Excellent article on oil and gas...

Provided by McKinsey Consulting. A definite read for anyone in oil and gas. (Click on the title for the url)

A technology vision.

A lot has happened in the past decade. Information technology has had its ups and downs and has provided some significant changes in the ways that business is conducted. This blog dedicated to the changes that information technologies are having on the business landscape in the energy industry. These underlying IT changes are derived from a vision of what and where the Internet will become in the very short term. This entry noting the components of the vision and detailing some of the aspects of the changes foreseen.

The 4 major components of the vision are of significant simplicity, are currently being implemented globally, and are only waiting for a final integration to occur. Just as many technologies need to be learned first hand before they are understood. These technologies share what I would suspect is their largest impact by building onto the comprehensive architecture of the technology environment available today.

The four components are as follows:

1. IPv6.
2. Object Oriented Programming (OOP) with particular emphasis and focus on Java.
3. Asynchronous Process management.
4. WiMax.
   

IPv6 (Internet Protocol version 6)
The first component is the network protocol IPv6. Current operations are conducted on the IPv4 protocol which is 2 to the power of 32 and version 6 provides 2 to the power of 128. A number of static IP addresses for every square inch of Earth. I suggest this eliminates the "Client Server" architecture we know the Internet as today. IPv6 provides a situation where every "network aware" device could be identified, controlled, managed, monitored, AND, monitor, control, identify or manage. Or in other words the ability to operate as either a client or a server.

Now these items don't require any "new" technologies be created, only adopt what is available and standard. Today most of the cell phones on the 3G network are operating on IPv6. Both China and Korea moved to IPv6 in 2004. The rest of the world is implementing IPv6 as quickly as they can, with North America being one of the slowest implementations. This slow response is predominately due to the large infrastructure already in place based on IPv4.

Elimination of the client and server model will have a dramatic overall effect in the way that information technology is deployed. There is really a very limited amount of work that a client can do, whereas servers are the main workhorses.

Other advantages of IPv6 include its more modern design that integrates better security, identity etc.

Object Oriented Programming (OOP) and Particularly Java
The difference between Java and most of the other OOP is its strict adherence to typing. Typing is a term that defines and requires every object be of some "Type". This ties the language to the real world in that any object that exists, either real or virtual, can be recreated, and their behavior reflected in the Java language.

A like copy of any object can therefore be replicated virtually by the Java language. This gives the user the ability to control, monitor, identify and manage any object through the Java language. Again a very simple interpretation of the language and its capabilities.

Asynchronous Process Management
Asynchronous vs. Synchronous communications can best be reflected in the differences between a letter vs. a telephone conversation. Synchronous communications and activities have the unpredictable nature to them. They are able to accommodate the unpredictability of the situation by both parties being their to rectify issues as they happen.

Asynchronous communications and actions have the tendency of not being predictable due to the nature of things never go like they should, or that the reply / response isn't necessarily what was expected.

Here is where the Java language can implement the asynchronous communications and actions with the objects so that they can deal with life's little problems. Asynchronous actions can be replicated in the Java language and over time acquire any and all possible characteristics or behaviors. This is through the developers ability to write methods of exception handling and explicitly in an asynchronous manner.

WiMax
Simply the loss of wiring has a liberating effect on the entire information technology architecture. Connections that are simple, powerful and cheap and the final component of this vision.

The ability to broadcast and receive a signal to the Internet at anytime, anywhere. If we think back it wasn't too long ago that we just started using the Internet on an "always on" basis.

Wrapping up the vision
The only limitation to this vision is the limit of ones imagination.

That's the what, here's the how...

Up until now we have discussed what the organizational changes could and should be. Moving to the Joint Operating Committee (JOC) as an organizational model has an air of being too philosophical or non-tangible and there is a need to have some meat added to the concept. So here is how I see the manner in which this type of system could be developed to meet the needs of the oil and gas industry.

I am going to call the initial phase of this system the Petroleum Lease Market (PLM). All associated documents and functionality will be built from here. (When things are developed.) The PLM is a database of the Petroleum & Natural Gas Leases for the land governed by the state, province or lessor. The lease, or concession, entitles the holder to the mineral rights and is the start of the process of exploring and drilling for oil and gas. This therefore being the natural place to start any software developments.

The lease documents are populated into the database to represent the mineral rights for the region. The population contained within the database would be those that are under lease, being posted, auctions and prospective lands. The level of detail of information queried and available by an authorized user, actively monitored, recorded and controlled by the system.

The ability to then buy, sell or trade these leases would be possible through a variety of transactions managed by the system. Or, in other words a market complete with its own community is formed.

From here the derivative works of the Farm-in, Farm-out, Novation, Joint Operating Agreement and / or Construction Ownership and Operator-ship could be developed through the collaborative environment of the PLM. Additional documentation such as the operating and accounting procedures would be available to be negotiated, documented and executed electronically in this collaborative environment.

The PLM would be a virtual portal that gives the producer, investor, employee access to the Lease, agreements and its associated history. It would literally be the area where people would "go to work." Having both a Private and Public interface to the data elements and functionality, a producer who has an interest in a certain area would be able to engage the owners of any lease of interest, on future business opportunities and from there, pursue subsequent operations.

Employees and contractors could actively contact producers and investors to offer and provide their services to work as consultants in the day to day activity of the lease, or contract for drilling rigs etc. Adding additional developments to manage the approval of AFE's, Contracts, Statements of Operations, and Statements of Expenditures. Tying these latter components into on-line commerce based on the comfort level of the individual producer.

All of these operations are derived through the Joint Operating Committee. As was mentioned in the research document, the financial, legal, cultural and operational decision making frameworks, why not move the accountability for those decisions over to JOC? This conceptual alignment has received immense tacit support by most of the people who are employed in the oil and gas industry.

The accountability is managed by the hierarchy because that is the only logical manner in which an organization could control their assets during the past 100 years. Now with the technologies available for "Collaborative Commerce" (recall Harvard's term) the hierarchy is not necessary for the purposes of 21st century operation, particularly in oil and gas.

Sarbane's Oxeley has placed an additional burden on firms from an accountability point of view. The level of documentation and detail necessary has to be codified in the systems. This naturally fits the organizational point of view of the JOC far better then the hierarchy. I fail to understand how a CFO who tells the market the company will increase its production by 10% in the next year, when in reality his scope of influence can not impact the operations to that level.

The final point of this entry is the cost of these developments need to be bourne by the hierarchy. (And hence why it hasn't happened yet). The expectation that this level of system development can be undertaken by the open source movement is too great a burden at this time. However, I would project that the open source movement could commence these types of developments in less then one year from now.

By early 2007 the oil and gas industry may be subject to the development of systems that they are not directly sponsoring. This is the type of situation we will see in the near future of all systems for all industries. Open source is very powerful you either get on board or get run over.

The last point is the methods that the industry would pay for these transactions. The producers would need to subscribe to the system and pay a nominal fee for each transaction. I can assure you that no employee or individual would ever have to pay for access to the system. The oil and gas industry > $2 trillion industry. The employee's use is almost guaranteed due to the fact that the alternative is to work the 80 hours that their jobs would take through the traditional hierarchy. This is the definition of Web Services and accurately reflects how things may be developed in the near future.

Some freinds joining the party...

The expiration of the use and function of the organizational hierarchy is also being discussed by some heavy weight think tanks. Harvard publishing and McKinsey & Company have both published works that address the need for organizations to use the collaborative tools available to eliminate the negative attributes of the hierarchy.

Harvard's book is directly on topic with its introduction of what they define as "collaborative commerce". A name that I like, and one that describes these concepts far better then the traditional "web services". Noting that the speed of innovation, and increased competitive advantage are at hand for the companies that implement these systems and procedures. Noting also that collaborative commerce in turn provides long term sustainable advantages.

I think that the only difference from the Plurality document and the Harvard book is that the focus on systems in oil and gas, where as Harvard notes the need for "commitment and change across a number of areas: governance, strategy, process design, information technology infrastructure, people management, culture and change, and measurement."

McKinsey's article is right on point with the focus on systems. Entitling the publication "The Next Revolution in Interactions" this in my opinion ties it into the "Web 2.0" discussion that many people have branded the concept, and of course is consistent with Harvard's "Collaborative Commerce". Providing the entire article in a down loadable podcast was also what I thought was a good idea that I hope to see more of.

These two new articles combined with the Plurality document are excellent road maps to the means of innovative organizations. I hope you enjoy them as much as I have.

"Plurality should not be assumed without necessity"

The following are the two key concepts of the research I conducted that form the foundation of this blog. The research proves the Joint Operating Committee forms the natural form of organization in oil and gas, and that to change an organization requires that systems be built based on the organizational model used, first. Suggesting that SAP is the bureaucracy. This entry consists of a heavily edited portion of the Abstract of the similarly entitled research report. Readers can email this blog to secure a .pdf copy of the research report.

The title does not appear to mean much until it is explained further. This statement was written by Ernst & Young in a 1997 report to the World Bank, and was described as: 'it's not what you know that you do not know that hurts you. It's what you do not know, that you do not know that will. It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle,
than to bring about a new order of things.' Knoop & Valor (1997). "Plurality..." is also known as Ockham's Razor, its modern interpretation being "The simplest explanation is more likely to be correct."

This statement clearly reflects the times we live in today. The difficulties in business appear to be expanding exponentially and inversely to the capacity to deal with them. Change within organizations is difficult when the constraints of a hierarchy are imposed on the employees within that organization. Additional issues that effect the organization are accurately reflected in the following statement:

'What information consumes is rather obvious. It consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention.'

- Herbert Simon, Economist and Nobel Prize recipient.

I undertook this research in 2004 for the following purpose;

To test the hypothesis of:

• The corporate hierarchical organizational structure is an impediment to progress and most particularly, innovation.
• Determine if the Industry Standard Joint Operating Committee, modified with today's information technologies, provides an oil and gas concern with the opportunity for advanced innovativeness.

Research questions (In summary)

• Has the hierarchy's value expired?
• Can the scope and understanding of the process of innovation; be reduced to a quantifiable and replicable process?
• Will the Standard Joint Operating Committee (SJOC) facilitate the means to innovate?
• Does the industry need to change from a banking to a science and engineering based mindset?

Several of the fundamental factors underlying the oil and gas business have changed.

• Commodity prices are providing a reallocation of financial resources to facilitate innovation.
• Earth sciences and engineering disciplines will expand substantially in the 5 - 10 year time frame.
• Oil and gas is entering a phase of complexity, risk, and reward particularly in:
• The mature Western Sedimentary Basin.
• The Arctic, a harsh and remote area.
• Heavy oil.
• Offshore operations, Pacific and Atlantic.

The scope of operations of an oil and gas concern are geographically, politically and scientifically diverse. The hierarchy limits the detail and focus to deal with the political and technical difficulties of each facility. Expecting an organization with these constraints to innovate is foolhardy.

The hierarchy has created Information overload, which in turn has created a paralysis in decision-making, directly affecting the capacity to change and or innovate. The hierarchy's bureaucratic, complex and conflicting lines of authority have muddled accountability. The ability to identify success / failure,
to share those experiences, and to learn from them has diminished and is not progressing. Calgary, as a collective group of independent producers, is discovering constraints to its ability to drill wells in the prairies. How can an industry with these constraints consider the complexities of the geopolitical,
technical and operational concerns in the frontier areas of oil and gas.

Research results.

What's the problem, the JOC is operating as usual? However, the:

• JOC is not directly accountable for its operating decisions in terms of financial performance.
• Smaller reserve opportunities require greater effort, innovation, consensus and focus.

Advantages of the JOC.

• All participants are motivated equally. Financial opportunity drives consensus.
• The SJOC is the legal, financial, operational and cultural foundation of the oil and gas industry. All the internal processes tacitly support this fact.
• The participants in SJOC hold significant technical and managerial capabilities.

The scope of operational authority of the committee is constrained by the participants financial interest in the property. The committees formation is traditionally formed around a geographical area, is traditionally limited in it's geological and aerial extent. This naturally limits the focus of the committee to
that facility. The SJOC is therefore motivated, and has the appropriate level of focus for the needs of an innovative organization.

The disadvantages of the conflict between the SJOC and the traditional hierarchy.

• Introduces political and bureaucratic conflict.
• Compromises and muddles internal decisions.
• Lacks the direct support from the hierarchy.
• Eliminates initiative and innovation. No tolerance for risk taking or experimentation that is required for innovation.
• Successes and / or failures are not identified, shared or learned explicitly by any of the participating organizations. Knowledge is held tacitly, limited amounts of knowledge is codified or made explicit.
• Conflicting processes between the hierarchy and SJOC impede not only innovation, but the speed and capabilities of the organization.
• The SJOC is not directly accountable.
• No consensus on performance related goals or objectives.
• No regulatory or internal financial reporting requirements.
• The hierarchically based organization is an impediment to future progress.
• Capacity to replace reserves has become logistically, operationally and organizationally constrained.
• Capacity to meet the market demand is diminishing.

My research's conclusion.

The classic hierarchy's useful life expired and its existence conflicts with the efforts and capabilities of the JOC. The Industry JOC is the natural form of organization for oil and gas where the participants of the committee are supported and augmented through the diversity and availability of the remaining organizations team members. A greater alignment to this conceptual model would facilitate the desired
innovation. SAP and their competitors tacitly support the hierarchy and bureaucracy that obstruct alignment to the JOC. And without explicit support for the JOC, these ERP systems are inappropriate for an oil and gas organization. Genesys'® research and software developments are the only opportunity for producers to acquire ERP styled systems based on the JOC.

This blog is being developed to broaden the communication of this message and to codify the tacit and explicit support that this concept has achieved. Although it sounds radical, it is met with strong support by members of the oil and gas industry, whom understand implicitly the benefits of this method, and at the same time seeing how many of the large issues regarding innovation and demand for oil and gas are able to be met.

I will provide further evidence that this concept has some legs to run further, with current research that reflects the technical and collaborative environments are having a significant impact. I hope to have a vigorous discussion around this concept with the express interest that; licensing of the copyright to prepare a number of software related derivative works be started.

A new blog...

Hello,

I want to invite everyone to this new blog to discuss the role of innovation in oil and gas, a topic that is complex, is being addressed globally, and might possibly be one of the most important corporate issues throughout the business world. That issue being how do we continue to fuel the global economy?

The purpose of this blog is going to be threefold,

1. discuss the methods of organization of oil and gas firms, and specifically the possibility of replacing the hierarchy or bureaucracy with the industry standard Joint Operating Committee (JOC).
2. debate the attributes and elements of innovation in oil and gas.
3. explore the impact of today's information technologies, and their role in making energy firms more innovative and accountable.

I would welcome any and all comments from readers and encourage a lively debate through this fascinating new medium of blogging.

Thank you


Paul Cox
People, Ideas & Objects