Energy, the one common denominator of life.

Discussions regarding energy and its value are being actively debated around the world. Since the shortages are placing the commodities of energy into the political arena, these discussion are taking on a heightened value.

I thought I would add my two cents in to the discussion, so here goes.

Two things are finite energy and life. No other commodity, or value of anything fits that definition of "finite". There is only so much of it and there is nothing that can be done once either is gone. As time passes, energy and life are irretrievably lost. Nothing can be done to recapture it.

Kind of puts the hole energy discussion into context for me.

[Energy] [Innovation] [Java]

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]