The Mouse that Roared

 We are now faced with officers and directors returning from their clean energy adventures. Maintaining their story line that shale remains uncommercial and their only hope is to consolidate their operations into massive bureaucracies that only Stalin and Lenin could appreciate. This is done in complete harmony throughout the industry. This is the next "thing" that all producers want to participate in spontaneously and unanimously. Why sit down and determine what, how and why their difficulties came about, and expend the substantial mental effort necessary to resolve industry issues? Instead, consolidation serves as today’s plug-in excuse? That only size can overcome shale difficulties is a specious and unsubstantiated claim. No doubt this meme will take another three years to shake out and prove false. Endorsing what we can all plainly see and agree with will be another failure. The officers and directors for that three-year period will be fine and they thank you for asking. What I believe is really happening is the surreptitious exit of industry leadership from the scene. 

When a firm faces an untenable situation beyond its individual issues. In this instance oil & gas producers' issues include:

• A legacy, a culture and an inability to comprehend chronic and systemic unprofitability and its associated fallout.
• Producers don't know where their operations generate profits or losses. Have organizations that have been led to believe that any action taken by them has been profitable. Creating a distinct lack of competitive and commercial operations throughout the industry. 
• Capital structures, as of 2023, have been unsupported for eight years.
• Producers' actions have decimated service industry capital structures. Only direct, sustained and long-term philanthropic efforts by producer firms to rebuild the service industry will provide them with what they need. Using the "you broke it, you fixed it" strategy, service industry representatives believe producers will view it as a valuable resource if they have some "skin in the game." In addition, it was shameful for producers to fool the service industry. The service industry now resolves they won't be fooled again.
• North American oil & gas management lacks accountability. In terms of both the development and use of its financial reporting and ERP systems.
• Shale-based reservoir momentum is declining due to producer officers and directors' inaction to address the issues identified and resolved in our 2012 publication, the Preliminary Specification. 
• Service industry capacity is at 30% of its peak and declining rapidly. Additionally producer working capital, an issue People, Ideas & Objects identified in 2015 has now become a culturally ingrained issue and an industry-wide, locked-down mindset. 
• Producer organizations have atrophied internally such that the seven to ten year exploration and development "work-in-progress" has been harshly cannibalized for "cost cutting" survival. "Ramping up" won’t happen soon.
• Consolidation provides leadership with a convenient way to exit their posts. Ensuring they will not be associated with this imminent catastrophe they’ve authored. 

Since August 2003, officers and directors have ignored our solution. What do they do now? How do they resolve a looming industry collapse of the most critical resource provided to the most powerful economy ever known to man? During a war with several theaters involved, including the greatest oil exporting countries? Does muddling through seem like a wise strategy? Officers and directors are well compensated during their tenure in the industry. It’s widely understood that Information Technology and other industries are doing well. Their management skills could find greener pastures there.  

I have certainly engaged in an aggravating dialog with North American producers' officers and directors. To suggest that the Preliminary Specification may have been considered if my message was not so negative and derogatory is a possibility. However, that was not the attitude of those I saw on the other side of this debate. They're used to criticism of their inaction and performance. I chose the Preliminary Specification as my route. And I find it difficult to understand how anyone would not be angry and frustrated by the unnecessary situation we’re in? With trillions of dollars of valuable resources wasted, and many more trillions of dollars to be wasted, a solution to remedy their particular situation has always been available. For them to choose the Preliminary Specification, and more importantly to do so now, would demand a willing acceptance and admission of their culpability in creating this catastrophe. 

Professor Richard Langlois makes a pertinent point regarding capitalism and how officers and directors drive consolidation in oil & gas. From his recent book. “The Corporation and the Twentieth Century: The History of American Business Enterprise.”

"Although it came to be a defining theme of the postwar period, it was not, as we have seen, a novel contention that a new class of organizational operatives would soon supplant—or indeed had already supplanted—the capitalist, the entrepreneur, or even the individual. At the back of most formulations of this idea lay the work of Veblen and of Berle and Means, from the 1920s or earlier. Many expressions of the thesis emerged during the Depression and the war, when the market seemed to have failed and enterprise had been commandeered for the needs of the military. In The Folklore of Capitalism in 1937, Thurman Arnold held that “we can observe the rise of a new class of engineers, salesmen, minor executives, and social workers—all engaged in actually running the country’s temporal affairs.” Although for the moment bourgeois traders still “possessed the symbols of power,” it was in fact the “great class of employees, working for salaries, which distributes the goods of the world.” The new class was already “showing signs of developing a creed of its own and a set of heroes.”427 

The power of heroism as a symbol was at the heart of the century’s most sophisticated musing on the disappearance of bourgeois entrepreneurship, that of Joseph Schumpeter. In Capitalism, Socialism, and Democracy, written during the worst years of the war, Schumpeter argued that because of the “progressive rationalization” of bourgeois society, innovation was becoming mechanized.428 It went without saying that salaried functionaries could administer whatever pre-existing economic structures were handed to them. But in the past, innovation—and with it economic growth—was not a matter of administration. Because of the limits to knowledge and the imperfect understanding of the physical and economic world in earlier times, innovation demanded a bold leap into the unknown. The function of the entrepreneur was thus a cognitive one: to appraise the possibilities and make that leap. But, said Schumpeter, the skepticism, critical rationality, and unrelenting curiosity of bourgeois society had created a new world in which science, including the science of administration, is able to foresee all the possibilities involved in innovation and to plan accordingly.429 Leaps are no longer necessary, and the cognitive function of the entrepreneur has disappeared.

When the entrepreneur disappears, so too will bourgeois society. The old family capitalists, not to mention captains of industry like Carnegie, Rockefeller, and Ford, were heroes whose visible role in generating economic growth worked to legitimize bourgeois capitalism. But scientific rationalization, provided by the bourgeoisie themselves, meant that golden eggs would now remain forthcoming even after the goose was cooked and eaten. Without the entrepreneur to provide cultural legitimacy for the bourgeoisie, control will indeed pass inevitably into the hands of the new class envisioned by Arnold. In Schumpeter’s formulation, it will indeed pass inevitably into the hands of the new class envisioned by Arnold. In Schumpeter’s formulation, it will be intellectuals and government bureaucrats who will come to administer a not so brave new world of colorless state socialism. 

Writing at about the same time, though with none of Schumpeter’s wry nuance, James Burnham made a similar forecast in "The Managerial Revolution.” For Burnham, the transition from a capitalist society to a managerial society “is already well underway.” Unlike Veblen, Burnham did not see managers as engineers or technicians; they are a level above: the knowledge workers whose function is guiding, administering, managing, organizing the process of production.” Once again, the crucial piece of evidence for the rise of the managerial class is the assumed separation of ownership from control. Because capitalists are no longer also managers at a day to day level it is self-evident that capitalism is doomed. The entrepreneur and the captain of industry are most certainly dead. The chance to build up vast aggregates of wealth of the kind held by the big bourgeois families no longer exists under the conditions of contemporary capitalism." (Richard N. Langlois, The Corporation and the Twentieth Century) p. 390.

As Professor Langlois discusses later and in many of his papers, this was the case during the latter decades of the 20th century. However, with Information Technology, and most specifically ERP systems, providing the means to disintermediate organizations and industries we may be seeing the end of a “managerial revolution.” And if not for the 10 - 25 thousand man hours of mechanical leverage from one barrel of oil equivalent, and as Professor Alfred Chandler suggests coal being developed early in their tenure, how effective and efficient was the “managerial revolution” for the 20th century corporation?

It is therefore reasonable to assume that what oil & gas is facing is a result of the failure of the “Managerial Revolution” and its legacy of bureaucracy, inactivity and a lethargic pace. 

One of the motivating factors for North American producers pursuing clean energy was their belief that shale would never be commercial. After discovering there was no real support for their clean energy ventures, they returned and were forced to follow the trend. If shale is economically unprofitable, they can no longer justify any other frontier in oil & gas. Consolidation is the only path forward. Consolidation accurately reflects the fierce opposition to everything People, Ideas & Objects provides. Such as a decentralized entrepreneurial market for oil & gas industry administrative and accounting resources.

Officers and directors need a reasonable way to escape their bulging closet full of skeletons, no scratch that, their bulging annex full of skeletons. The industry as it stands today is untenable. Critically, its investors deemed it unworthy of further support in 2015. It is the most damning and damaging event shareholders can assess against management. In most instances this is the precursor to an organization's death. With oil & gas being a capital intensive industry, those prior capital investments generate adequate cash flows that sustain the bureaucracy for years to come. However, if cash flows are not managed properly, they will wither and disappear along with the firm's ability to compete and function. 

Shell, Exxon, Chevron, and BP are hoping to resolve the issues and provide for everyone involved. For the short term anyway. Through their leadership, they can fill the void left by those who created the independent producer era. Industry consolidation is not justified or proven. As with all “actions” in this industry, it is done suddenly, seemingly without forethought or justification from a business point of view. This is all with the declared benefit of a billion dollars in annual cost savings here and there. Why, how are these meager tokens, however derived, designed to aid the industry and specifically any of the wasteful trillion dollar issues identified at the beginning of this post? Stating the issue as that without size, independents cannot approach shale, what are their underlying assumptions in making such claims? 

Observing the rise of independents in the late 1970s and early 1980s. It is expected that Exxon and Chevron will soon be without entrepreneurial talent. From the leadership gap caused by consolidation, a new independent era awaits. Creating the dynamic, innovative, accountable and profitable oil & gas producers we need for the next 25 years. All they’ll need is the means to manage the operation such as the Preliminary Specification. To show Exxon and Chevron how the oil & gas industry is operated and developed profitably. Maybe we’ll be able to thank the consolidators for the service they'll provide in the short term. Transferring oil & gas assets at today’s valuation, running their value into the ground and selling them to future oil & gas entrepreneurs at fire sale prices.

Understanding the existential issues at play in North American oil & gas. Two solutions are offered. It is the consolidated centralized bureaucracy that created these issues over four decades. Who had the opportunity to resolve their issues over the past decade but did nothing about them. Will they be able to deal with the speed and pace of change in their business, meet society's demands? Or is it the upstart decentralized solution of People, Ideas & Objects, our user community and their service providers that provides the most dynamic, innovative, accountable and profitable oil & gas producers with the real value generating choices to be made? People in oil & gas will be torn between these two options in terms of their individual makeup. As Professor Langlois noted in the reference above. There are those who find the corporation an ideal environment. And they account for the majority. There are also those who will form the next industry leadership. Creative destruction is in the air. We have an industry to build.

OCI The Preliminary Specifications 11th Anniversary

 On August 9, 2023 People, Ideas & Objects marked the 11th anniversary of the Preliminary Specification. We are pleased to be in the position we are due to our work in resolving marketplace issues for North American oil & gas producers. Our dealings with producers are difficult and rife with conflict and contradictions. Throughout our history we’ve experienced none of the behaviors that we would expect from our approach to providing the most profitable means of oil & gas operations everywhere and always. Why is this? What’s wrong with profitability? Why would producers continue to produce a property unprofitably for years or even decades at a time? 

During this past decade, these producer firms have destroyed their financial, operational and political foundations. They’re now incapable of meeting the needs of their shareholders and bankers, incapable of sourcing the manpower to deal with today’s market demands, a service industry that has lost much of its capacity and capability, officers and directors seemingly unaware that tomorrow only brings greater challenges and today’s energy consumers will be looking to producers for more at a time when their cupboards are bare. Whatever objective producer officers and directors were pursuing it will cost society detrimentally and unfortunately put our way of life in jeopardy. I cannot understand what their objective was. The Preliminary Specification is the solution to avoiding all of this. All concerned, who have been fundamentally betrayed in this process, would have gained substantial value from this alternative. Everyone in all corners of the greater oil & gas economy can now fully understand and appreciate why profits are necessary. And today we can recognize that the Preliminary Specification is in its second decade. 

What are the consequences of the inactions of North American oil & gas producers? To summarize the status quo as I see it today.

• Producer firms have diminished and in many cases unsupported and non-existent capital structures.
• Either through chronic losses or specious accounting which saw everything as a capital asset and never recognized as a cost, in a capital intensive industry. Conversely, creating equally inflated earnings.
• A capital intensive industry would imply the costs passed on to consumers would contain significant capital costs.
• Instead bloated asset values are now supported by excessive leverage.
• Abandonment in 2015 by their investors due to the producers' inability to deal with unacceptable profitability and accountability. A signal of supreme dissatisfaction.
• Abandonment by their banks who recognized similar issues. 
• An inability to accept the global role of high-cost, swing producers on global oil markets. To believe that markets would accept any level of output with no consequences. Never learning the business basics of overproduction.
• Where the great depression was largely caused by overproduction.
• Where July 1986s oil price collapse saw the first of dozens of commodity price collapses due to North American oil & gas producers' chronic overproduction. 
• I count six “good” years in the industry out of the past thirty seven years. Scoring the true effectiveness of "muddle through."
• In 1991 I began the pursuit of what has become several attempts to resolve the chronic overproduction of oil & gas. I've set out to develop software systems to alleviate systemic oil & gas overproduction.  
• In May 2004 published our Preliminary Research Report that set the foundation for the Preliminary Specification. A total of ten years of research to determine “what, how and why” the industry and producers would need to operate and eliminate their issues to provide for the most profitable means of oil & gas operations. Leading to publication of the Preliminary Specification on August 9, 2012.
• Throughout this period producers have only sought to violate our Intellectual Property. None of them inquired constructively about the solution. 
• July 4, 2019 People, Ideas & Objects published a paper “Profitable North American Energy Independence -- Through the Commercialization of Shale.” The paper has been well received by the market, receiving significant distribution. 
• Producers expressed no interest in the paper’s proposal. 
• We ultimately received the producers' final response to the ideas contained within the Preliminary Specification and the July 4, 2019 publication. When officers and directors allowed oil prices to drop to negative $40 in April 2020. 
• Seeking to remain unaccountable ERP systems and accounting are unable to provide the detailed and accurate information to base appropriate business decisions upon.
• Creating a culture within producers that achieves profitability and success by just spending money. 
• No measure of performance is evaluated, understood or earned. 
• Creating an environment where the difference between profitability and unprofitability is not understood, attained or cared for. 
• A slackness pervades the overall culture when anything and everything is reported to be profitable.
• Arguing otherwise will cause career ending repercussions.
• Throughout 2020 and 2021 declarations that shale would never be commercially viable and asset sales of shale properties were announced with many producers exiting from that business.
• Maintaining their cultural propensity to bail and abandon prior investments instead of remediating or attempting to make something of their “failures.”
• Alleged “shareholder driven initiatives” to reconfigure the producer organizations as clean energy providers were announced as the new frontier for oil & gas producers.
• Overnight they began listening to their shareholders about clean energy? An industry that is scientifically and commercially unviable, as pointed out in our July 4, 2019 publication. An industry with a history of repeated failure, poor accountability and massive government involvement. A bureaucrat's dream. 
• Contrast this with the fact that they've ignored and continue to ignore investor concerns regarding profitability and accountability issues for almost a decade.  
• For decades producers claimed they needed to ensure oil & gas prices remained competitive so that alternative energy could never get a foothold. 
• Now it is these same officers and directors who take producers' cash and oil & gas revenues to fund their unaccountable activities. This is in an industry that has never performed even with government subsidies. An industry they have no understanding or competitive advantage.
• Choosing an alternative business direction shows they’ve never had the focus and drive necessary to remediate and rehabilitate the oil & gas industry. By abandoning shale they’ve proven they have no right to lead.
• Consolidation is their solution.
• Difficulties in sourcing field resources have become a primary concern. 
• Producers have repeatedly betrayed service industry firms and their staff. Nothing is being done to remediate these relationships. 
• The resulting field capacity and capabilities damage and destruction have severely impaired producer's future deliverability. 
• 2022 Lockdowns are lifted and consumption resumes leading to price increases at the pump. Consumers are concerned about their energy supply.
• October 2023 saw nothing done to deal with these issues and opportunities. Consolidation continues as evidenced by mega deals such as Exxon - Pioneer.
• With higher oil prices will it be reasonable to leave the industry in such incapable hands?

It is their specious and unrepresentative financial statements that are as useless as their business objectives of “muddle through,” “building balance sheets” and “putting cash in the ground” are. Only they had the authority, responsibility, accountability and resources to act. Action via “muddle through” is exactly what they did, even while the Preliminary Specification existed and damages increased.

Consider the following. What has been the historical norm established since the great depression is the exit of the management class from the scene when their administrations become untenable. As I understand it, the traditional message of investors withdrawing their support signifies dissatisfaction and the demand for change. Which occurred in 2015 and was the point when producer firms became “untenable.” Why I’m writing this in August 2023 is that the traditional tools of a market economy have failed and are being exploited by these officers and directors to benefit themselves exclusively? 

Bankruptcy or business failure is no longer possible as it reinstates officers and directors and eliminates angry shareholders. Forces banks to dilute their loans and start again for the requisite period of time between bankruptcies deemed acceptable. The game is played with such skill and brashness now that officers and directors declare pre-bankruptcy bonuses. 

Serendipity is where organizations change with the times. Unfortunately our advanced, software driven world encases organizations in metaphorical cement. Only through active ERP software change can organizational change occur. This has been the reason that no change has occurred in any ERP systems for producers. Maintaining officers and directors' administrations in perpetuity. All Tier 1 ERP providers left by 2005. And a Tier 1 ERP solution needs to be implemented by the industry as an explicit demand from investors.

Spontaneous order occurs when people see an opportunity in the market and act. In highly diverse continental markets where people are connected through electronic means the ability to see and organize markets efficiently and effectively has been rendered obsolete. Things need to be actively pursued to succeed. Bureaucratic inactivity is the method of operation by officers and directors of producer firms.

Creative destruction has been massaged from producer firms' financial statements. Producer firms have massive capital costs in property, plant and equipment. These are not representative of the firm's performance but attempt to represent the producers' value. The result is a homogenization of producers. Each firm has the same cookie cutter financial statements that only differ by the size of its production profile. Can anyone discern from financial statements who is the hero and who is the zero? Outside of bankruptcy that is. 

Another behavior of these officers and directors we can reliably count upon is their ability to retreat in the face of criticism or opposition to their (in)actions. Only to eventually resurrect their prior behaviors through the “muddle through” culture they’ve fostered and enabled. Reimposing previously unacceptable behaviors quickly. Dishonesty, blaming and viable scapegoating have been in officers and directors' toolkit for decades. There are a litany of reasons why they can't do anything. Things don’t work in their favor or obstacles are in their way. The defining characteristic of this behavior is that all producers will sing from the same hymn sheet in perfect harmony. 

With the authority and responsibility to control large amounts of money, they are unaccountable, uninterested, unprofitable, culturally conflicted, unmotivated and uncaring. The eleven years of the Preliminary Specification attempts to enable the most profitable means of oil & gas operations, everywhere and always is all the evidence anyone now requires to discover the otherwise permanent issue our society faces. The inability to appreciate or concern themselves with the fact that each barrel of oil is equivalent to 10,000 to 25,000 man hours of mechanical leverage in the most advanced economy the world’s ever known is irrelevant to them.

This is evidence that exists today. This is the dark and dreary future they created and sent us down to. It could have been so different if the alleged leadership did their job and made the appropriate changes at the appropriate time. 2015 when investors withdrew their funds was the point where action was definitively necessary. Now that we face such an issue that change needs to be forced upon the producer's directors and officers. They are not responding to the usual forces or following traditional behaviors in times of financial duress in our economy. They are entrenched and have proven to be untrustworthy and unworthy of our continued support. 

Possibly, they are preparing the groundwork for ultra high oil & gas prices by realizing the damage they've done. Then they’ll be able to rally the cause of solving consumers' energy security concerns by doling out dollars from a primary industry here and there. This is to those that will be subjected to their classic methods. Making themselves out to be the savior of the damage no one will remember they caused. (I would point out the October 11, 2023 blog post detailing the anomaly in natural gas pricing over the past few decades. Identifying why that money was not realized should be their first concern.)

My day-to-day interactions with those in the oil & gas industry are remarkable for their consistency. The industry may be undergoing an existential crisis as I’ve described which contrasts the officers and directors' calm and reasoned approach to the situation in their utterance of “muddle through.” I would argue the destruction and frittering away of the value of an asset each month for decades may be described by officers and directors as an opportunity cost, and if that were correct it would not be a concern of management. However that argument needs to be reevaluated by producers. This is evident in the fact that as monthly losses are incurred at each and every property in North America, we are moving into the second decade of the Preliminary Specification. Of which I am able to report that I have had zero expression of interest in the development or interest in the remedial efforts necessary to establish the most profitable means of oil & gas operations, everywhere and always, by any and all officers and directors of North American producers. It is the fact that the Preliminary Specification disintermediates them from their lofty positions of power that concerns them. Enhanced profitability in the form of the Preliminary Specification as an ERP system, which is standard fare for any organization, is demanded by investors to be from a Tier 1 provider such as Oracle Cloud ERP, would attract interest from any common sense business person. Therein lies their conflict.

With higher oil prices providing increased revenue, is it reasonable to leave the industry in such unqualified hands? Have they learned that the need for profitability is paramount? Do they understand the differences between a profitable and high performing organization? Do they have a plan to overcome their culture that resists changes to increase profitability? What assurance is there that they'll remain focused on oil & gas, or maintain their current desire to satisfy shareholders? For years we have detailed that a profitable operation would provide a producer firm with all the financial resources it needed to as it required. Yet nothing is done.

OCI Leakage vs. the Right Information, Pooling and Operational Control

 Leakage vs. the Right Information

People, Ideas & Objects establish the means for producers to build value from their competitive advantages of their land & asset base, and earth science & engineering capabilities. To be achieved through profitable reserve expansion, production increases or cost reductions. With the Preliminary Specification a second revenue stream is firmly established from the deployment of their science and engineering capabilities to the various Joint Operating Committees they have an interest in. This revenue stream is designed, at a minimum, to offset the full cost of building and maintaining the competitive advantage the producer has in terms of their earth science & engineering capacities and capabilities.

Providing people with the appropriate knowledge and information to act in a fast-changing environment is difficult. Speed will be a critical component of producers' capabilities, deployment and competitive advantage. Currently, some of the difficulty in getting knowledge and information to the right people is a result of ensuring the integrity of the information will not be breached by those not part of the organization, or not the information authorized by the organization. The Security & Access Control module of the Preliminary Specification imposes high levels of integrity on all communications and storage of data and information. Inheriting much of these capabilities from Oracle Cloud Infrastructure. However with high levels of collaboration throughout People, Ideas & Objects Preliminary Specification there may be the expectation that these collaborations between firms in the Joint Operating Committee may lead to some perceived leakage of proprietary knowledge losses. People, Ideas & Objects ask if information losses impose any risk to innovative oil & gas producers' competitive advantages of their land & asset base, or earth science & engineering capabilities?

No they do not. In fact, collaborations enhance the firm's innovativeness and capabilities. In a fast moving, innovative industry the last thing a producer needs to be constrained by is a method of operation where they own specific Intellectual Property, and as a result it is the only method of operation the firm pursues. Are the producers and Joint Operating Committees capabilities a fixed point of science or an ability to apply innovations and scientific developments? Do medical Doctors own the Intellectual Property they treat their patients with or use the most advanced treatments available?

The question therefore becomes how is appropriate information and capability deployed as needed? Professor Giovanni Dosi notes that although the free movement of information has occurred in industries for many years, it has never been easily transferable to other companies within those industries. Replicating a competitive advantage from one company to another is not as easy, or even worthwhile. Dosi (1988) goes one step further and states, “even with technology license agreements, they do not stand as an all or nothing substitute for in-house search.” A firm needs to develop “substantial in-house capacity in order to recognize, evaluate, negotiate and finally adapt the technology potentially available from others.” Therefore why not focus on the need to increase the company's own unique and specific competitive advantages based on advanced specializations and divisions of labor in these sciences?

We’ve discussed the firm's operational governance and the Joint Operating Committee. A significant element of this discussion is the capabilities these organizations have access to. Capabilities are documented in the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. These are the documentation of the explicit knowledge that the producers capabilities are able to conduct. And to state this more clearly, these are attained through coordination of the market's earth science & engineering capabilities. Therefore, from a governance perspective, these capabilities should be protected and kept for the firm's use only? Nothing could be further from the truth. Usage of these capabilities will leak to outside firms. As part of their capabilities, the firm must prioritize having the right information deployed by the right people at the right time and in the right location. Governance therefore should be more concerned with the appropriate and timely use of these capabilities in terms of generating value, rather than the hoarding and protection of information that will be released in some form nonetheless, may be generally understood throughout the industry and will be the basis of further market innovations and developments in the near future. From Professor Richard Langlois' “Modularity in Technology, Organization, and Society."

This is the basic modularization of the market economy. It accords well with the modularization G. B. Richardson (1972) suggested in offering the concept of economic capabilities. By capabilities Richardson means "knowledge, experience, and skills" (1972, p. 888), a notion related to what Jensen and Meckling (1992) call "specific knowledge" and to what Hayek (1945) called "knowledge of the particular circumstances of time and place." p. 27.

If the Joint Operating Committee coordinates these capabilities in the appropriate way, externalities will flow to the producers represented there. That is what operation governance is most concerned about. That there’s leakage of some explicit knowledge of these capabilities during operation is immaterial to the firm's externalities and competitive position. We discussed this during our review of Professor Giovanni Dosi for the Preliminary Specification. His research showed that it took equal and sometimes more effort to copy another firm's capabilities than to generate them. It is therefore more effective for a firm to focus on their key competitive advantages, their land & asset base, and their specialized earth science & engineering capabilities. In a dynamic, innovative and rapidly changing environment a producer firm wants its key competitive advantage to be state of the art and on the cutting edge at all times. Using market offerings to encourage and reward Intellectual Property developers to fully develop their products and services. To do so without fear of the producer community disregarding their property. This will make the service industry and other vendors able to support oil & gas producers and their efforts to generate value. Intellectual Property is not the domain of oil & gas producers in any way. Their value development is a result of the deployment of their tacit knowledge and coordination of the marketplaces resources. And what producers capabilities can do with that knowledge to build value from their oil & gas assets.

Pooling

People, Ideas & Objects use specialization and division of labor to increase industry performance and productivity. These are joined with six other Organizational Constructs to form a culture of preservation, performance and profitability for North American oil & gas producers. We have applied this solution to the earth science & engineering disciplines to deal with the anticipated difficulties in accessing adequate numbers of these resources in the mid to long term. When using the Joint Operating Committee as the key Organizational Construct of the dynamic, innovative, accountable and profitable oil & gas producer. We are moving this earth science & engineering knowledge to where operational decision rights reside to increase accountability for decisions made. Therefore we have eliminated the “operator” designation to introduce our pooling concept.

The capabilities to house “state of the art,” “just in time” earth science & engineering resources necessary to operate each property within one oil & gas firm are believed to be beyond what will be commercially viable in the very near future. This is a result of the further specialization of earth science & engineering skills needed by each individual and each producer firm within the industry. With the current market situation, due to retirements and the inadequate number of people entering the professions, producers' resource costs are expected to increase. Additionally an anticipated increase in throughput is necessary to meet energy independence demands. The known fact is that each barrel of oil or gas demands more earth science & engineering effort as we consume the “easy” reserves first. When specialization is required, if each producer firm maintained the full scope of their capabilities necessary to achieve “operator” status, they would no longer be commercially viable businesses due to this increased demand from specialization and their limited supply.

Specialization and the division of labor is the only proven solution to increase performance and productivity. Introducing multiples of what is currently available. Another Organizational Construct of the Preliminary Specification is Professor Paul Romer's concept of non-rival costs, or sharing, as a further enhancement to specialization and the division of labor. With the Preliminary Specifications pooling concept, each producer on the Joint Operating Committee should be able to contribute their advanced hyper-specialized capabilities to the Joint Operating Committee. The objective being to enable the Joint Operating Committee to draw from the much larger pool of Joint Operating Committee producers' capacities of engineers and earth scientists. Also, it is meant to draw from market offerings to obtain the necessary "operator" capabilities. Additionally, there is the need for the removal and offloading to the marketplace of the lower level technical work and its payroll burden from the producer firms. This is done by service providers that specialize and divide labor based on geology and engineering skills. Enabling producers to specialize in those highly specific areas of competitive advantage that provide real tangible value creation.

To increase their competitive advantage and earn a return on their investment, the producer firm invests in developing their capabilities. Under the pooling concept this implies market coordination by using the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. They are the critical competitive differentiator in the industry under the Preliminary Specification. They are also how within People, Ideas & Objects ERP software the producer earns a return on their investment in their capabilities. Through expansion of their petroleum reserves, production deliverability or reducing their overall costs on a barrel of oil equivalent basis. This is done in a highly competitive, dynamic and innovative environment. The answer in the short term is to ensure that these critical resource costs are recovered from oil & gas exploration and production on a day-to-day basis. Time and direct charges are recovered from the joint accounts for all of their time and expenses. That is to say that the people (representing the producers capabilities) who are pooled into a Joint Operating Committee, have been assigned a role within the Industrial Command & Control, Job Order and Work Order systems of People, Ideas & Objects et al Preliminary Specification. Whose costs are captured in the Partnership Accounting module. Consequently, the deployment of the producer's capabilities will result in a second revenue stream. That offsets the cost of building and maintaining these earth science and engineering capabilities.

This pooling concept is the solution People, Ideas & Objects have developed to replace the current "Operator" designation. Producers' ability to have just-in-time capabilities for all properties requires an industry-wide surplus of unused and unusable earth science & engineering capabilities to fulfill this just-in-time requirement. This has led to individual producers hoarding these resources to meet their just-in-time needs, causing low utilization rates industry-wide. The ability to pool producers' highly specialized resources into the Joint Operating Committee releases these otherwise unused and unusable capabilities. Facilitating an increased level of specialization for producers. An innovative oil and gas industry requires specialized knowledge, skills, experience, and ideas from all producers. Therefore each of these producers must be able to charge and recover their costs for these resources through a joint account as necessary. A charge made to a company's operations or capital expenditures to earn a return on the specialized capabilities it has built.

A note here to say that this falls under the domain of an ERP (Enterprise Resource Planning) solution for the following reasons. People, Ideas & Objects highlighted Professors Anthony Giddens and Wanda Orlikowski's Structuration Theory and Model of Structuration. In summary these suggest that software defines and supports organizations and therefore constrains them. Without software to define what an organization is and what it does, it would not exist commercially in the North American oil & gas marketplace. Sealing the producer firm in the long term definition of the Preliminary Specification would be as inappropriate as today’s business issues arising from the unchanging ERP software environment that exists. Therefore, People, Ideas & Objects, our user community, and their service providers will develop a permanent software development capability. This is based on the needs of the dynamic, innovative, accountable and profitable oil & gas marketplace. Ensuring the Preliminary Specification and the services associated with it are kept up to date and serving the greater oil & gas economy.

Operational Control

Operational control and innovation are at opposite ends of the spectrum. That however does not mean they cannot be accomplished by the same organization. The innovative oil & gas producer must have both. One without the other is not worth pursuing. Conflict and contradiction will show up in the organization at some point and the need to deal with it becomes a governance issue. Producers using the Preliminary Specification will have the tools necessary to ensure that the Joint Operating Committee can discern the difference between innovative markets and tight operational control.

When the Joint Operating Committee conducts field operations, it establishes a temporary organization representing individuals from a variety of different sources. Other producers who are partners in the Joint Operating Committee, vendors, suppliers and service providers are some of the sources that make up these temporary organizations. Innovative oil & gas producers need operational control over these resources. In the Preliminary Specification we provide a number of tools to enable the Joint Operating Committee to maintain high levels of operational control over these temporary organizations. Please see the Operations Management module.

The first of these tools is Industrial Command & Control. An ability to impose a chain of command over these resources that span the producers, suppliers, vendors and service providers that are working in the temporary organization that’s been established. Next there is the Job Order which is a means to execute the plans and operations of this temporary organization during its operation. Nothing should be done without the appropriate Job Order issued by the recognized and designated authority listed in the Industrial Command & Control chain of command. There is the AFE in which the budget is established and maintained, as well as the lease. And the Work Order that enables producers' resources to be charged to the Joint Operating Committee. This ensures producers recover the costs of building and maintaining their distinct capabilities.

These are the tools at the disposal of the people responsible for the Joint Operating Committee's operation. They are designed to provide a sharp contrast to the freewheeling and innovative ways of the market. Both of these, innovative markets and tight operational control, are healthy for the innovative oil & gas industry. Provide the operational control required for a dynamic, innovative, accountable, and profitable oil & gas producer.

OCI Compliance & Governance, Part V

 Governance Over Operational Control

Within the Preliminary Specification there is a conflict or contradiction that needs to be managed through the Compliance & Governance module. That is the posture that needs to be adopted by the Joint Operating Committee members towards the service industry representatives. At two different times and two different places during the ongoing operation of the properties the approach towards the service industry may be fundamentally different. At one time the approach will be to have the service industry operate as a free-wheeling marketplace where innovation and ideas flow. And then there will be times when operations are conducted and military precision is expected and required to ensure operations are completed successfully. This Dr. Jekyll and Mr. Hyde routine would give most people, in both the Joint Operating Committee and the service industry, a second look. 

On the one hand we have a marketplace and on the other we have operational control. And for many reasons the two may be the same people interacting in different capacities and at different times. The governance issue is; how do we ensure that the operating mode, marketplace or operational control, is the appropriate mode for everyone? This is of particular concern to service industry representatives, as so much of the operational control and success of the operation depends on their full attention. 

The answer to this question comes from the “Operational Review & Governance Interface.” If there is an operation currently being conducted by the Joint Operating Committee. And there have been no corners cut or shortcuts taken. Instead, there will be the explicit knowledge contained in the “Dynamic Capabilities Interface,” the “Planning & Deployment Interface,” assignments under the Industrial Command & Control which will include representatives of the service industry, the AFE, and Job Order. While none of these are required in the marketplace. Therefore the onus is on the Joint Operating Committee to ensure that these tools are used to contrast it with a freewheeling marketplace. And it will be at the “Operational Review & Governance Interface'' that governance over the members of the Joint Operating Committee is imposed to ensure they are using these tools appropriately during their operations. 

Operational control and innovation are at opposite ends of the spectrum. That however does not mean they cannot be accomplished by the same organization. The innovative and profitable oil & gas producer must have both. One without the other is not worth pursuing. Conflict and contradiction will show up in the organization at some point and the need to deal with it becomes a governance issue. The user of the “Operational Review & Governance Interface” will have the tools necessary to ensure that the Joint Operating Committee can discern the difference between innovative markets and tight operational control. 

Governance Over the Second Innovation Process

We have been concerned with governance over operations, and now we want to look into governance over the two major innovation processes in the Preliminary Specification. The first process of innovation is the development of innovation within the producer firm. This is a result of earth science & engineering capabilities being developed. The second process is as a result of field level innovations developed by the service industry. These innovations are either product or service related in terms of their offering to the producer or Joint Operating Committee during some operation. Either way it is critical that the producer firm has a measure of governance over innovation developments for a variety of reasons. These governance elements will again be captured in the “Operational Review & Governance Interface” of the Compliance & Governance module. Quotes are from Professor Richard Langlois' paper “Innovation Process and Industrial Districts.” 

What will the innovative oil & gas producer and Joint Operating Committee do when they innovate? That seems to be a fairly reasonable question and one that would be the founding principle in which governance over the innovation processes should be based upon. It's here that Professor Langlois provides us with a very concise summary for our purposes. 

In this survey, we examine the operations of innovation within industrial districts by exploring ways in which differentiation, specialization and integration affect the generation, diffusion, and use of new knowledge in such districts. p. 1.

The source, deployment and use of this knowledge is the “Dynamic Capabilities Interface” in the Research & Capabilities and Knowledge & Learning modules. Recall that “knowledge begets capabilities, and capabilities beget action.” The capabilities contained within the “Dynamic Capabilities Interface” are comprehensive and are designed to serve the needs of all of the people required for that particular operation.

While it is possible to conceive of a firm that is so hermetic in its use of knowledge that all stages of innovation, including the combination of old and new knowledge, rely exclusively on internal sources, in practice most innovations involving products or processes of even modest complexity entail combining knowledge that derives, directly or indirectly, from several sources. Knowledge generation, therefore, must be accompanied by effective mechanisms for knowledge diffusion and for "indigenizing" knowledge originally developed in other contexts and for other purposes so that it meets a new need. p. 1.

And

Relationships within industrial districts therefore lead to diffusion but also to the creation of new knowledge through shared preoccupations. Because many people or firms can work on a problem simultaneously, a number of different solutions may be found (Bellandi, 2003b). The result is a larger and stronger "gene pool" within the sector (Loasby, 1990, 117), with the further advantage that solutions that are originally regarded as competing may turn out to be complementary and well-suited to different niches within the district.  p. 7.

I could recite more of the elements of the Preliminary Specification as the reasons for the governance requirements in the “Operational Review & Governance Interface.” The point needs to be made is that the two major innovation processes need to be reviewed at a high level within the firm. There are many interactions between the firm and the Joint Operating Committee, and the larger service industry. This means that the possibility that all valuable knowledge is not codified is high. That is just one of the risks. Another is that the “Lessons Learned Interface” doesn’t capture failures accurately for further learning. These are necessary to be reviewed to ensure that knowledge, capabilities, and innovations are built upon for the future.

People, Ideas & Objects and Oracle Corporation

Where to begin? Let's start with a high level summary of the Oracle Governance, Risk & Compliance Management Suite of modules. There are three groups in which the modules are organized. These are Risk & Financial Governance, Performance & Financial Controls and Access & Segregation of Duties Controls. Within these three groups you will find the modules Oracle developed in Oracle Fusion Applications, Oracle Governance, Risk & Compliance Management Suite. We will discuss the Risk & Financial Governance module with Performance & Financial Controls and Access & Segregation next. Needless to say these modules have all been adopted within the Preliminary Specification. 

To the larger issue of compliance and governance and how a firm handles the growing demand for more regulation. Oracle and People, Ideas & Objects have similar ideas on how to keep ahead in this difficult area. Oracle asks the following.

No one expects this to be the end of ongoing industry and legislative requirements. Business executives continue to struggle with questions like: How can we stay on top of regulatory demands while controlling costs? Can we better manage risk to prevent business and compliance failures? How do we achieve better performance while ensuring accountability and integrity?

And it is through automation, Information Technologies and the use of specialization and the division of labor that the innovative oil & gas producer can achieve these objectives of getting ahead of regulations. As we have proposed in the Preliminary Specification, the producers that participate in our user community will have the opportunity to shape the software they will use. People, Ideas & Objects is user defined software based on the Joint Operating Committee. Giving the producer the ability to remake their organization into an innovative, profitable and performance-oriented oil & gas producer. 

In terms of Oracle’s Risk & Financial Governance module. Producers will be able to increase compliance efficiency, improve financial reporting reliability and anticipate and respond to risk. We discussed the element of risk in the Financial Marketplace module and the assessment of all investments based on their anticipated returns. Each of the potential investments have to be “risked” in order to bring the return on comparable terms that consider the risk. It is here that the two modules, Oracle Risk & Financial Governance and Financial Marketplace will crossover. It is also at this point that our two firms have similar attitudes, again, with respect to how the producer attains value. Oracle states.

KPMG's Assurance & Advisory Service Center understood early that value and risk go hand in hand and that performance and risk management should converge to create, enhance and protect stakeholder value. In May 2007, the Institute of Management Accounting further characterized Enterprise Risk Management as aligning strategy, processes, technology, and knowledge with the purpose of evaluating and managing the uncertainties the enterprise faces as it creates value. It considers ERM to be a truly holistic, integrated, forward-looking, and process oriented approach to managing all key business risks and opportunities—not just financial ones—with the intent of maximizing stakeholder value as a whole.  

This will be a key insight that our user community will be able to build off of the People, Ideas & Objects Financial Marketplace and Oracle’s Risk & Financial Governance modules.

Oracle Transaction Controls Governor is an application designed to continuously track key transactions. It also monitors data and application modifications. In terms of reviewing transactions, much of the application is programmable and can be set to look for certain criteria. This is done through an intuitive interface that controls and monitors all transactions for certain behavior. Oracle also provides a library of internal controls that can be deployed if the producer finds them useful. People, Ideas & Objects, working on behalf of our subscribing producers, will be able to provide a library of these internal controls specific to the innovative and profitable oil & gas producer. These controls output can then be directed to the appropriate individual within the firm to be dealt with. 

Oracle Configuration Controls Governor is an Oracle Fusion Application that provides Sarbanes Oxley compliance to the producer of IT infrastructure configuration changes. When there is a change to your IT environment, the who, what, where and when of the change is sent to the appropriate people within your organization. There they can review the changes to ensure that they were carried out in compliance with the company's policies. The Configuration Control Governor also allows establishing tolerances for fields. So if a user entered a number that exceeded the field's tolerance, the transaction would be rejected. 

During our discussion of the Compliance & Governance module we discussed the need for more internal controls. These transaction and configuration controls will provide appropriate governance for an element of the internal controls. That these are automated helps to provide a strong understanding of the appropriateness of the global transaction base the producer firm’s base their financial reports upon. However, they are not the whole picture of internal controls. And that is where Oracle Preventive Controls Governor comes into play. Using configurable workflows, Oracle Preventive Controls Governor enables the user to design and implement appropriate internal controls for their firm. This tool provides both contextual and intrinsic policy applications to business processes.

We look at Oracle Fusion Applications, Governance, Risk & Compliance Suite, Access Controls Governor module. This will be a key element of the Preliminary Specification as segregation of duties (SOD) is taking on heightened importance in the firm. The SOD offers many advantages to innovative oil & gas producers, regardless of whether it is a result of regulation or better governance. Having multiple people involved in the process from beginning to end ensures that no one individual can manipulate firm resources for their own benefit. 

Oracle notes the following is also part of the Access Control Governor module functionality.

Global regulations are driving organizations to improve the transparency and accountability of financial data, processes, and transactions. Controlling, tracking, and reporting on user activity within the application environment are critical components of compliance.

So apparently Big Brother needs to watch. And as good as your internal controls may be, there will always be ways to hack the system in ways unknown before. Thankfully Oracle’s Access Controls Governor module is automated and implements policies based on management's understanding. There is also a library of controls that can be implemented developed by Oracle in collaboration with leading audit and consulting firms. As with the libraries mentioned, People, Ideas & Objects will maintain a library of these policies for the innovative and profitable oil & gas producer. And the system is not just reporting violations, it is actively stopping and enforcing SOD when they occur based on those policies. And they can be dynamic and proactive in their enforcement, stating that no user can be involved in more than two steps of a five-step process, and disabling the user to sign on to another process at the time of assignment. 

When preparing policies for implementation the Oracle Access Controls Governor provides a tool for simulating the revised policies. Using the historical record of user access as the base of information it can run the revised policy against that data. This will enable it to determine what the outcome of that revised policy will be. Would there be any violations, false positives etc? Then they can tune the policy based on the feedback they receive from the tool. This will ensure that it is only targeting the desired situations. Saving costly resources in the future. 

From a People, Ideas & Objects perspective the Oracle “Governance” applications that we have discussed help to bring 21st Century internal controls to the Preliminary Specification. When we think of the manner in which the industry will operate, we will see large portions of the existing producers' overhead being provided by service providers. And those service providers access their work through the People, Ideas & Objects Preliminary Specification. It will be necessary to extend these internal controls to those individuals. The producer will need to know that these controls are effective in their firm, their Joint Operating Committees and the service providers they hire to maintain their firm.

Conclusion

Here we have the beginnings of compliance and governance for the innovative oil & gas producer and Joint Operating Committee. What we need to do is deal with the compliance of an innovative oil & gas producer with the tools of the 21st century. Those include automation, specialization and the division of labor. And in terms of governance, we can begin to provide the producer firms with the appropriate operational governance that is consistent with innovations demands.

OCI Compliance & Governance, Part IV

 Governance Over the Value Add

The level of innovation within the oil & gas producer will become more challenging as the earth sciences and engineering disciplines continue their steep trajectories. With high levels of activity in this area, and the implications being so broad and far reaching there will be areas where substantial value might be left uncultivated by the producer. These could be in the scientific or business areas and the question becomes who is responsible for capturing this value? This discussion will detail how the Compliance & Governance module of the Preliminary Specification deals with this situation. 

With our look at technological paradigms and the effect they have on scientific and innovative trajectories in oil & gas. When discussing these points about innovation, it is pertinent to remember that the sciences, the trajectories they are on, and the opportunities they generate for a producer, are accelerating and will continue to do so. With this in mind, we note that Professor Giovanni Dosi suggests two separate phenomena are observed:

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

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

Specifically, these new opportunities will be in the firm's business and technological areas. There will be opportunities that are within the scope of the oil & gas company's competitive advantage of its land & asset base, as well as its expertise in earth science & engineering. However, much of it will also be generated outside of its core area, in the service industry. This is through further automation, division of labor and specialization. It will also be generated in non-related business areas that are new and not well served by existing businesses. Most of this business value will be easily captured. That however does not necessarily mean it should be pursued. At these times, the governance model must ensure that the firm sticks to its knitting and pursues its primary competitive advantages. That to move outside of its core competitive advantages, to pick up some of these low lying fruits would distract it from the real job at hand. This is the job of those who ensure the governance model is upheld. At the same time, any value in the core competitive advantage that is not realized must be captured and steps taken to systemically realize the value from that point forward.  

To ensure that the firm remains within its competitive advantages there will be one interface developed with two different elements to it. This will be called the “Capabilities & Deployment Additions Interface.” The first element will be a summary of the additions to the “Dynamic Capabilities Interface.” By reviewing the current additions, i.e. all of the text added in the last quarter, to the interface. The user will be able to determine if the firm can maintain its overall focus on developing its capabilities in line with its goals and objectives. If it sees that it is suddenly researching the development of drill bits, it has wandered in an inappropriate direction. The second element is similar in its characteristics but uses the “Planning & Deployment Interface.” With the deployment of its capabilities it can see that the firm deployed its resources in a manner that is consistent with its objectives and goals. That no capabilities were deployed to commission drilling rigs or similar unrelated activities during the quarter. 

In the same way that the capabilities and deployment of them can be evaluated, the AFE and Work Orders can be reviewed for the quarter. These will provide an understanding of what the firm conducts in partnership through its Joint Operating Committees and with other producers in the industry. After reviewing these activities the user of the “Capabilities & Deployment Additions Interface'' will be able to ensure that the producer's focus remains consistent with its objectives. Any potential deviations could be dealt with through discussions with management and corrective actions taken. 

Focusing on where it can generate the greatest value is the firm's only concern. Pursuing the value available in other areas is a distraction that should be ignored. However, understanding that at the same time there is new value being generated as a result of the steep trajectories that the relevant and core strategic science is on. That this new value may be reflected in other areas of the firm, and needs to be captured is part of the “Capabilities & Deployment Additions Interface” of the Compliance & Governance module.

Governance Over the Capabilities Revenues

Through our discussion of the Preliminary Specification we have noted that the innovative and profitable oil & gas producer will have two distinct sources of revenue. The first is oil & gas production, and the second is the value added process of the specialized capabilities they provide to the various Joint Operating Committees, working groups they participate in, and other producers who may hire them for their specialized capabilities. This discussion deals with governance over these capabilities to ensure that revenues are recovered from the appropriate partners. 

With the increasing volume of work required for each barrel of oil produced, the demand for earth science & engineering resources continues to grow. The supply of these resources is constrained as increasing them in the short, mid and long term is difficult. People, Ideas & Objects approached the supply of these technical resources by developing software that defines and supports increased automation, divisions of labor and specialization throughout the industry. We have also identified that the “operator” designation inappropriately requires that their capabilities be developed to handle any and all contingencies within the producer firm. The operator designation creates unused and unusable surplus capacity of earth science & engineering resources trapped within each producer firm. By pooling the technical resources available from the Joint Operating Committee partners. This pooling will take the available capabilities of each producer and match them to the needs of the property. This will ensure the requirements are fulfilled. Additional capabilities can be acquired from the marketplace if necessary. Eliminating the otherwise trapped unused and unusable surplus capacity of these earth science & engineering resources in each producer firm. Capabilities provided in this fashion will be cost to the joint account at an industry standard cost based on the producers' revenue per employee factor. 

Revenues from the provisioning of engineering and geological capabilities to the Joint Operating Committee are necessary for the oil & gas business. Replacing the current operator overhead charges. With the expansion in the volume of work required for each barrel of oil produced there is commensurate difficulty in securing these capabilities in-house. There is also increased difficulty just maintaining the capabilities. The need for producers to build specialized capabilities becomes an issue of how to develop them if they cannot source a dedicated revenue stream to support them. By having a dedicated revenue stream to support the engineering and geological expenditures, the producer can better manage their operation, and build their capabilities. There is a further issue when we apply specialization and division of labor. The scope and scale of an oil & gas earth science & engineering capable operation, without the pooling concept being applied, becomes so broad as to render it completely uncommercial. 

In terms of governance the Preliminary Specification will provide the “Capabilities Revenues & Support Interface” in the Compliance & Governance module. This will provide a summary of all of the charges to the various joint accounts and working groups for any engineering and geological resources. This will be done during the period the user's request. This interface will also have targets for departments to achieve in terms of percentage cost recoveries and budgeted incomes. Individual joint accounts should be able to meet these targets. 

These net revenues should be displayed in the proper context on the “Capabilities Revenues & Support Interface.” That is to say they should be presented in a pro-forma income statement showing the costs of these resources, which would include resource costs and the various other costs of rent, technical support, equipment etc. This would show progress in how the firm met its targets. 

Governance Over Coordination Without Incentives

With our review of Professor Richard Langlois' writings we can see there will be an element of the Preliminary Specifications Compliance & Governance module that will be devoted to what we would call “operational governance.” We want to discuss the incentives vs. coordination issue of any operation that a Joint Operating Committee undertakes. This deals with the conflict between producers and service industry representatives and the high costs associated with field operations. Producers feel field costs are out of control and impose cost controls to better manage them. People, Ideas & Objects believes that coordination of field operations and improved communications will control costs. This will also improve outcomes. The coordination and communication comes through the modules in the Preliminary Specification, specifically Research & Capabilities and Knowledge & Learning modules. In his paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization” Professor Richard Langlois states. 

More generally, we are worried that conceptualizing all problems of economic organization as problems of aligning incentives not only misrepresents important phenomena but also hinders understanding other phenomena, such as the role of production costs in determining the boundaries of the firm. As we will argue, in fact, it may well pay off intellectually to pursue a research strategy that is essentially the flip-side of the coin, namely to assume that all incentive problems can be eliminated by assumption and concentrate on coordination (including communication) and production cost issues only. p.12.

Let's assume that People, Ideas & Objects Preliminary Specification is operational in your firm. You have the Industrial Command & Control, the Planning & Deployment Interface, the AFE and Job Order systems operational as expected however your results continue to disappoint and the cost overruns are tragic. How do we ensure that performance expectations are met and these poor performing situations are identified quickly and dealt with?

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

We should have an interface in the Compliance & Governance module that provides a user with the ability to oversee the operations being conducted in the Research & Capabilities and Knowledge & Learning modules. This interface should be called the “Operational Review & Governance Interface” which gives its users access to the operational information being reviewed. There they can interact, if desired, and supervise or mentor the project manager. This will ensure that objectives are met and costs are maintained. All with an understanding of how these objectives can be achieved, through enhanced coordination and communication, not through incentives. 

In saying this, it's more about governance than supervision. When things go wrong, you need to be able to fix them effectively, but you also don't want to interrupt the day-to-day operations unnecessarily.

Governance Over the Deployment of Capabilities

We are discussing the operational governance of the firm and Joint Operating Committee. A significant element of this discussion is the capabilities these organizations have access to. Earth science & engineering capabilities are documented in the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. An innovative and profitable oil & gas producer has two key competitive advantages. Consequently, from the perspective of governance, these capabilities should be protected and kept for your firm only. Nothing could be further from the truth. Any usage of these capabilities will leak to member firms of the producer's Joint Operating Committees. That is an inevitable fact. And it is imperative that the firm consider as their priority the use of their capabilities as having the right information deployed to the right people at the right time. Governance must be concerned with the appropriate use of its capabilities, rather than information hoarding. From Professor Richard Langlois' “Modularity in Technology, Organization and Society.” 

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

What are we trying to achieve by employing these capabilities? It is to generate value. But more importantly to generate value for the owners represented on the Joint Operating Committee. In economic terms this value is called “externalities.” After the operation, after the deployment of the necessary capabilities at the right time by the right people the value should have been gained by the members of the Joint Operating Committee. 

So why don't we observe everywhere a perfectly atomistic modularization according to comparative advantage in capabilities - with no organizations of any significance, just workers wielding tools and trading in anonymous markets? We have already seen the outlines of several answers. The older property rights literature, we saw, would insist that the reason is externalities, notably the externalities of team work arising from the nature of the technology of production itself. The mainstream economics of organization is fixated on another possibility: because of highly specific assets, parties can threaten one another with pecuniary externalities ex post in a way that has real ex ante effects on efficiency (Klein, Crawford, and Alchian 1978; Williamson 1985). Richardson offers a somewhat different, and perhaps more fertile, alternative. Firms seek to specialize in activities for which their capabilities are similar: but production requires the coordination of complementary activities. Especially in a world of change, such coordination requires the transmission of information beyond what can be sent through the interface of the price system. As a consequence, qualitative coordination is necessary, and that need brings with it not only the organizational structure called the firm but also a variety of inter-firm relationships and interconnections as well." pp. 27 - 28.

If the Joint Operating Committee coordinates these capabilities in the appropriate way, the externalities will flow to the producers represented there. That is what the operation's governance is most concerned about. That there may be leakage of some explicit knowledge of these capabilities during the operation is immaterial to the firm's externalities and competitive position. Recall our review of Professor Giovanni Dosi for the Preliminary Specification. His research showed that it took equal and sometimes increased effort to copy another firm's capabilities than to generate them themselves. It is therefore more effective for a firm to focus on their key competitive advantages, their land & asset base, and their earth science & engineering capabilities. And the effective and efficient deployment of these competitive advantages on a “just in time” basis. 

We have asserted and I am certain that the oil & gas industry is moving towards its scientific basis as its primary competitive advantage. The days when financiers or lawyers could build viable producers based on their skills are numbered if not nonexistent. There is also a perception developed through the Preliminary Specification that the producer is a firm that maintains financial interests in a variety of Joint Operating Committees. That the producer will deploy their capabilities to these assets when and where they are needed and as they are developed. These capabilities deployment processes are under constant change and innovation. This level of change and innovation causes “Dynamic Transaction Costs” to be incurred, and people question the direction of the changes. What is needed is a method of governance in the Compliance & Governance module over the overall change process to ensure that the ship maintains its course and the costs remain in line. Quotations are from Professor Richard Langlois' “Transaction Costs in Real Time” paper. 

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

We introduced the “Operational Review & Governance Interface" and we will now continue its discussion. In our previous discussion, we discussed the ability to mentor the Project Manager and oversee or supervise the operation if required. What we need to discuss now is broader and more global in scope. An interface that encapsulates the entire firm's operations. This is so that the user can see that the firm's direction in terms of capabilities development is being optimized in its Joint Operating Committees, etc. It would be of questionable value if the firm expended valuable resources on developing its capabilities for multilateral fracing in shale formations. This is when none of its Joint Operating Committees were deploying, or able to deploy the technologies. 

With the “Operational Review & Governance Interface” the user can review the entire operation as it happens. From the “Dynamic Capabilities Interface” to the “Planning & Deployment Interface,” AFE, Job Order and “Lessons Learned Interface," review all of the actions taken and the documentation generated during the operation to determine what was the critical cause of the success or failure of the operation. This could be done in fine detail or in summary form to oversee the many operations conducted. 

Another variable captured by the Preliminary Specification is the Dynamic Transaction Costs. These are the costs associated with change and innovation. When people run into these charges, they will be able to tag them with the Dynamic Transaction Costs tag for further review. This will be a red flag in the “Operation Review & Governance Interface” for the user to trigger. When they see high levels of “Dynamic Transaction Costs" they know the operation has run into high levels of change and / or innovation. Therefore they will be able to see the implications of these costs in the knowledge and information at the interface. And know that some significant change or innovation will follow.

OCI Compliance & Governance, Part III

 Governance Over the Process of Innovation

One of the areas that we covered in our previous discussion in the Compliance & Governance module of the Preliminary Specification. Is that effective governance and innovation are not necessarily mutually exclusive. We want to discuss the “Lessons Learned Interface" initiated in the Knowledge & Learning module of each Joint Operating Committee. These lessons learned are aggregated in the Compliance & Governance module of the Preliminary Specification in an interface called “The Innovation Library.”

What we know about innovation can be summarized by Professor Giovanni Dosi. He states,

In very general terms, technological innovation involves or is the solution to problems.” p. 1125.

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 problem that generates its solution "automatically." Certainly the "solution" to technological problems involves the use of information derived from experience and formal knowledge. It also involves specific and uncodified capabilities on the part of the inventors. p. 1126.

With the demands for more earth science & engineering for each barrel of oil & gas produced, and the need to keep up with the steep trajectory of those sciences over the coming years, the oil & gas firm, and the individual Joint Operating Committees will learn substantial volumes of new and valuable information about the business. The innovative oil & gas producer will be able to take advantage of these developments and expand the knowledge of both the organization as well as the science. Keeping proper governance over these processes would seem counterproductive, however, it doesn’t have to be.

One of the first things we can do to provide effective governance is to ensure that the same mistakes are not made over and over. Having the lessons learned populated from each Joint Operating Committee, up to each participant producer firm. Where each producer firm will have the aggregated lessons learned from each Joint Operating Committee they have an interest in. Then they can apply any lessons learned from any of the Joint Operating Committee’s to other Joint Operating Committee’s as may be required. 

Another thing we can do in the governance section of this module is provide a strong understanding of the innovation process. By compiling and assimilating innovation processes into an understandable business process, those charged with responsible governance will understand what innovation is, and what unsuccessful innovation is. Having a library of the science of innovation, some written by Professors Dosi and Langlois, would alleviate the guesswork and concern that some of the activities occurring in the firm were moving the firm down the wrong direction, when in fact they were successful innovations. We know that innovation can be reduced to a quantifiable and replicable process. Therefore it should be governed on the same basis. However, that governance needs to be done in a manner that understands what successful innovation consists of. That successful governance is a responsibility to understand the innovation process just as much as innovators. Let's call this interface “The Innovation Library" of the Compliance & Governance module. Professor Dosi notes in his paper, Sources, Procedures and Microeconomic Effects of Innovation.

In general the uncertainty associated with innovative activities is much stronger than that with which familiar economic model deals. It involves not only lack of knowledge of the precise cost and outcomes of different alternatives, but often also lack of knowledge of what the alternatives are (see Freeman 1982; Nelson 1981a; Nelson and Winter 1982). p. 1134.

This is not what corporate governance wants to hear. What will please them is that we have the “Research Budget Allocation Interface” in the Research & Capabilities module. Remember that this interface documents the information that the firm is involved in. It summarizes the activities currently ongoing and the costs are budgeted. If a Work Order involves research or innovation being carried out, it will be listed on the interface. If an AFE includes some of these activities, they will also be listed on the interface. Within the Research Budget Allocation Interface the ability of its users to review all ongoing activities within the organization is possible. The risk of duplications would be discovered and the budget allocation for research and innovation costs would be prioritized and given some corporate direction. 

Additionally there is the Industrial Command & Control (ICC) providing governance over the innovation process. The ICC is developed to pool technical resources in the Joint Operating Committee, however it has just as much application in the producer firm. By using the ICC for innovative activities within the Research & Capabilities module, a firm can keep tight control over who is involved in innovation activities. By imposing a chain of command and control over the people seconded from different departments in the firm, the ICC helps to provide appropriate governance over innovation in the firm.

We know there is more to innovation than this. Sometimes it is the un-qualifiable and the unquantifiable that we seek. Professor Dosi notes. 

In fact, let us distinguish between (a) the notion of uncertainty familiar to economic analysis defined in terms of imperfect information about the occurrence of a known list of events and (b) what we could call strong uncertainty whereby the list of possible events is unknown and one does not know either the consequences of particular actions for any given event (more on this in Dosi and Egidi 1987).  p. 1134.

And

I suggest that, in general, innovative search is characterized by strong uncertainty. This applies, in primis to those phases of technical change that could be called pre-paradigmatic: During these highly exploratory periods one faces a double uncertainty regarding both the practical outcomes of the innovative search and also the scientific and technological principles and the problem-solving procedures on which technological advances could be based. When a technological paradigm is established, it brings with it a reduction of uncertainty, in the sense that it focuses the directions of search and forms the grounds for formatting technological and market expectations more surely. (In this respect, technological trajectories are not only the ex post description of the patterns of technical change, but also, as mentioned, the basis of heuristics asking “where do we go from here?”) p. 1134.

This will become the nature of the oil & gas business. An effective governance over the innovation process will have to limit its involvement so that innovations can develop. At the same time this does not preclude the oversight mentioned at the beginning of this module's description. And there may be substantially more “good governance” that our user community can determine when their involvement in these developments is unleashed. 

Continuing our discussion of corporate governance over innovation uncertainty. And how the firm's governance will seek to moderate investments in innovation and attempt to make it a routine aspect of the firm's activities. We have noted that innovation is a quantifiable and replicable process. It is, however, anything but routine. We want to ensure that innovations remain within the commercial sphere and do not become science projects. At the same time I want to reiterate that innovation and sound governance are not mutually exclusive. And with that jumble of contradictions let's continue. 

Writing the Preliminary Specification is an innovation of People, Ideas & Objects. It is something significant and will happen only once. It is not something that happens every day and it is unusual for it to be undertaken. These are characteristics of innovation. When a firm undertakes to do something innovative it is usually something that is original and significant to their firm. It involves some risk and implies a high level of uncertainty. Professor Giovanni Dosi notes. 

However, even in the case of “normal” technical search (as opposed to the “extraordinary” exploration associated with the quest for new paradigms) strong uncertainty is present. Even when the fundamental knowledge base and the expected directions of advance are fairly well known, it is still often the case that one must first engage in exploratory research, development, and design before knowing what the outcome will be (what the properties of a new chemical compound will be, what an effective design will look like, etc.) and what some manageable results will cost, or, indeed, whether very useful results will emerge. (Mansfield et al. 1977) p. 1135.

Unfortunately this is the state of the oil & gas business as it stands today. That every well drilled is literally the result of someone's theory as to what the existence of oil & gas is. Anything classified as exploratory, and much of the development work, would meet this innovation criteria. 

As a result, firms tend to work with relatively general and event-independent routines (with rules of the kind “... spend x% of sales on R & D,” ... distribute your research activity between basic research, risky projects, incremental innovations according to some routine shares ...” and sometimes meta-rules of the kind “with high interest rates or low profits cut basic research,” etc.). This finding is corroborated by ample managerial evidence and also by recent more rigorous econometric tests; see Griliches and Ariel Pakes (1986) who find that “the pattern of R & D investment within a firm is essentially a random walk with a relatively low error variance” (pp. 10 - 11). p. 1134.

Reverting back to People, Ideas & Objects. Writing the Preliminary Specification is not routine, however, it is in a long line of routine research and development projects undertaken by our firm to explore the development of user driven software for innovative oil & gas producers, based on using the Joint Operating Committee. 

In this sense, Schumpeter’s hypothesis about the routinization of innovation (Joseph Schumpeter 1942) and the persistence of innovation-related uncertainty must not be in conflict but may well complement each other. As suggested by the “late” Schumpeter, one may conjecture that large-scale corporate research has become the prevailing form of organization of innovation because it is most effective in exploiting and internalizing the tacit and cumulative features of technological knowledge (Mowery 1980; Pavitt 1986). Moreover, companies tend to adopt steady policies (rules), because they face complex and unpredictable environments where they cannot forecast future states of the world, or even “map” notional events into actions, and outcomes (Dosi and Orsenigo 1986; Heiner 1983, 1988). Internalized corporate search exploits the cumulativeness and complexity of technological knowledge. Together with steady rules, firms try to reduce the uncertainty of innovative search, without, however, eliminating it. pp. 1134 - 1135.

This is where corporate governance does not necessarily conflict with innovation. Priorities and budgets need to be set and established. Corporate focus is needed. Innovative oil & gas producers will benefit from a good corporate governance model. Otherwise the firm's pursuit would be an out of control science experiment. I think the governance mechanisms mentioned to date, the “Research Budget Allocation Interface” and the Industrial Command & Control provide the beginnings of effective governance. I want to stress again that our user communities' input into the Preliminary Specification will be of substantial value in this area.

Governance Over the Firm’s Collaborations

We want to discuss the governance of the firm and collaborations between the Joint Operating Committees. It is these collaborations between the industry participants and the service industry that will provide the fuel for the producer and Joint Operating Committee innovations. A proper governance over these collaborations is also necessary to ensure that the firm's capabilities are not unnecessarily leaked to areas where they are not required. We have stated throughout the Preliminary Specification that these capabilities are as difficult to copy as to generate within the firm. Copying another firm is as costly as developing them. This discussion is about good governance.  

We begin by discussing Professor Giovanni Dosi’s definition of technological trajectory. The definition of a technological trajectory is the activity of technological process along the economic and technological trade offs defined by a paradigm. Dosi (1988) states “Trade-offs are the compromise, and the technical capabilities that define horsepower, gross takeoff weight, cruise speed, wing load and cruise range in civilian and military aircraft.” People, Ideas & Objects assumes the technical trade-off in oil & gas is accurately reflected in commodity pricing. Higher commodity prices finance enhanced innovation. 

These trade-offs facilitate industries' innovation on changing technical and scientific paradigms. Crucial to the facilitation of these trade-offs is a fundamental component that spurs change and is usually abundant and available at low costs. For innovation to occur in oil & gas, People, Ideas & Objects would assert that the ability to seek and find knowledge, and to collaborate are two “commodities” that are abundant today. With their inherent low direct costs, knowledge and collaboration are the triggers for a number of technical paradigms that will provide companies with fundamental innovations.

Throughout the Preliminary Specification enhanced collaboration between the producer and other members of the various Joint Operating Committees the producer is partnered with. This included industry members, service industry participants and the general industry at large. These collaborations are for the expressed purpose of developing the firm's technology and understanding. Enhancing its innovativeness and capabilities. There are however limits to this exposure. For a variety of legal, proprietary, and other reasons certain things may not be able to be discussed openly. There is also the case that information regarding a certain capability will only be discussed with partners with an interest in that property. That releasing it to other partners would not be in the firm's interest. How is collaboration governance managed?

The capabilities within the “Dynamic Capabilities Interface” of the Research & Capabilities and Knowledge & Learning modules are restricted to those situations in which they are authorized. However, does that solve the problem? The issue comes down to collaboration itself. Does the information slip out in the discussion between the individual and their counterpart at company B? What can be done once a collaboration leaks the data? Is limited and that is the issue that the governance will deal with. 

One of the first things we can do is centralize the publication of collaborations in one area. There they can be approved for content before publication. If any collaboration is deemed too revealing, it can be returned for editing, and further review before publication. This would slow the process of collaborations however that is a minor issue compared to the loss of critical information. Secondly, the review before publication could be handled only by those familiar with corporate secrets. The problem with either of these situations is that it would take someone very senior within the organization. To do this would require that we have a centralized “Collaboration Interface” that aggregates the firm's collaborations into one central area. Therefore we will build this interface within the governance area of the Compliance & Governance module should any producer desire to use it.