Exploration vs. Exploitation the subtle differences.

What is the difference and why can't exploitationist make money as explorationists. There is a critical difference in comparing a firm that makes money exploiting oil and gas reserves and another firm that explores for reserves.

A funny thing happened when the oil and gas prices declined overall in the 1980's. Companies learned that to make money at $20 per barrel. The ability to exploit what was known within their properties was the key to their success. Larger firms were able to enhance their fields production through in-fill drilling and testing of what was known to exist. The time and the manner of making money in the manner of an exploitationist has expired.

The ability to earn profits at $20 required that an oil and gas company lay off the majority of their engineering and geological staff. They were not required in a world where it was determined that the drilling locations were between the two existing wells and the same depth as the others. This has been the successful oil and gas companies forte for the past 20 years or more. Accountants, businessmen, lawyers and "managers" began occupying the CEO's seat and these firms were run on risk profiles that projected windfall profits by controlling costs at $20 oil prices.

An explorationist determines where and how reserves are found on the basis of scientific theory. These theories are usually formulated over several years and take the geologist decades and sometimes lifetimes to prove their hypothesis. In a nutshell these are the very rare geologists that are generally credited with some major discovery. In Canada we have people like Arnie Nielson who discovered the Pembina field and eventually went on to run Mobil Canada, Dr. Hriskivich who found Rainbow pinnacle reefs and Ram River for Acquitaine, or smiling Jack Gallagher of Dome fame. This list is fairly long and all were handsomely rewarded for their discoveries. It is believed in the geological profession that only 3% of all geologists find any oil or gas in their career.

The explorationist was treated as a pariah and run out of the companies in the low cost environment of the 1980's. In many instances these "explorationists" sought refuge in smaller firms eking out marginal earnings competing in $20 oil. Or as consultants for relatively mundane tasks, compared to their training as rabid scientists.

The firm that made money exploiting in the 1990's at $20 per barrel in general terms can no longer make money at$75. Doesn't make sense I know, but using our marketing example of Petro Canada, I'll explain my point. After running the explorationists out of the firm in the 1980's the mindset became business as usual. The ability to find exploitable reserves was augmented by the abilities of the service companies that developed new "Horizontal Drilling", "Top Drives", "Coiled Tubing" and other innovations that provided value for the exploitationist. These technologies could be amortized over vast inventories of known reserves and profitably make money. It is fair to assume that the $20 oil, the world over, is gone for ever.

The service companies innovations that I mentioned also lead to the more rapid depletion of the reserves that were available. What used to produce for ever at 10 barrels a day is replaced by the horizontal well that produces 100 barrels per day for 6 years. Many of these exploited fields are now close to the end of their productive lives.

Here we are in 2006 with the following scenario.

1. The easy oil and gas reserves are gone.
   
2. The remaining reserves are being exploited too quickly for the markets needs. Creating a false sense of security as to the overall productive capacity of the world petroleum marketplace.
   
3. And all the geologists that could find oil and gas are twenty years older and generally have forgotten what the industry knew in the 1980's. Now in their pre-retirement years they have no desire to pick up the craft again.

So we leave the burden to the current population of recent university graduates that "may" be able to think like an explorationist and find some oil and gas reserves. I recommend we employ the shot gun approach of hiring as many as we can and setting them to their task.

In my opinion there has never been a more serious problem that the world has faced as the energy problem we have today. We are producing faster then we are replacing reserves, we have lost the ability to find new fields and do not have the intellectual talent to meet the needs of the marketplace in the next 10 years. How this gets resolved is with a lot of pain and $25 / gallon gasoline.

Companies such as Petro Canada are unable to operate in these environments and I think they have even given up trying. As I indicated here, here, and here they have systemically failed in every criteria of a successful oil and gas firm. Their inability to tell the truth covers the facts as I had revealed them. The accountants and lawyers are able to smooth over the issues and present a reasonable facsimile of an annual report. It will be interesting to see how the firm performs in the next 3 years, as it may be within that time frame that the firm runs aground permanently.

Google video of interest.

For many years I have described myself as an engineer wannabe. The science of math always got in the way and had to live with the fact that I couldn't make it. This video is of an A380 being built. The largest airliner in the world. The way that it is made makes the engineer wannabe in everyone scream out for more.

If this is the state of the art engineering, I am glad I found the math difficult. Truly one of the most impressive videos I have ever seen.

Dr. Giovanni Dosi, Sources Part IV, B & C

[Dosi]

Continuing on with the overall review of Dr. Giovanni Dosi's theories on innovation.

B) Appropriability of Technological Innovations.

Dosi defines appropriability as the:

"properties of technological and technical artifact's, of markets, and of the legal environment that permit innovations and protect them, to varying degrees, as rent-yielding assets against competitors imitation."

Companies that are innovative in their markets are able to secure a variety of intellectual property as a means of competitive advantage. The IP may consist of the traditional patents, trademarks and copyrights but should also include secrecy, lead times, learning curve capabilities and internal processes. Dosi suggests that these forms of intellectual properties form strong advantages when combined together.

The costs associated with imitating the competitive advantages of another firm become expensive. Dosi provides evidence that the cost of imitation is often higher then the original innovation! Noting that both innovation and imitation are creative processes that involve search. And imputing that a capability has to be built to be either innovative or imitative, with the latter being the more costly. It is at this point I would ask what the purpose of "best practices" is for?

C) The Driving Forces of Technical Change.

The various levels of innovativeness of each firm in an industry are derived through either exogenous scientific advances and / or endogenously accumulated capability within the firms. Dosi's general point is;

"the observed sectoral patterns of technical change are the result of the interplay between various sorts of market inducements, on the one hand, and opportunity and appropriability combinations on the other."

In terms of oil and gas this clearly sets the point that we are at. Oil hit $75 today and this is a major shift in the "market inducements" of the industry. Using Dosi's theory in oil and gas, it is clear that a producer that is able to establish higher levels of appropriability, as Dosi calls capability, would benefit from the higher commodity prices.

In the competitive market that exists today we see that each oil and gas company attempts to secure a competitive advantage based on the scientific capability built within the firm. In a related matter we are now seeing a projected shortfall in the number of qualified earth scientists and engineers. Universities will not be able to produce enough new graduates to fuel the prospective demand and replace the soon to retire baby boomers. This is where I think that Dosi's theories can be extended to communities, clusters, or ad-hoc self organizing teams.

If we continue to replicate the scientific and technical capability of each firm in an entrenched silo we most certainly will have failed in providing the marketplace with the energy required. These silo's of scientific capability mirror themselves in each large company. How wasteful of these critical resources is this? Smaller producers are less stringent on their use of outside assistance but could and should encourage greater sharing as well. What if we applied the theories of Dosi to the overall cluster of companies. Building the scientific and engineering capability from the larger pool of technical resources from each silo?

To arrange this pooling would be the simple part. The sharing of intellectual property and general mindset of the industry is that sharing is limited. I think that this is counter to the natural culture of most scientists who publish and submit their thesis and hypothesis to the community for critical review. What would happen if the Genesys system was able to:

• Manage all of the business attributes of the oil and gas operations.
• Provide market access to assets and resources for the producers.
• Including human, financial and technical resources.

I am unable to see how else we are to mitigate the issues of the market demand and the retirement of the knowledge base of the industry? Building independent silo's of capabilities higher is not the alternative.

Is this community the type of organizational structure and manner that the industry needs to gravitate too in order to rectify these issues? If so this blog should be seen as the main focal point of this reorganization. Building the systems to support this type of organizational structure and enable the community of oil and gas workers to get on with the job at hand.

The "Fifth" constraint.

The oil and gas producers are having a difficult time in keeping up with the demands for energy. I have attributed this problem to the organizational structure and named the hierarchy as the culprit. The resource constraints are serious and include human, technological, scientific, financial and lets name the fifth constraint "speed".

The problem as I see it is a deliverability one. The next ten years will see the productive capacity of the industry slowly adapt to the market demands. The time lines and capabilities are not in the supply of energies favor. Time is necessary to formulate scientific concepts, purchase land, drill and produce the oil or gas. This process is usually around ten years in terms of the beginning to production, especially for offshore and oilsands.

In terms of where the attitude and mindshare of the bureaucracies is at, it's 1996. When there were no such energy demands and a productive surplus of around 10 million barrels per day. None of the issues of the supply demand imbalance of today. Oil in 1996 is trading at around $20 per barrel and the capital budget of the large company is based on these criteria. These are the resources and production that are being brought to market today.

If you hear the large companies talk they fear a price drop to the 1996 levels. That there is no energy shortage and a sense of urgency doesn't exist. Why are they so calm? You have literally two billion plus people joining the industrial revolution and the large companies just blink at you in a stunned state of confusion.

The larger companies are experiencing information overload in addition to the lack of understanding of their market. They are completely engulfed in a paper world that has so confused them that they have no idea what year it is.

As these large companies will not be in existence in 10 years we should let them off the hook and let them die in peace. Anyone that would suggest the hierarchy will rise up to this challenge and solve it are being sarcastic at best. The effort necessary needs to be organized first, that is what this blog is about, defining the joint operating committee as the central organizational focus of the oil and gas producer.

This new organization needs to have the systems built to operate the new producer in the manner that the individual users need. Just as SAP defines the bureaucracy, this blog's developments will define the innovative producer, user and investor. So for those that have seen that blank stare of the large companies, join us here and help out where you can.

Web 2.0 based value propositions.

Google reported their quarterly earnings yesterday, boosting their market capitalization to $136 billion. This brings to mind the value proposition of Google, and for that manner, any and all Web 2.0 services. Not many people can say they ever paid any money to Google, I for one have never, even though I use all of their services.

Earning small advertisement revenues from the firms asking for exposure of their product on Google's sites doesn't sound like a great business. However, when the value generated produces multi billion dollar earnings for a ten year old company, this makes for interesting times.

Web Service companies that are Web 2.0 are able to aggregate users easily and share the costs and the load over far larger bases of customers. This site subscribes to this wisdom. If the usage of this Web Service (when built) charged as little as $1 / barrel of oil equivalent per year, the costs of systems to fuel the energy industry would collapse to the level that would parallel the value proposition of Google's.

Where we are...

It has been a long road to this point. I am not aware if the Calgary Herald will run a story regarding my criticisms of Petro Canada. I hope that they do as it would be a solid beginning for this blog to become the area of focus for our prototypical users, the people who earn their living in oil and gas.

This blog introduces a very disruptive innovation from the point of view of how organization's should be formed. To suggest that the hierarchy has failed is generally concurred with by most people, and feared at the same time. This has been a risky and controversial suggestion from the start. And that is the point, change is upon us, we either get with the changes or get out. I choose to challenge the old with the new.

There is a saying by George Bernard Shaw...

"The reasonable man adapts himself to the world; the unreasonable one persists to adapt the world to himself. Therefore all progress depends on the unreasonable man."

I am an unreasonable man.

Jonathon Schwartz and James Gosling in Brazil

[Technology]

I had the opportunity to attend a speech of Dr. James Gosling in Calgary. Firstly I am a big fan, and secondly, as both of us are Calgarians we share similar attitudes towards the large producers. The attitude being the oil and gas producers are not getting the new technologies, and are indeed resisting them.

Dr. Gosling stated some very interesting points regarding the status of the technologies employed in North America. Calling them third world due to the constraints of the legacy infrastructure. Noting that all Brazilians had cell phones which were used to access government services. And the high quality of the broadband in Asian countries.

The President of Sun was in Brazil with Dr. Gosling, and filed this entry on his blog. (Click on the title of this entry for the link to this article.) Reading this entry should concern those that reside in North America who think we are advanced in these technologies, we need to get with the program or we'll be left behind.

A summary for the press.

[Marketing]

I recently submitted a comprehensive summary of this blogs activity to the Calgary Herald and wanted to highlight what the point is / was. Firstly I would like to think that this blog provides a strong opportunity for anyone interested in innovation in oil and gas to actively participate in building the future. A Herald article would be very valuable for this blog and those readers.

Another point is that I wanted to show that the major oil and gas companies are now jeopardizing the future of the industry and the people that rely on it. This is quantified and qualified in the example I have made of Petro Canada. In summary this shows the following:

• Inability to find economic replacement reserves.
• Fudging the replacement reserves with;
• longer amortization on heavy oil assets
• restating as economic, formerly uneconomic reserves based on today's prices.
• Employing questionable independent and objective review of all reserves.
  
• Have participated in "lottery" style compensation of its managers.
  
• I'm all for rewards for performance, but have to ask where is the performance?
• Skewed earnings by not recognizing the costs of those reserves.

These managers have handsomely rewarded themselves for what can only be described as comprehensive failures. Covering up the problems with rosy numbers that don't correlate with the truth. This failure extends beyond the control of management to all those that were party to releasing the financial statements. So here are some questions.

• Mr. Brennaman did exercise 180,000 shares in 2005, but how many of the 4+ million shares options did he receive? For that matter what was the distribution of those share options?
• What are the actual reserves based on an independent review? Why did the company find only 26 million barrels of oil after spending over $2.4 billion? (Independent implies they did not receive share options.)
  
• What are the actual costs of the depletion, depreciation and amortization? If Petro Canada drew down 12% of its reserves, why recognize only 6% of property plant and equipment as the costs of those reserves?

The old hierarchical way isn't working, and that is clear to me. The only manner in which the industry can continue is through participation here and reorganization to new organizational models. These are more or less my words in 2004, and those that are now being echoed by Harvard, McKinsey and Strategy & Business. The justification to proceed and reorganize is there.

To continue will be the managers vain attempt to maintain the hierarchy and their stock options. These organizations will continue to function as they always have until the failure is admitted by them in bankruptcy court. I only hope that there is time as this system will need several years of development.

It is my hope that the Calgary Herald takes the opportunity to ask these questions of Petro Canada's management before their annual meeting on April 25, 2006. If so we will see the beginnings of the replacement to the hierarchical organizations.

Genesys' GUI technical definition.

I want to mention that there are a few unique characteristics of the Genesys system, particularly from the user interface point of view. First as discussed in the previous entries regarding the technical infrastructure and partnership accounting, the global scope of the core application, in my opinion, demands the strong "typing" offered by the Java Programming Language.

The system needs to be reliable and predictable. It is predictability that is particularly difficult to attain in the browser / Ajax world. When we consider the number of potential users and the exponential number of interactions between those users. Reliable and predictable can only be attained by taking the strict approach to how the systems will be built.

To define the user elements of the system, the following tools will be added to the technical architecture of the Genesys system. (For a more detailed description select the following links to Wikipedia.)

• Java Web Start
• Java Applets
• Java Swing
  

These Java components and tools make the development more difficult, however, in exchange, developers have greater control over the development of the system. These component's provide an unlimited tool kit in terms of what the developers and users can think of. But most important of all the reliability and predictability of the system will be what the users and developers need. Therefore we need to specify these as basic requirements for all components of the system and include the reliability and predictability with the other Java foundations of security etc.

The new energy economics...

[Energy]

A few housekeeping items that I wanted to comment on. These provide a bit of a common thread I'll summarize at the end.

Firstly, the price of gasoline continues to rise due to the seasonal consumer demands and the overall global demand for oil. (Click on the title for an interesting gas price summary in the New York Times.) Understanding energy is the fuel of the economy, we have seen that India and China have been able to sustain a labor based energy advantage in the globalized economy. This labor advantage has many countries concerned for their long term ability to compete. The U.S. has significant competitive advantages to sustain their economy in the face of these challenges, their key advantage may be the low gasoline prices their consumers enjoy.

With Europe's small population base, their ability to compete with China and India are limited. Europe also has a poor ability to compete in the horsepower, or industrial economy, due to the high taxes they assess on gasoline. The U.S., I think, has it right. By limiting the amount of taxes on gasoline provides the U.S. with an overall lower cost associated in generating horsepower.

I expect to see this will become a competitive advantage that most western governments will realize they are hurting their industrial infrastructure by assessing gasoline taxes. The gasoline tax cuts would be attributable to a further increase in demand for oil, hence further oil price increases. Could this thinking become the manner in which labor and energy is valued? Where the 8 hour shift of one man in China being the basis of the same value of one gallon of gas? Therefore to generate 1 horsepower for 2 hours (the cost of gas) vs 8 hours manual labor (the cost of food, tools, training, etc) being approximately the same.

Secondly, I wanted to create a new analogy to the saying that "If a tree falls in the forest...". And revise this to read, "If a natural gas compressor detonates in the field, will the commodities traders in Chicago hear it?"

Third point to make today is Einstein's calculation of E=MC2. This may be the most profound innovation in the oil and gas industry. If the mass of one atom is multiplied by the square of the speed of light, then one atom of C (Carbon) has the potential to power one person's needs, maybe for a lifetime. The source of the energy issues that we have today could be mitigated by the acceleration of our ability to more efficiently use each molecule of energy.

Since the 1960's we have seen how we produced 200 bhp for the average "Pony" car, and today provide the same 200 bhp in the family car that is longer lasting, more fuel efficient, and much smaller in displacement and pollutants. Does the aggressive exploitation of E=MC2 provide real competitive, and structural advantages for the North American automobile manufacturer?

Finally, this past weeks death of Casper Wienberger has started a variety of reflections of the 1980's energy pricing policies. Long lines of consumers at the gas pumps in the 1970's was quickly replaced by collapsed oil prices in the 1980's. Casper Wienberger was defense Secretary in the Reagan administration. History shows that he and Reagan were successful in breaking the Soviet Unions back by bankrupting it through spending for the alleged "Star Wars" initiative. At the same time the administration was dealing with the Saudi's who willingly flooded the market with oil and orchestrated the collapse in prices during the mid eighties.

The Soviets needed hard foreign currency to fuel their "Star Wars" level defense. Initially this was easily attained through the abundance of energy of the Former Soviet Union (FSU). However, when the energy prices collapsed, so did the bankrupt and corrupt communist regime of the Former Soviet Union. The Saudi's went along with the plan because they were in direct energy competition with the FSU. The house of Saud was also concerned with Iran and Iraq being supported by the FSU and the Saudi's wanted them out of the region.

Lastly putting these disparate threads together, by having producers drill more wells is the mindless (Petro Canada) solution to our energy problems. Energy problems that have been with us since the 1970's and are far worse as a result of the unintended consequences of the aggressive removal of the FSU. Don't get me wrong, I am as pleased as punch the FSU is gone.

We are however, behind the eight ball in terms of where the energy market should be, and the next decade will deal with these issues in remarkable ways. I certainly am doing my part here for the producers that need appropriate software built for these new market realities. I for one hope that Petro Canada's management can stop lining their pockets with shareholders money and start dealing with these issues as a responsible and practical organization. But don't get me wrong here either, I doubt the management can. Like the FSU in the 1980's their days are numbered.

Capturing the technology...

[Technology]

The title of this blog entry will lead you to an article in today's New York Times. This article captures the state of the technology marketplace today and should create a sense of urgency for all users. Users, particularly business' should heed the warnings contained within the article. The technology revolution is here and very capable.

To argue that this is the same as the technology bubble that burst in 2000 is fundamentally incorrect. These technologies are able to automate human thought and therefore provide real value. The only solution, in my opinion, is to fully immerse oneself in the technology in order to ride this very fast and extremely complicated trend.

Dr. Giovanni Dosi, Sources Part IV, A

[Dosi]

Part IV Opportunities incentives and the intersectoral patterns of innovation.

Dr. Dosi notes that the purpose to involve an industry in innovative activities is based on incentives and opportunities. Noting this Dosi starts his analysis with the key question.

"Are the observed intersectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both."

A. Technological opportunities: Exogenous Science and Specific Learning.

To state the oil and gas industry is heavily dependent on the sciences is an obvious comment. The issue that I am raising is not so much the use of science but industries ability to keep pace with the changes in the current and prospective earth sciences and engineering disciplines. Scientific changes will be the fuel of innovative producers in the near to long term. Producers that are able to interpret these scientific findings will be rewarded with higher levels of revenue and earnings. A difficult statement to support, yet something that is well understood and generally agreed to in the industry.

How can a bureaucracy, built on the basis of command and control, keep up with the changes in the sciences that are developing exponentially faster? I suggest they can't and have suggested a new method of organization needs to be adopted. An organizational structure who's focus is the industry standard joint operating committee. The severity of this innovativeness capability in oil and gas is leading to a substantial failure in the supply of energy to the market. A serious and detrimental issue for one of, and possibly the most important primary industries, energy.

Dosi asserts two important qualifications to this discussion. That technology is a derivative of science and science is dependent directly upon the technology that defines it. We first discussed the theory of communicative action with Dr. Jurgen Habermas. Dr. Habermas theories were first published in the 60's and Dosi is tacitly reflecting these as pertinent to the science and technology in general. The best way to state this simply may be to impute a symbiotic relationship between science and technology.

Dosi notes an important point as well. That science usually spawns "a widening pool of potential technological paradigms." p. 1136.

Based on this information, Dosi then draws an extremely pertinent point about the science and technologies associated within an industry. The point arises out of the fact that the organizational structure has a limited or defined capacity of knowledge and understanding of both science and technology.

Dosi states the following;

"the idea that technological opportunities are paradigm-bound is also consistent with the historical evidence and interpretive conjectures... stemming from the gradual exhaustion of technological opportunities along particular trajectories." p.1137.

and,

"New paradigms reshape the patterns of opportunities of technical progress in terms of both the scope of potential innovations, and the ease with which they are achieved." p. 1138.

It is my assertion here the failure of the oil and gas firms to manage their technology and keep pace with the changes in science are now organizationally and paradigm constrained. They can not keep up to any of these changes.

What can only be described as a failure of industry is glossed over with the immediate response that their is lots of oil remaining. Well if that is the case then provide the market with its demands! There is plenty of oil left for the remainder of the century, however, at fundamentally different economic values then they are willing to acknowledge publicly. These economic values require that new scientific and technological paradigms be introduced to enhance the capacity of the industry. Why has this not happened?

It is my opinion that the management of these firms require time for their pensions and stock options to vest before they will even begin to address these issues. This is the failure that I attribute to the organizational mess that they have created. They are well aware of the problems, they just don't have solutions and are in no urgent financial need to get to work on these issues.

This latter point is evidenced in the fact that since 1997 the companies based in Calgary have tripled their annual capacity to drill wells. Despite this tripling of wells drilled, the provinces overall deliverability is down from 2003. Evidencing, in my opinion, that the level of creative thinking in finding more oil and gas is equal to the number of wells drilled. An industry that has no capacity to think outside of this capability due to the organizational constraints discussed.

As I visualize the industry, I see a large rat running ever faster in the wheel in anticipation that the faster it runs the quicker it will get there. The ability of the industry to stop and think, as opposed to do, is zero due to this level of activity. And as with the rat in a wheel ultimately meets its demise, a similar fate awaits Petro Canada.

Partnership accounting Part III.

[Partnership accounting] [Java programming language]

In previous entries, located here and here, we discussed some of the accounting related issues of using the joint operating committee as the organizational focus. In Part I we discussed the ability for each partner to contribute time, effort, intellectual property, and capital in disproportionate amounts compared to their interest. In Part II discussion of the specific issues regarding billing was raised. This involved an enhanced method of equalization, or capacity utilization to be calculated individually for each producer on a frequent basis.

In Part III I want to expand the scope of the discussion to include a few characteristics that bring additional programming issues to deal with, and they are:

• Penalties, Casing point elections, Before and after payout. (Points in time when the working interests of the producer changes, and therefore, imposition of an accounting cutoff.)
• Accounting for the traditional concept of "accounting" month and "production" month.

The number of possible scenarios that a property may have is unlimited. There are many established traditions and cultural influences in oil and gas that are systemic the world over. These relate to not only working interest owners but also to royalty interest owners and lease holders. When we combine the additional layer of complexity of the accounting for interests over top of the discussion in Part I and II we begin to see another level of complexity. I want to reiterate the innovative producer will use more creative means to structure a deal and the need to have these complexities mirrored within the system adds a dimension that we have discussed elsewhere.

The second element that I want to discuss in this entry is the traditional accounting and production months and the differences in the timing of certain costs and revenues. In Canada, and specifically Alberta, the reporting process for reporting volumes requires that a long lead time is necessary to ensure the accuracy of the production data. The marketing process may also take some time. These lead to the deferment of the actual production month reporting for a later time in the accounting system. This lag in timing has to be dealt with in the system and the appropriate production reported in the appropriate month requires that there be an accounting month and a production month.

Of course I would be remiss at this point if I did not state the numerous amendments to the recording of the actual data may go through many iterations. These changes are created through a myriad of different justifications that are systemic through the industry and have to be addressed. Revised pricing, allocations, nominations and distributions are not uncommon.

What these two additional criteria for accounting in oil and gas do is complicate the calculation and reporting for this data. To model the possible outcomes of what may or may not happen in a specific property becomes conceptually difficult. The ability of the Java programming language is designed to deal with this level and style of complexity. I frequently think that Java can model data in up to ten different dimensions, and therefore Java provides the capability to address these type of programming problem easily. For this I have strong opinions as to how they should be managed, however, I will leave the technical decisions to the developers when they join. Needless to say I can see how the Java environment, based on the technical environment I stated here, can deal with this level of complexity.

I will close the discussion at this point and pick it up again in Partnership Accounting Part IV.

Technorati Tags: Energy, Genesys, Intelectual-Property, Partnership-Accounting, Technical Vision

March Business Report

[business report]

Marketing
As reported last month, March was our first month of actively marketing the Genesys project. A target selection process was undertaken, with specific marketing deliverables and objectives being defined. We selected our target, Petro Canada, and began the slow process of revealing that bureaucracies capabilities. With three months of budgeted time remaining we should be able to complete our overall marketing objectives.

For the month of April specific tasks will include participation at Petro Canada's Annual General Meeting on the 25th. This will be one of the many highlights for the month of April. Other activities will be reported on as they occur and within the specific months business report.

Technical Architecture
I am extremely pleased to report that Genesys was accepted as a project in the incubator of java.net. This accelerates our developments by allowing us to join the community and access the resources of the Collabnet software and the large population of independent Java developers.

Licensing has also been finalized for the development of the code. Using the Sun Community Source License as the base, we have published the Genesys Community Source License and created a business model that will motivate the community of developers to join. I believe these were significant developments in the project. Recruiting of specific developers will begin when the funds have been secured.

There has been an increase in the amount of donations being sought. First we are half way through the first six months of 2006, and even though we have not been able to secure any funding, we are ahead of schedule. Secondly we have increased the budget to accommodate the securing of the code development as a paid project. The business model proposed sees the payment of the code by Genesys from the individual developers whom are contracted to write the technology. This will ensure that their are no residual intellectual property issues.

• Revenue to the end of March: $0.00
  

April 1, 2006 budget items. (All costs are in U.S. dollars and include the 33% premium for the development copyright fee.)

• Sun Grid The first thing we need is a home for the code. The grid provides everything we need in this instance, and the Grid that I selected was Sun's. At $1 per processor hour, a very affordable way to secure the resources we need. I think that our first years requirements would be amply satisfied with 10,000 hours of processing for the remainder of 2006 calendar year. Total requirement = $13,300
• Ingres Open Source database and part time DBA, Total requirements = $57,500.
• Collabnet. I would like to have a generous budget for this critical tool. Provides the code management, community process, project management and issue management. Budget includes tools, appropriate setup and consulting services. Total requirements = $34,500
• General and Administrative, first 6 months of operation Total requirements = $69,000
• Membership in W3C Total requirements = $9,500
• Project management and development = $300,000
  
• Total Capital and Operating budget, 2006... $484,000
  

Notes:

• Sponsors, producers, and user contributions are accepted.
  
• Please recall that this community is and will be supported by the producers. Based on an annual $ assessment per barrel of oil. For 2006 the assessment was fixed at $1 per boe per day per year.
  
• A company such as Encana in Canada would therefore be expected to support the community to the tune of $700,000 for the 2006 calendar year.
  
• These Monthly Business Report budgets are being proposed on a pay as you go basis for 2006 to support the community and ensure the community develops in the manner that is expected.
  
• Your donations are greatly appreciated, no donations means minimal work is being done.

Dr. Thomas C. Schelling

Professor Schelling won the Nobel Prize in 2005 for his cumulative work in game theory. Generally credited with the strategy of Mutually Assured Destruction, or MAD, used during the cold war. The title of this blog entry will provide you with a summary of his works.

I am always of the opinion that rules apply in war fare, his work's go a long way to defining these concepts. One particular point that Schelling notes is that you have the right to be sued. Considering this, provides a lot of leeway in ones strategy.

Ms. Peggy Noonan of the Wall Street Journal.

Following up on the fine words of John F. Kennedy, Ms Peggy Noonan, Contributing Editor of the Wall Street Journal writes a fine article that strikes at the heart of the times that we now live in. That one has the courage to undertake their responsibilities is lost in the day to day of modern society. Ms. Noonan is writing about an opportunity she had recently to attend a meeting of the men who had recieved the United States Medal of Honor.

I quote from her article.

"I met Nick Oresko. Nick is in his 80s, small, 5-foot-5 or so. Soft white hair, pale-pink skin, thick torso, walks with a cane. Just a nice old guy you'd pass on the street or in the airport without really seeing him. Around his neck was a sky-blue ribbon, and hanging from that ribbon the medal. He let me turn it over. It had his name, his rank, and then "1/23/45. Near Tettington, Germany."

Tettington, Germany. The Battle of the Bulge.

When I got home I looked up his citation on my beloved Internet, where you can Google heroism. U.S. Army Master Sgt. Nicholas Oresko of Company C, 302nd Infantry, 94th Infantry Division was a platoon leader in an attack against strong enemy positions:

Deadly automatic fire from the flanks pinned down his unit. Realizing that a machinegun in a nearby bunker must be eliminated, he swiftly worked ahead alone, braving bullets which struck about him, until close enough to throw a grenade into the German position. He rushed the bunker and, with pointblank rifle fire, killed all the hostile occupants who survived the grenade blast. Another machinegun opened up on him, knocking him down and seriously wounding him in the hip. Refusing to withdraw from the battle, he placed himself at the head of his platoon to continue the assault. As withering machinegun and rifle fire swept the area, he struck out alone in advance of his men to a second bunker. With a grenade, he crippled the dug-in machinegun defending this position and then wiped out the troops manning it with his rifle, completing his second self-imposed, 1-man attack. Although weak from loss of blood, he refused to be evacuated until assured the mission was successfully accomplished. Through quick thinking, indomitable courage, and unswerving devotion to the attack in the face of bitter resistance and while wounded, M /Sgt. Oresko killed 12 Germans, prevented a delay in the assault, and made it possible for Company C to obtain its objective with minimum casualties.

Nick Oresko lives in Tenafly, N.J. If courage were a bright light, Tenafly would glow.

I met Pat Brady of Sumner, Wash., an Army helicopter medevac pilot in Vietnam who'd repeatedly risked his life to save men he'd never met. And Sammy Davis, a big bluff blond from Flat Rock, Ill., on whom the writer Winston Groom based the Vietnam experiences of a character named Forrest Gump. Sgt. Davis saved men like Forrest, but he also took out a bunch of bad guys. And yes, he was wounded in the same way as Forrest. That scene in the movie where Lyndon Johnson puts the medal around Tom Hanks's neck: that's from the film of LBJ putting the medal on Sammy's neck, only they superimposed Mr. Hanks.

I talked to James Livingston of Mount Pleasant, S.C., a Marine, a warrior in Vietnam who led in battle in spite of bad wounds and worse odds. I told him I was wondering about something. Most of us try to be brave each day in whatever circumstances, which means most of us show ourselves our courage with time. What is it like, I asked, to find out when you're a young man, and in a way that's irrefutable, that you are brave? What does it do to your life when no one, including you, will ever question whether you have guts?

He shook his head. The medal didn't prove courage, he said. "It's not bravery, it's taking responsibility." Each of the recipients, he said, had taken responsibility for the men and the moment at a tense and demanding time. They'd cared for others. They took care of their men."

Words to live by...

A man does what he must - in spite of personal consequences, in spite of obstacles and dangers and pressures - and that is the basis of all human morality.

John F. Kennedy

Petro Canada some clarifications.

[Petro Canada]

Seems I missed some important information regarding the numbers that comprise Petro Canada's reserves estimate and stock options. In the interest of fairness of my criticisms, here are the clarifications.

(1) Reserves

I mentioned here that Petro Canada did not have an independent review. Well they also don't have a committee at the Board of Directors level! This lonely task is left to the audit and risk committee to be rubber stamped by the vice president responsible for preparing the reserves numbers, the CEO and the Chairman. How come their is no signed statement of the directors involved in the Finance Audit and Risk Committee? Just as well none of them are engineers or earth scientists anyways.

"The Company's staff of qualified reserves evaluators performs internal evaluations on all of its oil and gas reserves on an annual basis using corporate-wide policies, procedures and practices. Independent qualified petroleum reservoir engineering consultants also conduct annual evaluations, technical audits and/or reviews of a significant portion of the Company's reserves and audit the Company's reserves policies, procedures and practices. In addition, the Company's contract internal auditors test the non-engineering management control processes used in establishing reserves. However, the estimation of reserves is an inherently complex process requiring significant judgment. Estimates of economically recoverable oil and gas reserves are based upon a number of variables and assumptions, such as geoscientific interpretation, economic conditions, commodity prices, operating and capital costs, and production forecasts, all of which may vary considerably from actual results."

My miss print is that I said no outside review of the reserves was done. This may have been incorrect as it sounds like a large portion of work has been done by "independent" reserves evaluators. If this information was available why didn't the company just publish those numbers?

Publish the "real" and "believable" numbers before the annual meeting, and prove that your reserve calculations are accurate by submitting the companies reserves data to Sproule associates or GLJ for their professional and independent review?

2 Management Stock Options.

I also note a large variance in the amount of value that I associated to the stock options granted to the management compared to the decidedly smaller number in the Calgary Herald article noted here. To help reconcile the 180,000 stock options exercised by Mr. Ron Brenneman CEO, as reported in the Herald and the $199 million in value assigned to the management as I stated here. The discrepancy is the Herald reported stock options exercised, and to prove my point about the $199 million please note.

18,361,617 cumulative stock options granted x $46.93 U.S. = $861,710,685.81 U.S.

Of that $861,710,685.81 in stock value confirms and verifies the $199 million that management holds is "in the money".

These clarifications should also serve notice to management of Petro Canada how really easy it is to restate the same facts by just stating the truth.

(1) Source is page 39 of the 2005 Petro Canada annual report.
(2) Derived from page 35 of the fourth quarter 2005 report. (Note 14 Stock Based Compensation)

Petro Canada's conflicting statements.

[Petro Canada] (Click on the title for a puff piece interview with Mr. Ron Brenneman, CEO)

In oil and gas the most innovative producers, on the basis of their capabilities in earth sciences and engineering, are rewarded with higher levels of production. This has been a fact in oil and gas since the days of the Rockerfellar's and exists today, but only with the junior oil and gas company.

What has failed to provide the market with the volumes of energy required is that some larger oil and gas producers have "survived" the past twenty years and grown to dominate the industry. These producers have found their success in a "banking mentality." A mentality that makes investments in oil and gas based on a reasonable or market competitive return. This mentality has gained a foothold in some companies, like Petro Canada.

In stable times this banking mentality can sustain itself. The smaller companies that are technically successful grow to be purchased by the larger firms, with the poorer performing properties being resold. When times change, such as today's high priced commodity market the banking mentality fails. The failure occurs as a result of the firm has lost the ability to function from a scientific and engineering point of view.

It is my opinion that this scientific failure has happened to Petro Canada. Reading the CEO's interview on the website referenced above, it is a clear reflection of his sense of urgency regarding oil and gas finding costs and capabilities. This piece of literature only mentions the words "oil" or "gas" in reference to the support of the Olympic program. Stating that finding costs are $94.50 would be inconsistent with "good news" and directly contradict the previous representation that the CEO's compensation was a reflection of his performance in moving the stock up.

Now that Petro Canada and others have no answer to the market demands for more energy. We hear that "we're not running out of energy" or "there is lots of oil left". I don't think that I am the only person that finds the ironic conflict that producers such as Petro Canada are stating to the marketplace.

Petro Canada believes

[Petro Canada]

Annual report season, timing is just right. Petro Canada believes and that in a nutshell, according to the annual report, is its strategy.

Start off reading this annual report with a strong pot of coffee. Your going to need it.

The first item that comes across as a major misrepresentation to the shareholders is on page 7. The diagram "Upstream Production Forecast" shows that the "Range of Potential Outcomes" may provide no production increases to 2008, yet the text states that production will increase in the range of "8 to 11% average annual growth rate." The other graph on page 7 "Proved and Probable Reserves" is representing that acquisitions are responsible for the "195%" alleged increase in "P2" reserves.

But wait, there's clarification of what this means.

"The reserves replacement ratio is calculated by dividing the year-over-year net change in reserves, before deducting production, by the annual production over the same time period. The reserves replacement ratio is a general indicator of the Company's reserves growth. It is only one of a number of metrics which can be used to analyze a company's upstream business."

It's good we received that piece of data. What it says is that for every barrel of oil produced, 1.95 barrels were "replaced". I think we'll all have to take the word of the company on that one since there is no independent review of the reserves. I wonder why its the only metric of "a number of metrics" provided?

The annual report is also heavy in terms of identifying the associated risks of being in business. Two things that strike me as odd is the hostile environment that Petro Canada operates in comparison to its competitors. Second that it will not be the fault of the company if anything bad happens.

So much effort that is associated with identifying risks, a little more substance on the strategy, objectivity, reserves calculations and financial performance outside of the commodity price increases would probably work to mitigate much of the criticism.

No news like good news, especially for Ron Brenneman

A well researched and appropriate article of news in Saturday's Calgary Herald. The article discusses the total compensation of the CEO's of the major oil and gas firms in Calgary. Questioning the CEO's compensation, and asking if these payments were appropriate? The compensation was measured against their stock price increases and was questioning the validity of their claim for better stock performance.

Asserting that stock price increases are attributable to their performance is of course a sham, I can unfortunately recall during 1986 when the oil prices collapsed. A time when the poor performance of firms was blamed on the 1,000's of people that were laid off. Times certainly have changed.

Of particular note is Petro Canada, our favorite topic here of late. Mr. Ron Brenneman CEO scored the highest monetary compensation and the lowest stock performance. I would think that the reporters at the Herald would be very interested in some of the analysis that I have written about here, lets find out if they are...

Update on Maven POM

I have heard from Milos, and he has stated that his obligations require him to pass on the opportunity we wrote about here. I sincerely thank Milos and the Maven developers for the excellent work being done with Maven.

I am therefore opening the development and maintenance of the Maven POM for anyone who is able to help out. Just email me.

Google Finance

Google now does finance. If you missed the announcement click on this entries title. The information provided is much better then the competitors. You can see photos of the principles, stock charts, performance measures and research reports.

For some unknown reason PCZ (Petro Canada) doesn't post executive compensation! I wonder why that is.

Petro-Canada "earnings"

[Petro Canada]

Emphasis is placed on the quotation marks as I am concerned with the companies calculated amount of earnings. My concern is that they may be highly overstated. And secondly the tacit assignment that they were "Petro Canada's" earnings.

The need to represent these numbers as managements performance are the logical assumption, I think. When it costs this management team $94.57 per barrel to find oil, why would a company cost the reserves at $6.49? The answer to this question is in the financial statements.

If we divide the amount of depreciation that was recorded in 2005 by the total upstream assets we arrive at 6.31% of the total assets were depreciated by the company. Now if we divide the production by the reserves then we should have a ball park value similar to the depreciation recorded. However, we get 12.6%! Clearly twice as much production value was actually depleted vs. the actual amount that management removed from the books.

Recall these reserves numbers are based on last week's hocus pocus of the reserve increases noted here. If we exclude the hocus pocus we end up with 14.18% of the reserves were produced. This management certainly is creative. But then again they probably have lots of time because they only found 2.4% of their reserve base in 2005. Nonetheless, the difference in earnings is only $1,006 million, reducing total reported earnings from $1,709 million down to $703 million.

Why would Canada's former national oil company overstate their earnings? Upon further investigation I think I found the answer. Drill down to the stock tables and you'll see that the management exercised 3.54 million shares at $18.00 per share, and awarded themselves another 4.19 million shares at $35.00. So for the year, based on Canadian tax rulings the management team will have taxes payable of $34.6 million. But wait, there's more, that is to say in exercising the value of these options based on Friday's stock prices of $53.00 the management will have earned $199,394,270.00 to pay those taxes, so they'll thankfully be ok to make the payment.

Back to the point about earnings. I have to ask if the total stock compensation for the management is (199 / 703) = 28.3% that would look bad, don't you think. Instead, if the stock option compensation was (199 / 1,709) = 11.6% it becomes less of an issue. I propose we accept these numbers as reasonable on the basis of the management team? Not. See you at the annual meeting on the 25th of April.

I can already here the argument that the company will make on this. "Everything is within reason of Generally Acceptable Accounting Principles". And I would agree with that statement. But when you write your own reserve reports and personal checks, you open yourself to criticism. As this may be acceptable to the accountants, as a shareholder, I am concerned in the long term of what the "managements" performance was?

Next entry, how Petro-Canada issues debt to buy stock back from the management.

Have my ontology call your ontology...

[Development] [Ontology]

I want to mention that some readers may have difficulty in understanding how Genesys has structured the development environment from an ownership point of view. The license for these developments is such that the core is the Genesys system which operates as an interface to "other" systems that are owned and operated by "other" ISV's (Independent Software Vendors). These ISV's are involved in the overall development of the Genesys system, own and operate the particular geographical location that they operate in. The point of this discussion is the interface between the data elements of the core and the individual ISV's functionality. Depracated.

Firstly it is necessary to assume that the ISV is serving a specific geographical area from the perspective of the head office of the producer. If this is not valid then the area where the most activity for that producer is located. The ISV's producer clients will all have the consistent data in the system and therefore, no interface will be required. What will occur is as a result of a producers international operations the ISV has to deal with the core Genesys system and the region where another independent ISV is providing services to producers in that region. The translation of data may not, in a traditional sense, be the same. These data elements may be dictated by two separate royalty jurisdictions or other requirement, yet the disparate data needs to relate to the other.

Relating this situation from one region to the other will require the population of translations within Genesys to be 2 to the power of x regions. (a large number of translations). This type of system has not been done before, nor would it have been able to be done, if not for some key points and technologies.

• Obviously the first point is the XML that builds the ontology for oil and gas.
  
• As mentioned here, here and here, this ontology is Genesys and the ISV's intellectual property.
• Standards are the objective.
  
• PPDM is used for their database schema and their taxonomy.
  
• The core of Genesys and the individual geographic coverage by the ISV's are clean slate developments. No retrofitting required.
  
• We can develop the optimal solution without constraints.
  
• Use of generic's in Java may be prolific.

This point is exactly why XML was developed. For companies to talk to other companies, mechanisms were required to ensure that this issue was dealt with. I mention this as there has been some concern developing regarding the use of multiple software vendors (Genesys' core and the ISV's) and this would become a sticking point. In the old software world that would have been the case, however, with web services this point is effectively dealt with.

So you say potato and I say potato, and this is ok in the system, the only thing we can not handle would be former vice-president Dan Quayle's spelling of potatoe.