OCI Financial Marketplace, Part I

 Introduction

Capital intensive industries like oil & gas have been hit hard by the financial crisis. Capital structures and commodity demand are the two factors causing significant management turbulence. Various issues that have gone unattended to by officers and directors are now causing serious difficulties in conducting normal operations. "Muddle through" believes that with time, economic performance will return to normal. With higher interest rates come higher expectations of performance, a possible recession, and there is no guarantee that commodity prices will rise. There is no real ability for producers to deal with any underlying changes in the business model because they are stuck in a business model that sees them producing at full capacity all the time. Compared to oil, natural gas prices have taken on a second, fundamental and structural repricing through their collapse in the first half of 2023.

The Preliminary Specification aims to provide the producer and Joint Operating Committee with an innovative and profitable business model. The Financial Marketplace module provides the means in which the capital structures are managed. 

In the Financial Marketplace module, the primary point is that there are competing interests and motivations in the investing community and industry. And with different strategies being deployed by different partners within a Joint Operating Committee, is it any wonder that the financing of a project can ever fall into place. What the Financial Marketplace module proposes is that instead of the property being funded by several different company bankers, each taking a working interest share claim against the firm. Using the Financial Marketplace module, one bank or consortium of banks would fund the Joint Operating Committee on behalf of all partners. An alignment of bank financing with the legal, financial, operational decision-making, cultural, communication, strategic, innovation, compliance, and governance frameworks of innovative Joint Operating Committees.

Today, achieving that may be a worthwhile objective or opportunity. Due to the financial difficulties the oil & gas industry is experiencing since the 2008 crisis, the Financial Marketplace module attributes are still applicable. What's the reason? At least until 2030, capital demand will remain high, while supply will remain tight, and the most competitive producers will generate their own capital by passing the costs of capital on to the consumer. This is a reasonable approach in a capital intensive industry. The purpose of this module is to demonstrate that dynamic, innovative, accountable and profitable oil & gas producers and Joint Operating Committees can ensure their capital structures are more efficient than what could be achieved with any other system. And their capital structures are indeed competitive in North American capital markets.

A Certain Dissatisfaction

It's the Financial Marketplace module where I throw the cat among the pigeons and discuss bureaucracies' redundancy. When I reflect on past decades, I see the investment marketplace holds oil & gas producers' officers and directors in poor esteem too. Oil & gas investors and bankers are generally dissatisfied and disappointed. The fact of the matter is that with the run up in commodity prices there has been an even more significant run up in production, operations and overhead costs. Despite the price increases, producers officers and directors have not experienced any upside from the price increases. Officers and directors that have provided no upside on 400% commodity price increases cannot provide any upside on further price increases. And it is inevitable that significant financial losses will arise due to any commodity price declines. So there is much to be concerned about when it comes to the current state of affairs in the oil & gas industry management.

Nonetheless, the industry is moving through fundamental changes. One where the earth science and engineering resources needed to discover and produce the base commodities are under increasing demand from engineering and geological sciences. We therefore need to organize ourselves first and foremost for this upcoming challenge. And in today’s marketplace that begins with the development of the software that defines the producer and Joint Operating Committee organizations. Which is offered in the People, Ideas & Objects, our user community and their service providers organizations Preliminary Specification. The question should be asked at this critical time is, what the officers and directors plan is for the future?

The Financial Marketplace module provides a window for producers to deal with bankers within the Joint Operating Committee. Whether a producer chooses to have each participant maintain their own bank representative. Or, each Joint Operating Committee has one banker for all the producers represented on the Joint Operating Committee. This is a choice provided by the Financial Marketplace module.

Our discussion shows the critical role of the investor in the oil & gas industry's long-term health. To have them participate in the industry again, it will require them to be provided with more innovative tools and opportunities to invest in oil & gas. Earlier it was suggested that a working interest share might be a securitized investment. I think based on the past decades' history, it should be considered that the investment community would have some enhanced tools and interfaces to the producer. This would be done through the Financial Marketplace module of the People, Ideas & Objects ERP software application. After all, it's a marketplace.

The interfaces and tools I am thinking of are not of the statutory type required by various regulatory agencies. These are provided to the investor through the Compliance & Governance module of the People, Ideas & Objects application. The type of interface that I am thinking may be used in the Financial Marketplace module which is more of a marketing style interface. Where the producer markets their investment to the “financial marketplace" to secure future capital investments. Ways to initiate dialog, information transfer and discussion to start the relationship between the investor and the producer.

Alignment and its Benefits

The logistical implications of having relationships with many banks providing financing to one oil & gas firm by way of their participation in many Joint Operating Committees. To suggest that this would make the financial aspects of a producer firm better would be contrary to the reality of a system that provides these types of opportunities. Legal, financial reporting and logistical requirements would be more voluminous. It is fair to assume that the producer firm would need to maintain a banking relationship with most oil & gas bankers. That relationship would include loans, accounts and all bank services. Managing each loan's financial requirements would become difficult. Causing all kinds of administrative and management burdens that would otherwise not be incurred in today's systems.

All of these are done today, albeit on a smaller scale, in most companies. Adding a multiple of volume through automated systems such as what is discussed in the Preliminary Specification makes the prior discussion moot. What is not realized is that the Joint Operating Committee is the key organizational construct of an innovative and profitable oil & gas producer. By enabling the financial constraints of the property to be just the financial constraints of the property and the only financial constraints of the property. The participants in the Joint Operating Committee are free to deal with those financially motivated in dealing with the issues of that Joint Operating Committee. There are no more discussions about “them,” who never attend meetings anyway. When it comes time to make a decision, those with financial interests can make it.

It's not that decisions are taken in the Financial Marketplace module. What this module does is align the financial interests of the Joint Operating Committee so that the decision rights are in alignment with the operational decision making authority. The financial, legal and operational decision making authority resides in the Joint Operating Committee. The alignment of these interests provides the ability to decide on the most appropriate course of action possible. Currently, the muddling of these frameworks by general assignments to banks by each producer, and some nameless and faceless investors, limits the flexibility of the decision making authority of the engineers and earth scientists who are responsible for the property's performance. By focusing ownership and operating resources on the assets of the Joint Operating Committee, consensus can be achieved and decisions can be implemented.

Our discussion of the costs of administering high levels of banking due to using the Joint Operating Committee as the key organizational construct of the innovative producer is a vital consideration in this discussion. We have two choices to deal with these potentially high administrative costs. We can hire a lot of people, or alternatively we can highly engineer ERP software that the industry will use to deal with the potentially greater administrative burden. A highly engineered software solution, backed by our user community driven software development capability. Such as proposed by People, Ideas & Objects would earn general consensus on how to deal with the issue.

Understanding the marketplace metaphor used in the Preliminary Specification and the discussion regarding bankers and investors, the Financial Marketplace Module would include, but not be limited to, the following.

Joint Operating Committee perspective.

• Banking deposit and payment processing.
• Account reconciliation and analysis.
• Short-term asset reconciliation and management.
• Dynamic working capital determinations.
• Short-term liabilities accounts and management.
• Long-term liabilities accounts and management.

From a producer's perspective.

• Banking deposit and payment processing.
• Account reconciliation and analysis.
• Short-term asset reconciliation and management.
• Dynamic working capital determinations and allocations.
• Short-term liabilities accounts and management.
• Long-term liabilities accounts and management.
• Shareholder equity accounts and management.
• Consolidated Joint Operating Committee working capital.
• Uncommitted consolidated Joint Operating Committee working capital.

People, Ideas & Objects are moving the hierarchy's compliance and governance frameworks into alignment with the Joint Operating Committees' legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks. We are doing this to achieve increased speed, innovative capabilities, accountability and most importantly profitability. Speed is achieved by reducing financial constraints and time required for financing in oil & gas.

Speeding up the Process

In a capital intensive industry, financing is critical for producers. In an industry where innovation provides significant value add, and with escalating capital and operating costs, relationships with investors need to be of primary concern in the business. Speed will become a major criteria on how producers will be evaluated in the marketplace. If a producer is unable to perform in terms of competing, or participating at the speed of the marketplace, they will be quickly left behind. Reputation has permanence that is difficult to change. The speed at which they conduct their financing can give them a head start and provide them with the ability to participate at the speed of the marketplace. Maybe they can even set the pace for others to follow. The speed at which a producer can execute would be reflected in the Financial Marketplace module. Transparency in a marketplace is a two-way street. And it is here that the Financial Marketplace module will enable those producers with superior performance to attain a financial advantage.

Our discussion of how one bank would finance all producers within a Joint Operating Committee. This is opposed to today’s method of producers having their own banker. Provides a focus for the bank unconstrained by other properties of the producers, or concerns other than the property at hand. We also discussed, with the technology and automation that is available today, that both the producers and the banks could automate most of the increased logistical banking requirements that this would cause. I also suggested that the disenchanted oil & gas investor might be better served by offering them the ability to invest directly in the property. This will give them the opportunity to circumvent officers and directors. Our standard and objective accounting is based on the Joint Operating Committee, a key organizational construct in the Preliminary Specifications. And these changes, made through the Financial Marketplace module, provide a focus for the alignment of financial interests with the Joint Operating Committee. This will enable us to achieve speed, innovation, accountability and profitability. The alternative is a bureaucracy that has not achieved any upside to 400% energy price increases.

The Financial Marketplace module is one of three People, Ideas & Objects marketplace modules. Which imputes a line of communication and transparency between the financial marketplace and the producer firm that is above and beyond the statutory compliance requirements. It therefore has to be authored by the senior people of the firm who know what they're authorized to state. Some of these current investors who have a direct investment interest in the Joint Operating Committee may source historical accounting data and information in the Partnership Accounting module. Future plans and investments, in the difficult situations discussed, could be published and promoted on the Financial Marketplace. This would meet the regulations requirements for full disclosure. Thereby giving no investor or group any unfair advantage in terms of the quality of information.

The marketplace offers the opportunity to establish significant and rich relationships with investors and bankers of all shapes and sizes. Make no mistake, capital attraction will be based on performance, for which there is no alternative. However, the speed and effort at which a producer raises the funds necessary to develop their assets depends on the quality of those assets. It also depends on the quality of their relationships with the investment community. The Financial Marketplace module helps establish a strong relationship with the investment community. It helps to raise the required capital, align stakeholders' interests and account for these investments. Therefore in a significant way increasing the speed at which producers can approach the oil & gas business.

Speed is Nothing Without Control

The first item of information a marketplace should tell a producer is what an acceptable rate of return is for an investment in oil & gas. This is the criteria all producers should use to evaluate their oil & gas investments. If the rate of return and capital allocation does not exceed the producers expected rate of return then the project should not proceed. There is no more relevant factor or information for producers. Producer discipline and methodology in capital allocation is how successful producers succeed. This is how the Financial Marketplace module incorporates the calculations of return on investment and capital allocation in the Preliminary Specification. What producers need to understand is that providing a return of capital over 20 years no longer qualifies as acceptable, if it ever did. Building balance sheets doesn't impress anyone.

First of all there is no more confidential, in my opinion, information than these calculations. Particularly, capital allocation can be a complex algorithm contained within multiple spreadsheets. Centralizing these calculations within the Financial Marketplace module would be opportune as it's managed by the Security & Access Control module and has general access to historical accounting data. Data elements would therefore be live and provide real time performance. It is important to remember that there is much more to decision making than just numbers. Management discussion, based on calculations, is sometimes important. As a result, robust features for discussion throughout the calculations of return on investment and capital allocation will be necessary. This might best be represented as a blackboard feature of the module.

There is more to the process than just blue sky thinking and numbers crunching. What I am suggesting here is that capital allocation is an art as well as a science. The process needs to be rigorous and thorough enough to ensure that every rock has been overturned and inspected. That process can and should be automated to the highest level in the Preliminary Specifications Financial Marketplace module. It is up to the individual producer to either follow the process or ignore it, just as they do the capital allocation process today. These facilities will be built within the module.

Astute readers will note the obvious contradiction inherent in the Financial Marketplace module. Doesn’t the speed we discussed contradict the deliberate pace of the capital allocation process outlined here? No, that means it shouldn’t, or they should be one and the same. Having the speed described earlier was desirable only if they had some measure of control. Control is achieved through capital allocation. These two forces, speed and control, are in the hands of the firm's management and are reflected in the assets' performance. The marketplace will see this performance and respond appropriately and that will be reflected in the Preliminary Specifications Financial Marketplace module.

Another contradiction might be suggested that with banks funding Joint Operating Committees on a semi-autonomous basis, this will interrupt the capital allocation process and affect the firm's return calculations. That is correct, however they will disrupt it in a positive way. Banks funding the Joint Operating Committee instead of taking general claims against the individual producers would be more motivated and aligned to develop the individual property. Since the producers are using borrowed money to invest in that Joint Operating Committee they are leveraging the producer's investment. An investment that previously yielded an acceptable return to the producer. Therefore the actual return to the producer would be leveraged to the point that it would most certainly exceed the producer's expected return. Leverage is used to benefit the firm unlike the method used today where interest rate increases reveal the chronic abuse of investors but also their bankers over these past decades. 

OCI Petroleum Lease Marketplace, Part IX

 Royalties

I thought that we would spend some time discussing the management of royalties in the Preliminary Specification. Royalties are calculated, paid, and processed in the Petroleum Lease Marketplace, as well as in the Accounting Voucher and Partnership Accounting modules. The geographical scope of the application will be an important determinant of the Preliminary Specification. The People, Ideas & Objects application modules will calculate, pay and process royalties in those jurisdictions based on that information. Participating in the community is the most effective way for a remote producer to ensure that all of their areas are covered by the application. For example, they should assert that Alaska should be included if they have production or leases in Alaska. Don't assume someone else will take care of this for you in our user community. 

Royalties are calculated and processed in a number of different ways. Over time, many have adopted what can be called generally accepted royalty principles, but there are still differences to consider. In addition to these differences, there are differences in the systems used to calculate royalties. I have to admit, Excel does a pretty good job at multiplication. However, many of these royalty frameworks were not designed to work that way. Excel is a labor-intensive program. As far as Gas Cost Allowance (GCA) goes, none of the industry's systems have implemented an ERP process. One of the largest cost items for producers is royalties. Making sure that the minimum correct royalties are calculated and paid can have a significant impact on profitability with high commodity prices. 

It is within the Petroleum Lease Marketplace module that the Lease document and royalty information are stored. Every jurisdiction will have its own methods and procedures for calculating royalties on its lands, be it Crown, Federal, Freehold, Private, or State. It is common for these to be comprehensive and to require substantial use of information technology. In some cases, they use realized prices, in others they use their own pricing models. Royalties can be applied to units of production in a variety of ways. However, there is nothing that cannot be handled by a software development capability like People, Ideas & Objects. Let's also examine how that compliance is achieved.

Within each royalty jurisdiction, we will have a royalty accounting service provider, or several providers, who specialize in the management of royalties, in this case, for the state of Texas. The only thing these people deal with is Texas production and the Texas Railroad Commission for state royalties. These companies pay Texas State royalties on behalf of hundreds of oil & gas producers in Texas. People, Ideas & Objects develops software specifically for the service provider to calculate royalties and ensure that producers pay their minimum amount. On behalf of their clients, the service provider also keeps up with the changes in the Texas royalty administration and ensures that these changes are reflected in their software at the appropriate time. There would be royalty specialist service providers located in each jurisdiction for each royalty that falls within the scope of the Preliminary and subsequent Specifications of the People, Ideas & Objects application modules. 

As a result of specialization and division of labor, everything from the administrative side has been handed off to these service providers, increasing service quality and reducing administrative costs. Only this method is proven to increase the industry's economic performance. The alternative is that we continue to build redundant individual silos of fully capable oil & gas producers non-competitive attributes. A scenario in which only the managers will be happy. 

Paying royalties is the responsibility of the individual producer. In most jurisdictions, I believe this is true. Accordingly, royalties are calculated on the producer's share rather than the Joint Operating Committee's production. Production is derived from the Joint Operating Committee, which involves the Material Balance Report. This discussion will deal with the production aspects of the royalty calculation and the tie in to the Accounting Voucher and Partnership Accounting modules Material Balance Report. 

First let's revisit the manner in which production accounting is handled in the Preliminary Specification. It is through specialization and the division of labor that we have looked to service providers to provide these production accounting services to the Joint Operating Committees. Specialized in a region, the production accounting service provider may be located within that region to have hands-on experience with the operation. Working for the many Joint Operating Committees that may be located in the region the service provider may as a result work indirectly on behalf of many producers to conduct their production accounting. 

Looking at this situation from the perspective of a fairly large producer. Depending on the number of jurisdictions or unique royalty administrations, they may have upwards of a few hundred geographically based production accounting service providers. It isn't the complexity of dealing with these many providers that is the issue, but rather the size of the producer. Here, it should be stressed that the billing of these services should be based on positive action. For the production accounting service provider, it would be based on the original production. Similarly, if there was no production for that month, no charges would be incurred. In the case of royalty accounting, the same situation should apply; however, producers do not want it to be dependent on royalty payments. 

The Material Balance Report is located within the Accounting Voucher and Partnership Accounting modules. This report provides material balancing for oil & gas facilities. Our discussion of the volumetric information within the Preliminary Specification is covered in those modules. Review the Material Balance Report in the Partnership Accounting and Accounting Voucher modules to review the discussion to date. Material Balance Reports will be used to produce information on royalties, one of the areas that will be using the data. Each producer's production is allocated in the report as part of the process. As a result, this information is incorporated into the royalty calculations for the various jurisdictions. For royalty purposes, this volume should be the final production volume after taking into account any swaps or inventory. The endless process of amendments will no doubt last for at least 30 - 60 days before everything settles down. The royalty calculation being a nature of revenue less costs times royalty rate equals royalty, these production volume changes do not require any human interaction until such time as the point the royalties are due at the end of the month. Royalties will be paid on the appropriate volume of production based on the Material Balance Report.

The prices that the royalties will be based on is what we will be discussing. Royalties must be paid by producers on the net price at the wellhead of all the commodities produced. We will discuss how these prices are calculated in the People, Ideas & Objects application.

There are some jurisdictions that use their own pricing scenarios. To calculate royalties, provinces in Canada calculate the average price of gas and NGLs for each producer. Gas processing costs are also based on standard costs. For most jurisdictions, the royalty is calculated based on the net realized price. To describe the scenario that we are using, let's take a look at a gas contract. We will assume there are no liquids for simplicity's sake. Using the Material Balance Report, we can see that the gas that is sold under the contract is all of the gas that is produced by company A in the region served by gas plant B. In some cases, this gas is collected over a considerable distance from over 50 wells. Producers pay custom processing and gathering fees for services that are not owned by them. The gas contract is with an industrial consumer located across the state, and the point of sale is the delivery to their facility. 

Therefore, the producer must pay for the transportation and processing of this gas to the point of sale. Netted back to the wellhead, the royalty price will be what the consumer pays less the processing and transportation costs. In the Material Balance Report, each production stream must have a sales contract and a transportation contract from the point of origin to the point of sale. This is a requirement of the system. Contracts support the production stream within the Material Balance Report; without a contract, the Material Balance Report will not balance. Therefore, all the information necessary to determine the royalty price can be found in the various Material Balance Reports.

From a well by well perspective, the prices that will be received at each wellhead might differ slightly since some wells may collect from a distance that is materially different, and therefore would pay more. The royalties are going to take the calculations from the point of view of the wellhead and begin the royalty calculations on that basis. These prices are derived from the Material Balance Report based on the contracts that are necessary to make that document operate and balance. As prices and volumes change, the Material Balance Report will be amended. The Material Balance Report is part of the Accounting Voucher module in People, Ideas & Objects. Any changes in the material balance must also correspond to the changes within the Accounting Voucher, and an Accounting Voucher can be for a producer or a Joint Operating Committee. So a volumetric change will recalculate the total custom processing and revenue receipts and a change in custom processing fees will affect total custom processing and net pricing to all the producers in that system. Making a change in one of the systems has an effect in the other. To change the price the producer received in the month can’t be done in the general ledger, it can only be done through the gas sales, custom processing or gathering contracts. This is a result of the high level of automation implemented in production, revenue and royalty processes of the Preliminary Specification. 

We’ve used a simple example of how the costs were netted back to determine the price used for royalties. Let's look at how the Preliminary Specification handles Gas Cost Allowance (GCA) and the costs of operations. The producer has a financial interest in the gathering or processing facilities that are used to carry their gas. Based on the annual throughput of these facilities, GCA allows the costs of capital and operations to be charged.

Each of these assets, whether it is a gas plant or a gathering system, will have its own Joint Operating Committee. It is first important to determine what types of capital items qualify for GCA. Not all capital may be deducted for GCA purposes. A producer should be able to tag an AFE with the designation that these costs are eligible for GCA within their accounts. Either that or select the eligible accounts through the chart of accounts. From there the costs of capital, both a return on investment and depreciation, can be calculated for the year.

In addition, the operating costs associated with those assets will have been aggregated under their Joint Operating Committee accounts. These costs are eligible for deduction as part of the facility's total costs. Each facility must be accounted for separately. For a gathering system alone, a cost/unit factor will be calculated. Each functional unit within a gas plant should be accounted for as a separate calculation for GCA purposes. Throughput calculations need to be based on gas or liquid equivalents. In a gas plant with a C2 facility, the output will be gas and liquids and a gathering system will be based on the gas volume. For products processed or gathered through that facility in a month, the results of these calculations provide an amount of GCA to deduct from the sales price to determine the royalty price. 

It is the purpose of the Petroleum Lease Marketplace module to automate these calculations. Royalties are calculated based on estimates of GCA using last year's factors. That does not mean they are not labor-intensive. People, Ideas & Objects already store all the factors needed to conduct a calculation. It is the Material Balance Report that provides information about production volumes and throughput at each functional unit. What is needed is the “Gas Cost Allowance Worksheet Interface” that aggregates these variables for the Revenue and Royalty Accountant for them to prepare their calculations for actual GCA, equalizations and estimates. 

Each functional unit can be viewed separately by the accountant using the "Gas Cost Allowance Worksheet Interface". The interface will pull in the the producers variables of the AFE’s and cost centers that are pertinent to that facility and the throughput information from the Material Balance Report. These AFE and cost centers information are dynamic. Then the accountant can organize the information in the manner that the calculation is automatically populated with the current information from the system. The accuracy and timeliness of this information, and the format of the data would be such that the production of GCA values for each month of the year would be possible. The outcome of the “Gas Cost Allowance Worksheet Interface'' would be the value that is used to deduct for royalty purposes. 

Producers may have different interests in the various gathering and processing facilities than they do in the producing property. Due to this, these calculations aren't done on a Joint Operating Committee basis, but at the utilization level of each producer. Royalty accounting service providers will continue to spend time in this area. Having people who specialize in the administration of royalties will help to ensure that the producer continues to pay the minimum correct royalties. 

Within the Petroleum Lease Marketplace, Oracle Fusion Applications Financial Management has been used in unique ways. It provides for the accounting and billing services to the producers, Joint Operating Committees and service providers that are involved in the Petroleum Lease Marketplace module. The Oracle Database is fully employed as well as there are many attributes, or data elements, that are stored within the Petroleum Lease Marketplace module. It includes the unique strategy of the Joint Operating Committee, the Lease, the agreements, and the royalty information. We need to understand how the unique attributes of an oil & gas royalty infrastructure will be implemented.

In Oracle Fusion Middleware there is Oracle’s Business Process Management Suite (BPM) which is a collection of tools and previously defined processes that developers use to configure for specific processes. Royalties are an ideal candidate for the use of these tools. Based on Oracle Database, Java and XML, Oracle BPM provides a graphical user interface that users can relate to when it comes to mapping processes. By combining data models from People, Ideas & Objects, PPDM, and Oracle Fusion Application Suites, data storage and integrity can be maximized. 

Oracle Fusion BPM tools are reliant on the user. Since People, Ideas & Objects are user-based, we need tools that allow us to interface directly with our users. Learning Java, XML, and SQL won't work. Reviewing a process from the business logic point of view, ensuring it is consistent with their needs and seeing a step by step basis of that logic assures them of the accuracy and the possibilities of what more they could have. This would seem to result in a bloated, slow product. The technologies used are the same as if the process were handcrafted, so that is not the case. People, Ideas & Objects intends to use Oracle Fusion BPM's output in our Cloud Administration & Accounting for Oil & Gas software and service, and Oracle Fusion BPM's output is fully scalable. 

The People, Ideas & Objects application development objectives include calculating royalties for multiple jurisdictions, each with its own nuance of how royalties are calculated. One of the important determinations in this is what jurisdictions are we developing for. This question is answered in our scope, and is one of the reasons producers should subscribe to this software development. To make sure we are covering all royalty jurisdictions. It will be our responsibility to maintain the current requirements of each royalty regime on an ongoing basis. Nevertheless, I would like to emphasize that our value proposition is that we would do this on behalf of all producers. The one time cost allocated over our entire subscribing producers will make these changes incidental to the innovative oil & gas producer. Specialization and the division of labor works in terms of our software development team as well as the service providers. 

Conclusion

The People, Ideas & Objects Petroleum Lease Marketplace module is one of three "Marketplace" modules included in the Preliminary Specification. In addition to the Resource and Financial Marketplace modules, this module uses the Marketplace Interface for collaboration. 

The innovative oil & gas producer relies on their competitive advantages of their land & asset base, & their earth science and engineering capabilities. The Petroleum Lease Marketplace is the module that provides the producer and Joint Operating Committee with the tools to build their land & asset base. The Petroleum Lease Marketplace provides producers with the competitive advantages they need to succeed in the 21st century. 

The division of labor and specialization plays a large role in this module. As in the Resource Marketplace module, service providers are relied upon to provide for the management of processes like lease rental payments and other areas of land administration. These aid in the conversion of the producer firms fixed overhead costs to the Joint Operating Committees variable overhead costs. This conversion is a critical part of People, Ideas & Objects value proposition in providing the oil & gas producer with the most profitable means of oil & gas operations, everywhere and always.

OCI Petroleum Lease Marketplace, Part VIII

 Updates

Our Petroleum Lease Marketplace's "Marketplace Interface" section was recently updated. In order to build upon the value provided, I'll add two updates to the discussion. 

Serendipity

Serendipity is defined as:

“Serendipity means finding interesting or valuable things by chance. It's what happens when we make unexpected connections and create possibilities that never existed before.” Innovative products and services are not created behind desks or in a boardroom full of executives.

What an organization does is defined and supported by ERP software. The organization is also constrained by the ERP's configuration. In today’s software driven environment, where the Internet provides “a wealth of information,” Professor Herbert Simon said it best, “creates a poverty of attention.” A number of the constraints placed on an organization's ERP software prevent any excessive information pollution from getting in. Globalization brings about advanced levels of specialization and division of labor based on global comparative advantages. Competition, vendors, suppliers and resources are dispersed in long distances and in every direction. The overall effect of this environment is to prevent serendipity from being able to “find interesting or valuable things by chance.” And I would suggest that it has all but eliminated spontaneous order which is defined as:

Spontaneous order theory proposed that orderly societies could emerge from the self-​interested actions of decentralized individuals who had no direct concern with the common good. 

Anyone arguing for centralized organization in oil & gas may have a hard time providing relevant examples of successful implementations. The People, Ideas & Objects Marketplace Interface represents the three marketplace modules of the Preliminary Specification. Is designed to provide an oil and gas focused forum of discussion and understanding of its communities to overcome the challenges presented by the issues and opportunities we identified. The industry has been hamstrung by issues that hinder progress, growth, and profitability. 

Apple

Apple announced a headset device yesterday for video conferencing, virtual meetings, whiteboards, and avatars consistent with the concept of the "Marketplace Interface" of People, Ideas, & Objects. As the "Marketplace Interface" is designed, headsets are not required. Apple's positioning, however, is clearly not competitive with Meta or Microsoft consumer products. Apple is considering and implementing this on a broader, more work-related platform. Consistent with WFH and of high quality for long-term use. From Bloomberg.

The device will have advanced video conferencing and virtual meeting rooms with realistic avatars, ideally making users feel like they’re interacting in the same place, and new collaboration tools via the Freeform app that let users work on virtual whiteboards and go over material together. There are also features to tie into existing Apple devices, such as using the headset as an external monitor.

People, Ideas & Objects offers these features which are deemed essential to establishing serendipity and spontaneous order once again in an ERP system such as the Preliminary Specification.

A Scenario

The Petroleum Lease Marketplace contains some of the data elements and characteristics that define the unique culture of the oil & gas industry. Many things, such as the AFE and working interest distribution, are a result of the Joint Operating Committee culture, and are collected and stored in the Petroleum Lease Marketplace. As these attributes are unique, standard accounting classifications for application modules cannot account for them. It is necessary for modules like the Petroleum Lease Marketplace to be built and for that we need to drop down from the Oracle Cloud ERP Applications to the Oracle Fusion Middleware layer. 

In order to demonstrate how People, Ideas & Objects differs from other ERP systems, we should start at the beginning, starting with the acquisition of a petroleum lease, the establishment of partners and the signing of an agreement, to the raising of an AFE to drill a well.

Markets are still feeling the effects of the 2008 financial crisis and investors and bankers disappointment in oil & gas performance. Many producers are willing to farmout large blocks of land in their shale positions. In order to participate in a promising area where the farmor has shot extensive seismic, the producer negotiates a 32,000 acre 20 well deal. The producer selects drilling locations and is 100% involved. Upon completion of the drilling of the 20 wells, the producer will earn an undivided 50% working interest. Despite having limited shale capabilities, the producer has promoted another producer with extensive capabilities to join the program. A 12.5% working interest will be earned by participating at 20% and providing these capabilities. 

Considering this scenario from the perspective of the producers who will theoretically all be using the People, Ideas & Objects modules. Due to the agreement, the leases with the farmor can now be listed with the companies that are party to the deal, the farmees. The agreement would have registered an encumbrance against the leases, and let's assume that happens coincidentally with the agreement. Farmees are responsible for the lease rental costs under the agreement. As part of the lease administration process, the service provider that we discussed uploads the lease data to the farmee's system and begins managing those leases. Once lease rentals are due, those leases will be paid, and the lease administration service provider will be charged for the annual services it provides. Joint venture billing will be used to bill the other farmee at 20% of the total. 

Within the Oracle Fusion Middleware suite of tools there are a variety of frameworks that will be used to make this happen. The frameworks that we would use as a minimum for what is discussed above would include, Business Intelligence, Business Process Management, Collaboration, Content Management, Cloud Application Foundation, Data Integration, Oracle Fusion Middleware for Applications, Service Oriented Architecture, SOA Governance, and Transaction Processing. 

Even when we step out of Oracle Cloud ERP Applications, we are still able to inherit substantial capabilities from Oracle Fusion Middleware. The promise of Java is that it builds on previous efforts in software development. Oracle Fusion Middleware is the result of considerable effort. Oracle Cloud ERP Applications are all derivatives of it. 

The discussion continues regarding the scenario in which the producers were farming in on a 32,000 acre parcel of land and committed to drill 20 wells. In order to provide the services to the partners of this agreement, we will use the Oracle Fusion Middleware layer to provide the People, Ideas & Objects Preliminary Specifications Petroleum Lease Marketplace module. 

It is a traditional farmin agreement with accounting and operating procedures between the farmor, the farmee and a partner with expertise in shale formations. Within the Petroleum Lease Marketplace module, all variables defined in the agreement and these procedures need to be populated. It is interesting to note that operating decisions require 60% approval for passage, which leaves producers in control of operations prior to earning. This threshold will be difficult to cross once earning is achieved since it will require almost full consensus among all partners. 

Using the Knowledge & Learning modules "Planning & Deployment Interface", operational decisions are made collaboratively. When a decision is required from the Joint Operating Committee participants, we will be able to create the necessary collaborative environment using Oracle Fusion Middleware to initiate, document, discuss and record the voting process of these decisions using the Collaboration Framework.

A new area will be documenting the capabilities of the partner who has been brought on to provide the shale area experience. They are listed in the "Capabilities & Commitments Interface" of the Petroleum Lease Marketplace. Before the agreement was signed, the producer had the opportunity to review with their team their Research & Capabilities “Dynamic Capabilities Interface” for the shale capabilities they had, and were satisfied that when those capabilities were available to the producer through the Joint Operating Committee in the Knowledge & Learning module; they would be more than adequate for farm-in purposes. The agreement stated that these capabilities would be included in the consideration paid to the producer and that they were being made available. Some of that consideration is paid in the form of a higher working interest through earning, and established day rates for their engineering and geological staff members. As the producer providing the capabilities, it will be their responsibility to describe in their "Capabilities & Commitments Interface'' the resources they are providing to the farm-in and the consideration they are receiving. As a result, both producers will be able to balance the costs and revenues of developing their capabilities and ensure that they are not overcommitting their resources in the future. 

It is important to note that the agreement itself is not static. Perhaps the "Marketplace Interface" was extensively used during the agreement's development. Changes to the agreement could be made in that forum again. Adding equipment to deal with production from the lands or expanding the scope of the lands. These are all elements of how the agreement could evolve over time. The variables that are stored within the system would change, of course, and provide raw data to most of the modules that operate in the Preliminary Specification. As the agreements are the place of origin of most of the critical data that is used within the oil & gas industry. This is where working interest distribution scenarios, accounting methods, land requirements, and procedural requirements are discussed. 

In this section, we will discuss the AFE process and how the Petroleum Lease Marketplace of the Preliminary Specification handles the elements of that document. Our discussion will also include the Oracle Fusion Middleware frameworks that would be used to implement our processes, functionality, and features. 

The producer has the resources to complete the 20 well program within the next drilling season, which is consistent with the capabilities of the partner. The "Dynamic Capabilities Interface'' can be found in the Knowledge & Learning module, a Joint Operating Committee module. Which also involves the “Planning & Deployment Interface” which has as part of that interface the AFE. The variables that are used to populate the AFE are derived from the agreement and include the working interest distribution, the participants, the location and the contacts for execution. Other variables such as the budget, also prepared within the “Planning & Deployment Interface,” and are derived from the Partnership Accounting module. Preparation of an AFE therefore is the least problematic in terms of creating the document. The ability to select from pull down menus and options that automatically populate the form are necessary to make the user interface as intuitive as possible. Items such as selecting the well id should automatically populate the partners and the working interest distribution variables.

As soon as the AFE form is completed, the document needs to be routed internally for approval. Prior to sending the AFE for external approval, all expenditures must be approved internally by the various departments. Documents are routed through the Oracle Fusion Middleware Business Process Management framework. For digital approval, it is sent to the CEO, CFO, COO, Land and Legal departments. After all approvals have been received, the document will be rerouted for external distribution. As we have brought on a partner for their capabilities, it is only necessary to gain their approval since they are paying 20% of the costs. We are also routing the document to the farmor, as the AFE will be used to document the 20 well commitment we have under the earning provision. The Joint Operating Committee other members also use the People, Ideas & Objects system, as we indicated. Thus, this routing is similar to the internal routing and approval process. Once approved, verified AFEs are circulated to the partners to inform them that the AFE has now become a valid cost center and will begin the drilling process.

Both the producer and the partner bringing in shale capabilities are actively involved in drilling these 20 wells. Costs will be incurred by both producers for the joint account. People, Ideas & Objects was designed around the concept of pooling. In order to make up for any potential resource shortfalls, all producers would have to participate in some form or fashion in order to fulfill the operator role. The producers will therefore participate and incur costs in unequal proportions to their working interests. During the Joint Venture Billing process, the People, Ideas & Objects system will equalize the participants' interests and participation rates each month. In this case, both producers must post their costs to the AFE for the month in which they incurred them, but it could involve as many producers as a Joint Operating Committee has. During the month end process, the equalization will be calculated based on their participation and the total costs incurred by both partners that month, and either compensate or bill them based on the difference. This is done on an AFE-by-AFE basis.

Part of the pooling concept involves billing a producer's engineering and geological resources to the joint account. When service providers charge actual overhead costs directly to Joint Operating Committees, overhead allowances are eliminated. The same process is used in having a revenue stream for producers' technical resources. Which is essential for a producer to maintain their earth science and engineering capacities and capabilities when the resource is in high demand. This is the ability to charge these resources to the joint account for services provided. 

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.