Specialization & the Division of Labor
Since 1776 the only basis of increased value generation is the expanded definition and use of specialization and the division of labor. Adam Smith proved in his research that reorganizing a pin factory around specialization and the division of labor between the individual workers, augmented through proficiency, automation and mechanical advantage, the output of the factory increased 240 fold. Today the inverse of this is true. Software and most particularly ERP software has sealed organizations in a definition that is unchangeable through any means other than changing the software process definition. This aids the status quo configuration of producers when they don’t sponsor or initiate any change in the ERP software that they use. Choosing instead to focus on engineering tasks such as cost cutting in an attempt to generate business value. If we are to meet the consumer's demands for energy in the 21st century it will be a result of an “all of the above” energy strategy. For the next several generations the largest component of the energy makeup will be oil & gas. Therefore to deal with these issues and opportunities demands that we increase the throughput of the industry substantially in order to meet the increasing demands of the North American marketplace.
It is therefore necessary to ensure that we proceed from this point forward with the defined capability and capacity to enhance the ERP software used in North American oil & gas. And to do so in order to facilitate an increased level of specialization and division of labor that is iterative and constantly evolving. People, Ideas & Objects provide for this and are configured specifically to ensure that this is the case. Our business model is dependent on change. We generate revenues on the basis of the software development changes initiated by our user communities interactions with industry. Our user community will be available everywhere and always on a part-time basis to work with our developers to make the changes they’ve identified while working in their service provider operations. These service providers will be configured to deliver the explicit knowledge that's captured in our software and the tacit knowledge provided of their services. Our user community members are therefore on the ground in the industry on a day to day basis in the administration and accounting of the producer firms. They are the exclusive, licensed individuals that are the only group authorized to make changes to the underlying Intellectual Property of the software. Our developers are aware of no one else in terms of who provides their input. In other words our user community members have the power necessary to ensure that the processes they manage provide for the most profitable means of oil & gas operations everywhere and always. User community members are the only individuals that own and operate a service provider. If anyone in industry wants to know who they need to have their issue resolved, they’ll only need to engage the pertinent user community member. Who do they call today, or at SAP if our suspicions of the officers and directors actions are correct and they’re in the process of selecting their solution?
The advantages that People, Ideas & Objects Preliminary Specification brings for all producers is significant. Ours is a solution that is to be used by all of the producers in the North American industry. Whether that is Exxon or the producer firm that conceptually began at the breakfast table this morning. This also applies to any and all other types of secondary and tertiary industry firms involved in the greater oil & gas economy, no matter their size. However, in the categories of the junior and startup oil & gas producers, the advantages we provide put their organizations in the driver's seat in terms of how they’ll prosper and grow. They’ll have distinct competitive advantages over the methods of organization provided under today’s business model. These are brought about through the reorganization of the administrative and accounting resources of the producer firms into our user communities service provider organizations. And the implementation of our Cloud Administration & Accounting for Oil & Gas service provided by them.
The producer organization that we define and support in the Preliminary Specification set out to employ and deploy much higher levels of specialization and division of labor. We feel the overhead costs of the producers demand these be dealt with by making these organizations more efficient through the application of an advanced, and continually advancing, specialization and division of labor. We also turn their overhead costs from a fixed, producer based capacity and capability, into a variable, industry based capacity and capability, their variable behavior being based on a Joint Operating Committees ability to produce profitable production. One of the reasons for the high overhead costs of each producer (up to 20% of revenues, not the 1 to 6% reported on financial statements) is that all of their capacities and capabilities are replicated within each producer firm in an unshared and unshareable form. Today these accounting and administrative capabilities and capacities are purpose built within each producer organization to meet the demands of the various stakeholders, tax and regulatory requirements and it is these high overhead costs that are the secondary cause of the lack of profitability throughout oil & gas. Overhead costs do not form any part of a producer's distinct competitive advantage.
What the Preliminary Specification defines and supports is a reallocation of the producers administrative and accounting resources into the individual service providers who are headed by one of People, Ideas & Objects user community members. Our user community and their service providers are independent businesses that are specialized on one administrative or accounting process and conduct that process on behalf of the entire industry as their client base. Whereas if that Joint Operating Committee was producing that month, under our decentralized production models price maker strategy, we can reasonably assume it is therefore profitable. Upon production the processes that are specifically administered by each of the service providers will be invoked through our task and transfer network, processes undertaken and their associated billings for each process will be charged directly to their Joint Operating Committees. If it’s not profitable then the property would be shut-in and none of the service providers would receive any data from our task and transfer network and therefore no processes will be conducted and subsequently no service provider billings will be rendered. The shut-in property does not incur a profit or a loss, but a null operation. In either scenario overhead costs are covered in the current period through either profitable operations or the fact the cost behavior is variable under the Preliminary Specification, and as a result not incurred.
There are many benefits for producers to begin their operations in this manner. First they will reach their optimum profitability when losses are no longer diluting profitable properties. Whether that is at 25% or at 100% of the producer's capacity. When all costs are variable, production will be profitable at any volume of their production profile. This will preserve their oil & gas reserves for a time when they can be produced profitably. Those reserves will no longer have to carry the incremental costs of the losses that would otherwise have been incurred if they continued to produce unprofitably. Keeping the commodity as reserves can be seen as an affordable means of storage where the subsequent costs of production and storage are zero. The commodity markets will find their marginal price when unprofitable production is removed from the marketplace. Increasing the value of all the producers' production by realizing the marginal price across their production profile. Producer officers and directors assert this is collusion. If making independent business decisions based on detailed actual, factual, standard and objective accounting information that is determining profitability is collusion, it is no wonder producers are incapable of profitability?
During 2017 the officers and directors realized their collusion claims were moot; they stated unequivocally that they could never shut-in any production, it would cause the formation to “fold over on itself” or other specious arguments. That is until they ran the oil price down to negative $40 in April of 2020. The refineries had to tell them they wouldn’t take anymore, forcing production to be shut-in. Upon resumption of production the formations reflected there was no damage anywhere. These are just some of the many reasons for the Preliminary Specifications implementation. Oil & gas commodities are price makers, not the price takers the officers and directors assumed they were for all these decades. One critical aspect of a price maker is that they only bring on new production when it’s profitable. The method we’ve developed is detailed further in the Preliminary Specifications Preamble.
Overall our decentralized production models price maker strategy invokes a high level of production discipline within the North American oil & gas industry. Achieving maximum profitability can only be gained through the fact that unprofitable properties dilute corporate earnings. Therefore the need to ensure they are fulfilling their primary task of maximizing profitability becomes the predominant method of production discipline. In order to compete in the capital markets of the 21st century will be much different than what it was in previous years. With technology and other industries providing growth opportunities, for oil & gas companies to continue to assert they are in a growth mode precludes them from that competition. They are a primary industry with commodities that are subject to the price maker principles of economics. An industry where shale reserves have changed the game from scarcity to abundance. This will also affect the producer's capital allocation and capital discipline. Capital investments will only be made with the assumption or demand that they be immediately profitable, and why would they invest in them if they can’t achieve that criteria. This invokes a far different criteria as to what is done in the industry and we can cast the foolishness of “building balance sheets” and the like to the scrap heap. Balance sheets are the fallout consequences of managing the business, not an objective.
Cash demands in the industry are currently one of the producer's pressing difficulties. A consistent theme that has defined a cultural dependence on annual outside capital infusions. This is due to all of the producer's costs outside of operations being more or less capitalized and then recognized as depletion over the course of several decades. This includes the capitalization of large percentages of overhead and interest. By not recognizing overhead costs in the current period producers are therefore able to more easily declare a specious profitability. However, the cash that was consumed in those overhead costs is not returned in the current period in the prices of the commodity charged to the consumer. These overhead costs currently sit as assets on the balance sheet in property, plant and equipment, or as we call them “the unrecognized capital costs of prior production,” for the next few decades before they’ll be realized as depletion and returned as cash. Therefore the search for new cash each month to replenish the cash float has been the producers issue for the past number of decades. When investors were willing, this was not an issue with the annual top up of investors dollars being priced to cover these costs. Now the reality of their specious accounting haunts them daily as they try to find new cash sources to cover the basic overhead costs of their operation. Working capital has been and will continue to be a crisis in the industry under the current business model. No matter what commodity price is attained.
Basic cash management would have indicated this to the officers and directors many decades ago. (I wonder why they never changed these methods? I’m sure they must have had their reasons! Other interested parties should ask these probing, and revealing questions.) With the Preliminary Specification recognizing overhead in the current period as part of the operation, capturing that in the price charged to the consumer, return of the cash to the producer will occur within that production month. That however assumes profitable operations are conducted and all costs are accounted for appropriately. I’m on record, and allege that hasn’t happened. Calling the producers accounting specious and deliberately deceptive. I do at times wonder what costs are contained in capitalized overhead that no one ever seems to be aware of? Both in terms of their size and composition. I do know each account never breaches the level of materiality during the annual audit, but outside of that these state secrets seem to me to be the reason that officers and directors have never changed these methods despite the negative consequences they cause and the Preliminary Specifications availability since August 2012.
Our user community and their service providers are involved in the delivery of the explicit knowledge that will have been captured in our ERP software and the tacit knowledge of the individuals within each of the service provider firms. Fulfilling the role of the accounting and administrative needs of the producers with a variable, industry based accounting and administrative capacity and capability. We are delivering these in what we’re calling Cloud Administration & Accounting for Oil & Gas. Building and leveraging the same principles of specialization and division of labor that deliver the extreme value proposition of cloud computing.
With the clear objective of rebuilding the industry brick by brick, and stick by stick in a style of rebuilding that will involve a dynamic industry that can be based on a decentralized, connected environment such as the Internet provides. People, Ideas & Objects et al don’t have to break down oil & gas in order to conduct this rebuilding. The rebuilding is necessary as a result of the damage and destruction from the chronic mistreatment industry has experienced at the hands of the officers and directors of the producer firms. Hierarchical strata of advanced paper shufflers is a future failure, best defined. To bring about an ERP system for the industry such as the Preliminary Specification provides; must consider the opportunity of what is commonly referred to as disintermediation. And People, Ideas & Objects, our user community and their service provider organizations abide.
The nature of this rebuilding process that we’re undertaking is the cannibalization of the processes that have occurred since the investors sent their message of dissatisfaction to producers in 2015. Being solely dependent upon investor cash demanded that cuts in the organization were necessary when the producers sole source of value generation, the investors annual injection of additional capital, was no longer available. Keeping the production processes in place was the priority and those processes that are involved in the early stages of the development of oil & gas were subject to layoffs. Assuming that the situation would be alleviated in the following year and any resources would be recalled. Since the inactivity and abstinence of the officers and directors has carried on for seven years we can assume that the process management has been cut well into the seven year development cycle. Therefore either way, through People, Ideas & Objects et al or SAP the processes will need to be redefined and rebuilt.
However, bringing one of the most complex systems into one of the most complex industries into the environment of the small and startup, or any producer is foolhardy to consider. How could that ever be a commercial software product? Or be provided to a commercially viable small or junior oil & gas producer? And that is the fact of the issue we stand with today as a result of the officers and directors “consolidation as a solution” and with SAP as an alternative. We need to ensure the future of the industry is in the hands of the oil & gas men and women who will knock down the barriers that stand in their way, just as so many have done before. The constraints and reality of the regulatory, compliance and investment demands are real and an impediment to these needs. That is, if producers could not access the kind of systems necessary to operate in that environment, no matter their size, the capital markets will remain forever closed to them. An untenable barrier today that will be even more so in the near future. It is an explicit request by investors that tier 1 ERP systems be implemented. Therefore all producers need to understand that the production discipline provided by the Preliminary Specification is necessary across all classifications of producer firms.
Under the Preliminary Specification a startup or junior producer would no longer need to establish the point where they’ll have to generate in excess of $3 to $5 million of free cash flow necessary to offset the annual base overhead of the producer firm. For the administrative and accounting they’ll only be incurring the variable overhead costs of the service providers fees that they use and the costs of the software development assessment by People, Ideas & Objects each year. Recall we noted recently that not only are these overhead costs variable, but if they’re incurred that denotes profitable production, indicating these costs are covered, or the property is not producing and as a result not generating any costs. And there are more attributes of our system that provide benefits for the new oil & gas industry we are rebuilding.
The Preliminary Specification also implements specialization and the division of labor across the producer firm and most particularly in the earth science and engineering capabilities and capacities of the producer firms. We list this as the first step in our solution for the startup and junior producers. These capacities and capabilities are becoming increasingly burdensome to each of the producer firms due to their unshared and unshareable nature, but for different reasons from the administrative and accounting difficulties mentioned. The costs incurred to maintain these capabilities are growing as a result of the advancement of their science and technological development which demands further specializations be undertaken within each of the producer's capabilities, and critical competitive advantages. We believe that all producers have reached the point where the demands to maintain these capacities and capabilities have expanded beyond the usable population of these technical resources. Or will soon. With the retirement of the brain trust of the industry, and the universities not producing anywhere near the replacement number necessary, a critical shortage will soon demand that these technical resources will become too rare, too costly and too unavailable to maintain, not to mention, expand the deliverability of the North America based industry.
Consolidated producers will have particular difficulty managing this technical resource when entrepreneurs see the startup opportunities we’re defining here. That is, if only there were an ERP system that provided a solution for the oil & gas startup to deal with the compliance, governance and regulatory environment and be able to access funding! In addition to this limited technical resource supply we also believe that the producers' firms are close to a point now where the costs of their scientific engineering and geology needs are beyond their commercial grasp necessary to maintain their just in time operator status. Nonetheless, a decidedly higher level of specialization and division of labor will be needed in the areas of earth science and engineering. It is the unshared and unshareable makeup of these capabilities that we find the difficulties once again. Producers need these technical resources for a variety of just-in-time purposes, as operators, for their highly technical areas. If we assume that across the industry the utilization rate of these technical resources are at 75% due to their organizational inefficiencies. Then by releasing that other 25% and deploying that unused and unusable capability more effectively we’ll have what I believe to be the second aspect of the solution of these pending and most certainly future difficulties. A one third increase in the capacity with higher output from enhanced specialization and division of labor, providing us a good start to solving this pending critical resource shortfall.
Instead of letting another issue manifest itself into a crisis level issue. People, Ideas & Objects et al have implemented a variety of changes within the Preliminary Specification. The first is to consider the producer firm from the time the Preliminary Specification is operational, to have two sources of revenues. The oil & gas sales and the revenues earned by all of their earth science and engineering capacities and capabilities being deployed and employed in the form of a revenue generating capacity. Whether that be to one of the producers own Joint Operating Committees, or in the consulting of the individual to other producers / Joint Operating Committees, as a client, of which they may / may not have an interest in. Due to the specialization and division of labor demands producers will need to have chosen to specialize or acquire a specific capability on the basis of the distinct higher level specializations and competitive advantages they hold or desire. These producer revenues will then offset these engineering and geological costs incurred and charged to either their Joint Operating Committees or other producer clients. And through this enhanced specialization and division of labor achieve some of the 240 fold increase in productivity that Adam Smith experienced in his pin factory.
In terms of an opportunity in this new oil & gas industry, in which we are building brick by brick, and stick by stick, this second source of revenue should be seen as the initiation of the start up oil & gas producer firms' startup revenues. Granted the startup’s technical capabilities and competitive advantages will be more generic or less specialized than the more advanced firms. These revenues will offset the additional costs of the head office burden not considered part of the administrative and accounting category. And this will apply to all producers no matter their production profile. When producers are specializing on their distinct competitive advantages, and all producers including Exxon, Shell and Chevron will need to do so, the demand for outside technical resources will be required to augment their needs.
In a world where software has to define and support the organizations that exist. This is some of the what, how and why we’re able to provide when the Preliminary Specification is delivered to all producers in the North American industry. Instead of being mere serfs as the officers and directors wish to continue treating the engineers and geologists, they’ll be able to take control of their careers from this point forward. The facility most responsible for this capability of making direct labor charges to the Joint Operating Committee is what we are implementing in the industry is our Work Order. Officers and directors may claim that charging labor directly is already available through the systems they use. Which is true they’re able to allocate some of these labor costs to the field, some are assumed to be captured in overhead allowances which the Preliminary Specification eliminates the use of. However their methods do not provide the necessary features of raising it to the point of making it a defined revenue stream of the firm. And the feature of making it a system that interacts throughout the industry. Allowing for the interactions between the resources they need and where they need them. Subject to the appropriate approvals and governance. Theirs does not enable the second purpose of our Work Order system that enhances the industry wide innovativeness through the establishment of working groups etc. Our Work Order system is able to bill its costs at all times to either corporate overhead, Joint Operating Committee overhead, an AFE or to a lease. Therefore the billable time of the individual engineer or geologist should be deployed within the producer at 100% of the time or not be working for the producer. And this is an inherent part of these people beginning the establishment of their own producer firms which rely on their talents of their much needed earth science and engineering capacities, capabilities and Intellectual Property. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what is the value proposition that you’re offering? We’re only beginning with the what, how, and why the Preliminary Specification facilitates the dynamic, innovative, accountable and profitable startup, junior, intermediate, senior and multinational oil & gas producers.
