Disintermediation of Oil & Gas, Part II

 People, Ideas & Objects occasionally provide updates on our activities in the greater oil & gas community. These updates focus on how people in the industry can become active and turn it around. Using the Preliminary Specifications vision. There are business opportunities available in the North American oil & gas marketplace regarding our disintermediation efforts.

Producers' officers and directors have not listened to investors and bankers. Additionally, their unwillingness to invest in their organizations' profitability, which is undisputedly the most profitable investment they could make, raises further concerns among investors. As a result, People, Ideas & Objects allege previous market failures, along with those that precipitated Oracle and IBM's exits. Were due to the inability to source support for appropriate ERP systems development from any corner of the North American producer population. This lack of support has extended into its third decade and today's oil & gas ERP systems reflect that fact. Producer firms provide little financial support to our competitors. If appropriate governance and accountability had been implemented, would the industry have fallen into the current situation? We suggest that ERP system failures and producer actions are no more than the convenience of not having to deal with investors' accountability demands.  

As People, Ideas & Objects have demonstrated through our legacy of pursuing profitability based on the Joint Operating Committee. An unwavering commitment to oil & gas since August 2003 seeking to avoid industry issues today. A protracted conflict between ourselves and producers, officers and directors that began with their giggles. Has resulted in the complete destruction of a primary and all its secondary industries. That statement may elicit more giggles from the bureaucrats' sycophantic entourage. However we’ve seen no evidence of trust, faith or goodwill from anywhere towards the producer firms' officers and directors. Producers must play a vital role in actively rehabilitating the service industry through direct philanthropy. And the inventories of work-in-progress, which we suggest may be as long as a seven to ten year timeline, have been cannibalized to the point where they're counted in months instead of years. This occurs as all U.S. basin production profiles decline. A giggling leadership group that doesn't understand profit, why it's so crucial, or how to earn it. It sits atop cultural manifestations of this lack of understanding. Of course we are unaware of the effectiveness of their investments in clean energy, retail, iPhones or space exploration. 

Granted others may not see it the way I do. The most accurate analogy I can suggest is a gigantic log rolling down the mountain. It’s now half way down and threatens to level the town. What do you do? The first thing I suggest is that we don't ask industry leaders. 

In an unrelated manner we’re adding two new logs to the fire in the form of further discussion of our user community. This includes their service provider organizations and Profitable Production Rights. I will also highlight any notable changes. Secondly we announced our Sales Commission program that will have this community actively involved and benefiting financially from the sale of People, Ideas & Objects Preliminary Specification. Please see the Wiki for further details. And the other recent announcement was our Whistleblower program which has details available here.

These remind us that Oracle CloudWorld 2023 is September 18-21, 2023. Registration for the free “On Air" conference may still be available. If not, the presentations will be available after the conference for a month. We don’t know what will be the focus of this conference. I would anticipate a further extension of the change in direction founder Larry Ellison and CEO Safra Catz took the company at last year's conference. Having filled out the full scope of enterprise needs in operating systems, databases, development, ERP and other enhancements. Making them as secure, robust and accessible on Cloud ERP as they are today. The next logical step was to work with partners to enhance the level of automation possible with such a strong foundation. Last year's conference was about movement in that direction with a few examples of Oracle Cloud ERP new features. 

Oracle's pursuit of these automations will benefit North American oil & gas producers with enhanced value generation. Although many appear to be intangible gains in value it is not too difficult to see the overall benefit of reduced time spent filing, checking and approving expense reports, etc. Oracle is seeking to build value for their global customer base through generic business processes. If producers joined People, Ideas, & Objects they would gain the intangible value Oracle has generated. If they continue to persist in their obstinance, they’ll only be set up with even more structural disadvantages than all the other industries that compete on North American capital markets. Which at this point may be their motivation. In addition to Oracle's advantages, this community would bring similar advantages from automation to the North American oil & gas attributes of the Preliminary Specification.

Lastly we would reiterate that investors are disappointed in the performance and lack of action by oil & gas leadership. They see opportunities and feel excluded from the market due to past performance. However, knowing that past performance is unacceptable. Producers who supported the development of communities focused on developing the Preliminary Specification. And fully fund these development needs. Investors may support producers' capital structures in anticipation that change arrives soon and future performance makes today’s investments sound.

Our User Community

Those who are new to People, Ideas & Objects, they may be unaware of the developments of our user community and their associated service providers. They are our primary focus, competitive advantage and we have been active in our user community development since March 2012. Our user community is unique because of three structural components. These include 1) they are licensed to make changes to the underlying Intellectual Property. 2) People, Ideas & Objects developers are licensed to only take input from our user community. And 3) they have discretionary control over their budgetary processes. They work part-time on the Preliminary Specification development. Gaining an understanding from their ownership of their service provider, industry input and their knowledge from the years they’ve worked in oil & gas administration and accounting. They’re able to make the changes to their ERP systems and processes that are necessary to ensure producers remain dynamic, innovative, accountable and profitable, everywhere and always. 

Specialization, the division of labor and sharing of the administrative and accounting infrastructure at the industry level are three among dozens of distinct competitive advantages for our user community service providers. They’ll specialize in the development of a process and in doing so, earn the service provider license to manage that process on behalf of the entire North American producer population. (In most instances.) Service providers are a reallocation of the producer firm's administrative and accounting resources into the various service providers to achieve the three noted distinct competitive advantages. Service providers will be the source of the majority of these individuals' income beyond the part-time income they earn as our user community members. Service providers are expected to be of reasonable size and maintain revenues from which our user community members can build substantial value. 

Service providers conduct process management and bill the various Joint Operating Committees for their services. In this way, producers who are unable to profit from a specific property can shut-in that property. The service provider then receives no data for that property, no work will be conducted by them and the Joint Operating Committee will record a null operation. At that time, it will be able to apply its innovations towards moving the property back into profitable production as soon as possible. The benefits of doing this across the industry are documented throughout the Preliminary Specification. They fall under the Preliminary Specifications decentralized production model’s price maker strategy. 

The point I'm making is that our user community is a substantial career choice for those in the administrative and accounting areas of the oil & gas industry. To provide for producers to begin to build a prosperous and profitable future for all concerned, including themselves.

Profitable Production Rights

Long ago we realized producer officers and directors would never fund the Preliminary Specification as they would be highly conflicted with their personal best interests. Therefore to raise the budget that we feel is necessary to develop the software and support our user community we would need an alternate means of raising money. We also knew that the only method that would prove valid in the long run would be that it has to come from oil & gas production itself in some form. If the industry did not pay for it, they’d show no respect or interest in it and the exercise would become futile. The logic behind how we came up with Profitable Production Rights and Flexible Profitable Production Rights developed on the following basis. 

Investors expressed disappointment and displeasure with the producer's officers and directors. Producer officers and directors had not participated in appropriate governance and accountability and have today no comprehension of what is meant by profit. They don't know how to earn it, why they can’t and are culturally constrained to make the changes necessary to be truly profitable. What People, Ideas & Objects see as a dead end for the current officers and directors. Outside of what is available in the oil & gas ERP marketplace it’s a simple matter of you getting what you paid for. And since at least the mid 1990s the producers have participated in nothing. The only alternative offering that identifies today's issues and resolves them is the Preliminary Specification published in August 2012. It is based on ten years of research into what, how and why the solution needs to be. Therefore we believe we have the only solution to industry issues today. 

In order for the industry to rehabilitate itself, it will require a rebuild on a new culture of performance and profitability. What the Preliminary Specification focuses on. A rebuild, not a situation where we listen or consider what the current culture or officers and directors expect of their environment. The Preliminary Specification is a full on disintermediation of how computers, iTunes, the iPhone, Pixar and the many other industries that Steve Jobs disintermediated.

Profitable Production Rights simply grant access for each boe to be processed through our Cloud Administration & Accounting for Oil & Gas software and service facility we are building through this community. There are approximately 35 million boe produced each day in North America and therefore there are equal numbers of Profitable Production Rights. Each sells for $600 and entitles the owner to process one boe through the facility. Producer firms will need to license or rent the Profitable Production Rights necessary to process their production. In order to acquire that capability they’ll need to negotiate with the Profitable Production Right holder for monthly access to their rights. Or…?

Some comments on People, Ideas & Objects' handsome budget. I have worked to solve this problem since 1991 and have experienced a number of costly failures in the marketplace to date. I have worked since 2003 to bring about the opportunity for industry to resolve the damage and destruction it has seen at the hands of these officers and directors. My value is earned, in my opinion. My value is not determined by the past 32 years at minimum wage in terms of back pay. I feel I can deliver a substantial value proposition to the oil & gas industry and it is packaged with a big bow at the moment. I have traded one third of my earnings and one third of my Intellectual Property royalties from this to subscribe to 33% of the Profitable Production Rights in what are called Flexible Profitable Production Rights. Which indemnifies the Profitable Production Rights holders from any production being shut-in due to a lack of profitability, with the caveat that the producers are actively looking to bring it back into production. Any suspension or abandonment of the property releases the Profitable Production Rights holders to seek other production. I know that since 1991 I’ve worked as hard as humanly possible to solve the problem. If this is unacceptable, I am fine with that.

This is a brief summary of these rights. They are being rewritten as we speak and will be published in three blog posts starting October 4, 2023. Again they are stated here as a means to show the various ways that we are actively disintermediating the oil & gas industry and setting in place the solution, how this community can participate in doing so and the value they can earn from these activities.

OCI Partnership Accounting, Part VI

 Our Decentralized Production Model & Price Maker Strategy

When we consider the next aspect of this change, our decentralized production model, this assures that People, Ideas & Objects, our user community and service providers offer oil & gas producers the most profitable means of oil & gas operation, everywhere and always. What we've experienced over the past four decades in North American oil & gas is unique in all organizations and of all business history. Although we learned during the great depression the economic consequences of overproduction, and experienced its consequences in oil & gas since the 1980s, no one seems to have explained it to the North American producer. Oil & gas overproduction in North America has been systemic and chronic throughout the producer population and will continue to be without an effective means and method of production discipline being imposed. The history over this period is stark and clear. In the late 1970s the SEC imposed its Full Cost Accounting and associated Ceiling Test requirements on producers trading shares in the American market. These requirements allowed producers to record costs in property, plant and equipment as assets up to the limit of the present value of their independently evaluated petroleum reserves. This allowed an unnecessary flexibility in the financial statements that created distortions since that time. Simply, shifting the accounting from an evaluation of performance to one of value, hence the producer's foolish objective of “building balance sheets” etc came about. This is the mindset of our good friends, the producer officers and directors. What we know of business is that overreported asset valuations lead to commensurate amounts of overreported profitability. Leading investors to rush in to capture those profits and hence a process of overinvestment begins. Overinvestment in the productive capacity of the oil & gas producers leads to overproduction of commodities that are subject to the economic price maker principles and characteristics. 

It is this reason that has caused the repeated and systemic collapses of commodity prices throughout this past four decade period. The first commodity price collapse that we can document was during the summer of 1986 when $10 oil prices decimated the industry for the better part of a decade. This is counter to the cultural belief that oil & gas commodities are price takers. These definitions are from investopedia.com

Price maker

A price maker is a monopoly or a firm within monopolistic competition that has the power to influence the price it charges as the good it produces does not have perfect substitutes. A price maker that is a firm within monopolistic competition produces goods that are differentiated in some way from its competitors' products. This kind of price maker is also a profit-maximizer as it will increase output only as long as its marginal revenue is greater than its marginal cost, so in other words, as long as it's producing a profit.

Price taker

A price-taker is an individual or company that must accept prevailing prices in a market, lacking the market share to influence market price on its own. All economic participants are considered to be price-takers in a market of perfect competition, or one in which all companies sell an identical product, there are no barriers to entry or exit, every company has a relatively small market share, and all buyers have full information of the market. This holds true for producers and consumers of goods and services and for buyers and sellers in debt and equity markets.

As evidence supporting People, Ideas & Objects claim of price taker characteristics I make the following argument in our User Community Vision. Officers and directors interpret substitutes to be; if they don’t produce others will, therefore substitution is everywhere. This is not what substitution means. Does it mean that Elon Musk could make it to Mars if he replaced rocket fuel with a hydro dam? Or could we use wind energy to lubricate our crankcase? How about storing nuclear fuel rods in the convenience of a jerry can as you travel outdoors this weekend. And if you’d be able to return alive from your weekend adventure you might make it back to the office in that new solar panel, or pine bark suit you just bought. Alternatively, if bottled water ceased to be produced people would switch to soft drinks, tap water, juice or other substitutes. Any overproduction of bottled water would see inventories swell and the price remain the same, as would the price of the last bottle of water found anywhere in the world.

The connotation of the economic term price maker has caused producer officers and directors to conclude this is collusion. We argue otherwise when the Preliminary Specification and specifically this partnership accounting module, uses the Joint Operating Committee and will produce detailed, actual, factual financial statements for each property. Producer firms will definitively know the “real” profitability of each of their properties. A task that is not done today and more importantly can not be done today. And therefore producers will independently decide to shut-in their unprofitable properties to ensure they attain the highest level of corporate profitability. Invoking the necessary industry wide production discipline. Saving their petroleum reserves for a time when they can be produced profitably. Keeping their production and inventory costs lower by not incurring the costs of unnecessarily producing and storing unprofitable production. Ensure their reserves don’t have to recover the incremental costs of their prior losses as additional earned profits. And most importantly ensure that the marginal production is removed from the commodity markets allowing them to find their marginal price. 

While the property is shut-in the producer can apply their innovativeness, another Organization Construct of the Preliminary Specification, to return the property back to profitable production as soon as possible. People, Ideas & Objects and our user community are the appropriate business approach to the chronic and systemic overproduction of oil & gas and the persistent obtuseness of the producer officers and directors, not collusion as they accuse us. Profitable operations in a capitalist society do not necessarily denote collusion. Without “real” profitability there is only waste and deterioration as we’ve experienced these past decades. Without investors and bankers who were duped by these specious financial statements, there was no sustainable value generated, only destroyed.

The definition of collusion is provided by Wikipedia. 

In the study of economics and market competition, collusion takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market structure of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole. Cartels are a special case of explicit collusion. Collusion which is overt, on the other hand, is known as tacit collusion, and is legal. 

By definition then the Preliminary Specification price maker strategy may fall under the category of overt or tacit collusion. Which is legal. Each of the producer firms will be making independent business decisions of whether or not to produce at each and every one of the many properties that they own. Those decisions will be based on the actual, factual accounting that provides the information for that decision. The decision is to make a profit, if the property is shut-in due to unprofitability it will incur a null operation, no profit but also no loss. Achieved when the Preliminary Specification has made all of the producers costs variable based on profitable production. The decision to avoid a loss of corporate financial resources and assets, in the form of petroleum reserves, when producing an unprofitable property at a price that does not cover the marginal cost, in the long term perspective of marginal cost, (as per Wikipedia “analysis is segregated into short and long-run cases, so that, over the longest run, all costs become marginal,”) is a rational business decision, not collusion. This also provides, for the first time in the history of the industry, the ability for producers to indirectly control their overhead costs based on their profitable production profile.

The following graph was provided by Les Borodovsky from @SoberLook. What this graph is representing is the status quo perception of costs and how management of production is handled in oil & gas.

The perception of the producer officers and directors is that their total costs of each barrel of oil produced in the various shale formations is in the range of $48 to $54. The operating and royalty cost of each barrel varies between $28 and $37. I would point out the $20 to $23 in capital costs are based on an allocation of their capital costs across the entire reserves of the property. We’ve argued that this allocation is unreasonable in a capital market where the demands for the performance of capital are far greater than what can be achieved when a producer is cycling their cash through their investments in a manner that retrieves their investment over several decades or more, or even if at all. This is further aggravated when shale exposes prolific reserves, however demands substantial incremental capital to offset shales inherent steep decline curves in order to maintain deliverability. 

As an alternative, People, Ideas & Objects recommend that producers retire their capital costs within the first 30 months of the properties life to provide for the reuse of the previously invested cash. In turn providing them with the means to meet their internal demands for future capital expenditures, shareholder dividends and bank debt repayments, and better match the rapid decline rates experienced in shale in order to compete on North American capital markets. This can only be done if the producer is selling their commodities at a price that is above their break even point which considers an appropriate accounting of the actual, factual costs of exploration and production. And to reuse their cash repeatedly on this basis and not every second or third decade. 

This graph reflects the Well Break Even and Shut-in prices of the producers current policy position. At any point, and as long as the commodity price covered the operating costs, the property would continue to produce regardless of the impact on capital costs. If a dollar of capital costs was being returned, or one dollar above the shut-in price, that would enable the production of the property to continue. Only at the point in time where the commodity price dropped below the operating costs would the producer allegedly shut-in their production. This is a fundamental misinterpretation of the term break even, it is the reason the industry is in the difficulty that it’s in and why the producers have continued to lose money for the past four decades. Break even is not what is being interpreted here. What in fact the producer is assuming is that as long as there is cash flow above the operating costs then they’re making money in their opinion and will continue to produce. What they’re stating is they may not be breaking even, and as a result over the long term, stranding unrecovered and unrecoverable capital costs in abandoned properties is acceptable and commonplace.

What People, Ideas & Objects provide in our Preliminary Specification, if we could assume the accuracy of this graph numbers, is the point at which the property would be shut-in would be at the breakeven point and below. (Note that our breakeven point would be higher due to the competitive recognition of capital over a thirty month period.) The reason for this being the production discipline gained through knowing that producing any property unprofitably only dilutes the producers corporate profits. Producing below the breakeven point is the point where unprofitability begins. Producing below the breakeven point for one producer, in an industry who’s commodities are price makers, will have the effect where the price of the commodities will be dropped below the breakeven price everywhere for all producers. When all producers continually produce below the breakeven price for four decades it exhausts the value from the industry on an annual and wholesale basis. Which I believe occurred some time in the 1990s and since then, times were only “good” when investors were willing.

To avoid the allegation of collusion officers and directors would have us believe that they were operating the industry within the law. Losses of catastrophic proportions have been realized, displacing and disrupting the financial resources of each and every producer over the long term. Today the financial, operational and political frameworks of the industry are in tatters. This is considered normal course business operations for the officers and directors. Imposing the destruction of their firm's assets, the capacity and capabilities of the oil & gas and service industries is the price that they believed needed to be paid as a consequence of its acceptance of a “boom / bust” business by way of “muddle through.” This is unnecessary and unacceptable when the Preliminary Specification is available to operate the oil & gas business as a business.

The inverse situation is provided by the Preliminary Specifications decentralized production models price maker strategy. A contrast to the “muddle through” times we have found ourselves in during thirty one of the past thirty seven years since the July 1986 oil price crash in North America. In an environment where the Preliminary Specification will be operational, higher commodity prices would bring about production volumes that would meet the threshold of profitability and therefore previously shut-in properties would return to production. The enhanced commodity prices, everywhere and always, would allocate the necessary financial resources to search for innovative means for exploration and production. Providing the dynamic, innovative, accountable and profitable North American producer with the most profitable means of oil & gas operations. 

The organizational objective is to satisfy the consumer demand for energy on the basis of abundant, affordable, reliable and profitable energy. The value proposition of a barrel of oil equivalent is in the range of 10 to 25 thousand man hours of equivalent mechanical leverage. Going without oil & gas is not possible in the most advanced society with the most productive economy. The oil & gas producers value proposition to their consumers is therefore by far the most substantial of any other business. 

People, Ideas & Objects feel that oil & gas has a unique characteristic that needs to be recognized and adhered to. These commodities are valuable and limited in the long run. How do we ensure that we can prove to future generations that we used our share of these resources appropriately. The first way is to show that all of them were produced profitably everywhere and always. And secondly by passing along a profitable, viable, efficient and effective oil & gas and service industry. To do otherwise would be unwise and unjustified. Most of all it is unnecessary when the commodities follow the principles of price makers. Consumers are aware that the only effective way that they’re going to have secure, reliable and affordable energy independence in North America is when producers are profitable. Why this hasn’t been done is a question that needs to be answered by those that have not done this, and had the alternative in the form of the Preliminary Specification available in hand since at least 2012.

Yet, just as producers were forced to shut-in production as a result of almost negative $40 oil prices and refineries refusing to accept feedstock, they would find compelling reasons to return any property that contained shut-in production back on production in order to satisfy consumer demand and to do so profitably. Operating the primary industry of oil & gas profitably, everywhere and always, will enable them to maintain the capacities and capabilities of the greater oil & gas industrial economy. That People, Ideas & Objects were subjected to abuse and punishment for this position and other content contained within the Preliminary Specification is evidence that officers and directors knew better, that our alternative was available and it was refused as it disintermediated the officers and directors method of management and personal compensation, they’ll now need to live with their legacy of inaction.

What officers and directors were able to do was run the entire oil & gas industrial complex into the ground over these past four decades and completely destroy a large percentage of the service industries industrial capacity, eliminating that industry's capital structures and any faith, trust or goodwill between them. Go find a willing drilling rig investor or banker of a few years ago who subsequently saw the drilling rig they invested in cut up for scrap metal while producer officers and directors whistled their uncaring and inconsiderate tune of “muddle through.” It is now incumbent upon the producers to provide the financial resources to rebuild the service industry. And do so on a philanthropic basis. The rule is “producers broke it, the producers need to fix it.” Producers used and abused the service industry and now they’ll be needing to provide the money and backbone involved in the rebuilding effort, otherwise they’ll only use and abuse the service industry after they’ve rebuilt it again. Maybe when producers have had to rebuild the service industry themselves, putting some skin in the game, they’ll respect it. 

With the costs associated in exploration and production, and particularly shale reserves it's no surprise that producers have consumed the cash that is generated and any that is provided from investors and bankers. What is surprising is that producers have done nothing over this period to mitigate the overproduction that has caused the decline in pricing, subsequent financial losses, destruction of the producers reserves and greater oil & gas industrial capacity. And here we find the motivation as to why these methods continue. 

The reason for this chronic overproduction is the producers have to generate the revenues to cover the out of pocket costs of the overheads they incur in the “high throughput production” model they employ. This model has these overhead costs of the firm being incurred whether there’s production or not, and if any percentage of their properties are shut-in it makes their operation a high cost operation at any level of production. At lower production volumes, it skews their earnings and overhead costs appear out of place. Therefore this behavior of producing at capacity should be expected to continue on both the oil & gas sides of the business. Even in spite of significant financial loss or the inability to meet market demands. 

Although most producers report overhead costs of less than 2% in almost all instances this is not representative of the situation. We believe based on our experience that overhead costs range between 10% and 20% of revenues. These itemized amounts are never detailed or discussed in the financial statements of producers. If they were itemized the disproportionate and creative levels of executive compensation would be evident. Overhead costs are capitalized across the industry in the region of 85% to avoid the necessary accountability for these costs. Avoidance of accountability is the motivation for doing so, the consequences of these actions are as follows, and it should be noted People, Ideas & Objects identified this anomaly in excess of a decade ago. Yet nothing was done.

When all of the overhead is capitalized to the extent that it is in oil & gas it creates that giant sucking sound around the producers bank. Overhead in most businesses is recognized and passed to the consumers of the firm's products. In oil & gas it is capitalized. Therefore the “cash float” that all businesses have to have in order to finance these costs doesn’t function or even exist when overhead is capitalized. Producer cash is essentially stored on the balance sheet for decades and is passed on to the consumer at some point. When that will be remains a mystery. The industry phenomenon of a working capital deficiency was traditionally filled by the astute budget manager providing the amount of next year's capital expenditures in the prospectus. Without support for the capital structure, no real profitability earned and fundamentally inadequate revenues generated as a result of the decades long industry wide overproduction, we should understand the quality cash management skills being applied in the industry. When the business is a spending machine, what would you expect?

Our Preliminary Specifications decentralized production model is proposed and enables the dynamic, innovative, accountable and profitable oil & gas producer to implement our price maker strategy. This decentralized production model has been defined by Professor Richard N. Langlois in his book The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy. 

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p. 58.

Production discipline is attained through this process when the producer realizes that their maximum profitability is obtained through producing only profitable production everywhere and always. Therefore producers are incentivized to adhere to the principles of the Preliminary Specifications decentralized production models price maker strategy. Just as all businesses in the capitalist system follow these principles since the great depression of 1929. The individual decisions of each oil & gas producer, based on an actual, factual accounting of the profitability of the property, will determine if the property produces. That is how the oil & gas industry needs to deal with any low commodity price situation that it occasionally finds itself in. 

As properties begin to lose money in a period of declining prices, incremental properties are shut-in each month as they too may become unprofitable. The inverse of this is also relevant when commodity prices rise, producers will be raising production volumes when they attain profitability from higher prices and return their shut-in properties to the market. Shale based reserves will always overwhelm the oil & gas commodity markets with flush production and deliverability that are driven by shale's prolific nature. Production discipline based on profitability can only be achieved through the reorganization of the industry and producers based on the Preliminary Specifications decentralized production model. Where overhead costs are made variable and producers are using the facility we’re building in the form of our Cloud Administration & Accounting for Oil & gas software and service. Which enables our price maker strategy to provide for the producers and industries profitability and in turn ensures consumers are always provided with an abundant, affordable, reliable yet profitable source of energy. 

The effectiveness of our method is reflected in our logic. Producer profitability is maximized when losses on properties no longer dilute profitable properties profits. Reserves are held for a time when they can be produced profitably. And those reserves costs will not have to carry the incremental costs of any losses that would have occurred if the property continued to produce unprofitably. Keeping the oil & gas as reserves reduces the producers costs of production and storage of the excess, unprofitable production. Commodity markets find the marginal cost when unprofitable production is removed from the marketplace. Marginal prices for not just the unprofitable production but all production. While shut-in any unprofitable properties will form the producers work-in-progress where they can innovatively approach methods of raising production volumes, reducing costs or expanding reserves. Using profitability is the only fair and reasonable method of invoking production discipline. If it’s profitable it produces. 

It should be noted here that the Preliminary Specifications service providers will provide a standard, objective method of accounting and process management. Therefore any producer that finds a property is unprofitable, it will know that shutting it in is the most effective remedy as the assessment of unprofitability is the same standard and objective assessment that all other properties were evaluated under. The decentralized production model provides the financial resources necessary to ensure a prosperous industry controls itself as independent businesses. It is a method of determining the current replacement cost of oil & gas, as price makers only bring on new production when it is profitable. The method used today, capital discipline is a dull, blunt instrument that has proven time and again to be completely ineffective. By definition it is the willing destruction of productive capacity. Due to the decentralized production model and industry reorganization to the Cloud Administration & Accounting for Oil & Gas software and service. Overhead is only incurred when production is profitable. Overhead is variable based on profitable production and is not incurred if the property is shut-in. Therefore all overhead costs are recovered in the current period when they’re priced in commodity sales. Producers will therefore be able to indirectly control their overhead costs.

OCI Partnership Accounting, Part V

 The Decentralized Production Model

Traditional oil & gas accounting systems seek to identify and record operations costs and allocate them to the rightful owners. And these are the objectives of the Partnership Accounting module of the Preliminary Specification. We are also seeking to transform producers from a “high throughput production” model to a “decentralized production” model where operations and overhead costs decline in line with revenues. And then during periods of low commodity prices, if the marginal costs of the property are not covered by revenues, production is shut-in. And when the property is shut-in, royalty, operating, administrative and accounting costs track revenues. Thus, while shut-in the property will report a null operation, with no profit or loss. This is necessary in the highly volatile pricing situations the commodity markets experience as a result of oil & gas commodities being subject to economic principles of price makers. As Professor Langlois describes the model in his book “Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy.”

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p. 58.

In the Petroleum Lease Marketplace we have the “Marginal Production Threshold Interface” which enables partners within a Joint Operating Committee to agree on a pricing point where production would be curtailed. We have also discussed in the Resource Marketplace module the use of a Production Accountant and other roles provided by service providers. Where service provider costs to the Joint Operating Committee are variable based on the property producing profitably. How these variable overhead costs would be reduced to zero during shut-in periods. What we haven’t discussed in detail is the need to charge the Joint Operating Committee directly for Production Accountants and other service provider charges. This will be a change due to the reorganization of administrative and accounting resources to the service providers and the transition to the decentralized production model. 

Many of these costs would have traditionally been incurred by the “operator” as administrative overhead; and were to be covered by the various provisions of calculating overhead allowances for the operator. These overhead allowances will be eliminated in the future due to service providers billing directly to the Joint Operating Committee. Any producer on the Joint Operating Committee may also incur administrative and accounting costs. Either directly by their staff or through a service provider. Either way, they'll be directly chargeable to the Joint Operating Committee. Joint Operating Committee costs include production, revenue, or partnership accounting. There would also be costs associated with the administrative areas of the production and exploration activities done on the property. 

During our review of Professor Richard Langlois, we learned that markets are ideal for sourcing producers' capabilities. That would be the case for administrative roles too. By hiring individuals in a dedicated manner, overhead costs are incurred during the time production is shut-in. By hiring service providers the costs associated with these administrative duties would be reduced to zero when production is shut-in. Attaining the “decentralized production” model benefits in terms of the properties operating and overhead costs. 

As we noted in the transition to a “decentralized production” model, it would enable the innovative oil & gas producer to match operational and overhead costs to any decline in revenues due to production being shut-in. By using accounting and administrative service providers the various Joint Operating Committees could control their costs if commodity prices were unfavorable. We want to discuss the configuration of those accounting and administrative service providers and how they will fulfill the needs of innovative oil & gas producers. 

As we discuss Service Providers, we emphasize their independence from any specific producer. With the elimination of the designation of "operator" from a single producer on the Joint Operating Committee no accounting, production or exploration administration is provided to the Joint Operating Committee in the manner that it is today. As a result, the way work is approached in the industry changes fundamentally. It is liberating when we consider the use of technology available today and the standardization of processes in the oil & gas industry. A Joint Operating Committee is therefore free to engage a service provider to fulfill these administrative duties. This is independent of any participating producers on a Joint Operating Committee.

From the accounting perspective we have reviewed the example of the Production Accounting role and how that could be specialized to the point where a service provider works in one geographical area for a large number of Joint Operating Committees. That is the most logical way to organize that type of work. We also discussed royalty accounting requirements. And how a service provider could specialize in that specific royalty legislation. This would enable producers that use that service provider to pay the lowest possible royalty obligations. And we have discussed an accounting service provider that specializes in SEC compliance requirements. The point being that we are seeing a further division of labor in the types of accounting service providers that specialize in a variety of different criteria for oil & gas producers. This is a necessary step in the evolution of the oil & gas industry's economic output. Further division of labor and specialization are the only means for an economy to expand output. 

With the specialization of individual service providers based on unique accounting specialities. [I’m not familiar with production or exploration administrative needs and therefore can’t comment on those. These would apply as well however.] A Joint Operating Committee would engage these People, Ideas & Objects authorized service providers to provide for the services required for their property. They could choose a regional Production Accountant. A revenue and royalty accountant known for keeping royalties down. And if the price of natural gas drops to the threshold price determined by the Joint Operating Committee, to where the facility will be shut-in, these accounting service providers are not engaged during that time and incur no billings for the property. 

The alternative is for each producer to hire the necessary accounting staff as they do now. This is bureaucratic and wasteful in that it builds capacities in each firm to handle X contingencies. The problem is that each firm only needs those capabilities for a few hundred hours a year. These capabilities are recreated within each producer firm and are unshareable between producers. Locking in unused and unusable capacity within each producer firm. It's time to look at alternatives, and the time to look is when we design systems for the Joint Operating Committee. 

We will simplify and reorganize oil & gas producers' administrative and accounting processes. Closer to the practical realities of the day we find that many administrative and accounting functions are driven by standards of practice and regulations. These standards of practice are critical elements in the market supporting institutions necessary for administrative and accounting firms to operate in the manner recently described here. It is the capabilities of the administrative and accounting marketplace, the skills, knowledge, experience and ideas that the Joint Operating Committees will acquire through what Professor Richard Langlois and others call Transaction Cost Economics. A concise summary of the concept is provided in Professor Carliss Baldwin and Kim Clark’s paper “Where do Organizations Come From? A Network Design Perspective of the Theory of the Firm.” 

...objects that are transacted must be standardized and counted to the mutual satisfaction of the parties involved. Also in a transaction, there must be valuation on both sides and a backward, compensatory transfer - consideration paid by the buyer to the seller. Each of these activities - standardizing, counting, valuing, compensating - adds a new set of tasks and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction. p. 15.

However, within a system such as the Partnership Accounting module of the Preliminary Specification, the costs associated with standardizing, counting, valuing and compensating a new set of tasks and transferring them into a transaction are minimal due to the advanced use of Information Technologies. These costs are incurred by both the service provider and the Joint Operating Committee and are for their mutual benefit. If the accounting service provider posts a journal entry for this month's revenue for a number of Joint Operating Committees, the transaction costs are minimal once the initial engineering of the system is complete. Producers reduce their focus to the development and deployment of their distinct competitive advantages of earth science & engineering capacities and capabilities, and their land & asset base. The benefit comes to the service provider when their competitive advantages become their primary concern.

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 is hidden in each one, then only a few, relatively simple transfers of material, energy and information need to pass between the domains. The overall network structure will have a thin crossing point at the juncture of the two sub-networks. Furthermore, because the transfers are relatively few and not complex, mundane transaction costs will be low at the thin crossing point. Thus, other things being equal, thin crossing points are good places to locate transactions. pp. 17 - 18.

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.

We have discussed how the People, Ideas & Objects Preliminary Specification is designed to accommodate the needs of producers, suppliers and vendors in the service industry. This is in addition to society and individuals. These administrative and accounting service providers will need special interfaces to process their work with the producer firms and Joint Operating Committees that employ them. For instance, if a Production Accounting service provider is providing services to all of the Joint Operating Committees at three major gas plants, they might want to have special interfaces that display the information in different formats to what any one of those individual Joint Operating Committees or producers might want to look at the information. These types of interfaces will support further division of labor and specialization. This is a founding principle of the service providers' organization. To expect that they will fit within the generic system configuration of what a “producer” needs would be incorrect. This is another reason why People, Ideas & Objects provides permanent ERP software development capability for the innovative oil & gas industry. 

We have also discussed in the Accounting Voucher module the design of transactions. This work of determining where the transaction point should occur is part of that process. It is more complex and detailed than it appears. If done appropriately it can have significant process efficiencies on both the producer or Joint Operating Committee, and service provider sides of the transaction. 

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, “The Use of Knowledge in Society.” (1945).

Through the process of moving the industry to a “decentralized production” model as we propose in the Partnership Accounting module of the Preliminary Specification. We have matched the operational and actual overhead costs of the Joint Operating Committee to the property's production and revenues. Now we have achieved a dynamic where no production occurs on any property within the industry that has not attained profitable operations. As prices decline, unprofitable production is removed from the market. And as prices rise production would return to the market when profitable. It would be at this point that the market would achieve a certain dynamic that is not present today. And oil & gas producers could claim that their operations were capable of providing returns to their investors that were real, everywhere and always. 

Discussion of the Decentralized Production Model will continue in the next post.

OCI Partnership Accounting, Part IV

 The Work Order system as a tool for innovation

We are discussing the role that the Work Order system would have in clearing up the administrative minutiae of the accounting related issues of the Partnership Accounting module in the Preliminary Specification. I want to continue with that discussion and ask what it has to do with innovation? Let's look at the Work Order system from the perspective of a successful producer in the marketplace that has developed an earth science & engineering capability. The CEO is approached by one of their engineers who hears of several other producers who are conducting a study on something of interest to their firm. They are looking for other participants to join in and want the engineer that brought the news to join in the project. Assuming everyone of the producers is using the Work Order system they can pool the resources they have within the Work Order to manage the project. The firm committed to a 10% share of total costs and offset those costs with engineers' time, office space and computer resources. (Note all of these producers' costs are pre-approved and budgeted from other accounts.) With the Work Order producers could make these commitments subject to the other 90% being committed to.

We have here the means by which people working within the industry can commit to programs and projects in a manner that is natural to their business. This is the way systems should work today. What we have today is an impediment in the industry for producers who feel that participation in the study with other producers would be worthwhile. However, the accounting, approval and accountability nightmare will haunt them for the next three quarters. It will subject them to regulatory oversight that questions their moral integrity. So instead the project doesn’t get proposed, funded, participated in or done.

In Professor Dosi’s paper “The Sources, Procedures and Microeconomic Effects of Innovation” he discusses the role these administrative minutiae have on innovation.

The discussion will aim to identify (a) the main characteristics of the innovative process, (b) the factors that are conducive to or hinder the development of new processes of production and new products, and (c) the processes that determine the selection of particular innovations and their effects on industrial structures. p.1121.

There are financial resources available in our example. Motivation exists within the organization to do an outstanding job on the project. What happens is bureaucracy gets in the way and slows things down and makes it a task that requires superhuman effort to even try. And maybe one or two projects will get done each year out of sheer will. But what is needed is the ability to conduct a volume of projects far exceeding one or two, and that is beyond the scope of the organizational context as producers are organized today. Without ERP systems to define and support these innovative processes and ad hoc organizations, these processes will not spontaneously appear.

We discussed how one producer could participate in a study with other producers by setting up a Work Order to capture their involvement. Their contribution involved one engineer, office space and computer time. That they would contribute some cash is also a possibility as they signed on for 10% of the projected costs. I want to discuss the other producers' involvement and how the Work Order system, being a multi-organizational system, can capture the different ways in which each producer will participate and account for these differences within the People, Ideas & Objects Partnership Accounting module.

The emphasis remains on enhancing innovation among producers. Collaborations and interactions between producers and industry participants will lead to many innovations in the future. The impediment to doing these as a result of the bureaucracy and the current suite of accounting systems in use in the oil & gas industry is what I want to contrast in this scenario using the Work Order. It's time in this day and age that systems become as sophisticated and complex as what is described here. This is so that innovation in the earth science & engineering disciplines can occur. Professor Giovanni Dosi expands on this point further in the following quotation from “Sources, Procedures, and Microeconomic Effects of Innovation.”

Additional issues include the conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulation, tax codes, patent and trademark laws and public procurement.) p.1121.

The producers are interested in participating in the project. Some want to contribute a variety of different resources, some have specialized capabilities that are critical to the project and others are more or less along for the ride and are willing to participate by paying cash. Some have an AFE that has been approved that directs funds to pay for their participation. Some companies incur the costs as part of their annual engineering budget. Some companies have a working interest partner that is willing to share the costs over Joint Operating Committees. The combinations and permutations of how a Work Order gets financed and funded are unlimited when we consider the number of different ways producers can participate.

To begin, we must have a Work Order system that takes into account the information from these various parties and assimilates the understanding of the deal from the five or six people who met to initiate this project. Each must codify how their participation in the costs is funded and costed in their People, Ideas & Objects Partnership Accounting modules Work Order. All of the participants use one Work Order, or in this case an Accounting Voucher, that is shared across all of the producers. This agreement understanding must be captured within the Work Order system before approval by all producers. As with all Accounting Vouchers, the accounting details need to be coded, as well as the sources of funds. Within the Preliminary Specification we are moving away from traditional transaction recording. Automation is the focus and this can be completed through Designing Transactions accounting features. This way the system can process charges within the firm in an accurate and timely manner. For any charges that are above the threshold that a firm is willing to commit to, that implies that another firm's cash commitment would be provided to cover those costs. The Work Order should make these cash transactions or equalizations between these producers as a result of document approval. The point of the exercise is that once the Work Order is approved, the understanding of the deal, as captured by the interface, or the designed transaction, is executed.

As I indicated, an accountant's ability to follow on with the necessary accounting for these transactions requires significant recreation of the “deal” and the time of the parties who conceived of the deal in the first place. A bureaucratic waste of time. The Work Order interface should be sophisticated enough to capture the deal substance. I understand the myriad ways to do these and the difficulty in making an interface that captures them. That I don’t think is the difficult part. What I think would be the difficult part is designing an interface that provides these services intuitively. An interface that conveys the deal's substance. I, however, know it can be done. The reason it hasn’t been done is that the budget for software development like this has not been set out. It's at times like these that we should revisit our revenue model and rethink the People, Ideas & Objects approach. This is based on our projected budget.

We used the scenario in engineering, however it could just as easily be used in geology or any other area of oil & gas interest. Alternatively, it could include the supplier or vendor marketplace to form a working group. The importance of the Work Order is that the producer or participant can designate how they want to participate in the working group. As part of their approval process, they identify the source of the funds and where the costs will ultimately be allocated. This is according to their organization. Each participant or producer in the working group conducts this, all within the same interface for the same Work Order. 

One of the most obvious areas that this interface will interact with the other modules is the Security & Access Control module. Access to the Work Order will require a certain period to recruit participants. And then it will be closed to everyone but existing working group members. Only those who are within the working group, or are subsequently granted direct access can participate directly in the working group.

With the Security & Access Control module we also inherit Industrial Command & Control that allows people to impose a chain of command across the working group. This might be something they want to do if they have a difficult task or a large group of people. The opportunity to do so is available to them if they so desire as this will be part of the Security & Access Control modules core functionality.

The designation of the source of funds and where costs will be allocated is coded directly to those accounts. The Work Order incorporates Accounting Voucher elements into its operation. Each producer's accounting system will be charged, upon approval of the Work Order, according to how they coded the Work Order. As a result, it will inherit many Accounting Voucher module attributes.

I see these working groups, as we’ve called them here, as an essential element of how an innovative oil & gas industry identifies and solves its problems. Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi defines this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and uncodified capabilities, or “tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.”

Therefore, how can oil & gas firms solve the technical and scientific problems of the future? How can a firm more effectively employ its capability to solve problems and encourage the discovery of other problems and the creation of their solutions? Clearly some companies are more effective at this process than others. However, this research in oil & gas asks, is there a means for an organization to increase its ability to innovate that leads to higher performance outcomes?

Having these working groups spawn at will without the bureaucratic, accountability and accounting logistical nightmare that they instill today will be a significant first step in making the industry more innovative.

The complexity of the relationships of these working groups must be captured and accounted for in the Partnership Accounting module of the Preliminary Specification. Whether we are talking about the various forms of contribution that a producer may make to the joint account, or how they may participate in a working group, the bureaucratic machinations of accounting for these transactions can’t stand in the way of producers' innovativeness.

Today, participation is hindered by the difficulty of capturing and accounting for these unique business arrangements. What is needed is the ability to develop software that captures the substance of the manner in which contributions are made. This is followed by the manner in which they are accounted for. That is the purpose of the Partnership Accounting module, to support the innovative oil & gas producer in their innovative actions. Professor Giovanni Dosi in "Sources, Procedures, and Microeconomic Effects of Innovation," points to the need for business aspects to support technical aspects of the business.

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.

Capturing the context of the deals made in both the Joint Operating Committee and working groups as described here in the Preliminary Specification can’t be done after the fact. What is needed is for the software to be sophisticated enough for the dealmakers to use while formulating the deal, to capture the substance of the deal, so that understanding will be used to allocate the costs and charge their accounting systems for these costs when they're incurred. The process we’ve defined is Designing Transactions within the Preliminary Specification. Then and only then will accountants have a chance of keeping up with the speed and innovation of the industry as it is contemplated here. Technical people will be free to pursue their science and not be hounded by those looking to recreate what was history and dealt with long ago. 

This is a necessary part of the People, Ideas & Objects software development team and most importantly, our user community. It won’t be too difficult to capture the multiple and myriad ways a deal can be formulated. The algorithm will be complex but with time and money it can be done. The real challenge in making this critical part of the Partnership Accounting module work is the user interface. Being able to intuitively use the module to capture the user's understanding. This is to document it in the People, Ideas & Objects system and account for it on that basis. That is what makes innovation possible.

We discussed previously how producers collaborated on a project to conduct research. The Work Order system of the People, Ideas & Objects Partnership Accounting module enabled the producers, who may not have been affiliated in any form or fashion until this working group’s formation, to be able to form and contribute to the project. The Work Order system captures the meeting of minds. This is because it captures the manner of each producer's contribution and method of payment at the time the project is formed. This will enable them to avoid the bureaucratic difficulties associated with participating in these types of working groups. Working groups are avoided today because accountants can make participation more difficult than they are worth. The reason we have to cut through the bureaucracy and promote working groups is that participation in these types of activities is critical to an innovative oil & gas industry. 

The accounting interface for the Work Order will have two elements. The first will account for the costs. This will list the costs of the working group and your interest based on your participation rate. The second element is where problems occur. Participation can be funded from a variety of sources and contributions. Some will have a key piece of research that is the foundation of the project. Some will contribute time and some cash. Combinations and permutations are unlimited. The one constant in these contributions is that they all have budgets. In the second element, you will identify the source of funding or contributions supporting your participation. It will need to be determined if that means cash will be transferred from your firm to others by simply clicking on a box in the interface. Once all of the producers have completed their interfaces the balancing of the Work Order will be attempted with any variances worked out to determine who will make up any shortfalls. Once all shortfalls are resolved, work can begin.

OCI Partnership Accounting, Part III

 The Work Order system as a means of budgetary control

We discussed how the Joint Operating Committee manages who’s available to work on the property. The ability to pool earth science & engineering resources from the partnership is asserted as a necessity in the future of the oil & gas industry. It should be stated here that our Industrial Command & Control would not be limited to just earth science & engineering disciplines. Instead, it would include everyone employed by producer firms. So this would help us deal with who, now we need a mechanism to deal with what they'll do.

The next part of the Partnership Accounting module deals with the operational side of how field work within the Joint Operating Committee gets completed. Partnerships have always had AFE’s and operations budgets to manage how much is spent annually at a facility etc. Those will be handled by People, Ideas & Objects. This discussion deals with how Industrial Command & Control can deploy resources and authorize budget spending in a manner that provides for the governance of the Joint Operating Committee. Basically, we are talking about the collaborative aspect of the Work Order System in Partnership Accounting and its interaction with other modules. (Compliance & Governance, Petroleum Lease Marketplace, Resource Marketplace, Accounting Voucher modules).

Deployment of the people within the Joint Operating Committee, with the budgets agreed upon, is not enough to satisfy any interpretation of appropriate governance. Proper authorization and responsibility are needed to ensure plans and budgets are executed successfully. Without a Work Order system within the People, Ideas & Objects application, property governance would not be possible. The ways and means of successfully controlling costs and deploying resources to complete the tasks at hand are what the Work Order system is designed to accomplish.

The Work Order system will be deployed in the following manner. If someone asks you to work on a project, your first question should be “what’s your Work Order number?" Then your time will be charged to that code. It doesn’t matter if you're an employee of the producer where the request came from, a partner in a Joint Operating Committee, a vendor or supplier. If they don’t have a Work Order number you're not generating service-based revenues or working for free. If they have a number, you key the Work Order number into your device or keyboard and continue. The Work Order system aggregates and bills your time spent working on that project. The details of the Work Order, chain of command, tasks and deliverables are all delivered within the Work Order system provided when you key in the number. Your role, based on your capabilities, is populated with those parts of that Work Order.

Note that one of the benefits of this system is that no unauthorized work gets done without a Work Order. Assigning budgets to a Work Order from an AFE, Lease or from internally sourced overhead accounts will be a matter of selecting from budget accounts or from pre-approved allocations. The ability to approve a Work Order would therefore be at an appropriate level within the Joint Operating Committee chain of command. This would be pre-authorized and designated through Industrial Command & Control (involving multiple producers) or a producer firm. If a Work Order were to exceed its budget it is reasonable to assume that it’s exceeding its AFE or account budget(s if it's involving multiple producers), which could trigger action from the Compliance & Governance module of the People, Ideas & Objects application, if that is what management desired or deemed necessary and established from that module.

Let's be clear, what People, Ideas & Objects propose in the Preliminary Specifications Partnership Accounting module is nothing like any other joint venture accounting system. When we consider the Joint Operating Committee as the key organizational construct of a dynamic, innovative, accountable and profitable oil & gas producer. Aligning the producers' compliance and governance with the seven frameworks of the Joint Operating Committee, we create speed, innovation, accountability and performance over the base case. Creating a performance and innovation-based culture through our seven Organizational Constructs. Producers and industry are reorganized dynamically and innovatively. As well as being open to the possibility of enhancing their capacities and capabilities through the ubiquity of the People, Ideas & Objects Work Order. Where everyone, Joint Operating Committee, producer and service industry firm employed in the industry has an account to manage revenues, billing and time spent on projects. This is for the various producers, Joint Operating Committees and facilities.  

Some processes described in the Preliminary Specification involve multiple organizations, over multiple accounting periods. Whether that’s the development of capabilities which begins in the Research & Capabilities module. It touches on the Resource Marketplace and Financial Marketplace modules, and passes to the Knowledge & Learning module. Some of these processes carry transactions that are as complex and difficult to quantify as the process. Some will be for the joint account, some will be for the producer to incur on their own. As we learned in the Financial Marketplace module some transactions may be the result of an investment by an investment group.

Discussing the Work Order system that controls the costs associated with a project. The projects contained within a Work Order might be funded by multiple producers, AFE’s or budgeted accounts, and as a result producers will be able to control the costs of the project, monitor them and maintain governance through the Industrial Command & Control of People, Ideas & Objects system. Producers using the Work Order system will be able to charge the costs to the appropriate owners of the projects. This will be done at Work Order initialization. Since the Work Order is a multi-organizational system, members of a Joint Operating Committee or members of the field services industries can participate in a Work Order. This means they can pre-approve their participation in specific costs in the project. The accountant working within the Partnership Accounting module won't be running around trying to seek approval from partners to authorize individual expenditures on projects that weren’t planned or budgeted properly. If everyone within the industry works to chargeable Work Orders, and all Work Orders are approved by those who will be financially responsible for the charges, then the accountant's job in chasing their tail and aggravating people is over.

The point of the Work Order system is hopefully not lost on others in the industry. Some may feel that the Work Order duplicates the AFE attributes, and I would argue that they are fundamentally different. The AFE approves spending for field level and construction projects of a capital nature. The Work Order system is a means to deploy the producer's or Joint Operating Committee's capabilities in an authorized and ad-hoc manner. When we extend the Work Order system across multiple producers, Joint Operating Committees and suppliers, the ability to deploy the capabilities of multiple organizations will enable the innovation we seek in the oil & gas industry. The Work Order may take budget dollars from a number of AFE’s and assign them to a team of engineers that are asked to develop the process necessary to make their firm more capable. Two producers may contribute budget dollars to a Work Order for their Geologists. They will be able to attend a conference and conduct research on some promising developments as a result. The point being that no one works without a Work Order to charge their time for. No Work Order can collect charges without a budget pre-authorized and approved.

This will make the Partnership Accounting module workable from the point of view of controlling the costs of the multitude of different arrangements being made within the organization. If the accountants are tasked with putting together the costs and determining who is to be charged after the fact, this is how they become the annoying and bothersome people they can / have become and accountability is less onerous. By imposing the Work Order system in this fashion, within the Partnership Accounting module, the arrangements are pre-made and authorizations are required before charges can be incurred. Making accounting for capabilities deployment systematic instead of problematic, resolved before the fact and automated. This is not about accountants hounding people trying to understand why such and such was done.

OCI Partnership Accounting, Part II

 The Beginning of Automation and the Material Balance Report

The Material Balance Report is an Accounting Voucher that is unique and has the following characteristics. It automates producer firms' and Joint Operating Committees' production, revenue, royalties, marketing and other processes. It is this type of specialized use of an Accounting Voucher that our user community will consider applying to other situations when contributing to the Preliminary Specifications development.

What is proposed in the People, Ideas & Objects Material Balance Report is that for an Accounting Voucher to close it must balance the financial debits and credits. However, it must also, from a volumetric perspective, be material, system and partnership balanced. Each of these three volumetric perspectives is accessed through a different “mode” within the voucher. This is to make the necessary changes to correct any volumetric imbalances or errors in that specific perspective.

The Joint Operating Committee exists due to legal agreements and in oil men and women's minds. It therefore doesn’t “own” anything or incur costs. The joint account charges must clear in the month they are incurred. It is the same with volumetric information. The Joint Operating Committee "Accounting Voucher" balances to zero in terms of costs and volumes each month by clearing charges to the partnership and royalty owners of the property. Clearings are done after the balance is determined. That does not guarantee the facility will remain balanced. Adjustments and amendments during a production month will trigger changes to the Material Balance Report. These may happen and they can be balanced and cleared to partnership accounts in the same manner as before, which is automated. The exercise ensures that the Joint Operating Committee's business is captured in the Material Balance Report. This is an integral part of the Accounting Voucher. Essentially all three are the same thing, the Joint Operating Committee, Accounting Voucher, and Material Balance Report. An integrity of reporting that is embedded within the accounting systems that are as rigid as the overall accounting requirement of debits must equal credits.

We now want to discuss the contracts associated with that Joint Operating Committee. Gas, oil, and natural gas liquid marketing contracts, as well as gathering, processing contracts. I don’t know the correct term to use, but stream seems most intuitive. If a stream of product flows through a facility, then a contract for processing or sale would be attached to it. The ability to attach the contract to a stream would enable the Material Balance Report to establish the billing of gathering or processing charges / sales for that stream. These charges (invoices) or sales (receipts) are generated by People, Ideas & Objects software automation of the process. Amendments and adjustments would generate similar documents to the initial product flows, and on an automated basis. 

The Accounting Voucher is for lack of a better term a template that is built upon as time passes. Each month as the property changes, these changes are recorded within each Accounting Voucher. The template is renewed each month with the accumulation of the property's history and any changes in variables derived from other modules. For example, the Petroleum Lease Marketplace. If an additional contract is added for production from a newly discovered well, that contract stream and the newly discovered well would be represented in next month's Material Balance Report. The Accounting Voucher template documents property changes over time.

Critical to the “definition and design” of transactions is their balance. If the debits and credits were not in balance at the end of the day, the systems automation and the accountants would not be doing their jobs. Volumetric reporting would be the same issue. If in the Material Balance Reports, they were out of balance (call this material balance), or were not balancing the inputs and outputs to other Material Balance Reports (call this system balance), or the internal accounting of those volumes to the partners, royalty holders and others were out of balance (refer to this as partnership balance) the accountants and systems would not be doing their jobs. Closing a Material Balance Report requires more than balancing debits and credits financially. They will also need to ensure that the material, system and partnership volumes reported in the Material Balance Report are balanced. Without these systems in balance, the Accounting Voucher will not close or clear.

This imposes another rather strict condition on the quality of the information accepted into the People, Ideas & Objects Accounting Voucher module. Precluding the acceptance of a voucher due to the inability to balance a volumetric requirement holds the system up for common occurrences. What if volumetric information is unavailable? What if the information is part of the normal amendment process? Traditional accounting methods are left for these issues. An accrual of the volumes necessary to achieve the balance would be processed in the current month. Most production processes are amended for up to 90 days. These accruals would then be automatically reversed in the following month. What is different from existing systems is that we force them to be volumetrically balanced. Not just inputting key variables but imposing and enforcing the facts of what actually happened at the Joint Operating Committee. In the case of a Construction, Ownership and Operation (CO&O) agreement, what is to be accounted for before the Accounting Voucher is closed.

The difference may be subtle but the implications are significant. A system that locks volumetric balancing into the Accounting Voucher itself enforces compliance with volume production and processing. Obtaining a system balance where each Joint Operating Committee activity reconciles with all other facilities and Joint Operating Committees. In this way, an unquestionable level of integrity can be achieved. Detailed processes based on data and information captured in other modules can be fully automated based on those facts. Please see the Operations Management module in the Preliminary Specification for further expansion through the Internet of Things (IoT), SpaceX's Swarm network and other technologies that automate field data capture.

There are many aspects of this system's process management that are unique and necessary. The reason they have not been undertaken is that the broad scope and scale of the development undertaking is comprehensive and beyond what the technology could have provided even a decade ago. It is from a budgetary perspective beyond the scale of what one major producer could undertake as the value gained may not necessarily be there for the individual producer to incur the entire cost, and most certainly well beyond the speculative approach of an oil & gas ERP software development solution provider. People, Ideas & Objects seeks to aggregate North American producer ERP budgets to bring these software and services to the market. Turning the cost of oil & gas administration and accounting, which includes continuous ERP systems development, into the variable cost of Cloud Administration & Accounting for Oil & Gas software and services for North American producers. Those with a comprehensive understanding of these processes will fully appreciate the points I make and the implications involved. My understanding of these processes is comprehensive and I know it can be done correctly. That this undertaking may be the single largest feature of the Preliminary Specification. Therefore, development costs are shared and shareable across the North American producer population. Driven by our user community's vision. From the perspective of dealing with contractual arrangements and governing agreements determining the production allocation method. Or if the agreement refers to an adherence to chemical composition as the basis of production allocation, both of these methods will be available in the Material Balance Report of the Accounting Voucher in an either, or and mixed environment. 

An element of the Material Balance Report is the clearing of both financial and volumetric information for the appropriate working and royalty interests. It is here where we find two critical points of interest in the differences between the Preliminary Specification and the status quo accounting methods. People, Ideas & Objects, our user community and their service providers provide standard and objective accounting information across North America. The Material Balance Report is an appropriate example of this. It will be the service providers managing the processes involved in the production, revenue and royalty aspects of the producer firms and Joint Operating Committees. We noted that in the Accounting Voucher module itself the Accounting Voucher could be generated based on either the producer firm or the Joint Operating Committee. The Material Balance Report cleared monthly is a Joint Operating Committee Accounting Voucher. Where the processes are automated and cleared based on the property's ownership and royalty interests. 

The Work Order System

In oil & gas there are two methods to capture costs. The first is the AFE for capital, and the second is the Lease for revenue and operating expenses. Incidental costs may also be incurred in departmental or Joint Operating Committee overhead accounts. These have been the standard methods used throughout the industry for decades. They have served the industry well, particularly from the point of view of distributing costs and revenues to other working interest partners. People, Ideas & Objects are introducing an additional document to augment the AFE and Lease to improve cost control in the industry. It is what People, Ideas & Objects call a Work Order. It has two distinct roles and captures costs in ways not captured today. The overall objective is to enable innovation throughout the industry, the producer firms and Joint Operating Committees. And to do so on the basis of the distinct science and technology of oil & gas exploration and production.

The Work Order is an implementation of our Accounting Voucher. A feature that we introduced as a separate module in the Preliminary Specification and a reflection of the capabilities of the Accounting Vouchers template characteristic. The Work Order is designed to capture costs in producer firms, Joint Operating Committees or other organizational structures that may or may not have a defined structure in terms of a formal agreement supporting the project or Joint Operating Committee. In the Work Order, costs and revenues could be assigned and authorized as the document that outlines the necessary details for these ad hoc organizations. These are not generally material costs, but they involve other complicating factors. This is not a license to spend funds in unauthorized areas. It is a feature of the Preliminary Specification that enables innovativeness to expand by allowing informal collaborative research and development work, or Working Groups, to be conducted throughout the industry. This is on the basis of its sciences and applied sciences. A means to benefit those participating in the research and development project. 

Today these types of costs fall outside the scope of the authority and responsibility of the producers' management. The AFE and Lease currently constrain producers to existing agreements as methods to capture costs. These Working Groups costs are therefore accountability and accounting nightmares that have proven to be more onerous for those that have attempted to benefit from conducting this type of research and development or even ventured to suggest them. Accounting for them is usually manual in nature as necessary to capture the distinct understanding of each effort and reflect it appropriately from a business perspective. 

Examples of these costs may include a geologic study of the producer shale gas characteristics of the Permian vs those in Pennsylvania's Marcellus formations. A study may examine the effectiveness of fracing in multilateral sections of shale gas wells with respect to longitudinal versus latitudinal orientation. They are necessary to advance the industries underlying science and technology, costly for one producer to undertake and of potentially limited value to the one producer that undertakes them, and therefore mitigation of risk through participation is the appropriate strategy. If costs can be mitigated through a shared model the results become more valuable, and it is this distribution of knowledge that is the basis of what we learned in our research from Professor Giovanni Dosi’s “Sources, Procedures, and Microeconomic Effects of Innovation.” That would be of benefit to any of the producers who participated in the study. Contributions from the producers could include financial or technical resources, computer simulations and other data, assets or value that a producer could contribute to the study. All participating producers would be entitled to the findings if their contributions were deemed equitable and other criteria for how long the study would take etc were defined. From this a Working Group of producers would gain a better understanding of whatever they were studying. It is helpful to remember that innovation isn’t always due to these successes but also the failures that prove what science is not. 

The other method in which the Work Order is employed is in the process necessary for a dynamic, innovative industry to broaden science and applied science resource availability. This is done through specialization and division of labor of earth science & engineering capabilities of each producer firm and the overall oil & gas industry. What People, Ideas & Objects define as one of the producers' competitive advantages. The other being their land & asset base. 

In order to unleash the unshared and unshareable aspects of these critical, competitive and soon to be constrained resources to the broader market based on their specialization. This is done through the elimination of today’s operator role in the Joint Operating Committee and implementing the Preliminary Specifications pooling concept. The “pooling concept" is in which those with the required specializations are sourced from the participating producer firms making up the properties Joint Operating Committee, or the market of earth science & engineering capabilities available from the marketplace to fill the needed role demanded of the property. The pooling concept is designed to introduce advanced specialization and division of labor to these resources. And to release what we’ve described as the hoarding of these resources in each producer firm. The need to have just-in-time capabilities available to meet the demands of the producer's operated properties requires that a surplus capacity of engineers and earth scientists be available to deal with the cyclical nature of the internal demand for these resources. This hoarding consumes large amounts of these resources in terms of the industry population of engineers and geologists. 

To make my point clear, let's break down a process that may be provided as a better service. This is in terms of the type of earth science or engineering resources that could be reorganized based on specialization. When drilling a well, well control is necessary. This can be achieved when the well is drilled on a known seismic line that reflects the targeted zones' geological features. It can then be compared with a variety of well logs from similar wells in the area. These wells are produced in the target zone. It is at this point that sea levels could be determined, and the depth at which the well should be drilled could be determined. This could be done in the future by an outside service that specializes in a variety of these different processes of analyzing the logs. This could include using seismic to choose the well location and picking the tops. These technical specialists could manage machine learning, Artificial Intelligence and have human determination in the selection of the tops. This would enable quicker turnaround, at a much lower cost without sacrificing higher quality. Releasing the vast numbers of technical resources burdened by these tasks by each producer today. The service provider's results are available for the producer to verify. Much of this is done in software today, however by the producer firm with the resources of the firm being dedicated to it in an unshared, unshareable and unspecialized manner which is costing the industry and producers due to the inefficient use of engineering and geological resources consumed within each producer. With less specialized equipment and constantly switching between tasks unnecessarily and inefficiently. These technical tasks within the producer firm are valuable in establishing well control. In turn the engineering and earth science resources of the producers would be focused on the higher level, value generating methods of dealing with the firms and Joint Operating Committee assets. While the geological service provider specializes in highly sophisticated ways to ensure service delivery is of the highest quality, lowest cost, precision and effectiveness. 

The other example of the Work Order is the one we identified in Organizational Constructs that changed the start-up and small oil & gas producers competitive advantages to Intellectual Property, earth science & engineering capabilities and land & asset base. Essentially the other side of the prior example transaction. It involves the ability to generate initial revenues using the Work Order from the services provided. This involves marketing the start-up's Intellectual Property and earth science & engineering capabilities to other producers and Joint Operating Committees. These revenues would help offset the difficulties of the start-up oil & gas process and defer much of the overhead burden today. Moving the success or failure of the start-up oil & gas firm from its ability to access capital to its technical capabilities. It won't be an industry based on who you know in the future, but on what you know, and what value you bring. These will be the determining factors of success and failure in the future oil & gas industry. 

Facilitating these changes is the Work Order, and this is our solution to the constraint of these resources in the foreseeable future. What is agreed upon by industry is the lack of replacements and the retirement of the braintrust of the industry. What we know is that the North American economy is the most powerful economy in the world and will continue to be so. For the oil & gas industry to attain and maintain profitable energy independence, it will demand much more of this existing scientific and technological resource base that may be static in terms of its population for some time. This shortage may be further aggravated as we also know that each barrel of oil produced will continue to be more difficult from an earth science & engineering point of view. We resolve this shortage by using specialization and division of labor principles to maximize throughput from the same resources. These are some of the details of our Work Order.