They've Been Swimming Naked!

 The tide has rolled out and I’m advising no one to look. It's not something you can forget. Financial statements of the producers in our sample have taken a step downward based on my interpretation of the industry. Over the past few years my interpretation has been different from what the CEOs of the producers were representing. As they ceremoniously paraded their balance sheets down main street. Thank God we didn’t have to see them naked while they did one of these parades. Producers have stuck to their principle objectives of cash flow and growth. Oops, scratch that, cash flow and growth aren't doing well. Running an industry into the ground is a special talent and requires dedication and commitment over the long term. Thankfully, producers officers and directors have been up to the job and caused the most comprehensive destruction I’ve seen.

In the book Churchill’s Trial: Winston Churchill and the Salvation of Free Government, Professor Larry Arnn stated.

Churchill chose differently. “[N]ations which went down fighting rose again,” he said, “but those which surrendered tamely were finished.

Churchill spoke about the French surrender in WWII. I don’t think it's reasonable to suggest that these officers and directors surrendered as courageously as the French. “Muddle through” would seek to ensure that every last bit of executive compensation was extracted before their final capitulation. “Are we there yet?" kids ask during summer vacation. It seems to me that we’re close to it though. History shows officers and directors lack the motivation to stick it out when things become untenable. Digging through closets full of skeletons is painful work and not what they signed up for. During the Great Depression, they found it profitable to move to greener pastures in other industries. We’re seeing some spontaneous retirement announcements in the industry. Two high profile and unexpected announcements were Pioneer and Cenovus. The trick is to wait for the Stampede of retirement and then no one will remember your name. 

Last week the Wall Street Journal's and Bloomberg published some indictments of officers and directors' performance. From WSJ Real Time Economics email subscription this graph shows the effect of “muddle through” on the industry's performance over the mid term. For those readers unfamiliar with oil & gas, I can assure you that the short and long term effects are the same. The industry has not performed meaningfully since the late 1970s. Establishing a non-performance culture. They don’t know what profitability is. They don’t understand how profitability is earned. They don’t know how to profit themselves. And worse, they couldn't care less about profits.  

Investors took their chances and suffered the consequences of their decisions. We saw in 2015 the investment and banking community turn their backs on the highly specious financial statements of the producers. When everything spent is an asset, it's easy to report profits. Culturally, this leads to an acceleration to the bottom over four decades. 

The fact is that everyone else in the industry except those in the lofty positions of officers and directors has been severely affected by this deliberately destructive mismanagement. I claim it's deliberate. Scroll to the left column of this blog and see that it was December 2005 that I began writing about these issues and the Preliminary Specification as the solution. How else do you account for almost twenty years of “muddling through” except purposeful, deliberate, self-serving destruction? To note also the dishonest way they've approached People, Ideas & Objects during this time. 

Bloomberg wrote on May 3, 2023 in “The US Shale Oil Capital Won’t Invest in Itself” documenting the disastrous consequences of “muddle through.” Here are just a few of the points that stood out to me. Note that these points were identified as causes of inaction by producer officers and directors. 

If the under-invested region can’t attract — and retain — people like Crawford to operate the continent’s most productive shale fields, the decline of America’s energy influence is only going to accelerate. Some shale bosses have already [started forecasting] the Permian Basin’s production peak by decade’s end, and a dearth of employees won’t help.

Part of the issue behind the city’s underinvestment is a small-government, fiscally conservative ethos that pervades the politics of West Texas, a Republican stronghold. But residents say there is also a quiet, underlying fear that the decade-old US shale boom could end as quickly as it started, turning the Permian into a ghost town almost overnight. Why spend tax dollars to improve a city, the thinking goes, when there’s a real feeling the bottom could still fall out?

“Unfortunately, a lot of people are always thinking, ‘when are we going to go down, when is the next bust cycle going to happen?’ So they’re afraid to really let some of that money go back into the community,” said Christine Foreman, president of the parent-teacher association at Midland High School. “They think, ‘we’re going to have a bust and everybody’s going to move away and then we’re going to have all this wasted infrastructure, wasted housing, wasted investment.’”

My patience is tested by the number of employees who have told me working for Diamondback was the best job they ever had, but they are moving because another destination offers them more than what they are receiving in Midland,” Stice wrote in [an op-ed] in the Midland Reporter-Telegram newspaper following the rejection. “How is Diamondback supposed to continue growing in a city that struggles to develop or grow with it?”

The schools are also a hard sell. One out of every three residents in the Permian reads below a third-grade level, Bentley said in written testimony before the US House Natural Resources Subcommittee on Energy and Mineral Resources earlier this year. Midland Independent School District spends $8,865 per student each year, according to National Center for Education Statistics data. If you ask NCES to compare that to US districts with similar demographics or other Texas cities, Midland is at the bottom of the list.

For now, companies in the region are just hoping the wages are enough to keep the workers coming — and prevent the existing workforce from packing their bags. 

That’s hard when even Foreman, the president of the parent-teacher association, is encouraging her three children to consider starting their families outside of Midland where she raised them.

“It’s frustrating as a citizen, as a parent, as somebody who grew up in Midland,” she said. “It’s frustrating to see us not reinvest in our community.”

These numbers show that the Permian, the largest U.S. field, suffers from infrastructure shortages. There is no faith, trust or belief in the producers to do right and turn the industry around. Or as People, Ideas & Objects et al provide in the Preliminary Specification, to work the “boom / bust” economy out of existence. Officers and directors take a lackadaisical, uncaring, and easy approach to “muddle through.”

” By “building balance sheets'' and “putting cash in the ground” we see their focus. It’s not business. It’s not common sense. It’s not constructive or productive. It’s just lazy. And most of all, the viable scapegoat in this article clearly identifies Midland City Council’s inability to invest in infrastructure. That’s why producers have to spend more on resources and resources are difficult to come by. 

Human nature forgives those that cause the biggest issues. However, they will prosecute those with the slightest indiscretion. An example of this is the current President and the alleged scandals his family is involved in. This can best be summarized as selling the United States to the highest bidder for personal gain. While the audacity of the former President to use Twitter is well beyond any social norm of acceptable civilized behavior. 

Officers and directors have been forgiven for their large indiscretions these past decades. The question then becomes, has the damage become so substantial that they’re now unable to rectify anything? Are they powerless and hopeless in their capabilities and capacities? Bloomberg suggests the Permian will face that in 2030. Officers and directors may ask, why am I here taking responsibility for this? As a result of the untenable situation they find themselves in, they may pursue greener pastures with fewer complications and difficulties. And perhaps most importantly, avoid accountability or responsibility for any looming difficulties their replacements may face. Having the wherewithal to say that it was in good shape when they left, and don’t know what their replacements have done. 

A historical example of this is when directors and officers leave, which was established during the 1929 Great Depression. In the past I’ve suggested they should invest in the development of the Preliminary Specification before they leave. Obviously, if the industry is in the state I suggest it is in, they won't do so. Funding People, Ideas & Objects would be a tacit admission that their job hasn't been done. They will therefore exit quietly in the crowd of other producers officer and directors as they too exit. Therefore who can People, Ideas & Objects appeal to for funding? If there is no one, does this leave the Preliminary Specification orphaned? 

If natural gas prices were maintained from September 2022 to the end of the first quarter of 2023? What would the differential be in terms of what producers' officers and directors gave up? I’ve calculated it to be a loss of over $72 billion for the quarter. However, that remains a faint shadow of the amount lost over the past four decades with at least a dozen outright oil or gas price collapses. And the chronic overproduction that has plagued the industry for years has depressed prices. These losses are what People, Ideas & Objects have focused on since August 2004. And as the Bloomberg article suggests we should have spent our time more productively convincing Midland’s City Council to pass the Hogan Park upgrade spending.  That is the issue the industry is focused on. From the same Bloomberg article. 

A couple of years ago, some residents thought they’d found a solution to the city’s inaction: fund public-space improvements with private money. A non-profit called Quality of Place Conservancy — led by Jeff Beard, vice president of business development at Midland-based driller CrownQuest Operating LLC — proposed a $55 million upgrade to the city’s historic Hogan Park. It would feature new sprawling sports fields, playgrounds, trails, a splash pad, pavilion, food trucks and more. Under the plan, $45 million would come from private investment, while the city would fund $10 million and have final approval over how the project moved forward — the sort of public-private partnership Texas towns bolster to try to build ambitious projects that taxpayer dollars alone wouldn’t be able to afford. By January, when the Midland City Council was set to vote on the proposal, $28.5 million of private investment had already been locked in, Beard said. Still, the council rejected it in a 4-2 decision, citing concerns over how the city would pay its portion and how the project would be governed.

The industry's challenges will continue to manifest while producers "muddle through." And they clearly admit that even the Permian will diminish by 2030. There may be a reason to justify industry leadership exit. If so, what would be done at that point?  

What People, Ideas & Objects Preliminary Specification brings to the table. A multi-trillion dollar value proposition based on two identifiable and quantifiable attributes. $5.7 trillion in higher profitability over the next 25 years through our price maker strategy that produces only profitable production, everywhere and always. Secondly the cycling of cash through the producer firms by realizing the capital costs of oil & gas exploration and production. This is done by passing the producer's capital costs on to the consumer. To do so in a competitive manner with the North American capital markets.

There is as much value in the intangible, unidentifiable and unquantifiable attributes of the Preliminary Specifications business model contained within our seven Organizational Constructs. These form a strong cultural structure for people who work within the industry. This structure allows them to rely upon and build incremental value for the producers, its people, the industry, all of its service and tertiary industries. Profitability drives prosperity. This business model identifies and addresses today’s issues and provides a foundation for tomorrow's financial, operational and political difficulties.

What should have been a continuing year of building on 2022's limited success has revealed a shocking lack of swimwear. We should not be surprised as the industry's financial foundation crumbled long ago. It may enjoy successful days here and there, and that will sustain those that have benefited from it the most. However, taking advantage of a primary industry in this way shows the irresponsible and reckless methods culturally developed by executives in this industry. I don’t think the situation is viable on a go-forward basis and I am encouraged that the WSJ graph shows that I’m not wrong from at least 2008. There has been a significant degeneration of motivation, faith, trust and goodwill throughout the industry, and the individuals responsible are the directors and officers. I have identified the issues, opportunities and solutions since well before 2008 and they only vilified and ostracized People, Ideas & Objects. I do not say that to solicit sympathy, only to show the culpability of those responsible who knew better and chose the route to destroy what was not theirs. This was so that each of them could continue to profit financially. Officers and directors may want to identify what we’ve described as their long list of viable scapegoats as the culprits. Which now include the Midland City Council and those “‘One out of every three residents in the Permian reads below a third-grade level,’ Bentley said in written testimony before the US House Natural Resources Subcommittee on Energy and Mineral Resources earlier this year.” However I only see this as a continuation of their despicable behavior.

OCI Accounting Voucher, Part III

 Purchase Order Systems

It's very 1970s to think of a Purchase Order system. The 1970’s is the last time I remember anyone using one. (It certainly might be applicable in larger firms, however, I am unaware of this.) The practicality and usefulness of these systems receded in the 1980’s and no one has considered their existence since. Now we talk in terms of Supply-Chains, however oil & gas doesn’t have a “supply-chain” as the term is used. Supply chains are for retail and manufacturing. Purchasing is for oil & gas. I would reiterate that our user community will need to research Oracle’s Purchase Order system to determine if the need and desire exists. I see substantial value in building one and seek to document how that value could be realized. 

The Purchase Order system is part of the Accounting Voucher module, which is a necessary part of large capital item processing. The use and application of the AFE, Cost Center or Lease charge code remains the same regardless of Purchase Order existence. There is no change in the coding structure due to the purchase order number. The Accounting Voucher relies on the Purchase Order for further approval of the specific contract dealing with a particular vendor on a specific project. Think of Purchase Orders as designing transactions.

There are a number of cases where the management of the vendor relationship needs to be taken into account. Particularly in oil & gas where the project details are specific and large. Engineering contracts for gas plants, pipelines and facilities are some examples. Situations where the contract must meet certain criteria and the vendor must qualify during the construction process. Producers are concerned that the firm chosen be capable of undertaking the work described. It’s never the lowest cost and the bid wins the contract bidding process. This overall bidding process falls under the larger Purchase Order process of the Preliminary Specifications Accounting Voucher.

Once the vendor has been chosen, the approval of the costs is subject to the contract terms and conditions. Any prepayments or partial payments can be processed based on the strength of the Purchase Orders document. The final payment depends upon satisfactory contract completion. If the contract is subject to holdbacks and other conditions, those would be applied to the Accounting Vouchers payments automatically.

The Purchase Order system provides producers with control over large contracts. Something done frequently in oil & gas. By managing the bidding process and providing control over the contract in terms of making and controlling the payment process. The Purchase Order is a valuable tool in any producer's system. Having these contained within the Accounting Voucher of the Preliminary Specification is the natural placement and method to automate many of these control processes. See also the Resource Marketplace module for discussion of the Oracle Purchasing and Procurement module that has been included as the base of the Preliminary Specification. 

Two Distinct Revenue Sources

Professor Giovanni Dosi’s paper discusses innovation's role in the market economy. It assumes companies in a free market are willing to invest in science and technologies to advance the competitive nature of their product offering or internal processes. The key aspects of Professor Dosi’s theories that make them directly applicable to oil & gas are the application of innovation theories to earth science and engineering disciplines. Oil and gas companies are dependent on these disciplines to search for and produce hydrocarbons successfully. Science and technologies are invested with the implicit expectation of a return on these investments. However, it is also to provide the firm with additional structural competitive advantages by moving their products' costs and / or capabilities beyond the competition. Professor Dosi notes:

Thus, I shall discuss the sources of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search, and the nature of the incentives driving private agents to commit themselves to innovation.

The producer firm is committed to developing earth science and engineering capabilities to advance their competitive advantages. This will enable them to earn a return on this investment? How within the People, Ideas & Objects application does the producer earn a return on their investment in these capabilities? Certainly through enhanced profitability of their land and asset base. This long-term value-adding process is enhanced through direct charges to their Joint Operating Committees to generate and sustain revenues to support their short-term capabilities. That is to say that the earth science and engineering resources pooled into a Joint Operating Committee, have been assigned a specific role within Industrial Command & Control. Their costs are captured in the Partnership Accounting module and produce a “revenue” stream from the producers' capabilities.

The question then becomes what is the charge for the individual during their time working on the Joint Operating Committee? It will be easy to determine the hours worked in the various Joint Operating Committee through the Preliminary Specifications Work Order system. The hourly rate charged would need to include a number of factors. The skills of the individual, the technical resources of the producer firm at the disposal of the individual, and also a measure of the level of innovation of their producer firm. People, Ideas & Objects developed the Revenue Per Employee factor which reflects the overall effective productivity of the firm. 

The net result of this is that the revenues generated from this second revenue stream should at least cover the costs of the producer. In some cases, they will have captured a return on their investment in the capabilities they’ve developed within their firm. To proceed on any other basis would be unreasonable.

It comes down to what business the producer is in. Are they in the business of generating profits from producing oil & gas, or are they in the business of generating profits from providing geologists and engineers to the operations they have an interest in? If we look at the competitive advantages of the producer it is the land and asset base, and the earth science and engineering capabilities that they apply to that asset base. Clearly both production and capabilities development are within the scope of the oil & gas producer's competitive advantages. To a large extent, the costing of technical resources is not fundamentally different from today's. In today’s market, the operator receives “overhead allowances” for some of these costs. And the payroll burden for individuals is charged directly to the Joint Operating Committee. A key difference between the model proposed here and today is the elimination of the operator role. This is in order to acquire the necessary overall capabilities by pooling technical resources committed by its members.

To take this opportunity to charge the costs of the producer firm's capabilities and earn a return on investment may be an issue for some. In a world where engineers and geologists are in high demand, producers are assessed on their performance based on Revenue Per Employee. This is a competitive and measurable factor. Acquisition of additional technical resources is a difficult process that has investment performance implications for the firm. The ability to at least offset some of the overall costs of technical resources helps to mitigate investments in the short term. This is the purpose for enabling the direct billing of technical resources to the joint account in the Work Order of the Accounting Voucher. The means to maintain and sustain these competitive resources for the long term by recovering their costs from capital and operation activities in the Joint Operating Committees.

When we get to the Research & Capabilities and Knowledge & Learning modules, we will see the development of these capabilities from an innovative point of view. This takes on a different perspective. The ability to capture the costs of a firm's technical resources as a competitive investment, and use them as a source of revenue through the Accounting Voucher is established. Looking at the development of the producer as it exists today, it is somewhat of a paradox as to which is developed first, the land base or the capabilities. With the ability to generate its own immediate source of short term revenue this paradox is resolved in the short term.

Some may suggest that these costs offset the Joint Operating Committee's production revenues that would have flowed to the producer anyway. And that may be true. However, in a world where the demand for technical resources are expected to be as significant as some suggest, the need to deal with the problem on a wholesale basis, as the People, Ideas & Objects pooling concept does, is a requirement, and secondly, the assumption that each of the producer firms will develop their technical capabilities may be proven to be false. The cost of the capabilities incurred by the producers will also be realized by the Joint Operating Committees. They'll be challenged to earn a profit to maintain production. Accounting is concerned with accurate and timely recording of costs, this recognition is therefore appropriate.

Miscellaneous

One thing that we’ve not been able to discuss regarding the Accounting Voucher module of the Preliminary Specification, is that the module is used for entry of all transactions for accounting purposes. Whether it is through the Material Balance Report, which is encapsulated within its own voucher, or a simple accounts payable voucher, everything entered into the People, Ideas & Objects system is through an Accounting Voucher. And there will be different types of vouchers for different types of charges. Each with their respective voucher numbering. (For example all Material Balance Reports will be 200,000 series.) Business is also, in many cases, repetitive. The ability to reuse any Accounting Voucher as a template for subsequent months will be a feature of the People, Ideas & Objects Preliminary Specification. 

Oracle Cloud ERP

Use of Oracle Cloud ERP as the base of the Preliminary Specification provides oil & gas producers, our user community and their service providers with a myriad of benefits. The sharing of Information Technology infrastructure includes Oracle’s premier software and services products. Their dedication to quality and performance. The addition of the Intellectual Property of the Preliminary Specification and specifically the seven Organizational Constructs it contains adds an element of oil & gas specific quality and performance. It is our user community and their service provider organizations that make the project more valuable to producers. Ability to share administrative and accounting infrastructure across the industry. Establishing an industry-wide capability available to all producers which will be supported and serviced by a permanent software development and user community.

Conclusion

One of the basic assumptions of the People, Ideas & Objects Preliminary Specification is the pooling concept that replaces the “operator” designation in use today. Therefore many of the participants in the Joint Operating Committee will actively manage the property on an ongoing basis. As a result some of the Accounting Vouchers will be open to charges from multiple producers represented on the Joint Operating Committees that the producer firm is a participant in. The revenue, capital and operations of each of the Joint Operating Committees accounts are open to the direct debit and credit charges of all of the participants in the Joint Operating Committee. 

The ability for each producer to have the just-in-time earth science and engineering capabilities available for all the properties they manage requires them to have unused and unusable surplus capabilities. These unused and unusable capabilities, on an industry wide basis, are leading to unnecessary resource shortages that are no longer affordable. Specialization and the division of labor will need to be employed by the producer in terms of their earth science and engineering capabilities. Having these critical resources pooled into a Joint Operating Committee releases these previously hoarded unused and unusable resources. The People, Ideas & Objects pooling concept also implies some producers will contribute disproportionately to the property. Producers need to contribute their skills, knowledge, experience and ideas to an innovative oil & gas industry. Therefore each of these producers need to have the ability to charge for their earth science and engineering capabilities to the joint account. All charges are subject to the AFE, Lease or Work Orders budget requirements and cost control remains the domain of the Joint Operating Committees. 

Professor Dosi (1988) states that profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives.” (p. 1135) Professor Dosi introduces the theory of Schmookler (1966) and asks “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both”? (p. 1135) Schmookler believed in differing degrees of economic activity derived from the same innovative inputs. It’s People, Ideas & Objects' assertion that "different incentive structures” and “different opportunities” can also be facilitated and constrained by the administrative ease in which producers operate. 

It is within the Accounting Voucher where the Material Balance Report is embedded within the Accounting Voucher itself. Inheriting the ability to balance the financial aspects of the voucher, but also the volumetric information. It is at that point, when the volumetric information attains the integrity of the accounting system, that the automation of the various processes based on the volumetric data can begin. 

If the producers are confident that the deal is accurately captured in the operation, it’s appropriately reported through the Accounting Voucher and throughout the Preliminary Specification. And the operation reports a substantial and consistent profit. Then they know that their innovations are working, their systems are working and the alignment of the legal, financial, operational decision making, cultural, communication, innovation, strategic, compliance and governance frameworks is achieved.

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.