OCI Petroleum Lease Marketplace, Part VII

 People, Ideas & Objects and Oracle Corporation

Oracle Autonomous Database

Data models define a database's architecture. A data model is an application-level structure that provides structured data storage and retrieval for Oracle databases. Normalization ensures that the database adheres to the rules and requirements of the data. People, Ideas & Objects Cloud Administration & Accounting for Oil & Gas provides this value through Oracle Autonomous Databases. There will be three data models used in the Preliminary Specification to provide the data attributes that are needed by this system. The combination of Oracle Cloud ERP applications, PPDM Association field operations data model, and People, Ideas & Objects' proprietary oil & gas ERP data model make up the three.

The Oracle Cloud ERP data model is comprehensive and manages not only Oracle Cloud ERP attributes but also system-related data model requirements. This data model's size is staggering, and People, Ideas & Objects, our user community, and their service providers will need to be familiar with the tables that their processes access and write to. I'm sure not much of what is contained in Oracle’s Intellectual Property can or will be known by any one individual. We are in the domain of specialization and the division of labor. It might be understood by as little as one thousand people but I would doubt it.

The PPDM Association defines and creates standards for oil & gas exploration and production data management. This data model includes the following information; general well header, digital well log, seismic location, seismic data, land parcel, reservoir field and pool, faults and formations, geographical, and surface grids. Although many of these data elements may seem outside of the ERP scope only seismic location information, seismic data, and faults and formations may be outside. As part of our industry-wide collaborative application, the land information will be of significant value. 

The PPDM data model is quite large. In one of the last upgrades PPDM suggested that just the upgrade was an addition of 500 tables. People, Ideas & Objects are not members of the association and are therefore not able to download the model and can’t tell what level of normalization the data model conforms to. Looking in the wiki however I see a number of tables with similar first names that have different second names. The first name should be the table, and the second name should be an attribute within that table. Instead of 10 or 15 tables, they would only need one. Despite this, data models are difficult to understand without a comprehensive look at them. 

Applications based on the PPDM data model are already used by many oil and gas producers. As a result, we are building on the existing infrastructure of technologies used by the producers for earth science and engineering applications. By implementing ERP, we are increasing the applications that producers' technical staff are able to access and use. Engineers benefit from having access to well header information that also references accounting data. This is also necessary when we get to some of the more complex items in the Material Balance Report of the Accounting Voucher. Particularly valuable will be the integration of IoT and SpaceX that will be undertaken in the Operations Management module. 

Oracle Cloud ERP, Oracle Autonomous Database, and PPDM Association data models don't adequately represent the fourteen modules, three marketplaces, or seven organizational constructs of the Preliminary Specification. In order to deal exclusively with oil & gas-specific attributes, we must develop our own Cloud Administration & Accounting for Oil & Gas data model. Consequently, People, Ideas & Objects data model will form part of the underlying Intellectual Property developed with our users. Our user community vision describes the methods we are using to accomplish this development. 

Service Providers

The Petroleum Lease Marketplace of the Preliminary Specification requires transaction support for many things. These include lease rentals, surface rentals, and bonus payments. The purpose of this discussion is to determine which services are available to assist in the transaction processing of Oracle Cloud ERP Applications Financial Management. 

In terms of the expanded division of labor and specialization enabled by the Preliminary Specification, we should once again look to our user communities service provider organizations. Innovative oil and gas producers and their Joint Operating Committees focus on their land and asset base, as well as their earth science and engineering capabilities as their unique competitive advantages. The Research & Capabilities and Knowledge & Learning modules focus on the development and deployment of capabilities and the Petroleum Lease Marketplace module is focused on the land and asset base of the producer. Therefore to focus on those assets would require that the administrative minutiae of land, production and exploration administration and the accounting associated with land and assets be outsourced to specialized service providers. By doing so, the producer is able to concentrate exclusively on securing and managing their company's competitive and strategic land and asset base. A task that will ultimately build value for the producer, and a task that is unlimited in terms of the amount of time and energy they spend on it. 

As an example, we have a scenario where a producer has chosen People, Ideas & Objects for their ERP system. Which includes the Oracle Financials and implies that high levels of specialization and division of labor are incorporated through our user communities service providers. Thus, these accounting applications are typically used by individuals who reside outside of the producer firm. Although information derived from them will be used by members of the producer firm, most of the data and processing will reside with the service providers. Thankfully we are using a cloud computing model of delivery of the systems by these service providers. 

Consider that there are service providers for lease payments who guarantee your surface and lease rentals will be paid on time, lawyers for contract maintenance, and one for Crown and Federal lands. They each represent many producers and hold a substantial share of the industry's market. Each has highly organized and efficient processes that require specialized software systems to meet their specific processes needs. On behalf of the producers represented in our subscription model, People, Ideas & Objects would provide access to the producers' data and develop these highly automated systems. Service providers have access to one or possibly a dozen data elements of each producer's Joint Operating Committee for the process management they are responsible for.  

The processes of one producer would be fairly straightforward. It is unlikely that an organization seeking high levels of automation could justify its high costs of software development independently. In a scenario where the industry is being represented by specialized service providers the need for automated systems is necessary. And these systems have to be an integral part of the producers in terms of their integration with our Security & Access Control module. For instance the lease rental service provider would be able to access only the tables relating to the lease rental data. And the service provider would be unable to complete their task without this level of access. 

Oracle Cloud ERP Applications will include the full suite of Financial Management modules. Among these are General Ledger, Accounts Payable, Accounts Receivable, Asset Management, Payments & Collections, and Cash & Expense Management. Our Resource Marketplace module already adopted these, so we only need to access the specific services within those modules. Modularity offers such advantages.

Consider the innovative oil and gas producer using the People, Ideas & Objects Preliminary Specification. Across the Petroleum Lease Marketplace, we noticed that the producer's main focus was acquiring land and assets while accounting, land administration, and other service providers handled the firm's administrative and accounting needs. For these highly specialized service providers to have access to the producer's data, the People, Ideas & Objects application needs to be specifically developed to meet their needs. Now we'll discuss the billing process and how service providers earn their fees from producers. 

Producers and service providers must be able to agree on prices for the service as part of the specialization and division of labor process. As the service provider can process higher volumes of lease rentals with a fixed number of resources, they can pass these savings on to the producers. Through automation, higher levels of specialization and division of labor, high utilization rates of service provider resources, and sharing of infrastructure costs across industries, savings can be derived. Due to the lower cost and higher quality of the service provided by the service providers, using them becomes more economically feasible for the producer. 

Service providers, however, do not want to generate thousands of invoices each month by manually compiling reams of data. In addition, the producer does not want to reward the service provider if the lease rentals are not paid. The billing for the service will be automated based on the producer's successful payment of any and all lease rentals. Through People, Ideas & Objects, the service provider will automatically send a bill for the service after processing a lease rental payment. The systems in which both the producer and the service provider use for these purposes. Consequently, a producer's payable and a service provider's receivable are created. 

With highly automated systems, and billing based on successful lease rental payments, we can be certain that costs are minimized. The efficiencies are gained by the producers, the service provider and society itself as all of these people are involved in a more productive use of their time, such as the producer building their land and asset base, the service provider gaining distinct competitive advantages. Advantages such as quality, hyperspecialization, division of labor, automation, innovation, leadership, integration, problem solving, identifying problems, collaboration, research, ideas, design, planning, thinking, negotiating, financing, tacit knowledge, reasoning, and judgment.

Oracle Cloud ERP Applications, in particular Oracle Financial Management Suite, are designed to be used in a cloud computing environment. Whether the service provider also has their own accounting system is not relevant to this discussion, what matters is that the billing process for the producer is as efficient as possible and that implies that the service providers have Oracle Cloud ERP and Oracle Financial Management suites available to them. 

Last but not least, it is important to emphasize the standardization and objective nature of accounting provided by service providers to producers. It is important to realize that the decision to shut-in production is based on the financial criteria of profitability determined by the accounting and administration of the service providers. It has also been proven that in oil & gas, a producer's losses are at times reported as their windfall profits. In order to implement the appropriate production discipline on the industry, unprofitable properties must be shut-in in order to achieve maximum profitability. These shut-in properties incur no profit or loss when using Cloud Administration & Accounting for Oil & Gas. All costs, including overhead, become variable based on profitable production. This prevents them from diluting earnings from profitable properties, and with only profitable properties producing, corporate profitability is maximized as well as many other benefits. To determine whether a property is unprofitable, producers need to know that they’re using the same standard and objective accounting criteria as all other North American producers. Therefore standard and objective accounting is the basis of all service provider output to assure producers of the confidence they need in making the appropriate decisions to optimize earnings.

OCI Petroleum Lease Marketplace, Part VI

 Management’s Role in This Transition

As a result of developing the Petroleum Lease Marketplace from the Preliminary Specification. A key deliverable would be the removal of management control from the current bureaucracy. And rebuild it with the marketplace's "vanishing hand". The marketplace would be represented through the “Marketplace Interface” that we’ve discussed here. In this quotation, taken from Professor Richard Langlois’ book “The Dynamics of Industrial Capitalism” he reflects on this point. 

In highly developed economies, moreover, a wide variety of capabilities is already available for purchase on ordinary markets, in the form of either contract inputs or finished products. When markets are thick and market-supporting institutions plentiful, even systemic change may proceed in large measure through market coordination. At the same time, it may also come to pass that the existing network of capabilities that must be creatively destroyed (at least in part) by entrepreneurial change is not in the hands of decentralized input suppliers but is in fact concentrated in existing large firms. The unavoidable flip-side of seeing firms as possessed of capabilities, and therefore as accretions of habits and routines, is that such firms are quite as susceptible to institutional inertia as is a system of decentralized economic capabilities. Economic change has in many circumstances come from small innovative firms relying on their own capabilities and those available in the market rather than from existing firms with ill-adapted internal capabilities. Chapter 5 will reconstruct the New Economy of the late 20th and early 21st centuries along exactly these lines, once again adding nuance and historical texture. If the antebellum period reflected the Invisible Hand of market coordination, and if the late 19th and early 20th centuries saw the rise of the Visible Hand of managerial coordination, then the New Economy is the era of the Vanishing Hand. p . 14

One could certainly accuse me of being anti-management. I’ve had quite a battle with them since we determined the Joint Operating Committee was the key to being a dynamic, innovative, accountable, and profitable oil and gas producer. Our other determination was that software defines and supports the organization, and therefore changing the organization requires changing the software first. Management has distorted this knowledge by realizing that if they never changed the software, their management domain would never be challenged. Using this knowledge to secure their future in unaccountable and unchallengeable ways. But we know many things from our review of Langlois, Coase and Chandler in particular.

• Management has no stake in the firm. 
• If a crisis strikes a firm, management resumes elsewhere, or declares bankruptcy.
• It is the investors and debt holders who will shoulder the costs.
• Management currently hold the reins, and are mindful of their options. 
• Ownership, in the same way as the Merchants need to start over. 
• Starting over begins with supporting People, Ideas & Objects, our user community and their service provider organizations.
• It was noted by Chandler that management has failed in the past. 
• During the great depression. 
• A time when the government had to increase its economic involvement.
• Management may not see the bigger picture, and fail again.

Management's knowledge in not changing the software is an extension of their monopoly on tacit knowledge. A market or bureaucracy can hold tacit knowledge. The producer has ensured no market can claim their tacit knowledge and gain a foothold to challenge their dominance. In this way, the whole People, Ideas & Objects Preliminary Specification is futile, or a call to action for oil and gas ownership. From Professor Langlois paper “Capabilities and the Theory of the Firm.”

Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. p. 17

The bureaucracy's assertion that the oil and gas service industry vendors and suppliers are greedy and lazy is self-serving. And designed to ensure that markets don’t develop and compete with management. What is needed is the market supporting efforts of an innovative oil and gas industry. This depends on a dynamic and effective “Marketplace Interface” in the Petroleum Lease, Resource and Financial Marketplace. 

I think that what we have learned about capabilities is valuable and applies to the “Marketplace Interface” that we have detailed here. That “knowledge, skills and experience” are the basic ingredients of capabilities and these fit well within the Petroleum Lease Marketplace module. If we at People, Ideas & Objects could be so bold as to assert that we include “ideas” with knowledge, skills and experience then we are beginning to build on these concepts.

The other aspect of what we have discussed is the role the oil and gas industry has in providing the infrastructure that supports the market. This includes standards and, as we have discussed, software like People, Ideas & Objects to support markets and marketplaces. The choice between the marketplace and management as to who will control the industry in the future has already been made. The Internet demands that decentralized markets will rule the day. Just don’t tell the current management as they fight to hang on to their last few moments of control. From Professor Richard Langlois' Book, “The Dynamics of Industrial Capitalism.”

When a modular product is imbedded in a decentralized production network, benefits also appear on the supply side (Langlois and Robertson 1992). For one thing, a modular system opens the technology up to a much wider set of capabilities. Rather than being limited to the internal capabilities of even the most capable Chandlerian corporation, a modular system can benefit from the external capabilities of the entire economy. External capabilities are an important aspect of the “extent of the market,” which encompasses not only the number of possible traders but also the cumulative skill, experience, and technology available to participants in the market. Moreover, because it can generate economies of substitution (Garud and Kumaraswamy 1995) or external economies of scope (Langlois and Robertson 1995), a modular system is not limited by the weakest link in the chain of corporate capabilities but can avail itself of the best modules the wider market has to offer. Moreover, an open modular system can spur innovation, since, in allowing many more entry points for new ideas, it can create what Nelson and Winter (1977) call rapid trial-and-error learning. From the perspective of the present argument, however, the crucial supply side benefit of a modular production network is that it provides an additional mechanism of buffering. p. 70

OCI Petroleum Lease Marketplace, Part V

 More on Capabilities

What follows is a general discussion of the Marketplace Interface in the Petroleum Lease Marketplace module. It is intended to provide some understanding of the Marketplace Interface's ability to enable a user to engage with other elements of the market. This will build the producer firms land and asset base. 

It was during the Preliminary Research Report that we first applied Professors Anthony Giddens and Wanda Orlikowski's Structuration research to the Joint Operating Committee. Professor Giddens Structuration Theory states that people, organizations and society must move together or fail. Professor Orlikowski’s Model of Structuration states that technology is a part of society and both defines and constrains action. Therefore when we look at the two possible organizational types of architecture for Petroleum Leases we see the Marketplace and the file cabinet. But seriously, the choice is that stark and the contrast is that dramatic. To match the organization, the people and societal definitions and constraints, the marketplace is the ideal architecture. To therefore designate a module within the Preliminary Specification as the Petroleum Lease Marketplace, it builds on this simple architecture. From Professor Richard Langlois' “Modularity in Technology, Organization and Society.” 

Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces - which can then communicate with one another only through standardized interfaces within a standardized architecture - one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections. p. 1

This next quote is critical. It's a chicken and egg problem however. I don’t know if we are taking elements of the technology and mapping them to the organization, or taking the marketplace and mapping it to the technology. Both are undergoing significant changes in the Petroleum Lease Marketplace.

What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to modularity in the design of the organizations that produce such products. p. 1

Lastly, users need a window to see the marketplace. In the Petroleum Lease Marketplace, is our “Marketplace Interface," consider a user examining a Unit that they are a member of the Joint Operating Committee within the Marketplace Interface. During viewing, contextual tiles with agreements, leases, and other information appear. If the user wants to click on those and query the information it is there as well as historical accounting data. If users from another firm view the property, they can be seen and engaged in a collaboration. Immediately contextual tiles of information about the individual are available to you, and any previous correspondence and outstanding matters appear. Meanwhile you click on the newly drilled well that you heard was performing beyond expectations to get an update of its actual production. You also notice that the adjoining lands have just been posted for bid by a producer firm who is not a member of your Joint Operating Committee. You can call on the other producers in the Unit and share a recorded video meeting within the Petroleum Lease Marketplace. This will initiate a plan to deal with it. 

Professor Richard Langlois in his 1992 paper “Modularity in Technology” defines what capabilities are in a corporate setting. 

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

Recently we discussed the Petroleum Lease Marketplace "Marketplace Interface." We hopefully saw with the brief description of how the system could provide a window on the Petroleum Lease Marketplace and how that contrasts with the current rows and rows of file cabinets. Application of the firm's capabilities within that “Marketplace Interface” will be how the producer and Joint Operating Committee will build its firm and earn its profits. Or as Hayek says about capabilities, how much “knowledge of the particular circumstances of time and place” is not being acted upon in your firm today?

There will be significant changes in the transition from file cabinets to People, Ideas & Objects Preliminary Specification. These changes imply that there will be a cost and part of these costs will be software development. Professor Langlois calls these “Dynamic Transaction Costs” 

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

Who said it's not the destination, but the path? That is what software development is about, the path. We have a rough idea of where we are heading and what it might look like. However, without the involvement of the user in the development of these systems it would all be pointless. User involvement is critical to People, Ideas & Objects success and quality. The Preliminary Specification is only a starting point. Our user community can take it and build upon it as they and the industry desire and need. Over time as the organization and markets change, so will the software. And the capabilities of the marketplace and the firms will develop as a result. From Professor Richard Langlois “Transaction Cost Economics in Real Time.”

"F.A. Hayek (1945, p. 523) once wrote that 'economic problems arise always and only in consequence of change.' My argument is the flip-side: as change diminishes, economic problems recede. Specifically, as learning takes place within a stable environment, transaction costs diminish. As Carl Dahlman (1979) points out, all transaction costs are at base information costs. And, with time and learning, contracting parties gain information about one another's behavior. More importantly, the transacting parties will with time develop or hit upon institutional arrangements that mitigate the sources of transaction costs." p. 104

There is a distinct market capability available in the Petroleum Lease Marketplace of the Preliminary Specification. A capability that is not reflected in the Research & Capabilities module, a capability that resides in the “Marketplace Interface.” A capability that provides the innovative oil and gas producer with the ability to participate in the dynamic marketplace of oil and gas leases, lands and properties. If the Research & Capabilities module handles the earth science and engineering aspect of the producers competitive advantage, it is the Petroleum Lease Marketplace that handles the Land and Asset Base attributes of the producers competitive advantage.

As we have discussed here many times, the amount of engineering and earth science effort for each barrel of oil or gas produced will continue to expand as time passes. Naturally therefore the volume of activity associated with oil and gas will increase as well. This implies that the number of P&NG leases and agreements will increase as will the number of Joint Operating Committees producers participate in. The Petroleum Lease Marketplace is the means to participate, make sense of and build your land and asset base from. It is reasonable to assume that this may require a multiple of legal, administrative and negotiating resources on your behalf to achieve these outcomes. The "Marketplace Interface" becomes the first place to source the skills, knowledge and experience you need.

Although one can find versions of the idea in Smith, Marshall, and elsewhere, the modern discussion of the capabilities of organization probably begins with Edith Penrose (1959), who suggested viewing the firm as a 'pool of resources'. Among the writers who have used and developed this idea are G.B. Richardson (1972), Richard Nelson and Sidney Winter (1982), and David Teece (1980, 1982). To all these authors, the firm is a pool not of tangible but of intangible resources. Capabilities, in the end, are a matter of knowledge. Because of the nature of specialization and the limits to cognition, organizations as well as individuals are limited in what they know how to do effectively. Put the other way, organizations possess a pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities. pp. 105 - 106.

It will be through the “pool” of knowledgeable providers supporting the innovative oil and gas producers. The “Marketplace Interface” will enable these providers to engage with producers and build their firm. These will be the Land people, the administrators and those that support the negotiations and transactions involved in land deals. Traditionally these people have been employed by individual producers. However, with the “Marketplace Interface” there will be a need for these services provided by the marketplace. That will be one of the changes during the Preliminary Specification development. 

But often - and especially when innovation is involved - the links among firms are of a more complex sort, involving everything from informal swaps of information (von Hippel, 1989) to joint ventures and other formal collaborative arrangements (Mowery, 1989). All firms must rely on the capabilities owned by others, especially to the extent those capabilities are dissimilar to those the firm possesses. p. 108

Now that there is a marketplace established for the knowledge, skills and experience of the resources used in the Petroleum Lease Marketplace, we can begin to approach that marketplace from the point of view of its specialization and division of labor. Most of the work that is done within a producer firm for Land administration etc. is done for timeliness and accuracy. Due to the scope and scale of the individual producers' volume of lease and land activity. Efficiencies from the analysis of the division of labor and specialization may not have been available. With the development of the “Marketplace Interface” of the Petroleum Lease Marketplace the opportunity to conduct that analysis during the Preliminary Specification is provided.

It was autonomous innovation that Adam Smith had in mind when he argued that the division of labor enhanced innovation: each operative, by seeking ways to make his or her lot easier, would discover improved methods of performing the particular operation (Smith, 1976, I.i8, p. 20). The improvement he had in mind were such that they improved the efficiency of a particular stage without any implication for the operation of other stages. Autonomous innovation of this sort may even further the division of labor to the extent that it involves the cutting up of a task into two or more separate operation. Instead of being differentiating in this way, however, an innovation may be integrating, in the sense that the new way of doing things - a new machine, say - performs in one step what had previously needed two or more steps (Robertson and Alston, 1992). More generally, a systemic innovation may require small modifications of the way work is performed at each of a number of stages, and would thus require coordination among those stages. pp. 116 - 117

In today’s market we have powerful tools that alleviate repetitive nature of lower level work. Two of those tools are computers and globalization. Our analysis of the marketplace should use these tools to the fullest extent to focus our attention on innovation. If we look at the Petroleum Lease Marketplace “Marketplace Interface” from this perspective there is much work to be done, and a significant opportunity to provide real value for all producers. Having a Petroleum Lease Marketplace that provides the producer and Joint Operating Committee with the ability to focus their capability on building their land and asset base would be a worthwhile objective for this module. It is one half of an innovative oil and gas producer's competitive advantage. 

Designing and implementing a marketplace that organized these capabilities efficiently and effectively would not be difficult. Ensuring that our user community was supported through their learning and development of enhanced and innovative capabilities would. 

A market form of organization is capable of learning and creating new capabilities, often in a self reinforcing and synergistic way. Marshall describes just such a system when he talks about the benefits of localized industry. p. 120

To review what we have with the Petroleum Lease Marketplace "Marketplace Interface". Using the People, Ideas & Objects Marketplace Interface, the user can access an environment that's accessible to producers and Joint Operating Committees. There they will find a rich market environment where they can resource the skills, knowledge and experience they need to secure and manage their Petroleum and Natural Gas lease and land base. Given that marketplaces have time to develop and grow, with its own market supporting institutions, it will take on its own characteristics and efficiencies. Enabling the innovative oil and gas producer to leverage the marketplaces capabilities and focus on their core competitive advantages. 

Making this transition to where the producers and Joint Operating Committees capabilities are sourced from the marketplace will take time, incur unique costs and involve many iterations. These “Dynamic Transaction Costs” as Professor Richard Langlois calls them are necessary as the transfer of capabilities from the firm to the market occurs. One should be aware of the reasons for this transition. And the reasoning is that we are moving the industry from the “High Throughput Production Model” to the “Decentralized Production Model.” This provides the producer with the capability to shut-in production, and then have the associated costs of production and overhead not incurred.

One might think that, as governance costs diminish in the long run, the boundaries of the firm would be determined solely by capabilities. But capabilities also change over time as firms - and markets - learn. The classical presumption was that the firm's capabilities would diffuse completely to the market in the long run, leading to complete vertical disintegration. This reinforces the point that capabilities are more than a matter of production costs in the neoclassical sense and, more importantly, suggest that the notion of a firm's capabilities implies a kind of information or knowledge cost - the cost of transferring the firm's capability to the market (other firms) or vice versa. These costs are a neglected kind of governance cost, which I call 'dynamic' governance costs. These are the costs of transferring capabilities: the costs of persuading, negotiating and coordinating with, and teaching others. These costs arise in the face of change, notably technological and organizational innovation. They are in effect the costs of not having the capabilities you need when you need them. pp. 123 - 124

As one can imagine, this marketplace would be dynamic. The need for a dedicated software developer to identify and support not only the innovative oil and gas producers and Joint Operating Committee, but also those changes occurring in the marketplace vendors and suppliers, would be critical. That is the role of People, Ideas & Objects. From Professor Richard Langlois “Vanishing Hand, the Changing Dynamics of Industrial Capitalism.”

"The basic argument - the vanishing hand hypothesis - is as follows. Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets, much as Allyn Young (1928) claimed long ago. But the components of that process - technology, organization, and institutions - change at different rates." p. 3

Let's assume you are a vendor involved in the Petroleum Lease Marketplace. You want to participate in the People, Ideas & Objects Preliminary Specification to expand your business. To include your firm in the “Marketplace Interface” would require you to use some of the interfaces we developed in the Resource Marketplace module. This discussion is about how the vendor would interact within the “Marketplace Interface” and engage with the producers and Joint Operating Committees that were looking for your products and services. 

First we should mention who will make the changes we expect to see in the “Marketplace Interface” of the Petroleum Lease Marketplace. Resistance to People, Ideas & Objects by current bureaucracies is strong. They have a comfortable system that keeps them firmly in control and do not foresee the need for change. So how do these marketplace changes come about? And how does a marketplace like this come about? The answer is simple and reflected in this next quote from Professor Richard Langlois paper "The Vanishing Hand: Industrial Capitalism's Changing Dynamics."

"Ruttan Hayami (1984) have proposed a theory of institutional change that is relevant to my story of organizational and institutional change. As they see it, changes in relative scarcities, typically driven by changes in technology, create a demand for institutional change by dangling new sources of economic rent before the eyes of potential institutional innovators. Whether change occurs will depend on whether those in a position to generate it - or to block it - can be suitably persuaded. Since persuasion typically involves the direct or indirect sharing of the available rents, the probability of change increases as the rents increase. And the more an institutional or organization system becomes misaligned with economic realities, the more the rents of realignment increase." pp. 36 - 37

Is the profit opportunity of being an innovative oil and gas producer more appealing than today's methods? And will those that operate in the “Marketplace Interface” find increased profits by providing services that innovative producers want and need? If either of those situations are the case then the profits will motivate the changes within the marketplaces described within the Preliminary Specification. (Please review the Preamble to the Preliminary Specification.)

In terms of the interfaces that will help vendors who provide lease and land services to innovative oil and gas producers the first would be the “Vendor / Supplier Contact Database.” This provides the basic information needed for the oil and gas producer or Joint Operating Committee to have on the vendor. Think of it as a rich contact database maintained by the vendor. There is a second aspect of this database that provides a secondary or tertiary level of data to the producer. This is when the producer engages the firm. This includes access to the vendors' staffing profiles, calendars and scheduling information and enables the producer and vendor to establish further elements of their working relationship. (Query the “Vendor / Supplier Bidding / Commitment Manager” in the Resource Marketplace module for further information on the extent of these interactions.)

The second interface that would help the vendor in operating within the “Marketplace Interface” of the Petroleum Lease Marketplace would be the “Gap Filling Interface.” Recall this is the interface that is used by producers and vendors to communicate the need to have a “Gap Filled.” The gap being a situation where the division of labor could be expanded by providing a further service that is not currently offered. The expansion of the division of labor is done through filling gaps. And if producers and vendors identify and communicate needs and services that are in need of filling, or demand for updated services, the opportunity for the service to meet the demand will occur quickly. The reason for this is that we live in a time and a place where the service and the need may be located thousands of miles away from each other, or even just next door, and may never know that either exists. The “Gap Filling Interface” eliminates time and distance of these needs.

The third interface that provides value to the vendors in the “Marketplace Interface” of the Petroleum Lease Marketplace is the “Actionable Information Interface.” Although somewhat similar to the “Gap Filling Interface” it fills a different role. If a vendor has undertaken a strategic and competitive investment over the next five years that would fundamentally change their service offering. They would publish this information in the “Actionable Information Interface.” This would inform the producers and Joint Operating Committees of the prospective changes in the marketplace and allow them to engage the vendors on what they need. This being a collaborative interface, vendors could engage the market to help define their market offering in the mid term. Most of this information is available to the prudent Google-enabled researcher today. Nevertheless, the aggregate value of the information would be a unique window on the marketplace offerings and market direction in the "Actionable Information Interface." One might question why you would publish such sensitive information? I would remind readers that publication is how you earn copyright.

OCI Petroleum Lease Marketplace, Part IV

 The Marketplace Interface

To develop an innovative system for the oil and gas industry is an opportunity that I think is a once in a lifetime, maybe a once in a century opportunity. To think that we will use these systems in the same way as today underestimates the possibilities. The user interface is the area where most innovation will occur in terms of how people interact with large volumes of data. Google “Oracle Redwood” to see their groundbreaking work in Oracle Cloud ERP. These and other types of issues should be considered in the Preliminary Specification. I offer the “Marketplace Interface” and this discussion to expand the scope of what is possible in terms of the Preliminary Specification. 

The Petroleum Lease Marketplace module is the second of three “marketplace” modules in the Preliminary Specification. Like the Resource Marketplace module, which deals with resources used in oil and gas development, the Petroleum Lease Marketplace emulates the marketplaces for Petroleum & Natural Gas Leases, concessions, etc. And the associated activities involved around those “things.” What is helpful in understanding the capabilities attained by developing “marketplaces” in the Preliminary Specification is this quote from Frederick von Hayek in “The Use of Knowledge in Society”.

The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. ...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 passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement. (Hayek 1945, pp. 526 - 527)

Prices for bonus paid on acreage. The price asked by a producer for a working interest share in a property. These are activities that occur in the marketplace every day. What we are doing in the Petroleum Lease Marketplace is emulating the real marketplace to make it thicker and more robust. With market opportunities being dislocated sometimes thousands of miles from interested parties, market participants cannot even on the Internet find someone. However, with a module like the Petroleum Lease Marketplace, you have a focused forum to deal with interested parties. At the same time you have the means to transact and manage the business, develop agreements, pay lease rentals etc. The Petroleum Lease Marketplace is an ERP software environment that emulates marketplaces.

Critical to the success of this marketplace is the further division of labor and specialization. We discussed earlier in the specification how Lease Rental Administration could be handled industry wide by a service provider. There may be other roles in the Petroleum Lease Marketplace that are handled similarly. With the development of these software modules, market supporting institutions would enhance the effectiveness of the marketplace. Providing assurances such as when the P&NG Lease was acquired it was known that it would automatically have its lease rentals processed by your service provider.

There are many advantages to emulating the Petroleum Lease Marketplace in the Preliminary Specification. Just as there are advantages in the Resource and Financial Marketplace modules. Attempts at exchanges and other technical solutions have been tried before but they don’t have the “business” aspects that a “marketplace” has. What we replicate is a business unit, not some technological solution. A significant difference for the users and producers of the physical marketplace today. They will take advantage of the Petroleum Lease Marketplace module if it provides further value in their use of the actual marketplace. And with that I want to introduce the “Marketplace Interface” which uses Open Wonderland technology. Here it is shown as an example of what we describe as the ultimate collaborative interface. 

See also this May 29, 2020 Wall Street Journal article.

We have detailed some of the interfaces that would be used by suppliers and vendors in providing specific products and services to oil and gas producers and Joint Operating Committees through the “Marketplace Interface” of the Petroleum Lease Marketplace. We note that the service provider organizations or Industrial Districts as Professor Langlois refers to the concept, is structurally different than in the Resource Marketplace. The "Marketplace Interface" focuses on administrative work. Although the disruption in moving the majority of the work from the firm to the marketplace will involve innovative and creative processes, once the marketplace settles into a rhythm, the administrative level of change will slow. Much of the actual work in the “Marketplace Interface” will be to support the transactions conducted by the producers in the marketplace environment.

The “Marketplace Interface” is not a source of innovation for the oil and gas producer. It is an area where the producer can focus on their core competitive advantage of their land and asset base. Administrative efficiencies and effectiveness are certainly part of that competitive advantage. In this regard, I wish to highlight the fact that the market will be dynamic when it comes to purchase, sale, bidding, acquisition, dealing, surrendering, leases and properties.

As a possible scenario, in the Marketplace Interface, we have a producer who is interested in determining what the market value for their interest in a small gas plant will generate. The average production is 100 barrels of oil equivalent per day from 50 wells, compression and dehydration. Through the “Marketplace Interface” the producer puts their 17.5% working interest in the property on the market for sale and is open to offers. The property is then highlighted in the property section of the “Marketplace Interface” where users can see that the property was just posted for sale. It is also listed by zone and product category in international market databases. Soon offers are made and the property attracts a reasonable price. The seller deems the asset to be sold, none of the partners can match the most competitive offer, and the property is sold. With the closing executed, the administrative tasks of recognizing the leases, agreements and partners are completed. Additionally historical data may be available to be copied to the purchaser's Cloud Administration & Accounting for Oil & Gas for reference.

Or something along those lines. The point in this scenario is to briefly show how many of the attributes we have been discussing will work together in the “Marketplace Interface.” The efficiencies of the marketplace in terms of having a ready market to buy and sell properties, leases and interests. And to have those transactions supported by transaction processing that is as complex as necessary to close the most complex of purchase or sale agreements. This is how innovative oil and gas producers will need to operate in the 21st century.

We have focused on the deliberate nature of developing the “Marketplace Interface” of the Petroleum Lease Marketplace in the Preliminary Specification. During the 1960's systems capabilities were limited and applications were quite crude. Organizational developments were therefore constrained by Information Technologies limitations. Systems development focused on the firm itself, and that focus was driven primarily by firms' compliance and governance requirements (Accounting, Tax, Royalty, SEC etc). During this time, in oil and gas, the Joint Operating Committee was secondary to the demands of the firm's compliance and governance frameworks. This system's thinking grew over a period of time that included several generations of people. Through this process the administration, oil and gas became more oriented to the compliance and governance frameworks of the firm. In contrast, they became more withdrawn from the Joint Operating Committee seven frameworks.

It is my opinion that the Preliminary Specification is not revolutionary in its move to the Joint Operating Committee, but evolutionary. Particularly from the point of view that we are moving towards the common-sense industry organization. Leaving this 1960’s “systems thinking" behind. This is what is necessary for the innovative producer to achieve the speed of operations to compete in the 21st century oil and gas industry.

We also must contend with the concepts that originated in the minds of the software developers of SAP. These concepts were different from what have been stated in the Preliminary Specification. I believe that whatever their vision may have been, for oil and gas it is misguided as it does not recognize the unique nature of the business, the Joint Operating Committee. The unique nature of the industry has led to new solutions and new methods of operation. Those solutions consist of the Joint Operating Committee and market dependence. I can't think of an industry that matches the energy business culture.

Today the technologies involved in the Internet provide the industry with the opportunity to realize that the manner in which it operates is unique. It can deal with those anomalies in the best Interests of the industry. A dedicated software developer to build the systems that mirror the industry operations, the Joint Operating Committee and marketplaces, will enable greater innovation by relying on the marketplace. This will allow innovation to flow from wherever and whomever. This will not happen by chance. It is a deliberate act. And today that demands software development capability and vision like that offered by People, Ideas & Objects and the Preliminary Specification. From Professor Richard Langlois paper “The Vanishing Hand: The Changing Dynamics of Industrial Capitalism”

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).

Therefore, the development of the “Marketplace Interface" is not an option to have but necessary for the innovative oil and gas industry. And the first technology I want to discuss is Oracle Cloud ERP. It is in fact the “Marketplace Interface" made available through the open source Open Wonderland organization. Recall that there is only one “Marketplace Interface” that serves the three marketplace modules, the Resource, Petroleum Lease and Financial Marketplace modules.

The origins of the Open Wonderland organization are of interest and pertinent to the discussion. Originally a Sun Microsystem research project, Project Wonderland development was open sourced and made available to the larger community. When Oracle purchased Sun Microsystems it was deemed that the technology was of no commercial value to it or its customers. It set the community to find a new home. Needless to say, Open Wonderland has struggled since. Without a major sponsor the technology has not advanced and the marketing of the technology is limited and difficult. There seems to be a lack of understanding of the marketplace metaphor within Project Wonderland. That is what I think they need to make it the killer app in the commercial market space.

Open Wonderland is written in Java and therefore is compatible with the Oracle Cloud ERP. Having this operate as a module in itself would not technically be an issue. The business risk of using weak organization technology is mitigated by the fact that they have open-sourced the code for the applications. If something happens to Open Wonderland as an organization there is still an avenue to pursue with the code itself. It would be incumbent upon People, Ideas & Objects, when our revenue streams begin, to support initiatives such as Open Wonderland since we directly benefit from their technologies and their organization. 

The “Marketplace Interface” is a place where anyone in the oil & gas or service industry can establish a market presence or create an avatar to collaborate with others within the industry. People, Ideas & Objects will enable these avatars to conduct business through the ERP service of the People, Ideas & Objects application modules and Oracle Cloud ERP. Interactions such as buying and selling oil and gas assets, purchasing field services, establishing an AFE, and making decisions within a Joint Operating Committee. Many of the things that can be done physically, will be accomplished virtually through the use of the avatars created and enabled in the “Marketplace Interface.”

Here’s why I think the “Marketplace Interface” is so critical to innovative oil and gas producers. Phone calls can’t do it. That is to say they are usually, or preferably, with only two people. They can’t be documented and any business that arises from them must be entered into other systems. They have the benefit of spontaneity and are available anywhere. Meeting scheduling is difficult, spontaneity is impossible, and virtualization of this kind is possible. However they are easily documented and the business that arises from them needs to be input into other systems. Meetings can be with any number of people, however the law of diminishing returns comes into play. There must be a compromise between these two forms of collaboration. Keep the phone calls and the meetings and add virtual collaborations from the “Marketplace Interface.”

The “Marketplace Interface” will provide the spontaneity of a phone call and the ability of people from far distances to meet up in no time. Documentation of the business can be comprehensive and include video of the simulation and copies of the documents. Any business generated during meetings can be dealt with through the “Marketplace Interface” by selecting the appropriate ERP related option-command submenu. Productivity would follow. Attendance at these virtual meetings could increase and overall travel time would be substantially reduced. Follow-up business associated with meetings would be initiated during the meeting and things would get done. A real productivity-enhancing tool, not just Information Technology for its own sake.

OCI Petroleum Lease Marketplace, Part III

 The Strategy Interface

What People, Ideas & Objects is undertaking in developing the Preliminary Specification is the simple process of moving the compliance and governance frameworks of the innovative oil and gas producer into alignment with the Joint Operating Committees legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks. This discussion will deal with the strategic framework and how the Petroleum Lease Marketplaces “Strategy Interface” works to communicate the unique strategic direction of each of the Joint Operating Committees the producer has an interest in. In addition, the business model provided to an innovative and profitable oil and gas producer using the Preliminary Specification will be discussed.

In each property, earth sciences and engineering are required. Producers' ability to apply generic corporate strategies to all of their properties is quickly expiring. A unique strategy for each property must be developed to address each property's unique characteristics. Each property's unique strategy will be the result of collaborations among the Joint Operating Committee participants and will be subject to change from time to time. A key determinant, or business model, is optimizing reserve value profitably consistently over the project's life. The model must be transparent, and flexible enough to adapt to changing commodity prices. It must also be tailored to the financial goals of the project, with an emphasis on maximizing efficiency and minimizing risk. Finally, it must be designed to be a long-term, sustainable strategy that will ensure the profitability of the project.

Placing the Strategy Interface in the Petroleum Lease Marketplace is the logical location for this information. Along with the agreements, leases, AFE’s, and other partner related information that shares several things in common with the “Strategy Interface.” Those common threads are the collaborative nature of the development of the documents, and the access privileges that will be used to access the information. Each producer has read / write access to each property that they have an interest in. Where they can collaborate within the partnership on the overall strategy and tactical direction of the property. Where individuals who are authorized to work within the Joint Operating Committee through the Security & Access Control module, and who are authorized with read access to the Strategy Interface are able to determine whether their actions are in line with the strategic intent of the property. Additionally, the Strategy Interface provides a platform for the producer to communicate and collaborate with other partners in the property. Allowing each partner to share their thoughts and ideas in order to reach a consensus and move forward with the overall strategy. The Security & Access Control module ensures that only authorized personnel have access to the Strategy Interface.

From the producers perspective they have a database of strategic documents unique to each property. They can determine quickly what the strategy is for any property and engage the specific people responsible for further information. Although each property follows its own proprietary strategy, the producer firm is not without its input. It can quickly determine the key strategic direction of the property.

We have now documented the “Strategy Interface” of the Petroleum Lease Marketplace module of the Preliminary Specification. This being a simple collaborative interface that documents the unique strategy of each and every Joint Operating Committee the producer has an interest in. This further discussion will deal with the positive attributes of the Strategy Interface, the application of the business model and the difficulties it will impose on bureaucracies unwilling to consider individual property strategies.

Natural gas is experiencing an exceptional situation with the prolific nature of shale gas discoveries. And oil continues to experience high global demand and prices with nominal supply growth. Providing energy for today's markets requires more complex earth science and engineering than in the past. The land and asset base of an innovative and profitable oil and gas producer is the basis for competition. For producers, now is the time to adopt a profitable and performance-driven business model. People, Ideas & Objects Preliminary Specification provides that updated business model for the industry. One that is based on the decentralized production model that sees the producer firm reduced to C class executives, earth science and engineering resources, some legal and support staff. The remaining administrative, accounting and overhead resources are reorganized into service providers focused on the industry-wide process. Processes like lease rental payments, production, revenue and royalty accounting, etc. Our business model enables the producer firm to focus on its core business of exploration and production. And converts overhead costs into variable characteristics, based on profitable production. It is therefore most profitable when only profitable production is produced to ensure oil & gas replacement value is earned.

In this manner, when the service providers provide production accounting services, they can bill the Joint Operating Committee for production accounting services. Note: They bill the Joint Operating Committee and not the producer. The property may be shut in if it fails to meet its marginal cost and moved to the producer's work-in-progress inventory. This allows innovative work to be undertaken to return it to profitable production as soon as possible. While shut-in all of the administrative, accounting and overhead costs that are typically incurred by the service providers will not be incurred and therefore will not be charged. Causing the property to report a null operation and saving the reserves for a time when they can be produced profitably. This will achieve our business model objective of removing surplus commodities from the marketplace and putting a floor under the commodity prices. Shutting in the property is a short-term solution to balancing supply and demand. In the long-term, there needs to be a plan to increase the property's innovativeness, so it can remain profitable and competitive in the marketplace. And ensure consumers have affordable, abundant and independently sourced oil & gas.

The combination of the Strategy Interface with the People, Ideas & Objects Preliminary Specifications business model for innovative and profitable producers. Gives the producer the tools to optimize the value they can achieve from their reserves. This is the way producers can compete in the complex energy era. 

Exploration and exploitation of oil and gas reserves have been and always will be a function of technology based on science. This is undeniable, and is also likely to contribute to the short-term life cycle that many believe will continue. This reserve size and deliverability is paralleled in Professor Giovanni Dosi’s discussion of how innovations in industrial companies have been diluted by demand prediction and lower production volumes. Generic corporate strategies impede the value realization of petroleum and natural gas reserves. An innovative approach will also bring about different strategies in terms of investment timing. Professor Dosi notes;

Finally, empirical studies often show the coexistence, within the same industry and for identical environmental incentives, of widely different strategies related to innovation, pricing, R & D, investment and so on. Specifically with regard to innovation one notices a range of strategies concerning whether or not to undertake R & D; being an inventor or an early imitator, or “wait and see”; the amount of investment in R & D; the choice between “incremental; and risky projects, and so on (see Charles Carter and Bruce Williams 1957; Freeman 1982 and the bibliography cited therein). Call these differences behavioral diversity. p. 1157

Changing the innovative behavior of one producer carries a scope of change that is as broad and as diverse as is contemplated in the business world. Change at this scale often cannot be managed within an organization. Instead, it needs to be managed through creative destruction in the general economy. A time of dynamic change driven by organizational changes focused around the innovative Joint Operating Committee. How can a firm that has been developed in an era of cost control transform themselves into an innovative, dynamic, earth science and engineering focused producer? In many cases the will to do so might exist. However, with the speed and unforgiving nature of the business cycle, not much time will be provided to those attempting the transformation. Since the financial crisis of 2008, we've seen many interesting phenomena in the capital markets. To suggest any trend or definitive result from these would be premature. It's just a different world for oil and gas CEOs than it was before 2008. However I am sure we can all agree that continued production of shale gas reserves at a loss would be the continuation of the destruction component of creative destruction. CEOs need to be aware of the risks associated with overproduction and be prepared to adjust their strategies accordingly. It's worthwhile to remember that creative destruction is not just about destruction; it also involves creating something better in its place. Such a transformation will require an innovative approach such as the Preliminary Specification which capitalizes on shale gas reserves opportunities.

The Marginal Production Threshold Interface

Within the Preliminary Specification the producer can scale back their production in the face of poor commodity prices. This is part of the business model that allows the innovative and profitable oil and gas producers to optimize their reserves. In the Resource Marketplace module we discussed the implications shutting-in production has on production and overhead costs. That is by moving to the “decentralized production model” from the “high throughput production” model it turns the producers' fixed costs of overhead, administration and accounting, into the variable costs of overhead, administration and accounting of the Joint Operating Committee. Therefore all Joint Operating Committee costs decline in line with revenues. With no production there are no revenues, however there are no other costs other than capital costs. Leaving the property, or Joint Operating Committee with no loss, or a null operation during periods of shut-in production. It is in the Petroleum Lease Marketplace module that the capability to reduce production is acquired through the Marginal Production Threshold Interface. This is the subject of this discussion. 

The operational decision making authority lies with the Joint Operating Committee. And we have discussed throughout the Preliminary Specification how the decision may be made to shut-in production to mitigate the losses on the property and to help return the commodity markets to profitable prices across the industry. Ultimately removing the bust from the oil & gas boom / bust economy. With the Preliminary Specifications move to the “decentralized production model,” where all costs are variable and recorded in the Joint Operating Committee. Therefore costs are suspended with the decision to shut-in production when triggered through the Marginal Production Threshold Interface. 

The Marginal Production Threshold Interface would provide the collaborative means by which the Joint Operating Committee would agree to the criteria for suspension of production. We see today with natural gas prices in North America, a situation where no one makes money. When prices meet the criteria the partnership has agreed to, i.e. the marginal costs, the decision to curtail production can be carried out. Whether that is manually issuing the order to shut-in production, or if the systems are automated, the system is triggered at the beginning of the month when the criteria is met. 

The Joint Operating Committee has the ability to collaborate and agree among the partnership. Having all of the Joint Operating Committees that producers have an interest in located within the Marginal Production Threshold Interface in the Petroleum Lease Marketplace. This will provide producers with an understanding of their production profile at various price scenarios. Recall within the Partnership Accounting module detailed, actual, factual accounting financial statements are prepared each month to determine the performance and profitability of each Joint Operating Committee. This can be subsequently analyzed through a “what if” scenario page within the interface. 

Every marginal property within the industry would be shut-in and therefore have a null operation if each producer managed its production this way. Reserves would be saved for a time when production was profitable. Production and storage costs would be reduced to zero when reserves remained unproduced. Those reserves would not have to retrieve incremental profits to cover unprofitable production periods. Commodity prices would have fewer and less impactful downside swings due to less overproduction. Or unprofitable production as we've described it. As a result, these prices would apply across the producer's production profile, providing the much-needed replacement value. The current method of managing prices by limiting capital spending, or “capital discipline,” is a very blunt instrument that leads to over and under production at the extremes. Creating a boom-bust economy. People, Ideas & Objects Preliminary Specifications business model, with our user communities service provider organizations, enables producers to stop producing marginal production. This enables producers to employ the only fair and reasonable method of production discipline across North America. Producers, the service industry and all those associated with oil & gas will participate in a dynamic, innovative and robust economy. Providing producers with a wide range of markets for goods and services. And consumers will be assured of a sustainable industry providing affordable, abundant and independently sourced energy. A bit of faith in the markets is all that is required.

Focusing on Capabilities

Discussion begins on the boundary of the firm and markets in the Petroleum Lease Marketplace in the Preliminary Specification. In this section we focus on capabilities. And the question should be what capabilities are we seeking from the Petroleum Lease Marketplace? And why is there a need to transition to this organization model, a marketplace? We begin with a quote from Professor Richard Langlois’ paper “Capabilities and Governance: The Rebirth of Production in the Theory of Economic Organization.” 

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

What we currently have are a number of departments; Land, Legal, Land Administration, Production and Exploration Administration and Accounting, which will become elements of the Petroleum Lease Marketplace. These departments will transition to various roles, some in newly formed service provider firms, where they will be part of a marketplace environment. It will be within the marketplace that they will provide their capabilities to those producers and Joint Operating Committees that need their services. 

If a profit opportunity requires a configuration of capabilities different from what already exists in the economy, the Schumpeterian process of creative destruction may be set in motion. p.21

It's a marketplace, not a department within a bureaucracy. A marketplace within the dynamic, entrepreneurial and innovative oil and gas industry. A place where buying and selling leases or interests in properties, making deals or building producers can and will be done. 

Seldom if ever have economists of organization considered that knowledge may be imperfect in the realm of production, and that institutional forms may play the role not (only) of constraining unproductive rent seeking behavior but (also) of creating the possibilities for productive rent-seeking behavior in the first place. To put it another way, economists have neglected the benefit side of alternative organizational structures; for reasons of history and technique, they have allocated most of their resources to the cost side. p. 6

It is interesting that one of the roles of the firm, in this revised boundary of the firm and market, is the enhanced role that coordination undertakes. This next quote states explicitly the need to improve coordination through routines and capabilities. 

All recognize that knowledge is imperfect and that most economically interesting contracts are, as a consequence, incomplete. But most of the literature considers seriously as coordinating devices only contracts and the incentives they embody. It thus neglects the role - the potentially far more important role - of routines and capabilities as coordinating devices. Moreover, the assumption that production costs are distinct from transaction costs and that production costs can and should always be held constant obscures the way productive knowledge is generated and transmitted in the economy. p. 14

Since contracts are one of the key end products of the Petroleum Lease Marketplace module activities. It is these incomplete contracts that will continue to demand the services of those employed in the marketplace and the firm. "Routines and capabilities as coordinating devices." Making the "marketplace" a key interface of the Petroleum Lease Marketplace module. 

We have noted that the ability to build a company was one of the things done while working within the Petroleum Lease Marketplace. Implying that the marketplace was an area where the active state of affairs was to create something instead of filling file cabinets with agreements. This is the key reason why the Petroleum Lease Marketplace must be a marketplace. It must reflect the personality of the people who build their firm. From Professor Langlois’ Competition through Institutional Form: the Case of Cluster Tool Standards. 

Industrial economists tend to think of competition as occurring between atomic units called "firms." Theorists of organization tend to think about the choice among various kinds of organization structures - what Langlois and Robertson (1995) call "business institutions.” But few have thought about the choice of business institution as a competitive weapon. p. 1

The “Marketplace Interface” of the Petroleum Lease Marketplace module of the People, Ideas & Objects system provides innovative oil and gas producers with the competitive weapon they need to build their firm. 

On the other side of the ledger, an open modular system can more effectively direct capabilities toward improving the modules themselves (Langlois and Robertson 1992). Such a system harnesses the division of labor and the division of knowledge, allowing organizational units to focus narrowly and thus deeply; at the same time, it magnifies the number of potential module innovators, and thus can often take advantage of capabilities well beyond those even a large unitary organization could marshal. p. 19

The modular nature of the Preliminary Specification provides this ability to focus on the critical attributes within the module. The Petroleum Lease and Resource Marketplaces are different just as the Financial Marketplace, Research & Capabilities and Accounting Voucher modules are unique. Each has a unique set of individuals and activities. All of these factors work together in support of the oil and gas company's innovative approach. From Professor Richard Langlois’ Organizing the Electronic Century.

A complex systems product is underlain by an architecture: a set of parts and a way of fitting those parts together. An integral architecture is one in which the parts depend on one another in complex and often unpredictable ways: the system is a tangle of spaghetti. By contrast, a modular architecture is one that regularizes the dependencies among the parts, forcing them to interact only in relatively formalized and predictable ways (Langlois 2002b) p. 6

The point that I am struggling to get across is the interface in which users will access this marketplace in the Petroleum Lease Marketplace. It is the "Marketplace Interface" that I am highlighting in this discussion as an oil and gas concern's value proposition. It is through the reorganization of the industry based on implementing People, Ideas & Objects et al's Cloud Administration & Accounting for Oil & Gas. And through this software representation of the marketplace, much value will be gained.

OCI Petroleum Lease Marketplace, Part II

 Revenue Per Employee

One of the complaints I have regarding oil & gas management is the myopic focus on cost control. It arises from an engineering discipline where the most efficient and low cost method is used to solve the issue. Oil & gas needs to be managed as a business and this has been lost in today's industry. To bring back a more rounded view of the overall oil & gas business other elements of what the business involves and where management should focus must be considered. Revenue Per Employee provides a perspective on the producer firm and Joint Operating Committee revenues. How these are enhanced, where their innovations are sourced, where they should be applied and how they compete with other producers. There also need to be objective criteria to evaluate a potential or existing partner's value. A need to value the deployment of their resources to the Joint Operating Committees based on what that producer's capacities and capabilities are. These are necessary as a successful oil & gas producer in the near future will need to know and understand exactly where that success originated and why. 

In terms of evaluating a potential partner firm's performance in a Joint Operating Committee. Determining a property's performance over time. Or to determine the hourly charge out rate of a producer's technical resources. People, Ideas & Objects have developed “Revenue Per Employee” as the metric that provides an understanding of the state of capabilities and innovativeness of a partner firm or Joint Operating Committee. If you calculate revenue per employee you will find rather dramatic differences in terms of the different factors for producers. Special consideration must be given for integrated firms to ensure that you exclude the downstream operations and the smaller producers as the factor unfairly reflects their capabilities. Given the disparity in Revenue Per Employee for producer firms this factor is a valuable tool in determining the appropriate partner to select for a property. It is also an effective tool for motivating teams towards higher capabilities, innovativeness and performance. However, it is most effective in assessing the technical capabilities of producers.

Professor Giovanni Dosi’s paper “The Sources, Procedures and Microeconomic Effects of Innovation'' 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 and gas are the application of innovation theories to earth science and engineering disciplines. These disciplines are key to the capability and success of oil and gas companies in their search for and production of hydrocarbons. The investment in science and technologies is 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 that of the competition. Ensuring that your partners in the Joint Operating Committee are of the same mindset and capability is critical to your future innovation strategies. 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.

A meeting of minds regarding innovation has to be established in the Petroleum Lease Marketplace module. This meeting needs to be captured in the agreements and associated modules. We will discuss the revenue per employee factor in the Analytics & Statistics and Performance Evaluation modules in the Preliminary Specification. Maybe what we need to do in the Petroleum Lease Marketplace module is find a place to compare the various producers' revenue per employee factors. This will enable people to determine if they are an appropriate or suitable partner in terms of being an innovative partner. A simple listing of the revenue per employee of your partners and potential partners on its own interface within the Petroleum Lease Marketplace module.

First we should ask ourselves: does the calculation of revenue per employee provide a reasonable comparison of the innovativeness of a producer? Or would this calculation reflect the quality of assets, the size of the firm or its actual innovativeness? That is the question hopefully answered here.

Clearly the factor of revenue per employee would reflect many factors other than the firm's innovativeness. However, would the comparison of revenue per employee over multiple periods determine innovativeness? The increase / decrease in the factor would be due to an increase or decrease in price and volume. The volume being particularly affected by the changes and innovations that occurred over the period in the firm. Another critical determining factor is the number of employees the firm employs. Unreported changes in employee numbers would skew the results significantly.

If the Revenue Per Employee interface in the Petroleum Lease Marketplace module calculated revenue per employee for the participants in the Joint Operating Committees of the producer. And calculate the factor for prospective producers there could be value in determining who would be a suitable prospective match as a partnership in the future. The report could also determine the trajectories on the basis of volume, price and employee variances during the periods under comparison by the user.

So what have we got? We have run some elaborate calculations that “might'' prove that one producer is innovative. What does that prove? That depends on what is expected of you as an innovator. 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 the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.”

Running this factor against the general population of producers within the industry provides value for the user. The ability to highlight who is solving problems in the industry innovatively and partner with them is positive for all concerned. However the real value in the Revenue Per Employee calculation would be the ability to run the report on the basis of the individual Joint Operating Committees that you are a participant in to determine where performance could be improved. Set the charge out rate of producers' earth science and engineering capabilities to Joint Operating Committees.

This is a more difficult task due to the calculation to determine the number of employees on each property. However, with People, Ideas & Objects Preliminary Specifications Industrial Command & Control and Work Order system, it is possible to determine who has worked and how many hours were worked. These systems will record the hours of the people from all of the various producers who are authorized to work on the Joint Operating Committee. Therefore the calculations that were run on the basis of the producers, can then also be run against any and all of the Joint Operating Committees that the producer has an interest in. This would also include the calculation of volume, price and employee variances, and their trajectories over the periods being compared. This being the first step in the process, determining which Joint Operating Committees were the most innovative. Why and how was that the case? And do those innovations apply elsewhere? The next step, and the most significant one, would be to understand where and who the innovations may be coming from.

Leveraging the Capabilities of Others

Our discussion of the producer's capabilities has documented a number of processes through the Research & Capabilities, Knowledge & Learning and Resource Marketplace modules. These are comprehensive processes that enable the producer to develop and maintain unique and valuable competitive advantages in earth science and engineering capabilities. These capabilities should be actively marketed to other producers as a potential partner in terms of the value added to a potential Joint Operating Committee.

We are in a period where the “easy energy era” has passed and it is generally agreed that the complex energy era has begun. The demand for earth scientists and engineers is substantial. This challenges producers to build the capabilities they need to operate all of their properties. Therefore the need to pool their capabilities with their partners in the Joint Operating Committee is not an option to have but a necessity. This pooling can take the form of an ad-hoc disorganized mashing of two or more producers or can be a deliberate construct as a result of the meeting of minds at the beginning of a joint venture. Enabling each producer in the pooled partnership of the Joint Operating Committee to specialize in their earth science and engineering capabilities. People, Ideas & Objects Petroleum Lease Marketplace assumes the latter is the preferred choice and provides the tools to develop these specializations and joint capabilities.

In Professor Giovanni Dosi’s paper he notes the following three factors involved in innovation development.

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

• Capabilities and stimuli generated with each firm and within the industry of which they complete.
• Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.
• 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.)

We assume for the purposes of these writings that the key stimuli are commodity prices which allocate financial resources to fuel innovation. Throughout the Preliminary Specification we focus on the producer's capabilities. What the producer must now learn to do is specialize in their own earth science and engineering capabilities. In addition, they must leverage their partners' specialized capabilities in their Joint Operating Committees.

Within the Petroleum Lease Marketplace there needs to be an interface that lists the areas where other producers' capabilities are being leveraged. These listings need to be based on the agreed to and documented exchanges of capabilities that are part of the CO&O or other agreements that make up the Joint Operating Committee. This same report could detail the commitments that the producer firm has made in terms of its capabilities to the partners in future years. This "Capabilities & Commitments" interface would be organized based on the Joint Operating Committee.

Within the Petroleum Lease Marketplace of the Preliminary Specification we have established two redesigned interfaces. The first is what we have called the "Revenue Per Employee" listing that details the various calculations of revenue per employee by producers within the industry. These calculations are broken down to provide variances based on commodity prices, volumes and number of employees. Further calculations are conducted on each Joint Operating Committee the producer firm participates in. These calculations are broken down by the variances noted above and are confidential to the producers who participate in the Joint Operating Committee. In this case, we look for the trajectory change in the three variables over a period of time.

The second interface in the Petroleum Lease Marketplace is what we call the "Capabilities and Commitments Report." It details the capabilities provided by agreement in the various joint venture agreements the producer participates in. This report also details the commitments that the producer has undertaken to provide in terms of its capabilities under those same agreements. This report enables the producer to fully leverage their partners' capabilities and focus on developing their capabilities. It also meets contractually their requirements.

These reports add value to the producer and the Joint Operating Committees that use the information contained within them. They are unique and provide information that can be used innovatively. Of note I think that a service provider could be established to complete the task of regularly verifying the producer data for Revenue Per Employee on an industry wide basis. That way one service provider would need to verify industry wide producer related information. However, there is more to these reports when used in combination. And what we could provide is a hybrid report that sorts the information based on the Joint Operating Committee, having both the Revenue Per Employee calculation and the determination of the Capabilities & Commitments Report output together. Learning “who” and “where” the innovations were developed.

In our review of Professor Dosi’s paper, he summarizes that businesses commit to innovation stemming from... 

“exogenous scientific factors and endogenously accumulated capabilities developed by their respective firms.” His general point is that “observed sectoral patterns of technical change are the result of the interplay between various sorts of market-inducements, on the one hand, and opportunity and appropriability combinations, on the other.” p. 1141

Recall that “appropriability” for the producer includes lead times and learning curves as more effective ways of protecting process innovations. Therefore appropriability and opportunity are clearly reflected in the Revenue Per Employee report. What the Capabilities and Commitments Report reflects are the “market-inducements.” The result of the “interplay” between these reports would be “patterns of technical change.” That might be a bit of a leap for some to make on an industry wide level, and I would agree, however, the devil would be in the details. On a Joint Operating Committee basis, which we would have the data for, both the capabilities from the partners, the producer and revenue per employee, this information would be valuable.

Any “pattern of technical change” would be triggered by Revenue Per Employee trajectory changes. Most probably by any volume variance trajectory change. Therefore, what was the reason for the change and was it as a result of any change in producer capabilities due to any “patterns of technical change” or “market-inducements?” Maybe I am being too analytical and attempting to extend the value of innovation within the enterprise.

Highlighting what is effective within your organization, from an innovation standpoint, will be a difficult and challenging task. These reports will highlight any success or failure in the current month. I think that provides ample time for the producer to determine the viability of their or their partners' innovative capabilities. These reports are critical for innovative oil and gas producers. In the future, it will be necessary not only to succeed, but also to point to where it originated from.

System, Which System

Previously we documented how the division of labor might affect the lease rental payment process. It was there that we discussed the specialization of 20 individuals who processed lease rentals for all of the Joint Operating Committees who use People, Ideas & Objects. How these people would actively improve the process by identifying “gaps'' and being supported by our software development team to amend the software to accommodate the changes they made to their processes.

The Petroleum Lease Marketplace is rich with processes like lease rental payments. All of these processes as well as those in other modules would be subject to similar changes as those noted for lease rental payments. The Petroleum Lease Marketplace module deals with the administrative details of both the producer firm and the Joint Operating Committee. Both of which will undergo significant changes due to innovation in other areas of the business. What has been a rather constant area in terms of activity and change, the lease rental payment and other processes, may take on a more dynamic feel for the business. When the producer and Joint Operating Committee actively innovate, Professor Giovanni Dosi notes that two distinct phenomena are observed.

First, new technological paradigms have continuously brought forward new opportunities for product development and productivity increases. p. 1138

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

The dynamic of the Research & Capabilities process, documented elsewhere, relies on the Petroleum Lease Marketplace for information and resources. The need for it to be responsive to Research & Capabilities changing needs is a necessary requirement of Research & Capabilities' innovative-ness. Looking to model the management of these change processes across all producers within all geographical regions would seem difficult. To capture this change process within People,Ideas & Objects software, is an even more difficult task. However, Professor Dosi notes that there are other serious concerns to consider.

The appearance of new paradigms is unevenly distributed across sectors and so are (a) the degrees of technical difficulties in advancing production efficiency and product performance, and (b) the technological competence to innovate, embodied in people and firms. pp. 1138 - 1139

Simply not everyone will be working off the same page when it comes to the types of innovation, the scale of their application and degree of complexity. In this next quotation it becomes clear that the processes under management by the software are the means in which to deal with these underlying paradigms and trajectories. Therefore, in order for the producers to begin the path of innovation requires that we resolve these process design issues, and build the software before they are implementable within the various disparate organizations.

These distributions of opportunities and competence, in turn are not random, but depend on (a) the nature of the sectoral production activities, (b) their technological distance from the “revolutionary core” where new paradigms are originated, and (c) the knowledge base that underpins innovation in any one sector. p. 1139

As the Preliminary Research Reports research question asked, can innovation be reduced to a quantifiable and replicable process? The answer was an unqualified yes. This last quotation is one of the reasons why. Our software captures the requirements of the "revolutionary core" and "knowledge base that underpins innovation". That does not mean that every producer will fully appreciate or understand the full scope or scale of what the system provides. Only those at the "revolutionary core" will be able to fully exploit its resources. That however, does not preclude the use of systems by everyone within the industry. For example not everyone is at the "revolutionary core" of Microsoft Excel and that does not preclude them from gaining value from its use. 

People, Ideas & Objects believes that if we engineer a software application to deal with these issues, we can accelerate the producer's performance and the industry. From a systems engineering point of view this has been beyond the scope of one software development team working with limited budget resources. For any producer to undertake the required analysis, let alone the development of the systems, is beyond the scope of what is possible or desirable. It is well beyond the scope of any software developer to undertake on their own, in a speculative manner. Therefore, it is beyond the industry's imaginations and possibilities. I would also argue that, in the past, automation of this business process would have generated limited value. Today we can, as with People, Ideas & Objects, define a more specific division of labor and specialization. This will, therefore, provide a more profitable oil and gas operation.

To state this point differently, we can focus the industry's resources on the comprehensive engineering of these processes. Allocating these costs over the entire energy producing base presents opportunities to undertake detailed software development that has not been attempted before. This is the approach necessary to deal with the issues associated with producers meeting market demands. Management of these processes is the key to enabling organizational performance, technological paradigms and trajectories that Professor Dosi notes in this paper.