OCI Performance Evaluation, Part II

 Collaboration's Risks and Rewards

While working in isolation we can achieve a lot of what we set out to do. When we collaborate with others, the possibilities grow exponentially. Reviewing a mountain of data seems fun. For a few people that might ring true. However, for most people the possibility of finding joy in the task is limited. As a team however, the task becomes something of an adventure with the findings being multiples of what one individual might discover. Collaborative capability needs to be part of the Performance Evaluation and Analytics & Statistics modules. 

Professor Giovanni Dosi noted that a technological trajectory is the activity of technological processes along the economic and technological trade-offs defined by a paradigm. Dosi (1988) states “Trade-offs being defined as 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 will allow more innovation to be funded.

Trade-offs facilitate industries' innovation based on changing scientific and technical 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 asserts 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.

Collaborating and sharing knowledge in the Performance Evaluation and Analytics & Statistics modules, and the other modules of the Preliminary Specification, will fuel innovation. Whether that collaboration is within a producer firm, a Joint Operating Committee or a working group recently established through a Work Order. Access to these two modules should enable participants to evaluate the data with the toolset provided.

These two modules will be more useful if they are made collaborative. Not the obscure applications favored by the data obsessed. Remember Professor Dosi says that “In very general terms, technological innovation involves or is the solution to problems.” Discovery of those problems can be collaboratively done here in the Performance Evaluation and Analytics & Statistics modules. 

What we do know is that “things” happen fast. Except in organizations. Providing people with the appropriate knowledge and information to act in a fast-changing environment is difficult. Some of the difficulty in getting the knowledge and information to the right people is ensuring the integrity of the information is not breached by those not part of the organization. And we are not recommending an open information policy. The Security & Access Control module imposes high levels of integrity on all communications, data storage and information. Collaboration between firms and transparency are areas where some perceived leakage of proprietary information may occur. It is here in these collaborative communications that I ask if information loss threatens innovative oil & gas producers' competitive advantages. Those being their land & asset base, or earth science & engineering capabilities. No they don't. As we have discovered, collaborations enhance firms' and Joint Operating Committee innovation and capabilities.

The question therefore becomes how is this proprietary information and capability deployed on an as-needed basis? 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. The ability to replicate a competitive advantage from one company to another is not as easy, and may not be worthwhile doing. 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 unique and specific competitive sources and directions?

Collaborations in the Performance Evaluation and Analytics & Statistics modules of the Preliminary Specification will provide increased value in getting original, innovative ideas and information to the appropriate people. This is in the right place and at the right time. These are the attributes the firm should pursue rather than worry about losing proprietary data or information. We note that innovation involves discovering problems. It also includes changes which Professor Dosi notes in the following.

Organizational routines and higher level procedures to alter them in response to environmental changes and / or to failures in performance embody a continuous tension between efforts to improve the capabilities of doing existing things, monitor existing contracts, allocate given resources, on the one hand, and the development of capabilities for doing new things or old things in new ways. This tension is complicated by the intrinsically uncertain nature of innovative activities, notwithstanding their increasing institutionalization within business firms. p. 1133.

It would therefore seem prudent for an innovative producer to enable collaborations in all modules of the Preliminary Specification. This is a key to their innovation strategy. Focus on dealing with the change in routines as a result of the discovery of problems and solutions. These are the areas where the innovative oil & gas producer will need to deal with the outcomes of innovation, and the overall capability to continue to innovate.

Dynamic Data and Information

How the innovative producer attains a higher innovation factor is through a constant search for petroleum reserves, increased production, lower costs and more effective management of their oil & gas assets. This search will begin with a query in either the Performance Evaluation module for the Joint Operating Committee or the Analytics & Statistics module for the producer firm itself. Having access to the data and information of the respective domain provides the user with the ability to formulate queries on the basis of different scenarios, what if’s, and other mathematical calculations. 

If we refer back to earlier parts of this module we find that performance is a key motivating principle behind the use of the module. People use these modules to find the next value increment. To determine where that value is located, it is necessary to use these specialized tools to identify it. Recall that these are subject to the Security & Access Control module, therefore the data and information they can access will be limited to the domain of the users' authority, i.e. only the Joint Operating Committees they’re assigned to. And the application modules will be collaborative, allowing interaction with others.

Running a query is a fairly basic operation that produces static output. The result just sits in the spreadsheet for the user to act upon. Within the Performance Evaluation and Analytics & Statistics modules we can invoke messaging services which include the following processes: person to person, person to process, process to person and process to process, on any of the system processes. Therefore if a process is running, and at any time that process obtains criteria for which it is necessary to know, the system will send out a message. Or if the same process was completed, it would invoke another process to initiate another action. It would also have the option of texting the system to invoke a number of different scenarios. Messaging processes bring the power of the ERP system into play from the point of view of using these calculations to act. People, Ideas & Objects have many tools in this area. Through Java, Oracle Autonomous Database, Oracle Fusion Applications and Functional Programming this area will be a rich environment for users to benefit from.

Professor Giovanni Dosi (1988) states that profit-motivated agents must involve both.

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

Performance Evaluation and Analytics & Statistics provide incentives and opportunities to innovate.

Focused on Changing Capabilities

As part of a competitive strategy, we focus on the key competitive advantages of the producer firm and Joint Operating Committee. These are their land & asset base, and earth science & engineering capabilities. These are the things that differentiate them from other producers and how they produce value for their shareholders. Everything else is secondary. We have adopted what Professor Richard Langlois calls the “capabilities approach” in his paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.”

When users are in the Performance Evaluation and Analytics & Statistics modules they will be able to look at an additional type of cost that we have recorded in the accounts of the firm and Joint Operating Committee. That is the costs associated with “Dynamic Transaction Costs” which are the unique costs incurred during times of change. Professor Richard Langlois described these costs in his article “Transaction Cost Economics in Real Time.” 

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.

The types of these costs will vary and are not necessarily the same in all instances. Breaking these down into their types may be overkill from an accounting perspective. Instead, putting them into an account called “Dynamic Transaction Costs” might be a better option. And we have mentioned that in other modules of the Preliminary Specification. However, having the ability to further analyze these costs when the time comes, from the Performance Evaluation and Analytics & Statistics modules could lead to further insight and learning into organizational changes that might, or should, be occurring. 

Indeed, in cases in which systemic coordination is not the issue, the market may turn out to be the superior institution of coordination. In general, the capabilities view of the firm suggests that we look at firm and market as alternative and sometimes overlapping institutions of learning. p. 99.

And

Economic progress, then, is for Marshall a matter of improvements in knowledge and organization as much as a matter of scale economies in the neoclassical sense. We can see this clearly in his 'law of increasing return,' which is distinctly not a law of increasing returns to scale: 'An increase of labor and capital leads generally to improved organization, which increases the efficiency of the work of labor and capital' (Marshall, 1961, IV. xiii,2 p. 318) pp. 101 - 102.

And maybe we need a page or screen in each of these two modules dedicated to breaking down these costs. Then a producer or Joint Operating Committee will have some point of reference to determine the state of change. This will enable them to determine its impact in terms of costs, and types of costs, on the organization. How the transition in the firm's or Joint Operating Committee capabilities is managed. 

F.A. Hayek (1945, p. 523) once wrote that 'economic problems arise always and only in consequence of change.' My argument is the flip-side: as change diminishes, economic problems recede. Specifically, as learning takes place within a stable environment, transaction costs diminish. As Carl Dahlman (1979) points out, all transaction costs are at base information costs. And, with time and learning, contracting parties gain information about one another's behavior. More importantly, the transacting parties will with time develop or hit upon institutional arrangements that mitigate the sources of transaction costs. p. 104.

Conclusion

Work in the 21st century will continue to be different. People's tools will also need to be different. The Performance Evaluation and Analytics & Statistics modules are the beginning of these 21st century tools for people's work. We often discuss specialization and the division of labor in the Preliminary Specification. There is also specialization and division of labor between what people and computers do and that is reflected here in these two modules. Computers handle storage and processing. People will be responsible for thinking, ideas, decisions, creating, collaborating, innovation and many other things. Much of this information will be generated based on facts determined through the Performance Evaluation and Analytics & Statistics modules of the Preliminary Specification.

OCI Performance Evaluation, Part I

 Introduction

Performance Evaluation and Analytics & Statistics modules have similar interfaces. The Performance Evaluation module is focused on the Joint Operating Committee and the Analytics & Statistics module is focused on the producer firm. Essentially these are user-based tools that enable analytical and statistical calculations run against the data and information contained within the People, Ideas & Objects ERP systems and other unstructured data. Providing users with the ability to analyze data in novel and innovative ways in seeking value for their firm or Joint Operating Committee. 

The types of data and information prepared and presented in these modules depend on individual users. They will be unique based on their needs and interests, their scope of authority and the type of work they do. When it comes to who will bring up the next breakthrough innovation we should expect it from anywhere. Part of the innovation process is the discovery of the problem and we all see the situation from different perspectives. The point of view and innovation of each will therefore be highly dependent on the viewpoints of different groups. Someone working in the trenches may find innovations that affect their work materially, which may not interest others and vice-versa. This process of discovery should be assisted by the types of tools that include the Performance Evaluation and Analytics & Statistics modules. Professor Giovanni Dosi notes in “Sources, Procedures, and Microeconomic Effects of Innovation.”

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

Irrespective of the source of the innovation the fact that it materially affects someone's work should indicate that it should be followed through. These opportunities are challenging to discover and we need to be able to evaluate them and assess them based on their impact and ability to build value. What sometimes appears to be a sound idea can also become an area where the firm could be exposed to unnecessary risk or loss. Historical data is necessary. However, in the 21st century it is also necessary to have advanced analytical tools available to analyze that data. 

In the Preliminary Research Report, People Ideas & Objects identified two critical developments. The first is that innovation can be reduced to a quantifiable and replicable process. Analytical tools are part of that process. And two, the Joint Operating Committee is the key Organizational Construct of an innovative oil & gas industry. Therefore having analytical tools in the Joint Operating Committee and producer firms is critical. 

Tools for the 21st Century

This discussion deals with people's motivations to use the Analytics & Statistics and Performance Evaluation modules of the People, Ideas & Objects applications. It's one thing to have statistical analysis tools available for those who want to use them. It's another thing to have these tools being used by people who are actively looking for the next measure of performance or metric. This will reflect on how their performance can be improved. This latter use is the reason for these tools to be in the fourteen module Preliminary Specification.

We pick up on our discussion of the McKinsey article “The 21st Century Organization.” We now discuss the fourth element of that paper, “Measuring Performance.”

The final set of ideas rounding out this new organizational model involves relinquishing some level of supervisory control and letting people direct themselves, guided by performance metrics, protocols, standards, values, and consequence management systems. 

And as noted in "The 21st Century Organization” people are not measured and told explicitly what to do in their jobs. There is too much activity taking place for someone to give task lists to mindless automatons. What a responsible and productive person needs to do in this world of massive information and activity is focus on what is essential. To deal with the critical value-generating areas of their jobs that can add, and avoid destroying, value. That is where the Analytics & Statistics and Performance Evaluation modules of the Preliminary Specification come into play. Providing the user with the ability to focus on building value for their clients and employers, the oil & gas producers.

Whether they are earth scientists or engineers, business professionals or in any field that the oil & gas industry employs, access to the data and information through these modules will be critical to building value. Using the “dashboard” metaphor where algorithms monitor various processes. The user would run statistical and analytical programs that look at data in novel and innovative ways. It could be conceivable that some people may dedicate large percentages of their day to day thinking of creative ways to analyze data and information available to them.

The Downside of Analytics

I have seen this happen many times in oil & gas. Situations where the divestiture of assets is done without the full understanding of how the asset fits into the overall makeup of the organization. These types of situations happen when the “cash” mindset takes over all rational thought and the highest resale price wins over every other consideration. This is the danger of analytical tools. As we move into a period of sharper and more accurate tools, that danger becomes more prevalent.

There’s math, and then there’s strategy. The situation we observe is when an oil & gas firm runs into problems financially or operationally and rationalizes their asset base. They think they need to raise money by selling some assets. So they naturally think they’ll sell some of their “midstream” assets. A gas plant, gathering facility, and processing facility that earns only a fee. These assets, when looked at from a financial performance point of view, are nowhere near the right street where the ballpark is on. Therefore they get sold for the highest replacement cost and the seller believes they made a good deal. The fact is that most small producers may have provided their C3+ products directly to gas plant operators for fire sale prices. This is because they otherwise have no capacity to deal with them. Gas plant operators being the only ones in the area with processing facilities negotiated a favorable bargain. They acquired the majority of the natural gas liquids in the area for royalty costs. Now that the plant is sold, those products are lost and production is transferred to the newly acquired plant owners. Materially and negatively changing the properties' performance.

The majority of oil & gas producers I have seen and studied take a while to fully understand what is happening. What seems to be a jumble of activity for no apparent reason can, upon further study, become a symphony of brilliance. This was assembled over decades by someone with such profound vision that it is truly breathtaking. Selling a gas plant out of the middle of this shows that the seller doesn’t see the vision. And none of their assets will perform in a satisfactory manner. Having tools like the Analytics & Statistics and Performance Evaluation modules in the hands of people who may not fully appreciate the vision of how the firm is built could have detrimental effects on the overall health of the firm.

We found this quotation from Professor Richard Langlois in his working paper "The Austrian Theory of the Firm: Retrospect and Prospect."

The question then becomes: why are capabilities sometimes organized within firms, sometimes decentralized in markets, and sometimes coordinated by a myriad contractual and ownership arrangements like joint ventures, franchisees, and networks? Explicitly echoing Hayek, Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). pp. 8 - 9.

In People, Ideas & Objects we have moved knowledge to those with decision rights, which reside with the Joint Operating Committee. And rather than contradict ourselves, we find clarification of this issue in the following fact. Decision rights are the authority of the Joint Operating Committee to make operational decisions. Each individual producer holds strategic decision rights regarding ownership and divestiture regarding their working interest shares. Therefore there is no risk that the property will be “harmed” in any material way by making a strategic decision of that type in the Performance Evaluation module. It is beyond the Joint Operating Committee's authority. It is reasonable to assume that the authority of decisions made through the Performance Evaluation module will be limited to one producer's operational concerns. This will be mitigated in the short term. That is to say any negative decision would be reversed as soon as it is realized.

I think that it would be worthwhile to have a strategy review “attached” to each decision based on the Analytics & Statistics and Performance Evaluations. To counter the quantitative elements of the modules, the decision analysis is qualitative. If this qualitative analysis could be embedded into these modules for documentation, it would add value.

User-focused Development Tools

When it comes to what we are currently given to work with in terms of ERP systems, they can leave much to be desired. If only we could have “this, that and the other thing,” our lives would be so much easier. It would appear, however, that the inertia necessary to overcome "this" requires saintly fortitude and political skills. So we continue in what can only be described as someone's bureaucratic vision. People, Ideas & Objects seeks to resolve some of the issues users face in confronting "this, that and the other thing” in systems by basing our development on our user communities' vision and participation. Inherent in that offering is that People, Ideas & Objects are not conflicted by the traditional constraints of software code and customers. That is to say we only earn our fees based on software code changes. We are therefore agents of change, not seeking to obstruct change.

The point is that our user community can enhance the system. People, Ideas & Objects are motivated by business reasons to do so. That’s how we earn our revenue. We believe software should be constantly improved, driven by users' imaginations and requirements.

When the time comes for a user to think that if they had “this, that and the other thing," they will have a means to effect that change and have it fulfilled through our user community and their access to our software developers. But this isn’t about that change process specifically. It's about a stop-gap measure they may want to implement in the short term. This is while they wait for our user community to implement their idea.

For that stop gap measure we turn to the Performance Evaluation and Analytics & Statistics modules of the Preliminary Specification. These modules will be able, since they have access to the data, to prepare ad-hoc reports that the user can develop for themselves. Granted most of these user developed reports won’t be ready for prime time, however for the purposes of the user they can fit the need in the short term.

The user generated reporting tool will be part of both the Performance Evaluation and Analytics & Statistics modules. And provide users with a sophisticated graphical user interface to manipulate data and develop queries. We’ve all seen these tools before and I’m not suggesting anything original here. What I think is different however is access to information. First, the volumes of data will be increased and secondly the Security & Access Control module will provide access to that data and information based on users' privileges.

A World of Data

Turning again to Professor Giovanni Dosi in “Sources, Procedures and Microeconomic Effects of Innovation” for the determination of the three key factors of innovation. He notes that they are the result of: 

Search, development and adoption of new processes and products in market economies and are the outcomes of the interaction between:

• Capabilities and stimuli generated with each firm and within the industry of which they compete.
• Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.
• Additional issues include the conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulation, tax codes, patent and trademark laws and public procurement.) p. 1121.

While in the Performance Evaluation and Analytics & Statistics modules the user would search for information or insight into the data. This is the beginning of the innovation process. The tools provided in these modules would be part of the capabilities necessary for innovation to be developed within an innovative oil & gas producer. Professor Dosi's three key factors clearly show this. With growth expected to continue. These tools provide a rich resource for developing an innovative perspective on data. 

Recently, we've heard about an emerging field of data that is growing in importance. Unstructured data. Data that isn't managed by a database and has no implied meaning to its structure. The marketplace modules of the Preliminary Specification, the Resource, Petroleum Lease and Financial Marketplace modules and to a lesser extent the Research & Capabilities module all have “marketplaces” within them. These marketplaces would have substantial unstructured data that would be of use to potential users of the Performance Evaluation and Analytics & Statistics modules. Organization and access to this information on an industry-wide scale is one objective of these modules.

Taking a step further, these two modules should not be constrained to producers' internal systems. They should be able to access other sources of data and information, structured and unstructured. This is so that the user can use all three of Professor Dosi’s key factors of innovation to develop original and innovative ideas. It might be worthwhile to have a “Help” section within the People, Ideas & Objects modules. A section that includes Professors Giovanni Dosi's and Richard N. Langlois' innovation research. People would have a quick reference to items like the three key factors. This is so that they could use them in their day-to-day tasks to develop a more innovative mindset. 

For example, Professor Giovanni Dosi states 

“In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Certainly the “solution” of technological problems involve the use of information derived from experience and formal knowledge (e.g., from the natural sciences); however, it also involves specific and uncodified capabilities, or "tacit-ness” on the part of the inventors. pp. 1125 - 1126.

It is therefore asked specifically, how can the knowledge, information and capability of oil & gas firms solve the technical and scientific problems of the future? How can a firm more effectively employ its capability to solve problems and facilitate the discovery of existing problems and creation of their solutions? These are the questions that the Preliminary Specification is determined to answer. From the perspective of the Performance Evaluation and Analytics & Statistics modules I think we can provide the user with a variety of tools that help them drill down into the data and ask questions that haven’t been asked. People, Ideas & Objects is an ERP system. However, as we have seen with the modules in the Preliminary Specification there is a lot of data and information generated through collaborations and item documentation. It won’t be just accountants that will want to use these two modules, but anyone employed by a producer firm or Joint Operating Committee. 

Here is a quick summary of some of the functionality and process management the Performance Evaluation and Analytics & Statistics modules provide users.

• Ability to rise above transactional work managed by other modules. We are moving from recording transactions to designing transactions in many modules. Leaving the recording of transactions to computers and the analysis to the users of these modules. 
• Use of the “R” statistical language and Apache Spark as embedded programs within both modules.
•  https://spark.apache.org/
• Configured user tools that enable the user to demo, or build small applications that fit small niche needs. If these needs grew to where more people wanted similar programs for a producers other Joint Operating Committees, they could be used as a prototype for the People, Ideas & Objects developers to build. 
• Querying and determining where the performance and direction of producer firms or Joint Operating Committees' value is. Allowing people to focus on value generation and avoid value destruction.

OCI Partnership Accounting, Part X

 Oracle CloudWorld 2022

It was during the Oracle 2022 CloudWorld conference that they introduced what I felt was an innovative direction they were taking with their products and their firm. It was the precipitating event that triggered the rewrite of the Preliminary Specification. Any blogpost preceded by OCI is a rewrite based on Oracle Cloud Infrastructure. The significance of the change in Oracle’s trajectory as to what I saw at the Oracle CloudWorld 2022 conference was obviously shared broadly. To me it was the next level in ERP systems for all industries. Representative of the maturation of Oracle hardware, software and services finally delivering what Information Technology had always promised and consistently failed to deliver. Wrapped in a coherent vision of where they were taking their products next. 

This vision sees Oracle partnering with others to provide integrated services that solve many of the low level transaction oriented busy work. The kind of work that consumes bureaucrats' time and gets them out of bed in the morning. Throughout the Preliminary Specification I’ve highlighted the J.P. Morgan Chase credit card example for business expense accounts and reporting. By using J.P. Morgan Chase credit cards employees can designate the account location of the charge for their expense. At that point Oracle Cloud ERP will evaluate the charge and ensure it falls within the company's corporate policies of what is permitted. If it is not approved the employee would be charged for the cost. Individual expense reporting tasks will be reduced to the time spent so far. Their supervisors will not review these charges and waste thousands of hours chasing the few pennies usually retrieved in that process. Employees are aware of the corporate policies and will adhere to them or will be responsible for the charge and as such uphold corporate accountability. Not some nameless, faceless bureaucrat who suddenly appears out of nowhere. 

Oracle's work is critical to providing high levels of automation. Is that it’s the same type of work that People, Ideas & Objects, our user community and their service provider organizations have pursued in oil & gas. These features would be best represented in the Partnership Accounting and Accounting Voucher modules. The difference is that Oracle automations are generic and apply to all Oracle Cloud ERP customers. While People, Ideas & Objects focus on oil & gas. Producing the benefits of both worlds for oil & gas producers. Both generic automations of the expense reporting type but also the Preliminary Specifications for oil & gas specific automations. For example, those built off the Material Balance Report. These automations are targeted at the dynamic, innovative, accountable and profitable oil & gas producer.

The Service Provider's Role

Throughout the Partnership Accounting and Accounting Voucher modules there is discussion of our user community owned and operated service provider organizations and their role. People, Ideas & Objects see the reorganization of the administrative and accounting resources of the producer firms to the service providers as the enabling means to the decentralized production model, its price maker strategy, our value proposition, the conversion of all of the producer's costs to variable costs, gain from the benefits of hyperspecialization and the division of labor and the sharing of an industry based administrative and accounting based capability. It is only possible to have an organizational structure like this thanks to the Internet and Cloud Computing. These are the elements of Information Technologies Organizational Construct that People, Ideas & Objects use to define and support service providers. 

Each service provider is owned and operated by one or more of our user community members. Each member's contribution and area of expertise will be evident during our development. This will be used to determine the assignment of an individual process for them to manage on behalf of the industry. Our user community members will own one or more service providers that manage an individual process within their area of expertise or specialization. This will enable them to automate these processes at significant levels since it is only our user community who are licensed to make changes to the software derived from the Preliminary Specification. Automation is one of the service provider's competitive advantages. The others include leadership, issue identification, issue resolution, creativity, collaboration, research, ideas, design, planning, thinking, designing transactions, negotiating and compromising, innovation, financing, conflict and contradictions, the deployment of tacit (their services) and explicit (our software) knowledge, observation, reasoning and judgment.

Managing a single process for the entire industry seems to offer a dismal, dull future. If we were focused on processing transactions and only processing transactions that would probably be the case. Based on the competitive advantages service provider organizations will have. And the number of service providers we expect. The level of competitiveness in terms of how to innovate, automate and increase the quality of the service provided would be the beginning of the focus of those services. The means to affect change are at their disposal as the service provider's owner is a user community member. Meaning they can change their process management and software. 

Service providers will charge their service fees directly to the Joint Operating Committees. It is in that way that the Joint Operating Committee can report a null operation, no profit or loss, during times when the property is shut-in. While shut-in nothing will be transferred to the service providers through our task and transfer network to trigger them to work on that property for that month. And therefore no billing is sent to the property by any service providers. Therefore, all costs associated with producer firms become variable. And the benefits of the Preliminary Specifications decentralized production models price maker strategy are realized. 

The last point I'll make in this brief summary of service provider organizations. It should be noted here that service providers will provide a standard, objective method of accounting and process management. Therefore, any producer who finds a property is unprofitable will know that shutting it in for the month is the most effective remedy. Producers across the continent will know the assessment of unprofitability from People, Ideas & Objects is the same standard and objective assessment that all other properties were evaluated under. That we are not an Exxon or Chevron derivative ERP system commercialized for industry use. Producers should not be concerned about the validity of the standard and objective nature of profitability calculations of other producers' profitability. User community based software development generates these and other quality benefits.

The shutting-in of production is the most effective remedy for all concerned. The need for profitability, everywhere and always, is an absolute necessity in commodities such as oil & gas. Commodities that are subject to price maker characteristics and are critical to our economy, society and way of life. Shutting-in of unprofitable production is the only reasonable and fair means of production allocation that can be implemented across the industry. Government mandates, industry boards or other methods always leave bitterness and disappointment in their wake. With no capacity to stop the arbitrary decision to shut-in production. While with People, Ideas & Objects if a property is evaluated based on generally agreed standard and objective financial accounting criteria then it is in their financial interests to stop diluting their profitable properties with unprofitable production. And once done, it falls within the authority of those producers to deal with their lack of profitability at their properties. Production discipline comes into play when the producer firm needs to maximize corporate profitability by no longer diluting profits with unprofitable properties production. Competition on the capital markets will be difficult when a producer's poor performance is evident.

Our wiki contains information about service provider organizations. 

OCI Partnership Accounting, Part IX

 Accounting Differences

In Canada at least, there is an accounting and production month to deal with production volume delays. Reporting volumetric information creates a one-month data delay. This is so that July’s production data will be processed and reported in August. And I’m sure everyone knows the amendment process for volumetric data. The adjustment process never seems to end. I wonder if we’ll ever find a solution to it.

People, Ideas & Objects seem to be a viable solution. We discussed briefly the Material Balance Report. While we noted that every report, and every input and output, must be balanced with other Material Balance Reports. And that each Material Balance Report serves as a Joint Operating Committee. We should note that there are some issues to be addressed in the Partnership Accounting module. These problems are caused by adjustments to Material Balance Reports. That is to say, these Material Balance Reports shift and amend volumes of products around as times pass and things are incorrect. When the physical world contradicts reporting, reporting must change. Hence the amendments.

I want to add to the discussion of the Material Balance Report by detailing the scope of the software engineering issue we have to solve. The first area of concern is that there are both daily and monthly volumes defining a period of time. Some of these volumes are “spec” vs. raw products and by-products, gas and liquids. Volumes are processed and gathered based on ownership and non-ownership of processing facilities. North America has two measurement units, American and Metric reporting standards. How gas is nominated (daily) and marketed (annually). Last but not least, royalty holders and surface property owners expect to earn money. And each of these processes could generate their own amendments.

The myriad combinations of possibilities within oil & gas must be captured and handled within oil & gas systems. That has not happened in any ERP system as of this date. The first aspect of solving this problem is to engineer a solution in software. Many have tried and found their budgets inadequate. Approaching this from an individual producer's perspective may seem like a reasonable investment, however, no one today declares success. If, as we have proposed in People, Ideas & Objects, we aggregate the industry's resources towards engineering the solution, this scope can be scaled, the costs to each producer will be incidental, and the results will be that each producer will realize the full scale of that software development effort.

The second aspect of the solution to this issue is to limit its scope. That is what we have done with People, Ideas & Objects. First, by using the Joint Operating Committee as the key organization construct. What we are doing is adopting the Material Balance Report as a function of the Joint Operating Committee. Which in reality it is. If however we separate it from other Joint Operating Committees from an accounting perspective then we can begin to view that Joint Operating Committee as its own autonomous legal entity, which it is. This simplifies the solution from an accounting perspective and helps to deal with business complexity. This discussion may not make sense until we get into the Accounting Voucher module. We also get into the final aspect of this solution which is where we encapsulate all of this reporting within the accounting system itself.

In a globalized oil & gas industry we have to deal with currency conversions in the modern era. And these are not your regular currency issues. The example I have used in the past is that a producer based in Texas (U.S. Dollar) with partners in Britain (British Pound) and Canada (Canadian Dollar) shares an interest in facilities and production in Turkey (Lira). Transactions through the joint account will be in Turkish Lira and recorded in the producers' native currencies based on the exchange rate at the time.

Another aspect of this problem is that currency conversions have different treatments for assets & liabilities than revenues & costs. Revenues & costs are converted at the time they occur and require no further action. While asset & liability accounts maintain a balance over a longer period of time, they may need additional consideration to ensure they are recognized and recorded correctly. If, for example, a producer’s finished inventory is in a country with a volatile currency, what amount should be assigned to the inventory? This could be answered by the ability to record finished inventory in US dollars. But operational costs may be valued in the domestic currency. And what about capital assets? These currency issues are predominantly producer related as they are cleared out of the Joint Operating Committee's accounts each month. Therefore the accounting for each producer in this scenario is and will always be unique.

I would however caution users in the community that the oil & gas industries' use of the Joint Operating Committee is unique. These currency issues may not be realized in other industries. And although I believe it is a fair assumption that Oracle Fusion Applications' currency management is state of the art. That state of the art would be for other industries like retail and other industries that would not have the scenario noted in this discussion. Because of the oil & gas industry's use of the Joint Operating Committee, currencies can be substantially improved. This is from the community's point of view. We are only scratching the surface of currency issues experienced daily in the oil & gas industry. These issues are what this community is after in terms of software engineering solutions that identify and support innovative and profitable oil & gas producers.

Costs Like Strategies Are Different

We should note that the cost structures of each producer within a Joint Operating Committee could be unique and mutually exclusive to each of the other producers on the property. When we expand the geographical view of the facilities owned in the area we see that ownership of associated infrastructure by producers can be remarkably different. This cost situation provides us with an opportunity to discuss the strategic choices that producers have within a Joint Operating Committee -- and adjoining facilities which are their own Joint Operating Committee -- and how each producer can maintain their own unique strategy.

In addition, since each Joint Operating Committee is autonomous from each other, a producer can choose unique strategies for each Joint Operating Committee they have working interests in. That is not to suggest that each Joint Operating Committee within a facility has its own strategy. They could, however that would be unproductive. What is suggested is that a producer could have each of their major properties operated under their own distinct strategies developed to optimize the assets' distinctive character. To reiterate, each producer within a Joint Operating Committee within a major area pursues their own unique strategy irrespective of each other's strategy.

Lastly, we recently noted that the Joint Operating Committee oversees the producer's strategic framework. It joins the legal, financial, operational decision making, cultural, communication and innovation frameworks within the Joint Operating Committee. This framework alignment is unrecognized in any existing ERP systems in the oil & gas industry today. People, Ideas & Objects is the only system to recognize, identify and support the Joint Operating Committee frameworks. In addition, People, Ideas & Objects aligns the hierarchies compliance and governance frameworks with the Joint Operating Committee seven frameworks. This alignment provides the innovative oil & gas producer with the speed, innovativeness, accountability and profitability necessary to compete in the shale-based era of oil & gas exploration and production.

Using global or generic corporate strategies is what companies did in the twentieth century. Today producers need to respond at the asset level to ensure optimal value is realized. These findings are based on extensive research conducted by People, Ideas & Objects.

People, Ideas & Objects and Oracle Corporation

Oracle Cloud ERP and Oracle Fusion Application technologies will be used in the Partnership Accounting module of the Preliminary Specification. Under the Oracle Fusion Application Financial Management Suite there are the following six modules included in the Preliminary Specification. General Ledger, Accounts Payable, Accounts Receivable, Asset Management, Payments & Collections and Cash & Expense Management. It is unknown at this time if the last three modules will provide any value to an oil & gas producer. Therefore, we will leave it to our user community to determine whether they remain and how they'll apply them. 

What we need is a solid mission critical, as they describe it, general ledger for the innovative oil & gas producer. This is for the Joint Operating Committee, the service industry and service providers. Oracle has competed in this arena since the late 1980’s with their own technologies. They have also focused their energies outside of their core database technologies on ERP systems by acquiring the top vendors in the business. When it comes to ERP software, SAP and Oracle are the two Tier 1 providers in the ERP software industry. 

When it comes to the technologies these systems are built upon, Oracle, in my opinion, wins out in a very substantial way. Their updated strategy is "hardware and software engineered together." And they have the industry leading products to do just that. With Oracle Servers, Oracle Operating Systems, Oracle Database, Java, Oracle Fusion Middleware, Oracle Fusion Applications and Oracle Cloud ERP all being industry leading proprietary technologies. SAP competes primarily on the ERP application layer, however has recently built their own database and tools. Oracle technologies are new. All Fusion products were written from scratch. Reflecting Oracle's significant commitment and investment in Java and database technologies. 

When we developed the Preliminary Specification we used modularity theory extensively. As defined in the modular definitions of the Preliminary Specification, for the producer firm, the market, and the Joint Operating Committee. Oracle also used modularity theory in Fusion product development. Enabling us to build industry specific functionality that works seamlessly with their technologies. Everything we need to build will be built on Oracle Cloud ERP. It is at the point where we'll be offering our Cloud Administration & Accounting for Oil & Gas software and service.

So when we begin to write the code for the Material Balance Report we will be standing on the shoulders of giants by using Oracle Fusion Applications and Middleware as the basis of where we start. And we will use the General Ledger, Accounts Payable and Accounts Receivable, as a minimum to provide the innovative oil & gas producer, Joint Operating Committee, service industry and service providers, no matter their size, with the mission critical capabilities of the industry leader in all of these product categories. 

Let's turn now to the comprehensive nature of the accounting done in the Partnership Accounting module of the Preliminary Specification. Whatever kind of accounting is done in the Preliminary Specification, whether it be for the producer firm, the Joint Operating Committee or the service provider, Partnership Accounting and Accounting Voucher are the two modules that capture everything an accountant will need. From the General Ledger to the Financial Statements of the producer and Joint Operating Committees everything a user needs, from management accounting to financial accounting will be here. 

To provide for this we will be using the Oracle Fusion Application Financial Management Suite of modules as the base of the Preliminary Specification. Included within that are the General Ledger, Accounts Payable and Accounts Receivable modules that will be used extensively. It will be here in the Partnership Accounting module that the People, Ideas & Objects user community will determine the need for the other Oracle Financial Management Suite modules of Payments & Collections, Asset Management and Cash & Expense Management. 

It is critical to stress our users' involvement in determining the input, process management, function and output of the Partnership Accounting module. As with all of the modules within the Preliminary Specification this is an opportunity to define what users need and want in terms of Information Technology in oil & gas firms. This should be considered a once in a lifetime opportunity. There will be very limited opportunities to join the community to have an impact once the Preliminary Specification begins commercial operation. The time to participate is now. If potential users can see value in the development of the People, Ideas & Objects systems, they should begin the process and participate as soon as possible. 

Outside of the core Oracle modules we will be doing a significant amount of development that will be key to the oil & gas industry. This will require us to drop down into the Oracle Fusion Middleware layer to access a very elaborate Java server. This will be used to provide the revenue and royalties systems that build off the Material Balance Report. Recall that the Material Balance Report is also crafted at this layer. Management of the firm and Joint Operating Committees capital and operating costs. And of course, revenues, royalties, capital and operating expenses will all be reported in gross and net values. Users may have extensive ideas about how they want their data to be displayed. They may want traditional formats like the Statement of Operations and Statement of Expenditures. This is just a small example of the Preliminary Specification feature set.

As we will see in the Compliance & Governance module there are extensive capabilities in the Oracle Fusion Applications. These capabilities enable the Balance Sheet, Income Statement and Statement of Changes in Financial Position to automate compliance. Updates to the regulations are done through Oracle and affect the Financial Statements submitted to the regulators. All in all providing the producer with an automated system from field data capture to financial statements is a wide-ranging scope, and one that should motivate everyone to participate in this worthwhile endeavor.

In addition to the Oracle Fusion Application Financial Management Suite General Ledger, Accounts Payable and Accounts Receivable modules we will use the Oracle Fusion Application Human Capital Management Global H & R Payroll module. Technically it will need to be worked out by our user community how each producer is able to charge the joint account for these costs. However, that does not present too difficult a task when we have the control being handled through the Joint Operating Committee and the Security & Access Control modules Industrial Command & Control. 

There is another assumption in the People, Ideas & Objects Preliminary Specification regarding specialization and the division of labor. And that is the division of labor between computers and humans. I suggest we cease operating in large part, from an accounting point of view, as quasi computers. Instead, I suggest we let computers handle the work that computers do best. Storage and process management are their domains and the sooner we leave these tasks to computers I think the better off we will be. The things that we are better at are the decisions, the ideas, the innovations, the change management, the planning, the creative process among many other things. These are the elements of our work that we should focus on and leave the computers to do the work that they do best.

Oracle introduced a few new concepts to its products years ago. Oracle Cloud ERP and all associated technologies are upgraded quarterly. Each upgrade contains up to 200 changes to the software and requires the attention of senior management in terms of implementation and configuration. This upgrade cycle keeps their product fresh and enables them to introduce enhanced product features faster. People, Ideas & Objects will participate in Oracle's upgrade cycle. Our service providers will support senior management in coordinating a shared and shareable understanding of the implementation and integration of Oracle and our updates. 

Secondly we are adopting the Oracle recommended method of making "additions" to the underlying software code. This is in contrast to building the modules as separate applications that reside as "customizations" on top of the Oracle product suite. Oracle’s recommendation is consistent with Java’s object model of polymorphism, inheritance and encapsulation. This will eliminate much of the conflict and difficulties Information Technology customers have experienced in the past. Where vendors debate which vendor was responsible for errors or omissions. Technically, these conflicts will have been identified and resolved prior to compile time.

OCI Partnership Accounting, Part VIII

 The AFE

One area we have not discussed in detail are the processes around the Authority for Expenditure or AFE. I will break the AFE discussion down into two parts. One is here in the Partnership Accounting module. The other can be found in the Research & Capabilities and Knowledge & Learning modules. What we’ll discuss are the Partnership Accounting aspects of the document. Later, we’ll examine the “capabilities deployment” elements in the other modules. 

As with any interface in the Preliminary Specification users will have the opportunity to right click on an item and pull up a contextual menu item called “Create an AFE.” The system will have intelligence and be able to generate elements of an AFE template with the information that a user right clicks upon. For this scenario, let's assume that a user clicks on an image of a well. The system will then populate the new AFE template with the information for that well type and the partners in that Joint Operating Committee. Suggestions were made that another lateral and frac job be done to increase shale gas production through the well bore. And the user populates the AFE with the appropriate account codes to account for the budgeted costs of those operations. (Note: Due to the extensive work done during development of the Preliminary Specification it should be anticipated that the industry would have access to a global chart of accounts.) Budgeted costs were worked out with a number of vendors that users were working with who have developed some enhancements to the re-entry and fracing of multilateral wells. Producers consider these innovations significant, and the costs make them potentially valuable additions to well profiles. 

To present the AFE to partners, users have asked them to join others in the “Marketplace Interface” at the vendor's facility to view a presentation of their enhanced tool. All confirmed attendance. At the end of the presentation users who are authorized members of the Joint Operating Committee digitally sign the AFE. This releases the document to the other partners. (All with data elements consistent with their data naming conventions. Global AFE #’s, account #’s, etc.) Cost estimates and timeframes that this can be done for the one well, the poorest performer in the facility. Users also submit engineering and geological analyses of why they think the formation will perform well for the proposed work. 

Within the AFE document itself there is a collaborative interface for partners to discuss issues and opportunities related to the document. During the month this discussion focused on how the existing lateral could be protected from damage during the drilling and fracing of the second lateral. Several partners expressed concern that the program did not do enough to ensure no damage occurred so a supplemental was raised. After the supplemental there seemed to be consensus among the Joint Operating Committee members that the risk was worth the effort. All participants digitally sign the AFE. 

As part of the collaboration, the producer firm determines who is available to participate. A team is set up to manage the engineering and geological aspects of the program. These people's time on this project can now be charged through the Work Order system with the appropriate Work Orders created. The account codes for vendors for that AFE will be able to accept charges. Cost overruns were not expected as an arrangement with the vendor for a fixed price was agreed. 

This is a scenario of how the firm will raise an AFE and have the members of a Joint Operating Committee approve / disapprove of / discuss it. Within producer firms there would be automated routing of the document to the various internal departments for approval. This could be done simultaneously as multiple people can read, process and approve one electronic document at the same time. Therefore accounting, production and exploration could each approve the AFE on the same day, eliminating the time-consuming paper shuffling that normally occurs. Even within each department the various people who need to see and sign off on the information can do so.

This document routing will be conducted at each producer participating in the Joint Operating Committee. Each partner has access to the AFE documents collaborative interface. This discussion is available to those who may have questions in the future as to why decisions were made and for what reason.

To clarify some of the similarities and differences between the AFE and Work Order in the Partnership Accounting module of the Preliminary Specification. And to point out a significant difference in the People, Ideas & Objects systems documents which differ from those ERP systems that operate in oil & gas today. 

Another aspect of how both the Work Order and AFE are unique in the People, Ideas & Objects system compared to other systems today is the manner in which documents are stored. Everyone has experienced the difficulties that multiple copies of files edited by different people create. A disappointing and troubling problem with electronic files that would be a disaster for documents. No one can have different electronic versions of a document. Therefore there can only be one copy of the document used by everyone. (Exclusions for backup etc.) However, since it's digital, multiple people can use the same document at the same time, as long as everyone is presented with the same, most current version.

The most effective example of a system that uses this exact manner of file management is Google Docs. Users have access to a list of files in which they grant access to and can edit the same file. Other users in Google Docs can be seen editing the file in real time. Any conflicts in editing those files are resolved by users while reviewing. The file remains as one complete edited file presented to each user at all times. With a history of prior versions available for review. There is no need for someone to take edits from many files and put them into one file as is the case with Microsoft Word or Excel. 

Instead of files People, Ideas & Objects will present users with documents like AFE’s and Accounting Vouchers that they have authorized access to. They and others will be able to view, edit and delete based on their authorization level and be assured that only those documents exist. No other more or less advanced copies are being worked on elsewhere. The amount of time and energy saved by knowing just one document exists is satisfying and highly productive. 

We have discussed many times that the People, Ideas & Objects application modules are moving the compliance and governance frameworks of the hierarchy into alignment with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee. By doing so we recognize and adopt the industry culture in its many forms. The change we are implementing is the removal of bureaucracy. When it comes to the AFE process there is little in the current process used by companies that is not representative of the industry culture. It is optimal that People, Ideas & Objects and our user communities capture that culture in these software developments when developing the AFE process.

One area that we will enhance the AFE process is through the elimination of the "Operator" designation. People, Ideas & Objects operates on the concept of pooling the resources of the partnership represented on the Joint Operating Committee. This is done to help mitigate technical resource shortfalls, particularly in earth science & engineering disciplines. As a result of this pooling an AFE will be available to any participant in a Joint Operating Committee to post charges. Those charges could be for their staff who are working on the project or for costs they incurred on behalf of the project. 

With each producer potentially contributing unequal shares to the joint account or AFE during a month, or over the course of an AFE’s term. They can either over- or under-commit their participation. Therefore monthly equalization will need to be a necessary part of the reconciliation of the AFE accounts. For example, if one of the partners pays for the drilling day rate, and their working interest share is only fifteen percent, they would have paid in excess of fifteen percent of the budgeted AFE. In a case such as this, the producer would be compensated to the point where their contribution does not exceed the approved total amount of their obligation.

All of this is consistent with the industry culture today. What we propose is aligning this culture within the Joint Operating Committee and its other eight frameworks. With the Joint Operating Committee being the key Organizational Construct there are six other Organizational Constructs that bring other cultural elements in as supporting institutions. We are not resisting this well ingrained highly functioning “inertia” as Professor Langlois calls it in his paper with Paul L. Robertson, Institutions, Inertia and Changing Industrial Leadership. (Please note all subsequent references in this module are to this paper.)

Inertia is the focus of this paper. As is explained in more detail below, inertia has two major functions in the cycle of punctuated equilibrium. Inertia results from, and in a sense embodies, the best feature of the stable phase of the cycle because it is based on the learning process in which producers determine which procedures are most efficient and effective. Once people are satisfied that they know how to do things well, they have very little incentive to look for or adopt new methods. In the words of Tushman and Romanelli (1985, pp. 197, 205), "those same social and structural factors which are associated with effective performance are also the foundations of organizational inertia..., success sows the seeds of extraordinary resistance to fundamental change." Inertia also provides the tension, however, that leads to the (relatively) short, sharp shock of the revolutionary period (Gould, 1983, p. 153) because the pressure required to displace a successful but inert system is considerable and takes time to accumulate. When there is little inertia, change can be assimilated in a gradual and orderly fashion, but an entrenched system may need to be vigorously displaced. p. 3.

I began with a discussion of the industry culture and how the inertia of the industries' routines and capabilities made for formidable obstacles to progress. Thankfully we are not focusing on changing cultural inertia in the oil & gas industry. We are trying to disintermediate the bureaucracies and change the systems to recognize the culture, routines, capabilities and inertia of the Joint Operating Committee. Making it a central part of all that is done in the industry. With a focus on bringing accounting and administration into the fold. This does however require the retirement of bureaucracy. 

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

The bureaucracy does not sustain its own inertia. It is a forced or contrived existence that serves a few within the organization. These needs can be taken care of by the Joint Operating Committee. I’m thinking of the command and control, budget and finance functions. What we have said we are doing with the Preliminary Specification is moving to the natural and cultural form of organization of the oil & gas industry, the Joint Operating Committee. Making the transition from the bureaucracy's forced means to the Joint Operating Committee's more natural way will not be a problem. Until...  

Another aspect of capabilities that has recently received a great deal of attention is organizational culture. In practice, not all organizations may be equally able to cope with change, as existing patterns of behavior involving both executives and subordinates may be resistant to change. Organizations develop collective habits or ways of thinking that can only be altered gradually. To the extent that a given culture is either flexible or consistent with a proposed change in product or process technology, the transition to the new regime will be relatively easy. If, however, the culture is incompatible with the needs posed by the change and is inflexible, the viability of the change will be threatened (Robertson, 1990; Langlois 1991; Camerer and Vepsalainen, 1988). p. 9.

And the proposition that this transition will occur has been threatened by the bureaucracy. They hold the budget and have exercised it by not providing funding towards People, Ideas & Objects. In this regard, the bureaucracy is self-serving and looks after its own interests. The abandonment of the industry's future is now evident in these actions. The responsibility for all damages and destruction falls to the officers and directors. What will the situation be like in five or ten years? Will their methods continue? What will they do now when it is clear they’ve failed? 

Teece neglects the negative side of Nelson and Winters analysis, however, and fails to note that the inflexibility, or inertia, induced by routines and the capabilities that they generate can raise to prohibitive levels the cost of adopting a new technology or entering new fields. Such inertia can develop to the extent that existing rules are both hard to discard and inconsistent with types of change that might otherwise be profitable. p. 10.

McKinsey Consulting suggests that large populations will join the middle class in 20 years. This will have a dramatic effect on the levels of energy consumption. If the oil & gas industry fails to respond to these demands due to bureaucracies' lethargic ways, will anyone note the Preliminary Specification was proposed?

Whereas major competence enhancing innovations may, in time, be assimilated, the creation of entirely new organizations may be needed to deal with innovations that undermine the capabilities or competencies of existing firms. p. 11.

Working Interest Distribution Changes

Producers have employed a variety of mechanisms to determine a point in time when the Joint Operating Committee working interest distribution would change. This is based on the property's financial performance or activity level. These triggers have been used extensively in the past. I would suggest that with the increasing dependence on Joint Ventures in the oil & gas industry, these mechanisms will expand in their use and type. What is therefore needed is a reliable means to calculate and invoke the necessary changes to the working interest distribution. This is at the time of the change. With People, Ideas & Objects we have our user community to define the level of control producers want to build into the Preliminary Specification for these accounting cutoffs.

It doesn't matter if it's an activity level trigger such as a Before or After Casing Point election. This is where the leaseholder can join the other working interest owners. The Partnership Accounting module will not necessarily provide information to enable decision makers to make better decisions. However, it is still necessary to ensure that whatever decision is taken, the costs are accounted for before and after the decision point in the accounts. This is more of an accounting determination in current systems. By including the casing point election, our user community can automate this level of trigger. A direct benefit of user-based systems development such as People, Ideas & Objects.

In some accounting cutoff situations the point at which the change in working interest distribution is the result of a payout or penalty situation. These require the calculation and determination of when the property has achieved a prescribed financial performance. And then the distribution would reflect the revised working interest. These calculations, determinations and revised distributions are to be automated in the People, Ideas & Objects application modules.

Due to the fact that these are performance-based calculations, expanding property performance reporting is an area where I think our user community will have a significant influence on building valuable and innovative reporting. Traditional reporting of Statement of Expenditures and Statement of Operations is a standard requirement, and is included in this system's development. However I’m sure the community of users built around the development of the Preliminary Specification can expand on this reporting and provide real value for the innovative producer. It is necessary to prepare actual, factual, full financial statements for each Joint Operating Committee for the appropriate decision-making needs of the industry. The gap between Statements of Operations and Expenditures and full financial statements is about as large as possible.

OCI Partnership Accounting, Part VII

 In today’s marketplace, producer management's focus on cash flow is designed to deceive those that believe they're productive. However, only officers and directors believe cash flow reflects value. It is simply a measure of how much cash the company generates. And in a capital intensive industry these numbers will always be significant. Included in that cash is an invisible amount of investment needed to maintain the assets. So although cash flow can be a big number it comes with big commitments. And sometimes those commitments exceed cash flow. Yet that never stopped management from promoting gross cash flow numbers as value. 

What is needed is for the producer and Joint Operating Committee to focus on earnings, that is the real earnings of the property. Those are based on revenues, less royalties, less a reasonable and competitive portion of capital, operating, and overhead expenses. Competitive in the sense that oil & gas needs to compete for capital on North American capital markets. When a firm focuses on those and leaves Wall Street analysts to themselves, favorable things can happen to the value of a property or a producer. Property valuation could be based on its present value earnings. Having a lot of production with no earnings provides no value for anyone. It's an exercise in activity. An activity that satisfies a small group known as officers and directors. Anyone can drill a well and produce oil or gas. Oil men and women make money. That’s the toughest part of the business, making money. Having abundant reserves is valuable if they can be produced profitably. By profitably, this implies being competitive, which is what the North American capital markets definition of competitive is.

Therefore, how can we ensure that the property always produces profitably? By reducing property operations costs. That is the next step in the ability of this “decentralized production” model to make the Joint Operating Committee the innovative framework of the oil & gas industry. With this understanding and operation, engineers and earth scientists will be able to turn to the Knowledge & Learning module of the Preliminary Specification. And determine what capabilities exist within the producer population represented in the Joint Operating Committee. To see if there is any operation that they can conduct to enhance the profitability of the property. In essence each property stands alone as its own unique cost center. Being evaluated as its own separate business based on business values and expectations. The Partnership Accounting module provides each Joint Operating Committee with detailed, actual, factual financial statements each month to determine the properties' performance. With overhead converted to variable cost, all costs are now variable and any shut-in production will incur a null operation. 

In recent discussions we saw that the accounting costs prepared for each Joint Operating Committee are the actual accounting costs for that property. This is not an overhead allowance as it is today. By reorganizing accounting and administrative functions for the service providers, we can identify the exact costs for each Joint Operating Committee. The other implication is that neither the producer firm nor the Joint Operating Committee directly employs or houses these accountants in their offices. Instead they are charged for the variable costs incurred by individual service providers. Where the service provider incurs costs on behalf of the industry and charges an individual price to the Joint Operating Committees for their services. And producers incur costs related to only those service providers they use. These are some of the advantages of the Partnership Accounting module of the Preliminary Specification, and modularity in general. 

When we’ve discussed modularity it’s been in the context of the fourteen module Preliminary Specification. However, it could easily be that we are discussing the Joint Operating Committee. Each Joint Operating Committee is isolated and exclusive to all others. As Professor Richard Langlois noted in his paper “Modularity in Technology, Organization and Society.”

What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to modularity in the design of the organizations that produce such products. p. 1.

To have the entire accounting provided by accounting service providers who are not present in either the producer firm or the Joint Operating Committee does not seem to be too much of an issue. Dare I ask when anyone saw someone from accounting in an operations environment? Aren’t these people sequestered on their own floors or in other buildings most of the time? A revenue and royalty accounting service provider operating on behalf of several dozen Joint Operating Committees and representing fifty producers would need their own office space to organize themselves in a manner that provides them with the most efficient way to do their job. Production accounting may ideally be deployed closer to production locations.

Accounting service providers are not core to producers' or Joint Operating Committees' competitive strategy. Producers focus on their land & asset base. The engineering & earth science capabilities that make up their value proposition are where time and energy should be expended. Accountants can complete their work through meetings, emails and telephone calls no matter where they’re located. The producer's objective is to have these accounting overhead items match revenues within a Joint Operating Committee, particularly when production is shut-in. The decentralized production model will ensure that operational and overhead costs are reduced to zero during shut-in production. 

To achieve specialization and division of labor that will improve accounting efficiency. The accounting service providers will need to organize themselves in a manner that provides the highest quality service to their customers. These configurations will not represent how work is done today. In addition People, Ideas & Objects and our user community are designing systems to be as highly automated as possible. That’s not to suggest accountants' role is diminished in this environment. Their role will be more high level value added work, not transaction oriented. And they will have the support of the People, Ideas & Objects software development capabilities available to develop valuable and innovative systems and interfaces. And to do so with a permanent industry capability. By doing so, they will be able to innovate and evolve their services to producers.

In the industry wide reorganization of producer firms' administrative and accounting resources to service providers. It is our user community who are the principal owners and operators of each of them. There will be the generation of what Professor Richard Langlois in his paper “Transaction Cost Economics in Real Time” in the Journal of Industrial and Corporate Change describes as “Dynamic Transaction Costs.” 

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

Previously, in other modules, we established an account to collect Dynamic Transaction Cost charges so that they can be identified and controlled. These costs will be incurred in the beginning stages of the transition from the firm to the market configuration. 

"F.A. Hayek (1945, p. 523) once wrote that 'economic problems arise always and only in consequence of change.' My argument is the flip-side: as change diminishes, economic problems recede. Specifically, as learning takes place within a stable environment, transaction costs diminish. As Carl Dahlman (1979) points out, all transaction costs are at base information costs. And, with time and learning, contracting parties gain information about one another's behavior. More importantly, the transacting parties will with time develop or hit upon institutional arrangements that mitigate the sources of transaction costs." p. 104.

It will be during this time when Dynamic Transaction Costs are high. It will need to be determined within service providers' Service Level Agreements how these costs are recovered. People, Ideas & Objects see our user community and their service provider organizations as responsible for the integration and implementation of our software and their services. And as time passes and the work undertaken by the various accounting service providers that provide services to the producer becomes routine, we will know the transition to the market is complete. Professor Langlois notes.

‘Routines,' write Nelson and Winter (1982, p. 124), 'are the skills of an organization.' p. 106.

And

Such tacit knowledge is fundamentally empirical: it is gained through imitation and repetition not through conscious analysis or explicit instruction. This certainly does not mean that humans are incapable of innovation; but it does mean that there are limits to what conscious attention can accomplish. It is only because much of life is a matter of tacit knowledge and unconscious rules that conscious attention can produce as much as it does. p. 106.

And

In a metaphoric sense, at least, the capabilities or the organization are more than the sum (whatever that means) of the 'skill' of the firm's physical capital, there is also the matter of organization. How the firm is organized - how the routines of the humans and machines are linked together - is also part of a firm's capabilities. Indeed, 'skills, organization, and technology are intimately intertwined in a functioning routine, and it is difficult to say exactly where one aspect ends and another begins' (Nelson and Winter, 1982, p. 104). p. 106.

To remove ourselves from the detail of the Partnership Accounting modules decentralized production model we find that the real value is gained by the oil & gas producer. The repeated collapse of oil & gas prices since July 1986s initial oil price collapse. These events have been unforeseen and no effort has been taken to remedy what is now obviously the result of overproduction or unprofitable production. And when prices have not collapsed such as in April 2020s negative $40 oil price, there are chronically depressed prices that are the result of overproduction, or unprofitable production. The most compelling example is the loss of natural gas’ pricing standard of 6 to 1. Moving to approximately 15 or 20 to 1 during 2009 to 2022. And this past year's prices ranged between 30 and 40 to 1. This is a non-event that requires no concern or effort on the part of officers and directors of producer firms. The value expected to have been lost due to this pricing damage across North America in just the past year is over $290 billion. We assert that these are not and never have been opportunity costs. This is pure and simple mismanagement and has occurred annually on both oil & gas commodities for four decades. This is due to chronic, unconstrained, unprofitable production. Fueled by deceptive accounting practices used to raise capital to make up for shortfalls.

The same applies to oil. However, oil being a global commodity it can withstand the abuse of North American producers better than natural gas can. Natural gas is transitioning to a global pricing market however that is taking much longer than expected. 

People, Ideas & Objects are well aware of the difficulties and costs producers will incur associated with the dynamic transaction costs that will be incurred in the transition to remedy these maladies. The cost today of not doing so is abhorrent. The value we detailed where unprofitable production was shut-in, reserves were saved for when they could be produced profitably, reserves were used as the low cost alternative to storage, producers would attain the highest level of profitability when property losses did not dilute property profits and marginal prices were obtained across the continent, are well beyond anyone's material threshold. 

People, Ideas & Objects' value proposition is composed of two components. Our first point is the incremental earnings the industry will earn from our decentralized production model. Over the next 25 years we’ve priced these at a minimum of $5.7 trillion. The second component is estimated to be worth $20 to $40 trillion over the same period. This value is earned due to the fact that capital will no longer be raised from investors, consumed by producers in order to “build balance sheets” or “put cash in the ground.” Internally generated cash due to overhead costs being recognized in the current period and capital costs being recognized in a time frame that is competitive on North American capital markets. Will generate adequate levels of cash to fund the capital expenditures necessary to rebuild the industry in the vision of the Preliminary Specification, pay dividends and pay off debt.

Due to the high costs and prolific nature of shale formations, a decentralized production model is required. Oil & gas is currently run by a bureaucracy that has no idea how to produce shale. Shale presents a fundamental change in oil & gas. A change that reflected the prior dynamic of scarcity is no longer valid, and has been replaced by an era of abundance. Other than through the generation of significant losses, we have ample evidence over the past decade and a half to confirm that officers and directors don’t care about profitability. They still get paid either way. They are entrenched and will continue to fight People, Ideas & Objects Preliminary Specification with everything they have. Theirs is a comfortable and convenient life that doesn’t expect or want to be disturbed. 

As little as two years ago, officers and directors determined that shale would never be commercial. And sauntered over to the clean energy frontier to save the planet. We have no belief in their ability to understand or produce profitably, to commit to the oil & gas business or act in any way responsible. One of the inherent benefits of the decentralized production model is that it considers the ever-escalating costs of oil & gas exploration and production. Each incremental barrel of oil produced is technically more difficult and costs more than any prior barrel. This natural cost escalation is evident in oil & gas and not present in any other industry that I know of. Actual, factual and detailed accounting being prepared for each and every Joint Operating Committee in the Partnership Accounting module will account for this escalation. This will ensure these costs are immediately passed onto consumers. 

Disintermediation of Oil & Gas, Part II

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

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

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

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

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

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

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

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

Our User Community

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

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

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

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

Profitable Production Rights

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

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

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

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

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

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