Governance Over the Process of Innovation

One of the areas that we covered in our previous discussion in the Compliance & Governance module of the Preliminary Specification. Is that good governance and innovation are not necessarily mutually exclusive. We want to discuss the “Lessons Learned Interface” that is initiated in the Knowledge & Learning modules of each Joint Operating Committee, and are aggregated in the Compliance & Governance module of the Preliminary Specification. And a new interface that we are calling “The Innovation Library.”

What we know about innovation can be summarized by Professor Giovanni Dosi. He states “In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.”

With the demands for more earth science and engineering being required for each barrel of oil and gas produced. And the need to keep up with the steep trajectory of those sciences over the coming years. The oil and gas firm, and the individual Joint Operating Committees will be learning substantial volumes of new and valuable information about the business. The innovative oil and gas producer will also become capable of innovating off of these developments and expanding the knowledge of both the organization and quite possibly the science. Keeping good governance over these processes would seem to be counter productive, however, it doesn’t have to be.

One of the first things that we can do to provide good governance is to ensure that the same mistakes are not made over and over. Having the lessons learned populated from each of the Joint Operating Committees, up to each of the participant producer firms. Where each producer firm has the aggregated lessons learned from each of the Joint Operating Committees that they have an interest in. Then they can apply any lessons learned from any of the JOC’s to other JOC’s as may be required.

Another thing I think that we can do in the governance section of this module is provide a strong understanding of the innovative process. By compiling and assimilating the process of innovation into an understandable business process then the people who are charged with good governance will be able to understand what good innovation is, and what bad innovation is. Having a library of the science of innovation, some written by Professor Dosi, would alleviate the guess work and concern that some of the activities that were occurring in the firm were moving the firm down the wrong direction, when in fact they were good innovations. We know that innovation can be reduced to a quantifiable and replicable process. Therefore it should be governed on the same basis. However, that governance needs to be done in a manner that it is apprised as to what good innovation consists of. That good governance has a responsibility to understand the process of innovation just as much as the innovators do. Let's call this interface “The Innovation Library” of the Compliance & Governance module.

In general the uncertainty associated with innovative activities is much stronger than that with which familiar economic model deals. It involves not only lack of knowledge of the precise cost and outcomes of different alternatives, but often also lack of knowledge of what the alternatives are (see Freeman 1982; Nelson 1981a; Nelson and Winter 1982). 

This is not what those in corporate governance want to hear. What however should make them happier is that we have the “Research Budget Allocation Interface” in the Research & Capabilities module. Recall that this interface documents the information that the firm is involved in, and summarizes the activities that are currently ongoing and have costs budgeted. If a Work Order has some Research or Innovation being undertaken then it will be listed in the interface. If an AFE has some of these activities it too will be listed in the interface. Within the Research Budget Allocation Interface the ability of its user to review all of the activities that are ongoing within the firm would be possible. The risk of any duplications would be discovered and the budget allocation for research and innovation costs would be prioritized and given some corporate direction.

Additionally there is the Military Command & Control Metaphor (MCCM) providing governance over the innovation process. The MCCM was developed in order to be able pool the technical resources in the Joint Operating Committee, however it has just as much application in the producer firm. By using the MCCM for the innovative activities within the Research & Capabilities module, then the firm is able to keep a tight control over whom is involved in the innovation activities. By imposing a chain of command, and control over the people who may be seconded from different departments in the firm, the MCCM helps to provide good governance over the innovation in the firm.

We know there is more to innovation then this. Sometimes it is the un-qualifiable and un-quantifiable that we are seeking. Professor Dosi notes.

In fact, let us distinguish between (a) the notion of uncertainty familiar to economic analysis defined in terms of imperfect information about the occurrence of a known list of events and (b) what we could call strong uncertainty whereby the list of possible events is unknown and one does not know either the consequences of particular actions for any given event (more on this in Dosi and Egidi 1987). 

and

I suggest that, in general, innovative search is characterized by strong uncertainty. This applies, in primis to those phases of technical change that could be called pre-paradigmatic: During these highly exploratory periods one faces a double uncertainty regarding both the practical outcomes of the innovative search and also the scientific and technological principles and the problem-solving procedures on which technological advances could be based. When a technological paradigm is established, it brings with it a reduction of uncertainty, in the sense that it focuses the directions of search and forms the grounds for formatting technological and market expectations more surely. (In this respect, technological trajectories are not only the ex post description of the patterns of technical change, but also, as mentioned, the basis of heuristics asking “where do we go from here?”) p. 1134

This has / will become the nature of the oil and gas business. Good governance over the innovation process will have to limit the amount of its involvement so that the innovations can develop. At the same time this does not preclude the oversight mentioned at the beginning of this modules description. And there may be substantially more “good governance” that the user community can determine when their involvement in these developments is unleashed.

Continuing with our discussion of corporate governance over the uncertainty of the innovation process. And how good governance will seek to moderate the investments in innovation and attempt to make it a routine aspect of the firms activities. We have noted that innovation is a quantifiable and replicable process, it is however, anything but routine. We do want to ensure that the innovations that are undertaken remain within the commercial sphere and not become science projects. At the same time I want to reiterate that innovation and good governance are not mutually exclusive. And with that jumble of contradictions lets continue.

Writing the Preliminary Specification is an innovation that People, Ideas & Objects is undertaking. It is something that is significant and will happen only once. It is not something that will happen every day and is unusual for it to be undertaken. These are the characteristics of innovation. When a firm undertakes to do something innovative it is usually something that is new and significant to their firm. It involves some risk and imputes a high level of uncertainty. Professor Giovanni Dosi notes.

However, even in the case of “normal” technical search (as opposed to the “extraordinary” exploration associated with the quest for new paradigms) strong uncertainty is present. Even when the fundamental knowledge base and the expected directions of advance are fairly well known, it is still often the case that one must first engage in exploratory research, development, and design before knowing what the outcome will be (what the properties of a new chemical compound will be, what an effective design will look like, etc.) and what some manageable results will cost, or, indeed, whether very useful results will emerge. p. 1135

Unfortunately this is the state of the oil and gas business as it stands today. That every well drilled is literally the result of someone's theory as to what the existence of oil and gas is. Certainly anything classified as exploratory, and much of the development work, would meet this criteria of being innovative.

As a result, firms tend to work with relatively general and event-independent routines (with rules of the kind “... spend x% of sales on R & D,” ... distribute your research activity between basic research, risky projects, incremental innovations according to some routine shares ...” and sometimes meta-rules of the kind “with high interest rates or low profits cut basic research,” etc.). This finding is corroborated by ample managerial evidence and also by recent more rigorous econometric tests; see Griliches and Ariel Pakes (1986) who find that “the pattern of R & D investment within a firm is essentially a random walk with a relatively low error variance” (pp. 10 - 11). 

Going back to the example of People, Ideas & Objects. Writing the Preliminary Specification is not routine, however, it is in a long line of routine research and development projects that have been undertaken to explore the development of user driven software for the innovative oil and gas producers, based on using the Joint Operating Committee.

In this sense, Schumpeter’s hypothesis about the routinization of innovation (Joseph Schumpeter 1942) and the persistence of innovation-related uncertainty must not be in conflict but may well complement each other. As suggested by the “late” Schumpeter, one may conjecture that large-scale corporate research has become the prevailing form of organization of innovation because it is most effective in exploiting and internalizing the tacit and cumulative feature of technological knowledge (Mowery 1980; Pavitt 1986). Moreover, companies tend to adopt steady policies (rules), because they face complex and unpredictable environments where they cannot forecast future states of the world, or even “map” notional events into actions, and outcomes (Dosi and Orsenigo 1986; Heiner 1983, 1988). Internalized corporate search exploits the cumulativeness and complexity of technological knowledge. Together with steady rules, firms try to reduce the uncertainty of innovative search, without however, eliminating it. pp. 1134 - 1135

This is where corporate governance does not necessarily conflict with innovation. Priorities and budgets need to be set and established. A corporate focus has to be imposed. That is what a good corporate governance model will provide the innovative oil and gas producer. Otherwise the firms pursuit would be an out of control science experiment. I think with the governance mechanisms that have been mentioned to date, the “Research Budget Allocation Interface” and the Military Command & Control Metaphor provide the beginnings of good governance. We’ll continue on with our discussion, however, I want to stress again that the user communities input into the Preliminary Specification will be able to provide substantial value in this area.

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 Compliance & Governance Opportunity

When will the demand for more information from regulators end? Maybe a more constructive question would be to think how can we get ahead of this situation on a more permanent basis? Part of the answer to that question is software. We are approaching the development of comprehensive software for the innovative oil and gas producer with People, Ideas & Objects. This should be seen as an opportunity to take the time to rethink the compliance and governance of the producer firm. To begin the implementation of software that will solve the issues of compliance and governance on a more permanent basis. And by that I mean from the point of view of using software, the division of labor and specialization as the solutions to the problem.

Assuming that each producer has to meet regulatory requirements from a to z, that’s 26 jurisdictions. That’s 26 specialized talents that they would need on staff in order to meet those regulatory requirements within each producer firm. Now on aggregate, the industry has those same 26 jurisdictions. Why would we not break this down into 26 teams who are specializing into one jurisdiction each on behalf of all producers? Using software that is designed to meet the needs of that jurisdiction, they could do the specialized work on behalf of each producer in the industry. They could apply their services to the small start up firms and to Exxon Mobil. The specialized nature of the staff at each service provider would be more efficient and less costly than having the in house staff at each producer firm. Add to that the costs of developing specific software to meet the compliance needs being amortized over the entire industry, as opposed to incurred at each firm, and the costs of compliance are lower with better service.

If we review Professor Giovanni Dosi’s three key factors of innovation we find that regulation is a part of the third key factor. Clearly it is currently a drag on innovation. And what we have here is an opportunity to reduce the amount of drag on innovation in the industry.

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.)

At some point the volume of regulations will become economically impractical for each producer to maintain on their own. I think that time has passed and these costs of compliance degrade the industries profitability. It should be at this point that the regulations should force the producers to look at other means to organize the way they meet these requirements. In today’s marketplace that has to include software, the division of labor and specialization. And sees a shift away from the individual producers compliance and governance capabilities to a reliance on an industry wide compliance and governance capability. That is the opportunity that is being presented here in People, Ideas & Objects 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.

Governance Over Lessons Learned

The innovative oil and gas producer is supported through the People, Ideas & Objects application modules. Their innovativeness is what the system was designed to achieve. This is based on the fundamental belief that the higher commodity prices are financing greater innovation and the most innovative producers will be the most profitable. However, as we know with innovation there is an amount of failure that is a natural part of the process. Therefore with greater innovative success there will be greater failure. This deals with the governance of failure within the Joint Operating Committee and how it is handled in the Compliance & Governance module of the Preliminary Specification.

The first thing we should do is define these failures in their proper context and call them what they are generally referred to as lessons learned. These will be documented in an area within the governance section of the Compliance & Governance module for review by others. As we have discussed, a producer may have hundreds of interests in Joint Operating Committees located throughout the world. The ability to know what works and what doesn’t work, where the lessons are learned on a daily basis would be a valuable resource for a firm. Recall in the Knowledge & Learning module these lessons learned are being captured in each of the Joint Operating Committees. What the Compliance & Governance module does is aggregate these lessons learned from each of the JOC’s that the producer has an interest in and presents them in a database with all of the other JOC’s they have an interest in.

The point of this is to simply avoid repeating the same mistakes and expecting different results. If the firm knows that a certain operation is unsuccessful then it should cease to conduct that operation. Very simple in concept, very difficult to implement. With each of the producers within a JOC having access to the lessons learned the less they might occur. Even though the lessons learned are somewhat after the fact it is still worthwhile to know the information for others to avoid the same situation. Lessons learned may also show the way to the ultimate success. It should be policy that a firm require their designates to the JOC to report via the lessons learned interface all material deviations in operations. This would update the Knowledge & Learning for the specific JOC and the Compliance & Governance modules for each of the producer firms so that learning could be spread as far and as quickly as possible.

It was through our research that we discovered an interesting anomaly. Do these collaborations within the JOC create a leakage of proprietary knowledge and capability from one producer to the other? The question therefore becomes how is this proprietary information and capability deployed on an as needed basis? Professor Giovanni Dosi notes that “although the free movement of information has occurred in industries for many years, yet has never been easily transferable to other companies within those industries. The ability to replicate a competitive advantage from one company to another is not as easy, and may indeed be not worthwhile doing.” Dosi (1988) goes one step further and states, “even with technology license agreements, they do not stand as an all or nothing substitute for in house search.” A firm needs to develop “substantial in-house capacity in order to recognize, evaluate, negotiate and finally adapt the technology potentially available from others.” Therefore why not focus on the need to increase the company's own unique and specific sources and directions of competitive advantage? This also imputes that the free flow of information between producers through collaborations in the Joint Operating Committee would increase the knowledge, yet not expose anyone of the specific organizations to any specific losses of key knowledge, proprietary information or capability.

Within a JOC each producer is entitled to this information irrespective of its origins. What is needed is the means to mitigate the losses that might occur by repeating the same mistakes on a corporate basis. The ability to learn from its mistakes should be a strong part of any corporate governance module and that is why it is included here in the People, Ideas & Objects Compliance & Governance 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.

Governance Over the Joint Operating Committee

Throughout our discussion of the Preliminary Specification we have been describing two distinct organizational structures. The producer firm and the Joint Operating Committee. Up until now we have focused the Compliance & Governance modules discussion on the producer firm. The manner that the Joint Operating Committee is operated through the People, Ideas & Objects software application modules is to identify and support the seven frameworks that the JOC defines. The question therefore becomes how does the producer firm maintain governance over the producers working interest share of the Joint Operating Committee?

First we have the Military Command & Control Metaphor that is adopted across the organization so that producers within a Joint Operating Committee can pool their human resources, and impose a chain of command, control and governance over those resources. This pooling is done to offset the shortages of technical resources in the earth science and engineering fields that we have discussed. Since the pooling is comprised of resources from multiple producer firms the governance over those resources in the Joint Operating Committee is deferred to the Committee itself.

Each Joint Operating Committee is governed by their own agreement, operating and accounting procedure in most instances. These are the documents that are used to provide the operational means for decisions, policies and procedures to be used. The influence of one producer to skew the results of these decisions, policies and procedures may occur if they have a high percentage of the voting rights during the establishment of the agreement. Other than that the Joint Operating Committee will be left to operate based on the parameters that have been set and have minimal need for voting on these points in subsequent years. Where they will be active is in the budgets and the decisions as to the directions as to what and where the facilities should be developed. For this there are mechanisms to deal with the (non) participation of other producers and these will be documented by the JOC.

As we can see the voting rights the producer has in the Joint Operating Committee is the extent of their influence in the day to day business. Other than their determination of the amount of capital they will be expending. The JOC will operate in a completely autonomous fashion based on the parameters that were agreed to by the founding producers. There are voting rights and those may be significant in terms of their influence over the outcome but the producer organization and the JOC are two separate organizations for all intents and purposes.

Nonetheless, the need to ensure that the governance of the operations of the JOC are within the normal scope of operations and are a responsibility of the management of each of the producer firms. How then can the governance of the producer be extended over the JOC in a manner that meets this criteria and respects that each producer in the JOC will have similar concerns?

When a producer adds up the number of JOC’s they have an interest in, it could easily number in the hundreds. The simple management of hundreds of properties operating on a semi-autonomous basis presents its own issues and opportunities. Documenting all of the activities that occur within the JOC is not the issue. This would be the easy part of putting an interface over the various data elements and presenting that within the governance section of the Compliance & Governance module. I think we have to get more sophisticated than that and start capturing the activities and actions that are occurring within the JOC’s. Every time there is a vote the results of the vote are reported through to the governance interface to each of the partners. Every time there is an election, a non-participation, capital expenditure decision, etc., its reported through to the governance interface to each of the partners. Then the users of the data have a summary of the actions that took place in those number of JOC’s and can determine if any of the actions require their further attention. I am sure the user community has substantially more needs than these few requirements. And that is why the users have such a prominent role in the development of this software.

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.

Compliance & Governance of the Innovative Oil and Gas Producer

Throughout our discussion of the Preliminary Specification there has been a spirit of cooperation between the producers that participate in the Joint Operating Committee and the vendors in the service industry. Oil and gas remains and will always be a very competitive industry and this spirit does not detract from that competitiveness. The individual producer is ultimately focused on developing their land and asset base, and expanding their earth science and engineering capabilities for the financial gain of their shareholders. Control of the corporation, and hence its competitiveness, should be through the governance interface of the Compliance & Governance module.

This emphasis on governance has to consider 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 firm. Some may see governance and innovation being two opposing forces on the same scale. That may be but I don’t think they have to conflict. You can have good governance and remain highly innovative and competitive. For instance look at Apple. No one would doubt they run a tight ship. I would suggest that it would be difficult to see an innovative corporate mindset come about from a poorly governed process.

One of the research questions that we asked in the Preliminary Research Report was “can the scope and understanding of the process of innovation; be reduced to a quantifiable and replicable process?” The answer to that is difficult to quantify. First you need the appropriate organization, such as the Joint Operating Committee, and it has to be supported by the aligned frameworks of the Joint Operating Committee, and then you need a service industry that is collaborating with the producers to develop the science and engineering products and services needed to develop the industry. So with that, that makes the answer to the research question an unqualified yes.

Having everything in place is no guarantee that innovation will arise. The people are a necessary element of the process. The best a producer can do is to provide the environment that will enable and enhance innovation, and that is what People, Ideas & Objects Preliminary Specification is designed to do. In terms of governance of that process I think we have given the producer some unique tools to maintain control over their firm and the Joint Operating Committees that they participate in. These tools include the Military Command & Control Metaphor, the Work-Order system, the Purchase-Order system, etc.

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.

Automation of the Compliance Frameworks

The question is, with the future of work being more and more self directed, and motivated through performance, and at the same time with the work of computers automating more of the lower level work, how does compliance and governance fit into this vision?

We will be highly successful in building the software described in the Preliminary Specification. And yet have a real mess on our hands in terms of compliance and governance if we don’t have an answer to this question built into that software. That is not what we are doing at People, Ideas & Objects. As much as everyone would like to ignore this difficult area of the business world it is a very necessary part of the business. And by saying that I know I have offended those people who are truly passionate about the business of compliance and governance. And its those people who will know how to implement these frameworks in the manner that solves the problem that we are discussing. As for every problem there are people who have a passion that will drive them to solve it. Such is the manner of user driven software developments.

I know enough of the topic that this can be done in a manner that makes the user aware of the compliance and governance requirements of their actions. Yet not mindlessly warn them with pop up windows every ten minutes of the day. Where decisions can be informed of the compliance and governance implications before they are made as opposed to after the fact. Where information can be contextually provided as opposed to having to be researched. The point of the matter is that the user interface should be a rich environment where the underlying intelligence of the system should be operating and providing much of these requirements. That is if we purposely set out to build it here in the Compliance & Governance module of Preliminary Specification.

One of the other areas that we discussed in the Compliance & Governance module was the scope of the regulations that the producer firm was now exposed to. A simple firm, well scratch that, there is no simple firm. A producer is required to meet quite a few different jurisdictions for a variety of different requirements. Staying on top of these requirements is  a full time job for many of the people within their organizations. If the trend is for more regulations then the demand for more people will increase, or alternatively, automation of the compliance and governance frameworks will become the necessity.

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.

Governance Over the Service Industry

We want to discuss the governance of one of the capabilities processes documented in the Research & Capabilities and Knowledge & Learning modules. The specific process takes the ideas that are generated throughout the oil and gas and service industries, funds them, develops commercial products and services, develops the producers capabilities, transfers those capabilities to the Joint Operating Committee and learns through their application. As we can see this is a long term process that has many open ended elements that could be lost in the shuffle, or has aspects of the process that are too tempting.

Its best to take a step back and discuss why we are implementing this process in the Preliminary Specification. Simply we have two choices for providing the producer firm with the products and services of the service industry. We can let the market provide for all of the products and services, or we can have the producers conduct all of the work from manufacturing drill bits to producing the oil. We currently have a situation where the producers are dissatisfied with the service industry and are micromanaging that industry through control of the market. When producers are not satisfied with the size of the drilling rig fleet, they, the producers will commission more rigs. Sending the wrong messages to the service industry entrepreneurs. Producers have to work with the service industry, not against them, and certainly they should not accuse them of being greedy and lazy. When you take away the incentives to build a drilling rig, don’t accuse them of being greedy or lazy.

It is here within this “capabilities” process that the firms governance must enforce the boundaries of the firm. The division between the market and the firm, and where that division lay’s, has to be enforced within this process. Simply the producer firm is only concerned with their asset base and their earth science and engineering capabilities. Everything else must be provided by the marketplace. The producer however has a role in providing a vision and leadership to the marketplace and seeding that market with funding. In a paper written by Professors Richard Langlois and Nicholas J. Foss entitled “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.” they note.

The organizational question is whether new capabilities are best acquired through the market, through internal learning, or through some hybrid organizational form. And the answer will depend on (A) the already existing structure of capabilities and (B) the nature of the economic change involved. p. 21

The economic change the producer is facing is the commodity prices are rewarding the innovative producer. To focus on purchasing more drilling rigs is not where a producer can generate value. The governance of the producer must maintain the focus on where the producer can generate the greatest value, on finding and developing oil and gas reserves, otherwise...

If by contrast, the old configuration of capabilities lies within large vertically integrated organizations, creative destruction may well take the form of markets superseding firms. History offers many examples of both. p. 21

I am going to suggest that reliance on the Work Order and Military Command & Control Metaphor of the Preliminary Specification be the means of how the producer maintain focus and governance on this process. Distraction away from the objective of the producer firm is a very real possibility in dealing with the noise of the marketplace. The Work Order will ensure that no work is done on unauthorized projects and that a chain of command is implemented in the administration of each project. This will help to ensure that each project is ultimately focused on providing the producer with earning greater returns on oil and gas reserves discovery, enhancement and production.

This discussion may seem like a fundamental contradiction as to what the producers involvement is in the service industry. I am critical of the way that the producers have involved themselves in the business of the service industry. The producers dissatisfaction with the costs, products and services provided to them by the service industry is as a result of the high levels of involvement of the producers in the service industries business. Micro-managing and cost control, as well as direct ownership of things like drilling rigs are counter to the producers interests. At the same time there needs to be stronger representation made by the producers in focusing and leading the service industry marketplace. This leadership is lacking and is sorely missed. My argument is that we need to remove the direct manipulation of the service industry marketplace by the producers and replace it with a more constructive leadership role so that the service industry marketplace can better respond to the needs 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.

Governance Over Self Organizing Groups

The manner in which much of the work is done in the People, Ideas & Objects Preliminary Specification resonates with the ideas of how work will be done in the future. Direct supervision is replaced by self organizing groups who are motivated and directed by the performance of their property. This creates the environment that people aspire to work for; and the governance issues that this creates for the firm. This discussion deals with the governance issues and how the governance areas of the Compliance & Governance module reels in the vision of self organizing groups to something that is more workable and sensible in the commercial environment.

First of all the Military Command & Control Metaphor is not just for the Joint Operating Committee. Although we have discussed it in terms of just the JOC, there is nothing stopping the firm from using the organizational overlay within the firm. This also applies to the Work Order system. These two tools would provide the firm with the ability to ensure that tasks were assigned and completed as budgeted and execution was consistent with the firms expectations. Recall by the use of these systems, it is understood that no other work is undertaken without the ability to charge time or costs to a Work Order. Effectively ensuring that no unauthorized projects are undertaken. The Work Order system would also provide the internal control necessary to ensure that the appropriate people necessary to achieve the governance are assigned to approved projects and are capable of meeting the requirements of the tasks. When “things” go wrong it’s usually at the beginning and having that “governance” information available is the objective of this capability.

When we talk about the firms and Joint Operating Committees internal controls, they seem to me to be a lost art in the tool kit of today’s management. The ability to set up a control to trigger a warning that something is happening that is inconsistent with normal policies, has been used more in the past then they seem to be used today. The power of technology seems to go hand in hand with internal controls. I think they provide a strong method of governance that should be built into the People, Ideas & Objects governance area of the Compliance & Governance module. That is to say that a section be devoted to building database “triggers” and “stored procedures” that are used by the firm to monitor areas of the firms activities. These of course being available to those individuals with the appropriate authority to access the data and information necessary to run the queries, and to fully appreciate the art and science of internal controls.

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.

Compliance for Everyone

In a capital intensive business such as oil and gas, access to capital is a critical capability the producer needs to develop within their operation. In order to have access to the capital you must meet the regulatory requirements and compliance needs of the capital markets. Therefore the Compliance & Governance module of the Preliminary Specification is a critical capability to all those that are dedicated to building an innovative oil and gas producer. That applies equally to ExxonMobil and the start up oil and gas operation.

And it should be a concern of ExxonMobil that the start up oil and gas operation has its compliance and governance in good shape. Why? You can't pick your neighbors and you can't necessarily pick all of your partners. Sometimes you have to deal with partners that you have no history with. You want to make sure that they are capable of operating in a fashion that is at least consistent with standard industry practices. It is those standard industry practices that include high levels of compliance and governance in today’s oil and gas industry operations. What about tomorrow’s environment?

As we have discussed the level of expectation by regulators with respect to the compliance requirements are high. It would appear that there is no sense that any relief will be forthcoming, on the contrary, we should expect the level of requirements to grow. This is the only reasonable expectation, however, I would ask, have we implemented these compliance frameworks correctly? Have the regulations which are submitted in technical frameworks, been “integrated” to the ERP system, or just attached?

We can see the answer to that question when we find that no current ERP system calculates the Gas Cost Allowance for royalty calculations. To conduct these types of calculations you would need to integrate the royalty frameworks deeply within the ERP systems, and that clearly has not been done. So when it comes to the automation of the compliance frameworks, which is the objective of the regulators in publishing these technical frameworks, nothing has been done from the industry side.

I have argued that there is two ways in which to approach the problems that we face in oil and gas. One is to automate the processes to high levels with systems. This requires the high capital costs of software development such as what People, Ideas & Objects have proposed. Or, you can employ the human resources to maintain the compliance requirements on a manual basis. This is the method that industry has chosen to pursue up to this point. I would ask in times where;

• The cost of capital is historically low.
• The demand for human resources is somewhat constrained.
• The regulators have published technical frameworks.

Why wouldn’t the oil and gas producers chose to develop the People, Ideas & Objects applications?

Automation of the compliance frameworks within the People, Ideas & Objects applications would provide many benefits to the innovative oil and gas producer. The costs of doing this engineering work is being amortized over the entire industry. Making these highly engineered software products, incidental in terms of actual cost to each producer. Access to these systems would be to the benefit of all the producers in the industry. Enabling the capability of each individual producer to meet or exceed the minimum standard of industry expectations. In a world of increasing demands, your partner's capabilities could become a critical issue to your operation. There is a compelling argument here in the compliance aspects of the Compliance & Governance 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.

Specialization and the Division of Labor

We noted the opportunity of centralizing the software development costs and efforts for Compliance & Governance frameworks under one roof. That is to say that instead of each producer building the in-house capacity to have their software and compliance capabilities maintained, it is preferable to have it centrally managed through People, Ideas & Objects. I want to take that concept a bit further and break down another element of the cost of compliance and discuss how that element could also be done in a centralized manner. That element is of course the accounting and administrative costs incurred in meeting the regulations requirements. The costs of which are incurred in the human resources and associated overhead. These costs are an area where specialization and the division of labor could be applied and build real value for the producer firms.

It comes down to the question of where is the compliance work done, at the Joint Operating Committee, or the firm? It has to be done at the firm as all the variables are unique to each producer. Within the Preliminary Specification we use the decentralized production model. This sees the prototypical producer firm reduced to the C class executives, the earth science and engineering resources, some land and legal and support staff. In the case of compliance and governance resources they are provided to the producer firms through industry based service providers. This moves the producers compliance and governance to be relied upon through the industries compliance and governance capabilities of service providers.

If we were to approach the accounting and compliance reporting requirements on an industry wide capability and used specialization and division of labor we could add significant value to the industry. Taking the organization of the accounting across the industry and building the accounting and compliance needs for all of the producers would provide that value at lower costs and better service because of the efficiencies from the division of labor and specialization. Where each individual accounting and administration service provider were specialized in one and only one compliance requirement. Particularly in the area of compliance reporting, especially royalty, where the knowledge of the people who were employed in the compliance service would be so specialized that they are able to ensure that their clients royalty obligations were the lowest possible. With royalties being the largest cost component of a producer this would certainly be of value but there are greater efficiencies than these available. There would also be the ability to manage the process with the most efficient team available.

These are the two elements of the costs of compliance. First, as we noted the cost of maintaining the software in compliance to the regulations. And two, the accounting and administration that is done in keeping the firm up to date by service providers. If the software can be maintained on a global basis on behalf of the industry by People, Ideas & Objects then the one time costs of the software can be amortized over the industry as a whole. And if the accounting and administration costs can be managed by also centralizing the accounting and administration function within an industry wide capability within service providers, and as a result, specialization and the division of labor coming into play. Then the industry is benefiting by reducing their costs by reducing the two largest components of the costs of compliance in the most cost effective way. Yet, they have also done so in the manner where their compliance quality is higher.

Another element of quality also comes into play as a result of the proposal from People, Ideas & Objects. That element is time. If the timeliness of the information that is provided is within the guidelines, or is earlier, than the quality of that information is much higher. I think that what is proposed here with the high levels of software automation, specialization and the division of labor provide an assurance that the timeliness of the information that the systems we are building will be better than the deadlines imposed by the regulators. This timeliness doesn’t appear to come at the expense of accuracy either.

Lastly when we discuss moving the compliance and governance frameworks of the hierarchy into alignment with the Joint Operating Committees legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks. We state that this provides an increased speed, innovativeness, accountability and profitability. For when you align compliance and governance with operational decision making, accountability is the result.

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.