Preamble Part VI

Our Value Proposition

It is People, Ideas & Objects claim that we provide the most profitable means of oil and gas operations. The final aspect of our claim is that our Revenue Model provides the lowest cost of obtaining an ERP system in the industry. And that is by charging for the costs of software development, plus an element of profit as our fee structure. Therefore the industry is only paying for the one time costs of ERP software development. A fundamentally more efficient value proposition than any of our competitors.

We can do this because we are not focused on the traditional software company concerns of code and customers. As a cloud computing provider we are oriented to the changing business dynamics of an innovative oil & gas, and associated service industries. This highlights the different motivations of the software developer over the long term. In People, Ideas & Objects instance we generate revenues on the basis of the changes that industry desires. Our motivation becomes the constant improvement of the software. In the traditional software vendor’s case they are motivated by their code and customer bases. The larger their code base the more difficult it becomes to change, which coincidentally does not generate revenue. And the larger the customer base the more costly the changes that need to be made to each customer. Which coincidentally these changes to the customer software do not generate any revenues. Hence, their age as a firm paradoxically leads to increases in their overhead burden. What you have is a contrast in the dynamic nature of the software itself. In terms of its cost to the industry and the motivation behind the developer.

Within our Revenue Model we have an annual fee and penalty structure for those who have not participated on a timely basis. Isn’t the penalty, when paid, a benefit to the software developer above their regular fees? No, it is not. The penalty structure is designed so that each producer pays an equal share of the total costs of all of the development. There are no free riders in this program. If a producer were to wait until the fifth year to start to participate in the user community and use the software that was built by others; then they would have to pay the fees for those past five years plus the associated penalties as well. These fees and penalties would then be used to offset the following years costs before the calculation of the next years fee assessment. So the next years fees would be proportionally less the amount of any fees and penalties that were paid by producers who decided to join the community and use the software. We call this the participation bonus.

Each year we specify the amount that each producer's share of costs will be based on a fixed charge per boe. These will be on the basis of estimates of our understanding of what is required to maintain and develop the software to meet its competitive advantage. So there is an inherent level of trust in the work that is done through the community, and the financial support that is provided. The research and software development necessary to make this happen can be significant and needs to be undertaken in a timely fashion. With today’s tools it can be done in a commercial fashion with remarkable speed. The real inhibition will be the communities ability to think fast enough. The producers are a critical part of the community. What can not happen is to have the funding for this development terminated as a result of a lack or fading interest by the producers. It is therefore inherent upon me to provide a compelling reason for that funding cut never to happen. And that is through the fact that we provide the most profitable means of oil and gas operations.

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

Preamble Part V

Earth Science and Engineering Resources

We now move on to the fifth component of our competitive advantage of providing the oil and gas producer with the most profitable means of oil and gas operations. Our focus is on the earth science and engineering resources of the producer firm and how these are more efficiently and effectively employed in comparison to what we call the standard corporate business model employed by the bureaucracy. There are many aspects of this component of our competitive advantage, however, they all generate their profitability for the producer through innovation, specialization and the division of labor.

In the area of innovation we look to the Research & Capabilities and Knowledge & Learning modules to highlight the processes that are managed within those modules. Focused on the development, documentation and deployment of capabilities within the Joint Operating Committees. It is there that the research and development of those earth science and engineering capabilities are funnelled into the Joint Operating Committee for their ultimate deployment. From an innovation standpoint there is also the Work Order that enables the innovative producer to participate and sponsor working groups to research and study various earth science and engineering based projects. Designed to eliminate the bureaucracy and the inherent difficulty in managing the accounting logistics for the ad hoc nature of these groups. The Work Order is an interface that enables the user to allocate their overhead and AFE budgets to these studies in a manner that is consistent with the nature of the opportunities.

The specialization and division of labor of the producer firms earth science and engineering resources takes on the difficult issue of the constraint of these resources. Over the next couple of decades the demand for these resources will outstrip supply due to retirements and the inability to bring on any increase in the numbers of new recruits. There just isn’t that percentage of the population that has the aptitude for geology or petroleum engineering. The need therefore to deal with the resource constraints is a problem that the industry must resolve and the Preliminary Specification has used specialization and the division of labor to do so.

One of the key difficulties is what I call the hoarding issue. Each producer is building the capabilities within their firm to deal with any contingency at any time. This hoarding of earth science and engineering resources, when taken across the industry, builds unused and unusable surplus capacity within each producer firm. With each producer firm attempting to provide all of the capabilities necessary for their producer firm, these critical resources are unnecessarily constrained. The solution that is provided within the Preliminary Specification is what is called the pooling of technical resources. Each member of the Joint Operating Committee commits the technical resources, based on their unique specialized capability, to the property. Any deficiency is made up from service providers or outside producers who provide the additional earth science and engineering capabilities for a fee.

Which brings up the last aspect of the division of labor and that is as it applies to the bread and butter aspects of geology and engineering work. Much of this work can be turned over to service providers who are organized on the basis of providing a specialized service to the industry. Organized around a process or skill that is common or generic and could be specialized to a high level if the scope and scale could be brought into the picture.

It is reasonable to assume that industry will turn to specialization and the division of labor to deal with these resource restrictions. However, without the pooling concept being a critical element in the solution, the scope and scale of the producers domain of earth science and engineering capabilities, because of the enhanced specialization and division of labor, will most certainly create further shortages in the resource base due to the hoarding issue. And lead to chronic unprofitability due to the enlarged scope and scale necessary to cover their operations.

In a few years having each producer conduct all the earth science and engineering necessary for all of their properties will seem like a business model from the dark ages. What is being proposed here in the Preliminary Specification is the only reasonable solution to the real issue of the limited resource base. It is the earth science and engineering capabilities that form a critical part of the innovative oil and gas producers competitive advantage. The Preliminary Specification enables the firms resources to focus on the specialized research and development of “knowledge, skills, experience” and ideas, and the deployment of those in the properties that are held by the firm. This is the appropriate posture for a profitable oil and gas firm, and the fifth component in how People, Ideas & Objects provides the oil and gas producer with the most profitable means of oil and gas operations.

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

Preamble Part IV

Lower Costs of Exploration and Development

We now come to the fourth component of our competitive advantage of providing the oil and gas producer with the most profitable means of oil and gas operation. It is the lower costs associated with any field work done for exploration or development. This would also include the field operations on producing properties that were covered by a workover or an AFE.

There have been many complaints from the oil and gas producers about the high costs of field operations. I have written about the accusations made by producers toward the service industry and how the situation has developed and what needs to happen in order to correct these. Everyone would agree that a more productive environment needs to be developed between the service industry and the producers. And I have put the onus on the producers to begin the process of building the capabilities for a more dynamic and innovative service industry. This can begin by developing the Preliminary Specification and implementing the changes within it to start the ball rolling.

There are a variety of interfaces within the Resource Marketplace and Research & Capabilities modules that provide windows to the service industry. These collaborative interfaces are designed to deal with the one issue that is systemic throughout the oil and gas industry. That issue is the manner in which the oil and gas producers deal with the ideas of others who have developed them. They ignore them. And they use them without respect to who the rightful owners are. This is counter to their own best interests. What has happened is that those that know the time and effort necessary to develop a new idea will not take the effort because the oil and gas industry will not respect their efforts, and therefore they don’t bother developing the idea. No new ideas are coming into the service industry at a critical time when the science in oil and gas is becoming paramount. And to add to the problem the oil and gas producers will not hire anyone for field operations that are not of a certain size and scope to handle the job. So all of the money is going to the larger firms in the service industry, no new competition is being developed and no new ideas to support that new competition. Is it any wonder that the producers complain about the costs associated with field operations?

In order for People, Ideas & Objects to claim that we provide the most profitable means of oil and gas operations. We need to show that the costs associated with field operations would be lower in an environment where the Preliminary Specification would exist. By having the oil and gas producers respecting the ideas of others in the service industries will be all that is required to make the changes from the current status to a dynamic and innovative service industry. There are a variety of interfaces and modules that are dedicated to the initiating, sponsoring and supporting of ideas throughout the Preliminary Specification. As I indicated, these are what are necessary for both an innovative oil and gas and service industry. When drilling a well in a shale formation can cost ten to fifteen million dollars the opportunities for innovation are strong. Today no one is motivated to do so because the producers will not respect the owner of the idea. So everyone just picks up their paycheck and carries on. Its a simple matter for the oil and gas industry that you reap what you sow. Recall in the quotation of Professor Giovanni Dosi that investments in innovation is for the purpose of profits. That reasoning applies in this instance as well in that the innovation will reduce the time, effort and costs of field operations by finding a better way.

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

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.

Preamble Part III

Innovation for Profits

As the third element of our competitive advantage, of providing the innovative oil and gas producer with the most profitable means of oil and gas operations. We focus on innovation as the way in which to enhance the profitable nature of the producer. Innovation for profit, particularly from the scientific basis of the business, is the successful perspective for the 21st century oil and gas producer. From Professor Giovanni Dosi.

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

The Preliminary Specification has been designed to capture the “what” and “how” of innovation within the software that will be used by the innovative producer. Throughout the modules the principles and understanding of innovation were researched and incorporated into the software. Our research included the works of many but most particularly Professor Giovanni Dosi and his key paper “The Sources, Procedures, and Microeconomic Effects of Innovation” (1988). It was there that we learned many of the fundamental aspects of what is necessary for the oil and gas producer to focus on innovation. Recall that it was in our Preliminary Research Report (2004) that we learned that innovation can be reduced to a defined and replicable process.

To highlight a few of Professor Dosi’s key points on innovation, in this next quotation he notes the opportunities, the processes of innovative search, and incentives to investments in innovation.

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.

and

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

• Capabilities and stimuli generated with each firm and within the industry of which they complete.
• Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.
• 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.)

Innovating for profit is the third element of People, Ideas & Objects key competitive advantage of being the most profitable means of oil and gas operations. It is within the DNA of the Preliminary Specification how the processes of innovation are identified and supported that enhance the ability of 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.

A New Hypothesis

Throughout our writings and particularly in the Preliminary Specification there is the understanding that organizational change will only occur after the software has enabled the changes first. That we are dependent on software in our organizations and as defined in Professor Anthony Giddens Structuration theory, we are enabled and constrained by these structures. Our hypothesis takes this understanding and extends it across the economic horizon. And concludes that as a result of the inability, or lack of capability, to amend the ERP software in organizations today, economic growth has stalled. We are, or should be, wholly dependent on a deliberate and purposeful pursuit of specialization and the division of labor. That the concept of spontaneous order, which is necessary for specialization and the division of labor, is eliminated through the use ERP software systems.

It was in the Preliminary Research Report that we first discovered Professor Anthony Giddens Structuration theory and Professor Wanda Orlikowski model of Structuration. In terms of its definition we have this quote from Olga Volkoff

From the perspective of structuration theory, adaptation is the joint effect of the actions of individuals and the institutional structures which those actions take place. Structures such as business strategies, organizational culture, reward and control systems, patterns of communication, and professional norms both enable and constrain the daily activities of people, but do not wholly determine them. 

ERP systems, particularly those installed in the larger organizations, are the modern equivalent of pouring concrete into your organization. The ability to make even a small change in a process requires the dedication and sacrifice of several peoples careers. The importance of this is possibly lost on the following two quotations. First is Fredrich Hayek on spontaneous order.

It is the other way round: man has been able to develop that division of labor on which our civilization is based because he happened to stumble upon a method which made it possible. Had he not done so, he might still have developed some other, altogether different, type of civilization, something like the "state" of the termite ants, or some other altogether unimaginable type.

And this next quotation is from Professor Richard Langlois. It describes how specialization and the division of labor are expanded.

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

People, Ideas & Objects provide a software development capability to the innovative and profitable oil and gas producer. Our revenue model is structured to support change. To avoid the difficulties that are evident in the economy today. To provide solutions to the issues that occur in the oil and gas industry. Solutions in both the administrative and in the operational domain. Operational issues such as our decentralized production model which provides the oil and gas producer with 2012 opportunity costs in the area of $94 billion. The decentralized production model can not be achieved in any manner other than by programming the industry through software. It is that simple, and that matter of fact, that we rely to this extent on software today. It is the same situation in other industries.

Within several modules of the Preliminary Specification there is the “Gap Filling Interface.” It enables users of the software, from the service and oil & gas industries, to publish areas where they sees gaps in the offerings being provided. This will open up communication and collaboration on the types of services and products that can be developed that are needed to fulfill those gaps. In addition with the software development capabilities of People, Ideas & Objects the software can be amended to deal with any change in the process to accommodate the gap filling process.

Spontaneous order brought us to this point. Unfortunately software systems have put a roadblock in its way. We now have to consciously workaround this roadblock and work to expand our economies deliberately and purposely. Our hypothesis suggests that today’s slow growth economy is severely constrained by the software and systems that are in use today. We need to fight to overcome these constraints. We also need to fight the bureaucracies who find comfort that their franchise is unchallenged by simply keeping the software intact.

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.

Preamble Part II

The Decentralized Production Model

It's been several years since natural gas prices have declined. And its not that the prices that were being realized before then were all that spectacular. With the costs associated with exploration and production, and particularly shale reserves, its no surprise that producers are reporting losses on operations. What is surprising is that producers have done nothing to mitigate the overproduction that has caused the decline in pricing. The reason for this chronic overproduction is the producers have to generate the revenues to cover the overheads they incur in the “high throughput production” model they employ. This model has the overhead costs of the producer firm being incurred whether there is production or not, and as a result, makes their operation a high cost operation even at full production. At lower production volumes it skews their earnings and overhead costs appear out of place.

In the Preliminary Specification the “decentralized production” model is employed. This 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

All of the administrative and accounting service providers that we discussed in the previous section charge for their services directly to the Joint Operating Committee. This makes for the conversion of the producers fixed administrative and accounting costs into the Joint Operating Committees variable administrative and accounting costs. Therefore, if there is no production, there is no charge for the administration or accounting item and neither the producer or the Joint Operating Committee is incurring any overheads during times of shut-in production. For example no charges would be made for Production, Revenue or Royalty Accounting to the Joint Operating Committee. Therefore the only costs that would not be covered during times of shut-in production are the costs of capital. The producer can therefore shut-in production that is not meeting the marginal cost and save those reserves for a later time when they will be produced profitably. And keep that production off the market until the commodity prices rise to the point where they cover the marginal cost. Putting an effective floor on the prices of the commodity markets.

If producers across the industry follow this process by subscribing to People, Ideas & Objects Preliminary Specification then prices would not have the significant declines that we have experienced in the last several years. If the downswing in natural gas prices were averted by way of a fifteen percent reduction in natural gas production volumes, therefore increasing average prices to $6.70. We projected total revenues (and profits) of the North American natural gas industry would have been $94 billion higher than what they have been. And those are just the opportunity costs for 2012. Making all of the production under this scenario exceed the marginal cost and be profitable. And for any shut-in production, no loss on operations would have been incurred because there would have been no overhead or production costs.

Adding the ability to shut-in production on marginal operations to the ways in which People, Ideas & Objects provides the innovative oil and gas producer with the most profitable means of operations is a substantial part of our competitive advantage. Shutting in production is the logical thing to do but producers refuse to do it due to the impact on their performance. The method used by People, Ideas & Objects would actually improve the profitability of the producer, retain the reserves for the future when prices rise, reduce the costs of operation and remove the excess production from the marketplace.

Whereas today’s continued unprofitable production maintains high cost operations, adds the losses on operations to the cost of the reserves to be recovered from future operations, requiring even higher prices and depresses prices. Instead of doing what it needs to do, the bureaucracy will continue to do what it know’s how to do, particularly when it lacks strong leadership. Which based on past history is nothing. But lets be honest, maybe their strategy of hoping for a cold winter will come through this year.

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.

Preamble Part I

I thought we would take a break between the Research & Capabilities and Knowledge & Learning modules to review the Preamble to the Preliminary Specification. There are six sections which will be published in six separate blog posts over the next three days. Each section deals with one aspect of the value proposition that People, Ideas & Objects provides the innovative and profitable oil and gas producer.


People, Ideas & Objects competitive advantage and value proposition is that we provide the oil and gas producer with the most profitable means of oil and gas operations. We do this by providing the software that supports a business model that defines the following characteristics.

Specialization and the Division of Labor

Our focus on the areas of specialization and the division of labor and how these tools will be highly effective in reducing all of the costs incurred in the producer firm.

What we do know is that today we stand on the shoulders of giants and benefit from a very sophisticated and complex specialization and division of labor. Today everyone in oil and gas has attained skills from education and training, and gained experience from years of working within their chosen field to conduct very select and highly specialized work. To disrupt this in any fashion without a full understanding of the global aspects of how specialized this work has become would be a failure. At the same time, with the corporate model proving to be unsustainable, the focus will be on cutting costs. Cutting too deep could have greater implications than what were intended. The point is to move to a higher level of specialization and division of labor will not be done, and can not be done without significant forethought.

Secondly we have to consider the role of software in our society. If we intend to move to a higher level of specialization and division of labor. Then the software that we use, and particularly the ERP software, is going to have to define and support those changes. Therefore we are not only going to have to deliberately plan the next level of specialization and division of labor, we will need to build the systems that define and support it first, before the implementation of any changes or benefits will be seen. This is one of the defined benefits of having the software development capability of People, Ideas & Objects.

If we review the Preliminary Specification there is a defined restructuring that takes place throughout the modules based on a higher level specialization and division of labor of the industry. The oil and gas producer is a stripped down version of itself that has the C class executives, earth science and engineering resources, a bit of legal, land and minor support staff. And that’s it. The rest of the producers needs are provided by service providers. And each of these service providers are focused on one process, or one element of a process, that is organized and specialized across the industry. So for example there would be a lease rental payment service provider that handles all of the industries lease rental payments. Where the cost of the lease rental payment, and the billing for the lease payment service provider is billed directly to the appropriate Joint Operating Committee. Not to the individual producer. Eliminating the fixed nature of the producers administrative and accounting costs, and replacing them with the variable nature of the Joint Operating Committees administrative and accounting costs.

What are the advantages of moving to a system or methodology such as this. Cost and efficiency are the reasons. The costs associated with the lease payment service provider would be a small percentage of what is incurred by the industry today. By focusing on the most efficient way to process lease rental payments, and only lease rental payments the service provider would become so specialized as to reduce the time and effort in administering these tasks as to be a small component of the costs today. In Adam Smith’s pin factory, his research yielded a 240 fold increase in productivity from the changes that he made in the process of making pins. Having the lease rental payment process and other processes in the industry subject to this type of analysis, complete with the software development capability of People, Ideas & Objects, similar results in productivity could be attained. All economic growth is a result of specialization and the division of labor.

When we consider the current corporate model attempts to provide the producers administrative and accounting needs for all that falls within their domain. And the understanding that is necessary to support those administrative and accounting tasks. The ability to build that administrative and accounting capability is costing each and every oil and gas producer their profitability. What will become to be seen as an archaic business model will be the way in which the industry is operated today. It has to because it is unsustainable. And a more effective and efficient business model based on a higher definition of specialization and division of labor will become the norm through the adoption of the Preliminary Specification. The industries survival requires it. What we are in essence doing is moving from a reliance on the producers administrative and accounting capabilities to a reliance on the industries administrative and accounting capabilities. And this assures our targeted market, the oil and gas investor, that we do indeed offer the most profitable means of oil and gas operation. As without the software to define and support this higher level of specialization and division of labor, it will not happen.

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 Research & Capabilities Module

The Research & Capabilities module documents the earth science and engineering “capabilities” of the innovative and profitable producer firm. Capabilities have been defined as those “knowledge, skills and experience” of the firm. People, Ideas & Objects have added “ideas” to that list. Capabilities have also been defined as “knowledge begets capabilities, and capabilities beget action.” These are the cornerstone of an innovative and profitable oil and gas producer in the 21st century. These capabilities are developed here in the Research & Capabilities module for publication in the pertinent Joint Operating Committees through the Knowledge & Learning modules.

The Research & Capabilities module enables the producer firm to structure a division of labor between those that will develop the research and innovations within the producer firm, and those that will deploy the innovations within the Joint Operating Committees. This is one of the major processes that is carried out in the module. Another major process is that it provides the innovative oil and gas producer with the ability to move the knowledge and capabilities to where the decision rights are held, the Joint Operating Committee. This module is at the core of the innovative oil and gas producer. Identifying and supporting the key elements of “what” and “how” innovation requires.

Lastly bringing new knowledge and capabilities into the organization are what provide economic growth. Deployment of that new knowledge to the right people at the right time is the challenge that the producer faces and the role that the Research & Capabilities module undertakes in the producer firm.

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 Primary Processes of Innovation

We have been discussing the coordination of operations and how that is organized in the People, Ideas & Objects Research & Capabilities module. Coordination of operations is one of the things that is carried out in the module, innovation another. To refresh our memory, the primary process in which innovation is carried out in the Preliminary Specification is as follows.

The producer firm through its interactions with the service industry develops new and innovative capabilities that are captured and documented in the “Dynamic Capabilities Interface.” The interactions with the service industry are through a variety of interfaces in both the Research & Capabilities and Resource Marketplace modules. Using the football analogy the Research & Capabilities module is the practice field where the team is developing new and innovative plays to be worked on and perfected before game day. Game day is when the capabilities are published in the “Dynamic Capabilities Interface” which enables them to be deployed in all of the Joint Operating Committees that the producer has an interest in. This process enables the producer firm to eliminate the unnecessary “trial and error” learning from being repeated in each and every Joint Operating Committee. The learning can be done once, and limit the cost of the innovation by reducing the unnecessary repeated experimentation. As I stated this is the primary process of innovation.

If there was a secondary or optional process of innovation in the Research & Capabilities module it would be based on the following. This is from Professor Richard Langlois’ paper “Innovation Process and Industrial Districts.”

Innovation is based on the generation, diffusion, and use of new knowledge. p. 1

Opportunities do occur at times and in places that are not planned for. Innovation is something that frequently falls within this description.

While it is possible to conceive of a firm that is so hermetic in its use of knowledge that all stages of innovation, including the combination of old and new knowledge, rely exclusively on internal sources, in practice most innovations involving products or processes of even modest complexity entail combining knowledge that derives, directly or indirectly, from several sources. Knowledge generation, therefore, must be accompanied by effective mechanisms for knowledge diffusion and for "indigenizing" knowledge originally developed in other contexts and for other purposes so that it meets a new need. p. 1

To preclude the opportunities to act upon these types of discoveries would leave the spontaneity out of the oil and gas industry. When faced with the knowledge that is provided to the user from the “Dynamic Capabilities Interface” some things may become obvious. Serendipity is a word that is used in economics. We should adopt it here to ensure that a dynamic and innovative nature of the industry is the result.

But there is more that we are doing in this secondary process. We are building on the already well established earth science and engineering capabilities of the producer firms of the Joint Operating Committees. This broadening of the scope of users occurs at the same time there is limiting of the focus to just that Joint Operating Committee. Professor Langlois notes.

When accompanied by close social relationships, tight geographical proximity may affect innovation in ways that are less common in more highly dispersed environments. For example, an awareness of common problems can encourage several firms, or their suppliers and customers, to seek solutions, leading to multiple results that can be tested competitively in the market. pp. 1- 2

and

Relationships within industrial districts therefore lead to diffusion but also to the creation of new knowledge through shared preoccupations. Because many people or firms can work on a problem simultaneously, a number of different solutions may be found (Bellandi, 2003b). The results is a larger and stronger "gene pool" within the sector (Loasby, 1990, 117), with the further advantage that solutions that are originally regarded as competing may turn out to be complementary and well-suited to different niches within the district.  p. 7

What is therefore needed is a means to capture innovations that arise from this secondary process. Whether they are in the domain of the service industry or in the earth science and engineering fields. A means to turn them into the primary innovation process so that they can be further populated throughout the various Joint Operating Committees that the firm participates in. That will limit the amount of trial and error learning costs that might occur if each Joint Operating Committee were to field test their own innovations based on the ideas they may have heard elsewhere.

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.

Professor Richard Langlois on Capabilities Part IV

A Critique of the Bureaucracy

As I stated earlier, the culture of the industry also has an influence on the design of these modules. These cultural conditions reference the boundary of the firms and markets and determine the future changes that will be needed. Since we are dealing with the service industry, and all but the smallest number of producers practice sourcing their field operations from the market. We are consistent with the culture of the industry. Nonetheless Professor Langlois notes three factors are important. Application of this framework to the methods used in the Preliminary Specification provides an understanding of the choices that were made.

• The pattern of existing capabilities in firms and market. Are existing capabilities distributed widely among many distinct organizations, or are they contained importantly within the boundaries of large firms? p. 360
• The nature of the economic change called for. When technological developments or changes in relative prices generate a profit opportunity, does seizing that opportunity require a systemic reorganization of capabilities (including the learning of new capabilities), or can change proceed in autonomous fashion along the lines of an existing division of labor? p. 360
• The extent of the market and the level of development of market supporting institutions. To what extent can the needed capabilities be tapped through existing arrangements, and to what extent must they be created from scratch? To what extent are there relevant standards and other market-supporting institutions? p. 360

The service industry is robust and dynamic. What is needed is for the oil and gas producers to build the interfaces described here. Once they have their capabilities documented and deployed in such a manner the natural evolution of the service industry will continue, although at a faster pace and with more competitive offerings.

The question that we have to ask ourselves is why should we focus on capabilities in the oil and gas industry? I think it is because we have lost the ability to respond to market signals and initiate new and innovative thinking. These next two points will ask the difficult questions that should be asked in terms of “what” and “how” the industry has been operated and what should be done to correct these behaviors. The Research & Capabilities module, along with the other modules of the Preliminary Specification enable the oil and gas producer, and particularly the Joint Operating Committee, to act in their best interests.

In the Preliminary Research Report I suggested that the oil and gas industry was not fundamentally different than the former Soviet Union in terms of its ways and means. Going through the motions and determining “best practices” shows a high level of stagnation present in the industry. We see the natural gas prices that everyone watches but no one does anything about. Everyone complains about the service industry, but no one does anything about it. Its as in the former Soviet Union where there was no bread because everyone was lined up at the bakery waiting for bread. The market system hasn’t existed in the oil and gas industry for so long, no one even knows what it would look like. From Professor Richard Langlois book “The Dynamics of Industrial Capitalism” chapter 1.

The question, then, is clear: why did managerial coordination supersede the price system? Why did “managerial capitalism” supersede “market capitalism” in many important sectors of the American economy beginning in the late nineteenth century? p. 9

To reinstate the market and the dynamism of the market system in the oil and gas industry will require new systems to identify and support innovative producers, suppliers and Joint Operating Committees. The Research & Capabilities module is designed to enable the systemic thinking that is necessary for the earth science and engineering capabilities of the producer and Joint Operating Committees to act in dynamic, innovative and market fashion.

The parallel of the current system to the former Soviet Union is striking when you realize the pervasiveness of the non-thinking environment. From Professor Langlois’ “Economic Institutions and the Boundaries of the Firm: The Case of Business Groups.”

Indeed, traditional command-style economies, such as that of the former USSR, appear to be able only to mimic those tasks that market economies have performed before; they are unable to set up and execute original tasks. The [Soviet] system has been particularly effective when the central priorities involve catching up, for then the problems of knowing what to do, when and how to do it, and whether it was properly done, are solved by reference to a working model, by exploiting what Gerschenkron . . . called the “advantage of backwardness.” ... Accompanying these advantages are shortcomings, inherent in the nature of the system. When the system pursues a few priority objectives, regardless of sacrifices or losses in lower priority areas, those ultimately responsible cannot know whether the success was worth achieving. The central authorities lack the information and physical capability to monitor all important costs—in particular opportunity costs—yet they are the only ones, given the logic of the system, with a true interest in knowing such costs. (Ericson, 1991, p. 21).

This is the one culture of the industry that we are moving against. It is also the most powerful. The bureaucracies control the budget and have exercised it by not supporting People, Ideas & Objects. Show me an ERP system with the depth of research into oil and gas that the Preliminary Specification has, and there are none. They all get financed on relationships that maintain the status-quo with the bureaucracy. The fact that there has been no funding proves that the bureaucracy are too conflicted to do the right thing in this regard. The decision to proceed will need to be taken out of the bureaucracies hands and handed to the investors and the C class executives to fund People, Ideas & Objects. After all they have some concerns with the bureaucracy as well.

There is no denying that the management revolution has taken the oil and gas industry to a scope and scale that is impressive and productive. The question is where do we go from here? We currently stand on the shoulders of giants and have absolutely no vision, no plan and no means in which to approach the future demands of society's needs for energy. We not only have no plan for the future we run the risk of failure of the existing “management” infrastructure. We have far to fall. Bureaucracies have failed before, and when they do fail, they leave it for the bond holders and investors to clean up the mess, while they look for greener fields elsewhere.

Economic Growth Through Organizational Change

There is no question how economic growth will occur. That is from organizational change. But I think that it is intended to be as a result of constructive action not as a result of atrophy and inaction.

Institutions may be the ultimate drivers of economic growth, but organizational change is the proximate cause. As Smith tells us in the first sentence of The Wealth of Nations, 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 (Young 1928; Richardson 1975). p. 3

With the selection of ERP systems like SAP the bureaucracy have secured their future in a bureaucratic and stifling maze of paper. Change occurs in decades and centuries for an application that has no concept of a Joint Operating Committee or even what a partner is. In this day and age, when the organization is defined and supported by the software it uses it is critical that the organization be supported by a software development capability like that which People, Ideas & Objects proposes. Otherwise you set your organization in the proverbial SAP like concrete that only today’s bureaucracies are pleased with.

Economic growth is about the evolution of a complex structure (Langlois 2001). p. 6

It is in the Research & Capabilities module of the Preliminary Specification that the producer firm is able to exercise their opportunities for economic growth. By developing their capabilities and documenting them within the “Dynamic Capabilities Interface” they are able to populate these capabilities to the various Joint Operating Committees that they have an interest in. Reducing the costly experimentation of innovation yet opening up the assets of the firm to innovations.

Economic growth is fundamentally about the emergence of new economic opportunities. The problem of organization is that of bringing existing capabilities to bear on new opportunities or of creating the necessary new capabilities. Thus, one of the principal determinants of the observed form of organization is the character of the opportunity – the innovation – involved. The second critical factor is the existing structure of relevant capabilities, including both the substantive content of those capabilities and the organizational structure under which they are deployed in the economy. p. 13

This previous quote captures so much of what we should be concerning ourselves with. I think it also shows that by using the Joint Operating Committee, and structuring the development and deployment of capabilities in the processes of the Research & Capabilities and Knowledge & Learning modules achieves much of what is discussed.

To expand the economic performance of the oil and gas producer requires that you focus on their competitive advantages of their land and asset base, and earth science and engineering capabilities. The Research & Capabilities module focuses on the producers earth science and engineering capabilities and provides the means in which to document them, expand them, deploy them, and most importantly innovate off of them. Professor Richard Langlois in his book “The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy.”

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

As we have learned “knowledge beget capabilities, and capabilities beget action” and capabilities are the “knowledge, skills and experience” of the people involved. People, Ideas & Objects are working to bring these systems to the oil and gas industry. Systems that provide the computers with the work that they do best and with work that people do best, ideas. So that capabilities should be comprised of knowledge, skills, experience and ideas. The Research & Capabilities module enables the producers capabilities to be captured and deployed in innovative ways.

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

and

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

This next quotation is focused on a specific type of innovation. The type of innovation that People, Ideas & Objects is bringing to the oil and gas industry. However, the conclusion I think is universal in its application to capabilities of all types, and not just organizational capabilities. And that is “those capabilities were the result, not the cause, of the innovation.” This is the primary reason that Research was grouped together within a module with Capabilities, they have a strong interaction with one another.

The first, and most obvious, point is that it was an outside individual, not an organization, who was responsible for the reorganization of the industry. Lazonick is right in saying that genuine innovation involves reorganizing or planning (which may not be the same thing) the horizontal and vertical division of labor. But it was not in this case “organizational capabilities” that brought the reorganization about. It was an individual and not at all a “collective” vision, one that, however carefully thought out, was a cognitive leap beyond the existing paradigm. If SMH came to possess organizational capabilities, as it surely did, those capabilities were the result, not the cause, of the innovation. p. 46

As we move to the Knowledge & Learning module we'll deal with the deployment of these capabilities in 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.