McKinsey, the 21st Century Organization

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

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

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

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

In addition, the producer will have the decentralized production model to rely on to ensure that “line managers will make good on company’s earnings targets.” The Preliminary Specifications decentralized production model ensures that the marginal production is shut-in so that those reserves can be saved for a time when commodity prices are higher and the reserves can be produced at a profit. So that the commodity markets are not flooded with marginal production that causes the collapse in prices we have seen time after time. And that no producer will produce a property that is marginal. This operational discipline will need to be adopted by the industry and strictly enforced. The decentralized production model is a feature of the Preliminary Specification and is contained within the Resource Marketplace module.

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

McKinsey notes;

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

It is through an iterative and collaborative approach to dealing with the various Joint Operating Committees that the users of the Research & Capabilities module is able to extract the value in the long term. By passing on new innovations or the results of experiments for the Joint Operating Committee to implement. The ability to influence any and all variables and to see any aspect of the firm and to analyze it is the domain of this application module.

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

What is the firm capable of and how can that capability be enhanced? The traditional steps of the producer was to build the in-house capability. The assumption that is used in People, Ideas & Objects is that due to the resource constraints, particularly in the earth science and engineering disciplines, these do not permit the luxury of each producer building the full scope of these capabilities in house. The need to collaborate with partners to build the global scope of the Joint Operating Committees capabilities is how these needs will be met. Therefore a specialization in the earth science and engineering capabilities will be the result of the division of labor between the partnership represented in the Joint Operating Committee.

But we are talking about more than just the capabilities that each Joint Operating Committee demands when we are talking about the capabilities of the producer firm and the use of the Research & Capabilities module. McKinsey put it well in this quotation.

Ongoing multi-year tasks such as launching new products, building new businesses, or fundamentally redesigning a company's technology platform usually call for small groups of full-time, focused professionals with the freedom "to wander the woods," discovering new, winning value propositions by trial and error and deductive tinkering.

We have detailed that the focus of the producer firm is on its asset base and its earth science and engineering capabilities. This area of focus of the Research & Capabilities module is therefore a key focus of the producer organization. We are not talking about the people that will be deployed in the day to day of the various Joint Operating Committees. These are the core scientists of the firm.

We discovered something very interesting in our research. When we deploy teams of people in a fashion like we are with People, Ideas & Objects use of the Joint Operating Committee. The earth science and engineering capabilities of each Joint Operating Committee will atrophy. They need to be fed a constant stream of new and innovative ideas and possibilities to remain “current” with the science. This of course has to be steered by the mother ship so as to not duplicate errors or replicate blind bunny trails unnecessarily in each and every Joint Operating Committee.

Now it may seem that I have contradicted myself by stating that the firm needs to develop the capabilities necessary “in-house.” But I didn't mean that they would be developed “in-house.” The Research & Capabilities module should be considered to be from an industry perspective. That although each firm will have specific people defined to support each firms needed capabilities, the service industry will take on a greater role in providing much of the innovative capabilities that are developed through the mindset employed by the producer firms.

We’ve talked about the role the producer would have in determining the long term horizon of the firm. How the Research & Capabilities module would provide a window on the various Joint Operating Committees to provide the ability to apply systemic earth science and engineering innovations at each JOC without the risks of unnecessary duplications or repeated following of blind bunny trails. I now want to discuss the risks and rewards of the leakage of earth science and engineering information from the firm through the Research & Capabilities module. As it would be apparent that the level of discussion and collaboration through the partnerships in the Joint Operating Committees, through the industry itself and the service industry in particular would lead to significant leakage of the producers proprietary earth science and engineering knowledge, understanding and capabilities.

In the Preliminary Research Report we learned an interesting point about the producers proprietary earth science and engineering knowledge, understanding and capabilities.

In Brown & Duguid (1998) they make the following observations: “The leakiness of knowledge out of and into organizations, however, presents an interesting contrast to internal stickiness. Knowledge often travels more easily between organizations than it does within them. For while the division of labor erects boundaries within firms, it also produces extended communities that lie across the external boundaries of the firms. Moving knowledge among groups with similar practices and overlapping membership can thus sometimes be relatively easy compared to the difficulty in moving it among heterogeneous groups within the firm. Similar practice in a common field can allow ideas to flow. Indeed, it’s often harder to stop ideas spreading then to spread them.” (p. 102) p. 32

We all know this leakage of information to be inherently true. When someone discovers something that is “news” within the industry, it is generally well known within industry associations for the geologists or engineers as soon as it is known in the firm. It is either imputed through what is known, or the leakiness is as porous as it is. What is a producer firm to do to ensure that the information they have does not leak? I think that the point lies in the meaning of “capabilities”; which is “an aptitude that can be developed” or “knowledge begets capabilities, and capabilities begets action.” Simply it is not possible to stop the leakage. The question therefore becomes, is it best to develop your aptitude by curling up with a text book or to participate in a marketplace. People, Ideas & Objects believes that innovative and profitable producers, instead of hoarding information, will deploy the right information to the right people at the right time.

According to McKinsey the solution requires...

... a company must develop organizational overlays in the form of markets and networks that help its professionals work horizontally across its whole extent. These overlays make it easier for them to exchange knowledge, to find and collaborate with other professionals, and to develop communities that create intangible assets.

These tacit interactions are what are captured in the “Research” area of the Research & Capabilities module. Interaction with the larger communities to develop the knowledge and understanding around the science of oil and gas not only expands the capabilities of the producer firm but will also expand the overall science. We learned two important points regarding innovation from Professor Giovanni Dosi in the Preliminary Research Report.

• That new science fuels new innovations, and new innovations fuel new science.
• Technical trade-offs facilitate the ability for industries to innovate on the changing technical and scientific paradigms.

People, Ideas & Objects research assumes that one technical trade-off in oil and gas is accurately reflected in the oil and gas commodity pricing. That these prices are providing the resources to fuel innovative and profitable oil and gas producers. Therefore the faster we iterate on the science and innovation, the more appropriate a producers strategy should be focused on a capabilities approach.

This realignment across the producer and Joint Operating Committee intuitively makes sense. From the Joint Operating Committee alignment of all the frameworks to having them focus on performance as the driving motivation, and the decentralized production model ensuring profitable operations. This also begins to make sense when we have the Joint Operating Committee pursuing the optimal short term horizon. Making the operational decisions based on the collaborative understanding of the partnership that makes up the Joint Operating Committee. And the producer firm undertaking the long term horizon of the firm by interacting with the Joint Operating Committee, the remainder of the industry and the service industry to build the needed earth science and engineering capabilities needed for the firm. However, as possibly the strongest and easiest evidence that I can provide that this is substantially correct is this quotation from Professor Richard Langlois.

The question then becomes: why are capabilities sometimes organized within firms, sometimes decentralized in markets, and sometimes coordinated by a myriad contractual and ownership arrangements like joint ventures, franchisees, and networks? Explicitly echoing Hayek, Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 9

To be specific, what we are doing in the Research & Capabilities module is “moving the knowledge to those with the decision rights.” And this is where the alignment under People, Ideas & Objects begins. What the bureaucracy is trying to do is to “move the decision rights to those with the knowledge.” And that is where the conflict is being created. The Joint Operating Committee has the operational decision making framework and there is little that can be done to change that. The knowledge is held within the producer firm. It is therefore necessary to create a process that sees the knowledge flow from the producer firms to the Joint Operating Committee and that is what the Research & Capabilities module does.

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 Research & Capabilities

We now move on to the Research & Capabilities module of the Preliminary Specification. This is a dual specification module in that it shares attributes with the Knowledge & Learning module. The difference is that the Research & Capabilities is a firm, or producer, facing module and the Knowledge & Learning module is a Joint Operating Committee module.

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

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

The process of using People, Ideas & Objects software will achieve all of these objectives. By aligning all of the Joint Operating Committee and the hierarchies frameworks, imposing the Military Command & Control Metaphor and having the financial interests of the producers drive the management of the Joint Operating Committee we are “narrowing the scope of the line manager’s role to the creation of current earnings.” These are the focus of the Partnership Accounting, Accounting Voucher, Petroleum Lease Marketplace, Resource Marketplace, Financial Marketplace and Performance Evaluation modules.

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

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

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

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

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

We have already had a quick review of the Performance Evaluation and Analytics & Statistics modules. Handing the Performance Evaluation module to the team that is running the Joint Operating Committee will enable them to manage the property in the best possible fashion. They are going to be able to figure out what it is that makes the most sense in terms of value, and begin to generate more of it.

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

It was in the Preliminary Research report (2004) that we learned the influence that Information Technology (IT) had on organizations. That IT defined and supported our organizations, and that it both enabled and constrained them. The need for the innovative and profitable oil and gas producer to remove these IT constraints requires the People, Ideas & Objects software development capabilities. Then, on an ongoing basis, as further constraints are identified they can be dealt with by developing new software to deal with new opportunities.

We have also discussed the current producers capacity to deal with issues are constrained by the systems that are in use today. That we see a repetitive inability, or lack of capacity to deal with the existing issues of the industry. Highlighting just the takeaway capacity and commodity pricing as the two premier issues that we seem to be reliving from the 1990’s. There is also an inability to approach new issues that industry is faced with; such as planning for the shale based reserves development and the relationship with the service industry. I have suggested that the industry seems to be in a never ending cycle in which it is unable to exit. The systems that exist today have us operating from a day to day basis and they are unable to deal with the long term perspective.

This cycle of day to day existence is hurting the industry. The ability to deal with this issue is by adopting the Preliminary Specification and acquiring the software development capability proposed by People, Ideas & Objects. Then the innovative and profitable oil and gas producer will be able to break the cycle of systems dependence and effectively plan and execute the business of the business. Until we do this, its best to become familiar with the various elements of the scenery that we are in. And that primarily involves the losses on operations in North America.

The Research & Capabilities module provides the exit from this endless cycle. How the firm breaks away from what it has done before and develop its capabilities to enhance its business in the long term is detailed here. There are a number of things we do in this module that make that happen here in the Research & Capabilities module.

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 Accounting Voucher

One of the basic assumptions of the People, Ideas & Objects Preliminary Specification is the pooling concept that is used to replace the “operator” designation in use today. Therefore many of the participants in the Joint Operating Committee will be actively participating in managing the property on an ongoing basis. As a result some of the Accounting Vouchers will be open to charges from multiple producers represented in the Joint Operating Committees that your producer firm is a participant in. The revenue, capital and operations of each of the Joint Operating Committees accounts are open to the direct debit and credit charges of all of the participants in the JOC.

The ability for each producer to have the just-in-time earth science and engineering capabilities available for all the properties they manage requires them to have unused and unusable surplus capabilities. These unused and unusable capabilities, on an industry wide basis, are leading to the resource shortages that we are experiencing. Specialization and the division of labor will also need to be employed by the producer in terms of their earth science and engineering capabilities. The ability to pool these critical resources from participating producers into the Joint Operating Committee releases these otherwise hoarded unused and unusable capabilities. The pooling concept also implies that some producers will provide other resources to the property in disproportionate amounts to their working interests. All producers need to contribute the skills, knowledge, experience and ideas that they have in an innovative oil and gas industry. Therefore each of these producers need to have the ability to charge for their earth science and engineering capabilities to the joint account. All charges are subject to the AFE or Work Orders budget requirements and cost control remains the domain of the Joint Operating Committees.

Professor Dosi (1988) states that profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives.” (p. 1135) Professor Dosi introduces the theory of Schmookler (1966) and asked “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both”? (p. 1135) Schmookler believed in differing degrees of economic activity derived from the same innovate inputs. It is People, Ideas & Objects assertion that the “different incentive structures” and “different opportunities” are facilitated or constrained by the administrative ease in which the producer operates.

This administrative ease can also be stated for the Material Balance Report. It is within the Accounting Voucher where the Material Balance Report is embedded within the Accounting Voucher itself. Inheriting the capabilities to balance the financial aspects of the voucher, but also the volumetric information. It is at that point, when the volumetric information attains the integrity of the accounting system, that the automation of the various processes based on the volumes can begin.

If the producer is confident that the deal that was conceived is accurately captured in the Accounting Voucher. And the operation is therefore also reporting a substantial profit. Then they know that their innovations are working, their systems are working and the alignment of the legal, financial, operational decision making, cultural, communication, innovation, strategic, compliance and governance frameworks is achieved.

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.

Miscellaneous

One thing that we have not been able to discuss regarding the Accounting Voucher module of the Preliminary Specification, is the module is used for entry of all transactions for accounting purposes. Whether it is through the Material Balance Report, which is encapsulated within its own voucher, or a simple accounts payable voucher, everything that will be entered into the People, Ideas & Objects system is through an Accounting Voucher. And there will be different types of vouchers for different types of charges. Each with their own voucher series numbering. (For example all Material Balance Reports will be 200,000 series.) This also imposing somewhat of a strict Prepared By and Approved By process where everything that is entered into the system has high levels of accuracy, timeliness and authorization. This is somewhat contrary to the open and free wheeling style of data entry in Oracle Fusion Applications Financial Management Suite of modules. We will need to enhance Oracle Fusion Application methods of accepting our view of Accounting Vouchers and the way they work. This will be done through the Oracle Fusion Middleware layers Business Process Management Suite to provide us with this functionality in the Accounting Voucher. The base level General Ledger, Accounts Payable and Accounts Receivable are being used extensively here and we need to build these specific functions within the module. Business is also in many cases, repetitive. The ability to reuse any Accounting Voucher as a template for subsequent months will be a feature of the People, Ideas & Objects Preliminary Specification. This will include the use of firm wide forms such as expense accounts and petty cash. What is being intimated here is that the user interface of the Accounting Voucher needs to be user friendly. With high levels of intelligence and multiple ways of interacting with it.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Designing Transactions

One area of the Accounting Voucher that the Preliminary Specification is different is in the concept of designing transactions. We should spend some time on defining what it is that we are speaking of. What accountants will be spending their time in the future is designing transactions and leaving the processing of transactions to the computers. If you have been reading the Preliminary Specification you will have an understanding of the methods of organization of the marketplace and the producer firm. And how the Joint Operating Committee interacts with these. It will be with that understanding that we can begin to understand the concept of designing transactions. So let us begin with a simple description of the transactions makeup. From Harvard Professors Carliss Baldwin and Kim Clark.

...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 task and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction.

Let's use a scenario where a group of small producers have four producing wells of natural gas with some liquids production. They are situated next to a large gas plant that processes their gas in exchange for the liquids and markets their gas on the spot market. In this scenario we are evaluating these properties from the perspective of including them in the Preliminary Specification. And we begin by analyzing the production accounting elements in the Accounting Voucher with the Production Accounting Service Provider in the area.

The Production Accounting Service Provider assesses their fees on the basis of a unit of work incurred during the production month. For example this might include reading a gas chart, meter reading, Material Balance Report etc. At each point they assess a standard fee for service. This then goes to their billing process and at the end of the month is billed to their clients based on the work output. This imputes that someone has designed their billing and work flow from a transaction design point of view. Professors Baldwin and Clark.

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

Again if there is no production there is no basis for the Production Accounting Service Providers automated billing. Fulfilling the decentralized production model objective. This scenario shows how the Production Accounting Service Provider had designed their transactions to produce their automated billings. Their accountants were not concerned about the processing of transactions, but the processes of billings in a fully automated manner.

Additional transactions are designed from the process of the gas production. Sales of the natural gas, royalties and payment of the processing fee are all designed into the Accounting Voucher. This is the role of the Accounting Voucher for the producer firm and Joint Operating Committee. Automation of the business processes of the innovative oil and gas industry through transaction design.

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)

The Accounting Voucher has the “Transaction Design Interface” that provides a worksheet for accountants to design transactions. There is a defined process of analysis of how to break down these transactions and we will get into that as we proceed through the Preliminary Specification. It is important to recall at this point that each Accounting Voucher can be used as a template for subsequent months. So once a transaction is designed, it can be reused, and built upon through the implementation of it as an Accounting Voucher template.

The role of the Accounting Voucher in defining the source of the market or the firm as the originator of the transaction is minimal. However, it has a role in ensuring the costs of these transactions are minimal and are a source of the firms profitable operations. If there was a simple way to describe this purpose it would be as a tool to coordinate the firm or Joint Operating Committees use of the market.

This conceptually falls between transaction costs economics, capabilities and transaction design. All three are areas that Professor Richard Langlois has included within his area of research. We have also used Professor Carliss Baldwin for her work in transaction design. Professor Richard Langlois in his paper "The secret life of mundane transaction costs."

However, a new approach to economic organization, here called "the capabilities approach," that places production centre stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization. p. 1

and

"One of our important goals here is to bring the capabilities view more centrally in the ken of economics. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as complementary area of research" pp. 7.

It is the Accounting Voucher module of the Preliminary Specification that takes the accountant away from the benign score keeper role to the role of active participant in the operation. One that looks at the market from the point of view of how best to coordinate the various elements to provide the greatest value add to the firm or Joint Operating Committee they are employed by. In Richard Langlois “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization"

A close reading of this passage suggests that Coase's explanation for the emergence of the firm is ultimately a coordination one: the firm is an institution that lowers the costs of qualitative coordination in a world of uncertainty. p. 11

And this is maybe one of the important considerations of the work that we do here in People, Ideas & Objects. Is the realization that each producer firm and each Joint Operating Committee are going to be unique. That due to their makeup they are going to be different in material ways. Innovation will have a dramatic scale in how it is measured against each firm or JOC. The approach will be anything but cookie cutter.

Either way it boils down to the same common-sense recognition, namely that individuals - and organizations - are necessarily limited in what they know how to do well. Indeed, the main interest of capabilities view is to understand what is distinctive about firms as unitary, historical organizations of co-operating individuals. p. 17

Therefore, according to the research of Professor Langlois the transaction costs will be an immaterial item in comparison between firms or Joint Operating Committees. That is to say that they will be the same in all instances. And People, Ideas & Objects have asserted that they will be immaterial due to the application of Information Technologies. However the differentiating costs between firms and JOC’s will be these costs of coordinating the market. Making the Accounting Voucher module a critical tool in the ability to offer the producer firm the most profitable means of oil and gas operations.

... while transaction cost consideration undoubtedly explain why firms come into existence, once most production is carried out within firms and most transactions are firm-firm transactions and not factor-factor transactions, the level of transaction costs will be greatly reduced and the dominant factor determining the institutional structure of production will in general no longer be transaction costs but the relative costs of different firms in organizing particular activities. p 19

We have been discussing the Accounting Vouchers “Transaction Design Interface” and its purpose as a tool to coordinate the use of the market. We want to ensure that the efforts in coordinating the market are consistent with the objectives of the firm or the Joint Operating Committee and don’t conflict with the objectives of those who are initiating the work in the Research & Capabilities or Knowledge & Learning or other modules. As we can see coordination through the Accounting Voucher of the Preliminary Specification is focused on the business end of the transactions, not on the operational side.

The first question that most people will have is why are we concerned with the coordination of the markets in the Accounting Voucher? Here Professor Richard Langlois made the following comment in response to a question on his “Vanishing Hand” paper.

Here again, I think the problem is one of conceptual imprecision. It is perfectly common, and often unobjectionable, to contrast a market and an organization, that is, to contrast the institution called a market and the institution called an organization (such as, notably, a firm). But the opposite of “organization” in the abstract sense is not “market” but disorganization. More helpfully, the opposite of conscious organization is unplanned or spontaneous coordination. In this sense the market-organization spectrum (and similar spectra one could imagine) are arguably orthogonal to the planned-spontaneous spectrum. One could well wonder, as I have (Langlois 1995), whether large organizations do not in fact grow far more as the unplanned consequence of many individual decisions than as the result of the conscious planning of any individual or small group of individuals. And it is certainly the case that, as Alfred Marshall understood, both firms and markets “are structures for promoting the growth of knowledge, and both require conscious organization” (Loasby 1990, p. 120).

In this day and age, with such large distances, geographic, size, language and other, between vendors and producers leaving the coordination of the markets to “spontaneous order” is asking too much of human ingenuity. Particularly with the focus of the industry to a further division of labor and specialization, where the risk and reward of oil and gas operations are so great, market coordination or transaction design will be a critical and necessary task to be carried out. Each operation may be the result of more people being involved. Once again it is not from an operations point of view that we are attempting to influence the operation, it is from the business point of view. How will the transactions and business be captured in such a manner that the firm and Joint Operating Committee are incurring the lowest possible costs of the most efficient methods of these business transactions?

As Harvey Leibenstein long ago pointed out, economic growth is always a process of “gap-filling,” that is, of supplying the missing links in the evolving chain of complementary inputs to production. Especially in a developed and well functioning economy, one with what I like to call market-supporting institutions (Langlois 2003), such gap-filling can often proceed in important part through the “spontaneous” action of more-or-less anonymous markets. In other times and places, notably in less-developed economies or in sectors of developed economies undergoing systemic change, gap-filling requires other forms of organization — more internalized and centrally coordinated forms. p. 6

and

Let’s take a closer look at the nature of the “gaps” involved. Adam Smith tells us in the first sentence of The Wealth of Nations that what accounts for “the greatest improvement in the productive power of labour” is the continual subdivision of that labor (Smith 1976, I.i.1). Growth in the extent of the market makes it economical to specialize labor to tasks and tools, which increases productivity – and productivity is the real wealth of nations. As the benefits of the resulting increases in per capita output find their way into the pockets of consumers, the extent of the market expands further, leading to additional division of labor – and so on in a self-reinforcing process of organizational change and learning (Richardson 1975; Young 1928). p. 7

If we recall in the Resource Marketplace module the vendors and suppliers are maintaining their own contact data. Within that data is their key personnel that include their field staff. They should also be including their key business people for the purposes of the “Transaction Design Interface” to collaborate on these interfaces. In addition their billing information and banking data, as well as other critical data and information that will help the producer firm or Joint Operating Committee efficiently coordinate and process the transactions they are involved in. Lastly a collaborative interface should be provided for everyone within the Accounting Vouchers vendor pool to discuss how the transaction is designed.

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.

Agreement to Withhold Capacity

One area that has been difficult for the oil and gas producer to deal with is the volatile energy prices. With the costs of production and reserve replacement increasing and the reserve depletion on such a rapid pace, the decline in energy prices can have a material effect on the value captured from an oil and gas field. With every producer producing at capacity, this risk of price declines comes into play more frequently than maybe needs to be realized. The question is therefore asked, what if, there was agreement in the Petroleum Lease Marketplace module and implementation in the Accounting Vouchers Material Balance Report of the Preliminary Specification, to limit the production at certain thresholds based on predetermined commodity prices?

We can accurately tell what the costs of reserves and production costs are and there are many times when these exceed the prices that are received in the marketplace. The North American natural gas marketplace is a very good example of this situation. Selling at a loss may fuel the short term cash flow situation however, it is at the long term expense of reserve replacements. In a highly innovative oil and gas marketplace, the costs of innovation are being funded by the commodity prices. However, these costs may exceed the temporary fluctuations in the market prices for the commodities. Is it wise for the producer to continue to produce at capacity?

What if the agreement that governs the Joint Operating Committee has the partnership agreeing to shut-in production when the price of the commodity drops below x value. The situation would help to mitigate the loss of earnings on the reserves and not materially affect the cash flow of the producer if they were using the Preliminary Specifications decentralized production model. The global implications of many producers implementing this type of price based production profile would put a floor on the commodity prices. A floor based on the marginal costs of reserve replacement.

Recall the decentralized production model was best 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

In the Preliminary Specification the typical producer is reduced to the C class executives, the earth science and engineering resources, the land and legal, and some support staff. The remainder of the producers resources are reorganized across the industry into service providers that are focused on a process and who use the industry as their client base. Therefore resources such as production accountants might be located within a geographic region where there are a number of gas plants, and provide production accounting to the Joint Operating Committees that have production at those facilities. That way each month the Joint Operating Committee will receive a billing from the production accounting service provider for their services. If however there is no production, there is no production accounting service provider billings, or any billings from any of the other service providers, and as a result those Joint Operating Committees will have no revenues, no operating costs, no administration or accounting costs, and as a result report no profits and no losses on operations.

The decentralized production model moves the fixed administrative and accounting capabilities of the producer to be the variable administrative and accounting capabilities of the industry. Charging the Joint Operating Committee directly for the service fees of the service providers ensures the industry gets an exact accounting of the costs of operations. No more administrative overheads will be charged to the Joint Operating Committees. By employing the decentralized production model the industry, the producer and the Joint Operating Committee gain a number of key advantages. First it enables producers to match costs to revenues on a monthly basis. Second it eliminates all losses on operations in oil and gas, and these losses are not added to the costs of the reserves. Third it saves the reserves that have been shut-in for a time in which they can be produced profitably. And fourth, it removes the marginal production from the marketplace, putting a floor on commodity prices. For the 2012 calendar year People, Ideas & Objects calculated the opportunity costs of not using the decentralized production model at $94 billion.

The Accounting Voucher’s Material Balance Report, the Marginal Production Threshold Interface of the Petroleum Lease Marketplace and the performance reporting in the Partnership Accounting module work together to ensure that no marginal production is produced. That production is withheld for the full month, as the entire months overhead associated with production will be incurred with just one day of production. And the producer remains profitable and innovative throughout their production profile. That is to say a producer may be producing 100,000 boe / day today, and tomorrow be producing 80,000 boe / day and be profitable and innovative in doing so. The value generated from the reserves under the decentralized production model would be materially higher than under the current environment. The producers share of the annual opportunity costs over the life of the reserves is what is being lost today. All to a bureaucracy that is too self absorbed to concern themselves with anything outside of their pay-check.

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.

Two Distinct Sources of Revenue

Professor Giovanni Dosi’s paper discusses the role of innovation in the market economy and assumes companies in a free market are willing to invest in science and technologies to advance the competitive nature of their product offering or internal processes. The key aspects of Professor Dosi’s theories that make them directly applicable to oil and gas are the innovation theories application to earth science and engineering disciplines. These disciplines are key to the capability and success of oil and gas firms search, and production of hydrocarbons. The investment in science and technologies is with the implicit expectation of a return on these investments, but also, to provide the firm with additional structural competitive advantages by moving their products costs and / or capabilities beyond that of the competition. Professor Dosi notes:

Thus, I shall discuss the sources of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search, and the nature of the incentives driving private agents to commit themselves to innovation.

The producer firm is committed to developing their capabilities with the understanding that they advance their competitive advantages, and, earn a return on their investment. How within the People, Ideas & Objects application does the producer earn a return on their investment in their capabilities? Through direct charges to the joint account. That is to say that the people (representing the producers capabilities) who are pooled into a Joint Operating Committee, have been assigned a role within the Military Command & Control Metaphor and whose costs are captured in the Partnership Accounting module are producing a “revenue” stream for the producers capabilities.

The question then becomes what is the charge for the individual during the time that they are working in the Joint Operating Committee. It will be easy to determine the hours that have been worked in the various JOC’s. Whether through the Work Order or through other means, the ability to capture the time spent will be available and accurate in the People, Ideas & Objects system. The hourly rate would need to include a number of factors. The skills of the individual, the technical resources of the producer firm that is at the disposal of the individual, and also a measure of the level of innovativeness of the producer firm, say something like Revenue Per Employee that reflects the overall productivity of the firm.

The net result of this is that the revenues should exceed the costs and the producer will have captured a return on their investment in the capabilities that they have developed within their firm. To proceed on any other basis would, I think, be unreasonable.

It comes down to the question of what business is it that the producer is in? Are they in the business of generating profits from producing oil and gas, or are they in the business of generating profits from providing geologists and engineers to the operations they have an interest in? If we look at the competitive advantages of the producer it is the land and asset base, and the earth science and engineering capabilities that they apply to that asset base. Clearly both production and capabilities development are within the scope of the competitive advantages of the oil and gas producer. And to a large extent the costing of the technical resources is not fundamentally different from what occurs today. In today’s market, the operator is provided with “overhead allowances” for the capture of some of these costs. The difference from today and what is proposed here is that the elimination of the concept of an operator by “pooling” the technical resources of the Joint Operating Committee participants to acquire the necessary capabilities. The direct costing of these technical resources is in some ways a replacement to the operator overhead allowances.

To take this opportunity to charge the costs of the capabilities of the producer firm and earn a return on investment may be the issue that some people will have with the concept. In a world where the market for engineers and geologists is highly competitive. And you as a producer are assessed on your performance based on Revenue Per Employee. The acquisition of additional technical resources is a difficult process that has investment performance implications to your firm. The ability to offset some of the overall costs of your technical resources helps to mitigate the costs of these investments in the short term. This is the purpose for enabling the direct billing of technical resources to the joint account in the Accounting Voucher.

When we get to the Research & Capabilities and Knowledge & Learning modules. We will see the development of these capabilities from an innovative point of view will take on a different perspective. The ability to capture this development of a firm's technical resources as an investment, and have them as a source of revenue here in the Accounting Voucher is what I want to establish. Looking at the development of the producer, it is somewhat of a paradox as to which is developed first, the land base or the capabilities. With the ability to have the capabilities generate their own revenue stream the paradox is resolved in the short term, in that capabilities development is expected to earn a return on investment.

Some may suggest that these costs offset the production revenues of the Joint Operating Committee that would have gone to the producer anyways. And that may be true. However, in a world where the demands for the technical resources are expected to be as significant as some suggest. The need to deal with the problem on a wholesale basis, as People, Ideas & Objects pooling concept does, is a requirement, and secondly, the assumption that everyone else will develop their technical capabilities may be false.

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.

Purchase Order Systems

Its very 1970’s ish to be thinking of a Purchase Order system. The 1970’s is the last time that I can think of anyone ever using one. (It certainly might be used in the larger firms, however, I am unaware of this.) The practicality and usefulness of these systems seemed to have receded in the 1980’s and no one has considered their existence since. Now we talk in terms of Supply-Chains, however oil and gas doesn't have a “supply-chain” as the term is used. Supply chains are for retail and manufacturing. Purchasing is for oil and gas.

I would reiterate that the use of a Purchase Order system is something that the user community needs to determine if it wants one. I see substantial value in building one and have attempted to document how that value can be realized.

The Purchase Order system is part of the Accounting Voucher in that it is a necessary part of the processing of any large capital item. The use and application of the AFE, Cost Centre or Lease charge code remains the same irrespective of the Purchase Orders existence or not. There is no change in the coding structure as a result of the inclusion of the purchase order number. The Accounting Voucher relies on the Purchase Order for further approval of the specific contract dealing with a particular vendor on a specific project.

There are a number of cases where the management of the vendor relationship needs to have special considerations. Particularly in oil and gas where the details of the project are specific and large. Engineering contracts for the building of gas plants, pipelines and facilities are some of the examples. Situations where the contract must meet certain criteria and the vendor must qualify to meet those criteria during a bidding process. Its of concern to the producers that the firm that is chosen is capable of undertaking the work that is described. It is not just a lowest cost and the bid wins type of contract bidding process. This overall bidding process falls under the larger Purchase Order process of the Preliminary Specifications Accounting Voucher.

Once the vendor has been selected then the approval of the invoices is subject to the terms and conditions of the contract. Any prepayments or partial payments can be processed on the basis of the strength of the Purchase Order document and the final payment is subject to the satisfactory completion of the contract. If the contract is subject to any holdbacks and other conditions, then those would be applied within the Accounting Vouchers payments.

The Purchase Order system is designed to provide the producer(s) with a level of control over large contracts. Something that is done frequently in oil and gas. By managing the bidding process and providing a level of control over the contract in terms of making and controlling the payment process. The Purchase Order, I think is a valuable tool in any producers system. Having these contained within the Accounting Voucher of the Preliminary Specification is the natural placement of these control processes. See also the Resource Marketplace module for discussion of the Oracle Purchasing and Procurement module that has been included in the Preliminary Specification.

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 Material Balance Report

The Material Balance Report is an Accounting Voucher that is unique and has the following characteristics. It is designed to deal with the automation of the production, revenue and royalties of the producer firm and Joint Operating Committee. It is this type of specialized use of an Accounting Voucher that the user community should consider applying to other situations when contributing to the Preliminary Specification.

What is proposed in People, Ideas & Objects Material Balance Report is that for an Accounting Voucher to close it must balance the financial debits and credits, but must also from a volumetric perspective material balance, system balance and partnership balance. Each of these volumetric perspectives being accessed through a different “mode” within the voucher to make the necessary changes to correct any volumetric imbalances or errors.

The Joint Operating Committee is a thing that exists as a result of legal agreements and in the minds of oil men and women. It therefore doesn’t “own” anything or incur any costs. All of the charges to the joint account must clear in the month they are incurred to the producers. It is the same situation for the volumetric information. The Joint Operating Committee "Accounting Voucher" balances to zero in terms of costs and volumes each month by clearing its charges to the partnership and royalty owners of the property.

Note that the clearing is done after the balance. That does not guarantee that the facility will remain in balance. Adjustments and amendments to the Accounting Voucher may occur. These may happen and they can be subsequently cleared to the partnership accounts.

The point of the exercise is that you have the business of the Joint Operating Committee being captured in the Material Balance Report which is an integral part of the Accounting Voucher. Essentially all three are the same thing, the Joint Operating Committee, Accounting Voucher, and Material Balance Report. An integrity of reporting that is embedded within the accounting systems that is as rigid as debits must equal credits.

We now want to talk about the contracts that the products produced may have associated with that Joint Operating Committee. Contracts that would include marketing for gas, oil, natural gas liquids, or contracts for charges for gathering, processing etc. I don’t know what the correct term that should be used, but stream seems to me to be the most intuitive. If a stream of product was flowing through a facility, then a contract for processing or sale could be attached to it. The ability to attach a contract to a stream would enable the Accounting Voucher to establish the billing of gathering or processing charges / sale for that stream. These charges (invoices) or sales (receipts) being generated in an automated fashion by the People, Ideas & Objects software.

The Accounting Voucher is a for lack of a better term a template that is built upon as time passes. Each month as the property changes, these changes are captured within each Accounting Voucher and the template is renewed each month with the accumulation of the properties history. If a new contract was added for the production from a new well, then that contract stream and the new well would be represented in the next month's Accounting Vouchers. The Accounting Voucher template documents the changes in the property over time.

Critical to the “definition and design” of transactions is the fact that these transactions are balancing themselves out. If the debits and credits were not in balance at the end of the day, then the automation of the systems and the accountants would not be doing their jobs. The same could be said for the volumetric reporting. If in the Material Balance Reports, they were out of balance (call this material balance), or were not balancing the inputs and outputs to other Material Balance Reports (call this system balance), or the internal accounting of those volumes to the partners, royalty holders and others were out of balance (call this partnership balance) the accountants and systems would not be doing their jobs. Simply the process of closing the Accounting Voucher will need to consider not only the balancing of the debits and credits from a financial point of view. They will also need to ensure that the material, system and partnership volumes reported in the Material Balance Report are also in balance. Without these systems in balance, the Accounting Voucher will not close.

This imposes another rather strict provision on the quality of the information that is accepted into the People, Ideas & Objects Accounting Voucher module. Precluding the acceptance of a voucher due to the inability to balance a volumetric requirement holds the system up for what could be a fairly common occurrence. What if the volumetric information is unavailable in a timely fashion? What if the information is part of the normal amendment process? Then we are left with the traditional accounting methods of dealing with these types of issues. An accrual of the volumes in order to achieve the balancing necessary should be able to be processed in the current month. These accruals would then be automatically reversed in the following months Material Balance Report. What is different from existing systems is that we are enforcing the systems to volumetrically balance. Not just inputting key variables, imposing the facts of what actually happened at the facility, or if the facility is subject to a comprehensive Construction, Ownership and Operation agreement, what is agreed to.

The difference may be subtle but the implication is significant. Locking the volumetric balancing, over the long term, into the Accounting Voucher itself enforces the system to follow the volumes as produced and processed. Once this is achieved a certain level of unimpeachable integrity is achieved and then the automation of detailed processes based on those volumes can begin and be assured to be based on the facts of the facilities and assets.

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.

Vouchers, Open to all Within the Partnership

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

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

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

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

What is different in People, Ideas & Objects Accounting Voucher system vs what exist today is the elimination of the designation of operator. The capabilities for each producer to house the state of the art earth science and engineering resources necessary to run all of their properties within one oil and gas firm is believed to be beyond the scope of what is possible in the future. The solution in the Preliminary Specification is the further specialization and division of labor of the earth science and engineering capabilities of each producer firm and the pooling of these resources of the partnership within the Joint Operating Committee.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.