Dynamic Transaction Costs

We have been discussing the way in which the innovative oil and gas producer and the Joint Operating Committee will source the capabilities they need from the marketplace. The last few blog posts have discussed how the marketplace has to be the source of those capabilities, and that modularity provides a means to deal with the changes that occur throughout the marketplace. It is important to remember that when we are discussing the marketplace what is pertinent to the Resource Marketplace module of the Preliminary Specification. Any and all resources that are available from the marketplace are accessed through the Resource Marketplace module by the producer or Joint Operating Committee. A simple definition would include the field, administrative, and other services they might use.

Today’s topic of discussion is Dynamic Transaction Costs. Dynamic Transaction Costs are somewhat of a unique area of research for Professor Richard Langlois. That is to say I think he is the leading researcher on the topic. It is a topic that affects the oil and gas industry significantly as we operate in an environment where change is the one constant that we can rely on. Langlois’ definition of Dynamic Transaction Costs from “Transaction Cost Economics In Real Time” is as follows.

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-verse. 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

It is therefore reasonable to assume that an innovative oil and gas industry will be incurring dynamic transaction costs. As we move to a more defined marketplace for our capabilities, and as those capabilities continually evolve, dynamic transaction costs will be incurred. Recall we are looking for “thicker” markets to develop as the Joint Operating Committees look to the market for all of its capabilities. Let's recall what capabilities are with a quote from Langlois’ paper, and the phrase from Harvard Professor Carliss Baldwin of “Knowledge begets capabilities, and capabilities beget action.” And then add to that this quote from Pablo Picasso "Action is the foundational key to all success."

Although one can find versions of the idea in Smith, Marshall, and elsewhere, the modern discussion of the capabilities of organization probably begins with Edith Penrose (1959), who suggested viewing the firm as a 'pool of resources'. Among the writers who have used and developed this idea are G.B. Richardson (1972), Richard Nelson and Sidney Winter (1982), and David Teece (1980, 1982). To all these authors, the firm is a pool not of tangible but of intangible resources. Capabilities, in the end, are a matter of knowledge. Because of the nature of specialization and the limits to cognition, organizations as well as individuals are limited in what they know how to do effectively. Put the other way, organizations possess a pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities. pp. 105 - 106.

And it is with that definition of capabilities that we begin to understand the role of the producer firm and Joint Operating Committee in coordinating the marketplace. It is not the ownership and operation of the machinery in the field operations, or the ability to file the appropriate production accounting reports that provides the value to the producer or Joint Operating Committee. It is the ownership of the appropriate mineral lease and knowledge of the earth science and engineering disciplines. Dependence on the marketplace to make up for the other areas, where value is not earned, can be coordinated by the producer and Joint Operating Committee. Applying some tools and knowledge towards the makeup of those marketplaces is what the Preliminary Specification has done. Tools such as automation through Information Technology, specialization and the division of labor, modularity, capabilities definition and dynamic transaction costs make for an innovative and dynamic Joint Operating Committee and oil and gas industry.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Modularity in Software and Organizational Design

Among the many areas of research that went into the Preliminary Specification is Professor Richard Langlois’ modularity. Modularity builds on the boundaries between the firm and markets and is the reason that the Preliminary Specification has eleven modules. The primary advantage gained by using modularity is the ability to manage change. By isolating the impact of any change to one module, the impact of the changes are manageable.

Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces - which can then communicate with one another only through standardized interfaces within a standardized architecture - one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections. p. 1

People, Ideas & Objects impact is beyond just the software that is proposed to be developed. Organizations such as the producer firm, the Joint Operating Committee and the service industries participants are all impacted as a result of the modules in the Preliminary Specification. Dynamic change within each area is a desired characteristic that is necessary for the innovative oil and gas industry.

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

and

Why are some (modular) social units governed by the architecture of the organization and some governed by the larger architecture of the market? p. 2

It is in the Revenue Model that People, Ideas & Objects assert that our software developments are not just for the oil and gas producers. They are for individuals, society, and the service industry as well. To focus only on the producers misses some of the “who” we are developing these systems for.

The set of design rules that guide social interaction are what we can generally call social institutions (Langlois 1986). These rules determine (among other things) the extent to which, and the way in which a society is a modular system. The desirability of modular design is a theme with a long history in the theory of social institutions. Adam Smith long ago proposed a decentralization scheme based on what he called "the obvious and simple system of natural liberty," by which he meant a system of private property regulated by common law and subject to minimal central administrative intervention. On the economic level, this approach would lead, he believed, to economic growth spurred by innovation, learning, and an ever increasing division of labor. pp. 14 - 15

and

if we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place," he wrote, "it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its order. We must solve it by some form of decentralization" (Hayek 1945, p. 524). p. 15

Change is the one constant throughout the Preliminary Specification. Modularity in the software, and the organizational design of the oil & gas, and service industries is a means in which to deal with change. By 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. We set in place significant levels of change where producers, service industry providers and individuals all move closer to the cultural, or natural way of the oil and gas industry. Around the Joint Operating Committee. Adopting modularity within our software and our organizational structures will provide us with the appropriate architecture to deal with change.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Capabilities From Thicker Markets.

One of the areas that we conducted significant research for the Preliminary Specification was in the area of capabilities. Capabilities in the sense that the earth science and engineering capabilities of the innovative oil and gas firm were one of its key competitive advantages. And capabilities in terms of how the producer firm acquired field operations capabilities from the marketplace, or service industry. Today’s topic is about the acquisition of capabilities from the marketplace and specifically the boundaries between the producer firm and the marketplace. Now when we discuss the producer firm we of course include the Joint Operating Committee as it is the source of all operations in the oil and gas industry. And it is natural that the Preliminary Specification places special reliance on the marketplace to provide for the Joint Operating Committees field operations.

To conduct these field operations internally has never been a choice, so for the Preliminary Specification to choose the boundary of the firm and market in this manner is not contrary to the culture of the industry. What we are attempting to do is to apply Professor Langlois’ theories to the culture of the oil and gas industry and determine the appropriate way forward. I think however, that the conceptual model of transaction cost economics considers that there will be “thicker” markets and a greater volume of transactions contemplated between the producer firms or Joint Operating Committees, and the marketplace. Thicker markets then what is represented in the current industry configuration. The Preliminary Specifications Resource Marketplace module considers these “thicker” markets would develop as a result of the changes in producers actions from using People, Ideas & Objects software.

The conflict that currently exists between the producers and the service industry is at a very high level. We have documented how the producers have been dissatisfied with the costs of field operations, how they have not sponsored new and innovative ideas and firms, and as a result, been left with a somewhat static service industry offering. These issues have been addressed in the Preliminary Specification and the point that I want to make today is that it is for the innovative Joint Operating Committee to rely more heavily on the marketplace for their field operations in the future and to remedy these issues through participation in the Preliminary Specification. Remedies such as purchasing and operating drilling rigs and other field level operations will not help the oil and gas industry to mitigate the issues that we are discussing here. Participation in the marketplace is the only solution. Focusing on the core competitive advantages of the innovative oil and gas producer; of their land and asset base, and earth science and engineering capabilities are where the value is earned. Not in replicating the marketplace offerings. From Professor Richard Langlois.

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

Of note and interest, having access to the same thick marketplaces as other Joint Operating Committees does not provide for the same costs or the same results. To achieve the same results one must replicate the competitive advantages in the earth sciences and engineering disciplines that others used. Coordination of markets is another area where there are distinct advantages that can be gained by the Joint Operating Committee. For further information on how the Preliminary Specification aids in the coordination of markets, please see the Accounting Voucher and Resource Marketplace modules ability to “design transactions.”

In a world of tacit and distributed knowledge - that is, of differential capabilities - having the same blueprints [or software] as one's competitors is unlikely to translate into having the same costs of production. Generally, in such a world, firms will not confront the same production costs for the same type of productive activity. p. 18

The end result of these thick marketplaces is what the innovative oil and gas producer must attain. To extend their capabilities in a manner far greater than what is possible through the current management's capabilities.

Moreover, by taking advantage of a range of capabilities far wider than the boundaries of what even the largest firm can encompass, a network of specialist suppliers and competitors is better able to exploit the value of a complex and potentially modular product architecture.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Software Development Capabilities

One of the key capabilities that the innovative oil and gas producers will gain through participation in People, Ideas & Objects is its software development capability. In the 21st Century the need to meet changing conditions requires that your organization adapt. The problem with software is that it defines and supports an organization The software therefore has to make these changes before the organization can change. When you employ applications such as SAP you have little opportunity for changes in the software, and therefore have an unchanging organization. People, Ideas & Objects is a software development capability that is focused on change, that supports a dynamic and innovative oil and gas industry.

If we look at the business model of the various software providers we see a fundamental difference in the People, Ideas & Objects business model. SAP and others provide a software sale and support type of business model that has the producer pay for the majority of the software up front. Each year they pay a maintenance fee to keep the software up to date. This model does not provide for any change in the business. The SAP software application is the same that is sold to businesses around the world. It is a poor system for oil and gas. Any changes to accommodate the needs of the oil and gas industry have to be customized by the individual producer at their additional costs to the license fees. Software is not a key competitive advantage of the innovative oil and gas producer. SAP is also not oriented to change in their code as a result of their code structure and their customer base. Any changes to their code require extensive testing and engineering and redeployment to thousands of their customers. A costly undertaking that does not generate any revenue above what is already contracted for under the license agreement. This business model is what is considered the most successful in the oil and gas industry, from a producer's point of view.

People, Ideas & Objects business model is focused on change. Producers subscribe to the community and participate by paying the annual fees defined in the Revenue Model. Software development costs, because they are oriented to the oil and gas industry, are amortized over the entire People, Ideas & Objects subscribing participant producers. These fees support the software development, hardware infrastructure and user communities on an annual basis. The software is provided as a free service to the user community. Only producers who are subscribing participants will have accounts. This business model is focused on change within the oil and gas producer organization as defined in the Preliminary Specification. An integrated oil and gas solution built for the 21st Century.

Having this software development capability as an overall industry capability will be necessary for the dynamic and innovative oil and gas producer. As the producers organizations evolve the software will need to evolve first, because organizational change is more deliberate now that we are so dependent on software. If we don’t take control over the means of software’s production, then we can’t take control over the means of the production of oil and gas. Software play’s that important of a role in our lives today. From defining and supporting a more sophisticated specialization and division of labor, to enhancing greater collaborations. Software such as that defined in the Preliminary Specification is necessary for the industry to evolve.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

The Issues With Natural Gas Storage Part II

Yesterday we began discussing the steps necessary for the innovative oil and gas producer to establish natural gas prices that ensured profitable operations. The issue was the natural gas storage business and how it affected natural gas prices. The first step was to ensure that no natural gas was sold below the marginal costs. That it needed to become culturally unacceptable for producers to sell oil or gas below its marginal cost. The solution for that was for the producers to subscribe to People, Ideas & Objects Preliminary Specification. The second step was for the producers to take indirect control of the natural gas storage marketplace and that is the topic of today’s post.

The issue that the natural gas storage owners take advantage of is the seasonal nature of the natural gas business. The lower demand summer seasons can have a significant impact on the price of natural gas and the storage owners take full advantage of this opportunity to fill their capacity with the lower cost natural gas. This leaves them with a lower cost product that they in turn can sell in to the higher priced market in the winter. Having the additional effect of dampening the upper limit on the prices during the peak season. The storage providers are able to take the lower prices during peak demand due to the fact that their costs, the natural gas that they purchased last summer, are low. Therefore it is imperative that the the innovative oil and gas producer begin to manage the storage providers costs and ensure that they carry market costs for the gas they keep in storage instead of the discounted costs they have traditionally kept.

Managing the storage providers costs can be easily handled if the innovative oil and gas producers ensures that they sell no gas below the marginal cost at any time during the year. The production discipline will be difficult to implement initially and will have to become culturally unacceptable. However the effect on the storage providers costs will have a significant impact on their behavior in the marketplace when selling in the peak and low demand times. Managing the storage providers costs in this fashion will limit the operational gains made on the seasonal variances in the natural gas prices. This may have been the major aspect of their operating profit. By eliminating this component of their operating profit the producers may be able to limit the effect of storage in the natural gas marketplace in the short to long term.

The reason there is a drop in prices in the summer months is due to the lack of demand and the producers have traditionally kept at full production. The storage providers made up the difference in the marketplace. What will now be required is the production discipline to shut-in marginal production and keep the prices in the range where they were all year, or at least above the marginal cost. This will affect the operational costs of the storage provider and their behavior so that their impact in the marketplace will be negligible.

The costs to the producer of not adhering to this production discipline is that they will incur operational losses on their properties. This will have the effect of incurring losses on the reserves that remain. These reserves will then have to provide a return on the remainder of the capital costs plus the losses that were incurred. Quite probably making the field or property uneconomic as a result of producing the well below the marginal cost.

Recall in our discussion yesterday that by shutting in the well we are suspending the overhead and production costs. To the point where most of the costs that remain are only the capital costs that are uncovered. This is a preferable situation compared to incurring a financial loss, and a loss of the physical gas reserves. It is a real strategy as opposed to just hoping for a cold winter. Producers will have it within their domain of operations to maintain profitable operations. There would be no need to report losses on any operations in this environment where the marginal cost was a threshold for production. Investors would need to hold the producers accountable for any losses on operations that meet this criteria and deal with them accordingly. That is the future of the innovative oil and gas industry.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

The Issues With Natural Gas Storage Part I

How much of today’s natural gas price decline is attributable to the record storage volumes. In the past, to aid in deliverability of natural gas during peak demand, producers invested in storage to aid in the delivery of natural gas. This was to offset the risk of not being able to meet the demand for natural gas on those cold winter days. With so much electricity being generated by natural gas, shortages would lead to critical electrical energy shortages. In the beginning, and with the cyclical nature of natural gas, producers found that natural gas storage was a good business to be in. Buy the product in the summer at low prices and sell it during peak demand in the winter at higher prices. Soon thereafter there was a boom in building natural gas storage facilities. And with all booms the inevitable fallout in terms of the potential earnings. The producers, who were the initial investors eventually sold their interests in the natural gas storage facilities to what become a new sub-industry of providers, the natural gas storage providers. Today we live with the legacy of these transactions. And I think the natural gas storage issues are the real source of the natural gas pricing issues. The first step to correct this is for the producers to be able to shut-in their marginal production, and the second is for the producer's to take indirect control over the natural gas storage marketplace.

In order for the innovative oil and gas producer to take the first step as described above. They would need to subscribe to People, Ideas & Objects and build the Preliminary Specification. It is within the Preliminary Specification that we enable all producers to use what is called the “decentralized production” model and discard the “high throughput production” model that is currently used. The decentralized production model is defined by Professor Richard Langlois in his book The Dynamics of Industrial Capitalism as.

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

What the Preliminary Specification does is move the production and overhead costs from the producer firm to the Joint Operating Committees. This then provides the opportunity to reorganize these tasks and processes, and focus them on their specialization and division of labor across the industry. So that production accounting, royalty accounting, and lease rentals etc can be focused on the most efficient and effective process and be billed directly to the Joint Operating Committee for the fees for these services. Where production accounting is focused on the specific region for the gas plant. Or royalty accounting is specialized on the unique characteristics of one royalty jurisdiction. Or the lease rental process is the most efficient and effective due to its scale and scope across the industry. How this then affects the decentralized production model is that during times of shut-in production, due to low natural gas prices, because these charges are billed directly to the Joint Operating Committee, the costs of production and royalty accounting are not incurred or billed to the joint account. Achieving the decentralized production models objective of making most costs variable and only the costs of capital uncovered during times when production was marginal and shut-in.

If all of the innovative oil and gas producers were able to take the marginal production off of the marketplace by following the decentralized production model in the Preliminary Specification. Then they would have completed the first step in obtaining control of the natural gas prices. But this will not be enough until they deal with the inventory in storage and that will be the topic of tomorrow's post. This first step is critical in the prolific era of shale technologies. With the ability to flood the marketplace with oil or gas with high deliverability fields. The need to invoke production discipline across the industry is a must. The marginal cost must become the floor at which any and all fields can be sold at. Selling below the marginal cost must become culturally unacceptable in the innovative oil and gas industry.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Alberta's Premier Alison Redford

Last night residents of Alberta were provided with an update from Premier Alison Redford on the upcoming April 1, 2013 provincial budget. Apparently an oil pricing situation in the province has become an issue to the government in terms of their ability to balance the books. And they announced that they may now be projecting a deficit of $3 billion Canadian for 2014. (The Alberta Government owns the majority of the mineral rights in the province on behalf of the Alberta residents.) This is news for a province that has traditionally been conservative in their spending and have run surpluses and have a variety of savings accounts that total at least $20 billion.

The issue apparently comes about as a result of the differential that the producers are receiving on their oil prices. West Texas Intermediate (WTI) is down to the low $90 range from what the Alberta Government projected of the low $100 range. Which is not material, however, since September 2012 the differential on Alberta production has grown to upwards of $40 so that producers are only receiving $50 for their oil production. This is as a result of the markets in the U.S. being satisfied with other imports and internal production and an inability to get the Canadian production out of the province.

We are all familiar with the Keystone XL pipeline issues and the delays in the approval by the Obama administration. Having this pipeline to the states would alleviate the problem and ensure that the producers received the WTI prices less the tariff for the Keystone XL pipeline. But I am not so certain that President Obama will approve the pipeline now that he has been re-elected. It was delayed on the belief that if he was re-elected that he would then approve it because he would not have to deal with his left wing base. I think he didn’t approve because he fundamentally doesn’t agree with the oil sands and will ensure that that oil doesn’t make it to the Gulf coast.

Irrespective of the situation in the states, the Canadian producers should never have put themselves in this situation. They learned in the mid-1990’s that take-away capacity in the natural gas business was what was required to increase the pricing for natural gas. When they built the Alliance pipeline this provided much relief to a congested production market. That same congestion is happening again in the oil markets on a much larger scale. They should have begun dealing with this situation earlier by attempting to get the Keystone XL built earlier, and, building pipelines to the west coast for markets in the far east. Hindsight is 20/20 however they have been advertising they have the second highest reserves of oil in the world. Is that their sole responsibility is the production end of the business?

We see with the recent termination of Mr. Randy Eresman, CEO of Encana Resources that he a) didn’t have the fight in him, and b) felt that the capital markets demand too much in the short term. This short term thinking is very prevalent that is for certain. Nothing focuses the mind like the quarterly demands for performance. But that does not preclude you from making sure that the long term perspective of the firm is taken care of as well. No one is excusing you from leaving the long term perspective alone. It must be taken care of as well. And that is something that the Canadian producers, as a whole, have let slide for so long it has become culturally ingrained throughout their part of the industry that no one concerns themselves with the long term. So projects like People, Ideas & Objects Preliminary Specification will, as it stands today, probably not have a Canadian component to it.

If the province is experiencing such a large hole in their financing I can only imagine what the Canadian producers are experiencing. The Premier said if the differentials continued it might cost the province $6 billion. Losing half of the revenue on any oil production for the oil and gas producers would most certainly put them into a loss situation. And the total loss in revenue could be in the tens of billions. More than enough to finance the development of People, Ideas & Objects Preliminary Specification from just the interest on those losses.

The Supplier Collaborative Interface.

We move from the Actionable Information Interface to the Supplier Collaborative Interface within the Resource Marketplace module of the Preliminary Specification. What the Supplier Collaborative Interface provides is a means for the innovative producer to deal with the uncertainty that is inherent in innovative procedures and dealings with the service industry. A collaborative wiki where the industry wide contributions of what and how the service providers new product or service has seen through its early beginnings to its early implementations. So why are we developing the Supplier Collaborative Interface? I think that most people understand that doing the same thing over and over is easy. Making the organization alter its routine is difficult and when a change is introduced is when the trouble begins. If we could just leave things the same then we would be better able to produce the oil and gas that we need. Unfortunately those days are gone and the routine in oil and gas is anything but. Professor Dosi notes the following point about this difficult situation.

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

Tension and the uncertain nature of innovative activities says it well. The ability for the producer to mitigate these through the Supplier Collaborative Interface is the reason for this critical interface of the Resource Marketplace module. Using the Supplier Collaborative Interface will enable the Joint Operating Committee (JOC) to maintain a focus on the scientific and business uncertainties of the innovations they are implementing. In many cases the people within the JOC will be implementing the technology or innovation for the first time. The supplier and vendor may be still troubleshooting aspects of the technology. The need to be able to collaborate at a high level during this process will be essential through this period of both business and technical risk and uncertainty. Professor Giovanni Dosi notes;

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

So with respect to all of the interfaces that are in the Research & Capabilities, Knowledge & Learning and Resource Marketplace modules regarding the development of new technologies and capabilities. The actual implementation of the technologies from a business and technical point of view is done predominantly by the JOC in the field at the time it is first used. Having this Supplier Collaborative Interface available to deal with the risks and uncertainty in an innovative JOC is a must have requirement for an ERP systems provider to include in their systems.

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

Separation of the business from the science and the operations was maybe something that could happen in the past. Today and in the future, with the high costs of innovation, the ability to troubleshoot the innovation from a science and business perspective seem to be more of the same thing. I certainly can’t foresee how we can continue to parse the two perspectives from the operation and send the respective “departments” their section of the operation. There has to be a better way and that begins with the Supplier Collaborative Interface. Where the users within the JOC are able to deal with the risks and uncertainties at the time they can be resolved, both from a business and science perspective.

It is in the Resource Marketplace, Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification that we have mapped complex innovation processes of the innovative oil and gas producer. These processes reflect the dynamic nature of both the producer and the service industry during this highly complex era of oil and gas exploration and development. In our discussion of the "Supplier Collaborative Interface," the interactions that will need to occur to complete the last parts of the innovative processes. But there is more for the Supplier Collaborative Interface as it works with the other interfaces in the other modules that have been mentioned.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Talisman Energy Announce Layoffs

Straight from the 1980’s Talisman Energy’s President and Chief Executive Officer Hal Kvisle has promised to cut General and Administrative costs by 20% or $260 million. I guess that means about 20% of their staff will be shown the door. I can’t think of a more wrong headed direction to take the firm. It’s obvious that Talisman is going to report a bad quarter, which is going to lead to a very bad year. But that has nothing to do with the size and cost of the G&A that it is carrying. It has to do with a fundamentally outdated business model. One in which it continues to sell gas at well below cost.

Talisman has a choice. It could adopt the business model inherent in the Preliminary Specification and begin the developments to make themselves innovative and profitable.

The Actionable Information Interface.

We have been discussing the interactions between the service and oil & gas industries. And how these interactions need to improve to lay the groundwork for a dynamic and innovative oil and gas industry. As we mentioned yesterday a critical element of these interactions are the Intellectual Property that make up the service industries products and services. What is therefore necessary to initiate the development of those products and services is detailed in the research of Professor Giovanni Dosi.

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.

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

Within the Resource Marketplace module there is the Actionable Information Interface. It is simply a database that is maintained by each company, both producers and service industry representatives, that detail their “actionable information”. If a drilling company were interested in purchasing a new rig then they would list this information in the Actionable Information Interface with the expectation that they could develop interest from producers in that region who would be appreciative of the additional capacity. The drilling contractor could then solicit contracts that would aid in securing financing for the new rig and all of this could be communicated through the Actionable Information Interface. What is different is that this is a central repository for all of this information. One could arguably search for this information today, however, since its centralized within one interface, certain information can be imputed from it. For example what would a service industry entrepreneur determine from the review of 200 producers actionable information? This is the beginning of innovation. And with knowledge and collaboration being part of the technical tradeoffs, the source of triggers to new paradigms in the oil and gas and service industries.

The expression of what is needed by the producers will help the service industry prepare the solutions the oil and gas industry needs. However the role of the producers in this process does not end with just the actionable information. They must actively engage with the service industry by endorsing promising ideas, help to commercialize products and services and as we discussed yesterday, respect the Intellectual Property that is being developed. Sitting back and waiting for the service industry to provide the producers with what they need, without the involvement of the producers, will only bring more of what they have now, dissatisfaction. Information about the Actionable Information Interface is contained in the Resource Marketplace module of the Preliminary Specification. There are also interfaces in the Research & Capabilities module that provide similar elements of how the producer develops their capabilities.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Change in the Resource Marketplace.

Change is one of the common elements in the Preliminary Specification. Change on a grand scale. The Resource Marketplace module is one area where we see a fundamental change in the manner in which the producers and service industry participants interact and depend upon each other. In yesterday’s post we noted the producers and service industry were not innovating and no new entrants were moving into the service industry. One of the reasons for this is that the Intellectual Property rights to the service industry innovations are not well respected by the oil and gas producers.

The big problems in oil and gas are not going to be solved until the incentive structures are aligned towards those that solved the problems. Who is going to spend the time, effort, energy and resources to solve the next big problem and secure it with today’s Intellectual Property laws if the oil and gas industry will just ignore the fact that someone took that time, energy and resources to do so. Today, in the service sector, the oil and gas industry exploits the lack of identifiable Intellectual Property (IP) by more or less ignoring it and passing it around to other firms in the service sector and its competitors. This lack of respect to those that developed the ideas has brought about a situation where the service providers have ceased to innovate or sponsor any new start-up firms as competition. The result of this is that producers are the ones that are losing, as they are unable to have their needs met by a diminishing overall capacity in terms of the service industry.

What is necessary is for the innovative oil and gas producer to focus on their key competitive advantages. Those being their land and asset base, and their earth science and engineering capabilities. The capabilities in terms of field products and services are best left to the service industry to build their competitive advantages upon. And if they have developed some new and innovative product or service it should be respected and dealt with as in the manner that the laws provide their owners. Then people within the service industry will see that if they spend the time, effort, energy and resources on their next idea; that they will be rewarded by the oil and gas producers when and if their product is successful.

Too many times I have seen the producers act in this fashion against what is their long term self interest. Sacrificing their long term benefits of an innovative and dynamic service industry for the short term gains of exploiting someones ideas. This only discourages people from solving the big problems. At a time when there are the issues that face the oil and gas industry today. Having a strong, innovative, dynamic and competitive service industry is a necessary element of the success of the oil and gas industry. But this will not happen without the oil and gas producers first recognizing the Intellectual Property rights that are the law in North America. Additionally the CEO’s of the producer firms need to stand up and state that they won’t accept this type of activity from their firm in the future. This needs to be a policy that starts from the top and becomes a culture of the oil and gas industry.

Within the Resource Marketplace and Research & Capabilities modules of the Preliminary Specification there are a variety of interfaces that provide for the effective and efficient management of Intellectual Property. From the formulation of ideas to the sponsorship of those ideas, there are ways and means for the service industry to be encouraged, directed and supported by the innovative oil and gas producers who rely on and demand more from a dynamic, competitive, innovative and successful service industry.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Designing Transactions in the Resource Marketplace Module.

We shift our focus to the Resource Marketplace module of the Preliminary Specification. What we want to talk about is the manner in which the service industry, the oil and gas producers and Joint Operating Committees will interact in the future. This has become an area where there are significant issues being raised and I would assert that it is an area of the current producers Unsustainable Business Model. We will be discussing these points in the next few blog posts, and to start off I want to raise the point of how the Preliminary Specification deals with the issue, by what we are calling “designing transactions”.

First of all lets look closely at the issue at hand. The producers are unhappy with the costs of operations in the field. To deal with the problem it would be in the producers best interest to sponsor some innovations that the service industry should develop, or alternatively, sponsor additional competitors to join the service industry. In both instances the producers choose not to provide any support to any innovative ideas or any new market entrants. Turning thumbs down to anyone and anything other than proven technologies and suppliers of size and scope. This has led them to be able to deal with the same handful of vendors who have willingly taken the criticism of the producers, along with their money. We witnessed this display of the producers accusing the vendors in BP’s Gulf of Mexico spill a few years back.

What we also need to realize is that the service industry marketplace will need to change in order to accommodate the needs of the innovative oil and gas producer. As was also determined in the Gulf of Mexico spill was that BP was ultimately responsible. There is little that a downstream supplier can do to a program that has been poorly engineered from the beginning. The ultimate responsibility in field operations is with the producer, and their means of control is through better engineering. Secondly, the service industry marketplace will be subject to the same specialization and division of labor that is working in other areas of the industry. There is too much work to be done without re-thinking how it is to be carried out. Therefore between the engineering and the service industry there will exist a higher level of transaction oriented activity that falls within the scope of the traditional administrative areas of the oil and gas producer and Joint Operating Committees. This work has been labelled “designing transactions” in the Preliminary Specification.

If we leave it to chance that vendor “a” will provide vendor “b” the details of part c and deliver it in phase 2 and have the transactions and billing associated with these types of relationships all established as expected, then we will be surprised. As the operations become more complex, the transactions will become far more complex. The ability to engineer the transactions before hand is the way in which the costs of processing these types of transactions will be mitigated. The producer can pay service providers to manage these types of transaction handling capabilities. Or, they can have them included as part of their ERP system.

Planning the effective and efficient deployment of transactions and billing processes doesn’t sound like a big labor saving device. Until one realizes the costs associated in dealing with the exceptions within the accounting world are where the real administrative costs lie. There are also significant transaction processing costs in the other departments associated with where the transactions originated and in executive time. And that is just from the point of view of the producer. Saving costs on behalf of the service industry representative will also ultimately be saved by the producer. The ability to plan and design the transactions with a few principles of cost savings and efficiency involved goes a long way to mitigate the costs, clear up the ambiguity and save the costs and frustration involved in fixing problems that are really just poor communication problems. Using the Designing Transactions feature of the Resource Marketplace and Accounting Voucher modules will go a long way in controlling these transaction processing costs.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Costs and Strategies Can Be Different.

When we look at the costs and strategies of the participants in a Joint Operating Committee we see these two things that are rarely the same. Each of the producers are pursuing their own strategic and tactical interests in the region and they may not necessarily be consistent with any of the other participants in the Joint Operating Committee. This will lead to different costs of capital and operating, and this fact is recognized and is consistent with the capabilities of the People, Ideas & Objects Preliminary Specification.

One or two of the producers in the Joint Operating Committee may have it as a key region and therefore have invested in infrastructure to support the production in the area. Other producers may be new to the property having recently purchased the property with no other interests in the region. Or, may have been with the property since the beginning but limited their investment to the producing assets. There are a variety of operational possibilities in terms of what could make up a producers interest in the region. These will have an effect on the costs of the property in terms of whether they pay for gas processing, or, are able to use their capacity in a gas plant. Naturally this reflects on the amount and types of capital investments they have made in the region. This also applies to their motivation of expanding their reserves or increasing their throughput. Therefore it is difficult to determine the costs and strategic makeup and motivation of the partners that are resident in the Joint Operating Committee that you are a participant in.

This lack of strategic transparency is something that exists in oil and gas. However, everyone’s motivation should be consistent. And that is to expand the return on investment in the properties that they hold in the region. That way consensus can still be attained with the various different strategies in play. The open collaborative ways of the Preliminary Specification. Particularly within the Knowledge & Learning module provide the opportunity for innovative producers to collaborate on the possibilities that are open to them. This can be done without exposing the strategic direction the producer firm is taking to the other members of the Joint Operating Committee. Assumptions can be made, and they may be correct, however, they may also be wrong. The companies strategic direction can not be interpreted through a more open and collaborative footing within the Joint Operating Committee.

One thing that is unique about the Preliminary Specification is the Strategy Interface within the Petroleum Lease Marketplace module. It contains the strategy that is held for the participants interest in the Joint Operating Committee. This may not seem to be too innovative of a feature within an ERP system, however, until you realize that each Joint Operating Committee within the producer firm has its own unique strategy. That’s correct the existence of one size fits all corporate strategies ceased to be effective some time in the past century. The innovative oil and gas producer must maintain multiple strategies for their properties at all times. Each property must be able to employ their own unique strategy in order to optimize the assets or reserves of that property. Generic corporate strategies are inappropriate for the 21st century and you must have an ERP system that can accommodate these needs. People, Ideas & Objects Preliminary Specification provides the ability to maintain unique strategies for each and every Joint Operating Committee through the Strategy Interface in the Petroleum Lease Marketplace module.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

How the Intellectual Property Works.

In my previous post I noted how the Intellectual Property that is derived from the Preliminary Specification will form the basis of the competitive advantages of an industry that will form to fill a gap between the oil and gas producers and the technology providers. Today we want to discuss how that Intellectual Property (IP) is managed and is made available to the users and producers. First of all I am the beneficial owner of the IP that is the Preliminary Specification and I have and will only license one firm to develop systems for the oil and gas producers. That firm is People, Ideas & Objects. This will enable the producers to focus their energies and resources on one solution and not be diverted or diluted by pursuing multiple “me-to” type of solutions.

Producers pay for the use of the software and access to the IP through the Revenue Model. These revenues will support the user community, software development, hardware infrastructure, and delivery of the software services to the producers. Other costs associated with training, accounting integration, etc., will be additional costs that are incurred with members of this new industry. Users are not charged for the use of the software. They are provided access to the software through their employer / client, the producer firms.

People, Ideas & Objects are user based developments. Having systems built without the collective knowledge and understanding of how and what the industry operates is of little value. Individuals know how to do their jobs, however, there are hundreds of unique positions within oil and gas. The only way to capture that knowledge is through user based involvements. Users are therefore a critical aspect of development and a major aspect of the IP that is brought to the table. However, it is derivative of the Preliminary Specification. Therefore users involved in development will be granted a license where they are provided unencumbered access to the IP that is the Preliminary Specification in exchange for the IP rights to any and all of their contributions to the development.

This will ensure that the IP that makes this new industry is available to everyone in an unencumbered manner. That access to all of the IP by the user base remains freely available to all of the users. And producers are assessed a reasonable fee for the use of the IP. It also assures that the IP does not become fragmented and subject to various trolls who come up with portions of IP that they can charge producers for on a scattered basis.

Having the IP managed in this fashion provides this new industry with a unique competitive advantage. It provides us with the ability to raise the revenues to pay the users for their ideas and contributions to the software development. All users are paid for their work here. Producers are protected by dealing with one and only one software development team that is focused on providing them with the solutions they need. The industry can not afford to engineer multiple solutions of the scope and scale of the Preliminary Specification. The industry can not afford to deal with IP trolls that are more of a nuisance and provide no value.

Lastly having the IP resident in the oil and gas industry provides no value for the users or producers. Without the management of the IP in this manner there is nothing People, Ideas & Objects can leverage, we need to generate revenues based on the IP.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

An Industry Based on Intellectual Property.

One of the things that we learned in our research was how the process of specialization and the division of labor expands over time. How do the changes occur and what signals are given for people to make the changes to expand the division of labor in an efficient way. We learned from Professor Richard Langlois that “gap filling” was the way in which specialization and the division of labor increased. When someone saw that a task was not being done, that would be of value if it was done, and the task was filled by someone then the process was complete. In an ever continuing process of improvement the division of labor and specialization continue to expand.

That is until ERP systems like SAP were developed. Then firms encased their processes in concrete in the interpretation of what SAP considered state-of-the-art. And no changes were ever able to be made again. This is why the industry needs to adopt the People, Ideas & Objects software development capability. To free themselves from the SAP encasement and allow themselves to freely innovate on their processes. And to expand on their specialization and division of labor to ensure that they realize the benefits from these powerful tools. In the Preliminary Research report I termed the phrase “SAP is the bureaucracy”. The management of the industry have used that knowledge to ensure they maintain SAP as their ERP system. In that way their franchise will never be challenged.

When it comes to gaps that need filling I see a large one between the technology industry that traditionally provides the ERP systems and the oil and gas industry. What I think needs to happen is that “gap” needs to be filled by an entire industry. One that is based on providing the technology solutions to the oil and gas producers, based on a fundamental understanding of the oil and gas industry. Not an industry that is based on selling the latest operating system or version of the database, but the Preliminary Specification or accounting integration that meets the needs of the innovative oil and gas producer. One that provides the software training or user support that understands oil and gas as fundamentally as the users themselves.

That would be one of the fundamental aspects of the competitive advantages of the people who work within this new industry. Their understanding of the oil and gas industry. Having worked and educated in the primary industry itself would give them a fundamental hands on understanding of the oil and gas business. Another aspect of their competitive advantage would be their abilities when it came to the technologies that are available today. Clearly some people “get them” and have a propensity to work within the core technologies of Java and Oracle databases that preclude large portions of the population. And there would be more. These people would have a third competitive advantage in that they would be licensed in the Intellectual Property that makes up what the industry is based upon and is derivative of the Preliminary Specification.

The current management of the industry do not accept that the Intellectual Property (IP) that People, Ideas & Objects has developed is needed as a competitive advantage for this new industry. They feel that the IP should remain within the oil and gas industry. I naturally disagree. The competitive advantages of the innovative oil and gas producer are its land and asset base, and its earth science and engineering capabilities. The IP that supports its internal processes doesn’t fall within the domain of their competitive advantages. I would also argue that the benefits of having the Preliminary Specification based IP managed in the manner that is proposed enables the industry to benefit in ways that are significant in terms of cost and quality. These will be the topics of tomorrows discussion.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

The Work Order System for Operational Control

In this our second post to discuss the Preliminary Specifications, Partnership Accounting modules, Work Order system. We look at the tight operational control aspects of the system and how it enables producers and Joint Operating Committees to control the costs associated with the work that is undertaken within the various projects that have been approved. First of all, it should be noted that the Work Order system is not just for ad-hoc working groups and research projects that we noted yesterday. They are also for the type of work that is undertaken in Joint Operating Committees everyday. When an AFE has multiple aspects of a construction project to be undertaken and requires the ability to have budget, chain of command, Job Order, governance and cost control as part of each phase of the project, the Work Order system is a natural addition to the attributes of the AFE or cost centre.

How the Work Order operates is that the individuals who are assigned to work on a project are given the Work Order number to use when they are working on the project. While they are working on the project the system will accumulate their time and their costs will therefore be billed to the AFE or cost centre that is affiliated with that Work Order. Keying the Work Order number into the persons phone, iPad or computer will be all that is required to ensure that accurate records are kept. This would include people who work for the producer firm, members of the Joint Operating Committee, field staff and service industry representatives.

A critical part of the Work Order system is the Job Order system. A method of issuing and documenting the authorized activities within the scope of the Work Order. When a certain decision is to be made, then people will look to the Job Order system for the authorized documentation of when that decision was made by the authorized individual. Only then will the activity take place. What we learned in our research into innovation is that tight operational control is highly consistent with an innovative footing. Having a historical record of this operational control helps to identify the sources of issues. But more importantly from an innovation standpoint. This historical record can also be used to determined what the source of the success was.

The Job Order system in connection with the Military Command & Control Metaphor (MCCM), which provides a flexible chain of command over any Joint Operating Committee or working group. Gives the additional operational control that is necessary for the innovative oil and gas producer. The MCCM which is a part of the Security & Access Control module is able to span multiple organizations and can be used to ensure the groups remains accountable and focused on the objectives of the project.

Lastly the Work Order can be used for internal purposes within the producer firm itself. We have discussed in the Research & Capabilities module how the earth science and engineering capabilities of the firm are being charged to the various Joint Operating Committees. How the producer firm develops and generates revenues from both oil and gas production, and from the delivery of its capabilities to the various Joint Operating Committees it has an interest in. The ability to capture the time and billing for this work is through the Work Order system of the Partnership Accounting module.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

The Work Order System for Innovation.

While we are in the mood to talk about accounting, or at least that is to say we have been talking about accounting. We should discuss the Work Order system that is part of the Preliminary Specifications Partnership Accounting module. One of the objectives of the Work Order system is to enable innovation in the oil and gas industry. Another objective is tight operational control over the activities within the firm and Joint Operating Committee, and we will discuss this objective in tomorrows post.

Our research in innovation taught us many things about the processes of innovation and the things that enable and impede these processes. When we consider the competitive advantages of the oil and gas producer are their land and asset base, and their earth science and engineering capabilities we see that science is a key part of their competitive advantage. We learned that science and innovation stimulate one another and therefore anything to increase the innovativeness of the industry would increase the scientific basis as well. We also learned that "knowledge begets capability, and capability begets action." Therefore the scope and scale of research in the earth sciences and engineering disciplines conducted by producers must increase substantially in the future. What we know is opportunity doesn’t always knock in pre-approved or nicely organized packages. It can be organizationally messy. The opportunity to participate in a study or working group rarely is as a result of being a participant in a Joint Operating Committee or fixed relationship with another producer. It is as a result of some serendipitous happening. Therefore what the innovative oil and gas industry needs to have is a means to deal with these opportunities by participating in them in an efficient and effective way. A manner that does not have the bureaucracy, which impedes them today, get in the way from them forming and destroying the producers participation. Therefore People, Ideas & Objects developed the Work Order system in the Partnership Accounting module.

What the Work Order system allows the innovative producer to do is to participate with others who they may not have a formal relationship with, and still access the full power of the AFE, Budget and means of allocating costs. Meaning there is no Joint Venture agreement of any kind between these firms, and there is no intent to form any such agreement. It is only two or more producers or individuals who may have an interest in certain characteristics or interests in some aspect of the underlying sciences that they want to know more about. And in their broader discussions have found like minded individuals who also want to participate in some substantial research that would be very valuable to each of their firms. They all agree on the scope and scale of the project, a budget for the costs and who should lead it. They also agree on what contributions should be made, with some just paying cash and others providing people and resources. Currently these types of activities are of limited use due to the bureaucratic nightmare that they cause and that needs to cease in an innovative oil and gas industry.

What the Work Order provides is the participants with the means to capture the meeting of the minds in terms of what the deal is that they have struck. It also enables them to allocate the source of the budgeted dollars they will use. The employees time will be sourced from the exploration departments payroll costs, the cash will be accessed from company b’s Research AFE and company c will be allocating some of their overhead budget to absorb the costs. When they agree on the project, at the beginning, they capture the deal in the Work Order, they approve it, the resources are then allocated as agreed to, and the accountants will happily process the charges knowing exactly why the costs were incurred and the money sourced. For more information review the Work Order section of the Partnership Accounting module.

For an innovative oil and gas industry to be on the leading edge. These types of research projects and working groups will need to be as commonplace as desks in an office building. The reason they are not is due to the nightmare that would cause the accountants. The Preliminary Specifications Work Order system provides the ability to deal with these problems at the beginning of the project and in a manner that is consistent with the users needs.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Production, Revenue and Royalty Accounting.

In Friday's post we discussed the Material Balance report and how it enabled the automation of the production, revenue and royalty accounting processes. Today we want to discuss the implications of that automation in terms of the specialization and division of labor of the people who work within these processes. Throughout the Preliminary Specification we are using these tools to leverage the value that people bring to the innovative oil and gas industry.

The first area that specialization and the division of labor can be applied is Production Accounting. Their role in using the Material Balance report would be significant as they, I think, should be organized into service providers that are based on geographical regions. That way a number of gas plants, the gathering and production that are associated with them would all be handled by the production accounting service provider. Which would ideally be located within the region that they are working. That way they would have a hands on understanding of the “what” and “how” of the operations. During the process of building the software from the Preliminary Specification we will work with these service providers to identify these processes and build the software they need to conduct these services. Included in that software will be the task based billing that will automate their billing to the producers. So that when they complete an operation then a charge for that Joint Operating Committee will be made at the end of the month. This will also, since we are using the decentralized production model, not trigger a production accounting billing during a month when there is no production. Eliminating the overhead charges for production accounting during times of shut-in production.

We discussed yesterday how the Material Balance report was able to ensure that the volumetric information in the People, Ideas & Objects software was as critical as the financial information. This is to ensure that the volumetric information is secure, reliable and mission critical so that automation can be built off of the information. The Production Accounting service provider who is working in the region. Who is working on behalf of all of the Joint Operating Committees who are located within those gas plants. Has provided an objective and historical interpretation of the Construction, Ownership & Operation agreement, and all associated agreements. These production volumes now form the basis of the Revenue Accountant service providers efforts. Here we may have differences in the makeup of the revenue of the Joint Operating Committee. Each participant may have a sales agreement for their own product, or they may all have sales under one agreement. Therefore the situation in terms of how to handle the process is different than with the Production Accounting service provider. The unique nature of the sales contract signals that the service provider should be hired on the basis of the producer firm that has the interests in the various Joint Operating Committees. Again these Revenue Accounting service providers will have the ability to work with our developers to define the process and build the software with People, Ideas & Objects that bills their services to the Joint Operating Committee for the services completed. And if there is no revenue during the month then the associated services would not have occurred and the charges would not have been billed.

Lastly we have the Royalty Accounting service providers that will be ideally organized based on their specialization in certain royalty regulations. Having unique knowledge and specialized skills in the administration of royalties that ensure the royalties paid by the Joint Operating Committees are the lowest possible. These service providers will be large in terms of the number of people they employ and therefore will be able to specialize in terms of the types of services they provide. They will be able to minimize the royalties, the largest costs of any producer, paid. Due to the service providers size they will be able to work with People, Ideas & Objects and develop software that is unique and specific to the needs of the Joint Operating Committees royalty needs.

There exists today a strong skill set in the production, revenue and royalty accounting field. The problem is there are systemic shortages of these people. Using the tools of automation, the division of labor and specialization in the manner that we have above will help to mitigate these issues. It will alleviate the tasks of reworking the information again and again and permit the people to do the higher level work of planning, thinking, innovating and deciding. And leave the simple work to the computers. That is as soon as we lock down and secure the volumetric information.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

The Material Balance Report.

It is within the Petroleum Lease Marketplace module that many of the key variables for the Material Balance report are held. The Material Balance report is part of the Accounting Voucher and Partnership Accounting modules of the Preliminary Specification. The report is designed to balance the production, transportation and delivery of oil and gas for the producers and Joint Operating Committees. The report will contain some valuable characteristics that ensure the producer and Joint Operating Committees production remains in balance and is consistent with standard industry field practices.

To start lets agree that there are different types of producers or Joint Operating Committees. Some have ownership interests in plants that have capabilities to process gas production and some don’t have the ownership interests. Those that have the capabilities have certain contractual leverage with those that don’t have the capabilities and that can be used in one of two ways. The by-products, propane, butane and condensate can be purchased from the producer by the plant owner or the producer can pay a processing fee to the plant owner. Either way the accounting for the production will be fundamentally different. These differences need to be captured and reported in the Material Balance report. As each unit of production, gathering system, functional unit or processing facility is a stand alone reporting unit with its own Material Balance report. Each report must balance the inputs and outputs, and must balance with the adjoining facilities.

What is unique about the Preliminary Specification is that the Material Balancing between facilities will be reconciled between producers. Using the information that is also reported for sales contracts and royalty regimes we will be able to determine the overall production for a region. When we match that with the production that is reported by the individual producers we will be able to determine if there are any shortages or volumes over reported. This is a critical first step in ensuring that the volumetric integrity of what is reported by the producer is correct. The “reporting” world can’t be out of step with the “physical” world in any material way and this overall balancing will ensure the next phase of what we do with the volumetrics is possible.

The next phase of the Material Balance report is to embed these reported volumes within the ERP system itself. This is so that the volumetrics are subject to the same basic rules of the system as the accounting information is. So that for example, what is in inventory must be removed from or added to inventory through an accounting voucher in the Accounting Voucher module. Denoting that every volumetric transaction in the Material Balance report will have associated Accounting Voucher entries in the financials. This level of automation is only possible when we have the assurance that the volumetric information is valid.

Automation of the entire production, revenue and royalty process is only possible when we have settled the volumetric process. There will still be a multitude of volumetric reporting errors, amendments and changes that can and will be made throughout the system. However, they will be automated as well. As volumetric changes are made the associated financial accounting changes to the various accounts will also be amended because we know that the system remains in balance and the amendments are therefore necessary.

Automation of these processes around the Material Balance report in the Preliminary Specification is necessary for the innovative oil and gas producer. Today there are significant costs incurred in managing these processes by the bureaucracy. Tomorrow we will discuss the management of these processes through the division of labor and specialization.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

The Marketplace Metaphor.

Just a note regarding the discussion we had yesterday. When we discuss the specialization and division of labor of the service providers, as in the case of the lease rentals process. The work that we will undertake during the Preliminary Specification phase of development. Will include the determination of the process that the lease rental service providers will use. It will also include the types of software that we will be developing for them. That is the type of work that we are doing here in the Preliminary Specification.

In today’s post we are discussing the Marketplace Metaphor that is used in the Petroleum Lease, Resource and Financial Marketplace modules. Each of these marketplace modules use the concept of a marketplace for the producer firm and Joint Operating Committee to engage in the various communities and marketplaces they have an interest in. Participation and collaboration in marketplaces is what private enterprise is about. What the Preliminary Specification provides is the ability to capture the activities in the marketplaces virtually, and enable the recording of transactions and the overall support of the marketplace.

One of the key enabling technologies in the virtualization of the marketplace is Open Wonderland. A Java based technology that was originally developed by Sun Microsystems in their research division. Participants, which would include anyone who is active in the oil and gas or service industries, would access the portal to conduct their commerce virtually through these facilities. Each participant would in turn be supported by the full power of the Preliminary Specification by right clicking their mouse and having the ability to pull down menus, or selecting features from specific tiles on their screens. Here is a video of the Open Wonderland technology.

The physical facilities that exist within the virtual environment are easily created by those that want to establish some real estate. So for a bank that does business in oil and gas they may want to establish branches throughout the virtual environment where their employees would be available to help staff of oil and gas producers or Joint Operating Committees to resolve their needs. Or service industry representatives who need space to demonstrate their services. The point is that its a virtual representation of the marketplace that is fully supported by the Preliminary Specification. And there are not three marketplaces within the Preliminary Specification. Each of the marketplace modules, the Petroleum Lease, Resource, and Financial Marketplace modules access the same virtual environment.

The benefits of having this technology active in the Preliminary Specification are many. The time and travel savings of individuals will be incrementally better. The quality of the collaborations between participants will increase due to the close virtual representations. And with the support of the Preliminary Specification, the dynamic nature of the market will be experienced.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Specialization and the Division of Labor in the Petroleum Lease Marketplace

The Petroleum Lease Marketplace of the Preliminary Specification is the place where innovative oil and gas producers and Joint Operating Committees will go to build their land and asset bases. Just as the Research & Capabilities module will be used to develop their earth science and engineering capabilities. These two modules are at the core of the innovative producers competitive advantages. It is also the hub of many of the source documents that originate throughout the modules in the Preliminary Specification. What is different and unique about the Petroleum Lease Marketplace is the marketplace metaphor that we use with it, the Resource and Financial Marketplace modules. We will discuss these more tomorrow. Today I want to discuss the elements of specialization and the division of labor as they relate to the Petroleum Lease Marketplace module.

As with all aspects of the Preliminary Specification, the producer firm and the Joint Operating Committee are subject to a comprehensive analysis to determine an appropriate specialization and division of labor. Is there a better way to organize the processes within the industry to optimize the resources and increase the performance of the industry. These tools are being used particularly effectively with respect to the earth science and engineering resources to ensure that the mid - long term shortages in those professions are mitigated. Within the Petroleum Lease Marketplace there are a few areas where these tools are highly effective as well.

The first application of specialization is in the area of lease rentals. To organize the process of managing and paying lease rentals on an industry wide basis is far more efficient than having each producer maintain the resources internally. By organizing the process industry wide we are able to specialize based on the process and bill the individual Joint Operating Committees for the services performed by the lease rental service provider upon successful completion of certain tasks. Tasks such as the payment of lease rentals.

If there were a handful of lease rental service providers in the industry. They would be able to establish highly efficient processes where the services they provided the producers and Joint Operating Committees were second to none. Yet at the same time the costs of these services to the producers and Joint Operating Committees would be far less than what it would cost to manage the lease rentals internally. The benefits of specialization and the division of labor are not incremental, they are exponential. These benefits are not achievable for the average producer due to the fact that they do not have the scale of operations to warrant the investment in managing the process as efficiently as possible. A few geographically located service providers would have that scale.

And there’s more. What People, Ideas & Objects provides is the Preliminary Specification and a software development capability. It is an approach that systems are not static and should remain flexible and open to user requirements. In a scenario where there are hundreds of producers who are wanting to have changes made to their lease rental process this becomes unmanageable and the primary reason that systems remain the same. However, with a only a few service providers, who are focused on the most efficient process, are going to want and need that software development capability to cater to their process developments. To accommodate a handful of service providers becomes much more manageable than dealing with hundreds of producers.

This is how the tool set of specialization and the division of labor are being used in the Petroleum Lease Marketplace to deal with the processes under management in the Preliminary Specification. And these are powerful tools. It should be remembered that the productivity gains achieved by Adam Smith in his pin factory totalled two hundred and fourty times what was found when he first started.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.