The Petro Canada definition of value and maturity.

Today's papers are full of the hostile bid that our favorite company, Petro Canada, is launching against oil and gas producer Canada Southern Petroleum Ltd. Paying $113 million for approximately 1,000 barrels of oil equivalent and 52 square miles in the Arctic may seem high, because it is. Asigning a value of $113 million per 1,000 bbls /day (raw land is always included in deals). Petro Canada wants to be known as an explorer, and that's all there is to it.

Or are these people even acting rationally? Petro Canada recently sold producing assets in Syria. These assets were deemed as "mature" by the company and therefore were no longer appealing to management. Is it therefore fair to assume that Petro Canada's "hostile" bid for Canada Southern is for immature assets? Lets do a comparison.

Syrian assets were sold for $676 million in late 2005 (including rights acquired in 2003). Syrian properties were producing 70,000 boe / day, or, approximately $10 million / 1,000 bbls per day. Petro Canada disposed of this for the following reason.

"The sale of the mature Syrian producing assets aligns with the Company's strategy to increase the proportion of long-life and operated assets in its portfolio."

So to use the vocabulary of Petro Canada the following values can be determined.

Arctic assets are "good" because they are strategic. (ie. long life and operated.) Syrian assets are "bad" because they are not strategic (ie. short life(?) and non-operated.)

Now I see the theme of this management. Again as with the Syrian sale, the Arctic assets seem to be done from the point of view of pure "panic."

I am going to make a clear recommendation that I hope the management of Petro Canada can understand. Revise your strategy to include the word "producing". You'll feel better for it.

[Petro-Canada] [Strategy] [Java]

Partnership Accounting Part IV, currency and volumes.

In previous entries about partnership accounting, I have discussed the unique nature of accounting for partners in this proposed new networked application environment. In Part I, and Part II, I included how the membership of a producer within the joint operating committee might contribute capital, lands or leases, capability or intellectual property to the table. That these values would need to be identified, quantified and equalized before the partnership accounting was completed. The role of chairman would be somewhat diminished and be more equal to the other participants active participation .

In Part III I raised the issue regarding changes in the working interest shares of a property based on certain criteria or events. Imposing a cutoff in which these changes take place within the month. I also discussed the need to account for both accounting months and production months.

Today in Part IV I want to raise the issue of currencies. The operation of a facility may be in a remote area of the globe and be owned by two or more producers located in other countries. This may be a likely scenario considering today's makeup of producers.

I also want to reiterate how this system is built and its impact on the producer. Genesys software will be the core of the application that does the majority of the processing. Developers that build the core will also have plug-ins of their own that will deal with the unique data, information and regulations of a certain jurisdiction. These interfaces will need to handle the presentation of data in the appropriate accounts at the appropriate values. The core algorithm will calculate the nuances of the data elements and the presentation of these will be done by the partner providing the plugin.

Therefore, a producer in Texas may have partners from Canada and Great Britain involved in a large facility in the capital of Turkey. To represent the involvement of each partner in the currency they are regulated to report in, is up to the Genesys core with data representation in each of the four countries mentioned. A difficult task in this era of large currency fluctuations.

Currency translations can take on two distinct characteristics depending on the type of account. The asset's need to be reported at the lower of cost or market value. How is this impacted on each producer if the currency in use by the partner is the U.S. and the Turkish dollar declines precipitously. What happens to some debt or obligation if your home currency declines and your debt is denominated in U.S. dollars?

The second type of currency translation are those that would be associated with the revenue and expense type of accounts. These could also disrupt the makeup of the partnership accounting particularly if the U.S. dollar were to decline to record levels. Does this make the property represent a disproportionate value to each one of the partners?

Another issue respecting these accounts, what if the firm had paid a cash call at the beginning of the work and their was a large currency adjustment between the time the cash call was paid and the monthly statement of operations or expenditures was issued. How are these going to be handled.

The purpose in raising these points in partnership accounting should be clear. The number and types of transactions are taking on a multitude of exceptions that need to be addressed. To make this system functional and useful in this environment will be a test of the technologies. Difficult at this point, but I am confident that given the right amount of time the Java developers will have made the system able to accommodate all these various data elements. I therefore assign the technical risk as low.

In Partnership Accounting Part V, I will be discussing the difficulties in dealing with production volumes. How they are recorded, balancing, custom fees, custom products etc.

[Partnership-Accounting][Genesys][Java]

The "anti"-Petro Canada.

I have been very quick to point out the failures of our favorite company, Petro Canada (PCZ on the NYSE). I can assure you that the fun will continue, and as I suspect, only get better. Today I want to contrast the failures of Petro Canada with what I think the large international producer should be doing. And here in Canada we have somewhat the prototypical explorationist, Talisman Energy Inc (TLM on the NYSE). So from now on, not only will we be highlighting the systemic failures of Petro Canada, but highlighting the success of Talisman.

Firstly, Petro Canada has failed again in developing its Terra Nova field. What was supposed to be a highlight of their international capabilities is turning out to be a financial and operational disaster. Even the provincial government is recalculating their budgets to accommodate the Petro Canada failures. This time there was a failure in their production platform that will cause their facility to be down for four months. There goes that revenue, up goes those costs, down go our profits. Oops I forgot they were losing money before these failures.

I have to ask of the Petro Canada management, all this for a billion dollars in stock options?

Enough about Petro Canada, for now. Talisman announced their quarterly results and I am pleased to announce that they have discovered another significant gas find in British Columbia, Canada. Talisman is headed by it's CEO, Dr. James Buckee, a geologist, and consider themselves explorers. It is on that basis that they were able to report that oil production was up 27% to 300,000 bbls / day and gas production was the same at 1.338 BCF / day. All in all, a stellar performance in comparison to Petro Canada's diminishing production profile.

Talisman is reporting that in addition to last years find of 55 mcf / day in the Monkman area, an additional 33 mcf / day in the same area went on production last month. Attributing an exploration mindset to the company is explicitly stated by the CEO.

Dr. Buckee also noted an interesting point that Dr. Giovanni Dosi states about innovation. (Click on the title of Dr Dosi's name for that blog entry.) I stated the following based on Dosi's research.

"as any industry continues in a high priced environment the technological changes that are brought about (from innovations discovered) provide "irreversible" advantages to the innovator "at any price level".

Dr. Buckee notes his target is to find gas that is economic around $5.50. By doing so he finds the discoveries from his target of $5.50 are usually profitable at around $2.50 - $3.00! This is exactly what Dosi suggests happens. That when innovations are developed by the innovative firm, it usually has the effect of being profitable throughout the pricing structure.

All in all an interesting day, and one day closer to the Petro Canada second quarter results. I wonder how many stock options it will take them to figure out this latest disaster, I sure hope the management takes it easy from now on.

[Talisman] [Petro-Canada] [Java]

The revolution grows.

The title of this entry will take you to an eloquent revolutionary that accurately captures the opinion of this blog, and the systems that are needed to be developed.

As I stated in my thesis,

"the only requirement for the technical revolution to continue is for the coup to trigger the signal. Metaphorically speaking of course"

Pamela Slim, a business consultant is starting the call to the CEO's and other officer's within the corporate hierarchy. Calling out the staff to give up on the corporate environment and make a difference in the world.

All I have to say is welcome, there's a role for everyone...

The competition.

The ERP systems that are in use today by oil and gas producers are Oracle, SAP and IBM's Qbyte. These systems all directly support the hierarchy and ignore the joint operating committee's existence and authority. These are the class of application that are targeted to be replaced by Genesys.

Firstly these systems are old. In many cases up to 20 years old. Are designed to conform to the vision of the developers that started them such as SAP, and cater to manufacturing or other industries. Conceivably, Qbyte was designed for oil and gas, but that was back in the mid 1980's and since IBM inherited it from Price Waterhouse Coopers little development has taken place.

None of these systems were developed for oil and gas, and possibly more telling is that none are being developed today. Genesys is the only proposed oil and gas development that I am aware of. In a time of significant conflict within the oil and gas industry, only one system is being proposed?

As I have indicated here before, I am the rightful copyright owner of the concept of using the joint operating committee as the organizational focus of these developments. Soon after the publication of the thesis / proposal to industry, I put these competitor companies on notice that they were not authorized under this copyright to use the joint operating committee as the organizational focus of any of their ERP software.

Understanding that the competitive software companies are also based on intellectual property it serves no purpose for them to abridge, or in anyway attempt to diminish, this copyright. Recognizing this I am pleased to say they have not, and most importantly will not.

In reviewing the competitive offerings of SAP, Oracle and IBM, there appears to be no overriding issue or vision being prepared for this industry.

[Oracle] [Competition] [Java]

John Hagel III and John Seely Brown

McKinsey Consulting is providing free access to a recent publication of John Seely Brown and John Hagel regarding innovation. Entitled "Creation Nets: Getting the Most from Open Innovation" and it's available by clicking on this title.

A little background, much of what Hagel and Brown have been writing about over the past 5 or 6 years is web services. Call them what you like, Web 2.0, Service Oriented Architectures, Software as a Service, Hagel and Brown have been on topic for many years. Of all the business consultants and bloggers, these two individuals have best defined the needs and effects of these developing and critical technologies. Much of their work is available for free at their respective websites and I highly recommend a thorough review.

• John Hagel's Edge Perspectives.
• John Hagel's website and blog.
• John Seely Brown.

I was fortunate enough to find their discussions early enough to make them a solid part of my thesis. I am grateful for their efforts and see that they have continued on with their theme and have released another "free" paper of significance. So lets dive in.

"Creation Nets: Getting the most from open innovation."

"When companies look outside their own boundaries they can gain better access to ideas, knowledge, and technology than they would have if they relied solely on their own resources."

Defining what they are calling Creation Nets with this excellent quote, Hagel and Brown go on to define the two extremes of "distributed innovation" which is

"difficult to manage / control"

or

"may seem to be mostly about narrowly defined joint ventures or transactions to acquire IP created by others."

Hagel and Brown admit the business models proposed are not mainstream and answer the question

"why companies must visit the patterns that emerge across very diverse domains". Why do creation nets matter? "The case for creation nets has its foundation in the speed of change in today's global economy."

Today speed is the critical component that is needed in oil and gas. The decline of reserves from exploitation requires a speedy solution to what MIT presidents Susan Hockfield's calls "Energies Perfect Storm".

Joint ventures are what the Joint Operating Committee (JOC) represents in its organizational form. The "Genesys Software creation Nets" are global populations of oil and gas workers available to provide information and knowledge to the JOC. The JOC being virtual in the Genesys system, these workers availability and value are readily available to be deployed to apply their knowledge, understanding and most of all their imaginations for innovation.

Creation Nets, or open innovation's virtual nature, permit and facilitate greater exposure to larger bodies of knowledge tacitly held by engineers and geologists as sub populations of all oil and gas workers. Exposing issues and opportunities to larger groups of scientists to achieve a speed and quality the hierarchy can not, and never will attain.

Hagel and Brown note this "broader set of participants brings with it a number of practical difficulties: Trust can be difficult to establish" noting that "in fact the more diverse the participation the thornier the issues."

Hagel and Brown state "the institutional mechanisms of creation nets help overcome these very real difficulties and provide for the diverse kind of collaboration needed to support sustained innovation in a world of far flung knowledge and talent".

How creation nets work.

"Creation nets work by mobilizing hundreds or thousands of independent entities in the pursuit of distributive, collaborative and cumulative innovation."

Mobilizing such a range of participants requires a precise set of institutional mechanisms to make clear who assembles the network, who can participate in it, "how disputes will be resolved and how performance will be measured."

Genesys fills this role for the developments, this blog is the starting point. On one side are the producers who need the software, the users who seek to provide the work for the producers and explain their needs to the developers. Motivated by long term incentives creation nets align the resources for innovation.

Building and Participating in Creation Nets.

Consider the diversity of skills and experiences their networks requires and tailor the approaches accordingly. Balance local innovation with global integration. Three primary challenges are

• Accessing and developing highly distributed talent.
• Provide the proper contexts for the participants to come together and engage in collaborative experimentation, tinkering and innovation.
• Effectively integrating the creations of diverse participants into shared releases.

Innovation is not the point or the focus of this. Creating the innovative oil and gas producer by defining and building the software to support the innovative users and producers.

Finally Hagel and Brown state three necessary components need to be in play for creation nets to be effective.

• Uncertain demand for goods and services.
• A need for the participation of many different specialists if creation and innovation are to occur.
• Rapidly changing performance requirements in the marketplace.

In summary Hagel and Brown note that creation nets "Provide the ability to mobilize dispersed and diverse talent for innovation in flexible ways, whatever the scale."

I will be writing more about Creation nets in the months to come. The important take away from this discussion is that the long term investments made by many participants needs to get started, and therefore, I will prepare the final attributes necessary to make this so.

[Creation-Net] [Innovation] [Java]

IPv6, the third component in the Genesys technical vision.

The previous entry regarding the Genesys technical vision was wireless. IPv6 is the third component of the four elements of the vision and works in combination with wireless. IPv6 is not a new technology, just a modification of the old. IPv6 will replace IPv4 which is in use and provides the client server model of computing. The key difference is that IPv4 is 2 to the power of 32 vs. IPv6 being 2 to the power of 128.

IPv6 will enable anything of importance or value to be monitored and controlled, anything and everything. The ability to have unlimited static IP addressing eliminates the client server model of computing. In oil and gas, I foresee a variety of devices that will be installed at production facilities to monitor and control activities at the finest of levels. Considering the oil and gas industry is primarily chemically driven, heat and pressure are two aspects of what engineers and earth scientists concern themselves with. In other words application of IPv6 opens up the entire spectrum of the sciences for exploitation.

Currently Korea and China have implemented IPv6 as their network infrastructure. Most cellular phones use IPv6 addressing. Computers from Apple and Sun have been IPv6 capable for many years. It is therefore only a matter of time before the world can and will switch.

In Formula One the cars have 1,000's of sensors actively collecting data at all times. This data was then able to make modifications to the vehicle while racing. Although the ability to change settings was eventually banned the information collection was able to eliminate engine failures through remote remapping and altering the pneumatic valves.

The ability to function in this environment is going to require some unique technology skills on behalf of the average users. The point I want to make today is that the tidal wave of information is going to saturate workers, exponentially more so then today. Therefore each user needs to better understand the information technologies and how best to manage them. The challenge for users is to realize the unlimited application of their imaginations.

The combination of the two technologies are quickly providing firms with the ability to monitor and control their assets and resource's. Nothing in the client server model that we currently experience on the web today comes even close to the impact of these technologies.

In many ways the roll out of IPv6 networks is the culmination of all the technologies to date. Releasing the inherent capabilities of the past 45 years of building the hardware and software infrastructure.

[Genesys] [IPv6] [Java]

Three calls to action.

MIT Video has its president Susan Hockfield calling for MIT to lead the charge to solve the global energy problems. Framing MIT's role as not that dissimilar to what their role was during World War II. I can not agree with her more. At 53 minutes run time, another must see video. Click on the title to be taken to the video website.

The second call to action is from The Oil and Gas Journal. They have identified the demands of quarterly performance as the reason that the energy industry has not resumed its role in addressing these issues. Nonetheless they are stating that the demands for more energy are great and the producers need to innovate is critical. A must read article.

The third call to action is of course this blog. Organizations are defined by the ERP software the firm uses. To use the joint operating committee as the method of organization will mitigate many of the administrative issues in oil and gas. It will also facilitate the innovation that is being called for. No one would argue that the hierarchy or bureaucracy in these organizations will be able to solve these energy issues.

Three calls to action in one day is a record at this point. However, they are more of the same in dealing with this significant issue. All that is needed is for the donations to support the development of this software. Clicking on the PayPal button to make a donation is all that is required to start the 50 year process of supplying the global energy demands. I don't think that anyone would argue that the organization of the resources not be the first step.

[Call-to-action] [Energy] [Java]

Dr. Giovanni Dosi, Sources Part IV, (D)

D. Inducement Factors, Patterns of Technical Change and Irreversibility.

Dosi tears into these aspects of his theory with some valuable research. First he differentiates his focus away from

"the economic incentives to reduce costs always exist in business operations" p. 1143.

And defines

"specific incentives coupled with the paradigm-bound cumulative, and local nature of technological learning can explain particular rates and directions of technological advance."

When technological change is triggered by price changes, the overall trajectory of the

"new is likely to be superior to the old ones irrespective of relative prices" p. 1144.

Dosi then notes that technical progress provides values that reflect irreversible features.
Mapping the changes of technical progress provides an increase in the trajectory of those firms that used the innovations over those that choose not to implement them.

Here Dosi makes the case that the time in which the old methods are replaced by the new may be longer then anticipated. That the innovativeness of the methods that replace the old are disruptive and lag the decline of the old. Essentially determining what Clayton Christianson has been writing about recently. Innovation is difficult and disruptive.

In oil and gas we have witnessed tremendous pricing pressures since the turn of the century. Why these pressures exist, I believe, is the world is globalized and the Chinese and Indian nations are advancing their economies and consumption. The oil and gas firms are sticking to the tried and true belief that they operate at the $25 - 30 level, not the current $75 prices.

What Dosi does provide is tangible evidence that innovations are directly attributable to the changes in pricing. And this logic is easily understood. However, as any industry continues in a high priced environment the technological changes that are brought about provide "irreversible" advantages to the innovator "at any price level".

And this is the point, the oil and gas company assumes that the need to provide profitable operations at $25 to 30. Making this assumption eliminates the innovative mindset and cripples the solutions to the problems. Adopting a mindset that exists only in their minds that will never, ever be valid again, and is as fictitious as a cartoon. That is the reason for the high energy prices and left to the devices of the hierarchy this will become a self fulfilling prophecy.

If on the other hand the oil and gas company used the current prices to fuel engineering and geological innovation, it would ultimately lead to lower costs across the entire spectrum of potential energy prices.

So these companies have fooled themselves into believing that they know best and have given up trying because they don't see the demand side of the equation. This is a fundamental failure in the most pure manner of speaking. A failure that I have attributed to the hierarchy and its self promoting and self rewarding self.

As I have said many times before, those who believe the hierarchy will lead us out of this spiraling mess of an energy market is deluded. The bureaucracy is redundant and exists for itself and itself alone. No one could stand up to argue otherwise. The systems that are employed in the oil and gas firms, the SAP's and Oracle's explicitly define and support the bureaucracy.

The only manner to stop this foolhardiness is to build the systems discussed in this blog. Systems that move the accountability framework into alignment with the legal, financial, cultural and operational decision making frameworks that reside with the joint operating committee.

[Dosi] [Innovation] [Java]

When it comes to oil, gas and innovation,

This is your one stop blog. I have increased the number of del.ico.us bookmarks and Google Reader "starred" items. I decided this was more valuable then the traditional blog roll. As a friend pointed out to me, I am the filter in terms of quality oil and gas information.

If there is any thing more you may want me to add to the blog, just ask.

Innovation Genesys Java

Wireless, another component of the Genesys technical vision.

Based on the discussion of Asyncronous Process Management (APM) noted here. Looking forward it is fair to assume the volumes of data that an individual will be exposed to on a daily basis has begun its relentless increase in volume and importance. The manner of dealing with data overload by safely ignoring it may soon be over. Whether it is your competitor, litigation or a failure that is a direct result of "missing" some data. The ability to "miss" data and proceed safely is a luxury that is expiring as we speak. This blog entry deals mostly with how the work will be done through the Genesys system.

In the asynchronous environment. The speed and ability to deal with all the processes of one individual will require significant automation. Automation that is necessary in order to fulfill the requirements of their jobs. Those that expect to respond on a one to one basis will have difficulty in co-ordination of the resources necessary to complete their responsibilities. Having employees that were productive generating $4 million per year in revenue will lose their competitive advantages to employees that are capable at $20 - 30 million per year.

For example how much time is wasted in preparing for, arranging and attending meetings? In addition to the waste, there is the "lag time". A period of time that is consumed in order that everyone schedules the something "urgent" meeting for next week. It is the "lag time" that provides the asynchronous worker with their time frame for completion. The ability to discuss things asynchronously is augmented by video to mitigate the time losses and lags.

Wireless (WiFi) is a fairly straight forward technology that exists today. A broader scope of the reception (WiMax) will bring wireless into being more of a common and necessary tool for the people who work in oil and gas. It is my assumption here that wireless will enable working from anywhere at anytime. Increasing the time requirements of the average worker in oil and gas to 24 hours of being on call. Some of the personal benefits include reducing the demands for time and fuel by the average commuter who only needs to go to the office occasionally. This enables the employee to more effectively manage their day to meet their needs.

The primary advantage, however, of having an always on work environment is the ability to do the work when the individual can. Although the user will be available 24 hours a day, the "other" activities in their life can take priority in terms of being addressed. Work is more a natural outflow of the day to day activities. The work being predominately asynchronous in nature, enables the work to be addressed after careful thought and interaction that is dependent on the user's time and availability.

As I indicated at the start of this entry. The "how" this system will operate in a wireless environment is discussed. The "what" that the user accesses wirelessly is all manner of reports, accounting information, journal entries, ledgers and financial statements. These reports are prepared for the monthly accounting of the joint operating committees that the employees are affiliated with. The overall scope of information would also include the engineering and geological data that the producers staff would need.

Vision Technology Java

Emery Lovins on MIT video.

MIT is hosting a variety of lectures and talks regarding energy. First up is Emery Lovins who is the founder and CEO of the Rocky Mountain Institute. Mr. Lovins has far too many awards to list here and I highly recommend clicking on the title of this entry to watch the video. Run time is 1 hour and 36 minutes.

Mr Lovins and some of his staff have written a book "Winning the Oil Endgame" which is available for free. Of note and interest much of what President Bush's recently announced energy policy is derived from these materials, and the forward is written by Mr. George Schultz.

Both the Rocky Mountain Institute and Winning the oil Endgame are excellent resources that should be bookmarked and reviewed frequently.

Dr. Lovins speech focuses on two distinct areas. First the costs of innovations regarding reducing the weight of vehicles mass are far less costly then the fuel they save. Making them economic. The second area of focus is on reducing the demand for oil with alternative sources of energy. The switch grass comments by President Bush seem to have originated with Dr. Lovins and his group.

A third point that I will be spending some time thinking about is that the hydrogen molecules in oil and gas are more valuable then the carbon molecules.

Energy Research Java

Aprils Business Report

Marketing
As reported last month, March was our first month of actively marketing the Genesys project. A target selection process was undertaken, with specific marketing deliverables and objectives being defined. We selected our target, Petro Canada, and began the slow process of revealing that bureaucracies capabilities. Unfortunately we did not receive the response we were expecting. Petro Canada's first quarter provides further evidence of the problems with the hierarchy in oil and gas and we will continue on with our marketing program.

Technical Architecture
We have subscribed to Google Analytics and are able to map out the response to the blog entries. This a comprehensive tool that provides significant advantages for our marketing plans.

• Revenue to the end of April: $0.00
  

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

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

Notes:

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

Business-ReportMarketingJava

Petro Canada's first quarter.

Our favorite company Petro Canada filed its first quarter report this week. Unfortunately no response was forthcoming from the company regarding my criticisms of 2005, so we'll just keep working on that. Since the company proceeded through the annual meeting and did not address these issues we have acquired some history, and they are now in a fixed position regarding their comments to shareholders.

The first quarter is not looking good to me. Petro Canada is now in what I would call a desperate situation, and I have to say that things are worse in 2006 then 2005, here are my concerns. I will elaborate on them further in other postings.

• Why were the Syrian properties sold.
  
• Syria earned $152 million profit and was sold for $645 million. Was this a fire sale?
• Allegedly the property was "mature"?
  
• Earnings from continuing operations were $54 million however,
  
• After deducting the downstream operations, Petro Canada lost $40 million.
  
• Maybe it was these assets that were "mature"?
  
• Without the cash from the Syrian property sale, Petro Canada would have only had $428 million in cash. Not the $1.073 billion as stated.
  
• I am also concerned why the firm has such large accounts receivable. $1.372 billion accounts receivable should recognize the additional $480 billion that was sold under its securitzation program. On that basis total accounts receivable would be $1.852 billion or 42% of the first quarters sales.
  
• If Petro Canada did not sell the Syrian property and securitize the Accounts receivables they would have had to restate cash to $(52) million as a shortfall.
  
• Was cash the reason the property was sold?
• The excessive compensation of the management continues in 2006, without missing a beat.
• General and administrative costs are up 22% year over year.
• $65 million in stock based compensation was recorded.
  
• Total options now issued = 21,823,525 shares at $49.18 U.S. = $1,073,281,451 U.S.
  
• $227 million in forward futures contracts recorded for the quarter. (I've listed the hedges here as I believe the only reason the hedging is done is for management appearances.)
  

The ability to raise additional cash has to come into question. The loss of Syrian assets will have a significant effect on 2nd quarter earnings and cash flow. The continuation of the excessive levels of compensation may become a glaring sore spot for the company. I do not know of a manner in which these management costs are justifiable, particularly based on this performance.

Recall that my purpose in providing this analysis is that the hierarchy, or in Petro Canada's case the management, has failed in the traditional form of organizational structure. Proof that the failures are occurring is evident to me based on this analysis. The criticism is directed at Petro Canada because they are by far the most representative of the concerns that I have for this industry.

Marketing Petro-Canada Java

People and Processes.

In my recent entry regarding Asynchronous Process Management I did not mention the manner of the communications. Consider that the processes that are being asynchronously managed could be any one of the four following types.

• Person to Person.
• Person to Process.
• Process to Person.
• Process to Process.

These methods of asynchronous process management provide an unlimited capability in managing a process as I had mention here.

Process Asynchronous Java

Asynchronous Process Management a cornerstone of the Genesys technical vision.

It has been a while since I posted any information regarding the technical vision stated here. Each of the four elements of this vision will be broken down and expanded upon individually in the next few weeks.

Today I want to start this review with the Asynchronous Process Management (APM). Asynchronous communications are like a letter where the reader has ample time to reflect and respond. Synchronous communications are like telephone conversations in that the communication itself engages its participants in real time. Asynchronous Process Management (APM) is the style of communication applied to the variety of oil and gas processes that require interaction through a number of different individuals, disciplines or producers. The Java Programming Language can engage in transactions that are asynchronous in nature and as a result reside as real objects with tasks and processes that may take many days, weeks or months to complete, based on the individual responses throughout the process.

The area that I foresee APM playing a strong role is in the joint venture billing, or as I have re-stated, the Partnership Accounting methods. Specifically how the reporting process is updated amongst the partners. We need to consider the number of ways that a producer may contribute to the joint account. I have limited these contributions to capital, leases, intellectual property, human resources and operational capabilities. There may be more types of contributions that can be discussed at a later date.

Each month an accounting of the property is required. I have suggested that this process should be accelerated and lets assume that we bring this up to a weekly process. The example will involve the drilling and day work for a well that was rig released 3 days ago. The example will start with the completion and distribution of the Daily Drilling Report, then the Vendors Invoice, comparison to the Drilling Contract, and finally distribution of the Joint Venture Billing to the partners and final resolution through payments.

You are the successful geologist in a productive well drilled just last week. You as Chairman of the Joint Operating committee have assumed operatorship of the property and are in receipt of the last information required for the Daily Drilling Report. Filing of the report in the file system (noted here) populates the report to the authorized partners and authenticated users of the information. Due to the security of the information you know that none of the information about the tight hole will be leaked to any third party.

Completing that task the Drilling Contractor submits a finalized invoice based on the drilling contract. Comparisons are run between the current invoice and pre-paid invoices to the Drilling Contract. The system kick's out an anomaly in the mud and tubing used, and the invoice is approved subject to the holdback of the costs in the mud and tubing algorithm. This is then sent to the various partners through a weekly joint venture billing process.

For the purposes of the example, we should assume that there are only two other partners. One whom is the original P&NG lease holder, and geologist by training that promoted the deal based on his theory, the other providing the capital to drill the well where as the operator provided the operational expertise and drilling rig availability.

Based on the agreement that was put across by the geologist partner, the recognition of the lease, the capital, the capability and drilling contract are all assessed in determining the working interest distribution of the new well. The Chairman then sends the partners their agreed to share of the final drilling contract. As with all invoices there is a net 30 day payment requirement that would apply to both the drilling contractors invoice and the Statement of Expenditures.

Each partner peruses the invoice based on their agenda's availability. As the individuals time comes free the system offers the opportunity to review and approve the joint venture billing invoices of the operators that manage their properties. And on the 15th and 22nd days the two other partners approve the invoices for payment on the due date of the 30th.

On the 30th the invoices are paid with the automatic transfer of the funds from bank to bank based on the approval of each partner earlier that month. These payments are aggregated by the system and the operator then approves the payment of the invoice to the drilling contractor.

What we have in essence done is provided the cost justification and process management of one of the key processes of oil and gas. This is carried out in the paper based world industry wide with little variation. The process mentioned here is entirely electronic based on the Genesys Web Services provided. Each time the opportunity or need occurs the process is re-awaken to complete another element of the overall process, based on the relative criteria of each individuals decisions.

When the original invoice is approved by the operator it is automatically forwarded to the partners, who wait to peruse it on their time availability, upon review, which would include a comparison to the drilling contract in this case, would see that the tubing and mud reconciliations have some outstanding issues would accept them in to their Genesys Web Service and pay them at the appropriate time.

Each aspect of the process is being completed when it is convenient or required to be completed. Which ever is the latter. Java's asynchronous capability and exception handling are the most robust of any system. Their ability to conduct these types of operations asynchronously so that people are reduced to making the key decisions in their own time frames is the desire of the Genesys system.

I think that the ability to build on this concept requires that other elements of the technology vision to be brought about and discussed in the next week or two. As the asynchronous methods are able to build on the Java objects, Wifi and IPv6 component's of the vision. Until then we'll leave the discussion here.

Anne Mulcahy at Xerox.

Anne Mulcahy the long term CEO at Xerox is finally being recognized for the leader that she is. She took on a very difficult job in the ailing Xerox and has made the firm stand on new and innovative product offerings, that resurrect the days of old. (Click on the title of this entry to get a summary from the Business Innovator.)

Quoting her words about being disruptively innovative:

"This is the pain of technology transitions. You can either sit and wait like Kodak or Fuji Photo and fall off a cliff when it happens. Or you can migrate. We're transitioning the light-lens [traditional copiers] out as quickly as possible. If you look at what that's cost us, this company would have been growing for the last three years very nicely. It cost six points of growth in 2003; four points last year. It will cost us probably a point and a half this year. So it's going away... It's always more attractive to stay in the old technology from a profit standpoint. Always. But you'll be going out of business."

It is too bad that here in Calgary the oil and gas industry chooses to treat me as a pariah for offering the opportunity to "migrate" to the new technologies. Now they have the same problems that I identified two years ago in the Plurality publication. Only these problems have manifest themselves to include accounting reporting issues, poor reserves replacements and related issues. To listen to the oil and gas producers they seem to think that higher energy prices are their biggest surprise! What business are they in?

The time to proactively start building the systems focused on the Joint Operating Committee is passing quickly. There remains very little time left to make the transition from the old energy industry to the new. As I have indicated here before, if we had the resources to start tomorrow, we would still take three years to complete the development.

No one can stand up to the concept of using the Joint Operating Committee and refute the logic. Everyone agrees that this is the manner that companies need to proceed with, yet the bureaucracies continue on in an attempt to reward themselves for their success in their businesses. Its the high commodity prices that are providing the "good" earnings guys, not any skill's you may lay claim too. Go back and recalculate what you would have earned at $25 / bbl prices. The sad fact is that many of the companies, like Petro Canada, would be run by court administrators if oil were at yesterday's prices.

Sun Microsystems is our key supplier...

Reading the technology entries of this blog will provide an understanding of the significance of Sun Microsystems in this development project. Sun has prepared an offering that I find compelling, complete and all within their one shop. Something that no other firm does. IBM uses Java and Linux, HP and Dell use Windows and Java.

Apple and Sun are my two favorite companies. This is primarily based on their understanding of providing the user with the entire environment. Sun offers Java, Solaris, Grids, Servers, Workstations and Storage. Everything a project like this needs. Not only do the offer these items, they own them, and they are the best offerings in the business. The only area they do not have a footprint is on the desktop. Apple's domain.

So here is to the fulfillment of the vision of Scott McNealy. I always looked to him more as a Chairman then as a CEO. Now as he hands the CEO position over to Sun's President Jonathan Schwartz we're seeing a continuity of the vision and the horses to take the market with their offerings.

I will leave the reasons why Scott McNealy has such a profound effect on the market place to his worthy successor Jonathan Schwartz. Click on the title of this blog for his entry recognizing that "The Network is the Computer".

Exploration vs. Exploitation the subtle differences.

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

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

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

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

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

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

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

Here we are in 2006 with the following scenario.

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

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

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

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

Google video of interest.

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

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

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

[Dosi]

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

B) Appropriability of Technological Innovations.

Dosi defines appropriability as the:

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

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

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

C) The Driving Forces of Technical Change.

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

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

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

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

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

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

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

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

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

The "Fifth" constraint.

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

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

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

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

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

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

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

Web 2.0 based value propositions.

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

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

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

Where we are...

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

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

There is a saying by George Bernard Shaw...

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

I am an unreasonable man.

Jonathon Schwartz and James Gosling in Brazil

[Technology]

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

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

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