Conclusion to Compliance & Governance

Here we have the beginnings of compliance and governance for the innovative oil and gas producer and Joint Operating Committee. What we need to do is to deal with the compliance of an innovative oil and gas producer with the tools of the 21st century. Those include automation, specialization and the division of labor. And in terms of governance, we can begin to provide the producer firm with the appropriate operational governance that is consistent with the demands of innovation.

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.

People, Ideas & Objects and Oracle Corporation

Where to begin, lets start off with a high level summary of the Oracle Governance, Risk & Compliance Management Suite of modules. There are three groupings in which the modules are organized, they are Risk & Financial Governance, Performance & Financial Controls and Access & Segregation of Duties Controls. Within these three groups you will find the modules that Oracle has developed in the Oracle Fusion Applications, Oracle Governance, Risk & Compliance Management Suite. We will be discussing the Risk & Financial Governance module with the Performance & Financial Controls being discussed next and Access & Segregation after that. Needless to say these modules have all been adopted within the Preliminary Specification.

To the larger issue of compliance and governance and how a firm gets a firm handle on the growing demand for more regulation. Oracle and People, Ideas & Objects have similar ideas as to how to keep ahead in this difficult area. Oracle asks the following.

No one expects that this is the end of new industry and legislative requirements, so business executives continue to struggle with questions such as: How can we stay on top of regulatory demands while controlling costs? Can we better manage risk to prevent business and compliance failures? How do we achieve better performance while ensuring accountability and integrity?

And it is through automation, Information Technologies and the use of specialization and the division of labor that the innovative oil and gas producer can achieve these objectives of getting ahead of the regulations. As we have proposed in the Preliminary Specification, the producer that participates in the user community has the opportunity to shape the software that they will use. People, Ideas & Objects is user defined software based on the Joint Operating Committee. Giving the producer the ability to remake their organization into an innovative, profitable and performance oriented oil and gas producer.

In terms of Oracle’s Risk & Financial Governance module producers will be able to increase the efficiency of compliance processes, improve the reliability of the financial reporting and anticipate and respond to risk. We discussed the element of risk in the Financial Marketplace module and the assessment of all of the investments based on their anticipated returns. Each of the potential investments have to be “risked” in order to bring the return on to comparable terms that considers the risk. It is here that the the two modules, the Oracle Risk & Financial Governance, and the Financial Marketplace modules will have some cross over. It is also at this point that our two firms have similar attitudes, again, with respect to how the producer attains value. Oracle states.

KPMG's Assurance & Advisory Service Center understood early that value and risk go hand in hand and that performance and risk management should converge to create, enhance and protect stakeholder value. In May 2007, the Institute of Management Accounting further characterized Enterprise Risk Management as aligning strategy, processes, technology, and knowledge with the purpose of evaluating and managing the uncertainties the enterprise faces as it creates value. It considers ERM to be a truly holistic, integrated, forward-looking, and process oriented approach to managing all key business risks and opportunities—not just financial ones—with the intent of maximizing stakeholder value as a whole.  

This will be a key insight that the user community will be able to build off of the People, Ideas & Objects Financial Marketplace and Oracle’s Risk & Financial Governance modules.

The Oracle Transaction Controls Governor is an application that is designed to continuously monitor key transactions. It also provides monitoring of data and application modifications. In terms of reviewing transactions, much of the application is programmable and can be set to look for certain criteria. This is done through an interface that is intuitive and easy to set up a control to monitor all transactions for certain behavior. Oracle also provides a library of internal controls that can be deployed if the producer finds them of value. People, Ideas & Objects, working on behalf of our subscribing producers, will also provide a library of these controls that are specific to the innovative and profitable oil and gas producer. These controls output can then be directed to the appropriate individual within the firm to have them dealt with.

Oracle’s Configuration Controls Governor is an Oracle Fusion Application that provides Sarbane’s Oxley compliance to the producer for IT infrastructure configuration changes. When there is a change to your IT environment, the who, what, where and when of the change is sent to the appropriate people within your organization. There they can review the changes to ensure that they were carried out in compliance with the companies policies. The Configuration Control Governor also provides the ability to establish tolerances on fields. So if a user entered a number that exceeded the value of the fields tolerance, the transaction would be rejected.

During our discussion of the Compliance & Governance module we discussed the need for more internal controls. And these transaction and configuration controls will bring an element of the internal controls under appropriate governance. That these are automated helps to provide a strong understanding of the appropriateness of the global transaction base the producer firm has based their financial reports upon. However, they are not the whole picture when it comes to internal controls. And that is where the Oracle Preventive Controls Governor comes into play. Using configurable workflows, Oracle Preventive Controls Governor enables the user to design  and implement appropriate internal controls for their firm. This tool provides both contextual and intrinsic policy applications to business processes.

We take a look at Oracle Fusion Applications, Governance, Risk & Compliance Suite, Access Controls Governor module. This will be an important element of the Preliminary Specification as segregation of duties (SOD) has taken on an heightened importance in the firm. Whether that is as a result of the regulation or from the need for better governance, SOD offers many advantages to the innovative oil and gas producer. Having multiple people involved in the process from beginning to end ensures that no one individual can manipulate resources of the firm for their own benefit.

Oracle notes the following is also part of the Access Controls Governor modules functionality.

Global regulations are driving organizations to improve the transparency and accountability of financial data, processes, and transactions. Controlling, tracking, and reporting on user activity within the application environment are critical components of compliance.

So apparently big brother needs to be watching. And as good as your internal controls may be, there will always be ways in which the system might be “hacked” in ways that were unknown before. Thankfully Oracle’s Access Controls Governor module is automated and implements the policies based on management's understanding. There is also a library of controls that can be implemented that was developed by Oracle in collaboration with leading audit and consulting firms. As with the libraries that were mentioned, People, Ideas & Objects will maintain a library of these policies for the innovative and profitable oil and gas producer. And the system is not just reporting on violations, it is actively stopping and enforcing SOD when they occur based on those policies. And they can be somewhat dynamic and proactive in their enforcement, stating that no user can be involved in more than two steps of a five step process, and disallowing the user to sign on to another process at the time of assignment.

When preparing policies for implementation the Oracle Access Controls Governor provides a tool for simulating the new policies. Using the historical record of user access as the base of information it can run the new policy against that data to determine what the outcome of that new policy will be. Would there be any new violations, and / or false positives etc? Then they can tune the policy based on the feedback that they get from the tool to ensure that it is catching only the desired situations. Saving costly resources in the future.

From a People, Ideas & Objects perspective the Oracle “Governance” applications that we have discussed help to bring 21st Century internal controls to the Preliminary Specification. When we think of the manner in which the industry will operate with large portions of the existing producers overhead being provided by service providers. And those service providers accessing their work through the People, Ideas & Objects Preliminary Specification. Extension of these internal controls to those individuals will be needed as well. The producer will need to know that these controls are effective in their firm, their Joint Operating Committees and the service providers they hire to maintain their 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.

Governance Over the Second Process of Innovation

We have been concerned with the governance over operations, and now we want to look into the governance over the two major processes of innovation in the Preliminary Specification. The first process of innovation is the development of innovation within the producer firm and is a result of the earth science and engineering capabilities being developed. The second process is as a result of the field level innovations that are developed by the service industry and are either product or service related in terms of their offering to the producer or Joint Operating Committee during some operation. Either way it is important that the producer firm have a measure of governance over the developments of innovation for a variety of reasons. These governance elements will again be captured in the “Operational Review & Governance Interface” of the Compliance & Governance module. Quotes are from Professor Richard Langlois paper “Innovation Process and Industrial Districts.”

What is it that the innovative oil and gas producer and Joint Operating Committee will be doing when they are “innovating”? That seems to be a fairly reasonable question and one that would be the founding principle in which the governance over the innovating processes should be based upon. It's here that Professor Langlois provides us with a very good summary for our purposes.

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

The source, deployment and use of this new knowledge is the “Dynamic Capabilities Interface” in the Research & Capabilities and Knowledge & Learning modules. Recall that “knowledge begets capabilities, and capabilities begets action.” The capabilities that are contained within the “Dynamic Capabilities Interface” are comprehensive and are designed to serve the needs of all of the people that are required for that particular operation.

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

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

I could recite more of the elements of the Preliminary Specification as the reasons for the governance requirements in the “Operational Review & Governance Interface.” The point that needs to be made is that the two major processes of innovation need to be reviewed from a high level within the firm. There are many interactions between the firm and the Joint Operating Committee, and the larger service industry that the possibility that all of the valuable knowledge is not codified is high. That is just one of the risks. Another is that the “Lessons Learned Interface” doesn’t capture the failures accurately for further learning. These are necessary to be reviewed to ensure that the knowledge and capabilities, as well as the innovations are built upon for the future.

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 Operational Control

Within the Preliminary Specification there is a conflict or contradiction that needs to be managed through the Compliance & Governance module. That is the posture that needs to be presented by the people who are members of the Joint Operating Committee towards the service industry representatives. At two different times and two different places during the ongoing operation of the properties the approach towards the service industry may be fundamentally different. At one time the approach will be to have the service industry operate as a free wheeling marketplace where the innovation and ideas are flowing. And then there will be the times when the operations are being conducted and the need for military precision is expected and required to ensure the operations are completed successfully. This Dr. Jekyll and Mr. Hyde routine would give most people, in both the Joint Operating Committee and the service industry, a second look.

On the one hand we have a marketplace and on the other we have operational control. And for many reasons the two may be comprised of the same people operating in different capacities and at different times. The governance issue is; how do we ensure that the operating mode, marketplace or operational control, is the appropriate mode that everyone is operating under? This is of particular concern to the service industry representatives, as so much of the operational control and success of the operation is dependent on their full attention.

The answer to this question comes from the “Operational Review & Governance Interface.” If there is an operation that is currently being conducted by the Joint Operating Committee. And there has been no corners cut or short cuts taken then there will be the explicit knowledge contained in the “Dynamic Capabilities Interface,” the “Planning & Deployment Interface,” assignments under the Military Command & Control Metaphor which will include representatives of the service industry, the AFE, and Job Order. Whereas none of these are required in the marketplace. Therefore the onus is on the Joint Operating Committee to ensure that these tools are used to contrast it from a freewheeling marketplace. And it will be in the “Operational Review & Governance Interface” that the governance over the members of the Joint Operating Committee is imposed to ensure they are using these tools appropriately during their operations.

Operational control and innovation are on two opposite ends of the same spectrum. That however does not mean that they can’t be attained by the same organization. The innovative and profitable oil and gas producer must have both. One without the other is not worth pursuing. The conflict and contradiction will show up in the organization at some point and the need to deal with it becomes a governance issue. The user of the “Operational Review & Governance Interface” will have the tools necessary to ensure that the Joint Operating Committee is able to discern the difference between innovative markets and tight operational control.

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 Deployment of Capabilities

We are discussing the operational governance of the firm and Joint Operating Committee. An important element of this discussion is the capabilities that these organizations have access to. Earth science and engineering capabilities are documented in the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. And are one of the two key competitive advantages of the innovative and profitable oil and gas producer. Therefore from a governance point of view these capabilities need to be safeguarded and ensure that they are kept for your firms eyes only. Nothing could be further from the truth. Any usage of these capabilities will cause their leakage to member firms of the Joint Operating Committees you are a participant in. That is an inevitable fact. And it is imperative that the firm consider as their priority the use of their capabilities as having the right information deployed to the right people at the right time. Governance therefore should be concerned with the appropriate use of its capabilities, rather than the hoarding of information. From Professor Richard Langlois “Organizing the Electronic Century.”

"This is the basic modularization of the market economy. It accords well with the modularization G. B. Richardson (1972) suggested in offering the concept of economic capabilities. By capabilities Richardson means "knowledge, experience, and skills" (1972, p. 888), a notion related to what Jensen and Meckling (1992) call "specific knowledge and to what Hayek (1945) called "knowledge of the particular circumstances of time and place." For the most part, Richardson argues, firms will tend to specialize in activities requiring similar capabilities, that is, "in activities for which their capabilities offer some comparative advantage" (Richardson 1972, p. 888)." p. 27

What is it that we are trying to achieve in employing these capabilities? It is of course to generate value. But more importantly to generate value on behalf of the owners represented in the Joint Operating Committee. In economic terms this value is called “externalities.” After the operation, after the deployment of the right capabilities at the right time by the right people the value should have been gained by the members of the Joint Operating Committee.

So why don't we observe everywhere a perfectly atomistic modularization according to comparative advantage in capabilities - with no organizations of any significance, just workers wielding tools and trading in anonymous markets? We have already seen the outlines of several answers. The older property rights literature, we saw, would insist that the reason is externalities, notably the externalities of team work arising from the nature of the technology of production itself. The mainstream economics of organization is fixated on another possibility: because of highly specific assets, parties can threaten one another with pecuniary externalities ex post in a way that has real ex ante effects on efficiency (Klein, Crawford, and Alchian 1978; Williamson 1985). Richardson offers a somewhat different, and perhaps more fertile, alternative. Firms seek to specialize in activities for which their capabilities are similar: but production requires the coordination of complementary activities. Especially in a world of change, such coordination requires the transmission of information beyond what can be sent through the interface of the price system. As a consequence, qualitative coordination is necessary, and that need brings with it not only the organizational structure called the firm but also a variety of inter-firm relationships and interconnections as well." pp. 27 - 28

If the Joint Operating Committee coordinates these capabilities in the appropriate manner then the externalities will flow to the producers represented there. That is what the governance of the operation is most concerned about. That there was leakage of some documentation of these capabilities during the operation is immaterial to the externalities and the competitive position of the firm. Recall during our review of Professor Giovanni Dosi for the Preliminary Specification. His research showed that it took an equal and sometimes greater effort to copy another firm's capabilities then it did to generate the capabilities themselves. It is therefore more effective for a firm to focus on their key competitive advantages of their land and asset base, and their earth science and engineering capabilities. And the effective and efficient deployment of these competitive advantages on a “just in time” basis.

We have asserted and I am certain that it is generally agreed that the oil & gas industry is moving towards its scientific basis as its primary form of competitive advantage. The days in which financiers or lawyers could build viable producers based on their skills are numbered if nonexistent. There is also a perception that is developed through the Preliminary Specification that the producer is a firm that maintains financial interests in a variety of Joint Operating Committees. That the producer will deploy their capabilities to these assets when and where they are needed and as these capabilities are developed. These processes of capabilities deployment are under constant levels of change and innovation in the innovative producer. This level of change and innovation causes “Dynamic Transaction Costs” to be incurred, and for people to question the direction of the changes. What is needed is a method of governance in the Compliance & Governance module over the overall process of change to ensure that the ship maintains its course and the costs remain in line. Quotations are from Professor Richard Langlois “Transaction Costs in Real Time” paper.

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

We introduced the “Operational Review & Governance Interface” and we will now continue with its discussion. In our previous discussion we had the ability to mentor the Project Manager and oversee or supervise the operation if required. What we need to discuss now is broader and more global in scope. An interface that encapsulates the entire firm's operations so that the user can see that the direction the firm has taken in terms of capabilities development is being optimized in its Joint Operating Committees, etc. It would be of little value if the firm was expending valuable resources on developing its capabilities on multilateral fracing in shale formations when none of its Joint Operating Committees were deploying, or able to deploy the technologies.

With the “Operational Review & Governance Interface” the user would be able to review the entire operation as it happened. From the “Dynamic Capabilities Interface” to the “Planning & Deployment Interface,” AFE, Job Order and “Lessons Learned Interface.” Review all of the actions taken and the documentation that was generated during the operation to determine what was the critical cause of the success or failure of the operation. This could be done in fine detail or in summary form to oversee the many operations that may have been conducted.

Another variable that is being captured by the Preliminary Specification is the “Dynamic Transaction Costs” themselves. These are the costs associated with change and innovation. When people run into these costs then they will know to tag them with the Dynamic Transaction Costs tag for further review. This will be a red flag in the “Operation Review & Governance Interface” for the user to trigger on. When they see high levels of “Dynamic Transaction Costs” then they know the operation ran in to high levels of change and / or innovation. Therefore they will be able to see the implications of these costs in the knowledge and information in the interface. And know that either some significant change or innovation was 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.

Governance Over Coordination Without Incentives

With our review of Professor Richard Langlois writings we can see there will be an element of the Preliminary Specifications Compliance & Governance module that will be devoted to what we would call “operational governance.” We want to discuss the incentives vs. coordination issue of any operation that a Joint Operating Committee undertakes. This deals with the conflict between producers and service industry representatives and the high costs associated with any field operation. Producers feel that field costs are out of control and are imposing cost controls in an effort to better manage them. People, Ideas & Objects feel that coordination of the field operations and better communications will provide the appropriate means to control costs and will also provide for better outcomes. The coordination and communication coming about through the modules in the Preliminary Specification, specifically the Research & Capabilities and Knowledge & Learning. In his paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization” Professor Richard Langlois states.

More generally, we are worried that conceptualizing all problems of economic organization as problems of aligning incentives not only misrepresents important phenomena but also hinders understanding other phenomena, such as the role of production costs in determining the boundaries of the firm. As we will argue, in fact, it may well pay off intellectually to pursue a research strategy that is essentially the flip-side of the coin, namely to assume that all incentive problems can be eliminated by assumption and concentrate on coordination (including communication) and production cost issues only. p.17

Let's assume for a moment that the People, Ideas & Objects Preliminary Specification is operational in your firm. You have the Military Command & Control Metaphor, the Planning & Deployment Interface, the AFE and Job Order systems operational as expected however your results continue to disappoint and the cost overruns are tragic. How do we ensure that the performance expectations are met and these poor performing situations are identified quickly and dealt with?

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

We should have an interface in the Compliance & Governance module that provides a user with the ability to oversee the operations being conducted in the Research & Capabilities and Knowledge & Learning modules. This interface should be called the “Operational Review & Governance Interface” which gives its user access to the operational information that is being undertaken. There they can interact, if desired, and supervise or mentor the project manager to ensure that the objectives are met and the costs are maintained. All with the understanding of how these objectives can be achieved, through enhanced coordination and communication, not through incentives.

In saying this, it's more about governance than about supervision. You want to be able to effect change when things go wrong, and you want to quickly identify when things do go wrong, however, you also don't want to unnecessarily interrupt the day to day 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.

Governance Over the Capabilities Revenues

Through our discussion of the Preliminary Specification we have noted that the innovative and profitable oil and gas producer will have two distinct sources of revenue. The first is the oil and gas production, and the second is the value added process of the specialized capabilities they provide to the various Joint Operating Committees, working groups they participate in, and other producers who may hire them for their specialized capabilities. This discussion deals with the governance over these capabilities to ensure that the revenues are recovered from the appropriate partners.

With the expanding volume of work required for each barrel of oil produced. The demand for earth science and engineering resources continues to grow. The supply of these resources are constrained as the ability to increase them in the short, mid and long term is difficult. People, Ideas & Objects has approached the supply of these technical resources by developing software that defines and supports a greater division of labor and specialization throughout the industry. We have also identified that the “operator” designation inappropriately requires that their capabilities be developed to handle any and all contingencies within the producer firm. The operator designation creates unused and unusable surplus capacity of earth science and engineering resources that are trapped within each producer firm. By pooling the technical resources available from the partners represented in the Joint Operating Committee. This pooling will take the available capabilities of each producer and match them to the needs of the property to ensure that the requirements are fulfilled. Additional capabilities can be acquired from the marketplace. Eliminating the otherwise trapped unused and unusable surplus capacity of these earth science and engineering resources in each of the producer firms. Capabilities provided in this fashion will be costed to the joint account on the basis of an industry standard cost that recognizes the education, skill and experience of the resource.

Revenues from the provisioning of engineering and geological capabilities to the Joint Operating Committee are a necessary part of the oil and gas business. Replacing the current operator overhead charges. With the expansion in the volume of work required for each barrel of oil produced there is commensurate difficulty in securing these capabilities in-house. There is also increased difficulty just to maintain the capabilities. The need for the producer to build the specialized capabilities becomes an issue of how to develop them if they can not source a dedicated revenue stream to support them. By having a dedicated revenue stream to support the engineering and geological costs then the producer can better manage their operation, and build their capabilities. There is a further issue when we apply the tools of specialization and the division of labor. The scope and scale of an oil and gas earth science and engineering capable operation, without the pooling concept being applied, becomes so broad as to become completely noncommercial.

In terms of governance the Preliminary Specification will provide the “Capabilities Revenues & Support Interface” in the Compliance & Governance module. This will provide a summary of all of the charges to the various joint accounts and working groups for any engineering and geological resources during the period the user requests. This interface will also have targets for the departments to achieve in terms of their percentage cost recoveries and budgeted incomes. These targets should be able to be allocated to the individual joint accounts.

These revenues should be displayed in the proper context on the “Capabilities Revenues & Support Interface.” That is to say they should be presented in a pro-forma income statement showing the costs of these resources, which would include resource costs and the various other costs of rent, technical support, equipment etc. This would show the progress in terms of how the firm had moved towards meeting its targets.

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 Value Add

The level of innovation within the oil and gas producer has / will become more challenging as the earth sciences and engineering disciplines continue their steep trajectories. With high levels of activity in this area, and the implications being so broad and far reaching there will be areas where substantial value might be left uncultivated by the producer. These could be in the scientific or business areas and the question becomes who is responsible for seeing that this value is captured? This discussion will detail how the Compliance & Governance module of the Preliminary Specification deals with this situation.

With our look at technological paradigms and the effect they have on scientific and innovative trajectories in oil and gas. When discussing these points on innovation, it is important to remember that the sciences, the trajectories they are on, and the opportunities they generate for a producer, are accelerating and will continue to do so. With this in mind, we note that Professor Giovanni Dosi suggests two separate phenomenon are observed:

First, new technological paradigms have continuously brought forward new opportunities for product development and productivity increases.

Secondly “A rather uniform, characteristic of the observed technological trajectories is their wide scope for mechanization, specialization and division of labor within and among plants and industries.” p. 1138

As we have learned these new opportunities will be in the technological and business areas of the firm. The opportunities will be within the scope of the oil and gas businesses competitive advantages of its land and asset base, and earth science and engineering capabilities. However, much of it will also be generated outside of its core area, in the service industry, through the further division of labor and specialization, and in non-related business areas that are new and not well serviced by existing businesses. Most of this business value will be easily captured. That however does not necessarily mean that it should be pursued by the firm. It is critical at these times that the governance model ensure that the firm stick to its knitting and pursue its key competitive advantages. That to move outside of its core competitive advantages, to pick up some of these low lying fruits would be to distract it from the real job at hand. This has to be the job of those who are ensuring the governance model is upheld. At the same time, any value that is in the core competitive advantage that is not realized, must be captured and steps taken to systemically realize the value from that point forward.

To ensure that the firm remains within its competitive advantages there will be one interface developed with two different elements to it. This will be called the “Capabilities & Deployment Additions Interface.” The first element will be a summary of the additions that were made to the “Dynamic Capabilities Interface.” By reviewing the current additions, i.e. all of the text that was added in the last quarter, to the interface. The user will be able to determine if the firm has been able to maintain its overall focus on developing its capabilities in line with its goals and objectives. If it sees that it is suddenly researching the development of drill bits then it knows that it has wandered in an inappropriate direction. The second element is similar in its characteristics but uses the “Planning & Deployment Interface.” With the deployment of its capabilities it can see that the firm has deployed its resources in a manner that is consistent with its objectives and goals. That no capabilities were deployed to commission drilling rigs or similar unrelated activities during the quarter.

In the same way that the capabilities and deployment of them can be reviewed, the AFE and Work Orders can be reviewed for the quarter as well. These will provide an understanding of what the firm has done in participation with the partners and other producers in the industry. After reviewing these activities the user of the “Capabilities & Deployment Additions Interface” will be able to ensure that the focus of the producer has remained consistent with its objectives. Any potential deviations could be dealt with through discussions with management and corrective actions taken.

Focusing on where it can generate the greatest value is the only concern of the firm. To pursue the value that might be available in other areas is a distraction that should be of no concern. However, understanding that at the same time there is new value being generated as a result of the steep trajectories that the relevant and core strategic science is on. That this new value may be reflected in other areas of the firm, and needs to be captured is part of the “Capabilities & Deployment Additions Interface” 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.

Governance Over the Firms Collaborations

We want to discuss the governance of the firm and Joint Operating Committees collaborations. It is these collaborations between the industry participants and the service industry that will provide the fuel for the producer and Joint Operating Committee innovations. Good governance over these collaborations is also necessary from the point of view of ensuring that the firms capabilities are not unnecessarily leaked to areas where they are not required. We have stated throughout the Preliminary Specification that capabilities are as difficult to copy as they are to generate within the firm. That to copy the capabilities of another firm is as costly as developing them on your own. What this discussion is about is good governance.

We begin by discussing Professor Giovanni Dosi’s definition of a technological trajectory. The definition of a technological trajectory is the activity of technological process along the economic and technological trade offs defined by a paradigm. Dosi (1988) states “Trade-offs being defined as the compromise, and the technical capabilities that define horsepower, gross takeoff weight, cruise speed, wing load and cruise range in civilian and military aircraft.” People, Ideas & Objects assumes the technical trade-off in oil and gas is accurately reflected in the commodity pricing. Higher commodity prices finance enhanced innovation.

These trade-offs facilitate the ability for industries to innovate on the changing technical and scientific paradigms. Crucial to the facilitation of these trade-offs is a fundamental component that spurs the change and is usually abundant and available at low costs. For innovation to occur in oil and gas, People, Ideas & Objects would assert that the ability to seek and find knowledge, and to collaborate are two “commodities” that are abundant today. With their inherent low direct costs, knowledge and collaboration are the triggers for a number of technical paradigms which will provide companies with fundamental innovations.

We have throughout the Preliminary Specification enhanced collaboration between the producer and other members of the various Joint Operating Committees the producer has partnered with, members of the industry, service industry participants and the general industry at large. These collaborations are with the expressed purpose of developing the technology and understanding of the firm and enhancing its innovativeness and capabilities. There are however limits to this exposure. For a variety of legal, proprietary, and other reasons certain things may not be able to be discussed openly. There is also the case that information regarding a certain capability will only be discussed with partners that have an interest in that property. That to release it to other partners would not be in the interest of the firm. How is the governance of these collaborations managed?

The capabilities within the “Dynamic Capabilities Interface” of the Research & Capabilities and Knowledge & Learning modules are restricted to those situations in which they are authorized. However, does that solve the problem. The issue comes down to the collaboration itself. Does the information slip out in the discussion between the individual and their counterpart at company b? What can be done once the collaboration has leaked the data? Not much and that is the issue that the governance has to deal with.

One of the first things we can do is centralize the publication of the collaborations to one area. There they can be approved for content before publication, and if any collaboration is deemed to be too revealing then it can be returned for editing, and further review before publication. This would slow the process of collaborations however that is a minor issue compared to the loss of critical information. Secondly the review before publication could be placed only on certain people who know the corporate secrets, then the workload would be less onerous. The problem with either of these situations is that it would take the time of someone very senior within the organization. To do this would require that we have a centralized “Collaboration Interface” that aggregates the firms collaborations into one central area. Therefore we will build this interface within the governance area of the Compliance & Governance module should any producer desire to use it.

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

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.