OCI Research & Capabilities, Part I

 Introduction

Next, we discuss the Research & Capabilities module of the Preliminary Specification. This is a dual specification module in that it shares many attributes with the Knowledge & Learning module. The difference is that Research & Capabilities is a firm, or producer facing module and the Knowledge & Learning module is a Joint Operating Committee module.

The Research & Capabilities module will help build value by managing the transition from the hierarchy to the aligned producer organization under People, Ideas & Objects software. In which the key Organization Construct of the Preliminary Specification, the Joint Operating Committee legal, financial, operational decision making, cultural, communication, innovation, and strategic frameworks align with the hierarchies' compliance and governance. And the other six Organizational Constructs which include markets, specialization and division of labor, Professor Paul Romer's non-rival costs, innovation, Intellectual Property and Information Technology. Making this cultural transition will create opportunities for people to change their work to be more efficient and effective. The “what” and “how” of this software is best described in a McKinsey article “The 21st Century Organization.” In a four-part report, McKinsey outlines what is required.

1) Streamlining and simplifying vertical and line management structures by discarding failed matrix and ad hoc approaches and narrowing the scope of the line manager's role to the creation of current earnings.

The process of using People, Ideas & Objects software will achieve all these objectives. By aligning all of the Joint Operating Committee and the hierarchies frameworks, imposing the Industrial Command & Control and having the financial interests of the producers drive the management of the Joint Operating Committee we are “narrowing the scope of the line manager’s role to the creation of current earnings.” These are the focus of the Partnership Accounting, Accounting Voucher, Petroleum Lease Marketplace, Resource Marketplace, Financial Marketplace and Performance Evaluation modules.

2) Deploying off-line teams to discover new wealth-creating opportunities while using a dynamic management process to resolve short and long term trade offs.

These are the critical key roles discussed in the Research & Capabilities and Knowledge & Learning modules. Providing valuable insight to their users about the business that is above the day-to-day noise. Where the organization's long-term vision can be set, executed and realized through these two advanced software modules.

3) Developing knowledge marketplaces, talent marketplaces, and formal networks to stimulate the creation and exchange of intangibles.

Within the Preliminary Specification, if we include the Research & Capabilities and Knowledge & Learning marketplace definitions, we have five marketplace modules in People, Ideas & Objects Preliminary Specification, or Cloud Administration & Accounting for Oil & Gas. Marketplaces are things that people will participate in more in the future. Computers can provide assistance, but they are generally very poor at making decisions, bargaining, knowing what to do, etc. The other three marketplace modules in the Preliminary Specification include the Petroleum Lease, Resource and Financial Marketplaces.

4) Relying on measurements of performance rather than supervision to get the most from self-directed professionals.

We have provided Artificial Intelligence, Performance Evaluation and Analytics & Statistics modules. Handing over the Performance Evaluation module to the team running the Joint Operating Committee will enable them to manage the property in the most efficient manner. They will be able to figure out what makes the most sense in terms of value, and generate more of it. A detailed set of financial statements of the actual costs of each Joint Operating Committee will be available for the first time. This will help them evaluate their financial performance.

It is clear that it’s no longer the 20th century. That managing an enterprise requires a different approach. The first thing needed to manage that enterprise is ERP software to define, support and enable a dynamic approach. With real shortages in the quality human resources necessary to maintain the market's energy demand for the long term, it will be the producer that can maintain a high performing organization based on the criteria we are discussing here.

It was in our Preliminary Research report (2004) that we learned about the influence that Information Technology (IT) had on organizations. IT defined and supported our organizations, enabled and constrained them. In order to eliminate these IT limitations, oil & gas producers need People, Ideas & Objects and our user communities software development capabilities. Then, as further constraints are identified, they can be addressed by our permanent software development capability. Dealing with new issues and opportunities. 

We have also discussed that current producers' capacity to deal with issues is constrained by the systems in use today. There is a repeated inability, or lack of capacity, to deal with the existing issues within the industry. Highlighting just the takeaway capacity and commodity pricing as the two premier issues that we seem to be reliving from the 1990’s. Industry is also unable to address new issues, such as the development of shale reserves and their relationship with the service industry. I have suggested that the industry seems to be in a never ending, repetitive cycle, fueled by "muddle through" that it cannot break free of. Their systems operate on a day to day basis and cannot deal with the long term perspective, change and cultural influences.

This cycle of day-to-day existence has created damage and destruction in the industry. To where the industry's value has been exhausted and the industry demands financial resources to sustain operations. Producers whose capital structures have been unsupported for almost a decade. Where the service and tertiary industries are unwilling to participate as they too have been financially and operationally destroyed. They are unwilling to trust, believe or have faith in the oil & gas producers. Producers broke it, they can fix it by providing the necessary capital for rebuilding. When producers have some skin in the game, maybe they’ll respect the service industry. This issue can be dealt with by adopting the Preliminary Specification, our user community and their service provider organizations. In addition, producers will acquire permanent ERP software development capabilities offered by People, Ideas & Objects. Then the dynamic, innovative, accountable and profitable oil and gas producer will be able to break the cycle of systems dependence and organizational definition. This will enable him to effectively plan and execute the business of the oil & gas business. Until we do this, it's helpful to become familiar with the various elements of the scenery we are in. And that primarily refers to the real losses on operations in North America that have occurred each and every year for the past four decades. Without investors who were deceived by specious financial statements, producers would not have survived and existed today.

The Research & Capabilities module provides an exit from this endless cycle. We describe how the company breaks away from what it has done before and develops its capabilities to enhance its business in the long run. 

McKinsey, The 21st Century Organization

We read through the four points from the McKinsey article on why we should use the Research & Capabilities module. This is for the long term perspective of an innovative oil and gas producer. We now want to revisit these points and highlight the significance of the opportunity presented by separating the long term perspective in the Research & Capabilities module from the day to day in the Knowledge & Learning module. In the McKinsey article it is noted:

The first design principle is to clarify the reporting relationships, accountability, and responsibilities of the line managers, who make good on a company's earnings targets, for all other considerations will get short shrift until short term expectations are met.

By making the Joint Operating Committee the key Organizational Construct of an innovative and profitable oil and gas producer. By aligning the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee with the compliance and governance frameworks of the hierarchy. Providing an extension of the governance structure over the partnership with Industrial Command & Control. The Joint Operating Committee is isolated to the oil and gas company's day-to-day operations. This frees up the remaining portion of the producer to concern itself with the long-term value generation of the firm.

These Joint Operating Committees are autonomous in the sense that they focus on the most profitable means of oil & gas operations. They are driven through our Performance Evaluation module that allows them to determine where and how they can build the greatest value each month. They're operated by a partnership, in which all participants are motivated equally by financial gain. Producers will have faith that "line managers will make good on a company's earnings targets.”

The Preliminary Specifications decentralized production model ensures that marginal production is shut-in so that those reserves can be saved for a time when commodity prices are higher and the reserves can be produced at a profit. So that the commodity markets are not flooded with marginal production causing the price collapses we've seen time after time. And that no producer will produce a marginal property. This production discipline will be adhered to when the producer has the flexibility to move up and down their production profile to maximize corporate profitability. Capital markets indirectly ensure production discipline. The decentralized production model is a feature of the Preliminary Specification and is contained primarily within the Resource Marketplace module, however all modules support this business model.

And in terms of the long term perspective, the Research & Capabilities module looks at the producer's interests in any number of Joint Operating Committees. This number may total thousands. Concerning themselves with each's operational performance would be daunting and impossible. And based on the previous discussion their involvement is limited. However, there may be systemic corporate similarities to each that bring value to the overall producer firm. Systemic similarities that can only be seen from the firm's perspective, and in the long term. These are where business value can be generated through the Research & Capabilities module.

McKinsey notes;

Dynamic management and improved collaboration, as we show later, are better ways of accomplishing the purposes of these ad-hoc structures. A company that aims to streamline its line management structures should create an effective enterprise wide governance mechanism for decisions that cross them, such as the choices involved in managing shared IT costs.

It is through an iterative and collaborative approach to dealing with the various Joint Operating Committees that the users of the Research & Capabilities module can extract value in the long term. By passing on ideas, innovations or experiments results for the Joint Operating Committee to implement. The ability to influence any and all variables and to see any aspect of the firm and analyze it is the domain of this application module.

If we reduce the oil and gas producer's business down to the Joint Operating Committee's activities. By focusing only on the day to day activities of the property then we can generally be satisfied that we will know where our next meal will come from. But what about everything else? The business must choose between the long-term and short-term horizons, a classic conflict that every company faces. How much should be sacrificed in the long term and in the short term? It should be noted that the module is Research & Capabilities. This discussion also focuses on the capabilities component of the module.

What is the firm capable of and how can that capability be enhanced? It was traditional for the producer to build in-house capabilities. The assumption in People, Ideas & Objects is that due to resource constraints, particularly in the earth science and engineering disciplines, producers cannot build the full scope of these capabilities in house. The need to collaborate with partners to build the global scope of the Joint Operating Committee capabilities is how these needs will be met. Therefore a specialization in the earth science and engineering capabilities of each producer firm will be the result of the division of labor between the partnership represented in the Joint Operating Committee. This is how the Preliminary Specification has chosen to increase the scientific throughput of the North American producers.

But we are talking about more than just the capabilities that each Joint Operating Committee demands. We are talking about the producer firm's capabilities and the use of the Research & Capabilities module. McKinsey put it well in this quotation.

Ongoing multi-year tasks such as launching new products, building new businesses, or fundamentally redesigning a company's technology platform usually call for small groups of full-time, focused professionals with the freedom "to wander the woods," discovering new, winning value propositions through trial and error and deductive tinkering.

We have detailed that the producer firm focuses on its land & asset base and earth science & engineering capabilities. This area of focus of the Research & Capabilities module is therefore a key focus of the producer organization. We are not talking about the people that will be deployed in the day to day operations of the various Joint Operating Committees. These are the core and highly specialized scientists of the firm.

We discovered something very interesting in our research. When teams of people are deployed in Joint Operating Committees, such as what People, Ideas & Objects propose. Joint Operating Committee earth science and engineering capabilities will deteriorate. They need to be fed a constant stream of advancing and innovative ideas and possibilities to ensure that they remain up-to-date with science. These directives need to ensure efforts do not duplicate errors or replicate "blind bunny trails" unnecessarily in each and every Joint Operating Committee. Only proven, tested and implemented innovative products and procedures are deployed across the firm.

It may seem that I've contradicted myself by stating that the firm needs to develop the capabilities necessary “in-house.” But I didn't mean that they would be built within the firm, but rather that they would be organized through market coordination. The Research & Capabilities module should be viewed from an industry perspective. That although each firm will have specific people defined to support each firm's needed capabilities. The service industry will take on a more prominent role in providing much of the innovative capabilities developed through the innovative mindset and thinking employed by producer firms.

We’ve discussed the role the producer plays in determining the long-term horizon of the firm. How the Research & Capabilities module would provide a window into the various Joint Operating Committees. This would provide the ability to apply systemic earth science and engineering innovations at each JOC without the risks of unnecessary duplications or repeated following of blind bunny trails. I want to discuss the risks and rewards of the leakage of earth science and engineering information from the firm through the Research & Capabilities module. As it would be apparent that the level of discussion and collaboration through the partnerships in the Joint Operating Committees, through the industry itself and the service industry in particular would lead to significant leakage of the producers' proprietary earth science and engineering knowledge, understanding and capabilities.

In the Preliminary Research Report we learned a surprising point about the producers' proprietary earth science and engineering knowledge, understanding and capabilities. In Brown & Duguid (1998) they make the following observations: 

The leakiness of knowledge out of and into organizations, however, presents an interesting contrast to internal stickiness. Knowledge often travels more easily between organizations than it does within them. For while the division of labor erects boundaries within firms, it also produces extended communities that lie across the external boundaries of the firms. Moving knowledge among groups with similar practices and overlapping membership can thus sometimes be relatively easy compared to the difficulty in moving it among heterogeneous groups within the firm. Similar practice in a common field can allow ideas to flow.Indeed, it’s often harder to stop ideas spreading than to spread them. (p. 102) 

We all recognize this information leakage to be inherently true. When someone discovers something newsworthy in the industry. It is generally well known throughout the industry soon after. It is either imputed through what is known, or the leakiness is porous. What should producers do to ensure information does not leak? I think that the point lies in the meaning of “capabilities”; which is “an aptitude that can be developed” or “knowledge begets capabilities, and capabilities beget actions." Simply put, it is impossible to stop leakage. The question therefore becomes, is it better to develop your aptitude by studying a text book or participating in a marketplace? People, Ideas & Objects believes that innovative and profitable producers, instead of hoarding information, will deploy the right information to the right people at the right time.

According to McKinsey the solution requires...

... a company must develop organizational overlays in the form of markets and networks that help its professionals work horizontally across its whole extent. These overlays make it easier for them to exchange knowledge, to find and collaborate with other professionals, and to develop communities that create intangible assets.

These tacit interactions are captured in the “Research” area of the Research & Capabilities module. Interaction with the larger communities to develop knowledge and understanding around the science of oil and gas not only expands the capabilities of the producer firm but iteratively expands the overall science. We learned two significant points regarding innovation from Professor Giovanni Dosi in Sources, Procedures and Microeconomic Effects of Innovation.

• That new science fuels new innovations, and new innovations fuel new science.
• Technical trade-offs facilitate the ability for industries to innovate on the changing technical and scientific paradigms.

People, Ideas & Objects research assumes that one technical trade-off in oil and gas is accurately reflected in the oil and gas commodity pricing. That these prices provide the resources to fuel dynamic, innovative, accountable and profitable oil and gas producers. Therefore, the faster we iterate on science and innovation, the more appropriate a capabilities-based producers strategy is.

This realignment across the producer and Joint Operating Committee is intuitive. From the Joint Operating Committee alignment of all seven frameworks focusing on performance as the driving motivation. In addition, the decentralized production model ensures profitable operations everywhere and always. This also makes sense when the Joint Operating Committee pursues an optimal short-term horizon. Making operational decisions based on the collaborative understanding of the Joint Operating Committee partnership. And the producer firm undertakes the long term horizon of the firm by interacting with their Joint Operating Committees, the remainder of the industry and the service industry. This is to build a base of earth science and engineering capabilities, through market coordination, needed for the firm. However, the strongest and easiest evidence that this is substantially correct is this quotation from Professor Richard Langlois in his working paper "The Austrian Theory of the Firm: Retrospect and Prospect."

The question then becomes: why are capabilities sometimes organized within firms, sometimes decentralized in markets, and sometimes coordinated by a myriad contractual and ownership arrangements like joint ventures, franchisees, and networks? Explicitly echoing Hayek, Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 8

To be specific, what we are doing in the Research & Capabilities module is “moving the knowledge to those with decision rights.” And this is where the alignment under People, Ideas & Objects begins. What the bureaucracy is trying to do is to “move the decision rights to those with knowledge." And that is where the conflict is being created. The Joint Operating Committee has the operational decision making framework and there is little to be done to change that. Knowledge is held within the participating producer firms. It is therefore necessary to create a process that sees knowledge flow from these producer firms to the Joint Operating Committee and that is what the Research & Capabilities module does.

OCI Financial Marketplace, Part V

 What About the Cash?

Let’s get to the real issue within the Financial Marketplace. Producer cash consumption. With each Joint Operating Committee being funded and operated through its own bank the cash of the producers will be scattered through a variety of accounts held within the various Joint Operating Committees they have an interest in. Or will they? Through this discussion we will trace the cash generated through the properties and the various operations that occur in the day-to-day of an oil & gas operation. What we will find is that from a cash balance point of view, the balance that the producer holds will be fundamentally unchanged. This is between the People, Ideas & Objects method of conducting business and the way it is done in the majority of today. 

What happens today is the net proceeds from the operation of the property are determined, each working interest share of those proceeds are calculated, and depending on whether the property is generating or consuming cash a check or an invoice is sent. The difference in the People, Ideas & Objects system is that where the property generates cash instead of issuing a check, the balance will be transferred to the individual producers. In the case where the property consumed cash it would still send an invoice. There would need to be some operating advance provided for the Joint Operating Committee to deal with any shortfalls while these invoices were being processed by the producer firms. In times when there are capital expenditures, cash calls which are the norm in the industry, will offset the demand for cash. 

One of the other key differences in the People, Ideas & Objects application modules is that the Joint Operating Committee is open to contributions from all participants. Producers pool their resources to fulfill the property requirements and that requires that each producer participate in some form or fashion. This is the pooling concept developed in the Preliminary Specification to deal specifically with anticipated resource restrictions in the earth science and engineering disciplines. Each month the Joint Operating Committee contributions are equalized in the process of determining net cash payable or receivable. They will be included in the joint venture billing. These equalized amounts will affect the cash balance in terms of the size of the payment. A producer could be compensated for the two components, the net proceeds of the property and their contribution through pooling and joint venture billing process. 

We have specified the Oracle Fusion Application Financial Management Suite as part of the Preliminary Specification. For purposes of these cash management activities we will use the Oracle Cloud ERP for these cash management purposes. I would caution readers that the manner in which these accounts are cleared have not been worked out. That is the purpose of the Preliminary Specification. These are still early days and problems such as these need to be resolved within the Preliminary Specifications budget. Today, the optimal method of clearing balances in the joint account is through clearing accounts in the general ledger. There is no reason that we can’t modify that concept to allow for the contributions of all producers within a Joint Operating Committee to contribute to the joint account. These contributions can cleared as they are today, and then add the additional step of equalizing the contributions. 

From another perspective, the interfaces to the variety of banks and producers' accounts for deposits and withdrawals will need to be worked through. Although this is not a technical issue, as all of this is being done today, the volume of transactions will be high compared to today’s traffic. Banks are well prepared for this. Producers are not. Particularly in Compliance & Governance. Automation of this type and at this level will make many people wince. They can continue with paper-based systems if they choose. The practical solution is that we build these systems with the appropriate internal controls to ensure that the process is managed efficiently and effectively and without the risks associated with this type of activity. The end result at the end of the day is that in today’s systems the Joint Operating Committee is essentially cleared of any cash balance. This will be the case in the future under the Preliminary Specifications Financial Marketplace module.

Cash Drainage

Due to the accounting methods used in oil & gas over the past four decades. Where the majority of overhead costs are capitalized on an average of 85% of the total. And when interest rates were high, interest costs were capitalized at high rates too. Large amounts of the producers' overhead are stored on the firm's balance sheet under property, plant and equipment. When capital costs are recognized on a unit of production method and that unit of production is the petroleum reserve, small amounts of capital costs are passed on to the consumers at any point in time. Therefore the cash used in paying these overhead and interest costs is not returned to the producer on a timely basis to meet the needs of the organization. The producer is left with seeking alternative sources of cash to cover the chronic shortfall of what business traditionally called the "cash float." In the past investors were called upon to make up the shortfall. They then learned the validity of such specious producer profits and moved on.

The Preliminary Specifications reorganization of the industry makes all producers' costs variable. Variable based on profitable production. If a property is unable to produce profitably, it can be shut-in without incurring an incremental loss. And therefore the producer increases their overall profitability when losses on properties no longer dilute profitable properties. Then producers can rely on consumers to replenish their funds to cover their overhead costs each month when they pass these costs directly on to them. While shut-in producers can determine what innovative methods of returning the property to profitable production.

We've accomplished this by restructuring administrative and accounting resources within the industry. By removing them from the producer firms and moving them to our user communities service provider organizations. Each service provider manages one process on behalf of the industry. If the property is shut-in, then no data will be generated, no service providers will perform work for that month, and no billings will be submitted to the Joint Operating Committee. This allows a producer to optimize profitability by moving up and down their production profiles.

Securitization

Securitization invokes the 2008 financial crisis with thoughts of mortgages purchased from banks, parsed based on their credit rating. These mortgages are repackaged as investments on Wall Street. Add in some sloppy accounting and poor legal work, some innovative ideas like synthetic credit derivative obligations, and then investors can see how such an idea can become the source of a banking crisis. Securitization, I think, has a role in the revised oil & gas industry. It could be a source of capital to develop the industry in the future. If working interest ownership positions within various Joint Operating Committees were repackaged as securitized investments and bought and sold on exchanges. Then some of the capital necessary to fund the next leg of the industry might be available. 

Securitization is potentially enabled in the Preliminary Specification through service providers detailing their work at the Joint Operating Committee level. This is for administrative and accounting costs. Joint Operating Committees will have actual overhead resources to conduct these services, costs and revenues to administer the property. Add these detailed overhead costs to the detailed royalty and operating costs and all of the Joint Operating Committees actual costs in their entirety will be recognized. Actual detailed accounting each month! With the capital costs of the property known, under the Preliminary Specification the property can prepare auditable financial statements for any Joint Operating Committee and for any month of the year. 

Therefore the net profits of the Joint Operating Committee can be calculated and determined accurately every month for every property. With the reserves data, working interests in these properties could be securitized and the producer could generate additional capital through the process. One other aspect of the Financial Marketplace module of the Preliminary Specification that is different is that due to the way the accounting is done, the operator and the working interest owners' overhead costs will be the same on a working interest basis. The operator will no longer carry the significant administrative and accounting resources and costs necessary to operate the properties on behalf of the Joint Operating Committees. And they will not be forced to capitalize these costs to hide them. The actual costs incurred by service providers will be distributed based on working interest distribution to all working interest owners. And this is why producers will use service providers for their administrative and accounting needs. Sharing the cost of a variable cost, industry-based capability offsets the need for each producer to develop their own in-house, fixed capacity and capability for administration and accounting. 

The Who, What, Where, When and Why of Investment Decisions

The speed and performance of the innovative and profitable oil & gas producer come about due to demands from the capital markets. Investors want to deploy their capital at that critical moment when results are about to be achieved. Such is the way of their business. Having a faster capital turnover is a means of increasing its effectiveness. Innovative and profitable producers that replicate this turnover within their organization will gain market recognition for their speed and performance. Speed is good, but not at the expense of performance. Quickly drilling dry wells doesn’t impress anyone. It is a reasonable approach to this tradeoff. 

There also needs to be a means to control what the firm is involved in in terms of investment criteria. This will be managed through the “Capital Allocation Interface” of the Financial Marketplace module. All investments are assessed based on their expected returns and risk profiles. It is imperative that the firm evaluates every opportunity and critically reviews the results. This is to ensure their investment selections are appropriate and within the framework of what the producer can do. 

And let’s be clear, most if not all producers have these processes operating within their organizations. However not within the organization's financial domain. What is proposed here in the Financial Marketplace module is controversial because the administration of these processes will be within the organization's financial jurisdiction. One in which this falls under the responsibility of the Chief Financial Officer and is administered in the Financial Marketplace module. It is my opinion that the CFO will continue to move away from a financial to a more technical background. Having a geologist or engineer as CFO may become the norm in the future. The CFO will have technical accounting aspects provided to them by their accounting firm, service providers and staff. Their ability to discern which projects to proceed with will be due to collaborations conducted within the speed, performance and control decision processes. In addition, they will participate in senior management and executive meetings. However, having these decision processes managed by a CFO who is an accountant would be the same as giving the keys to the Ferrari to a teenager. What positive outcome would be expected? 

To manage these processes we turn to the Oracle Middleware layer and specifically the Oracle Business Process Management Suite. We need to take these from the spreadsheet and ad hoc nature they're currently managed under. We need to put them through a defined and rigorous process that meets the organization's needs. From the C-class executives to the people who grind out the calculations. The decision process has to be defined and managed by software within the organization. It also needs to be highly collaborative with the decision-making process and well documented. It will be in this way that a firm can learn from what it is doing wrong, perhaps most importantly. Moreover, it can learn from what it does right. Right down to the details of who came up with the idea and who pushed it through. And then everyone will be able to answer who is responsible for that last big success in the firm.

Conclusion

I have criticized the officers and directors of the oil & gas producers. They have resisted the changes proposed in the Preliminary Specification and governed as if all was well. It needs to be asked if the oil & gas industry is the same industry when it receives $100.00 for its products when only a few years ago it received $25.00? I’m not sure it is the same. There has been a fundamental change from a low cost energy era, to an era that will see the rise of the innovation focused dynamic producer. The type of producer in these two domains is fundamentally different. The Preliminary Specification is designed for innovative producers. To make the transition from the low cost energy era to the era of innovation focused dynamic producers will require that we build the Preliminary Specification first. The Financial Marketplace module is a critical aspect of the Preliminary Specification. By aligning the industry's financial framework with the legal, operational decision making, cultural, communication, innovation, strategic, compliance and governance frameworks we will achieve the speed, accountability, innovativeness and profitability we desire. In his book “The Dynamics of Industrial Capitalism,” Professor Langlois notes.

As soon as we go into details and inquire into the individual items in which progress was most conspicuous, the trail leads not to the doors of those firms that work under conditions of comparatively free competition but precisely to the doors of the large concerns – which, as in the case of agricultural machinery, also account for much of the progress in the competitive sector – and a shocking suspicion dawns upon us that big business may have had more to do with creating [the modern] standard of life than with keeping it down. (Schumpeter 1950 [1976, p. 82].) p. 2

My two criticisms are that the officers and directors operate too slowly, and innovativeness is non-existent. In the financial marketplace the pace of activity will need to accelerate and mirror the changes in the producers. I think we have addressed these with the changes documented here in the Preliminary Specification. 

Schumpeter’s account of progressive rationalization takes the form of a contrast between two modes of economic organization, modes roughly cognate to the difference between the small owner-managed firm and the large multi-unit enterprise. Characteristically, however, the issue in Schumpeter is a dynamic one: he is concerned with the respective merits of these two modes of organization not in the static allocation of existing resources but in generation of economic change and growth. The paradox of Schumpeter is that he famously defended, and has come to be associated with, both of these modes as drivers of economic growth. Schumpeter has returned to prominence today as champion of the role of bold entrepreneurs in creating new combinations and redirecting the means of production into new channels, to such an extent that he is revered as an inspiration to the present-day field of entrepreneurship studies (Shane and Venkataraman, 2000). In this (Schumpeterian) literature, the force behind economic growth comes from individuals or small groups of individuals who work mostly outside the established structure of organization rather than from within it. pp. 17 - 18

It doesn't matter what configuration the producer firm is in, big or small, lean or bloated with bureaucracy. The future requires that we can provide for the market's energy needs. The financial crisis is providing relief in terms of a reduction in global economic growth and reduced energy demand. Eventually the increase in energy demand will resume and that is not something we can currently contemplate. What we have proven here in the Financial Marketplace module is that innovative and profitable oil & gas producers will demand more efficient capital structures. Those structures lead to the overall performance of the producer and the Joint Operating Committees they participate in. We need to get our heads around this energy demand situation and start dealing with a solution. Muddling through just seems too risky.

OCI Financial Marketplace, Part IV

 Dynamic Transaction Costs and Market Coordination

We'll now discuss “Dynamic Transaction Costs" in the Financial Marketplace module of the Preliminary Specification. Dynamic Transaction Costs are technological and organizational innovation costs incurred when capabilities are moved from the firm to the market or vice-versa. These are the costs when we establish a “Marketplace Interface” such as we're discussing in the Financial Marketplace module. But first in a paper entitled “Modularity in Organization, Technology and Society” Professor Richard Langlois provides us with this definition of capabilities.

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

People, Ideas & Objects have also added “ideas” to “knowledge, experience and skills” for capabilities. The financial marketplace, that is the banking and investment community capabilities, are currently accessed by the oil & gas industry through the marketplace. Therefore the changes and the Dynamic Transaction Costs will be due to adapting to the “Marketplace Interface” of the Financial Marketplace module, and will be minimal. This is in comparison to the Dynamic Transaction Costs incurred in the Petroleum Lease Marketplace module where the marketplace currently doesn't exist and the capabilities are held within the producer firms. Professor Langlois describes Dynamic Transaction Costs in his paper “Transaction Cost Economics in Real Time.”

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

What we therefore need is to record these technological and organizational innovation costs for both the producer firm and Joint Operating Committees. To have an account that clearly defines Dynamic Transaction Costs, whatever they may be, within the firm's chart of accounts or Joint Operating Committee. This would help identify and control these costs. This would also be the case for the Resource and Petroleum Lease Marketplace modules. Although some of the producers' costs for “change, notably technological and organizational innovation” would be associated with the fees paid to People, Ideas & Objects. There are other out of pocket expenses that the firms are incurring to make the changes to the “Marketplace Interfaces” and these costs need to be captured in the accounts.

We will now discuss the manner in which changes from the firm to the marketplace will occur. We will also discuss the importance of having software development capability like that proposed by People, Ideas & Objects. We will also discuss some of the interfaces previously introduced in the Resource Marketplace module that will be needed here in the Financial Marketplace module. The quotations are from Professor Richard Langlois’ “The Vanishing Hand: the Changing Dynamics of Industrial Capitalism.” We begin by noting that although the marketplace for banking and investment dealers is well established, the coordination capabilities within the producer firms and the “Marketplace Interface” of the People, Ideas & Objects Financial Marketplace module are not currently available.

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

Part of the process of developing the Preliminary Specification will be to identify the various standards that affect the markets and firms within the industry. These standards are part of market-supporting institutions. It may be through this process that it is determined that the market supporting institutions are inadequate for the producers' and Joint Operating Committees' needs. And it will be the responsibility of our user communities that are part of the People, Ideas & Objects software development. They will identify additional standards needed to ensure these markets are established and operated appropriately. It will also be necessary to ensure this is a continuous process. One in which the evaluation of market-supporting institutions is undertaken frequently to make sure producers' and Joint Operating Committee needs are continually met and an iterative software development approach is taken.

As in Chandler, secular changes in relative prices attendant on "globalization" (driven by technology or politics) affect economic organization not only directly but also, and perhaps more importantly, indirectly through changes in technology. Production costs matter as much as transaction costs (Langlois and Foss 1999) Moreover, the kind of transaction costs that matter in history are often not those of the Williamson kind but those I have labeled dynamic transaction costs (Langlois 1992b). Costs of coordinating through markets may be high simply because existing markets - or more correctly, existing market-supporting institutions - are inadequate to the needs of new technology and of new profit opportunities. But when markets are given time and to a larger extent, they tend to "catch up," and it starts to pay to delegate more and more activities rather than to direct them administratively within a corporate structure. p. 5

The Process of Renewal

To provide for these market-supporting institutions and to bring in enhanced services, when and if they are needed, we are introducing the “Gap-Filling Interface” that has been introduced elsewhere within the Preliminary Specification. Specialization and the division of labor are achieved through filling gaps. Jobs that were not done before are filled by newly created tasks and people who expand the division of labor. "Gap-Filling Interface" allows producer firms and Joint Operating Committees who see a gap within any service industry offering to publish their findings within the interface for product or service providers to understand and potentially configure. The key is that with the time and distance within the oil & gas industry, the demand for a service and its supply might never know of the others' existence. With the “Gap-Filling Interface” there is a reduction in time and space by using Information Technologies available today. The “Gap-Filling Interface” can also be used from the other perspective of the service provider configuring a product or service that fills a gap, then publishing that to the producers and Joint Operating Committee. With People, Ideas & Objects continuous software development capabilities we can join in the discussion and accommodate changes from a software perspective.

As we continue to document the capabilities of the various financial communities. And how these capabilities will be sourced from the marketplace by the producer firm and Joint Operating Committees. We see that technology is a large part of the organization and its definition. Particularly in the People, Ideas & Objects Financial Marketplace module where the “Marketplace Interface” brings everything together. We continue with our review of Professor Richard Langlois’ “Institution, Inertia and Changing Industrial Leadership.” And discuss whom will find the “Marketplace Interface” the most valuable in their pursuit of oil & gas innovation.

If we look at the scope of the changes made by the Preliminary Specification, they are substantial. The movement to the Joint Operating Committee, and six other Organizational Constructs, has remarkable impacts on every aspect of an oil & gas concern. Added to that is the use of advanced technology and innovative oil & gas producers operations are more in alignment with what innovative oil & gas producers operations should be than ever before. Yet oil & gas companies have not responded. They remain trapped in concrete with their SAP installations. Living a bureaucratic life so far removed from the oil & gas business that is mind-numbing. Adopting any change to People, Ideas & Objects is counter to the inertia built within the organization. This will only happen through creative destruction.

And institutional change, we argue, can often take place through the more or less slow dying out of obsolete institutions in a population and their replacement by better-adapted institutions - rather than by the conscious adaptation of existing institutions in the face of change. p. 6

Therefore the people that will be attending the “Marketplace Interface” of the Financial Marketplace will be those that can accept the dynamics of industrial change and begin the process of renewal. Those looking for ways to operate their oil & gas land & asset base, and deploy their earth science & engineering capabilities. Those that will be able to claim their share of those minimum of $94 billion in annual losses caused by chronic commodity overproduction. Commodities highly susceptible to price maker characteristics. From Professors Langlois and Robinson "Firms, Markets and Economic Change: A Dynamic Theory of Business Institutions."

Another aspect of capabilities that has recently received a great deal of attention is organizational culture. In practice, not all organizations may be equally able to cope with change, as existing patterns of behavior involving both executives and subordinates may be resistant to change. Organizations develop collective habits or ways of thinking that can be altered only gradually. To the extent that a given culture is either flexible or consistent with a proposed change in product or process technology, the transition to the new regime will be relatively easy. If, however, the culture is incompatible with the needs posed by the change and is inflexible, the viability of the change will be threatened (Robertson, 1990; Langlois 1991; Camerer and Vepsalainen, 1988). p. 16

Here we have the advantage of moving towards industry culture. The Joint Operating Committee is the industry's cultural framework. People, Ideas & Objects Preliminary Specifications use of the Joint Operating Committee aligns its legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks with the hierarchy's compliance and governance frameworks. This alignment is in line with the industry's natural culture and therefore will succeed. The constrained, obscure and difficult ERP systems in use today are not aligned with these frameworks of the oil & gas industry. Instead, they focus on the corporate SEC, Tax and Royalty compliance needs. 

As the key Organizational Construct, the Joint Operating Committee has a dominant influence on establishing culture in the Preliminary Specification. People, Ideas & Objects, our user community and their service provider organizations have six other Organizational Constructs that define the culture of the industry we're rebuilding. Markets, Specialization and the Division of Labor, Professor Paul Romer's Non-Rival or sharing of costs, Intellectual Property, Innovation and Information Technology. Together, these factors establish the culture of a successful, dynamic, innovative, accountable and profitable oil & gas producer.

Can anyone provide a vision of how the existing bureaucracy will survive and prosper in the coming decade? Have these officers and directors taken any steps to deal with these issues? What is the future of the oil & gas industry? Do these officers and directors care? Many questions that can be answered by selecting and supporting the People, Ideas & Objects software development capability and Preliminary Specification.

Teece (1980) and others have generally neglected the negative side of Nelson and Winter's analysis, however, and fail to note that the inflexibility, or inertia, induced by routines and the capabilities that they generate can raise to prohibitive levels the cost of adopting a new technology or entering new fields. Such inertia can develop to the extent that existing rules are both hard to discard and inconsistent with types of change that might otherwise be profitable. p. 105

I may yet be surprised that one or two of these behemoths can break these chains of their own mindset and self interest. I will be surprised if that happens. Until then, we appeal to the investors in the industry to make the decision. And for users who are tired of the ways and means of what can best be described as the “old ways.”

More on the Gap Filling Interface

We continue our discussion of the “Gap-Filling Interface” in the Financial Marketplace module of the Preliminary Specification. And how a software development capability like that proposed by People, Ideas & Objects is necessary to support the changes instituted by the gap-filling process. But before we get to that I found these quotes from Professor Richard Langlois in his paper “Economic Institutions and the Boundaries of the Firm: The Case of Business Groups.” They detail exactly what the gap-filling process is.

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

And

Let’s take a closer look at the nature of the “gaps” involved. Adam Smith tells us in the first sentence of The Wealth of Nations that what accounts for “the greatest improvement in the productive power of labor” is the continual subdivision of that labor (Smith 1976, I.i.1). Growth in the extent of the market makes it economical to specialize labor to tasks and tools, which increases productivity – and productivity is the real wealth of nations. As the benefits of the resulting increases in per capita output find their way into the pockets of consumers, the extent of the market expands further, leading to additional division of labor – and so on in a self-reinforcing process of organizational change and learning (Richardson 1975; Young 1928). p. 7

As gaps are discovered they will be published by users in the “Gap-Filling Interface” of the People, Ideas & Objects Preliminary Specification. There they can be seen by banks and investment houses that provide products and services to the producer firms and Joint Operating Committees. And in turn, develop a product or service to fill that gap in a manner that meets the needs identified. The reverse is also the case, that banks and investment houses may initiate the discovery of a gap and have the producer or Joint Operating Committee address the gap. In either of these scenarios the division of labor and specialization doesn’t consider the fact that the 21st century organization requires software to identify and support the roles and responsibilities within it. If we are to fill "gaps," it is not just a matter of having someone fill the position. It also requires that a dedicated software development team be available to prepare the software for the role. This is to be productive within the ERP system. This is the role People, Ideas & Objects provide in the Preliminary Specification. It is not a destination in terms of what the specification will be, but more a journey where the end result is a continuously improving system driven by its users' needs to ensure profitable oil & gas operations everywhere and always.

The other aspect of this software development capability is that this is prospectively an innovative oil & gas industry. Management operates on the basis of what is considered the acceptable norm in operations. They will need to break this mindset and become the innovative producers we all know deep down they want the industry to be. Either that or the forces of creative destruction will descend upon them. Either way the need for a dedicated software development capability will be necessary. Professor Langlois notes the following in his paper “Economic Institutions and the Boundaries of the Firm: The Case of Business Groups.”

The second hypothesis, which has resonances at least as far back as Gerschenkron’s famous “backwardness” thesis (Gerschenkron 1962), is that the way an economy responds to the problems of coordinating economic development depends not only on its own institutions and capabilities but also on institutions and capabilities elsewhere. It depends not only on an economy’s own history but on the history of other economies as well. The force of this observation is that an economy at the frontier of economic development (however we care to define that) is likely to respond to the coordination problem differently than an economy lagging behind that frontier. Specifically, an economy at the frontier is arguably more likely to rely on decentralized modes of coordination. This is so because uncertainty is greater at the frontier — uncertainty about technology, organizational form, market direction. p. 18

To pursue this economic frontier, the innovative and profitable oil & gas producer must have the tools at their disposal to develop their “institutions and capabilities.” It will be the “Gap Filling” interface in the Financial Marketplace module that provides for this.

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.