OCI Financial Marketplace, Part III

 The “Marketplace Interface”

Just as in the Petroleum Lease and Resource Marketplace modules, the Financial Marketplace  uses the "Marketplace Interface" to create a virtual instance of the existing oil & gas financial marketplace. This will emulate the banking and investment communities discussed in this module. Creating an environment where the marketplace capabilities in terms of banking and investment dealing are made available to producers and Joint Operating Committees.

(Please review the video below.)

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

Within the “Marketplace Interface” producers can engage banks to provide the medium of communication and transaction support currently available in two separate mediums. With a producer focused on their bank and their representatives, all banking documents will be available in the tabs / tiles that populate the computer screen. Items that are outstanding or at issue with the bank will also be populated in other tabs / tiles. They are a click away from the user's full attention. Users can resolve outstanding issues and transactions with the bank and move onto the next group.

While still at their desk, the next area of concern is the investment group they've been working to finance the producer firm. They've reviewed the firm and have some detailed questions for the producer to answer. Those representatives are included in the virtual meeting and recorded. It seems that the investment group wants to take the firm's offering on speculation. They would appreciate it if they increased the producers' offering by 30%. Such is the way for innovative and profitable producers. 

The point of the “Marketplace Interface” is to provide a virtual environment that accelerates producer financial capabilities. If the producer and Joint Operating Committee are to pursue the oil & gas marketplace in the near future, the pace of their operations must accelerate. Demands for more energy will be substantial to attain energy independence. Commodity prices realized by producers will reflect this demand and reward enhanced innovation. It is therefore necessary to ensure that the producer has the capabilities within the financial community to finance this level of activity. 

It would seem that the majority of banking and investment costs are fixed. That is there is almost nothing a producer can do to offset the costs associated with these services. And they are usually priced as a percentage of the transaction for loans and investments, or service fees based on banking practices that are global in terms of their competitive offering. Therefore the need to leverage these services appropriately to enhance shareholders' returns should be the key to optimizing the value. 

Before we proceed any further we should note that the People, Ideas & Objects Preliminary Specification aligns the seven frameworks of the Joint Operating Committee with the compliance and governance frameworks of the hierarchy. This alignment includes the oil & gas industries financial framework as discussed in this Financial Marketplace. Having the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks aligned with the compliance and governance frameworks permits the speed, accountability, innovativeness and profitability in the oil & gas industry.  

Offsetting as much of the logistical and transaction related costs associated with banking and investment management to the banks and investment managers will enable this marketplace to operate more efficiently. Imputing that the division of labor and specialization will fall within the domain of bankers and investment managers. The fee for their services will be one charge for that service. From a paper “Where do Transactions Come From? A Network Design Perspective on the Firm Theory" by Harvard Professor Carliss Baldwin.

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

And

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

By leveraging the marketplace in this manner, it helps to mitigate the increased logistical load on a producer. This is due to the many Joint Operating Committees undertaking their own banking and investment management needs. This leveraging, through the aid of Information Technology, makes this a minor irritant when compared to the benefits achieved when the financial framework is aligned with the other six frameworks of the Joint Operating Committee and the governance and compliance frameworks are also aligned. (Speed, Accountability, Innovativeness and Profitability vs. a minor logistical irritant.) Frederick von Hayek in “The Use of Knowledge in Society.”

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

We have noted how banking and investment dealers provided their services to oil & gas producers and Joint Operating Committees through what Professor Richard Langlois calls Transaction Cost Economics. The services were provided at a fixed service cost that was passed on to the producer / JOC as a transaction on completion of the service. The division of labor and specialization of the service was the responsibility of the bank or investment dealer. They were free to organize themselves in any fashion based on a competitive pricing of their services. We want to explore the “Marketplace Interface” a little further and how transaction costs will impact the marketplace for producers and JOC’s. 

The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. ...The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more that is reflected in the price movement. (Hayek 1945, pp. 526 - 527)

With producers maintaining relationships with every bank. This is as a result of banks financing all of the Joint Operating Committees partners in a property. And possibly the same situation occurs with multiple investment dealers. The need for the marketplace to deal with the logistical aspects of finances of each bank and investment house will be necessary. There is however not much of an issue with this method of handling finances. The majority if not all of the banking payments and receipts can and should be managed by People, Ideas & Objects Preliminary Specification electronically. The need to print checks or make physical deposits occurred last century. Another thing that happened last century was the need to manage cash in various accounts. The Financial Marketplace module will provide an “Advanced Cash Management Interface” to enable appropriate cash management to a producer's cash resources.

Another aspect of this marketplace is the topic of discussion and the type of transaction that can be undertaken in the marketplace. With high volumes of activity anticipated in the oil & gas producers domain. (This is as a result of the volume of work needed for each barrel of oil equivalent produced and the associated increased demands on everyone's time. The work necessary for producers to rebuild the service industry, etc.) The amount of travel may be limited in the future with the reliance on the “Marketplace Interfaces” of the Preliminary Specification as a replacement for some of the face to face time done now. If a transaction can be done virtually, the “Marketplace Interface” would be worthwhile to build just for that purpose. Let alone the day-to-day transactions of paying bills and depositing money. People, Ideas & Objects calls our “Marketplace Interface” the ultimate collaborative environment.

The “Marketplace Interface,” Specialization and the Division of Labor

Discussing the capabilities that the producer firm or Joint Operating Committee acquires through the “Marketplace Interface” of the Financial Marketplace module. It is the full scope of the financial capabilities and money management that banking and investment dealers provide. These are acquired through the payment of a fee when necessary. These markets are “thick” and many standards support them. The costs of executing transactions are negligible, or in other words, ideal for the “Marketplace Interface.” 

When we think in terms of the boundaries of firms and markets, there is little ambiguity as to which lies in which domain. Banking is banking and oil & gas is oil & gas. Would any producer attempt to provide bank services as a value-added process for its shareholders today? Why would it assume that it could provide a better lease rental payment process than one that can be done industry wide as in the “Marketplace Interface” of the Petroleum Lease Marketplace? 

Just as in the Petroleum Lease Marketplace, where the marketplace infrastructure, standards and other market supporting institutions are currently in existence. The marketplace in the Petroleum Lease Marketplace needs to be created. However, here in the Financial Marketplace it already exists and only requires a virtual interface, the “Marketplace Interface,” built to emulate the marketplace. In the Petroleum Lease Marketplace the entrepreneurs need to establish service offerings and provide services to the producers and Joint Operating Committees. In contrast, in the Financial Marketplace that infrastructure, the banks and investment houses, already exist. 

Acquiring the capabilities of a bank or a lease administrator through the marketplace is a choice that 21st century oil & gas producers need to make. The People, Ideas & Objects Preliminary Specification assumes that producers and Joint Operating Committees are best served by markets. The producer and Joint Operating Committee are best left to focus on their land & asset base, and earth science & engineering capabilities as key competitive advantages. The majority of the processes that support those tasks can be provided by robust marketplaces. 

This manner of operation is consistent with how innovative organizations operate in other industries. It is also wholly inconsistent with the current officers and directors thinking about the oil & gas industry today. Theirs is an attitude that will maintain command and control of all aspects of the oil & gas producer firm. This will ensure that they maintain their “power” for longer. If not for the Internet these ideas from People, Ideas & Objects would not be communicated to like-minded individuals. The officers and directors would be unchallenged. There are distinct advantages to relying on the marketplace for the administration of these administrative processes. 

I think we have firmly established that by placing a virtual interface, the “Marketplace Interface” over the financial marketplace we could provide the capabilities of that market to the innovative oil & gas producers and Joint Operating Committees. Having this marketplace would provide access to the "skills, knowledge, experience and ideas" of the banking and investment communities. This would be in an administratively more efficient, effective and timely environment. This is a critical aspect of the innovative oil & gas producer and therefore a critical aspect of the Financial Marketplace module of the Preliminary Specification. 

Oil & gas is a capital intensive industry. Access to capital is necessary and primary for producer's success. Without funding, unfortunately, it's just ideas. Unfortunately there are skills needed to access capital markets that are not evenly distributed. These “access” privileges are holdouts of the last century. It will be the strength of ideas and the potential of deals that will drive the motivation of investment dealers in the future. Therefore creating marketplaces where access is open to all parties may be how things will get done. Reliant on capabilities as opposed to who you know.

By accessing the banking and investment community through the “Marketplace Interface” the innovative oil & gas producer and Joint Operating Committees acquire the financing and banking capabilities they need. Allowing them to focus on their key competitive advantages, their land & asset base, and earth science & engineering capabilities. The scope of what is required to succeed in their competitive advantage is broad enough. To expand it unnecessarily into other areas is incomprehensible in today’s business environment. From Professor Richard Langlois in “Capabilities and Governance: The Rebirth of Production in the Theory of Economic Organization.”

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

And that would include areas that are part of the Resource Marketplace module. No producer would own their own drilling rigs as part of their competitive advantage, yet some Canadian producers like Encana Corp. think that is part of their competitiveness. From Professor Langlois in his paper “Competition through Institutional Form: the Case of Cluster Tool Standards." 

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

The “Marketplace Interface” in the Financial Marketplace module of the Preliminary Specification provides a window for the producer and Joint Operating Committee on the banking and investment communities. A virtual world where interactions and transactions are unlimited and undefined. Watching this video from Open Wonderland will provide an understanding of how the Marketplace Interface would operate.

(Please review the video below).

The “Marketplace Interface" and Modularity

What we’ve described so far in the Financial Marketplace is a comprehensive area where the banking and investment communities conduct all of their business with the producer firms and Joint Operating Committees. This would involve not only the day to day payment of bills but also the closing of a major financing. We have also discussed that this would enable the alignment of the seven Joint Operating Committee frameworks, including its financial framework. This would enable alignment with the firm's compliance and governance. The "Marketplace Interface" would be a place where people could get their financial “things” taken care of. From Professor Richard Langlois’ “Modularity in Technology, Organization and Society.” 

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

And

Why are some (modular) social units governed by the architecture of the organization and some governed by the larger architecture of the market? p. 2

Professor Langlois has taught us that modularity depends on interdependence and standards. If we include compliance and governance within the standards definition. In addition, the Financial Marketplace with banking and investment capital standards will enable automation and innovation. Modular interdependency reduces the user's focus to just banking. If the user wants to find a P&NG lease, they refer to the Petroleum Lease Marketplace. The Financial Marketplace has nothing for them. Interdependency reduces the interactions between the elements within the modules to simplify the systems within each module. If everything was contained within one module the interdependency would be so high that the system would not function as effectively. Professor Richard Langlois' “Modularity in Technology, Organization and Society.” 

In organizational and social systems - and perhaps even in mechanical ones as well - it is possible to think of interdependency and interaction among the parts as a matter of information transmission or communication. p. 5

Lastly Professor Langlois provides us with a clear understanding of what is required in a modular system design. These are some of the guiding principles I am using to write the Preliminary Specification. 

An architecture specifies what modules will be part of the system and what their functions will be.

Interfaces describe in detail how the modules will interact, inc`luding how they fit together and communicate.

And standards test a modules conformity to design rules and measure the modules performance relative to other modules. p. 7

I now want to discuss the videos presented. Specifically the one posted below. It has the commentator highlighting the different buildings that he has built, and the terrain that he has set out in his virtual world. Here is how the “Marketplace Interface” will look. Banks or investment houses will set up a building and their people’s avatars will be able to set up demonstrations and marketing presentations for those who may be just walking around the various buildings within the “Marketplace Interface.” When they see something of interest they will be able to engage one of the bank or investment house representatives and begin a discussion of how they could help their producer firm or Joint Operating Committee. Once the relationship has begun the producer / JOC could return and have their needs met virtually by that firm represented in the “Marketplace Interface.”

(Please review the video below.)

The advantage of this is obvious to me, however, it may not be obvious to everyone. This is not technology for technology's sake. This is a marketplace for business purposes. A completely different situation from the current social media experiments which appear to have no business purposes behind the interactions. Within the “Marketplace Interface,” which is full of interactions, the People, Ideas & Objects ERP systems are available for use by parties within the virtual world. If they conduct a business transaction, it can be handled virtually. If they close a deal that can be facilitated virtually within the “Marketplace Interface," transaction management is what makes this video transform from a useless technological experiment to a potential for so much more.  

The “Marketplace Interface,” a Scenario

By way of a scenario I want to impart an understanding of how I see the Financial Marketplace module “Marketplace Interface” provides innovative oil & gas producers and Joint Operating Committees with banking and investment products and services.

As the Chairman of the Joint Operating Committee for an area where producers have a mutual interest with five other companies to explore shale gas. After many years of acquiring land and drilling to identify the scope of reserves, these companies have announced a major discovery of significant reserves. 80% of the participating companies voted to undertake bank financing through a general assignment of those reserves. This was to fund the gathering, compression and tie-in to a nearby gas plant. It was approved that these funds could be sourced from any bank that bids competitively for the business.

A specification and a detailed cost proposal have been developed to support the funds application. Two individuals from the other companies who have participated in the Joint Operating Committee will join in making the proposal to the banks. Arrangements are made to propose to 16 banks located in New York, London and Hong Kong next Tuesday through the “Marketplace Interface” of the Financial Marketplace module. Three of the banks have relationships with two of the producers represented in the proposal.

It quickly becomes evident that there are technical questions regarding shale gas and company B's financial situation. Calling upon the geologist for the project and the CFO of company B within the “Marketplace Interface” to answer these questions. This however causes an overrun of the time allotted and sends the other two participants to the next meeting. Eventually one producer satisfied bank A, and returned to the second meeting to find that the same questions had arisen. Contacting the CFO and geologist of company B again and asking them to edit video excerpts from the previous meetings' answers. They will include them in the proposal to satisfy bank B, and move on to bank C and so on.

Days later there are offers from 4 of the banks visited virtually. However, one of the banks' offers stands out from the other three banks, and is accepted by 80% of the Joint Operating Committee participants. The CFO’s, lawyers, accountants and bankers of all participating producers were informed of a closing two weeks away. The closing will be held within the “Marketplace Interface” of the Financial Marketplace module. Scheduling of the virtual signing of AFE’s for the project's commencement will be undertaken once closing is complete.

What this scenario shows is that the alignment of the financial framework with legal and operational decision-making frameworks of the Joint Operating Committee. The decision to leverage the property with debt is appropriate from a business perspective. This scenario also shows that leveraging the property can be done quickly and efficiently. Even though there are more people involved in the decision making process, because of the number of companies on the Joint Operating Committee, the time needed to deal with everything is compressed and exposure to the best deal was obtained with minimal administrative time incurred.

Another Scenario

We invoke the “Marketplace Interface” with the technologies provided to us by Open Wonderland. The open source Java toolkit that creates the collaborative environment we call the “Marketplace Interface.” Sitting on the Oracle Fusion Middleware layer, this toolkit provides our users with simultaneous interaction for the Resource, Petroleum Lease and Financial Marketplace modules. The “Marketplace Interface” simulates a market where buyers and sellers engage, buy, sell and trade products and services. It is the ultimate collaborative environment. The user will have the option to click to create a transaction, an AFE or another form of business. This is based on the interaction they simulate in the marketplace. This discussion details some of the activities within the Financial Marketplace module of the Preliminary Specification. 

We fast forward a few years to where energy demand is very strong. Therefore the demand for capital in a capital intensive business is even more difficult. An important element of an innovative oil and gas producer's toolkit is promoting the performance and speed of the company's capabilities. What they want to do is engage the investment community in a discussion around its various elements. To do that they use the "Marketplace Interface" for selling / promoting oil & gas assets and the producer firm itself. It is here within the oil & gas property district that they’ve acquired some virtual real estate. This is to house the distribution of packages and promotion of their properties and company.

(Please review the video below.)

When they’ve engaged a qualified and interested buyer, they provide and execute a confidentiality agreement. Then begin the presentation of the package properties without leaving the marketplace interface or traveling anywhere. Next, an investor wants to know more about the team and its performance over the past three years and their current capabilities. All of this information can be easily compiled from within the “Marketplace Interface” as they are all part of the People, Ideas & Objects ERP system. Whether it be from Oracle Cloud ERP or the People, Ideas & Objects application modules themselves, all of these modular application features interact and operate as one. 

Or maybe the shoe is on the other foot, and are in the market to acquire some properties. The ability to shop around the oil & gas property district in the “Marketplace Interface” provides the opportunity to find the right property with less time and cost involved. Producers from around the world are located in the district, allowing potential buyers to search globally and locally. Reviewing hundreds of reserve reports and evaluating formation porosity has its rewards. However, sometimes in a marketplace, it's something someone says that piques their interest in a property. Having this marketplace open on their desktop and available all day would open up a world of opportunity, serendipity and spontaneous order for the innovative oil & gas producer. 

OCI Financial Marketplace, Part II

 Selling the Team

We now focus on innovation and review Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation.” It has been argued throughout the writings in the Preliminary Specification that commodity prices allocate financial resources to fuel the innovative oil & gas producer. If that is so, what role will capital markets play in the oil & gas industry's future?

Taking this thinking to its logical conclusion, the most innovative firm would also be the most profitable. As their capital costs would be lower than their competitors, and with their innovation on a steeper trajectory, they would be more effective. This would cause them to be less costly than the competition. Science and technologies are invested with the implicit expectation of a return on these investments. However, it is also to provide the firm with additional structural competitive advantages by moving their products' costs and / or capabilities beyond the competition. Professor Dosi notes in his 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation.”

Thus, I shall discuss the sources of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search, and the nature of the incentives driving private agents to commit themselves to innovation. p 1121

What you can achieve as an innovative oil & gas producer is possibly the most valuable asset they'll have in the near future. This capability is what they’re investing in and how they expect to earn a return on their land & asset base, and earth science & engineering capabilities. Although much of a producer's capability may be funded by the day-to-day of its operation, it represents a critical part of a firm's cumulative investments. In answer to the question that was posed earlier, what role will capital markets play? It will be to invest in capabilities. Capabilities provide producers with the highest return on investment. 

We noted that the producer firm's engineering and earth science team was highlighted in an interface in the Financial Marketplace module. Isn't it time for the producer to take advantage of these capabilities on the capital markets? If innovation is the result of a team put together, then the ability to fund that team and earn a return on their performance should be considered in this new energy era.

To facilitate that possibility the interface in the Financial Marketplace module could have performance metrics that reflect the results of their efforts. These could be quantified over a certain period and verified by reserve reports prepared by independent engineers. The point of the exercise is to increase the value of the producer firm based on its intangible capabilities. In a world where ideas matter, the ability to quantify them and qualify them within a marketplace brings real value to the oil & gas producer and investor.

Revenue Per Employee as a Key Financial Metric

We asked the question: What role will capital markets play in the oil & gas industry's future? More specifically, we should ask what role will they play in funding innovation? Will they value the innovative producer's capabilities and fund them as was suggested earlier? Will the demand for capital be diminished due to high commodity prices allocating the financial resources towards an innovative producer? What role will banks play in this costly science and engineering-based environment? These are all difficult questions to ask when funding an oil & gas producer. 

Recently we discussed in the Petroleum Lease Marketplace module the factor developed in the People, Ideas & Objects Preliminary Research report of Revenue Per Employee. The Financial Marketplace module will publish the revenue per employee factor for the producers over the current and past periods. It will also include some future projections of where the producers' factor is heading. This would provide investors and bankers with an understanding of the firm's innovative standing and its future expectations over the next few periods.

Revenue Per Employee therefore reflects value not only of the team's performance but also of the assets the producer has accumulated. When we discussed the factor in the Petroleum Lease Marketplace module it was for internal consumption purposes. Revenue Per Employee is used in the Financial Marketplace module to publish it and allow the investment community to compare a producer's performance against their peers. In the Petroleum Lease Marketplace module, we discussed three types of variances that could be calculated between periods. There would be volume, price and number of employees variance. Each would impute a different result in terms of what the variable comparison meant.

Is Revenue Per Employee reflecting a more innovative approach. That is debatable. I think that it does, and I can’t think of a more effective way to determine how innovative a producer is. Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi defines this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve information derived from experience and formal knowledge. It is the specific and uncodified capabilities, or “tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.” The net result of this, in a laboratory setting, would be great experiments. The net result of this in a commercial setting like an oil & gas firm would be increased revenue over the period. This would be without the additional burden of increased overhead. Therefore Revenue Per Employee will have its own interface in the Petroleum Lease Marketplace, and published in the Financial Marketplace module.

One of the attributes of Revenue Per Employee is that a producer's history becomes a significant part of the calculation. If a producer has a poor factor, the performance of those fields will continue to affect the calculation from that point forward. Laggards remain laggards. Change requires significant and radical changes to the firm's operations. Those firms with a high factor are those that can truly say they're innovative. And they have the benefit of that history in which they can live off those high factors for the short and medium term. This factor can be a significant selling point, or it can highlight the real stinkers.

The variance in the market due to the factor of Revenue Per Employee is truly remarkable. A variance of fivefold is not uncommon. When a producer has five times as much revenue per employee as its competition, it reflects that something unique has happened in terms of what they're doing. As we stated in the Petroleum Lease Marketplace module, although Revenue Per Employee itself is not necessarily an overall reflection of innovativeness, the trajectory of the factor over a period of time is definitely a reflection of innovativeness, or the lack of it.

We have discussed the promotion of a producer's coordination of the markets earth science and engineering capabilities in the Financial Marketplace module. This is done through the publication of their Revenue Per Employee factor. It is through that interface that the producer communicates to the financial marketplace the capabilities that they‘ve assembled and what they as a producer can accomplish. I see the long-term development of the producer as an extension of this capability development. The application of the capability and its development to a geographical area where the risks are of a certain nature. They are unknown and unknowable for the foreseeable future. This is the nature of the oil & gas business. To embark on such an adventure without the financial support of the financial market would be unwise and certain to fail. What is needed is a means to communicate on top of the “Dynamic Capabilities Interface” of the Research & Capabilities module. This should include what Professor Giovanni Dosi states here.

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

It sounds reasonable to include “good communication channels” as a necessary part of any relationship between an innovative producer and its financial backers. Including these within ERP systems is the key to their effectiveness. What originates as a result of these “good communication channels” is defined by Professor Dosi.

In general, each organizational arrangement of a firm embodies procedures for resource allocation to particular activities (in our case, innovative activities), and for the efficient use of these resources in the search for new products, new processes, and procedures for improvements in existing routines; however, the specific nature of these procedures differs across firms and sectors. For example, the typical degrees of commitment of resources vary by industry and so do the rates at which learning occurs. I now turn to the interpretation of these phenomena. p. 1135

Professor Dosi states that profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives.” (p. 1135) Professor Dosi introduces the theory of Schmookler (1966) and asks “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both”? (p. 1135) Schmookler believed in differing degrees of economic activity derived from the same innovative inputs. It is the capabilities that make the determining difference.

Scientific knowledge plays a crucial role in opening up possibilities of major technological advances. In this century, the emergence of major new technological paradigms has frequently been directly dependent and directly linked with major scientific breakthroughs; see, for example, the origin of synthetic chemistry (John Beer 1959; Freeman 1982), the transistor (Nelson 1962; H. S. Kleiman 1977; Dosi 1984) and bioengineering (Orsenigo 1988). Certainly, in western civilization there is a long history of linkages between science and technology, hinting at rather close feedback, at least since Leonardo da Vinci and Galileo. What is new and increasingly important in this century is that the generation utilization of part of the scientific knowledge is internal to, and often a necessary condition of, the development of new technological paradigms. p. 1136

What Innovation Provides the Investor

In our review of Professor Giovanni Dosi’s paper, “Sources, Procedures, and Microeconomic Effects of Innovation“ we should ask what are the incentives for the financial marketplace to invest in the producer's discovery of innovations and their development? Will these depend on incentives interested and motivated investors perceive in terms of expected economic returns? Professor Dosi calls “appropriability those properties of technological knowledge and technical artifacts, of markets and the legal environment that permit innovations as rent yielding assets against competitors' imitation.” Previously we have documented that producers have lead times and learning curves as process innovations. Are these incentives enough market inducement for profit-motivated agents?

Competitive advantages of the producer are its land & asset base, and coordination of the markets earth science & engineering capabilities. The Financial Marketplace module suggests that the financial community should be motivated to fund these exploration and production capabilities. These competitive advantages, the capabilities, when applied to their land & asset base will generate the rent yielding assets the financial community seeks. Holding the land & asset base is the alternative the investor must consider as the alternative investment. However, without the capabilities to develop the properties the assets are of questionable use. How was the land & asset base accumulated? Through the capabilities of the producer firm. The investor must acquire capabilities in some fashion and that will cost them. They may find that developing them through a producer is the most cost-effective and efficient option.

Another aspect of innovation understanding is that it is the result of a quantifiable and replicable process. Taken from the perspective of an investor, the value this understanding provides is that the means of production, the scientific capability are within the scope of their undertaking. Risks still exist. However, the ability to develop innovation from a known capability exists and is possible based on a quantifiable and replicable process. 

Money is not necessarily the determinant of innovative success. If it were there would be more innovation occurring in large firms. Innovation can and does come from anywhere and does not necessarily require the vast financial resources necessary to make them real. From the financial marketplace perspective this would provide them with evidence they don’t need to throw money around to make producers innovative. Many capabilities can and will be developed innovatively without an unlimited capital budget. This might be the key point that draws the capital marketplace into the Financial Marketplace module. It participates in the development of the producer's capabilities, innovations and its capacities.

Professor Giovanni Dosi summarizes what we have learned about innovation in the following quotation.

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

The manner in which the oil & gas investor earns a return on their investment will be based on the producer's earth science and engineering capabilities, capacities and innovativeness. This is applied to their land and asset base. From the investors point of view, using the public interface of the People, Ideas & Objects Financial Marketplace module they can quickly determine who has the highest trajectory change in terms of Revenue Per Employee and why. They will then be able to engage with that producer in terms of what their team is capable of in the earth science and engineering disciplines. And then begin collaborations with those producers that are of interest to the investor based on what they have seen in the Financial Marketplace module. Then the producer and the investor can discuss how the financing of the “interplay between various sorts of market-inducements, on the one hand, and opportunity and appropriability combinations, on the other '' can come about.

The efficient financing of innovation industry wide should be the result of the overall processes managed by the Financial Marketplace module. As described here the ability to focus on the producer with the highest level of innovation, as reflected in the trajectory change in Revenue Per Employee, will be quick. The pace of change in science will need to be mirrored in the pace of change in producers. And the pace of change in producers will only be matched if the investment community can respond to market changes at the same speed as the producers can. Therefore in order to accelerate the producers it is necessary to accelerate the pace and speed of the financial community in terms of their capabilities in understanding the producers' business. This is the focus of the Financial Marketplace module.

In terms of what the producer's capabilities are, and what they can achieve, I can see some producers unwilling to document and publish this material. This is because they will be exposed to competition and exploitation. That’s always possible, however, as with any competitive advantage they can be actively developed and marketed or hidden and atrophied. The ability to market these competitive advantages to the investment community and develop them further is discussed here. The paradox of Revenue Per Employee is the area where the difficulties really lie and where producers and investors' attention should be focused.

The major point is twofold. First this is not your grandfather's oil & gas industry. The degree of difficulty and dependence on science has increased substantially in the past few decades. Many producers are unable and most are unwilling to recognize that their business model no longer functions in this changed reality. Secondly, the level of scientific and technical input in each barrel of oil equivalent is increasing at its traditional pace and trajectory. Soon the one idea necessary to earn an incremental nickel of profit per barrel will demand ten ideas. And soon it will be one hundred. Contrast this environment to the state of the industry today where producers' repeatedly collapse commodity markets through overproduction, capital structures are unsupported, the service industry has no faith, trust or goodwill left for the oil & gas industry, and the political climate producers have created. And top these off with a capacity to do absolutely nothing in face of looming existential difficulties and to serially generate excuses, blame others and generate viable scapegoats. All while potential solution authors are ostracized and vilified.

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.