OCI Accounting Voucher, Part II

 Designing Transactions

One area of the Accounting Voucher where the Preliminary Specification is different is the concept of designing transactions. We should spend some time defining what it is that we're talking about. Where accountants will spend their time in the future is designing transactions and leaving the processing, mostly through automation as a result of the design of the transactions, to computers. If you’ve read the Preliminary Specification you’ll understand the methods of organization of the marketplace and the producer firm. You'll also understand how the Joint Operating Committee interacts with these. It will be with that understanding that we can begin to understand the concept of designing transactions. We begin with a simple description of the transaction's makeup. From Harvard Professors Carliss Baldwin and Kim Clark. 

...objects that are transacted must be standardized and counted to the mutual satisfaction of the parties involved. Also in a transaction, there must be valuation on both sides and a backward, compensatory transfer - consideration paid by the buyer to the seller. Each of these activities - standardizing, counting, valuing, compensating - adds a new set of tasks and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction.

Let's use a scenario where a group of producers have several producing wells of natural gas with some liquids production. They are situated next to a large gas plant that processes their gas in exchange for the liquids and markets their gas on the spot market. In this scenario we are evaluating these properties from the perspective of implementing them into the Preliminary Specification. We begin by analyzing the production accounting elements in the Accounting Voucher with our user communities and specific production accounting service providers. Production accounting service providers assess their fees based on a unit of work incurred during a production month. This is for any of the many processes involved that depend on the method our user community configures within the Preliminary Specification during development. At each point of the process service providers will assess a fee for their service based on these transaction design principles. The transaction’s design provides for enhanced automation and the related service provider produces their invoice for the services provided to the Joint Operating Committees. This implies our user community designed their work flow from a transaction design point of view. Professors Baldwin and Clark. 

The user and Producer need to deploy knowledge in their own domains, but each needs only a little knowledge about the other's. If labor is divided between two domains and most task-relevant information hidden with each one, then only a few, relatively simple transfers of material, energy and information need to pass between the domains. p. 17

And

Placing a transaction - a shared definition, a means of counting, and a means of payment - at the completed transfer point allows the decentralized magic of the price system to go to work. P.22

If there is no production there is no basis for production accounting service providers billing. Fulfilling the Preliminary Specifications decentralized production models' objective of establishing variable administration and accounting costs based on profitable production. This scenario shows how the production accounting service provider needs to design their transactions to produce the desired result. It also needs to conduct their service and automate their billings. The Accounting Voucher incorporates additional transactions from the process of gas production, sales of natural gas, royalties and payment of the processing fee. This is the role of the Accounting Voucher for the producer firm and the Joint Operating Committee. Automation of innovative oil & gas industry business processes through transaction design. Being in production itself creates an information unit that triggers the appropriate service providers to conduct their operations on the Joint Operating Committee behalf. Without profitable production there will be no triggers, no work conducted by the service providers at that property and therefore no billing. From Frederick Hayek.

The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on... Frederick Hayek (1945)

The Accounting Voucher has a “Transaction Design Interface” that provides a worksheet for accountants to design transactions. There is a defined process for analyzing how to break down these transactions. We will discuss that as we develop the Preliminary Specification. It is worthwhile to note at this point that each Accounting Voucher is used as a template for subsequent months. So once a transaction is designed, it will be reused, and built upon through the implementation of it as an Accounting Voucher template. This will provide consistent standard and objective automation each production month. Using tacit knowledge of service providers.

The role of the Accounting Voucher in determining the source of the market or the firm as the originator of the transaction is minimal. However, it ensures the costs of these transactions are minimal. These transactions are a source of both the producers, as represented in the Joint Operating Committee and service industries profitable operations. If there was a simple way to describe this purpose of designing transactions it would be as a tool to coordinate the firm's or Joint Operating Committee's use of the market. This conceptually falls between transaction costs economics, capabilities and transaction design. Professor Richard Langlois has included all three in his research. We have also used Professor Carliss Baldwin for her transaction design work. Professor Richard Langlois in his paper "The secret life of mundane transaction costs."

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

And

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

The Accounting Voucher module of the Preliminary Specifications transaction design takes the accountant away from the benign scorekeeping role to the role of active participant in the operation. One that looks at the market from the point of view of how best to coordinate the various elements. This will provide the greatest added value to the firm or Joint Operating Committee. In Richard Langlois' “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization"

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

And this is perhaps one of the most important considerations of the work we do here in People, Ideas & Objects, our user community and service providers. Is the realization that each producer firm and each Joint Operating Committee will be unique. That due to their makeup they’re going to be different in material ways. Innovation will have a dramatic impact on how it is measured against each firm or JOC. Specialization and the division of labor, other aspects of the changes being imposed on the industry will require a high diversity in terms of their makeup. The approach will be anything but cookie cutter. 

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

Therefore, according to Professor Langlois' research, transaction costs will be an immaterial item in comparison between firms or Joint Operating Committees. That is to say that they will be the same in all instances. People, Ideas & Objects have asserted that they will be immaterial due to the application of standardization, specialization, the division of labor and sharing of infrastructure as represented in our Cloud Administration & Accounting for Oil & Gas software and service. The differentiating costs between firms and JOC’s will be these costs of coordinating the market. Making the Accounting Voucher module a critical tool in offering producers the lowest market coordination costs. Further enhancing each company's most profitable means of oil & gas operations. 

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

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

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

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

Considering the distance, geography, size, language and other issues between vendors and producers, leaving the coordination of markets to "spontaneous order" is too difficult. Particularly with the focus of the industry on a further division of labor and specialization, where the risk and reward of oil & gas operations are so substantial, market coordination or transaction design will be a critical and necessary task to be carried out. Each operation may be the result of more people being involved. Specialization and the division of labor will influence this process. Once again it is not from an operations point of view that we are attempting to influence the operation, it is from a business point of view. How will the transactions and business be captured in such a manner that the firm and Joint Operating Committee incur the lowest possible costs of the most efficient methods of these business transactions? From Professor Richard Langlois "Economic Institutions and the Boundaries of the Firm: The Case of Business Groups."

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

And

Let’s take a closer look at the nature of the “gaps” involved. Adam Smith tells us in the first sentence of The Wealth of Nations that what accounts for “the greatest improvement in the productive power of labor” is the continual subdivision of that labor (Smith 1776, I.i.1). Growth in the extent of the market makes it economical to specialize labor to tasks and tools, which increases productivity – and productivity is the real wealth of nations. As the benefits of the resulting increases in per capita output find their way into the pockets of consumers, the extent of the market expands further, leading to additional division of labor – and so on in a self-reinforcing process of organizational change and learning (Richardson 1975; Young 1928). p. 7

We’ve seen over the past several decades that producer firms lack speed and capacity for change. People, Ideas & Objects have asserted that this is attributable to bureaucrats' desire to maintain low levels of accountability through poor ERP systems. Today organizations are defined and supported by software, and most particularly ERP software, and they are therefore constrained by them. The Preliminary Specification has chosen the market to deal with this issue instead of cultural difficulties of change and historical performance of the firm as the other choice. There needs to be a means to affect a change in trajectory in the performance of the producer firms. It is specialization and the division of labor which has been the only proven method to build economic value since 1776. This can be done most effectively through the market which disrupts the bureaucratic culture of the producer firms. A culture that counters profitability and must be dismantled. The addition of transaction cost economics and these tools will enhance our ability to support the transition. This will facilitate the performance trajectory necessary to achieve profitable energy independence in North America.

Choosing a firm or market as a means of production for a producer is an academic question in oil & gas. The geographical and technical diversity is necessary to operate in the North American oil & gas marketplace. This is a result of the many levels and types of operations a producer could specialize in, even in today’s market. The answer has always been the market. There is significant conflict and contradiction in the relationship between producers and the service industry. This is due to the treatment the service industry has been subjected to over the past decades. It is suggested that producers will need to make a deliberate effort to remediate and rebuild the capabilities and capacities necessary in order to provide profitable energy independence in North America. 

The starting point of this rebuilding process for our user community is as follows: If we recall in the Resource Marketplace module the vendors and suppliers maintain their own contact data. Within that data is their key personnel which includes their field staff. They should also include their key business personnel for the purposes of the “Transaction Design Interface” to collaborate on these interfaces. In addition, their financial and billing information, as well as other critical data and information. This will help the producer firm or Joint Operating Committee efficiently coordinate and process transactions. Lastly a collaborative interface should be provided for everyone within the Accounting Vouchers vendor pool to discuss how the transaction is designed. This should include the template used by the specific vendor. Needless to say the involvement in our software development for the service industry will begin here. Please see the Implementation page of this wiki to review the budget and more details.

OCI Accounting Voucher, Part I

 Introduction

We now focus on the Accounting Voucher module. The interactions between the Accounting Voucher and the Partnership Accounting modules of the Preliminary Specification are naturally quite significant. The Accounting Voucher is unique in that it provides the producer with the ability to design transactions and specific accounting voucher templates. For example, the Material Balance Report. These are not innovations producers will use to become more innovative. Instead, they are intended to ensure that innovative producer processes are actively defined and supported throughout the People, Ideas & Objects application modules. When business is a science, as it is in oil & gas, it would be in the producer's interest to remain open and flexible in both its scientific and business approach. The Accounting Voucher and Partnership Accounting modules provide this organizational flexibility.

These two modules operate as follows. The Accounting Voucher documents the transactions. Partnership Accounting reports on transactions. Accounting Vouchers remain open for one accounting period and are subject to the same closing process familiar and traditional in the accounting world. 

We noted in the Partnership Accounting module how our Work Order provided producers with the ability to form and participate in working groups. Providing flexibility in participating and accounting for these working groups. This flexibility is what is being sought by the rest of the producer firm and Joint Operating Committee from these accounting modules. Elimination of bureaucratic inertia that impedes these activities today makes these modules critical to producers innovation as much as the Research & Capabilities or Knowledge & Learning modules contribute.

The People, Ideas & Objects Accounting Voucher module will provide the means for the Preliminary Specification to “manage the disparate inter-dependencies of modularity theory and Transaction Cost Economics.” That is a summary application of Professor Baldwin's comments and theories. And therefore this Accounting Voucher is one of the key crossroads to all other modules in People, Ideas & Objects, our user community and their service provider organizations Cloud Administration & Accounting for Oil & Gas software and service. What this means is people need to go beyond just processing transactions, through automation. Instead, they should move toward the definition and design of transactions to optimize the producer's business and Joint Operating Committees' performance.

Vouchers Open To All Within the Partnership

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

Cost control becomes an issue when everyone can charge freely to the joint account. A careful reading of the previous paragraph reveals that I did not say "charge freely." Cost control comes about as a result of the traditional budgetary control of AFE and the Work Order system that we’ve discussed in the Partnership Accounting module. Without pre-approval by the partnership, no transactions can be processed by the People, Ideas & Objects Preliminary Specifications Accounting Voucher. And as we’ve seen in the discussion of the Security & Access Control module, few will have authorization to “charge freely” to the joint account in any form or fashion. With the traditional ability to charge to an AFE or Cost Center, the need to have a purchase order system, ensuring that an appropriate bidding and contracting process is in place, no unauthorized amount will be accepted in the system. There is also the fact that each voucher needs to be approved for payment before any money is expended. This approval would need to consider the Joint Operating Committee budget authority.

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

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

The Material Balance Report

The Material Balance Report is an Accounting Voucher that is unique and has the following characteristics. It is designed to automate the production, revenue, royalties, marketing and other processes of producer firms and Joint Operating Committees. It is this type of specialized use of an Accounting Voucher that our user community should consider applying to other situations when contributing to the Preliminary Specifications development.

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

The Joint Operating Committee exists as a result of legal agreements and in oil men and women's minds. It therefore doesn’t “own” anything or incur costs. All joint account charges must clear in the month they're incurred. It is the same for volumetric information. The Joint Operating Committee "Accounting Voucher" balances to zero in terms of costs and volumes each month by clearing its charges to the partnership and royalty owners of the property. Clearings are done after the balance has been reached. That does not guarantee that the facility will remain in balance. Adjustments and amendments to the Accounting Voucher may occur. These may happen and they can be subsequently balanced and cleared to the partnership accounts in the same manner as before. And that is on an automated basis. The point of the exercise is to have the Joint Operating Committee's business captured in the Material Balance Report. This is an integral part of the Accounting Voucher. Essentially all three are the same thing, the Joint Operating Committee, Accounting Voucher, and Material Balance Report. An integrity of reporting that is embedded within the accounting systems that are as rigid as debits must equal credits.

We now discuss contracts regarding petroleum products produced by a specific Joint Operating Committee. Contracts that include marketing for gas, oil, natural gas liquids, or contracts for gathering, processing charges. If a stream of product flows through a facility, then a contract for processing or sale would be attached to it. The ability to attach the contract to the stream would enable the Accounting Voucher to establish the associated accounting for the gathering or processing of charges / sales for that stream. These charges (invoices) or sales (receipts) are generated in automated fashion by the Preliminary Specification.

The Accounting Voucher is for lack of a better term a template that is built upon as time passes. Each month as the property changes, these changes are captured within each Accounting Voucher. The template is renewed each month with the accumulation of the property history, data from the Petroleum Lease Marketplace and other modules. If an additional contract was added for production from an additional well, that contract stream and the newly acquired well would be represented in the next and every subsequent month's Accounting Vouchers. The Accounting Voucher template documents the property changes over time. Providing the base for the subsequent automation of business processes. These templates then provide a historical means to recreate transactions, amendments and adjustments in subsequent periods. This is based on the environment at that time. 

Critical to the “definition and design” of transactions is the fact that they balance themselves out. If the debits and credits were not in balance at the end of the day, the automation of the systems and the accountants would not be doing their jobs. Volumetric reporting is no different. If in the Material Balance Reports was out of balance (call this material balance), or were not balancing the inputs and outputs to other Material Balance Reports (call this system balance), or the internal accounting of those volumes to the partners, royalty holders and others were out of balance (call this partnership balance) the accountants and systems would not be doing their jobs. Essentially, closing an Accounting Voucher involves not only balancing the debits and credits from a financial perspective. They will also need to ensure that the material, system and partnership volumes reported in the Material Balance Report are also balanced. Without these systems in balance, the Accounting Voucher will not clear or close.

This imposes a rather strict condition on the quality of the information accepted into the People, Ideas & Objects Accounting Voucher module. Precluding the acceptance of a voucher due to the inability to balance a volumetric requirement holds the system up for common occurrences. What if volumetric information is unavailable? What if the information is part of the normal amendment process? Then we are left with traditional accounting methods for these types of issues. An accrual of the volumes or values necessary to achieve the required balance should be processed in the current month. Most production processes are amended for up to 90 days. These accruals would then be automatically reversed in the following accounting months' Material Balance Report. What is different from existing systems is that we force them to be volumetrically balanced. Not just inputting key variables but imposing and enforcing the facts of what actually happened at the Joint Operating Committee. If it is subject to a comprehensive Construction, Ownership and Operation agreement, what is agreed to be accounted in terms of production allocation will be conducted before the close of the Accounting Voucher. And by that I mean specifically, from the point of view of either dealing with the contractual arrangement as dictated by the governing agreements. This is the determining factor for production allocation. Or if the agreement refers to chemical composition as the basis of production allocation, both of these methods will be available in the Material Balance Report of the Accounting Voucher in an either, or and mixed environment.

The difference may be subtle but the implications are significant. By enforcing the volumetric balance within the Accounting Voucher itself, the system is forced to keep track of volumes as they are produced and processed over time. Once this is achieved a certain level of unimpeachable integrity is achieved regarding the production data and the automation of detailed processes based on those volumes can begin and be assured to be based on the facts of the facilities and assets data and information captured in other modules. Any subsequent amendments will correct the record.

There are many aspects of this system's management of these processes that are unique and necessary. The reason they have not been undertaken is that the scope and scale of the development undertaken is extensive and beyond what technology could have provided. It is certainly from a budgetary perspective beyond the scale of what any individual major producer would undertake as the value gained would not be there for the individual producer to incur the entire cost, and most certainly well beyond the standard approach of an oil & gas ERP software development solution provider. People, Ideas & Objects aggregate North American producers' software development budgets to make these available through our ERP software and service provider organizations. Those with a comprehensive understanding of these processes will fully appreciate the points I make and the implications involved. This undertaking may be one of the most comprehensive features of the Preliminary Specification. Therefore it is done where development costs are shared and shareable, or non-rival, and driven by our user community vision. 

The application of Professor Paul Romer's non-rival or shared software development costs, specialization and the division of labor, and high levels of automation to these complex processes will provide substantial cost savings to each producer. Adding unquantifiable incremental value beyond the specific quantifiable attributes of People, Ideas, and Objects.

OCI Decentralized Production Model

 Our Decentralized Production Model & Price Maker Strategy

What we've experienced over the past four decades in North American oil & gas is unique in all organizations and business history. Although we learned during the great depression the economic consequences of overproduction, and experienced its consequences in oil & gas since the 1980s, no one seems to have explained it to North American producers' officers and directors. Oil & gas overproduction in North America has been systemic and chronic throughout the producer population. It will continue unless there is effective production discipline. 

The history of this period is stark and clear. In the late 1970s the SEC imposed its Full Cost Accounting and associated Ceiling Test requirements on producers trading shares on the American market. These requirements allowed producers to record costs in property, plant and equipment as assets up to the limit of the present value of their independently evaluated petroleum reserves. Consequently, accounting statements were distorted since then due to an unnecessary amount of flexibility. Simply, shifting accounting from an evaluation of performance to one of value, hence the producer's foolish objectives of “building balance sheets” and “putting cash in the ground” etc came about. This is the mindset of officers and directors, CEO’s, CFO's and COO’s and other officers. Business knows that overreported asset valuations result in commensurate overreported profitability. Leading to investors rushing in to capture those profits and hence overinvestment begins. Overinvestment in a producer's productive capacity leads to overproduction of commodities that are subject to economic price maker principles. Causing a collapse in commodity prices over the past four decades. The first commodity price collapse was during 1986 when $10 oil prices decimated the industry for a decade. This is counter to the cultural belief that oil & gas commodities are price takers. These definitions are from investopedia.com

Price maker

A price maker is a monopoly or a firm within monopolistic competition that has the power to influence the price it charges as the good it produces does not have perfect substitutes. A price maker that is a firm within monopolistic competition produces goods that are differentiated in some way from its competitors' products. This kind of price maker is also a profit-maximizer as it will increase output only as long as its marginal revenue is greater than its marginal cost, so in other words, as long as it's producing a profit.

Price taker

A price-taker is an individual or company that must accept prevailing prices in a market, lacking the market share to influence market price on its own. All economic participants are considered to be price-takers in a market of perfect competition, or one in which all companies sell an identical product, there are no barriers to entry or exit, every company has a relatively small market share, and all buyers have full information of the market. This holds true for producers and consumers of goods and services and for buyers and sellers in debt and equity markets.

The following argument supports People, Ideas & Objects' claim of price taker characteristics. Officers and directors interpret substitutes to be; if they don’t produce others will, therefore substitution is everywhere. This is not what substitution means. Does it mean Elon Musk could reach Mars if he replaced rocket fuel with hydro dams? Or could we use wind energy to lubricate our crankcases? How about storing nuclear fuel rods in a jerry can as you travel outdoors this weekend? And if you return alive from your weekend adventure you might return to the office in that stylish solar panel, or pine bark suit you just bought. Alternatively if bottled water ceased to be produced people would switch to soft drinks, tap water, juice or other substitutes. Any overproduction of bottled water would see inventories swell and the price remain the same. As would the price of the last water bottle found anywhere in the world.

The connotation of the economic term price maker has caused producers and directors to conclude that this is collusion. We argue otherwise when the Preliminary Specification uses the Joint Operating Committee and will produce standard, objective, detailed, actual, and factual financial statements for each property. Producer firms will definitively know the “real” profitability of each property. A task that is not done today and more importantly cannot be done today. And therefore producers will independently decide to shut-in their unprofitable properties to ensure they attain the highest level of corporate profitability when unprofitable properties no longer dilute their profitable properties. Saving petroleum reserves for a time when they can be produced profitably. Maintaining the commodity as reserves makes sure they don’t have to carry the incremental costs of unprofitable production. Keeping production and inventory costs lower by not unnecessarily producing and storing unprofitable production. Additionally, ensure that the marginal production is removed from the commodity markets so that the marginal price of the product can be determined. Attaining the marginal price not only for the individual property but for all properties. Replacement costs for any production needs to be provided. Investors have stopped doing so and are not that source. In a shut-in situation, the producer can take advantage of their innovative skills to restore the property to a financially viable state. Profitability is the only fair and reasonable production allocation method. People, Ideas & Objects decentralized production models price maker strategy provides all the financial resources producers will need to meet their challenging future. It allows them to contribute to society productively and constructively. 

We believe that People, Ideas & Objects and our user community are the appropriate business approaches to chronic and systemic overproduction. Without “real” profitability there is only waste and deterioration as we’ve experienced in the past decades. Without investors and bankers who were duped by these specious financial statements, there was no sustainable value generated. And today the industry is worthless as it demands capital to operate.

Wikipedia defines collusion. 

In the study of economics and market competition, collusion takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market structure of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole. Cartels are a special case of explicit collusion. Collusion which is overt, on the other hand, is known as tacit collusion, and is legal. 

By definition, the Preliminary Specification price maker strategy may fall under overt or tacit collusion. Which is legal. Each of the producer firms will make independent business decisions about whether or not to produce on each and every one of the many properties they own. Those decisions will be based on actual, factual accounting that provides the information for that decision. In the event that a property is shut-in due to unprofitability, a null operation will follow, no profit, but also no loss. Achieved when the Preliminary Specification makes all of the producers' costs variable depending on profitability. The decision to avoid a loss of corporate financial resources and assets, in the form of petroleum reserves, when producing an unprofitable property at a price that does not cover the marginal cost, in the long term perspective of marginal cost, (as per Wikipedia “analysis is segregated into short and long-run cases, so that, over the longest run, all costs become marginal,”) is a rational business decision, not collusion. This method also provides for the first time in the industry history the ability for the producer firm to indirectly control their overhead costs based on their profitable production profile.

The following graph was provided by Les Borodovsky from @SoberLook. What this graph represents is the status quo perception of costs and how production management is handled in oil & gas.

Looking at this from the perspective of the producer's officers and directors. Their total cost of each barrel of oil produced in the various shale formations is $48 to $54. The operating and royalty costs of each barrel vary between $28 and $37. I would point out that the $18 to $23 in capital costs are based on an allocation of their capital costs across the entire reserves of the property. We’ve argued that this allocation is unreasonable in a capital market where the demands for capital performance are far greater than what can be achieved when a producer cycles their cash through their investments in a manner that retrieves their investment over several decades or more. This is further exacerbated when shale exposes prolific reserves, however it requires additional capital to offset steep decline curves to maintain deliverability. 

To reuse previously invested cash, People, Ideas & Objects recommends that producers retire their capital costs within 24 to 30 months of the property's life. In turn, it provides them with the means to meet their demands for future capital costs, shareholder dividends and bank debt repayments. In addition, they can better match shale's rapid decline rates. This can only be done if the producer sells their commodities at a price above their break even point. This considers an appropriate accounting of operations costs and reasonable retirement of capital. Capital in a capital intensive industry would be the majority of the cost passed on to consumers.

Based on the producer's current perspective, this graph shows the producer's break-even and shut-in prices. At any point, and as long as the commodity price covers the operating costs, the property would continue to produce regardless of the impact on capital costs. If a dollar of capital costs was returned, or one dollar above the shut-in price, that would enable the property's production to carry on. Only at the point in time where the commodity price dropped below operating costs would the producer allegedly shut-in their production. This is a fundamental misinterpretation of the term break even. It is the reason the industry is in difficulty and why producers have continued to lose money for the past four decades. Breakeven is not being interpreted here. What the producer assumes is that as long as there is cash flow above operating costs, they’re making money and will continue to produce. What they’re stating is acceptable is that they may not be breaking even, but they’re generating cash flow.

Lately we’ve seen producers continue to produce without considering what price the market provides. Selling oil for almost negative $40 during April 2020 was consistent with selling natural gas at negative prices. Or I guess those are payments for sales and not conventional sales. Or the first quarter of 2023 when natural gas traded in the range 30 to 1 to 40 to 1. Having reduced the price well below their "break even point" for extended periods of time, decades in most cases, is the consequence of officers and directors' inaction. Their behavior is unlimited. Their production discipline is to produce 100% all the time. 

According to People, Ideas & Objects' Preliminary Specification, if we could assume the accuracy of these graph numbers, the property would be shut-in at the breakeven point and below. The reason for this being the production discipline gained through knowing that producing any property unprofitably only dilutes the producers' corporate profits. Producing below the breakeven point is unprofitable. Producing below the breakeven point for one producer, in an industry whose commodities are price makers, will drop the price of the commodities below the breakeven price for all producers. In the event that all producers produce below breakeven prices for four decades, you have exhaustion of the industry's value. Times were only " favorable " when investors were willing.

To avoid the allegation of collusion officers and directors would have us believe that they were operating the industry within the law today. Losses of catastrophic proportions have been realized. Displacement of each producer's financial resources over the long term is normal business for officers and directors. Imposing the destruction of their firm's assets and the capacity and capabilities of the oil & gas and service industries is the price that must be paid, as it is accepted as a “boom / bust” business. If the Preliminary Specification is available to operate the business as a business, this is unnecessary and unacceptable.

The inverse situation is provided by the Preliminary Specifications' decentralized production models price maker strategy during 2023 in North America. In an environment where the Preliminary Specification was operational, higher commodity prices would bring about higher production volumes that would meet the threshold of profitability. Therefore,incremental shut-in properties would be returned to production. Providing the dynamic, innovative, accountable and profitable North American producer with the most profitable oil & gas operations. The organizational objective is to satisfy consumer demand for energy with abundant, affordable and profitable energy. The value proposition of a barrel of oil equivalent is 10 to 25 thousand man hours of equivalent effort. Living without is impossible in the most advanced society with the most productive economy. Yet, just as producers were forced to shut-in production due to almost negative $40 oil prices, they are required to bring on any previously unprofitable production that would have been shut-in under the Preliminary Specification to satisfy new demand. Who should we look to for the oil & gas we need? Apparently not the officers and directors. Operating the industry profitably, everywhere and always, would have enabled them to maintain the oil & gas industrial economy's capacities and capabilities. That People, Ideas & Objects were subjected to abuse and punishment for this and other content contained within the Preliminary Specification is evidence that officers and directors knew better. They knew our alternative was available and threatened their management method. They will need to live with their legacy of inaction.

What officers and directors were able to do was run the entire industrial complex into the ground over the past four decades. They also destroyed large percentages of service industries' industrial capacity, eliminating their capital structures. Go find a willing drilling rig investor or banker from a few years ago who saw the drilling rig they invested in cut up for scrap metal. This was while producers whistled their uncaring and inconsiderate tune of “muddle through.” It is now incumbent upon the producers to provide the financial resources to rebuild the service industry. The rule is “you broke it, you fix it.” Producers used and abused the service industry and now they’ll need to provide the money and backbone involved in the rebuilding effort, otherwise they’ll only use and abuse again. Everyone else had their fun and they don't trust the producers. Maybe when they rebuild the service industry, they’ll respect it. Not only do producers not have any previously shut-in production, but they do not have the capability to meet the demand for energy in 2022. Whether it's a failure to make any real profitability or to meet market demand, we can certainly count on our North American oil & gas producer officers and directors to fail. 

With the costs associated with exploration and production, and particularly shale reserves, it's no surprise that producers report losses on operations. What is surprising is that producers have done nothing over this period to mitigate the overproduction that has caused the decline in pricing. This has caused subsequent financial losses, destruction of the producers' reserves and the greater oil & gas industrial capacity. The reason for this chronic overproduction is that the producers have to generate revenues to cover the out of pocket costs of the overheads they incur in the “high throughput production” model they employ. This model has these overhead costs of the producer firm being incurred whether there is production or not. As a result, their operation becomes a high-cost operation at any level of production. At lower production volumes, earnings are skewed and overhead costs appear out of place. Therefore this behavior of producing at capacity should be expected to continue on both the oil & gas sides of the business. Even despite significant financial loss or the inability to meet market demands. Although some producers report overhead costs of less than 2% in many instances this is not representative of the situation. We believe overhead costs range between 10% and 20% of revenues. These itemized amounts are never detailed or discussed in producers' financial statements. Please see the Preamble section regarding cash management and more detail on overhead.

The decentralized production model has been defined by Professor Richard N. Langlois as follows:

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. 

Production discipline is attained through this process when the producer realizes that their maximum profitability is obtained through producing only profitable production everywhere and always. Due to this, producers are motivated to stick to the decentralized production model price maker strategy of the Preliminary Specification. Just as all businesses in the capitalist system have followed these principles since the great depression of 1929. The individual decisions of each oil & gas producer, based on an actual, factual accounting of the property's profitability, will determine if the property produces. That is how the oil & gas industry needs to deal with the low commodity price situation it occasionally finds itself in. The inverse of this is also relevant. When commodity prices rise, producers will raise production volumes by returning shut-in properties to the market. Shale-based reserves will always overwhelm the oil & gas commodity market with flush production and deliverability driven by its prolific nature. Production discipline focused on profitability can only be achieved through the reorganization of the industry and producers. This is based on the Preliminary Specifications decentralized production model and detailed in the Specialization & Division of Labor Organizational Construct section. Where overhead costs become variable and producers use the facility we’re building of Cloud Administration & Accounting for Oil & Gas. Which enables our price maker strategy to provide for producers and industries profitability and ensure consumers are always provided with an abundant, affordable, reliable yet profitable source of energy.

OCI Revenue Per Employee

 People, Ideas & Objects developed a factor that defines what price engineers and geologists in producer firms will be charged out to the various internal or external Joint Operating Committees. What objective criteria could be used to determine the value of an individual's time while working for a joint account? How representative is that factor of the firm that employs them? Would all resources of that firm be assessed at that same rate? What about start-ups and small producers? What rate would they use? These questions are answered in the Preliminary Specifications Revenue Per Employee as the basis of determining these charge out rates. 

The Preliminary Specification resolves the anticipated shortfall in earth science and engineering resources by eliminating the “operator” role in the industry. People, Ideas & Objects believe that specialization and the division of labor are the only means to approach this limited resource base and the challenging volume of work our future demands. Having each producer firm build its own specialized "operator" level of capabilities and capacities would be too burdensome for any commercial organization. Therefore we used Professor Paul Romers’ non-rival cost approach. Where we’ve made these resources shared and shareable across the Joint Operating Committees the producer firms participate in. Each member of the Joint Operating Committee pools their own specialized expertise to aggregate what the property needs. Consulting firms fill in the lower level capacities and capabilities to complete the overall offering. 

Revenue Per Employee is a unique attribute in oil & gas. It has a wide range of variance between producers and we can draw significant meaning from these values. Although I have not run the numbers lately, it can easily vary between $1 and $4 million per employee. Which denotes an hourly revenue of $571 to $2,285. It is therefore reasonable to assume that each of these individuals would generate the level of value represented by the producer firm that employs them. This value is represented in each producer's employees' individual skills, knowledge and talent but also in the firm's capacities and capabilities. If we assume that an industry agreement is reached in which percentages of those revenues per employee can be assigned to, for example, junior, intermediate and senior engineers at 50, 75 and 90% of the Revenue Per Employee factor then these would form the individuals charge out rate for purposes of the time they spend on any Joint Operating Committee or other activity. Their hours being aggregated in the Work Order, the percentage value of Revenue Per Employee their position is charged out at. In addition, the monthly updated Revenue Per Employee value is contained within the Work Order. The allocation of employee costs and billing to joint accounts will be handled through a Work Order, which is an Accounting Voucher. This is based on the AFE, Lease or internal account the employee assigns their work to. Revenue Per Employee minimum values attained by the lowest 25 producers might be averaged. This is so that start-up and small producers are not adversely affected by their firm's size and its production profile. Establishing a floor for charge-out rates across the industry. 

So what do we have? We’ve run some calculations that “might” prove that one producer is innovative. What does that prove? That depends on what innovation means. Professor Giovanni Dosi states 

In very general terms, technological innovation involves or is the solution to problems. 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’ on the part of the inventors who discover the creative solution.

People, Ideas & Objects argue oil & gas has been mismanaged by its officers and directors. The resources available to industry in the fields of earth science and engineering are unparalleled. I’ve never stated otherwise. However, if an architect specifies a building will be built with subgrade materials and poor design, the engineers assigned to correct the consequential issues of those initial poor decisions, half way through the project are limited in what they can do. If People, Ideas & Objects have learned anything from the obstinance and inaction of these officers and directors, it is that engineers and geologists are well aware of the issue. 

Additionally, they know the culture that secures it and the need to eliminate it. Are working constructively within these constraints and dealing with them. People, Ideas & Objects Preliminary Specification attempts to resolve the issue by changing the industry culture to performance. Our goal is to provide the most profitable means of oil & gas operations for dynamic, innovative, accountable, and profitable producers everywhere and always. To fulfill their obligations and duties, engineers and geologists must operate in the current financial environment. In a hostile financial environment, a successful career is unlikely. They are therefore aware that the current culture cannot handle the complex and challenging issues the oil & gas sector faces in the future. 

OCI Industrial Command & Control

 Throughout the Preliminary Specification we've discussed our solution to one of the premier issues the oil & gas industry faces. That means the demand for earth science and engineering effort per barrel of oil increases with each barrel produced. This is best represented by the steep escalation of oil & gas exploration and production costs. In the short and medium term, it is difficult to expand the critical earth science and engineering resources. Add to that the anticipated retirement over the next twenty years of the current brain trust of the industry and the problem becomes a critical concern.

There are few short-term solutions to the current volume of geologists and engineers. It takes the better part of that time to train them to operate in the industry. Our resolution in the People, Ideas & Objects software applications modules involves what we’ve developed and called “Industrial Command & Control” (ICC) and the application of specialization and division of labor. Specialization and the division of labor are well known economic principles that bring about greater economic productivity from the same volume of resources. Given that the volume of earth science and engineering resources is known for the foreseeable future, specialization and the division of labor will provide us with a tangible means to potentially increase the capability, capacity and productivity of the oil & gas industry, yielding multiples of today’s performance over the long term. With software defining and supporting organizations, today’s producers must approach a heightened level of specialization and division of labor through software in broadly dispersed North American markets.

People, Ideas & Objects ICC involves the implementation of specialization and the division of labor in the fields of geology and engineering. To deal with the needs of their "operated" properties, each producer firm is currently required to acquire all earth science and engineering capabilities. Providing in-house capacities and capabilities of these scarce resources to be deployed "just-in-time." When each producer within the industry pursues this same strategy, inefficiencies in these critical resources are introduced. This is due to the organizational structure built into the industry's overall capacity and capabilities. Leaving resource utilization rates lower due to the volume of unused and unusable resources locked within each producer firm. 

What is proposed through the People, Ideas & Objects software application modules in Industrial Command & Control is that the producer's operational strategy avoids the “operator” concept. Instead, it pools these technical resources through each of their partnerships represented in their Joint Operating Committees. That way the inefficiencies that would have been present in the industry can be made available and used through industry wide, producer focused, advanced and advancing specialization and division of labor. Where many of the lower end processes are offloaded to service providers who specialize in that basic skill on behalf of many producers. This is done in a geographical area or other specialization. And each individual producer focuses on a specialized element of science as it develops and innovates upon that. People, Ideas & Objects believe producers will soon be unable to commercially support the full scale of engineering and earth science disciplines tasks and responsibilities as they currently have in house. This will be due to the shortages of resources, the cost escalation of these resources in the market due to their shortages, the expansion of demand from higher production volumes to achieve energy independence, the demands for more science in each incremental barrel of oil produced, the anticipated, substantial expansion of the sciences and the need to innovate upon that expanding science.

What these concepts demand is what the Security & Access Control module is designed to provide through Industrial Command & Control. The People, Ideas & Objects system must provide access to the right person at the right time and at the right place. This is with the right authority and the right information. With the ICC there will also be a manner in which the technical and all the resources pooled from the producers, interact with the appropriate governance, compliance and industry standard chain of command.

Before the hierarchy which was a commercial development of the 20th century, there was only the military structure in terms of large organizations. The main difference between the two is subtle but significant. Military structures are broader and flatter than hierarchies. That is one of the ideals we are seeking, but the more critical feature is the ability for the chain of command to span multiple internal and external organizational structures and to move resources from different areas of the military through standardization.

The nature of people interacting through an industry standard chain of command layered over the Joint Operating Committee will include all oil & gas disciplines. The contributions of staff, financial, field and technical resources will include all those employed by the industry today. As a background, we should recall that each individual has different access levels and authorizations to People, Ideas & Objects ERP systems. Assuming different roles and responsibilities, they would impose different access levels to data, information, processes and functionality. The Security & Access Control module is essential for implementing Industrial Command & Control across People, Ideas & Objects. This structure, particularly in a Joint Operating Committee, would weave multiple producer firms under one industry standard chain of command. Also, it provides an interface to ensure that all processes are monitored to ensure compliance, governance, and overall completeness.

OCI Work Order

 In oil & gas there are two methods to capture costs. The first is the AFE for capital, and the second is the Lease for revenue and operating expenses. These have been the standard methods used throughout the industry for many decades. They have served the industry well, particularly from the point of view of distributing costs and revenues to other working interest partners. We are introducing an additional document to augment the AFE and Lease and improve cost control in the industry. It is what People, Ideas & Objects call a Work Order. It has two distinct roles and captures costs in ways not captured today. A key objective of the Work Order will be to enable innovation within the oil & gas industry, producers,and Joint Operating Committees. Enable innovation in the science and technology of oil & gas exploration and production. 

The Work Order is an implementation of our Accounting Voucher. A feature that we introduced as a separate module in the Preliminary Specification and a reflection of the capabilities of the Vouchers template characteristic. The Work Order is designed to capture costs in producer firms, Joint Operating Committees or other organizational structures that may or may not have a defined structure in terms of a formal agreement supporting the project or Joint Operating Committee. In these ad hoc organizations, costs and revenues could be assigned and authorized in the Work Order. These are not generally material costs, but they involve other complicating factors. This is not a license to spend funds in unauthorized areas. It is a feature of the Preliminary Specification that enables innovativeness to expand by allowing informal collaborative research and development work to be conducted throughout the industry. This is on the basis of its sciences and applied sciences. A means to benefit those participating in the research and development project. 

Today these types of costs fall outside the scope of the authority and responsibility of the producers' management. As a method of capturing costs, the AFE and Lease currently constrain producers. These costs are therefore accountability and accounting nightmares that have proven to be more onerous for those that have attempted to benefit from conducting this type of research and development or even ventured to suggest them. Accounting for them is usually manual in nature as it is necessary to capture the distinct understanding of each effort and reflect it appropriately from a business perspective. 

Examples of these costs may include a geologic study of producer shale gas characteristics in the Permian vs. those in Pennsylvania's Marcellus formations. An investigation of the effect of fracting a multilateral section of shale gas wells on a longitudinal vs. latitudinal orientation on multilateral results. The last one was made up, but these types of studies would not be specific to any one property. They are necessary to advance the industries underlying science and technology, costly for one producer to undertake and of limited value to the one producer that undertakes them. If costs can be mitigated through a shared model the results become more valuable, and it is this distribution of knowledge that is the basis of what we learned in our research from Professor Giovanni Dosi’s “Sources, Procedures, and Microeconomic Effects of Innovation.” That would be of benefit to any of the producers who participated in the study. Contributions from the producers could include financial or technical resources, computer simulations and other data, assets or value that a producer could contribute to the study. All participating producers would be entitled to the findings if their contributions were deemed equitable and other criteria for how long the study would take etc were defined. From this a group of producers would gain a better understanding of whatever they were studying. It is helpful to remember that innovation isn’t always due to these successes but also the failures that prove what the science is not. 

The other method in which the Work Order is employed is in the process necessary for a dynamic, innovative, accountable and profitable industry to broaden science and applied science resource availability. This is done through specialization and division of labor of earth science & engineering capabilities of each producer firm and industry. What People, Ideas & Objects define as one of the producers' competitive advantages. The other being their land & asset base. 

In order to unleash the unshared and unshareable aspects of these critical, competitive and soon to be constrained resources to the broader market based on their specialization. This is done through the elimination of today’s operator role in the Joint Operating Committee and introducing the Preliminary Specifications pooling concept. The “pooling concept" involves those with the required specializations available from the participating producer firms making up the properties Joint Operating Committee, or the market of earth science and engineering capabilities that are available to fill the needed role demanded of the property. The pooling concept is designed to introduce advanced specialization and division of labor to these resources. And to release what we’ve described as the hoarding of these resources in each producer firm. The need to have just-in-time capabilities available to meet the demands of the producer's operated properties requires that a surplus capacity of engineers and earth scientists be available to deal with the cyclical nature of the internal demands for these resources. This hoarding consumes large amounts of these resources in terms of industry population. 

To make my point clear, let's break down a process that may be provided as a more effective service. This is in terms of the type of earth science or engineering resources that could be reorganized based on specialization. In order to drill a well successfully, effective well control is necessary. This can be achieved when the well is drilled on a known seismic line that reflects the targeted zones' geological features. It can then be compared with a variety of well logs from similar wells in the area. These wells are produced in the target zone or drilled there. In this way, the sea level could be determined and the depth of the well can be ascertained. This could be done in the future by an outside service that specializes in a variety of these different processes of analyzing the logs. This could include using the seismic to choose the well location and picking the tops. These technical specialists could manage machine learning, Artificial Intelligence and have human determinations in the selection of the tops. This would enable quicker turnaround, at a much lower cost and with higher quality. Releasing the vast numbers of technical resources burdened by these tasks by each producer today. The service provider's results are available for the producer to verify. Much of this is done in software today, however by the producer firm with the resources of the firm being dedicated to it in an unshared, unshareable and unspecialized manner which is costing the industry and producers due to the inefficient use of engineering and geological resources consumed within each producer. With less specialized equipment and constantly switching between tasks unnecessarily and inefficiently. These technical tasks can be provided to the producer firm to establish valuable well control. In turn the engineering and earth science resources of the producers would be focused on the highest level, value generating methods of dealing with the firms and Joint Operating Committee assets. While the service provider specializes in highly sophisticated ways to ensure service delivery is of the highest quality, lowest cost, precision and effectiveness. 

The other example of our Work Order is noted in Organizational Constructs. This changed start-up and small oil & gas producers' competitive advantages to include Intellectual Property to earth science & engineering capabilities and land & asset base. Essentially the other side of the transaction outlined previously. The ability to generate initial revenues using the Work Order from the services provided. This is done by marketing the start-up's Intellectual Property and earth science and engineering capabilities to other producers and Joint Operating Committees. These revenues would help offset the difficulties of the start-up oil & gas process and defer much of the overhead burden today. Moving the success or failure of the start-up oil & gas firm from its ability to access capital to its technical capabilities. It won't be an industry based on who you know in the future, but on what you know, and what value you bring. These will be the determining factors of success and failure in the future oil & gas industry. 

Facilitating these changes is the Work Order and this is our solution to the constraint of these resources in the foreseeable future. What is agreed upon is the lack of replacements and the retirement of the industry braintrust. What we know is that the North American economy is the most powerful economy in the world and will continue to be so. For the oil & gas industry to attain and maintain profitable energy independence, it will require much more of this existing scientific and technological resource base that may be static in terms of its population for some time. This shortage may be further aggravated as we also know that each barrel of oil produced will continue to be more difficult from an earth science and engineering point of view. Work Orders resolve this shortage by leveraging more throughput from the same resource base by leveraging specialization and division of labor principles. These are some of the Work Order details.

The Work Order system for budgetary control

We discussed how the Joint Operating Committee managed who was available to work on the property. The ability to pool earth science and engineering resources from the partnership is asserted as a necessity in the future of the oil & gas industry. It should be stated here that our Industrial Command & Control Metaphor would not be limited to just earth science and engineering disciplines. Instead, it would include everyone employed within producer firms. So this would help us deal with who, now we need a mechanism to deal with what they'll do.

The next part of the Partnership Accounting module deals with the operational side of how field work within the Joint Operating Committee gets completed. Partnerships have always had AFE’s and operations budgets to address how much will be spent annually at a facility etc. In People, Ideas & Objects, these continue in their traditional ways. This discussion deals with how the Industrial Command & Control Metaphor can deploy resources and authorize budget spending in a manner that provides for the governance of the Joint Operating Committee. We are talking about the collaborative Work Order System that is part of Partnership Accounting and other modules. (Compliance & Governance, Petroleum Lease Marketplace, Resource Marketplace, Accounting Voucher modules etc).

Deployment of these people within the Joint Operating Committee, with the budgets agreed upon, is not enough to satisfy any interpretation of appropriate governance. Proper authorization and responsibility are needed to ensure plans and budgets are executed successfully. Without a work order system within the People, Ideas & Objects application, governance of the property would not be possible. The ways and means of successfully controlling costs and deploying resources in a manner to complete the tasks at hand are what the work order system is designed to accomplish.

The work order system will be deployed in the following manner. If someone asks you to work on a project, your first question should be “what’s your work order number?" Then your time will be charged to that code. It doesn’t matter if you're an employee of the producer where the request came from, a partner in a Joint Operating Committee, a vendor or supplier. If they don’t have a work order number you're not generating revenue. If they have a number, you key the work order number into your device or keyboard and continue. The work order system aggregates and bills your time spent working on that project. The details of the Work Order, chain of command, tasks and deliverables are all delivered within the work order system provided when you key in the number. Your role, based on your capabilities, is populated with those who are also part of that Work Order.

Note that one of the benefits of this system is that no unauthorized work gets done without a work order. Assigning budgets from an AFE, Lease or from internally sourced overhead accounts will be a matter of selecting from budget accounts or from pre-approved allocations. The ability to approve a work order would therefore be at an appropriate level within the chain of command of the Joint Operating Committee. This would be pre-authorized and designated through the Industrial Command & Control Metaphor (involving multiple producers) or producer firm. If a work order were to exceed its budget it is reasonable to assume that it was exceeding its AFE or account budget(s if it involved multiple producers), which could trigger action from the Compliance & Governance module of the People, Ideas & Objects application, if that is what management desired or deemed necessary and established in that module.

What People, Ideas & Objects propose in the Preliminary Specifications Partnership Accounting module is nothing like any other joint venture accounting system. When we account for the Joint Operating Committee as the key organizational construct. Align all producer and Joint Operating Committee frameworks together. Unleash innovation of both the producer and the Joint Operating Committee. Accounting becomes a torrent of activity where no transaction is the same as prior decades or generations.

Some processes described in the Preliminary Specification involve multiple organizations, over multiple accounting periods. Whether that’s the development of capabilities that begins in the Research & Capabilities module. It touches on the Resource and Financial Marketplace modules, and passes to the Knowledge & Learning module. Some of these processes carry transactions that are as complex and difficult to quantify as the process. Some will be for the joint account, some will be for the producer to incur on their own. As we learned in the Financial Marketplace module some transactions might be the result of an investment by an investment group.

Discussing the Work Order system that controlled project costs. The projects contained within a Work Order might be funded by multiple producers, AFE’s or budgeted accounts, and as a result we will be able to control the costs of the project, monitor them and maintain governance through the use of our Industrial Command & Control Metaphor of the People, Ideas & Objects system. The Work Order system will be able to charge the costs to the appropriate owners of the projects. This will be established at the Work Order initialization. Since the Work Order is a multi-organizational system, members of a Joint Operating Committee or members of the field services industries will be allowed to participate in a Work Order. This means they will then need to pre-approve their participation in the project. The accountant working within the Partnership Accounting module won't be running around trying to seek approval from partners to authorize individual expenditures on projects that weren’t authorized or budgeted properly. If everyone within the industry works to chargeable work orders, and all work orders are approved by those who will be financially responsible for the charges, then the accountant's job in chasing their tail and aggravating people is over.

The point of the Work Order system is hopefully not lost on others in the industry. Some may feel that the Work Order duplicates the AFE attributes, and I would argue that they are fundamentally different. The AFE approves spending for field level and construction projects of a capital nature. The Work Order system is a means to deploy the producer or Joint Operating Committee capabilities in an authorized and ad-hoc manner. When we extend the Work Order system across multiple producers, Joint Operating Committee and suppliers, the ability to deploy the capabilities of multiple organizations will enable the innovation that we are seeking in the oil & gas industry. The Work Order may take budget dollars from multiple AFE’s and assign them to a team of engineers that are asked to develop the process necessary to make their firm more capable. Or, departmental budget dollars from two producers may be contributed to a Work Order for their Geologists. This will enable them to attend a conference and conduct research on some promising development. The defining element being that no one works without a Work Order to charge their time to. No Work Order can collect charges without budget pre-authorization and approval.

This will make the Partnership Accounting module workable from the point of view of controlling the costs of the multitude of different arrangements being implemented within organizations. If the accountants are tasked with putting together the costs and determining who is to be charged after the fact, this is how they become the annoying bothersome people they can / have become and accountability frightens those into inaction. By imposing the Work Order system in this fashion, within the Partnership Accounting module, the arrangements are pre-determined and authorizations are required before charges can be incurred. Making accounting for capabilities deployment systematic instead of problematic, resolved before the fact and automated. This is not about accountants hounding people trying to understand why such and such was done.

The Work Order system as a tool for innovation

We are discussing the role that the Work Order system would have in clearing up the administrative minutiae of the accounting related issues of the Partnership Accounting module. I want to continue that discussion and ask what that has to do with innovation? Let's look at the Work Order system from the perspective of a successful producer in the marketplace. They have developed an earth science and engineering capability. The CEO is approached by one of the engineers who hears of several other producers who are conducting a study on something of interest to the firm. They are looking for other participants to join in and you want the engineer that brought the news to join in the project. Assuming each producer was using the Work Order system they would pool the resources they have within the Work Order that was set up to manage the project. You committed to a 10% share of X costs. You offset those costs with your engineers' time, office space and computer resources. (Note all of these producers' costs are pre-approved and budgeted from other accounts.) With the Work Order you could make these commitments subject to the other 90% being committed to, and then your approval would be automatic.

We have here the means by which people working within the industry can commit to programs and projects in a manner that is natural to their business. This is the way systems should work today. What we have today is an impediment to the industry operator who feels that participation in the study with the other producers would be worthwhile. However, the accounting, approval and accountability nightmare will haunt him for the next three quarters. It will subject him to regulatory oversight that questions his moral integrity. So instead the project doesn’t get proposed, funded, participated in or done.

In Professor Dosi’s paper “The Sources, Procedures and Microeconomic Effects of Innovation” he discusses the role a number of administrative minutiae have on innovation.

The discussion will aim to identify (a) the main characteristics of the innovative process, (b) the factors that are conducive to or hinder the development of new processes of production and new products, and (c) the processes that determine the selection of particular innovations and their effects on industrial structures. 

There are financial resources available in our example. Motivation exists within the organization to do an excellent job on the project. What happens is bureaucracy gets in the way and slows things down and makes it a task that requires superhuman effort to even try. And maybe one or two projects will get done each year out of sheer will. But what is needed is the ability to conduct a volume of projects far exceeding one or two, and that is beyond the scope of the organizational context as producers are organized today. Without ERP systems to define and support these innovative processes and ad hoc organizations, these processes will not spontaneously appear.

We discussed how one producer could participate in a study with other producers by setting up a Work Order to capture their involvement. Their contribution involved one engineer, office space and computer time. That they would contribute some cash was also a possibility as they signed on for 10% of the project's projected costs. I wish to discuss producers' involvement and how the Work Order system, being a multi-organizational system, can capture the different ways each producer will participate and account for these differences within the People, Ideas & Objects Partnership Accounting module.

The emphasis remains on these producers' innovation. Collaborations and interactions between producers and industry participants will lead to many innovations in the future. The impediment to doing these as a result of the bureaucracy and the current suite of accounting systems in use in the oil & gas industry is what I want to contrast in this scenario of using the Work Order. It's time in this day and age that systems become as elaborate as what is described here. This is so that innovation in earth science and engineering disciplines can occur. Professor Giovanni Dosi expands on this point further in the following quotation.

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.)

As part of the project that the producers wish to participate in. Some want to contribute a variety of different resources, some have specialized capabilities that are critical to the project and others are more or less along for the ride and are willing to participate by paying cash. Some have an AFE that has been approved that directs funds to pay for their participation. It is possible for some companies to incur the costs as part of their annual engineering payroll budget. Others have a working interest partner that is willing to share the costs over Joint Operating Committees. The combinations and permutations of how a Work Order gets financed and funded are unlimited when we consider the number of different ways producers can participate.

Now to have a Work Order system that takes the information from these various parties and assimilates the understanding of the deal from the five or six people who have the “meeting of the minds” to initiate this project is the critical point to start. People, Ideas & Objects Partnership Accounting modules Work Orders should clarify their understanding of how their participation is funded and costed. All of the participants use one Work Order, or in this case an Accounting Voucher, that is shared across all of the producers. This agreement's understanding needs to be captured within the Work Order system before approval by these producers. An Accounting Voucher must not only contain accounting details, but also identify the sources of funds. Within the Preliminary Specification we are moving away from traditional transaction recording. Automation is the focus and this can be achieved through the design of transactions. This way the system can process the charge within the firm in the manner it was expected to be. For any charges that are above the threshold that a firm was willing to commit to, that implies that another firm's cash commitment would be provided to cover those costs. The Work Order should make these cash transactions between these producers as a result of the document approval. The point of the exercise is that once the Work Order is approved, the understanding of the deal, as captured by the interface, or the designed transaction, is executed.

As I indicated, an accountant's ability to follow on with the necessary accounting for these transactions requires significant recreation of the “deal” and the time of the parties who conceived of the deal in the first place. A bureaucratic waste of time. The Work Order interface should be sophisticated enough to understand the substance of the deal. This is in whatever permutation or combination the creators chose at the beginning. I understand the myriad ways to do these and the difficulty in making an interface that captures them. That I don’t think is the difficult part. What I think would be the difficult part would be to create an interface that provides these services in a manner that is simple and easy to use. This interface should capture the deal's substance. I, however, know it can be done. The reason it hasn’t been done is that the budget for software development like this has not been set out.

Continuing the scenario of using the Work Order system across multiple producers. I will use this scenario to show how the Partnership Accounting modules integrated nature with the other modules of the Preliminary Specification provides value to these ad-hoc working groups. Also why they are such a crucial element of innovation in oil & gas.

We used the scenario in engineering, however it could just as easily be used in geology or any other area of oil & gas interest. A working group could also include the vendor or supplier marketplace. The importance of the Work Order is that the producer or participant can designate how they want to participate in the working group. Before their approval they are allocated the source of funds and where the costs will ultimately be allocated because of their participation. Each participant or producer in the working group conducts this, all within the same interface for the same Work Order. 

One of the most obvious areas that this interface will interact with the other modules is the Security & Access Control module. Access to the Work Order will be unlimited for a certain period of time. It will then need to be closed to everyone except the existing working group members. An interesting point will be reached when the search for participants reaches a threshold and the people feel there is sufficient substance for a working group. Only those who are within the working group, or are subsequently granted direct access can participate directly in the working group.

With the Security & Access Control module we also inherit the Industrial Command & Control Metaphor. This allows people to impose a chain of command across the working group. This might be something they want to do if they have a difficult task or a large group of people. The opportunity to do so is available to them if they so desire as this is part of the Security & Access Control modules core functionality.

The designation of the source of funds and where costs will be incurred is coded directly to those accounts. This is the Work Order taking on elements of the Accounting Voucher module. Each producer's accounting system will be charged, upon approval of the Work Order, according to the way they have coded the Work Order. 

I see these working groups, as we have called them here, as an essential element of how an innovative oil & gas industry identifies and solves its problems. Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi defines 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 information derived from experience and formal knowledge. It is the specific and uncodified capabilities, or “tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.”

It is therefore asked specifically, how can the knowledge, information and capability of oil & gas firms solve technical and scientific problems of the future? How can a firm more effectively employ its capability to solve problems and encourage the discovery of upcoming problems and creation of their solutions? Clearly some companies are more effective at this process than others. However, this research in oil & gas asks, is there a means for an organization to increase its ability to innovate that leads to higher performance trajectories?

Having these working groups spawn at will without the bureaucratic, accountability and accounting logistical nightmare that they instill today will be a significant first step in making the industry more innovative.

The complexity of the relationships within the Joint Operating Committees must be captured and accounted for in the Partnership Accounting module of the Preliminary Specification. Whether we are talking about the various forms of contribution that a producer may make to the joint account, or how they may participate in a working group, the bureaucratic machinations of accounting for these transactions can’t stand in the way of the innovativeness of the producers.

Business arrangements are difficult to capture and account for today, inhibiting the freedom to participate. What is needed is the ability to develop software that captures the substance of the manner in which contributions are made, and then the manner in which they are accounted for. That is the purpose of the Partnership Accounting module, to support the innovative oil & gas producer in innovative actions. Professor Giovanni Dosi emphasizes once again the need for business aspects to support the technical aspects of the business.

Internalization and routinization in the face of the uncertainty and complexity of the innovative process also point to the importance of particular organizational arrangements for the success or failure of individual innovative attempts. This is what was found by the SAPPHO Project (cf. Science Policy Research Unit 1972 and Rothwell et al. 1974), possibly the most extensive investigation of the sources of commercial success or failure of innovation: Institutional traits, both internal to the firm - such as the nature of the organizational arrangements between technical and commercial people, or the hierarchical authority within the innovating firm - and between a firm and its external environment - such as good communication channels with users, universities, and so on - turn out to be very important. Moreover, it has been argued (Pavitt 1986; Robert Wilson, Peter Ashton and Thomas Egan 1984) that, for given incentives and innovative opportunities, the various forms of internal corporate organization (U form versus M form centralized versus decentralized, etc.) affect innovation and commercial success positively or negatively, according to the particular nature of each technological paradigm and its stage of development. p. 1135

Capturing the context of the deals made in both the Joint Operating Committee and working groups as described here in the Preliminary Specification can’t be done historically. What is needed is for the software to be robust enough for the dealmakers to use while formulating the deal, to capture the substance of the deal, so that understanding will be used to allocate the costs and charge their accounting systems for these costs when they are incurred. The process we’ve defined is Designing Transactions within the Preliminary Specification. Then and only then will accountants have a chance of keeping up with the speed and innovation of the industry as it is contemplated here. Technical people will be free to pursue their science and not be hounded by those looking to recreate what was history and dealt with long ago. 

This is a necessary part of the People, Ideas & Objects software development team and most importantly, our user community. It won’t be too difficult to capture the multiple and myriad ways a deal can be formulated. The algorithm will be complex but with time and money it can be done. The real challenge in making this critical part of the Partnership Accounting module work is the user interface. Having the user's ability to intuitively use the module to capture their understanding of their part of the deal. This is to capture it in the People, Ideas & Objects system and account for it on that basis. That is what makes this innovation possible.

We discussed previously how producers collaborated on a project to conduct research. The Work Order system of the People, Ideas & Objects Partnership Accounting module enabled the producers, who may not have been affiliated in any form or fashion until this working group was formed, to be able to form and contribute to the project. The capturing of the meeting of the minds was the objective of the Work Order system. To capture the manner of each producer's contribution and payment method at the time the project was formed. This enabled them to be free of bureaucratic difficulties associated with participating in these types of working groups. Today accountants can make participation in these more difficult than they are worth, and therefore, the working groups are avoided. The reason we have to cut through the bureaucracy and promote working groups is that participation in these types of activities is critical to an innovative oil & gas industry. 

The accounting interface for the Work Order will have two elements. One will account for the costs. This will list the costs of the working group and your working interest share based on your participation rate. Fairly simple so far. The second element is where problems arise. Participation can be funded from a variety of sources and contributions. Some will have a key piece of research that builds the project. Some will contribute time and some can contribute cash. Combinations and permutations are unlimited. The one constant in these contributions is that they all have budgets. The second element will identify the source of funds or contributions that makes up your participation in this working group. It will need to be determined if that means cash will be transferred from your firm to others by simply clicking on a box in the interface. Once all of the producers have completed their interfaces the balancing of the Work Order will be attempted with any variances worked out to determine who will make up any shortfalls. Once all shortfalls are resolved, work can begin.

OCI Material Balance Report

 The Material Balance Report is an Accounting Voucher that is unique and has the following characteristics. It is designed to automate the production, revenue, royalty, marketing and other processes of producer firms and Joint Operating Committees. It is this type of specialized use of an Accounting Voucher that our user community should consider applying to other situations when contributing to the Preliminary Specification.

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

The Joint Operating Committee exists as a result of legal agreements and in oil men and women's minds. It therefore doesn’t “own” anything or incur costs. All joint account charges must clear in the month they are incurred to the producers involved. It is the same for volumetric information. The Joint Operating Committee "Accounting Voucher" balances to zero in terms of costs and volumes each month by clearing its charges, volumes and inventories with the partnership and royalty owners of the property. Clearings are done after the balance is reached. That does not guarantee that the facility will remain in balance. Adjustments and amendments to the Accounting Voucher may occur. These may happen and they can be balanced and cleared to partnership accounts in the same manner as before. The Preliminary Specifications Material Balance Report generates the subsequent automated filing of amendments and adjustments automatically. The point of the exercise is to have the Joint Operating Committee's business captured in the Material Balance Report. This is an integral part of the Accounting Voucher. Essentially all three are the same thing, the Joint Operating Committee, Accounting Voucher, and Material Balance Report. An integrity of reporting embedded within accounting that is as rigid as debits must equal credits.

We now want to discuss the contracts associated with that Joint Operating Committee. Contracts that include marketing for gas, oil, natural gas liquids, or contracts for gathering, processing charges. If a stream of product flows through a facility, a contract for processing or sale would be attached to it. The ability to attach the contract to a stream would enable the Accounting Voucher to establish the billing of gathering or processing charges / sales for that stream. These charges (invoices) or sales (receipts) and all the follow on, subsequent processes are generated automatically by People,Ideas & Objects Material Balance Report. 

The Accounting Voucher is for lack of a better term a template that is built upon as time passes. Each month as the property changes, these changes are captured within each Accounting Voucher. The template is renewed each month with the accumulation of the properties history. If an additional contract was added for production from an additional well, that contract stream and the newly added well would be represented in the next month's Accounting Vouchers. The Accounting Voucher template documents the property changes over time. To ensure that the appropriate understanding of the properties configuration is achieved, an archive of the templates will be available for adjustments to prior periods.

Critical to the “definition and design” of transactions is the fact that they balance themselves out. If the debits and credits were not in balance at the end of the day, the automation of the systems and the accountants would not be doing their jobs. Volumetric reporting is no different. If in the Material Balance Reports, they were out of balance (call this material balance), or were not balancing the inputs and outputs to other Material Balance Reports (call this system balance), or the internal accounting of those volumes to the partners, royalty holders and others were out of balance (call this partnership balance) the accountants and systems would not be doing their jobs. In closing an Accounting Voucher, not only will the debits and credits need to be balanced from a financial perspective. They will also need to ensure that the material, system and partnership volumes reported in the Material Balance Report are also balanced. Without these systems in balance, the Accounting Voucher will not clear or close.

This imposes another rather strict condition on the quality of the information accepted into the People, Ideas & Objects Accounting Voucher module. Precluding the acceptance of a voucher due to the inability to balance a volumetric requirement holds the system up for what could be a common occurrence. What if volumetric information is unavailable? What if the information is part of the normal amendment process? Then we are left with traditional accounting methods for these types of issues. An accrual of the volumes needed to achieve the necessary balance should be processed in the current month. Most production processes are amended for up to 90 days. These accruals would then be automatically reversed in the following month's Material Balance Report. What is different from existing systems is that we force them to be volumetrically balanced. Not just inputting key variables but imposing and enforcing the facts of what actually happened at the Joint Operating Committee. If it is subject to a comprehensive Construction, Ownership and Operation agreement, what is agreed to be accounted for before the close of the Accounting Voucher.

The difference may be subtle but the implications are significant. When this level of unquestionable integrity is achieved, automated processes based on those volumes can begin, and they can be assured of being based on the information and data collected in other modules.

There are many aspects of this system's management of these processes that are unique and necessary. The reason they have not been undertaken is the broad scope and scale of the software development is comprehensive and beyond what Information Technology could achieve a decade ago. It is certainly from a budgetary perspective beyond the scale of what one major producer could undertake as the value gained may not necessarily be there for the individual producer to incur the entire cost, and most certainly well beyond the standard approach of an oil & gas ERP software development solution provider. 

By aggregating North American producers' budgets, People, Ideas & Objects proposes a shared infrastructure cost. Incurring these software development costs once for the entire North American producer population. People, Ideas & Objects cost of oil & gas administration and accounting are variable costs based on profitable production. Delivered through our Cloud Administration & Accounting for Oil & Gas software and service. Those with a comprehensive understanding of these processes will fully appreciate the points I make and the implications involved. My understanding of these processes is comprehensive and I know it can be done correctly. And to do so from the point of view of dealing with the contractual arrangement as dictated by the governing agreements. This is to determine production allocation methods. If the agreement refers to either a legal or a chemical composition as the basis of production allocation, both of these methods will be available in the Material Balance Report of the Accounting Voucher in an either, or a mixed environment.