Leakage vs. Hoarding

Yesterday we discussed the division of the short term and long term perspectives through the Research & Capabilities module of the Preliminary Specification. But we are talking about more than just the capabilities that each Joint Operating Committee demands when we are talking about the capabilities of the producer firm and the use of the Research & Capabilities module. McKinsey put it well in this quotation.

Ongoing multi-year tasks such as launching new products, building new businesses, or fundamentally redesigning a company's technology platform usually call for small groups of full-time, focused professionals with the freedom "to wander the woods," discovering new, winning value propositions by trial and error and deductive tinkering.

We have detailed that the focus of the producer firm is on its asset base and its earth science and engineering capabilities. This area of focus of the Research & Capabilities module is therefore a key focus of the producer organization. We are not talking about the people that will be deployed in the day to day of the various Joint Operating Committees. These are the core scientists of the firm. The ones who are responsible with developing the key competitive advantage of its earth science and engineering capabilities.

We discovered something very interesting in our research. When we deploy teams of people in a fashion like we are with People, Ideas & Objects use of the Joint Operating Committee. The earth science and engineering capabilities of each Joint Operating Committee will atrophy. They need to be fed a constant stream of new and innovative ideas and possibilities to remain “current” with the science. This of course has to be steered by the mother ship so as to not duplicate errors or replicate blind bunny trails unnecessarily in each and every Joint Operating Committee.

Now it may seem that I have contradicted myself by stating that the firm needs to develop the capabilities necessary “in-house.” But I didn't say that. The Research & Capabilities module should be considered to be from an industry perspective. That although each firm will have specific people defined to support each firms needed capabilities, the service industry will take on a greater role in providing much of the innovative capabilities that are developed through the mindset employed by the producer firms. The in-house capabilities will be from the earth science and engineering point of view.

We’ve talked about the role the producer would have in determining the long term horizon of the firm. How the Research & Capabilities module would provide a window on the various Joint Operating Committees to provide the ability to apply systemic earth science and engineering innovations at each JOC without the risks of unnecessary duplications or repeated following of blind bunny trails. I now want to discuss the risks and rewards of the leakage of earth science and engineering information from the firm through the Research & Capabilities module. As it would be apparent that the level of discussion and collaboration through the partnerships in the Joint Operating Committees, through the industry itself and the service industry in particular would lead to significant leakage of the producers proprietary earth science and engineering knowledge, understanding and capabilities.

Hoarding of Information

In the Preliminary Research Report we learned an interesting point about the producers proprietary earth science and engineering knowledge, understanding and capabilities.

In Brown & Duguid (1998) they make the following observations: “The leakiness of knowledge out of and into organizations, however, presents an interesting contrast to internal stickiness. Knowledge often travels more easily between organizations than it does within them. For while the division of labor erects boundaries within firms, it also produces extended communities that lie across the external boundaries of the firms. Moving knowledge among groups with similar practices and overlapping membership can thus sometimes be relatively easy compared to the difficulty in moving it among heterogeneous groups within the firm. Similar practice in a common field can allow ideas to flow. Indeed, it’s often harder to stop ideas spreading then to spread them.” (p. 102) p. 32

We all know this leakage of information to be inherently true. When someone discovers something that is “news” within the industry, it is generally well known within industry associations for the geologists or engineers as soon as it is known in the firm. It is either imputed through what is known, or the leakiness is as porous as it is. What is a producer firm to do to ensure that the information they have does not leak? I think that the point lies in the meaning of “capabilities”; which is “an aptitude that can be developed” or “knowledge begets capabilities, and capabilities begets action.” Simply it is not possible to stop the leakage. The question therefore becomes, is it best to develop your aptitude by curling up with a text book or to participate in a marketplace. People, Ideas & Objects believes that innovative producers, instead of hoarding the information, will deploy the right information to the right people at the right time.

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.

Separating the Long and Short Term Perspective

We went through the four points from the McKinsey article as to why we should use the Research & Capabilities module for the long term perspective of the innovative oil and gas producer. We now want to revisit the first point of that article and highlight the significance of the opportunity that is presented by separating the long term perspective into the Research & Capabilities module, and the day to day into the Knowledge & Learning module. In the McKinsey article "The 21st Century Organization" it is noted;

The first design principle is to clarify the reporting relationships, accountability, and responsibilities of the line managers, who make good on a company's earnings targets, for all other considerations will get short shrift until short term expectations are met.

By making the Joint Operating Committee the key organizational construct of the innovative oil and gas producer. By aligning the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee with the compliance and governance frameworks of the hierarchy. By providing an extension of the governance structure over the partnership with the Military Command & Control Metaphor. We have isolated the Joint Operating Committee as the day to day operation of the oil and gas producer. This frees up the remaining portion of the producer to concern itself with the long term value generation of the firm.

Recall that these Joint Operating Committees are autonomous in the sense that they are focused on providing the greatest performance. They are driven through the Performance Evaluation module that allows them to determine where and how they can build the greatest value each month. Because they are operated by the partnership, which all the participants are motivated equally by financial gain, the producers will have faith that the “line managers will make good on a company's earnings targets.”

The Research & Capabilities module is looking at the interests the producer has in any number of Joint Operating Committees. This number may total into the thousands. To concern themselves with the operational performance of each would be a daunting and impossible task. And based on the previous paragraph their involvement is limited. However, there may be systemic corporate similarities that can be applied to each that bring value to the overall producer firm. Systemic similarities that can only be seen from the perspective of the firm, and in the long term. These are where the business value can be generated through the use of the Research & Capabilities module. McKinsey notes;

Dynamic management and improved collaboration, as we show later, are better ways of accomplishing the purposes of these ad-hoc structures. A company that aims to streamline its line management structures should create an effective enterprise wide governance mechanism for decisions that cross them.

It is through an iterative and collaborative approach to dealing with the various Joint Operating Committees that the users of the Research & Capabilities module is able to extract the value in the long term. By passing on new innovations or the results of experiments for the JOC to implement. The ability to influence any and all variables and to see any aspect of the firm and to analyze it is the domain of this application module. To define it as a set of fixed functionality will ultimately be the result of what the user community is able to provide, however, I am certain that they will also recommend that the application module remain open to analyzing any and all data.

If we reduce the business of the oil and gas producer down to the activities of the Joint Operating Committee. And concern ourselves only with the day to day activities of the property then we can generally be satisfied that we will know where our next meal will come from. But what about everything else. This is the classic conflict that a business must satisfy, the struggle between the long and short term horizon of the business. How much should be sacrificed in the long term and how much should be sacrificed in the short term? It should be noted that the name of the module is Research & Capabilities, this discussion focuses on the capabilities component of the module.

What is the firm capable of and how can that capability be enhanced? And more importantly since we are so dependent on our partners in the Joint Operating Committee and the service industry how is this apparent contradiction resolved? The traditional steps of the producer was to build the in-house capability. The assumption that is used in People, Ideas & Objects is that the resource constraints do not permit the luxury of each producer building these capabilities. The need to collaborate with partners to build the capabilities needed for the Joint Operating Committee is how these needs are met.

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 Introduction to Research & Capabilities

A quick pass through the Accounting Voucher brings us to what has to be my favorite module, Research & Capabilities. This module shares many similarities with the Knowledge & Learning module. The difference is that the Research & Capabilities is a firm, or producer, facing module and the Knowledge & Learning module is a Joint Operating Committee module.

We discussed how the Research & Capabilities module would be used to help build value by managing the transition from the hierarchy to the aligned producer organization under the People, Ideas & Objects software. Where the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee were aligned with the hierarchies compliance and governance. Making this transition will create opportunities for people to make changes to the work that they do in order to be more efficient and effective. What and how the software will do this little bit of magic is best described in a McKinsey article entitled “The 21st Century Organization”. In a four part recommendation McKinsey sets out in broad strokes what is required.

Streamlining and simplifying vertical and line management structures by discarding failed matrix and ad hoc approaches and narrowing the scope of the line manager's role to the creation of current earnings.

The process of using People, Ideas & Objects software will achieve these objectives by aligning all of the Joint Operating Committee and the hierarchies frameworks, imposing the military chain of command and having the financial interests of the producers drive the management of the Joint Operating Committee. We are “narrowing the scope of the line manager’s role to the creation of current earnings.” These are the focus of the Knowledge & learning, Partnership Accounting, Accounting Voucher, Petroleum Lease Marketplace and Performance Evaluation modules.

Deploying off-line teams to discover new wealth-creating opportunities while using a dynamic management process to resolve short and long term trade offs.

These are the critical new roles that are being discussed in these “new” modules “Research & Capabilities” and “Knowledge & Learning.” Providing valuable insight to their users about the business that is above the day to day noise. Where the long term vision of the organization can be set, executed and realized through these two advanced software modules.

Developing knowledge marketplaces, talent marketplaces, and formal networks to stimulate the creation and exchange of intangibles.

Within the Preliminary Specification, if we include the Research & Capabilities and Knowledge & Learning marketplace definitions, we have five marketplace modules in People, Ideas & Objects. Marketplaces are things that people will be doing more of in terms of participation in the future. Computers can assist, but again are generally very poor at making decisions, bargaining, knowing what to do, etc. The other three marketplace modules in the Preliminary Specification include the Petroleum Lease, Resource and Financial Marketplaces.

Relying on measurements of performance rather than supervision to get the most from self directed professionals.

Handing the Performance Evaluation module to the team that is running the Joint Operating Committee will enable them to manage the property in the best possible fashion. They are going to be able to figure out what it is that makes the most sense in terms of value, and begin to generate more of it. It is as simple as that. Except it is a very complex business. And that’s why you have your best earth science and engineering staff on the job. And the best business / geological / engineering minds running the Research & Capabilities module.

It should be coming clearer that it is no longer the 20th century. That to manage an enterprise requires a different approach, and the first thing that is needed to manage that enterprise is the software to enable that approach. With real shortages in the quality human resources necessary to maintain the markets demand for energy, it will be the producer that is able to maintain a high performing organization based on criteria such as these.

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.

Open Charges to the Accounting Voucher

Following on the Partnership Accounting module, the Accounting Voucher is unique to oil and gas systems due to the nature of recognizing the Joint Operating Committee (JOC) as the key organizational construct of the innovative and profitable oil and gas producer. One of the implications of using the People, Ideas & Objects system is that each partner will have access to the Accounting Voucher during the time that a Voucher is either open or closed. Each of the producers involved in the JOC are therefore able to access the Accounting Voucher and have costs / revenues distributed to the other partners involved in the Joint Operating Committee. This is one of the key differences that we had discussed in the Petroleum Lease, and Resource Marketplace modules. Partners are all contributing to the joint account as equal participants with the role of “operator” being relegated to a thing of the past. (Note too of course, that each participant is able to charge their own account with their own 100% charges. These charges are to their private accounts and therefore not seen by any of the other participants.)

Cost control becomes an issue when everyone is able to charge freely to the joint account. A careful reading of the previous paragraph reflects that I didn’t state “charge freely." Cost control comes about as a result of the traditional budgetary control of AFE and the Work Order system that is part of the Partnership Accounting module. Without pre-approval by the partnership nothing is able to be processed by the People, Ideas & Objects software applications. And as we have seen in the discussion of the Security & Access Control module, few will have the authorization to “charge freely” to the joint account in any form or fashion.

With the traditional ability to charge to an AFE or Cost Center, and possibly during the development of the People, Ideas & Objects Preliminary Specification, the user community determines the need to have a Purchase Order system, ensuring that an appropriate bidding and contracting process is in place, no unauthorized amount will be accepted in the system. There is also the fact that each voucher needs to be approved for payment before any money is expended and that approval would need to consider the authority of the joint account.

As one can envision these Joint Operating Committee - Accounting Vouchers can become large as they include all of the business of the property. Accountants would be frustrated at month-end trying to get these Vouchers closed if they had to seek approvals and close each of the transactions within the appropriate small window of time of their month end. Needless to say that each transaction within the Accounting Voucher is a small subset of the larger Accounting Voucher and can be dealt with as a stand alone individual item. Seeking its own approvals and authorizations that deal with just the domain of the specific transaction.

What is different in People, Ideas & Objects Accounting Voucher system vs what exist today is the elimination of the designation of operator. The capabilities for each producer to house the state of the art earth science and engineering resources necessary to run all of the properties within one oil and gas firm is believed to be beyond what is possible in the future. The solution prescribed in the Preliminary Specification is the further specialization of earth science and engineering skills and pooling of the resources of the partnership within the Joint Operating Committee. Therefore charges from each of the participants will need to be processed and paid just as if they were the operator in today’s systems. This will include not only internal costs but also for the field work being done on AFE’s and Work Orders. It may be that any one of the participants will be incurring charges on behalf of the partnership. Therefore the need to have the Accounting Voucher open to the partnership is a necessary evolution of the pooling concept that is part of People, Ideas & Objects Preliminary Specification.

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.

User Based Developments

The comprehensive accounting for the producer firm and Joint Operating Committee is conducted in the Partnership Accounting module of the Preliminary Specification. It is here that you will find the many traditional accounting reports, activities and information for the innovative and profitable producer and Joint Operating Committee. It will be this module and the Accounting Voucher that will be used by the producer, Joint Operating Committee and various service providers to carry out the accounting requirements for those concerns. Each will have access to their domain of information necessary to conduct their jobs whether that is at the producer, Joint Operating Committee or service provider. Security and access control being provided through the Preliminary Specifications Security & Access Control module.

In the high level discussion of the past few months we have discussed the material balance report and its automation of the production, revenue and royalty process once the production volumes are settled. We have also discussed the decentralized production model and how it enables the innovative and profitable producer to eliminate the overhead during times when production is shut-in. These are areas that are part of the Partnership Accounting module, and with the generic nature of the accounting, don’t need to be repeated here. There is one area that we haven’t discussed and that details the global scope of the accounting information of an ERP system. And that is the manner in which the developments have been approached in the industry before.

The myriad combinations of accounting possibilities that happen within oil and gas have to be captured and handled within the systems that are used in oil and gas. These combinations have not been captured in any of the existing ERP systems as of this date. The first aspect of solving this problem is to engineer the solution. Many have tried and have found their budgets to be too small for the job. Approaching this from the one producer perspective may seem like adequate funding, however, no one today is declaring success. If, as we have proposed in People, Ideas & Objects, aggregate the resources of the industry towards engineering the solution, this scope can be scaled, the costs to each producer will be incidental, and the results will be that each producer will realize the full scale of that software development effort.

When an individual producer has approached the development of an ERP system they have been granted a budget that is less than what is desired to deal with the potential issues. When the development begins, the issues become greater than what was expected and the need to simplify the application to meet the budget is the skill of the project manager. Users are rarely consulted as to their needs and are told as to what and when they will transition to a new system. Everyone grits their teeth until someone declares it a success and you hope for a better system next time. At least that is how I see most system integrations.

The first issue is the budget is inadequate to deal with the size and scope of the problems. Once the developers get into the problems, its time to quit and get out. What is needed is a concerted effort that is a quantum of size and effort to determine the issues and resolve them. Aggregating the budgets across the industry from like minded producers presents the possibilities that a budget can be presented to the developers to approach the issues and resolve them.

The second issue, and possibly the biggest is the fact that the user is not a member of the development team. People, Ideas & Objects are user community developments. Having the collective understanding of thousands of individual jobs that are present within the oil and gas industry can only be gained by the direct involvement of those users. To have developers spending time without the direction of users is a waste. They collectively do not understand, nor does any individual, the thousands of jobs that are done in the industry. Therefore the limited budgets that have been used in ERP systems development have been unable to deal with the user environment. And that has been to their detriment.

People, Ideas & Objects have put forward a vision of how the innovative and profitable producer and Joint Operating Committee can function in the future oil and gas industry. It is now for the user community to take that vision and build the systems that they need to make that vision real. This is their opportunity to have the systems necessary to do their jobs and provide the industry with the means to meet the future energy demands.

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.

Two Distinct Lines of Business

We move now to the Partnership Accounting module of the Preliminary Specification. Our first topic of discussion relates to the recent discussion in the Financial Marketplace module regarding the funding of the development of the capabilities of the producer firm. In today’s post we are discussing the second line of business of the innovative producer firm and that is the billing of the earth science and engineering capabilities to the various Joint Operating Committees that it has an interest in. These direct charges are in replacement to the overhead allowances that have been the standard in the industry. And are a result of the “pooling” concept that has been developed in the Preliminary Specification to meet the shortfall in supply of geologists and engineers. There is also the secondary issue of dealing with the specialization and division of labor as it applies to the earth science and engineering work that is conducted in the industry.

If partners are contributing human resources to the Joint Operating Committee then the systems that the partners use should be able to cost these resources, charge them to the joint account, and have their costs recovered by the Joint Operating Committee the resource was provided to. This also brings up the point that if the operator classification has ceased to be valid, the charges for operator overhead, where the recovery of these costs are realized today, the operator overhead charges should also cease to be valid. If three different producers are providing engineers and geologists to the Joint Operating Committee each should be able to recover the direct or standard costs of these individuals for the time they spent working on the property.

The ability to contribute technical resources from each of the members of the Joint Operating Committee and have their costs recovered by the producer firm will help to offset the costs in maintaining their capabilities. In addition the excessive costs of maintaining the capabilities of meeting any and all contingencies as firms do today, are not carried on any specific producers payroll. The bread and butter geological and engineering work can be conducted by specialized service providers in a division of labor that bills these services directly to the Joint Operating Committee as and when required. Understanding that genius is 1% inspiration and 99% perspiration, the 1% can be conducted within the producer firms and be focused on the generation of ideas, and the 99% can be focused on the work of developing those ideas and charging the Joint Operating Committee for the work in a highly specialized, and hence lower cost, manner.

The Partnership Accounting module provides the innovative and profitable producer firms with the ability to capture the time their resources spent on projects within the Joint Operating Committees. We have discussed the Work Order system and its ability to capture the time spent on any AFE or Cost Centre. This time will be automatically aggregated, calculated based on actual payroll burden or alternatively standard costs depending on how industry determines, and bill the Joint Operating Committee for the costs. During the monthly distribution these costs will be equalized and the net contribution will be a revenue stream as an offset for the producer firms capabilities.

This second revenue stream will never cover the costs of the capabilities of the producer. But it will go a long way to providing a base in which to support the firm in terms of the costs of its capabilities. In developing a producer firm it may be possible to rely on the revenues from its capabilities before the revenues from oil and gas begin. The Partnership Accounting module of the Preliminary Specification provides the ability for this charging out of capabilities, capturing the costs, billing and recovery within the system as a base feature of the 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 Friction Between Capital and Innovation.

Within the Financial Marketplace module we are creating lines of communication between the producer firm and the investment community. This is to aid in the objectives of speed and control that we set out earlier in this module. Much of this communication can be focused around the publication of the Revenue Per Employee calculation that we have discussed in the Petroleum Lease Marketplace module. A factor that reflects the innovativeness of the producers earth science and engineering capabilities, and also as a result of the expanded division of labor and specialization that is available as a result of using the People, Ideas & Objects Preliminary Specification.

Revenue Per Employee is therefore a reflection of value. When we discussed the factor in the Petroleum Lease Marketplace module it was for internal consumption purposes. The purpose of using Revenue Per Employee in the Financial Marketplace module is to publish it and allow the investment community to compare your performance against your peers. As we discussed in the Petroleum Lease Marketplace module there would be three types of variances that could be calculated on the comparisons between periods. There would be the volume, price and number of employees variance. Each would impute a different result, or trajectory, in terms of what the comparison of the variable meant over time.

Does Revenue Per Employee reflect a more innovative footing. That may be debated for some time. I think it clearly does, and I can’t think of a more effective means of answering how innovative a producer is. Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or “tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.” The net result of this, in a laboratory setting would be great experiments. The net result of this in a commercial setting like an oil and gas firm would be increased revenue over the period without the additional burden of increased overhead. Therefore Revenue Per Employee, in my opinion should have its own interface in the Petroleum Lease Marketplace, and be published as well on the Financial Marketplace module.

With such a focus on the earth science and engineering capabilities of the innovative oil and gas producer we run the risk of becoming too focused on the science. Revenue Per Employee will go a long way to keeping the producer focused on the business end of the calculation. But there has to be more. And sometimes that “more” comes from the cold hard slap in the face from the money markets telling you that you’ve been wrong about something for a long time. How can we incorporate some feedback within the Financial Marketplace module of the Preliminary Specification, so that it doesn’t get to the point where the producer has to sustain that humbling cold hard slap from the financial community.

We have discussed the promotion of the producers team of earth science and engineering capabilities on the Financial Marketplace module. It is through that interface the producer communicates to the financial marketplace the capabilities that they have assembled and what they as a producer are able to accomplish. I see the long term development of the producer as an extension of this capabilities development. The application of the capability and its development to a geographic area where the risks are of a certain nature and are unknown and unknowable for the foreseeable future. This is the nature of the oil and gas business and to embark on such an adventure without the financial marketplace committed to your team would be unwise and certain to fail. What is needed is a means to communicate on top of the “Dynamic Capabilities Interface” of the Research & Capabilities and Knowledge & Learning modules, and include what Professor Giovanni Dosi states here.

Internalization and routinization in the face of the uncertainty and complexity of the innovative process also point to the importance of particular organizational arrangements for the success or failure of individual innovative attempts. This is what was found by the SAPPHO Project (cf. Science Policy Research Unit 1972 and Rothwell et al. 1974), possibly the most extensive investigation of the sources of commercial success or failure of innovation: Institutional traits, both internal to the firm - such as the nature of the organizational arrangements between technical and commercial people, or the hierarchical authority within the innovating firm - and between a firm and its external environment - such as good communication channels with users, universities, and so on - turn out to be very important. Moreover, it has been argued (Pavitt 1986; Robert Wilson, Peter Ashton and Thomas Egan 1984) that, for given incentives and innovative opportunities, the various forms of internal corporate organization (U form versus M form centralized versus decentralized, etc.) affect innovation and commercial success positively or negatively, according to the particular nature of each technological paradigm and its stage of development. p. 1135

It sounds simple, and reasonable, to include “good communication channels” as a necessary part of any relationship between an innovative producer and its financial backers. To include these within the ERP systems is the key to making them effective. What originates as a result of these “good communication channels” is defined by Professor Dosi.

In general, each organizational arrangement of a firm embodies procedures for resource allocation to particular activities (in our case, innovative activities), and for the efficient use of these resources in the search for new products, new processes, and procedures for improvements in existing routines; however, the specific nature of these procedures differs across firms and sectors. For example, the typical degrees of commitment of resources vary by industry and so do the rates at which learning occurs. I now turn to the interpretation of these phenomena. p. 1135

Professor Dosi states that profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives.” (p. 1135) Professor Dosi introduces the theory of Schmookler (1966) and asked “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both”? (p. 1135) Schmookler believed in differing degrees of economic activity derived from the same innovate inputs. One would assume that this is the calm guiding hand of the capital markets providing leadership to the producer.

If the role of capital in the innovative oil and gas producer is going to change as we suggested in yesterday’s post. Then the influence of the investment community will need to be present in terms of the earth science and engineering capabilities of the firm. The risk that ideas become a self-serving science project with no commercial grounding is something that I think the investment community can safeguard against. The enhanced communication provided through the Financial Marketplace module, and particularly the focus on the factor of Revenue Per Employee will aid in making the investors returns from the capabilities, and the oil and gas properties continue to accelerate.

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.

What Role Will Capital Play?

It has been argued throughout the writings in the Preliminary Specification that commodity prices are allocating the financial resources to fuel the innovative oil and gas producer. If that is so, then what role will the capital markets play in the future of the oil and gas industry?

Taking this thinking to its extreme then the most innovative firm would also be the most profitable. As the costs of capital would be lower than its competitors, and with their innovations being on a steeper trajectory, and therefore more effective, and would be at less cost than the competitions. The investment in science and technologies is with the implicit expectation of a return on these investments, but also, to provide the firm with additional structural competitive advantages by moving their products costs and / or capabilities beyond that of the competition. Professor Dosi notes:

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.

What you are capable of achieving as an innovative oil and gas producer is possibly the most valuable asset that you have in the very near future. This capability is what you are investing in and how you expect to earn a return on your investments in oil and gas. Although much of your capability may be funded by the day to day of your operation, it represents a critical part of your firm's investments. In answer to the question posed earlier, this investment in your capabilities is a future role for the capital markets to make investments in.

Let me restate what has been said for clarity purposes. The costs of field operations will be offset, both from a capital and operations point of view by the higher commodity prices. The investment in capabilities, the earth science and engineering resources of the firm, will be augmented through capital investments made by the capital markets.

We noted that the producer firms engineering and earth science team was being highlighted in an interface on the Financial Marketplace module. Is it time that the producer was able to financially leverage these capabilities in the capital markets? If innovation is the result of the team that is put together, then the ability to fund that team and earn a return on the basis of their performance might be something that should or could be considered in this new insatiable energy era.

To facilitate that possibility an interface in the Financial Marketplace module could have performance metrics that reflect the results of their efforts. These could be quantified over a certain period and verified by reserve reports prepared by independent engineers. The point of the exercise would be to increase the value of the producer firm based on the intangible value of its capabilities. In a world where ideas matter, the ability to quantify them and qualify them within a marketplace brings real value to the oil and gas producer and investor.

To make dedicated investments in the firms capabilities, and to expand on their current capabilities will take significant efforts. Muddling along over a number of years will see the reserves and possibilities pass before an inexperienced team. That will be the cost of failure, the price for success will be the highly capable team.

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.

Objectives of the Financial Marketplace Module

We move now from the Petroleum Lease Marketplace module to the Financial Marketplace module for a review of its features. There are a couple of overall objectives that the Financial Marketplace module provides the innovative oil and gas producer and Joint Operating Committees. Those are the alignment of the financial interests with the legal, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee, and the compliance and governance frameworks of the hierarchy. The second objective is to make the capital structure of the innovative producer more efficient than that which is achieved under any other ERP system.

Recognizing and leveraging the Joint Operating Committee in our systems in the manner that the Preliminary Specification does is a substantial breakthrough in terms of our research. Significant value is gained by the innovative and profitable oil and gas producer by using People, Ideas & Objects Preliminary Specification and its recognition of the Joint Operating Committee. One of the keys to that value is the alignment of the seven frameworks of the Joint Operating Committee. Alignment is a key buzzword in systems integration. However, by using the Joint Operating Committee in the manner that we have in the Preliminary Specification we have achieved an alignment that is fundamental and to the core of the producer.

Within the Financial Marketplace module the alignment of the financial interest across the participants in the Joint Operating Committee is the alignment that we are seeking. To have a bank finance each of the participants working interest share, and therefore aligning the interests of that one bank with the participants of that Joint Operating Committee is the alignment that we are discussing. When banks, as they do in most instances today, take a general claim against all of the assets of the producer firm, and that occurs with each participant in the Joint Operating Committee, it is difficult to reach a consensus in terms of the banking issues for one specific property.

In terms of the second objective of the Financial Marketplace module of making the capital structure of the producer more efficient, this is provided in the following manner. There are a number of assumptions made about the way that business will be done in the future of the oil and gas industry. The Preliminary Specification makes these assumptions based on a reasonable trajectory of the manner in which “things” are progressing today. We can safely say that the level of work or activity in the production of one barrel of oil will be substantially more tomorrow then it is today. The demand for energy will be higher and the production volumes from the industry will be necessarily much higher as a result. It is also reasonable to assume that the volume of earth science and engineering resources will not materially change over this period of time. Doing more with the same resources is therefore somewhat of a given. The same could therefore be stated for the capital structure of the producer firm as well. Much more capital will need to be raised to fuel the increase in production volumes, and those volumes will require greater capital investments to be made.

It would therefore be incumbent upon us to include these assumptions in the designing and delivery of our ERP systems that we will use during this period of time. And that is what the Preliminary Specification has done. We will discuss these points more in the days to come but the two points that have to be considered are speed and control. The producer must have the ability to turn over larger volumes of capital in shorter periods of time if they want to be successful. And having speed is nothing without having the control necessary to deal with that speed. Having an ERP system that enables the producer and Joint Operating Committee with the speed and control in the capital markets are what will be necessary for the innovative and profitable oil and gas producer to deal with the marketplace in the future.

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.

People, Ideas & Objects and Oracle Corporation

The base of functionality of all eleven of the Preliminary Specifications modules is Oracle Corporation’s database, Fusion Middleware and Fusion Applications. We have chosen Oracle’s applications to support the Preliminary Specification as they are the leader in the Enterprise Resource Planning marketplace. Particularly from a technical point of view. Oracle’s technologies are the most advanced in terms of the database, and their Fusion product offerings are the most current in the marketplace. We have chosen a foundation in which to build the Preliminary Specification that is consistent with the needs of the innovative oil and gas producer.

When you review the Preliminary Specification there is a section within each module that discusses the products that Oracle provides. Use of the individual Oracle products is very high level and only provides a flavor of how the technology will be used. The Preliminary Specification is about the business of the oil and gas producer and Joint Operating Committee. The capabilities and constraints of the Information Technology are not to be considered during the further development of the Preliminary Specification. I have only mentioned the Oracle technologies to give the user an understanding of the direction in which People, Ideas & Objects is moving in terms of the product that the users will be working to develop.

As our marketing program is currently seeking commitments from producers and investors to fund the development of the Preliminary Specification. And the development costs associated with the Preliminary Specification are estimated at $100 million. This process may take some time and there is no urgency in making any contact with Oracle Corporation. They will have little to add to this and are more oriented to applying the technology and booking our business. What I am saying is they don’t have the patience to wait for the market to develop. And therefore its best to let them do their own thing while we do ours and we’ll contact them when we are ready with a handful of producer commitments.

Within the Petroleum Lease Marketplace module I have included some comprehensive discussion regarding the Oracle technologies. This includes the adoption of the Professional Petroleum Data Management Associations (PPDM) data model. How the service providers that we have discussed throughout the Preliminary Specification and are a key to the productivity of the innovative oil and gas industry. And these service providers are able to interact with the producers and Joint Operating Committees by also using People, Ideas & Objects systems, software and particularly our software development capabilities to meet the users needs.

I also use a scenario that is common in the industry to describe how the Preliminary Specification and Oracle Fusion Applications will provide value to the producers in the development of some properties. Touching on the various modules and features within the Preliminary Specification it provides an understanding of “how” and “what” the innovative producer and Joint Operating Committee could be using the software.

Lastly there is a detailed description of the Royalty Accounting process that will be used in the Preliminary Specification. Using service providers that are organized and specialized based on one royalty jurisdiction, a producer will rely on them to ensure that their royalties are consistent with the regulations and provide the lowest possible royalty costs of this, the highest cost item of an oil and gas producer.

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.

A Critique of Current Management

The key deliverable that would be the outcome of the development of the Petroleum Lease Marketplace of the Preliminary Specification. Would be the removal of management control by the current bureaucracy and replace it with the “vanishing hand” as Professor Richard Langlois describes the marketplace. The representation of the marketplace would of course be through the “Marketplace Interface” in the Petroleum Lease Marketplace and also in the Resource and Financial Marketplace modules. In this quotation, taken from Professor Richard Langlois’ book “The Dynamics of Industrial Capitalism” he reflects on this point.

In highly developed economies, moreover, a wide variety of capabilities is already available for purchase on ordinary markets, in the form of either contract inputs or finished products. When markets are thick and market-supporting institutions plentiful, even systemic change may proceed in large measure through market coordination. At the same time, it may also come to pass that the existing network of capabilities that must be creatively destroyed (at least in part) by entrepreneurial change is not in the hands of decentralized input suppliers but is in fact concentrated in existing large firms. The unavoidable flip-side of seeing firms as possessed of capabilities, and therefore as accretions of habits and routines, is that such firms are quite as susceptible to institutional inertia as is a system of decentralized economic capabilities. Economic change has in many circumstances come from small innovative firms relying on their own capabilities and those available in the market rather than from existing firms with ill-adapted internal capabilities. Chapter 5 will reconstruct the New Economy of the late 20th and early 21st centuries along exactly these lines, once again adding nuance and historical texture. If the antebellum period reflected the Invisible Hand of market coordination, and if the late 19th and early 20th centuries saw the rise of the Visible Hand of managerial coordination, then the New Economy is the era of the Vanishing Hand. p . 14

One could certainly accuse me of being anti-management. They and I have had an interesting battle since the breakthrough of using the Joint Operating Committee was the key to administrative efficiency in the innovative oil and gas producer. Our other key breakthrough, that software defines and supports the organization, and therefore to change the organization requires that we change the software first. Management have distorted this knowledge by realizing, if they never changed the software, their domain would never be challenged. Using this knowledge to seal their future. But we know many things from our review of Langlois, Coase and Chandler; specifically.

• Management have no stake in the firm. 
• If a crisis were to strike a firm, the management would resume elsewhere. 
• It is the investor and debt holders who will shoulder the costs.
• Management currently hold the reigns, and are mindful that their options may lay elsewhere. 
• Ownership, in the same fashion as the Merchants needs to start over. 
• Starting over begins with supporting People, Ideas & Objects and the Community of Independent Service Providers.
• Chandler noted that management have failed before. 
• During the great depression. 
• A time when government had to increase its involvement in the economy.
• Management may not see the more global picture, and therefore, may fail again.

The knowledge that management have in not changing the software is an extension of their monopoly on the tacit knowledge of how to get things done. They know that the tacit knowledge can be held by bureaucracies or markets and have ensured that no tacit knowledge capable markets gain a foothold to challenge their franchise. Making the entire People, Ideas & Objects idea an exercise in futility, or a call to action for the ownership class of the oil and gas industry.

Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. p. 359

Management’s assertion that vendors and suppliers are greedy and lazy is as much self serving and designed to ensure that a market doesn’t develop and compete with management. What is needed is the market supporting efforts of an innovative oil and gas industry that depends on a dynamic and effective “Marketplace Interface” in the Petroleum Lease, Resource and Financial Marketplace modules.

I think that what we have learned about capabilities is valuable and applies to the “Marketplace Interface” that we have detailed here. That “knowledge, skills and experience” are the basic ingredients of capabilities and these fit in well with the Petroleum Lease Marketplace module. If we at People, Ideas & Objects could be so bold as to assert that we include “ideas” with knowledge, skills and experience then we are starting to really build on these concepts.

The other aspect of what we have discussed is the role the oil and gas industry has in making the market supporting infrastructure. This includes standards and, as we have discussed, software like People, Ideas & Objects to support the markets and the marketplace. The choice between the marketplace and the management as to who will control the industry in the future has already been made. The Internet demands the decentralized methods of the market will rule the day. Just don’t tell the current management as they fight to hang on to their last few moments of control.

When a modular product is imbedded in a decentralized production network, benefits also appear on the supply side (Langlois and Robertson 1992). For one thing, a modular system opens the technology up to a much wider set of capabilities. Rather than being limited to the internal capabilities of even the most capable Chandlerian corporation, a modular system can benefit from the external capabilities of the entire economy. External capabilities are an important aspect of the “extent of the market,” which encompasses not only the number of possible traders but also the cumulative skill, experience, and technology available to participants in the market. Moreover, because it can generate economies of substitution (Garud and Kumaraswamy 1995) or external economies of scope (Langlois and Robertson 1995), a modular system is not limited by the weakest link in the chain of corporate capabilities but can avail itself of the best modules the wider market has to offer. Moreover, an open modular system can spur innovation, since, in allowing many more entry points for new ideas, it can create what Nelson and Winter (1977) call rapid trial-and-error learning. From the perspective of the present argument, however, the crucial supply side benefit of a modular production network is that it provides an additional mechanism of buffering. p. 70

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 Marginal Production Threshold Interface

We have discussed the People, Ideas & Objects competitive advantages of providing the oil and gas producer with the most profitable means of oil and gas operations. One of the components of our competitive advantage is the ability for the innovative oil and gas producer to suspend marginal production until the commodity prices return to the point where their operations are profitable. In today’s post we’ll discuss the Marginal Production Threshold Interface in the Petroleum Lease Marketplace module.

Firstly, let us recall that any shut-in production does not incur any additional losses due to the fact that People, Ideas & Objects Preliminary Specification uses the decentralized production model. By using service providers for production, royalty and revenue accounting, and lease rental payments etc., the charges for these overhead costs are charged directly to the Joint Operating Committee. If there is no production for the current month then there will be no activity to account for in these overhead accounts and hence no charges to process to the Joint Operating Committee. Therefore during times of shut-in production only the costs of capital are uncovered.

The manner in which it is determined if production should be shut-in is based on the financial criteria of whether the property is contributing to the profitability of the Joint Operating Committee. In order to make that determination the accounting for that property would need to reflect that, and those reports are included in the Partnership Accounting module. Upon determination that the property was not contributing then it becomes a part of the Joint Operating Committees operational decision making framework as to whether or not to shut-in production. This is where the Marginal Production Threshold Interface comes into play.

The ability to predetermine at what point the Joint Operating Committee would suspend production is an option in the Marginal Production Threshold Interface. For instance if the property was in a loss situation for two months then at the beginning of the third month production would be suspended until pricing resumed a more normal course. This would be pre-approved by the members of the Joint Operating Committee and implemented at the beginning of the third month of losses.

The ability to collaborate and agree among the partnership falls within the functionality of the Petroleum Lease Marketplace. Having all of the Joint Operating Committees that you have an interest in located within one interface in the Petroleum Lease Marketplace will provide you with an understanding of what your production profile will be at various price scenarios. This can be provided through a “what if” scenario page within the interface. Extensions of the prices and volumes will also calculate what your pro-forma revenues will be. Determinations can also be made on the overhead and production costs and therefore what your returns from all of your operations will be.

The objective of the Marginal Production Threshold Interface is to have the pre-approved operational decision made. The Joint Operating Committee is the operational decision making framework of the innovative oil and gas producer. If the oil and gas industry were to conduct their operations in this manner then the fall in commodity prices would be very limited in both scope and time. It would be necessary to remember that any production that was taken off the market would have to remain off the market for the entire month, or alternatively the partial months production would have to carry a whole months overheads cost. If the price dropped precipitously and large portions of the industries production profile were taken off the marketplace then the natural gas storage business could make up for any shortfall in the demand. This latter situation might be a good thing in the long run as a means to eliminate the storage providers influence from the natural gas markets pricing.

If each producer within the industry was able to manage their production in this manner there would be less destruction of capital and less volatile commodity prices. The industries current method of managing prices by reducing capital spending is a very blunt instrument that leads to over and under production at the extremes. The Marginal Production Threshold Interface will enable the producers to stop producing the marginal production and save the reserves for the day when they can be produced at a profit. A little faith in markets is all that is required.

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.

Leveraging the Capabilities of Others

In yesterday’s post we discussed how producers might form partnerships based on their earth science and engineering capabilities. Using the Revenue Per Employee Interface in the Petroleum Lease Marketplace module to find other producers of similar capabilities. In today’s post we want to discuss how the Petroleum Lease Marketplace, the Research & Capabilities and Knowledge & Learning modules work to leverage those capabilities within your Joint Operating Committees.

Recall that we have used specialization and the division of labor to deal with the shortages of geologists and engineers. For each producer to build the capabilities necessary to deal with all of the possible situations they may face within their firm was a “nice to have” that was maybe possible in the past. With each producer pursuing this strategy it creates unused and unusable surplus capacity in these needed resources. In addition, in the future, by using specialization and the division of labor the broader scope of the range of duties necessary to cover off all of the tasks will consume all of the producers financial resources. Therefore the need to specialize in specific areas will become a necessity for each producer. And therefore a reliance on these partnerships based on technical capabilities that are complementary to those that are developed internally. This is what is called the pooling concept in the Preliminary Specification.

Within the Petroleum Lease Marketplace there needs to be an interface that lists the areas where the capabilities of other producers are being leveraged. These listings need to be based on the agreed to and documented exchanges of capabilities that are part of the CO&O or other agreements that make up the Joint Operating Committee. This same report could detail the commitments that the producer firm has made in terms of its capabilities to the partners in future years. This "Capabilities & Commitments" interface would of course be organized based on the Joint Operating Committee and would give them an understanding of their contractual position in terms of their capabilities and commitments.

Within the Research & Capabilities module is the area where the producer firm documents its own capabilities. These capabilities are documented for the purposes of deployment through the Knowledge & Learning module. The process of the capabilities development proceeds through the research, testing and ultimate documentation in the Dynamic Capabilities Interface of the Research & Capabilities module. Deployment of the capabilities for its own account are possible for the producer through the Research & Capabilities module, however most deployments will be conducted through the Knowledge & Learning module.

Within the Knowledge & Learning module the perspective is from the Joint Operating Committee. Each capability is sorted based on its type, for example if it was a capability that was geological in nature and associated with shale then it would only be available to Joint Operating Committees that had that same criteria. Those capabilities that met the criteria for the Joint Operating Committee would be available for review by each member of that Joint Operating Committee. And therefore the full scope of the partnerships capabilities would be made available to the Joint Operating Committee in terms of what the available capabilities of the partnership were.

A last point to make is the manner in which to organize these disparate resources is done through the Security & Access Control’s Military Command & Control Metaphor. Which provides the partnership with a means to impose a temporary structure over the resources that are assigned to conduct any operation. These resources would include the resources from any of the members of the Joint Operating Committee and the service industry representatives. It would also include the Work Order system in which to accumulate the costs and the Job Order system in which to execute the programs that are necessary. In essence an entire command and control system is made available to these temporary organizations that is tailored to the needs and the types of work that is carried out by the innovative oil and gas producers.

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.

Calculation of Revenue Per Employee

Traditionally the selection of your working interest partners is a result of the fact that they hold financial interests in the same regions and properties that you have an interest. This and the financial capability are the two primary reasons for the formation of the various Joint Operating Committees. But what if there was another way in which to strike a partnership in the oil and gas industry? One based on the similar earth science and engineering capabilities that you have. In an innovative oil and gas industry, a partnership founded on the basis of the capabilities of a number of producers would provide some strategic advantages.

What would be the determining factor in establishing these partnerships. Certainly everyone would want to partner with the most attractive producers, but how does the industry pair off in a meaningful way where there are various strata of partnership being formed and competitive strategies being made by producers of very similar capabilities. People, Ideas & Objects research have developed the Revenue Per Employee Interface within the Petroleum Lease Marketplace to provide that understanding.

Clearly the factor of revenue per employee would reflect many factors other than the innovativeness of the firm. However, would the comparison of revenue per employee over multiple periods be a determining factor of innovativeness? I think it would. That the increase / decrease in the factor would be as a result of an increase or decrease in price and volume, with the volume being particularly affected by the changes and innovations that occurred over the period in the firm. The one other critical determining factor is the number of employees the firm employs. Changes in the number of employees would skew the results significantly. Calculations for the industries population of producers would be one element of the Revenue Per Employee Interface.

So what have we got? We have run some elaborate calculations that “might” prove that one producer is innovative. What does that prove? That depends on what is imputed by being innovative. Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.”

Clearly Revenue Per Employee and its trajectories would impute a capability that the producer has achieved in terms of their earth science and engineering skills. Their trajectory in terms of the production volumes over time would impute the capacity to identify and resolve the issues present in the oil and gas business. Either that or its just plain old luck that makes some companies successful. Other considerations would have to be taken in the calculations such as any material acquisitions or divestitures etc., however, the factor and its trajectories would have material meaning in the selection of partners with similar earth science and engineering capabilities.

If I have not convinced you of the validity of the argument you’ll need to run some of the calculations yourself. Take a few producers that you know and determine their Revenue Per Employee by reading their annual report. What you will find is the diversity in terms of the range of Revenue Per Employee between producers. The leaders are substantially far ahead of the laggards. Having this information as detailed in the Preliminary Specification Petroleum Lease Marketplaces Revenue Per Employee Interface. Where the producers analysis would be augmented by detailed analysis of each and every Joint Operating Committee that you participated in, I think builds value for the innovative oil and gas producer.

The grouping together of like minded and technically capable producers will be a means in which to approach some of the inherent risk in the industry. Whether you're a group of industry leaders or a group of laggards, together you’ll be much stronger and more capable and will be able to grow and prosper faster and stronger in a more dynamic and 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.

Managing Data and Information in the Petroleum Lease Marketplace Module

We move now to take a quick look at the Petroleum Lease Marketplace module of the Preliminary Specification and its attributes over the next few days. The objective of this module is to replicate virtually what the physical oil and gas marketplace is. And that begins of course with Petroleum Leases.

When we are replicating the physical oil and gas marketplace, the Petroleum Lease is the source document that is the common denominator of all activity and ownership within the industry. Any physical oil and gas assets will be attached to some lease, agreement, rights or concession granting the holders the rights and privileges of ownership, lease or rental. These are the things that are contained within a marketplace. They are what are purchased and sold, bargained and traded for. They are the things that people are recruited to provide services for. Generally a marketplace is a dynamic and evolving commercially oriented hub of activity. That is what we are replicating in the Petroleum Lease Marketplace.

When we look at the types of work that are carried out in the Petroleum Lease Marketplace we see a large group of administrators working within different areas within a producer firm. Whether it be the Land or Legal department, Production or Exploration Operations staff or Accounting people; all of these groups have an interest in the information, people, assets, documents, processes and functionality contained within the Petroleum Lease Marketplace.

The types of documents that are generated within the Petroleum Lease Marketplace are somewhat self-evident. Most of them are created in collaboration with the participants of the Joint Operating Committee and include: Authority for Expenditures (AFE"s), Capital Budgeting (Firm and JOC), Construction Ownership and Operating Agreements, Mail Ballots, Daily Drilling Reports, Lease Bonus, Lease Rental, Lease Taxes, Areas of Mutual Interest are some of the forms, processes and attributes of the Petroleum Lease Marketplace Module. A more detailed specification will be the result of the user communities contribution and commitments.

Included in the data elements of the Petroleum Lease Marketplace are the working interest distributions that make up the partnership representing the Joint Operating Committee. And since the Construction, Ownership & Operating (CO&O) agreements are part of the Petroleum Lease Marketplace module. They include the production allocation for any facilities that are owned and operated by that Joint Operating Committee. This brings into play the manner in which the production allocation algorithm is managed, and this will include the Material Balance Report that we discussed earlier this year.

The issue comes down to the fact that there are two different ways in which to calculate the working interest distribution of the throughput of the product through the facilities. One is to take the literal chemical reality of the situation, the other is to take what is agreed to by the owners and operators of the facilities in the Construction, Ownership & Operation (CO&O) agreement. The two worlds could not be more different. As you can imagine the agreed to situation has to rule the day. The facts of the agreed situation are very dynamic and create variances that are unique and depend on the situation that is in play that day. What the situation is at issue with, is the owners or the producers who have production processed through that plant or facility will have either sold or purchased product or had done some transaction with their production at that facility that needs to be accounted for.

Now to handle that day-to-day activity there needs to be an ability for the plant owners to account for the transactions that are occurring within the plant based on the CO&O. Relying on the Partnership Accounting module will be part of what they will use for the handling of the plants accounting. However, because they can’t take a literal working interest distribution and they have to rely on a dynamic distribution based on the CO&O, a special algorithm will need to be built within the Petroleum Lease Marketplace to deal with the CO&O. This algorithm will capture the agreements production allocation methodology. This algorithm will be dynamic based on the gas composition, production factors and activities at the plant, but it is also not fixed. There are changes to the algorithm on a month to month basis. As new wells are brought on, new functional units are brought on, new products are sold to new purchasers etc. these need to be taken into consideration into the algorithm. It will be necessary for the user community that develops the Petroleum Lease Marketplace captures the full scope of the needs of this particular element of the oil and gas business. It has been poorly handled by the software vendors to date and there is much that can be improved upon and the Material Balance Report is a good start.

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.

Encana's 2012 Results

We can't call them earnings, so we'll call them results. Encana announced the results of their 2012 "activities" late on Friday before the long weekend. That way most people would forget about their results and the stock would not take a big hit for such poor performance. Encana lost $2.79 billion in fiscal 2012. This should not be a surprise as they have been leaderless and rudderless for a number of years. Now that they finally punted their CEO maybe they can get someone who can run the show and get the company performing. They'll need a business model first, but then I am a little biased and have a preference for the Preliminary Specification. Clayton Woitas who's now running the show on a temporary basis would be a good choice but he doesn't seem to be interested in sticking around.

Anyway we'll be taking a running total of the earnings and losses for 2012 as they're announced. The running total for 2012 stands at a loss of $2.79 billion. Its the beginning of the season so there'll be plenty more to come.

Removing the Business Risk

In yesterday’s post we contrasted the two business models that the oil and gas investor has to choose from. The current bureaucracies muddle along business model and the Preliminary Specification from People, Ideas & Objects. It was suggested that the investor could take the assets under management by the bureaucracy and in turn manage them through the People, Ideas & Objects software. There is one problem with that in that the oil and gas business is inherently risky and the investor would be taking on the full scope of the risk associated with the business. And that would not be a good idea. Instead what we need in addition to the software is for the investor to have the software, the organization and the people needed to run the industry for the investor to reduce the risks inherent in the business. What we should seek to do is to remove the bureaucracy in the transition to the new business model. And for clarity purposes this is what we are attempting.

Since the publication of the Preliminary Research Report in May 2004 and its proposal in August of 2003, the bureaucracy has declared war on People, Ideas & Objects. Using the Joint Operating Committee puts the writing on the wall for the archaic ways in which the industry is currently run. They have done everything in their power, their budgets primarily, to ensure that what has become the Preliminary Specification does not see the light of day. The bureaucracy chose to fight instead of participate. I don’t see them changing their tune now. As for the C class executives I think they are in a difficult position. The pressures of the job are far greater now as a result of the crisis in 2008 and I get the sense that they don’t have the bandwidth to take on anything with the scope and scale of the Preliminary Specification. There is also the feeling that even if they could support the Preliminary Specification the bureaucracy would not follow them. A mutiny if you will.

So why would the investor class be successful in making the transition to the Preliminary Specification, if even the C class executives are unable to do so. Simply it comes down to the health of the industry. The profitability is not a temporary situation. It is a permanent structural problem that requires a new business model to address the issues. Continued losses over the short to mid-term, particularly when the costs of, and reserves of shale are being brought onto the market are unacceptable. The industry needs to position itself for the insatiable energy era, to be innovative and dynamic. Not an industry losing money based on a business model of muddling along. The bureaucracy can’t support their justification for these losses. They have done nothing in the face of these challenges. And will do nothing as a result of these challenges. They are leaderless and faceless. They are also the first to leave when the trouble really begins. So we should act well before then and relieve them of their duties.

Back to the original point of the inherent risk of the business being taken on by the investor. By removing the bureaucracy we have a stripped down version of today’s oil and gas producer. The C class executives, the earth science and engineering resources of the firm, some legal and support staff would be directly employed. And the remainder of the needs of the producer, the accounting, production administration, land administration etc would be obtained through service providers organized across the industry. These service providers would be able to achieve levels of service and cost metrics that would make the current bureaucracies embarrassed at their inefficiencies and ineffectiveness. This organization would not only provide the business model for the innovative oil and gas producer, but would also provide the organization that would mitigate the inherent risks that the investors would seek to use an organization for. And after all if the business model doesn’t provide the means to mitigate the risks in the business, what good would it be?

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.

Indirect Control of the Business Model

There is a storied history with respect to how the bureaucracy has handled their ERP systems. To say that it was poorly is giving them credit for having an overall strategy. And it would be generous to grade them as poorly based on their history. The only first tiered vendor with a presence in the marketplace is SAP. IBM and Oracle left decades ago. Second tiered vendors such as P2’s Qbyte provide large portions of the markets offerings. P2 in fact purchased the Qbyte application from IBM when they decided to leave the business.

There has been an attitude that ERP systems are a basic necessity in business and they are purchased for primarily the producers compliance and governance requirements. No one sees these purchases as a strategic competitive strategy, only something in which it is necessary to ensure that the ERP system checks off all the right boxes. Get the application installed at minimal costs and ensure we are compliant with all of the firms requirements. Check. This is the way business was done. Might I suggest there has been a change and the ERP system is front and center in terms of the way in which the firm operates. That it defines and supports the organization's business model.

The bureaucracies business model that was pursued in the past was one of a low cost producer which was consistent with how the ERP systems approach was taken. Now the business model of the producer firm must focus strictly on the competitive advantages of the firm and ensure that these are front and center in the minds of its people. To focus the resources of the firm requires the software that connects them to be built with that business model and competitive advantage in mind. And it is because the existing tier one and two software vendors offerings do not support a competitive business model for oil and gas, that they are inadequate for the innovative oil and gas producer.

I would argue that the bureaucracies have not been able to establish a business model in either their current ERP systems, or in their businesses. And certainly not one that is consistent with the needs of the innovative producer. And are therefore rudderless and adrift. Indeed as 2012 will most certainly prove to be one of the worst years in terms of profitability. And one in which there are no plans or actions to deal with the situation. Control of the industry must be taken by some group. I expect that the investors will eventually declare they have had enough of this mindless, leaderless group of zombies and take control. But how.

Simply by taking control of the business model through the development of the ERP systems necessary to support that business model. Such as People, Ideas & Objects Preliminary Specification. One in which we provide the oil and gas producer with the most profitable means of oil and gas operations. Through use of the industry standard Joint Operating Committee. Which is the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. And when we move the compliance and governance framework from the hierarchy into alignment with the seven frameworks of the Joint Operating Committee we will achieve a speed, innovation and accountability in our operations that is necessary for the 21st century.

It is through the development of the Preliminary Specification with People, Ideas & Objects that the investor can achieve the profitability in their operations that they desire. It is also the means in which they can wrestle control of the oil and gas asset from the bureaucracy. To control the business model is through the development and use of the ERP software. And the bureaucracy have neither control of their business model or participation in an ERP system that is providing them the necessary means to control their business model. If the investors were to support People, Ideas & Objects, taking control of the innovative oil and gas producers business model from the hands of the bureaucracy would be like taking candy from a baby.

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.