies, or copies that are less advanced, are being worked on. The amount of time and energy that will be saved in knowing that just one document exists is not only satisfying but highly productive.

We have discussed many times that the People, Ideas & Objects application modules are moving the compliance and governance frameworks of the hierarchy into alignment with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee. By doing so we are recognizing and adopting the culture of the industry in its many forms. The change that we are exercising is the removal of the bureaucracy. When it comes to the AFE process there is little in the current process used by companies that is not representative of the culture of the industry. It is optimal that People, Ideas & Objects and the user communities capture that culture in these software developments when developing the AFE process.

One area that we will provide an enhancement to the AFE process is through the elimination of the “operator” designation. People, Ideas & Objects operates on the concept of a pooling of the resources of the partnership represented in the Joint Operating Committee. This is done to help mitigate the technical resource shortfalls, particularly in the earth science and engineering areas. As a result of this pooling an AFE will be open to any one of the participants in a Joint Operating Committee to post charges to. Those charges could be for their staff who are working on the project or for costs they incurred on behalf of the project.

With each producer potentially contributing unequal shares to the joint account or AFE during a month, or over the course of an AFE’s term. The possibility that an over or under contribution of their participation might occur. Therefore monthly equalization's will need to be a necessary part of the reconciliation of the accounts of the AFE. For example, if one of the partners was to pay for the drilling day rate, and their working interest share was only fifteen percent, then they would have paid in excess of fifteen percent of the budgeted AFE. In a case such as this, the producer should be compensated to the point where their contribution does not exceed the approved budgeted amount.

All of this is consistent with the culture of the industry as it operates today. What we are proposing is aligning this culture within the Joint Operating Committee with the other eight frameworks. We are not resisting this well ingrained highly functioning “inertia” as Professor Langlois would call it.

Inertia is the focus of this paper. As is explained in more detail below, inertia has two major functions in the cycle of punctuated equilibrium. Inertia result from, and in a sense embodies, the best feature of the stable phase of the cycle because it is based on the learning process in which producers determine which procedures are most efficient and effective. Once people are satisfied that the know how to do things well, they have very little incentive to look for or adopt new methods. In the words of Tushman and Romanelli (1985, pp. 197, 205), "those same social and structural factors which are associated with effective performance are also the foundations of organizational inertia..., success sows the seeds of extraordinary resistance to fundamental change." Inertia also provides the tension, however, that leads to the (relatively) short, sharp shock of the revolutionary period (Gould, 1983, p. 153) because the pressure required to displace a successful but inert system is considerable and takes time to accumulate. When there is little inertia, change can be assimilated in a gradual and orderly fashion, but an entrenched system may need to be vigorously displaced. p. 3

I began with a discussion of the culture of the industry and how the inertia of the industries routines and capabilities made for formidable obstacles to change. Thankfully we are not focusing on changing any of the cultural inertia in the oil and gas industry. We are trying to change the bureaucracies and the systems to recognize the routines, capabilities and inertia of the Joint Operating Committee. This does however require the retirement or fading of the bureaucracy in its current form.

And institutional change, we argue, can often take place through the more or less slow dying out of obsolete institutions in a population and their replacement by better-adapted institutions - rather than by the conscious adaptation of existing institutions in the face of change. p. 6

Thankfully the bureaucracy does not sustain its own inertia. It is a forced or contrived existence that serves the purposes of a few within the organization, and these needs can be replaced by the Joint Operating Committee. I’m thinking of the command and control, budget and finance functions. What we have said we are doing with the Preliminary Specification is moving to the natural form of organization of the oil and gas industry, the Joint Operating Committee. I don’t foresee difficulties in making the transition from the bureaucracies forced ways to the more natural way of doing things with the Joint Operating Committee.

Another aspect of capabilities that has recently received a great deal of attention is organizational culture. In practice, not all organizations may be equally able to cope with change, as existing patterns of behavior involving both executives and subordinates may be resistant to change. Organizations develop collective habits or ways of thinking that can be altered only gradually. To the extent that a given culture is either flexible or consistent with a proposed change in product or process technology, the transition to the new regime will be relatively easy. If, however, the culture is incompatible with the needs posed by the change and is inflexible, the viability of the change will be threatened (Robertson, 1990; Langlois 1991; Camerer and Vepsalainen, 1988). p. 9

And the proposition that this transition will occur has been threatened by the bureaucracy. They hold the budget and have exercised it in not providing any funding towards People, Ideas & Objects. In this fashion the bureaucracy has been self-serving and looking after its own interests and has abandoned the future of the industry. What will the situation be like in five or ten years. Will their ways still be the methods in which the industry functions? What if they fail?

Teece... fails to note that the inflexibility, or inertia, induced by routines and the capabilities that they generate can raise to prohibitive levels the cost of adopting a new technology or entering new fields. Such inertia can develop to the extent that existing rules are both hard to discard and inconsistent with types of change that might otherwise be profitable. p. 10

McKinsey Consulting suggest that large populations will be joining the middle class in the next 20 years. This will have a dramatic effect on the levels of demand for energy. If the oil and gas industry fails to respond to these demands due to the bureaucracies lethargic ways, will anyone note that there were alternatives proposed?

Whereas major competence enhancing innovations may, in time, be assimilated, the creation of entirely new organizations may be needed to deal with innovations that undermine the capabilities or competencies of existing firms. p. 11

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 Decentralized Production Model

Traditional oil and gas accounting systems have sought to identify and record the costs of operations and allocate those costs to the rightful owners. And these of course will be some of the objectives in the Partnership Accounting module of the Preliminary Specification. We are also seeking to transform the producers from a “high throughput production” model to a “decentralized production” model where the costs of operations decline in line with revenues. Then during periods of low commodity prices, if the marginal costs of the property are not covered by the revenues, production is shut-in. And when the property is shut-in the operating, administrative and accounting costs will track revenues. That is they will be zero and the property will not report a loss or a profit. This is necessary in the highly volatile pricing situations the commodity markets get themselves into. As Professor Langlois describes the model.

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p.58

Recall in the Petroleum Lease Marketplace we have the “Marginal Production Threshold Interface” that enables the partners within a Joint Operating Committee to agree on a pricing point where production would be curtailed. We have also discussed in the Resource Marketplace module the use of the Production Accountant and other roles in terms of how the costs of those resources would be reduced to zero in the case of shut-in production. What we haven’t discussed in detail is the need to charge the Joint Operating Committee directly for the charges of the Production Accountants service provider. This will be a change as a result of using the Joint Operating Committee and the elimination of the “operator” designation for any one specific producer.

Many of these costs would have traditionally been incurred by the “operator” as administrative overhead; and were to be covered by the various provisions of calculating overhead allowances for the operator. These overhead allowances will be eliminated in the future as a result of using the Joint Operating Committee. These administrative and accounting costs may be incurred by any one of the producers in the Joint Operating Committee. Either directly by their staff or through a service provider. Either way they should be directly chargeable to the Joint Operating Committee. Costs such as production and revenue accounting, or partnership accounting in general is a cost of doing the business of the JOC. There would also be costs associated due to the administrative areas of the production and exploration activities done on the property.

What we have learned from our review of Professor Richard Langlois is that markets are the ideal situation in which to source the capabilities the producers need. That would be the case for these administrative roles as well. By hiring individuals in a dedicated fashion incurs the costs during the time production is shut-in. By hiring service providers the costs associated with these administrative duties would be reduced to zero when the production was shut-in. Attaining the “decentralized production” model in terms of the operating and administrative costs of the property.

As we noted in the transition to a “decentralized production” model, it would enable the innovative oil and gas producer to match the operational and overhead costs to any decline in revenues due to the shut-in of production. By using accounting and administrative service providers the various Joint Operating Committees would be able to control their costs in the event that commodity prices were unfavorable. We want to discuss the configuration of those accounting and administrative service providers and how they will fulfill the needs of the innovative oil and gas producers.

When we talk about the Service Providers we are highlighting their independence from any one specific producer. With the elimination of the designation of “operator” from any one specific producer in the Joint Operating Committee no accounting, production administration or exploration administration is provided to the Joint Operating Committee in a dedicated manner as it is today. This creates a fundamental change in the manner of how the work is approached in the industry. It is liberating when we consider the use of technology that is available today and the standardization of the processes that has occurred in the oil and gas industry. A Joint Operating Committee is therefore free to engage a service provider to fulfill these administrative duties, independent of any one of the specific participating producers in a Joint Operating Committee.

From the accounting perspective we have already talked about the Production Accounting role and how that could be specialized to the point where a service provider is working in one geographical area for a large number of Joint Operating Committees. That is the most logical manner in which to organize that type of work. We have also discussed the royalty accounting requirements. And how a service provider would be able to specialize on that specific royalty legislation enabling the producers that use that service provider to pay the lowest possible royalty obligations. And we have talked about an accounting service provider that specializes in the compliance requirements to the SEC. The point being that we are seeing a further break down in the types of accounting service providers that are specializing on a variety of different criteria for the oil and gas producers. This is the required next step in the evolution of the economic output of the oil and gas industry. The further division of labor and specialization are the only means in which an economy can expand its output.

With the specialization of individual service providers based on unique accounting specialities. [I’m not familiar with production or exploration administrative needs and therefore can’t comment on those.] A Joint Operating Committee would engage these service providers to provide for the services that are required for their property. There they could choose a Production Accountant who is located in the region. A revenue and royalty accountant who is known for their ability to keep royalties down. And if the price of natural gas drops to the threshold price determined by the Joint Operating Committee, to where the facility will be shut-in, these accounting service providers are not engaged during that time and incur no billings for the property.

The alternative is for each producer to hire the necessary accounting staff as they do now. This is bureaucratic and wasteful in that it builds capacities in each firm to handle x contingencies. The problem is that each firm only needs those capabilities for a few hundred hours a year. These capabilities are recreated within each producer firm and are unshareable between producers. Capturing unused and unusable capacity within each producer firm. It's time to look at alternatives, and the time to look is when we are designing systems for the Joint Operating Committee.

We have now conveniently reorganized the administrative and accounting services provided to oil and gas producers. Such is the way of the 21st century technologies. Closer to the practical realities of the day we find that many of the administrative and accounting functions are driven by standards of practice. These standards of practice are critical elements in the market supporting institutions necessary for the administrative and accounting firms to operate in the manner that was recently described here. It is the capabilities of the administrative and accounting marketplace, the skills, knowledge, experience and ideas that the Joint Operating Committees will acquire through what Professor Richard Langlois and others call Transaction Cost Economics. A good summary of the concept is provided in Professor Carliss Baldwin and Kim Clark’s paper “Where do Organizations Come From? A Network Design Perspective of the Theory of the Firm.”

...objects that are transacted must be standardized and counted to the mutual satisfaction of the parties involved. Also in a transaction, there must be valuation on both sides and a backward, compensatory transfer - consideration paid by the buyer to the seller. Each of these activities - standardizing, counting, valuing, compensating - adds a new set of tasks and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction.

However, within a system such as the Partnership Accounting module of the Preliminary Specification. The costs associated with standardizing, counting, valuing and compensating a new set of tasks and transfers into a transaction are minimal due to the advanced use of Information Technologies. These costs are incurred by both the service provider and the Joint Operating Committee and are for their mutual benefit. If the accounting service provider is posting a journal entry for this month's revenue for a number of JOC’s, then the costs for that transaction are minimal once the initial engineering of the systems are complete. The value comes about for the service provider in having their billings being generated for these transactions processed in an automated fashion during the month.

The user and Producer need to deploy knowledgeable in their own domains, but each needs only a little knowledge about the other's. If labor is divided between two domains and most task-relevant information hidden with each one, then only a few, relatively simple transfers of material, energy and information need to pass between the domains. p. 17

and

Placing a transaction - a shared definition, a means of counting, and a means of payment - at the completed transfer point allows the decentralized magic of the price system to go to work. p. 22

We have discussed how the People, Ideas & Objects Preliminary Specification is designed to accommodate the needs of the producers, the suppliers and vendors in the service industry, society and individuals. These administrative and accounting service providers will need special interfaces in order to process their work with the producer firms and Joint Operating Committees that employ them. For instance, if a Production Accounting service provider is providing services to all of the Joint Operating Committees at three major gas plants then they might want to have special interfaces that display the information in different formats to what any one of those individual JOC’s or producers might want to look at the information. These types of interfaces will be to support the further division of labor and specialization that is a founding principle of the way in which the service providers were organized. To expect that they will fit within the generic system configuration of what a “producer” needs would be probably incorrect. This being another reason that People, Ideas & Objects provides a dedicated “software development capability to the innovative oil and gas industry” as a necessity.

We have also discussed in the Accounting Voucher module the design of transactions. This work of determining where the point of the transaction should occur is part of that process. It is more complex and detailed then it appears and if done appropriately it can have significant process efficiencies on both the producer or JOC, and service provider sides of the transaction.

The most significant fact about this system, is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on... Frederick Hayek (1945)

Through the process of moving the industry to a “decentralized production” model as we are proposing in the Partnership Accounting module of the Preliminary Specification. We have been able to match the operational and the actual overhead costs of the Joint Operating Committee to the production and revenues of the property. Now we have achieved a dynamic whereas, conceptually, no production would occur in the industry that was not profitable. As the prices declined production would be moved off of the market as it became unprofitable. And as prices rose production would return to the market when it was again profitable. It would be at this point that the market would achieve a certain dynamic that is not present in the marketplace today. And the oil and gas producers would be able to claim that their operations were capable of providing the returns to their investors that were real.

In today’s marketplace the management's focus on cash flow is designed to deceive those that will believe they are productive. However, it is only management that believe that cash flow reflects any value. It is simply a factor of how much cash the firm has generated. Included in that cash is an invisible amount of investment needed to maintain the assets. So although cash flow can be a big number it comes with big commitments as well. Sometime those commitments can exceed the amount of cash that is generated. Yet that never stopped management from promoting their cash flow numbers.

What is needed is for the producer and Joint Operating Committee to focus on the earnings, that is the real earnings of the property. Those based on the revenues less royalties less operating and overhead expenses, after tax. When a firm focuses on those and leaves the Wall Street analysts to go play by themselves then good things can happen to the value of a property or a producer. The valuation of a property could be based on the present value of its earnings. Having a lot of production with no earnings has no value to anyone. It's an exercise in activity. Anyone can drill a well and produce oil or gas. It takes an oil man to make money. That’s the tough part of the business, making some money, despite what the Wall Street analyst might think of you.

If our focus is on the properties ability to generate a profit. And based on the shutting in of any unprofitable production, the property will only produce a profit. Therefore, how do we ensure the property always produces? By lowering the costs of the properties operations. That is the next step in the ability of this “decentralized production” model to make the Joint Operating Committee the innovative framework of the oil and gas industry. With this understanding and operation the engineers and earth scientists will be able to turn to the Knowledge & Learning module of the Preliminary Specification to determine what capabilities exist within the producer population represented in the Joint Operating Committee to see if there is any operation that they can conduct to enhance the profitability of the property. In essence each property is standing alone as its own unique cost centre. Being evaluated as its own separate business based on business values and expectations.

In recent discussions we saw that the accounting costs that are prepared for each Joint Operating Committee are the actual accounting costs incurred for that property, not an overhead allowance as it is today. By moving the accounting and administrative functions to the market, we are able to identify the exact costs to each of the Joint Operating Committees. The other implication is that neither the producer firm nor the Joint Operating Committee has to directly employ or house these accountants within their offices, only accommodate them when and where it's required. These are some of the advantages of the Partnership Accounting module of the Preliminary Specification, and modularity in general.

When we have discussed modularity it has been in the context of the eleven module Preliminary Specification. However, it could easily be that we are discussing the concept of the Joint Operating Committee. Each JOC is isolated and exclusive to all other JOC’s. As Professor Richard Langlois noted in his paper “Modularity in Technology, Organization and Society.”

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

To have the entire accounting provided by accounting service providers who are not present in either the producer firm or the Joint Operating Committee seems too great of a stretch. Dare I ask when was the last time you saw someone from accounting in an operations environment? Aren’t these people sequestered on their own floors or in other buildings for most of the time? A revenue and royalty accounting service provider operating on behalf of several dozen Joint Operating Committees and representing fifty producers would need their own office space to organize themselves in a manner that would provide for the most efficient way in which to do their job.

These accounting services are not core to the producers or Joint Operating Committees core competitive strategy. Focusing on the land and asset base, the engineering and earth science capabilities which make up the value proposition is where the time and energy should be expended. Accountants can complete their work through meetings, emails and telephone calls no matter where they are located. The producers objective is to have these accounting overhead items match the revenues within a Joint Operating Committee when the production is shut-in. The decentralized production model will ensure that the operational and overhead costs are reduced during times of shut-in production.

In order to achieve the specialization and division of labor that will provide the efficiencies in their accounting services. The accounting service providers will need to organize themselves in a manner that provides the best service to their customers. These configurations will in no way represent the way the work is done today. In addition People, Ideas & Objects and the user community are designing systems to be as highly automated as possible. That’s not to suggest the role of the accountant is diminished in this environment. Their role will be more high level value added work, not transaction oriented. And they will have the support of the People, Ideas & Objects software development capabilities available to develop new and innovative systems interfaces. Enabling them to innovate and evolve their services to the producers.

We’ve uprooted the accountants from their homes within the comfortable hierarchy. And expected them to develop their own businesses with their own self sustaining revenue streams. In the movement of the administrative functions from the firm to the market there will be the generation of what Professor Richard Langlois in his paper in the Journal of Industrial and Corporate Change describes as “Dynamic Transaction Costs.”

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

Recall in other modules, we established an account to collect the charges for Dynamic Transaction Costs so that they can be identified and controlled. These costs will be incurred in the beginning stages of the transition from the firm to the market configuration.

"F.A. Hayek (1945, p. 523) once wrote that 'economic problems arise always and only in consequence of change.' My argument is the flip-side: as change diminishes, economic problems recede. Specifically, as learning takes place within a stable environment, transaction costs diminish. As Carl Dahlman (1979) points out, all transaction costs are at base information costs. And, with time and learning, contracting parties gain information about one another's behavior. More importantly, the transacting parties will with time develop or hit upon institutional arrangements that mitigate the sources of transaction costs." p. 104

What I would imagine will happen will be the accounting staff of an oil and gas firm will be cast adrift to find its own footing. Based on unique specializations and Service Level Agreements they will be free to organize and approach other producers for similar services and attempt to discern where their specializations exists. Sounds pretty dramatic but should this not have happened a long time ago?

It will be during this time when the Dynamic Transaction Costs are high. It will need to be determined within the Service Level Agreement how these costs are recovered. And as time passes and the work that is undertaken by the various accounting service providers that provide services to the producer fall into a routine, then we will know the transition to the market is complete. Professor Langlois notes.

‘Routines,' write Nelson and Winter (1982, p. 124), 'are the skills of an organization.' p. 106

and

Such tacit knowledge is fundamentally empirical: it is gained through imitation and repetition not through conscious analysis or explicit instruction. This certainly does not mean that humans are incapable of innovation; but it does mean that there are limits to what conscious attention can accomplish. It is only because much of life is a matter of tacit knowledge and unconscious rules that conscious attention can produce as much as it does. p. 106

and

In a metaphoric sense, at least, the capabilities or the organization are more than the sum (whatever that means) of the 'skill' of the firm's physical capital, there is also the matter of organization. How the firm is organized - how the routines of the humans and machines are linked together - is also part of a firm's capabilities. Indeed, 'skills, organization, and technology are intimately intertwined in a functioning routine, and it is difficult to say exactly where one aspect ends and another begins' (Nelson and Winter, 1982, p. 104). p. 106

To remove ourselves from the detail of the Partnership Accounting module we find that the real value is gained by the oil and gas producer. There are three elements that are affected in very positive ways by using the decentralized production model. Having the option of removing the marginal production from the marketplace enables the producer to attain the following three attributes.

The first attribute is the ability to avoid the financial losses that occur as a result of producing the property when the commodity prices are below the properties marginal costs. The fact that today the properties marginal costs exceeds its commodity price, and the property continues production has significant downward influence on the current market prices for the commodity. In addition, losses on operations can become quite significant as a result of the large overheads that companies are required to carry to meet the demands of their organizations at full production. Therefore they are compelled to produce at full capacity to justify their high overheads. Moving to the decentralized production model will enable producers to shut-in production on any property that is not meeting its marginal costs. Under the decentralized production model of the Preliminary Specification the associated administrative and accounting overhead, and operating costs will match the revenues of the property, and the property while shut-in will neither report a profit or a loss on operations.

As a result of the property being shut-in the reserves of the property will be saved for a time when they can be produced profitably. Instead of producing the reserves at a loss, as they are today, the shutting-in of production will save those reserves for the time in which they will produce profits. Reducing the capital costs of those reserves as the operating losses that might otherwise have been incurred are not added to the capital costs of the reserves.

By shutting-in production the commodity pricing will find a floor around the marginal costs. There will no longer be dramatic declines in commodity prices as experienced in the past few years. Commodity markets will be healthier and provide appropriate returns for the risks taken by producers. Producers will have to impose a capital discipline that sees only profitable operations are carried out. Unprofitable producers should be dealt with harshly by the investment community.

These three attributes are significant in terms of the value they provide the oil and gas producer. For 2012 People, Ideas & Objects calculated that if the Partnership Accountings decentralized production model was available. The opportunity costs for the year would total $94 billion in additional revenue and profits for the North American producers. This is based on removal of 15% of the annual natural gas production volumes which leads to what is believed to be an increase in the commodities price towards the expected marginal cost of $6.70 / mmbtu.

With the high costs and prolific nature of the shale formations the need for the decentralized production model is a necessity. The oil and gas industry is currently run by a bureaucracy that has no idea how to produce the shale formations. Other than at significant losses. But they don’t care about that. They still get paid either way. They are entrenched and will fight People, Ideas & Objects Preliminary Specification with everything they have. Theirs is a comfortable and convenient life that doesn’t want to be disturbed. With so much to be gained, we can be sure that this fight will be a long one.

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 Work Order System

We discussed how the Joint Operating Committee was able to manage who was available to work for the property. The ability to pool the earth science and engineering resources from the partnership is something that is asserted as being a necessity in the future of the oil and gas industry. It should be stated here as well that the Military Command & Control Metaphor would not be limited to just the earth science and engineering disciplines, but would include everyone that is employed within the producer firms and service industry. So this would help us to deal with the who, now we need a mechanism to deal with what it is they will be doing.

The next part of the Partnership Accounting module deals with the operational side of how the field work within the Joint Operating Committee gets completed. Partnerships have always had AFE’s and operations budgets to deal with how much will be spent on an annual basis at a facility etc. And those continue in their traditional ways in the People, Ideas & Objects application. This discussion deals with how the Military Command Control & Metaphor can deploy the resources and authorize the spending of budgets in a manner that provides for the governance of the Joint Operating Committee. Simply we are talking about the collaborative Work Order System that is part of the Partnership Accounting and other modules. (Compliance & Governance, Petroleum Lease Marketplace, Resource Marketplace modules).

Deployment of the people within the Joint Operating Committee, with the budgets that are agreed to are not enough to satisfy any interpretation of adequate governance. Proper authorization and responsibility needs to be assigned to ensure that plans and budgets are executed successfully. Without a Work Order system within the People, Ideas & Objects application the governance of the property would not be possible. The ways and means of successfully controlling costs and deploying the resources in a manner to complete the tasks at hand are what the Work Order system is designed to complete.

The manner in which the Work Order system will be deployed will be as follows. If someone asks you to work on a project, your first question should be is “what’s your Work Order number.” Then you immediately start charging your time to the code. It doesn’t matter if you're an employee of the producer where the request came from, a partner in a Joint Operating Committee or a vendor or supplier. If they don’t have a Work Order number you hang up the phone. If they have a number, you key the Work Order number into your device or keyboard and continue talking. The Work Order system will aggregate and bill your time while working on that project. The details, chain of command, tasks and deliverables are all delivered within the Work Order system that was provided when you keyed the Work Order number into your computer.

Note that one of the benefits of this system is that no work gets done without a Work Order. Assigning budgets from either an AFE or from internally sourced overhead accounts will be a matter of selecting from budget accounts or from pre-approved allocations. The ability to approve a Work Order would therefore be at an appropriate level within the chain of command of the Joint Operating Committee designated through the Military Command & Control Metaphor (involving multiple producers). If a Work Order were to exceed its budget it is reasonable to assume that it was exceeding its AFE or account budget(s if it involved multiple producers) as well, which could trigger action from the Compliance & Governance module of the People, Ideas & Objects application, if that is what management desired or deemed necessary and established in that module.

Let's be clear, what People, Ideas & Objects are proposing in the Preliminary Specifications Partnership Accounting module is nothing like any other joint venture accounting system. When we begin to account for the Joint Operating Committee as the key organizational construct. Align all of the frameworks of the producer and the Joint Operating Committee together. And then unleash the innovativeness in both the producer and the Joint Operating Committee, the accounting and systems used by the producer becomes an enabling capability.

Some of the processes that we have described in the Preliminary Specification have been comprehensive and involve multiple organizations, over multiple accounting periods. Whether that’s the development of capabilities that begins in the Research & Capabilities module, touches on the Resource Marketplace and Financial Marketplace modules, and passes through to the Knowledge & Learning module. Some of these processes carry transactions that are as complex and as difficult to quantify as the process. Some will be for the joint account, some will be for the producer to incur on their own and as we learned in the Financial Marketplace module some transactions might be as a result of an investment being made by an investment group.

Discussing the Work Order system that will be able to control the costs associated with a project. The projects contained within a Work Order might be funded by an AFE or a budgeted account, and as a result will be able to control the costs of the project, monitor them and maintain a governance through the use of the Military Command & Control Metaphor of the People, Ideas & Objects system. The Work Order system will be able to designate the ability to charge out the costs to the appropriate owners of the projects at the initialization of the Work Order. Since the Work Order is a multi-organizational system, that is members of a Joint Operating Committee or members of the field services industries will be able to participate in a Work Order, which means they will then have the ability to pre-approve and participate in the project. The accountant working within the Partnership Accounting module won’t therefore be running around trying to seek approval from partners to approve the expenditures to projects that didn’t get approved properly. If everyone within the industry only works to a chargeable Work Order, and all Work Orders are pre approved by those who will be financially responsible for the charges, then the accountants job in chasing their tail is over.

The point of the Work Order system is hopefully not lost on others in the industry. Some may feel that the Work Order duplicates the attributes of the AFE, and I would argue that they are fundamentally different. The AFE approves spending for field level and construction projects of a capital nature. The Work Order system is a means to deploy the capabilities of the producer or JOC in an authorized manner. When we are able to extend the Work Order system across multiple producers, JOC’s and suppliers, the ability to deploy the capabilities of multiple organizations will facilitate the innovativeness that we are seeking in the oil and gas industry. The Work Order may take budget dollars from multiple AFE’s and assign them to a team of engineers that are asked to develop the process necessary to make their firm more capable. Or, departmental budget dollars from two producers may be contributed to a Work Order for their Geologists to attend a conference and conduct research on some promising development. The simple point being that no one does any work without a Work Order to charge their time to, and no Work Order can collect charges that hasn’t had their budget pre-approved.

This will make the Partnership Accounting module workable from the point of view of controlling the costs of the multitude of different arrangements being made within the organization. If the accountants are tasked with trying to put together the costs and determine who is to be charged after the fact, it's generally too late to fix in a cost effective manner. By imposing the Work Order system in this fashion, within the Partnership Accounting module, the arrangements are pre-made and the authorizations are required before the charges can be incurred. Making the accounting for the deployment of capabilities systematic as opposed to problematic.

We are discussing  the role that the Work Order system would have in clearing up the administrative minutiae of the accounting related issues of the Partnership Accounting module in the Preliminary Specification. I want to continue on with that discussion and ask what that has to do with innovation? Lets look at the Work Order system from the perspective of a successful producer who is active in the marketplace and has developed an earth science and engineering capability that scores well in terms of Revenue Per Employee. The CEO is approached by one of the engineers who hears of several other producers who are conducting a study on something of interest to your firm. They are looking for other participants to join in and you want the engineer that brought the news to participate in the project. Assuming everyone of the producers was using the Work Order system they would be able to pool the resources they have within the Work Order that was setup to manage the project. You were able to commit to a 10% share of x costs and would offset those costs with your engineers time and use of office space and some computer resources. (Note all costs are pre-approved and budgeted from other accounts.) With the Work Order you were able to make these commitments subject to the other 90% being committed to, and then your approval would be automatic.

We have here the means of which the people who are working within the industry to commit to programs and projects in a manner that is natural to their business. This is the way that the systems should be working today. What we have is an impediment to the operator in the industry who feels that participation in the study with the other producers would be worthwhile, however, the accounting and approval nightmare will haunt him for the next three quarters and subject him to such regulatory oversight as to question his moral integrity. So instead the project doesn’t get proposed, funded, participated in or done.

In Professor Dosi’s paper “The Sources, Procedures and Microeconomic Effects of Innovation” he discusses the role that such administrative minutiae have on innovation.

The discussion will aim to identify (a) the main characteristics of the innovative process, (b) the factors that are conducive to or hinder the development of new processes of production and new products, and (c) the processes that determine the selection of particular innovations and their effects on industrial structures. 

In our example the financial resources are there. The motivation exists within the organization to do a spectacular job on the project. What happens is the bureaucracy gets in the way and slows things down and makes it a task that requires superhuman effort to even try. And maybe one or two projects will get done each year on the basis of sheer will. But what is needed is the ability to conduct a volume of projects that is far in excess of one or two, and that is beyond the scope of the organizational context as the producers are organized today. Without the ERP systems to define and support these innovative processes, these processes will not spontaneously appear.

The emphasis is once again on the ability of these producers to innovate. The collaborations and interactions between producers and participants in the industry will be the source of many of the innovations that occur in the future. The impediment to doing these are as a result of the bureaucracy and the current suite of accounting systems in use in the oil and gas industry is what I want to draw a contrast to in this scenario using the Work Order. Its time in this day and age that the systems become as complex and as sophisticated as what is being described here so that the innovation in the earth science and engineering disciplines can occur. Professor Giovanni Dosi expands on this point further in the following quotation.

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

Within the project that the producers want to participate in. Some want to contribute a variety of different resources, some have specialized capabilities that are critical to the project and others are more or less along for the ride and are willing to participate by paying cash. Some have an AFE that has been approved that can direct the funds to pay for their participation. Some will incur the costs as part of their annual payroll budget for engineering. Still others have a working interest partner that are willing to share the costs over a number of Joint Operating Committees. The combinations and permutations of how a Work Order gets financed and funded are unlimited when we consider the number of different ways producers can participate.

Now to have a Work Order system that takes the information from these various parties and assimilates the understanding of the deal from the five or six people who have the “meeting of the minds” to initiate this project is the critical point in which to start. Each needs to codify their understanding of how their participation of the costs are funded and costed to their People, Ideas & Objects Partnership Accounting modules Work Order. All of the participants are using the one Work Order that is shared across all of the producers. This agreements understanding needs to be captured within the Work Order system prior to its approval by all of the producers. Much like an Accounting Voucher the costs need to be coded, but also the sources of the funds need to be identified. This way the system can process the charge within the firm in the manner that it was expected to be. For any charges that are above the threshold that a firm was willing to commit to, that imputes that another firm's cash commitment would be provided to cover those costs. The Work Order should make these cash transactions between these producers as a result of the approval of the document. The point of the exercise is that once the Work Order is approved, the understanding of the deal, as captured by the interface, is executed.

As I indicated the ability for an accountant to follow on with the necessary accounting for these transaction requires significant recreation of the “deal” and time of the parties who conceived of the deal in the first place. A bureaucratic waste of time. The interface of the Work Order should be sophisticated enough to be able to capture the substance of the deal in whatever permutation and combination that is conceived of by the originators. I understand the myriad ways that these can be done and the difficulty in making an interface that captures these. That I don’t think is the difficult part. What I think would be the difficult part would be to make an interface that provides these services in a manner that is simple and easy to use, and captures the deals substance. I, however, know it can be done, and the reason it hasn’t been done is that the budget for software developments like these have not been set out. Its at times like these that people should revisit our revenue model and rethink People, Ideas & Objects approach based on our projected budget.

Continuing on with the scenario of using the Work Order system across multiple producers. I will use this scenario to show how the Partnership Accounting modules integrated nature with the other modules of the Preliminary Specification provides value to these ad-hoc working groups. Also why they are such an important element of innovation in oil and gas.

We used the scenario in the context of engineering, however it could just as easily be used in the area of geology or any other area of oil and gas interest. It could also include the supplier or vendor marketplace to form a working group in that area. The importance of the way the Work Order works is that the producer or participant is able to designate how they are going to participate in the working group. Prior to their approval they are to allocate the source of the funds and where the costs will ultimately go as a result of their participation. This being conducted by each participant or producer in the working group, all within the same interface for the same Work Order in the People, Ideas & Objects Partnership Accounting module.

One of the most obvious areas that this interface will interact with the other modules is the Security & Access Control module. Access to the Work Order will need to be unlimited for a certain point in time and then need to be closed to everyone but the existing members of the working group. This will need to be an interesting point in time when the search for participants reaches a threshold and the people feel the substance for a working group exists. Then only those who are within the working group, or are subsequently granted direct access are able to participate directly in the working group.

With the Security & Access Control module we also inherit the Military Command & Control Metaphor that allows the people to impose a chain of command across the working group. This might be something that they want to do if they have a difficult task or a large group of people. The opportunity to do so is available to them if they so desire as this is part of the Security & Access Control modules core functionality.

The designation of the source of the funds and where the costs will go is coded directly to those accounts. This has the Work Order taking on elements of the Accounting Voucher module in terms of how it operates. Each producers accounting system will be charged, upon approval of the Work Order, according to the way in which they have coded the Work Order. Therefore in that instance it will take on many of the attributes of the Accounting Voucher module.

I see these working groups, as we have called them here, as an important element of how an innovative oil and gas industry identifies and solve the problems that it faces. 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.”

It is therefore asked specifically, how can the knowledge, information and capability of oil and gas firms solve the technical and scientific problems of the future? How can a firm more effectively employ its capability to solve problems and facilitate the discovery of new problems and creation of their solutions? Clearly some companies are more effective at this process than others, but this research in oil and gas asks, is there a means for an organization to provide a quantum increase in its ability to innovate that leads to higher trajectories of performance based on production revenue per employee?

Having these working groups spawn at will without the bureaucratic and accounting logistical nightmare that they instill today will be an important first step in making the industry more innovative.

The complexity of the relationships within the Joint Operating Committees has to be captured and accounted for in the Partnership Accounting module of the Preliminary Specification. Whether we are talking about the various forms of contribution that a producer may make to the joint account, or how they may participate in a working group, the bureaucratic machinations of the accounting for these transactions can’t stand in the way of innovativeness of the producers.

The freedom to participate is inhibited by the fact that the business arrangements are difficult to capture and account for. What is needed is the ability to develop software that captures the substance of the manner in which the contributions are being made, and then the manner in which they are accounted for. That is the purpose of the Partnership Accounting module, to support the innovative oil and gas producer in the innovative actions they need to participate in. Once again Professor Giovanni Dosi points out specifically the need for the business aspects to support the technical aspects of the business.

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

Capturing the context of the deals made in both the Joint Operating Committee and working groups as described here in the Preliminary Specification can’t be done on an historical basis. What is needed is for the software to be sophisticated enough for the dealmakers to be using it while formulating the deal, to capture the substance of the deal, so that it will be used to allocate the costs and charge their accounting systems for these costs when they are incurred. Then and only then will the accountants have a chance of keeping up with the speed and innovativeness of the industry as it is contemplated here.

This is the necessary part of the People, Ideas & Objects software development team and most importantly, the user community. It won't be too difficult to capture the multiple and myriad ways in which a deal can be formulated. The algorithm will be complex but with time and money it can certainly be done. The real difficult aspect of making this critical part of the Partnership Accounting module work is the user interface. Having the ability of the user to intuitively use the module to capture their understanding of their part of the deal, capture it in the People, Ideas & Objects system and account for it on that basis. That is what is necessary to make this innovation possible.

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 Beginning of Automation and the Material Balance Report

The best way to describe the similarities and differences between Partnership Accounting and the Accounting Voucher is to pick up the discussion of the Material Balance Report. (This discussion assumes that you have read the Material Balance Report material in the Accounting Voucher module.) When we last discussed the report in the Accounting Voucher we noted that the voucher needed to balance the debits and credits as well as volumetrically for material, system and partnership balance. Note that these are all the monthly variables that have to do with either financial transactions or production volumes for the current month. Therefore these monthly variables would be processed through the Accounting Voucher module of the Preliminary Specification.

We also discussed a “template” that contained information that was used to process the monthly variables. The wells that production was from. The contracts production was sold to, and the functional units that process fees may have been charged on, etc. These 100% share constants are part of what are contained within the Petroleum Lease Marketplace module and represent the whole contracts. They are pulled from the Petroleum Lease Marketplace module to populate the “template” that reside semi-permanently in the Accounting Voucher.

Now the Accounting Voucher, in the instance of the Material Balance Report, is a Joint Operating Committee voucher. Therefore the clearing of the accounts will be to each of the producers and they will each have access to the Accounting Voucher. The Partnership Accounting working interest share constants, which is similar in its makeup to the “template” in the Accounting Voucher, are a check and a balance for the Accounting Voucher calculations and each individual producers share to ensure that their interests are being calculated correctly in the Accounting Voucher. Since they are based on their understanding of the agreements as represented in the Petroleum Lease Marketplace module, there should be no variances. However this is oil and gas, if there was a variance then the producer would be notified before the voucher could be closed.

I think that to have a variety of systems checks and balances on the calculations are a necessary part of the Partnership Accounting module. In the hands of the People, Ideas & Objects software development team, and user community I think this area of the module could become quite sophisticated, and as opposed to just tripping up the closing of the Accounting Voucher, be quite helpful in determining a number of production data related difficulties to focus on. Once these production data related difficulties have been resolved that data could then be subjected to the various reporting processes that use that data.

It is at this point in the production process that each producer within the Joint Operating Committee will have factual, subject to the usual amendment process, volumetric information. It is with this factual information that we can begin the follow on processes that are based on the volumetric information that is provided. If there is an amendment that is processed we can assume that it will also be of the same factual quality and be able to process it in the same automated fashion. Once we have been able to settle the volumetric information into a quality that is impeachable in the ERP system then the rest of the system can be automated based on those volumes. This being the beginning of automation of the many of the processes that are dependent on volumetric data in the innovative and profitable oil and gas 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.

Pooling of Technical Resources

The first Partnership Accounting issue addressed in this module is related to the fact that the earth science and engineering resources that are of such value in the industry are of a finite number. It is asserted here in People, Ideas & Objects that the “operator” classification may become a thing of the past as firms will find it difficult to staff the engineering and earth science capabilities necessary to meet all of the needs of their firm. People, Ideas & Objects enables producers in a Joint Operating Committee to pool their earth science and engineering resources to ensure they have the required technical needs. The pooling won't be a convenience or nice to have at the Joint Operating Committee. It will be a necessity for the partners within a property to ensure that adequate staffing of the technical resources are secured. That it will become commonplace that each of the partners will be contributing technical resources to the property.

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.

Within the Preliminary Specification the Military Command & Control Metaphor (MCCM) provides a means in which the resources within the producer companies represented within the Joint Operating Committee, can organize a chain of command through these pooled resources to deal with the governance of the property. This governance along with the ability to cost these resources enables producers to allocate the finite earth science and engineering resources more efficiently. This assumes that during the building of the Preliminary Specification, that the user community is able to determine a somewhat standard chain of command for all members of the industry, standard rates for the people in the industry, and detailed job descriptions for the work that each role within that chain of command are responsible for. Please also see the Research & Capabilities and Knowledge & Learning modules for the development and deployment of the firm and Joint Operating Committees capabilities.

Today the bureaucracy builds silo’s of engineering and earth science capabilities that are capable of dealing with any and all contingencies that the firm may face. This is a reasonable approach to a difficult business, with the inherent risk profile that oil and gas has, safety is a priority which can be handled in this manner. The problem arises as a result of each and every producer replicating the same capabilities within their organizations. As a result the industry has developed unused capacity that is unavailable for use at any time and at any place in the industry. At a time when the engineering and earth science talent is at a premium in terms of the demand for these resources. Accessing this unused capacity, reorganizing the manner in which the resources are used, and using specialization and the division of labor are the ways that People, Ideas & Objects Preliminary Specification have used to solve this problem.

To approach the mountains of earth science and engineering work that needs to be done will require a new approach based on the tried and true division of labor and specialization principles. By breaking down the jobs into smaller more specialized components the process can be managed in a way that is faster and more efficient. The productivity of this process would be an order of magnitude more efficient than what is done today. This process would be managed through the Partnership Accounting module with the Military Command & Control Metaphor to maintain the chain of command and authority from the producer firms. What may have taken 6 engineers and geologists on a full time basis may now be done by 35 specialized engineers and geologists. These engineers and geologists may be assigned to over 100 properties or Joint Operating Committees. Management of the process, as one can see, is the key to productivity. The point of the exercise would be to get the bread and butter engineering and earth science work completed.

And there is another issue. If we are using the division of labor as the solution to the limited technical resources of today. Without the pooling or specialization that is provided in the Partnership Accounting module. The enhanced productivity from the division of labor being the objective of the exercise would require that each producer would need to hoard even more earth science and engineering resources in order to cover the entire scope of earth science and engineering effort. Making the manner in which oil and gas producers are organized today archaic, obsolete and highly unprofitable. This point is an important consideration in any solution to this problem.

If we were able to pool the technical resources from each of the producers who represent the Joint Operating Committee. Then we begin to break down the individual silos and the hoarding of the technical resources issue. One of the key advantages of using the Joint Operating Committee is that all of the partners are financially motivated. Consensus is easily achieved because of this and that will continue.

Now I know the difference between a good engineer and a super star. The perception that “our” capabilities are better than “theirs” type of comparisons. The problem will however come down to, in the hoarding situation, no one is left to do the bread and butter engineering that should have been done two weeks ago. Life is one percent inspiration, ninety nine percent perspiration. The bread and butter issues are what need to be taken care of. How the majority of the bread and butter work gets done is the focus here.

The solution to where the enhanced engineering and geological throughput comes from is where the division of labor and specialization comes into play. But first let me reiterate that in this day and age, to manage a process, or to change a process requires that the software to manage that process be built first. People, Ideas & Objects Preliminary Specification builds these processes for industry so that these changes can be made.

We discussed the manner in which the division of labor and specialization could increase the throughput of the engineering and geological capabilities of the oil and gas industry. How the mountains of this type of work could be approached by pooling the technical resources of the producers represented in the Joint Operating Committee. We now want to talk about how the cost of those resources would be recognized and recovered in the Partnership Accounting module of the Preliminary Specification. What this discussion is also about is the multitude of equalization's that need to be taken into consideration each month for each producer in order to calculate their working interest share of the property. And how the Joint Operating Committee authorizes these funding requirements.

We need to deal with who is going to charge for work done at a Joint Operating Committee and why? For that we need to revisit the Work-Order system that is part of the People, Ideas & Objects application modules. Recall that eligible charges to the Work-Order system are based on the AFE, lease of the partnership or overhead accounts of the producer and are therefore a pre-approved means of controlling the costs. Without a valid work-order no one can be charging any work to an AFE, lease or overhead account. And with a work order, only the work that is authorized through an AFE, lease or overhead account will be completed.

For the purposes of this discussion, we have an example that assumes your firm has contributed two engineers and two geologists to a property that is producing a positive cash flow in the current month. The part-time costs associated with the authorized work was part of an AFE approved by the partnership, and the work order was prepared by one of the producer firms. The hourly costs of these employees is captured in the work order and calculated based on standard costs. These standard costs are then charged to the Joint Operating Committee as represented in the Partnership Accounting module with an appropriate revenue offset for your firm for providing the engineers and geologists. For the purposes of accounting lets suggest we process this accounting entry. The reason for the $900 is the standard costs vs. the actual costs of $1,000.

Dr.      Salaries             325.00
Dr. Accounts Rec    675.00
  Cr. Payroll                1,000.00 

Dr.      Joint Account    900.00
  Cr.   Revenue Offset           900.00

Now when the clearing of the accounts at month end occurs there is also an equalization so that any contribution that any producer made to the Joint Operating Committee can be taken into consideration. These can take the form of whatever is agreed to by the partners and this example assumes that technical resources have been agreed to. The case that we are assuming here is going to distribute the $900.00 in engineering costs to the partners. If you had a 25% working interest share then you would therefore be responsible for and charged $225.00 of these costs. And the Revenue Offset would be processed at 100% or $900.00 as a revenue item. Therefore the net proceeds in the joint account of this transaction would be revenue of $675.00.

Now this example was a cash flow positive scenario and the question needs to be asked what happens when the Joint Operating Committee is in the very familiar situation where it doesn’t have any revenue. This situation remains the same. The net $675.00 in the above example is derived through the payment of the costs by the other partners and that remains the same. This producer would still show a Revenue Offset of $900.00 on their Statement of Expenditures and the net balance would, since it has no revenue, be for a cost, not an income.

How these equalization’s are handled is proposed to be automated through the Work Order system of the People, Ideas & Objects application modules. Capturing the time of the individuals as they worked on the specific approved project would generate the above accounting entries. Then the clearing of the accounts would account for any subsequent equalization’s at month's end.

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 Partnership Accounting Module

The Partnership Accounting module is a pure “accounting” module from the traditional sense, however, I think there are many attributes and concepts in this module that make it unique and of interest to everyone in the industry.

So for the accountant in all of us, why don’t we start off with the statutory list of required functionality and output. And then get into some of the new concepts and differences that are as a result of using the Joint Operating Committee as the key organizational construct of the innovative and profitable oil and gas producer. So here we go, great stuff!

• General Ledger
• Account Payable and Receivable Detail
• Payments
• Revenues and Royalties (Gross & Net)
• Capital and Operating (Gross & Net)
• Statement of Operations
• Statement of Expenditures 
• Gas Cost Allowance (Unique to each participant in a JOC)
• Trial Balance
• Balance Sheet
• Income Statement
• Statement of changes in financial position.
• Field data capture.
• Material balance c/w inventory control. 
• Nomination and contract fulfillment.
• And many, many more

This is standard fare for any software provider in oil and gas. And the user community will fill this list with much more. As we will see in subsequent discussions the difference in the People, Ideas & Objects software application is substantial in that the Joint Operating Committee is treated as the partnership that it is. It also recognizes that the costs of the property for each of the producers within a Joint Operating Committee are as unique as the strategies that are employed.

When we talk about the scope of operations that would be managed under the Partnership Accounting module I would say that it includes just everything. Simply the cut-off would be the inlet to any refinery. Therefore the total scope of any upstream oil and gas operation. Let me be more specific about that from the point of view of geography and type of operation managed by the People, Ideas & Objects application.

If we look at the North American oil and gas infrastructure we see a variety of oil and gas installations designed to serve both producers and consumers of oil and gas. Wells, gathering systems, gas plants, pipelines, storage facilities etc. At each point along these systems there may be additional deliveries of product, or sales of product or products inventoried. What seems to be an obvious and simple business becomes incredibly complex when it's realized that each asset may be owned by a Joint Operating Committee itself and hold product on behalf of owners of other Joint Operating Committees. This summary glosses over the incredible complexity of this business when the volume of transactions that occur in these businesses make it an important part of the oil and gas operation.

Critical to controlling the business is the Material Balance Report that is part of the Preliminary Specification. It is the central document that so much of the subsequent process activity is based upon. If someone is to be charged for storage of butane for example, or if someone is to be charged a marketing fee for delivery of product to a customer. Or simply if a sale of a raw gas stream is deemed to have occurred at the wellhead. The Material Balance Report captures these transactions and initiates the flow of documents that need to be generated. It is these documents that also need to be captured and generated in the People, Ideas & Objects Preliminary Specification. To state this as simply as possible is that the scope of the Partnership Accounting module captures all of these activities for all of these facilities as its purpose. Each Material Balance Report must balance. And each reports inputs and outputs balance to other Material Balance Reports. Many of these Material Balance Reports are also from one company to another.

As we explore the Partnership Accounting module further we see the reasons why we are taking such a broad scope of operations into considerations. It would be an understatement to state that this area has been poorly served by IT. To approach it from a global perspective that includes production operations, accounting and the other areas that depend on this information would be “ideal,” however, the complexity of the business has always been in the way. The engineering of software has never been available to approach the type of problem that this area presents. I think it exists now. And I think that the Partnership Accounting and Accounting Voucher modules of People, Ideas & Objects provides the vision and opportunity of how this engineering solution solves this problem.

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. 

More on the Decentralized Production Model

I want to take a quick break between the Financial Marketplace and Partnership Accounting modules to discuss the situation in the natural gas marketplace. What surprises me is there is a complete capitulation by the bureaucracy regarding the short and medium term regarding the gas side of the oil and gas business. They have completely given up on doing anything about the situation and are allowing themselves to be the victims of whatever the market prices provide. The fact that no one is making any money at these prices, around $3.60 for Henry Hub, doesn’t seem to come into the picture. The situation in Canada is even more dire. There they are receiving only $1.66 and yet no one is looking at this as a problem. Its as if the shale gas reserves were intended to be produced at a loss.

I continue to be persona non grata in oil and gas. My solution, the Preliminary Specification, requires the bureaucracy to give up its ways, to retire itself and wander off into the distance. They certainly appear to be winning the race. However with the losses that are being incurred in the current environment. With the reality of the shale gas reserves existence. This situation is unlikely to improve without some action. Action is the second attribute that the bureaucracy are anathema to. They certainly are not willing to put the effort into building new systems for the industry. Why work is their attitude.

The fact of the matter is that for 2012 the opportunity costs of using the Preliminary Specification and its decentralized production model would have provided $94 billion in additional revenues and profits for the industry. It would appear that for 2013, considering the Canadian production is attracting such low prices, the opportunity costs will be as high as they were in 2012.

The decentralized production model solves the natural gas pricing problem by enabling the producers to remove the marginal production from the marketplace. The decentralized production model has been defined by Professor Richard Langlois as.

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p.58

Within the Preliminary Specification we change the fixed administrative and accounting costs of the producer to the variable administrative and accounting costs of the Joint Operating Committee. We do this by changing from a reliance on the producers administrative and accounting capabilities to a reliance on the industries administrative and accounting capabilities. How we do this is by reducing the prototypical producer firm to the C class executives, earth science and engineering resources, land, legal and some support staff. This enables the producer to focus on their key competitive advantages of their land and asset base and their earth science and engineering capabilities.

The remainder of the resources are reorganized into service providers who are focused on the process and use the industry as their client base. This enables them to use specialization and the division of labor to enhance their service based offering and to control their costs. Enabling for the first time in the oil and gas industry the ability to control its administrative and accounting costs. Charges for the service providers services are charged directly to the Joint Operating Committee.

When the property is shut-in in the Petroleum Lease Marketplaces Marginal Production Threshold Interface. The activity for that property ceases and as a result the activity that generates the demand for the services at the service providers during the month of production also ceases. Therefore the billings for the administrative and accounting services from the service providers ceases to be billed to the Joint Operating Committees that are shut-in for the month.

This provides the ability of the producer to report no loss on operations as there are no operating or overhead costs, and no profits either. However, the reserves are held for a time when the prices are able to provide for profitable operations. And the natural gas marketplace finds a floor for prices around the marginal costs of the commodity.

The 2012 opportunity costs were calculated on the basis of removing 15% of the annual production from the marketplace and as a result, the prices were able to reach what are reputed to be the natural gas marginal costs of $6.70 mmbtu.

This is the solution to the profitability of the shale gas reserves. It is more than that. People, Ideas & Objects provide the most profitable means of oil and gas operations. You can leave the business in the hands of the bureaucracy. They don't care and they have no plans whatsoever. I am only too happy to be the one providing the choice.

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 Financial Marketplace Module

I have been critical of the bureaucracy of the oil and gas producers. They have resisted the changes proposed in the Preliminary Specification and have governed as if all is well. It needs to be asked if the oil and gas industry is the same industry when it receives $100.00 for its products when only a few years ago it received $25.00? I’m not of the opinion that it is the same. There has been a fundamental change from a low cost easy energy era, to an era that will see the rise of the innovation focused dynamic producer. The type of producer that operates in these two domains is fundamentally different. The Preliminary Specification is designed for the innovative producer. To make the transition from the easy energy era to the era of the innovation focused dynamic producer will require that we build the Preliminary Specification first. The Financial Marketplace module is a critical aspect of the Preliminary Specification. By aligning the financial framework of the industry with the legal, operational decision making, cultural, communication, innovation, strategic, compliance and governance frameworks we will achieve the speed, accountability, innovativeness and profitability we desire. In his book “The Dynamics of Industrial Capitalism,” Professor Langlois notes.

As soon as we go into details and inquire into the individual items in which progress was most conspicuous, the trail leads not to the doors of those firms that work under conditions of comparatively free competition but precisely to the doors of the large concerns – which, as in the case of agricultural machinery, also account for much of the progress in the competitive sector – and a shocking suspicion dawns upon us that big business may have had more to do with creating [the modern] standard of life than with keeping it down. (Schumpeter 1950 [1976, p. 82].) p. 2

My two criticisms are that the velocity at which the bureaucracy operates at is too slow, and the innovativeness is non-existent. In the financial marketplace the pace of activity will need to accelerate and mirror the changes in the producers. I think we have addressed these with the changes we have documented here in the Preliminary Specification.

Schumpeter’s account of progressive rationalization takes the form of a contrast between two modes of economic organization, modes roughly cognate to the difference between the small owner-managed firm and the large multi-unit enterprise. Characteristically, however, the issue in Schumpeter is a dynamic one: he is concerned with the respective merits of these two modes of organization not in the static allocation of existing resources but in generation of economic change and growth. The paradox of Schumpeter is that he famously defended, and has come to be associated with, both of these modes as drivers of economic growth. Schumpeter has returned to prominence today as champion of the role of bold entrepreneurs in creating new combinations and redirecting the means of production into new channels, to such an extent that he is revered as an inspiration to the present-day field of entrepreneurship studies (Shane and Venkataraman, 2000). In this (Schumpeterian) literature, the force behind economic growth comes from individuals or small groups of individuals who work mostly outside the established structure of organization rather than from within it. pp. 17 - 18

Big, small, lean or bloated with the bureaucracy it doesn't matter what configuration the producer firm is in. The future requires that we are able to provide for the markets demands for energy. The financial crisis is providing relief in terms of overall global economic growth and therefore reduced demand for energy. Eventually the increase in the demand for energy will resume and that is not something that we can currently contemplate. What we have proven here in the Financial Marketplace module is that the innovative and profitable oil and gas producer will demand more efficient capital structures. Those structures lead to the overall performance of the producer and the Joint Operating Committees they participate in. We need to get our head around this energy demand situation and start to deal with a solution. Muddling through just seems to be too much of a risk.

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.