The Next Technological Revolution:

Will the US Lead, or Fall Behind?

I stumbled upon this excellent summary of the way that innovation, research and development have changed in the new globalized economy. Noting the corporate research popularized in the 1960's and 1970's has faded from the landscape. Xerox, IBM, GE, AT&T and others were involved in large volumes of primary research in a variety of areas that may not have had a defined business for the company. Today these research dinosaurs have faded from the modern corporation. With few companies involved in research and almost no primary research being done anywhere.

The authors document how research and particularly innovation occurs today. Defining "Open Innovation" as;

"Open innovation is the new business paradigm in American industry. Under Open Innovation, a company's value chain is no longer fully contained within the company, and ideas, people, and products flow across company boundaries, to and from other companies, universities, and even countries. Innovation is now a global game characterized by both cooperation and competition between firms and between nations." p. 2

The need to collaborate on a much greater scale is necessary for open innovation. I think and firmly believe that in oil and gas, the need to cooperate, compete and collaborate is necessary for "ideas, people and products" to be able to keep up with a large amount of science moving at an ever increasing pace.

Technorati Tags: Genesys, Collaboration, Ideas, Innovation, Research

Adam Smith meets SMP

The title of this post will take you to an article that provides an interesting perspective on some of the actions that are occurring in the technology field. As I have discussed before, one of the theories that Adam Smith was responsible for was Division of Labor. Back in the 1700's Smith proved through re-organization of a pin factory that dividing the tasks amongst the employees produced significant externalities. (240 fold increase.) These externalities are the benefits associated with all economic growth. If you have economic growth it is fair to assume that someone has made an effective and further division of labor. Externalities are the benefits that produce financial returns above and beyond their costs. This theory of course has been proven many times.

The author of this article argues that the development of multi-core processors or Symmetric Multi-Processors is the further division of labor that will bring about externalities for future economic growth. Duh, well of course, but why didn't I think of that? Intel is currently selling quad-core multiprocessors. Sun Microsystem are shipping 32 core processors and are believed to be in the area of 128 core processors in their next chip. Intel claims to be able to provide future iterations that have a logarithmic volume of cores and hence performance.

The other piece of technology that makes Adam Smith so relevant today is part of the Technical Vision that I have developed here. That technology is Asynchronous Process Management or APM and it is a critical (for me) technology of the Java Programming Environment. Recall that processes are either synchronous, like a conversation or telephone call, or asynchronous like an email or letter. Asynchronous processes provide the user with the opportunity to consider their response at a time and a place that is optimal in terms of convenience and availability. To put a half completed Asynchronous process in a restful state, until such time as the user has responded is something that is inherently part of Java. For an oil and gas user think of the joint venture billing process as it travels through the various companies affected. How much of this processing can be asynchronous, and how much of the operational time of the joint venture billing process can be reduced? 90 days?

These technologies in the hands of the right developers will enable the producer to increase the division of labor. And as mentioned, have the operational time reduced in doing so. And receive the externalities that Adam Smith discovered at the pin factory. The producer's being the net benefactors of this division of labor and the user's being highly productive with minimal interruptions.

Technorati Tags: Genesys, Java, Capabilities, Asynchronous, Development

The Firm in a Knowledge Perspective.

Professor Sidney G. Winter, The Wharton School, May 15, 2006, European School of new Institutional Economics presentation slides.

Professor Sidney Winter presented at last Years European School on New Institutional Economics (Esnie). Click on the title of this entry to be taken to Esnie. It appears that Professors Winter, Dosi and Langlois have submitted working papers and participated in this organization. Also, I have included Esnie in both the oil and gas and academic "Google custom search engines" you can find in the first column of this weblog. Although Professor Winter did not submit any working paper, and his presentation is only 23 slides long, there is much to learn from this resource, so lets begin.

Recall that many of the papers that have been reviewed on this blog were authored by Professor Winter and the "Winter" label will pull together the individual blog posts. With only 7 posts to date, Professor Winter's contribution is of very high quality. The firm in a knowledge perspective is something that I recently wrote about in the Life and Times of Humpty Dumpty. I suggested that Chrysler's loss of engineering capability in the move to design teams is something the energy producers needs to consider may also apply to them. In the redefining the boundaries of the firm I have also suggested here that the scientific and engineering research capability reside with the firm. This is so that the losses realized by Chrysler are not symptomatic of the move to "Design Teams", or similarly, the Joint Operating Committees in the energy industry case. And operational performance metrics override the knowledge capability within firms. I have also suggested elsewhere that the competitive advantages of an oil and gas producer depend on their land base and the capability to find and produce oil and gas are the critical competitive strategies and value creators. This article will therefore focus on the role of the firm and particularly the Research Module of our proposed application.

Winter suggests the key competitive advantage of a firm is the "Knowledge Based View" a subset of the "Resource Based View." Clearly arguing that the knowledge of the firm is the key competitive advantage. This may seem contradictory to what I just stated about the land base and engineering and science based capabilities as the competitive advantage of oil and gas producers. I think we are saying the exact same thing. What does a company know and how is it known? What key resources are required to deploy that capability? (Land, Scientific and Engineering Capabilities). These are more direct questions that seek to reconcile the two different "views" of what has been stated. It is the knowledge of the firm and the ability to deploy it that makes the firm more competitive. And Winter concurs with this assertion with the following quotation;

"Some speak of a competence view or a capabilities view or even a dynamic capabilities view -- all to roughly the same, fairly vague, effect." Slide # 2.

As we have discussed before, in determining the boundaries of the firm and the market. I believe the market is ready to take on a greater role in deploying and developing the innovative approaches to how, what, where, when, who, and why of the industry. To have the contracts between firms free the hand of the market to conduct the operations in dare I say a "just in time" basis. These contracts are able to handle the transaction costs better then the bureaucracy is able to micromanage at this time, primarily through enhanced Information Technologies. And it is this thinking that Winter states

"In that view, firms are where productive knowledge lives, the only place it lives, and knowledge does not travel among them. When firms are a "nexus of contracts" or have boundaries determined only by transaction costs, this traditional perspective tends to fade form view." Slide # 3.

Here I think Winter, is also making the assumption that the move to Design Teams at Chrysler is responsible for the slackening in the intensity of global engineering capabilities. And therefore the risk of a degradation in firm knowledge and capability is a potential outcome of organizational change focused on moving to a market perspective only. The firm exists, and it is the firms sole responsibility for knowledge.

On the next slide Professor Winter comes in with a few solid home runs.

"On this view, firms are central to the social arrangements for storing productive knowledge for extending its application, and for advancing it - three very closely related economic functions."

and

"Of course, there are also other players - other types of institutions, organizations and individual roles complement the firm role." Slide # 4.

This last point firmly pointing to the production related transactions, and other activities of the Joint Operating Committee as proposed in this table.

Winter then makes the point of this discussion with a handful of objectives. Slide # 5.

• "Explain what has been added to the traditional understanding of knowledge and the firm."
  
• "Point out some specifically "institutional" aspects of the current view."
• "Take note of recent and potential research topics in this area."
  

It is also at this time Winter takes the entire scope of operations and opens it up for consideration and discussion. Slide # 6

• "Organizational learning."
  
• "Creativity and innovation, and diffusion." (Innovation has been primarily assigned to the market or JOC.)
  
• "Knowledge transfer -- transfer of practices, replication (broad scope), imitation (from afar)"
• "Industrial and technological evolution."
• "Knowledge Management."
• "Communities of practice, networks."
• "Routines, capabilities, dynamic capabilities."

Outside of innovation these items should be conducted primarily by the firm. With the caveat that items like "creativity" are not the sole domain of the firm or the market but the global oil and gas industry.

Next Winter asks for and attempts to define what knowledge is. Noting that "it is to achieve some understanding of how society's work gets done." Let a definition emerge! (If needed.)" And Winter provides an excellent definition of "productive knowledge that guides work" with a few global parameters. Slide #'s 8 & 9.

• "Situated, context dependent."
• "Embedded - in physical, temporal and social contexts at various levels."
  
• "Partly Tacit - skills, pattern recognition, not facts."

If we look at these three parameters and the scope of operation of the upstream oil and gas producer. We see the constraints and opportunities based on this definition of knowledge. I hesitate to discuss the impact of these three categories of knowledge for fear that I may limit the scope of the knowledge base. I will state however that the importance of this definition needs to be codified in this applications Research Module. "How" may have to wait until I complete more of this research into this critical area. That I believe the energy industry needs to move in this direction obviously resonates with the academic community overall. Today there is more research being put into these areas. It is overwhelming in volume and quality of the work being done. I can also assure my readers that the scope of this problem, what I am asserting as the "Chrysler Issue", for purposes of this blog, will not be raised as a reason for any failure associated with this software application. The scope of the "firms" responsibilities has not diminished in my opinion. The firm needs to be as strong, and as involved in their operations then they ever have been. The boundaries of the firm, and the allocation of some responsibilities to the market does not provide any opportunity for the "Firm" to rest. The transition will bring an enhanced focus to the competitive differentiators of its land base and this knowledge stuff. And Winter agrees. With Slide # 10 recreated here.

"Therefore,"

• "We must put aside, probably forever, any ambition of drawing a sharp conceptual line between productive knowledge and the context in which such knowledge is operative."
• "All three of the named considerations point to the infeasibility of that; it is a futile exercise."
  
• "The good news: dropping the idea may be the main key to understanding knowledge."

It is at this point that Winter provides an excellent discussion on the issues around personnel turnover and firm knowledge. Citing a combination lock with three numbers from 0 to 9 on each dial. If each dial were represented as an individual, it is fairly easy to replace only one, in fact it would only take 10 tries to have the key replaced. If all three need to be determined it may require a 1,000 searches and 500 expected in order to restore the combination. A strong analogy to the human resource issues that are being faced in the oil and gas industry as we transition to new leadership and management. The retirement of the baby boomers in the next 5 to 10 years, based on this analogy, may be devastating to the operations of the firm and market. If the knowledge that is contained within the boomer generation isn't captured in the short time available, we could experience serious difficulty.

It is at this time that I want to add this information to our table and module breakdowns. And this is how I see the situation evolving;

Construct	Market	Firm
Joint Operating Committee	P	s
Military Styled Command and Control	s	P
Transaction Costs	s	P
Production Costs	P	s
Innovation	P	P
Routine, compliance and accountability	s	P
Research	s	P
Development	P	s
Financial Framework	P	s
Legal Framework	P	s
Cultural Framework	P	s
Operational Decision Making Framework	P	s

P = Primary
s = secondary

Application Modular Breakdown

So if we take a moment and define some of the modular architecture of this system.

• Partnership Accounting Module,
  

• Petroleum Lease Marketplace,
  

• Human & Supplier Resource Marketplace,

• Financial Resource Marketplace,

• Governance & Compliance Module, (a.k.a. Military Command & Control Structure)

• Research Module (Primary is the Firm)
  
• Firm Knowledge Objectives
• Storing Productive Knowledge
• Extending Knowledge Application
• Advancing Knowledge
  
• Organizational Learning
  
• Knowledge Capture
• Situated, context dependent.
• Embedded - at various levels
  
• physical,
  
• temporal
  
• social contexts
• Partly tacit
• Skills
• Pattern Recognition
• Not facts
• Replication
• Imitation
• Knowledge Management
  
• Industrial and Technological Evolution
• Communities of Practice, Networks
• Creativity, Innovation and Diffusion
  
• Other
• Routines
• Capabilities
• Dynamic Capabilities

I think the primary thing we have learned through Professor Winter's slides is that the firms role is not diminished in this proposed organizational change. And with some concurrence on the issues regarding Chrysler. Some of the aspects and attributes are ceded to the market, however, the firm is as vitally needed in these new capacities as it has in the past 100 years. As we look to the challenging future of the energy industry, the needs to address these points will become more prescient as the knowledge contained within the firm begins to retire, and hopefully left in the hands of those that will able to continue on.

I noted in the entry about Matthew Simmons that May 2005 was possibly the point of peak oil. Which may or may not be the case. It is important to realize an interesting aspect of all declarations of peak oil in terms of a single field or a single country. (Such as the U.S. onshore peak occurring in 1972) Each time that the Peak has been attained it is also the point where half of the recoverable oil or natural gas remains in the ground. So even though the total throughput will continue to decline. At least we know the reserves that remain are what fueled the world economy for the past 140 years.

Technorati Tags: Genesys, Winter, Organization, Governance, Innovation

McKinsey on Vertical Integration.

In honoring of the passing of Alfred Chandler, the McKinsey Quarterly is issuing a reprint of a 1993 article entitled "When and when not to vertically integrate; A strategy as risky as vertical integration can only succeed when it is chosen for the right reasons". The article was originally published in Sloan Management Review and was authored by John Stuckey and David White.

Vertical integration was the survival strategy of the oil and gas industry for many years, particularly back in the days of the "Seven Sisters" Exxon, Mobil, Amoco, Shell, BP, Chevron, Texaco and Gulf. The ability to handle the exploration, production, processing, distribution, chemical processing, retail operations of oil and gas firms was through Verticle Integration. Without the integration, it was believed, the company would not earn any returns. This type of thinking left the industry scene sometime in the 1980's when the then junior producers focused on exploitation. Nonetheless this is a review of some of the criteria that was used to determine the validity of using a vertical integration strategy. I think this review would be worthwhile particularly as many of the writings in this blog are pointing away from integration as a strategy.

The primary message of the article is the company should not consider vertically integrating unless there is some risk of losing value, or if value will be gained in the integration. The reason for this limited view of when integration should be used. Is the difficulty in integrating the various disparate parts and have them operate as a whole. I would also assert that the focus on integration is a management belief that the more sophisticated the domain of operations, the more valuable their services were required.

The authors do a very fine job of defining what Vertical Integration is in the following quotations;

"Vertical Integration is simply a means of coordinating the different stages of an industry chain when bilateral trading is not beneficial. Transaction costs and the risk of exploitation would be high."

We discussed the markets role in transaction costs and this is the issue that causes the vertical integration to be considered. Transaction costs are expensive. It is only the ability to reduce the transaction costs that I have proposed the Joint Operating Committee (JOC) to operate as the market for the industry, and process the markets "production transactions" with the modern Information Technologies.

"Vertical Integration typically reduces some risks and transaction costs, but it requires heavy setup costs, and its coordination effectiveness is often dubious."

The authors note the justifiable reasons that vertical integration is required.

• The market is too risky and unreliable - "it fails".
• Companies in adjacent stages of the industry have more market power than companies in your stage.
• Integration would create or exploit market power by raising barriers to entry or allowing price discrimination across customer segments; or
• The market is young and the company must forward integrate to develop a market, or the market is declining and independents are pulling out of adjacent stages.
  

The authors note the first reason is the most important one, and hence, the most applicable justification for proceeding with using the JOC in oil and gas. The markets transaction costs are negligible with today's Information Technologies. The marketplace in oil and gas is where the ability to deal with all that the energy industry needs resides. And this is the point. In immature markets the need for producers to integrate vertically was necessary to ensure that the operations were managed appropriately. Today the level of micromanagement, I would assert, is unable to deal with the level of complexity, innovativeness and speed at which things should be done of even the most focused producer. The other justifications, in my opinion, barely rise to the level of an excuse.

The question I should ask is how many JOC's are there. For every company there may be hundreds and even thousands. Bringing the total population of Joint Operating Committees into the hundreds of thousands globally. Each and every JOC that exists in oil and gas is unique to all the others. I am certain there would be a strong concurrence on that point. This market vs. the vertically integrated firm is determined in favor of the JOC's just on the basis of the number of JOC's that exist in the world. How can the needs of each unique JOC be met in this high demand era of the oil and gas industry. I assert the market, managed in the manner that this software development project has proposed, is the only method that makes sense. By reviewing this article it is clear to me, that in 1993, the decision to integrate vertically was still an option in the managers toolbox. Today, based on my understanding of the industry it makes absolutely no sense. And as we see companies like Daimler shedding many of the Vertically Integrated divisions they managed, the value of the stock continues to climb. How long will it be before someone begins the process of breaking down the vertical nature of the oil and gas companies. In theory, the remnants of the seven sister's would be able to generate larger values for their shareholders by discarding the theory that Vertical Integration is a strategy of value creation. For it is false.

Technorati Tags: Genesys, Strategy, Organization, McKinsey

JavaFX is a go!

Sun Microsystems has announced a new scripting language, JavaFX. Designed to work with Swing, Java's GUI toolkit, JavaFX gives the developer many of the attributes of the current trend to asynchronous page loading and graphics. This trend started off on the wrong foot and has become a nightmare of coding hell. AJAX was the first, Asynchronous Java Script with XML is a dynamic hodge podge of technologies that unleashes the power of coding into any wrong direction it can find. Next was Adobe Flex, then Microsoft SilverLight and they all offer the ability to write anything on the web and the desktop of the user. Very dangerous as the access to the desktop and web provides the developer with the ability to do just about anything malicious that they can dream up. I have cautioned about the use of these products before and they certainly should never be used in a corporate setting. JavaFX is different in that it maintains the security model of Java and is unable to access the local machine. This is the primary reason that there are no associated virus' or related garbage brought to the user through their use of Java.

JavaFX takes another step above the competition in that it is statically typed, not dynamic. Dynamic languages are the easy to implement and are the Swiss army knife of programming. Perl, Python and PHP are all good languages that aid the developer in many of the tasks and routines necessary for their productivity. Few would recommend the use of these languages in an enterprise setting, and that relates to the languages inability to scale to size. JavaFX being statically typed enforces a rigid framework or constraint on the developer that aids in the codes ability to scale.

Other benefits of JavaFX is it applies across the development implementations of J2ME, J2SE and J2EE, Sun's mobile, standard and enterprise editions of Java. Enabling the use of JavaFX in mobile phones and other devices that are proliferating and making the oil and gas worker more productive. This will also aid in the deployment of the many sensors and control devices. I suspect technologies will proliferate under the new Internet protocol IPv6. The prolific use of GPS in vehicles and Google maps could be used to determine who is where. Lastly this years JavaOne conference highlighted the use of the language in the area of robotics. JavaFX also provides access to this developing area of technology.

Therefore, Groovy, the previously proposed scripting language is out. I thought that Groovy would be worthwhile tool to have as a scripting language in the developers toolbox for work being done on this project. Groovy is a dynamically typed language that enabled the Groovy developer to use the same Java classes. The only issue that I had was that it was a dynamically typed language and therefore I stated that in the design specification for this project, it would be inappropriate to have any Groovy code in the final commercial versions.

Technorati Tags: Genesys, Java, Development, Sun, Software

The peaking of Offshore Oil and Gas:

Is the party over?
Or just Beginning to get exciting?

April 30, 2007

Matthew R. Simmons

Although the majority of this information is sourced from this Simmons presentation, little specifically is referenced. I felt that most of the information was factual and therefore not subject to Mr. Simmons copyright. (You can't copyright a fact.) I highlighted only what I thought was Mr. Simmons opinions in the noted references below.

Simmons noted the significance of the earlier period of the years 1859 to the 1930's where "no one had any idea what to do with so much oil"! The 148th year of the oil era is marked this year. 70 Years ago drilling teams began hunting for oil in the Middle East. Scouting for oil in Kuwait, Iraq, Iran and Saudi Arabia. Many of the large commercial fields that still produce in that region where found. Ghawar, the biggest was discovered in 1948, Safaniyah in 1951, up to 1967 with the last great super giant onshore Middle East find being Shaybah.

During 1947 Kerr-McGee moved offshore beyond piers and brings in the era of offshore oil and gas. These initial wells reached as deep as 150' feet of water. 150 feet being the limit of human endurance and safety due to the "bends". 1967 saw the Siberian Samoltar region develop, ARCO discovered the North Slopes Prudhoe Bay in 1968, Phillips found Ekofisk in 1969 and in 1975 Pemex found Cantarell. These regions and discoveries were the last 3 great oil frontiers.

With the development of mixed gas for diving, hyperbaric chambers, and the "Jim Suit" c/w GE's robotic arm. Led to testing and drilling into 1,000 feet of water in the early 1970's. Commensurate with this deeper diving capability Drill-ships and Semi-Submersible were able to conduct drilling into 150 to 400 - 450 feet of water. Further development of sub-sea production systems led to offshore satellite fields. During the 1980's the offshore drilling industry was faced with declining returns due to the costs of these technologies and the relative decline in demand for offshore drilling due to the delcine in the price of oil. As I recall it went to $10 / barrel in 1985 or 86. The pricing problem led to what was believed as the overbuilding of the offshore drilling fleet. This lack of offshre drilling demand dropped the capacity utilization rates to 43% overall. However when 1993 saw new offshore drilling technologies being introduced, the associated declines in costs and the producers earning reasonable returns on moderate oil prices of around $18 - 21 / barrel. This led to the real deep-water / ultra deep-water opportunities. This lead to a rebound or recovery of offshore drilling when in May 1997 Sonat Offshore announced the building of a deep-water rig with a 5 year contract at $200,000 / day day-rates.

"After 1980: all growth in oil output came from offshore oil". In his presentation Matthew Simmons shows the volume of oil production increases since 1980 are attributable to the offshore drilling discoveries. 120% of the 1980 to 2007 increase in the global oil production has come from offshore exploration and production. This is significant in showing the way in which the industry should turn. If the industry was able to make these discoveries with immature technologies and imploding commodity prices, I think the answer as to where the oil and gas industry needs to turn is evident.

Today after 38 years, the contractors for offshore drilling are financially healthy and prosperous. Only the number of rigs has not changed in the last 20 years. And the vintage of that fleet is quickly realizing its useful life. Recall that rust never sleeps and the useful life issue becomes more focused. Only 15% of the total fleet is new, with the majority being 25 years or more in age. It is unknown how quickly the fleet can be refurbished and how fast the fleet could be rebuilt. Simmons asks what does 500 offshore rigs cost. With 126 rigs on order, the delivery dates being from 2008 to 2011 it would seem the drilling platforms are very limited in their opportunities for the energy industries redevelopment capabilities. Time seems to be the greater cost in rebuilding the fleet. One must recall the effort of the United States during WWII, mixed in with some modern day innovation and science in seeing how the number of platforms could be built in time. With all of the oil found from offshore wells since the early 1980's, what is the prospect of the industries productive capacity and uptake?

One of the reasons that I follow Simmons is his analysis is usually unimpeachable. He is / has been a lightning rod for the wrath of the industry soothsayers that state all is well. Dr. Daniel Yergin seems to have sampled some magic cool-aid when it comes to predicting the supply possibilities, and hence his popularity. Simmons on the other hand has consistently put quality analysis that has proven correct over time. I have been following him since 1997 and his comments are stark, to the point and not something that Yergin appears to want to wake up to. For example, in this article Simmons notes the following prospective changes with respect to the supply that Yergin thinks is going to explode in the next 10 years.

• USA's onshore oil totals approximately 4.5 MB/D with an associated produced water of 128 MB/D. A 96.6% overall average water cut.
• Middle Easts giant oilfield now in decline. (Based on reserve analysis and decline in production from the region.)
  
• Mexico's Cantarell complex is beginning its steep decline.
• Lake Maracaibo is a "mess".
• Niger Delta is a rust belt of decay.
• The North Sea is in steep decline.
  

In light of this and the fact that 120% of the increase in oil and gas production in the past 27 years is from offshore oil exploration and production. How is it that Yergin believes the onshore oil and gas industry can respond to today's demand challenge. If it didn't contribute in the past 27 years to the global capacity of production, what is it that Yergin believes will solve this problem? More and more each day I think that Yergin is actively attempting to impeach his history and contribution to the oil and gas industry. As time passes he will become known for getting it all wrong.

Simmons falls definitively in the category of Peak Oil Theorists. He asks if the January 2007 production profile is 1 MB/D lower then May 2005's 74,151,000 B/D. This decline may show that May 2005 was the point of no return from a Peak Oil theory point of view. Unless the number of wells that can be drilled increases size-ably, then Peak Oil starts it's otherwise impossible decline. With the associated growth in the global fleet of offshore drilling capability, production decline will accelerate.

Its at this time that Simmons puts across one of the other phenomenon he has asserted many times before. The ability to accelerate the decline by aggressive exploitation is the only thing that the industry has really done in all of the onshore and offshore fields. This has raised the deliver-ability of oil and gas from known reserves to its absolute optimum, and cleaned out what was producible form the formations quicker then what has been found to replace it. In some companies in Canada this replacement rate is consistently 15% of the production! If you see a hamster in the wheel running at full speed your correct, however, this last point demands a doubling in the speed from the hamster. Our current consumption of energy is enabled by the aggressive and highly technical exploitation of known reserves over the past 25 years. This deliver-ability rate is therefore not sustainable. And if the peak oil theory is proven right, since May 2005 a very large clock has been ticking for the energy consumer who is unawares and unprepared. Thank you Dr. Yergin.

The dire nature of Simmons facts are captured in his 27th slide. Asking "Can the industry survive post peak oil?

• Will the global economy survive post-peak oil world?
• How high could oil prices go?
• When demand outstrips supply are shortages inevitable?
• Will the Offshore Technology Conference (OTC) survive Post Peak Oil? (The OTC is the group Simmons made this presentation too.)
  

How this gets done, and I cannot imagine anyone arguing for the bureaucracy to lead this charge. We need to organize our efforts to scale to this level. The industry is significantly bound by constraints and needs to reorganize around this proposed software development. How much longer will we face an angry consumer regarding the alleged gouging at the pump? How much longer will the bureaucracy feel complacent and wealthy in their deliberate inaction? How much longer will Yergin continue to belittle the Peak Oil theories and Simmons, and tell his customers, the consumers and bureaucracies, things are not as rosy as he has stated?

Technorati Tags: Genesys, Peak-Oil, Simmons, Yergin, Offshore, Engineering

The life and times of Humpty Dumpty

We all know what happened to old Humpty after his fall, all the Kings horseman and all the Kings men... I think today we have an excellent business example of what the nursery rhyme taught us. The example company is Chrysler. Recall in my thesis I noted that Chrysler experienced a strange depreciation of their engineering capability. I said the following then;

"The need to clarify that holding the JOC accountable is not, and should not be, construed as a capitulation of the innovation process and its inherent benefits to the four winds. A study was undertaken at Chrysler to determine why the changes to “teams” were successful in product development, as reflected in their cab forward design, yet the overall engineering and technical capability of the company declined. The Chrysler study reflects that the accountability of the JOC (or team) needs to be augmented by an internal management system that provides an overall focus and direction to the innovations. Management needs to create and guide the internal innovative science and engineering capability that is unique and a key competitive advantage."

Were the "Synergies" that Mercedes sought in the merger with Chrysler an attempt to source and resurrect Chrysler's overall engineering capability? We know Mercedes saw these synergies as the key to the mergers value creation in their 1998 $36 billion purchase of Chrysler. However, did all the Kings horses and men (Mercedes) soon realize they could not put the engineering capability back together again? Selling the firm for $7 Billion (although we don't know what stays and what goes) seems to indicate that there is something fairly seriously wrong with Humpty (Chrysler).

Irrespective of the validity of this possibility, is there a lesson to be learned here regarding the current capability in oil and gas and the potential move to the Joint Operating Committee? Is it possible that during this transition the capacity to function from an industrial engineering capability is somehow lost? I don't think so, for a few reasons. First the industry is showing symptomatic failures at every turn. In the past two weeks we have seen Canadian Natural Resources Ltd. loose control of the building of their tank farm at Horizon, their heavy oil plant. With the lose of life in the second incident being averted, we see these types of failures everywhere. I also see the inability of the industry to capitalize on the higher oil and gas prices as a failure to respond to the market's demands. The oil and gas prices just seem to keep climbing, with no response from industry.

Secondly, I see a fundamental misunderstanding of the supply structure of the energy industry. It's not about the supply. The demand dynamic we are now dealing with has its origins in a world energy supply that catered to predominantly Japan, Europe and the U.S. or 750 million consumers. Now with India and China competing we have 3.15 billion consumers, or 4.2 times the demand for energy. I attribute this inability to identify the competitive demand landscape to a myopic focus on supply that was the industries focus while there were surplus barrels of production available. Now the industry has not switched, in my opinion, and don't have the ability to switch to the demand satisfaction of the equation under the current bureaucratic organizational structure.

In summary I would suggest the risks associated with losing an advanced engineering and scientific capability within the oil and gas industry is limited. For the reasons cited and the history of the industry over the past 25 years. The last quarter century has been a survival game. Living off assets that were innovated on from the perspective of exploitation. This capability will be needed and expanded upon, but what is needed now is for the industry to increase their scientific and engineering capability in the exploration and development areas as well. An area I suggest where little has been done in the past quarter century. The offshore drilling, the Arctic, the Tar Sands and areas that were too risky before the prices rewarded the larger risk profiles.

I also think that the industry having access to the Research Module in this proposed application will be critical to developing the new exploration requirements and at least maintain the exploitation capability. The Research Module will contain the explicit knowledge of the firm, with links to partners, consultants, academics and supplier capabilities. Within this mix will be much of the leading edge thinking in the academic community and the applied project processes the company uses to discover the new techniques, procedures and policies. The more that the Research Module is pursued the greater level of Intellectual Property that the firm will have access too. This will also provide the majority of the industries scientists and engineers to develop their ideas and monetize their intellectual property through their rights of copyright, patent and to a lesser extent trademarks. For that is the stated benefit of Intellectual Property, and particularly, copyright. The ability to copyright the idea is earned through the act of publication. Therefore society as a whole has access on the ideas within the marketplace for others to expand upon and benefit from. What the Research Module will do primarily is provide a forum to capture this knowledge on a global basis and provide a means of transaction processing and cost measurement to the companies, vendors, academics and suppliers who use it. Note, I will be writing more on this important module in the proposed application in the near future.

Technorati Tags: Genesys, Capabilities, Research, Innovation

Modularity on Google Video

"Aspect Oriented Programming: Radical Research in Modularity."

Gregor Kiczales, Professor of Computer Science at the University of British Columbia.

Professor Kiczales does an excellent job in making this presentation (click on the title of this entry for the video). He hints at his past experience throughout the video, and this experience includes leading the Aspect Oriented Programming (AOP) development at Xerox PARC. This is a highly technical video of aspect oriented programming in Java. This is a key technology for this system's developments, and if you have a desire to learn these topics (recommended) this is a good video.

Much of object oriented programming is defining the objects or classes that interact with each other. The net result is an overall hierarchy of your code. In order to invoke one class from one area of the code to the other may be difficult due to the recognition of the hierarchy. (Casting up the hierarchy, over, and then down to the class that you want.) Aspects maintain this hierarchy but allow the developer to "crosscut' the hierarchical structure as if it were modular.

One of the key components of Java is the ability to use different aspects. How these different aspects are implemented in oil and gas is very common in a design such as we have proposed in this system. Not to get into too many of the components of Java code, I want to point out that this video is entitled "Radical Research in Modularity". A key aspect of the system as designed with the research that we have done with Professor Richard Langlois and applied here. Professor Kiczales makes the following points that are critical to the understanding, purpose and value of aspects in programming. This discussion begins around the 50 minute mark (50:10) and carries on to the end.

"Modularity has a cost, the cost being sometimes you get an indirection, and its only worth paying this cost if you get something back. What your getting back here is a couple of things. One thing is;"

The Raw Benefit of Modularity, which is in some sense, I could ship point (cut) without display update."

"Second an ability to reason about the structure now, and this is provided by aspect orientation."

And then later on, at (55:25) Professor Kiczales says

"What can I modularize now, that I couldn't modularize before."

The last point that I wanted to make was Professor Kiczales did point to a text of "Baldwin and Clark" that we were prompted to review by Professor Langlois. Kiczales also has some very good papers that are available on his website if readers wanted to follow through on this topic. Hopefully reviewing this video and a little research in the area of aspect and object oriented programming will begin to reflect on the value of the modularity being discussed on this blog and elsewhere.

Technorati Tags: Genesys, Kiczales, Langlois, Modularity, Java, Aspects

McKinsey Enterprise Software Customer Survey

I participated in a McKinsey study a while back and the results of that survey are now being published. (Sorry no link, the survey hasn't been released yet, email me if you would like a copy.) The topic of the survey was "Enterprise Software Customer", was sponsored by McKinsey & Company and the Sand Hill Group. The survey was completed by 475 senior IT and business executives. The objective of the survey was to;

"determine how software budget levels will change, who will control the spending, what industry trends will most impact their company in the near term, and what role innovation plays in their decision making."

and

"The results draw a picture of continually increasing software budgets, a shift to more decentralized purchase decision with increased roles for the business side in purchasing decisions, and the increasing importance of software innovation that respondents predict will come from small vendors."

Music to my ears, looking at the details of the result of the survey.

Software will account for an increasing portion of IT budgets.

McKinsey notes software accounts for 31% of spending which is expected to grow to 36% of IT costs. No change in the composition of that spending is expected.

The majority of software purchase decisions are still made centrally, although line of business buying is expected to increase.

The survey shows there may be some change in the way that software budgets are controlled. Moving from a centralized model to include business leaders and end users having a greater say.

Innovation and Service Oriented Architecture (SOA) are top of mind issues for software customers.

Respondents noted that "SOA's" were expected to be the top pick at 23% and "Software on New Devices" would total 20%. Other new trends that were noted is the Open Source Software movement.

In another question regarding "which of a list of trends would most impact their business" Software Industry Innovation claimed top spot at 33%, Software as a Service at 21% and Web Services / SOA 18%.

Product Innovation scored highest when asked "where the software industry most needed to improve, our respondents again pulled product innovation into the top slot, ranking it number one with 30% of responses. Followed closely by ease of use and customer service in the second and third spots. Curiously, "Cost" slipped in the rankings "with only 14% of respondents ranking cost as their top issue for improvement", and "48% of respondents omitting this from their top three areas". The study notes "While price will certainly continue to be a factor in purchase decisions, business customers seem to be placing a greater premium on the value that the software industry can deliver in innovative new ways."

We are still early in this software innovation wave with considerable product innovation, business model innovation, and process innovation yet to come.

"The vast majority of respondents clearly think the best innovation is yet to come. Fifty-Five percent of respondents reported they still expect significant new technology innovation to come, and another 22 percent saw the industry near the peak of technology innovation with only business model and process innovations still ahead of us."

and

"We polled our respondents to understand what type of software innovation they were looking for. Across the board buyers want more innovation, citing all of the various types of product, business model, and process innovation as important."

and

"We also inquired about the speed with which respondents were adopting various new software business models. The results showed a great degree of enthusiasm for business model innovation, with respondents predicting that more than 40 percent of their software budgets may be spent in alternative business models over the next 2 years (subscription, transaction, advertising, or another format.) Even more striking in analyzing the fraction of respondents that plan to at least try each of the proposed alternative business models a whopping 80 percent plan some subscription on demand spend, 60 percent plan some transaction based spend and 33 percent plan spend funded by advertising. This broad willingness to experiment indicates alternative business models have hit the mainstream and software vendors of all types and sizes need to ensure their level of business model innovation matches the level of product innovation."

Few customers expect to see innovation coming from large software vendors.

When asked where the innovation likely to come from, 59% of respondent's pointed to the community of small software vendors. With only 19% expected to come from the largest software vendors.

From my point of view I can't be happier with these responses. I have worked on this project as the better model and now the business community is beginning to follow. I can not think of a more timely opportunity for the oil and gas industry to get on with the development of this project. Its scope is too large for someone to come along and throw a usable software application on the table that everyone can use. It has to contain the users and the customers involvement in order for it to be functional. The energy industry can not expect the venture capital people to step up and fund this. By doing so the venture capital would eliminate the key ingredient, the user involvement from the mix.

All in all a very loud call to action.

Technorati Tags: Genesys, Call-to-Action, Software, McKinsey

Where we're at, Part II

In reviewing the recent posts of Professor Langlois' works, I find there are many points of great interest. Modularity is a critical component of the development environment of Java. Dr. James Gosling, the founder of Java, has put together an extremely powerful and safe environment in which we can develop these modular applications. One point that I should have made in those entries is the logical application of the Military Command & Control Structure (MCCS).

MCCS has its own label to aggregate all of the postings in this blog. It is an important concept of using the Joint Operating Committee (JOC) and I would suggest a review of the posts to gain a strong understanding of the principles that I have proposed. The principle is that a means of command and control is necessary to replace the hierarchical command and control that is otherwise lost in specifically recognizing the JOC. By recognizing the JOC there are many opportunities to accelerate the performance of a producer. By pooling the joint human and other resources, and making them fully available to the Joint Account, virtually, the performance of the work being done by the JOC will increase. The work being the planning and execution of the drilling, completing, building of gathering and facilities. To have the JOC populated by the members seconded (permanently) to the JOC and operating in a manner consistent with the Military analogy of command and control. Not only the people who are actively representing the owners of the JOC, but the suppliers and vendors that are usually the boots on the ground in implementing the plan. This enhanced collaboration would provide a collective knowledge base and would be able to mitigate any issues as quickly as is possible. It should also, in an almost natural way, provide the documentation and transaction processing as direct fall-outs of the decisions and actions of those active JOC's.

Modularity demands the Military Styled Command & Control Structure. The loose coupling that modularity in the organization, and in the systems, requires a strong bond to ensure that it is operating as expected. This bond is the MCCS. In periods of high growth and rapid change modularity needs the support of the MCCS.

Most importantly we have addressed the scope of this application with the analogy that Langlois uses in architecting these systems. The industry would not hire "two interior decorators" to design and implement 1/2 of a room. Systems, and systems design need to have a more holistic approach. Modules help to define exactly where the user will find what it is that they are looking for. Some of the modules reside in the exclusive domain of the firm, such as the Research Module, and some reside exclusively in the market domain, such as the Petroleum Lease Marketplace Module.

I am recreating the table that I produced after review of some of Langlois' works. This makes the division between the market and the firm as I foresee the JOC being employed. Various elements of the JOC are assigned the responsibility of the market and in other areas, such as research, are assigned the primary domain of the firm.

Construct	Market	Firm
Joint Operating Committee	P	s
Military Styled Command and Control	s	P
Transaction Costs	s	P
Production Costs	P	s
Innovation	P	s
Routine, compliance and accountability	s	P
Research	s	P
Development	P	s
Financial Framework	P	s
Legal Framework	P	s
Cultural Framework	P	s
Operational Decision Making Framework	P	s

P = Primary
s = secondary

So if we take a moment and define some of the modular architecture of this system.

• Partnership Accounting Module,
• Petroleum Lease Marketplace,
• Human & Supplier Resource Marketplace,
• Financial Resource Marketplace,
• Governance & Compliance Module, (a.k.a. Military Command & Control Structure)
• Research Module

These module classifications enable one to begin to see the value of modular thinking. Langlois noted Hayek's comment;

"Abstract symbols and rules can provide a visible information structure that allows individuals to operate effectively on the basis of their more concrete (and hidden) information." p. 16

Those who are within the oil and gas industry can clearly see and determine where each part of their understanding of the industry would fall under. The beginnings of seeing the "hidden" information is already beginning to bear fruit, just with these modules classifications. It is very clear to me where I could find a specific issue, information or opportunity in the appropriate module. This "hidden" data and information is a very powerful concept. These six modules will become the core of the system we are building here. If there are any other modules that you might think of, please comment on it.

Recall a salient point of Langlois regarding private property;

"There is also a flip side. Ownership may not only insulate one from certain kinds of unforeseen change, it may also enable one to generate radical change." p. 25

I read this as being innovation, where the innovation is being generated in the modular architecture that I have laid out? And this is the point, it is no where specifically but innovation is everywhere. The innovations may come from anyone using any of the modules. Innovation is not something that can be defined as a process. It needs however, to be facilitated through the organizational construct that allows the innovators to apply their craft.

Technorati Tags: Genesys, Lanlois, Modularity, Military-Command, Summary

Mission possible?

In this FastCompany article written by J.J. Brazil, a Pulitzer Prize winner, the necessary organizational transition of the FBI is well documented. I intimated the difficulty of the changes that I have proposed in my last article reviewing Professor Langlois' paper. Change within oil and gas is the biggest issue we face in terms of the move to the Joint Operating Committee (JOC). What they are attempting to do at the FBI is completely change the Bureau. That they have the fortitude to deal with these changes in not a question, it will be done. And if the FBI can change as radically as is proposed, this industry, the oil and gas industry, can do it as well. There is no doubt in my mind, and here is why. Billed as possibly the "toughest, most important change effort of our time" the FBI has had to consider some serious questions regarding the September 11, 2001 attacks.

"More than five years after the 9/11 attacks spurred a top to bottom redesign of its mission and culture, the FBI is still battling to change itself - to adapt to the 21st century world of technology and terrorism. It's not just a matter of installing computers, which in any case has proven far from simple. The FBI must address the way its people are hired, managed and trained. It has to fix the way they communicate and the way decisions are made. It has to remedy a balky, hierarchical structure that sometimes thwarts local action."

Later in this article the author notes that the perspective of the Bureau has changed from chasing the crook, to finding the foreign terrorist before he acts. In an era of high technology the FBI is in the stone age when it comes to its technology use. At the time of the 9/11 attacks the FBI were still using non-networked x386 computers. Today is not much better.

"Making change, Kotter observes, comes down to this: understanding the awesome power of tradition. "Leaders underestimate it, and they don't find enough ways to bar the old culture from seeping into the new," Kotter says. "The bigger the organization and the older the organization, the tougher it is."

Thankfully we have a problem of a substantially different scope. Although the size of the FBI's and this systems are in the same league, the issues are almost exactly reverse. In energy we are trying to tie together what until now have been two disparate organizations that barely recognize each other. The hierarchy and the Joint Operating Committee. And move the recognition of how the business operates to the JOC. One that would place the 5 frameworks, the cultural, financial, legal, operational decision making and compliance together. This project from an organizational point of view is a unifying change, not a disruptive change. Although I would agree that the oil and gas industries current hierarchies will find this disruptive, the changes will be surprisingly easy as the employees find more efficient alternative ways of completing their work through this system.

Technorati Tags: Genesys, Organization, Change

Patent Changes

The Supreme Court has made two important decisions in the area of U.S. Patents. (Read the New York Times article by clicking on the title of this entry.) The application of U.S. Patent Law is enforceable only in the United States. Apparently many people were thinking the U.S. Patent was pertinent to other jurisdictions in assessing fees and determining damages. The second decision was the more interesting decision and it pertains to the definition of prior art.

In the past few years, the issuance of software patents has become a bit of a joke. Microsoft and other companies have been filing patents for the most blatant and obvious software advances. The cost of filing a patent escalated and the burden of being awarded a patent went to those with the most money. Now a process and a reasonable standard are in place to challenge many of these patents on the basis of prior art and obviousness. There will be many companies that have been awarded patents that will now have them revoked.

The patent troll is most definitely out of business. Filing for patents on what was prior art, then without making anything new or truly innovative, went after the company that developed the idea first and did not think to file a patent. These trolls were usually successful. Under the old rules they were easily able to be awarded a cease and desist order on the original developer. These types of transactions are now over thankfully and in the area of software patents, hopefully it will make that category extinct. Software Patents are a nuisance and most importantly not necessary. Copyright law can enforce the software code easier then the patents could.

Technorati Tags: Genesys, IP, Innovation, Software

Transition of the generations.

Sun Microsystems have posted on their Sun Executive Boardroom, information that details issues around the Boombers commencing their retirement in five years. As always, click on the title for the article. This is a very interesting article and one that certainly applies to the energy industry. Essentially what it appears to me is a small window of opportunity for the four generations, the Boombers, Gen X, Gen Y and Millennial's to resolve how the industries that are currently managed by the Boombers will get handed over. There are needless to say many problems ahead. That I would point to technology to help is probably the smallest surprise in this entry.

Wow, only one paragraph, didn't think I could do it!

Technorati Tags: Genesys, Organization, Trends, Change

McKinsey on the Environment

McKinsey consulting have prepared an economic summary of the relative costs and opportunities to address the "Global Warming" issue. This study is a global look at the situation and what the different methods will have in terms of success and costs of each method to the overall economy.

Two things I notice in the article is the size of the problem from the point of view of China's and the rest of the third worlds production of CO2. It is difficult to understand how there could be any progress made without those countries actively participating in CO2 reductions. In the Kyoto protocol China and the third world countries are now in compliance, and will be well into the future, without any changes. As these economies expand they may make the "Global Warming Crisis" into a real issue.

The second item that I noted is the cost, if McKinsey's calculations are correct, is less then the amount of insurance. Calculating the cost of insurance, excluding life insurance, the cost to the economy in 2030 is 3.3% of global GDP. Whereas the costs of climate change abatement totals only 0.6% of Global GDP, or 500 billion euros. If that is the cost, then what is the concern? And this last question needs to be questioned, I think.

You may be able to tell that I am skeptic about the impact of CO2. I need to be convinced that the globe is rising in temperature directly as a result of CO2 production. 500 billion euros is a lot of money to waste. It seems odd to me that the temperature on Mars has also increased lately, however, I don't think there is any human involvement in their atmospheres changes. What I am concerned about is we waste time and energy pursuing the wrong factors. Is there not natural phenomenon that can account for this. I would also suggest if you frame each weather oddity as evidence of global warming each night on every news channel around the world, then the distorted view of the climate change people will only be reinforced. How much of the CO2 is attributable to the spectacular volcanoes we have seen in the last 30 years? Humans don't necessarily cause everything on earth.

Much can also be done about the environment through effective and intelligent programs. In the 1980's we were subject to acid rain that was going to wipe out our forests. Maybe we should go back to creating acid rain so that the forests will be eliminated. The CO2 released by forest fires is very large. Prior to that, the ice age was coming back in the 1960's. I think that McKinsey have done a very good job at attempting to quantify the costs of global warming. Based on the understanding that we have today. And I don't doubt that global warming may be a fad that will abate as the acid rain and ice age did.

Technorati Tags: Genesys, McKinsey, Environment, Science

Modularity in Technology, Organization and Society

This is a follow on to the posting of Professor Langlois' recent article "Organizing the Electronic Century". This article was written in August 1999 and contains several valuable ideas. Let me point out first that the topic is something I have discussed in this blog before. Going back to 1984's Dr. Anthony Giddens Constitution of Society" ISBN 0520057287 he notes that people society and organizations move together or there is failure. And Professor Wanda Orlikowski's Model of Structuration notes that technology is part of society. To read the details of these theories in this context please see me previous post. This post may be the longest post that I have made. I would encourage you to read it in its entirety, there are many valuable points and ideas that are documented here.

Introduction
What I have proposed in this project is a system that is designed to operate an industry. Not one that is limited to operate just within a company. The Joint Operating Committee (JOC) by definition dictates this different perspective in order to operate between its member firms. This is a system in which the user is a consultant, an employee of a firm, or member of one the many service companies operating within the industry. In other words anyone who is employed in the energy industry. A tough prospect, and lets not forget a system that implements changes in the ways of life of most of these people mentioned. How could this possibly function as intended? The scope of the application notes the interactions between partners are as dynamic as the industry itself.

I have noted here a technological vision that includes Wireless, IPv6, Java and Asynchronous Process Management. These technologies not only allow the industry to achieve these overall system objectives, they guarantee it. And that is the inherent threat of ignoring these technologies. Although technical risk is part of any software development, the risks associated to this project are mitigated through many new and effective tools, like modularity. Modularity is an important component in dealing with change and complexity and the difficulties they involve.

Professor Richard N. Langlois writes about the elements of "Modularity" with the organization as the primary focus. I will take these theories, apply them to my understanding of oil and gas, and then layer the technologies and how they could be involved in mitigating these risks.

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

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

Modular design of products can lead to the modular design of organizations is highly consistent with my "SAP is the Bureaucracy" thinking. Systems support, and therefore, define organizational structures. This comment by Langlois seems to intimate the same result of the alignment of systems.

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

And lastly Langlois asks why modularity is sometimes seen in the market, and sometimes within the firm. Since we are seeking the boundaries of the firm, we are interested in Modularity in both the market and the firm. Langlois provides an excellent example of modularity's benefits in the following watch maker analogy.

Modularity and Complexity

"Tempus and Hora both make complicated watch-systems from myriad parts, and both are interrupted frequently in their work. Tempus does not design his watches as decomposable systems, so every time he is interrupted and forced to set aside his work, the entire unfinished assembly falls to pieces. By contrast, Hora first builds stable sub-assemblies that he can then put together in hierarchic fashion into larger stable sub-assemblies. Thus, when Hora is interrupted, only the last unfinished sub-assembly falls apart, preserving most of his earlier work. In an evolutionary selection environment, such stability would be be rewarded with survival (Simon 1962 [1981, pp. 200 - 205])." p. 4

"In the end, however, what makes Tempus's unfinished watches unstable is not the sheer number of distinct parts involved. Rather, it is the interdependency among the parts in his design that cause the watches to fall apart." p. 4

"In organizational and social systems - and perhaps even in mechanical ones as well - it is possible to think of interdependency and interaction among the parts as a matter of information transmission or communication." p. 5

In the system description I have proposed, I have described the Petroleum Lease Marketplace, or PLM. The PLM is a Database of the Crown and Freehold leases that are available and issued in a certain geographical region. The PLM will provide access to the leases ownership, royalty obligation and other information that is publicly available. A producer looking for a new partner, lease, or deal could engage other producers within the PLM and have their business relationships recognized in this virtual marketplace. A marketplace where like minded producers, investors and land holders meet to exchange ideas and build relationships that generate oil and gas deals and activity. From within the PLM the details of the prospect would be populated to those producers that shared some common interests. Ultimately, in time these collaborations could lead to a meeting of the minds and facilitate the inevitable agreement, operating and accounting procedures. These items that were negotiated, and the attributes would contribute to forming the initial data elements that will go on to drive other modules within the overall Genesys system.

How can modularity help in this example? Langlois states interdependency and standards are critical components of modularity. With these PLM based transactions we are able to review standard data elements, standard operating and accounting procedures, standards in how the governments issue information. We can also see how these interactions could be carried out. Each producer enters the PLM with only a desire to expand the drilling and production prospects of his firm. The flexibility and modularity of the PLM provides the producers with the system that will document and provide the support necessary to facilitate and complete the transactions as they are conceived by the disparate participants. Once there, the producers are afforded a variety of opportunities that can be codified and begin the documentation process of their deal. Ultimately in a fully operational system, these data elements would provide the necessary transaction processing I have detailed in the Partnership Accounting module.

Langlois now turns to the technology to explain how the modularity of the system can be captured and managed. His use of hardware and software provide strong analogies, and I am concerned that I may hop down a technological bunny trail if I am not careful. Therefore let me note the points that Langlois states, and point the reader to the Java Programming Language for the implementation of this modularity. It is a fundamental underlying concept of the programming language and I will write another specific post to deal with Langlois modularity theories and the technologies.

"At one point, Brooks briefly considers a "radical" alternative proposed by D.L. Parnas, whose "thesis is that the programmer is most effective if shielded from, rather than exposed to the details of construction of system parts other than his own" (Brooks 1975, p. 78). This radical alternative is in fact the strategy of seeking decomposability in the design of the development project and of the underlying software. Parnas (1972) is the inventor of the notion of information hiding, a key concept in the modern object-oriented [Java] approach to computer programming. Programmers had long understood the importance of modularity, that is, of breaking programs into manageable pieces." (Parnas 1972, p. 1056)." p. 6

"Recently, Baldwin and Clark (1997, p. 86) have drawn on similar ideas from computer science to formulate some general principles of modular systems design. The decomposition of a system into modules, they argue, should involve the partitioning of information into visible design rules and hidden design parameters. The visible design rules (or visible information consists of three parts. p. 7

• An architecture specifies what modules will be part of the system and what their function will be.

• Interfaces describe in detail how the modules will interact, including how they fit together and communicate.

• And standards test a modules conformity to design rules and measure the modules performance relative to other modules.

These visible pieces of information need to be widely shared and communicated. But contrast, the hidden design parameters are encapsulated within the modules, and they need not (indeed, should not) be communicated beyond the boundaries of the module." p. 7

Design Processes

Is modularity good for all types of systems and developments? How about Oil and Gas in particular, with a high level of change and in demand as quickly as possible? Is this even a worthwhile objective of systems development? Or would the industry be better off to build a highly interconnected system? Here Langlois makes note of the following;

As usual, however, there is no free lunch. It turns out that modular systems are much more difficult to design than comparable interconnected systems. The designers of modular systems must know a great deal about the inner workings of the overall product or process in order to develop the visible design rules necessary to make the modules function as a whole. they have to specify those rules in advance. And while designs at the modular level are proceeding independently, it may seem that all is going well; problems with incomplete or imperfect modularization tend to appear only when the modules come together and work poorly as an integrated whole (Baldwin and Clark 1997, p. 86)." p. 8

"Under some circumstances, the benefits of modularization may not be worth the cost. For example, a system whose environment never changes may not have to worry much about modularization: Tempus will do as well as Hora if neither is ever interrupted. Systems that develop slowly in slowly changing environments may not acquire, or require, much modularity." p. 8

Makes a lot of sense to me. If I would be as bold to suggest this is also why the majority of the ERP software applications operating in oil and gas fail. Taking the entire industry from a scope and scale basis requires significant application development. The ability of the industry to integrate disparate modules form different vendors, and have them operational in the firm is a large task and difficult to do. The ability to mash these systems into one cohesive ERP style of application have been attempted many times and in many different ways before. The interconnectedness problems originating from the inability of the vendors to standardize on the requirements, data elements and processes. What the industry truly needs is a single vendor solution that addresses the scope and scale of the industry in a modular fashion. One that adopts the industry standards, such as those established through Public Producer Data Model (PPDM), Canadian Association of Petroleum Landman (CAPL), and Petroleum Accountants Society of Canada (PASC) and others. And through a dedicated solutions provider, such as what is discussed and proposed here in this blog, and focused around the JOC. Only then can these associated issues of interconnectedness vs. modularity be addressed.

Encapsulation boundaries.

"In a world of change, modularity is generally worth the costs. The real issue is normally not whether to be modular but how to be modular." p. 11

I can't think of a better reason to employ the one vendor focus, such as is described here. The multi vendor approach to building interconnected system in oil and gas has failed, in any manner of criteria. Langlois' analogy is precisely on point.

"We would think it odd indeed to assign two interior designers each half of a room (von Hippel 1990, p. 410). It makes a good deal more sense either to give each designer a whole room or to give up encapsulation entirely and let the two designers communicate extensively." p. 11

The traditional separation of Production Accounting from Financial Accounting modules by different software vendors is as laughable as the output from the two interior designers being assigned half of a room. One vendor pointing to the other vendors is the favorite game when problems arise. With the oil and gas industry being somewhat stable in terms of change, the vendor finger pointing was tolerable. Now with a dynamic demand rewarding the most innovative, change is the order of the day. How will this vendor strategy fair in this current and future environment?

"For example, the tasks in an innovative development project cannot be partitioned in advance, since knowledge is continually changing. In such a case, the modularization of the system (the development project) has to change continually; moreover the modularization at any point has to take into account the inevitability of re-modularization as learning takes place." p. 11

Social Institutions and Modularity.
Picking up again with the works of Giddens and Orlikowski structuration theory, and a model of technological structuration. What strikes me as being particularly on target here is the discussion around adaptability. Recall also that Sun Microsystems CEO Jonathon Schwartz has written on the positive attributes of adaptability.

Dr. Wanda Orlikowski built upon the Theory of Structuration when she defined her Model of Structuration for Technology. Dr. Orlikowski's model asserts that a fundamental component of society is technology, that technology provides a duality and therefore is a constraint or facilitator to successful advancement of society, people and organizations. Giddens and Orlikowski's background information are directly in line with what Langlois states in this section. It is with great interest of mine that Langlois seems to be of a similar mindset to what has been written in these documents.

"I now want to make the discussion more concrete by considering a particular kind of system; a society. My contention is that the theory of modular systems provides a useful way to look at the theory of social organization and to recast the classic debates in that literature." p. 14

Setting the societal foundations in a modular context makes clear to me the objectives of this research, and software development are attainable and the opportunities prolific. Not just from an individual point of view, but from one that is as broad as society itself. Langlois in this discussion also notes the contribution of externalities. Or economic benefits to society from industry actions.

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

Not only Langlois but Hayek and Smith wrote on this topic.

"More recently, Hayek argued for similar principles in terms that draw even more explicit on the theory of complex systems. Indeed, the benefits of information hiding lie at the base of Hayek's opposition to central planning, which he viewed as a cumbersome non-decomposable system ill-adapted to change. Because of the dispersed and often tacit character of the knowledge individuals must use, he argued, it is not only costly but ineffective to try to construct society as an intertwined system." p. 15

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

The work that we have done with Langlois has been very fruitful to date. We have been able to apply many of his theories to the determination of the boundaries of the firm and of the market, we have assigned roles within the price system of transaction costs and production costs respectively. All of which fully endorse the use of the Joint Operating Committee as the key organizational construct for the market. And there have been other benefits, now modularity provides a conceptual tie in to the technologies we use here. I believe the next quotation of Langlois puts into context the overall value of his research to the work being done through this blog and proposed software development project.

"What makes decentralization economically effective is the possibility of a standard interface that allows the modules to coordinate with one another without communicating large volumes of information. This interface is the price system. "The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned" (Hayek 1945, pp. 526 - 527)"" pp. 15 - 16

and

"Abstract symbols and rules can provide a visible information structure that allows individuals to operate effectively on the basis of their more concrete (and hidden) information." p. 16

Langlois now introduces the effect of property rights. I have asserted in the past the energy industry needs to refocus on new forms of competitive advantage. Specifically the inventory of oil and gas leases are the private property rights that entitle the producer to earn economic rents. In addition, the ability to employ the operational necessities of finding and producing oil and gas are the attributes that are most important to the innovative producer. How those operational necessities are employed innovatively is the producers value add that is not replicable from one producer to the other. Oil and gas leases and operational efficiencies form what I would call an energy innovation strategy, and I have not seen a more compelling, nor indeed, sensible strategy for oil and gas. Outside of these specific tasks of the producer, a less constrained view of how and where they can apply their knowledge most effectively are the benefits that are evident to me.

I have proposed that the go forward revenue stream (outside of the initial development needs) of this software project is an assessment of $X / boe for access and use of the system. If the assessment were $10 / boe / year then the costs to use this system for Encana Corporation (a 700,000 boe / day producer) would total $7 million to access and use the system for all their transactions. The definition of these systems is heavily dependent on the standards making bodies, and the demands of its users providing the direction, and use, of the system. These users being compensated for their time as either employees or independent workers of the innovative producer.

"But when the sphere of property are not well modularized - when property rights are absent, ambiguous, or ill defined - the initial assignment of property rights matter to efficiency. The symptoms of imperfect modularization came to be called transaction costs." p. 17

"Imperfect modularization came to be called transaction costs." Recall that inefficient use of transaction costs support the justification for the firm. This we have learned from Langlois. We have also learned that standards are a critical part of modular architecture, and now that poor property rights affect efficiency of the market particularly, and the firm. This last point being somewhat common sensible, however, from the viewpoint of an oil and gas producer there is no threat, ambiguity, or deficiency with the property rights they hold. This reinforces and promotes the concept of modularity that is sought through these writings in the market structure of the Joint Operating Committee.

"The economic benefits of carving out a protected sphere of authority fall into two broad categories, the concentration of rewards and costs more directly on each person responsible for them," and "comparative advantage effects of specialized applications of ... knowledge in control" (Alchian 1965 [1977, p. 140, emphasis original]). We might call these the incentive benefits and the division of knowledge benefits of property rights. Both are important, even if the first has attracted a disproportionate share of the attention of economists." p. 18

The processing of a "production cost" or market transaction has no substance or value to the oil and gas producer. It is inert, it is nothing, it is based on matter of fact principles that can, and will, never provide the holder with any sustainable competitive or strategic advantage. There is no interpretation, no analysis to determine the correct process, only application of the standards as defined in the agreements and understandings of the JOC. The producer can be provided with this market and firm based transaction processing service through the development of the software described in this blog. The firms "transaction" costs are exclusive to the specific producer, yet highly dependent on the actions of the market. Processing of "transaction costs" has no monetary, tangible, competitive or strategic value either.

New rights will emerge (or old rights will be altered), he argued, whenever exogenous conditions conspire to make the costs of modularization worthwhile. p. 19

With this last comment it is clear to me that the opportunity for the energy industry to offset the production and transaction cost processing burden to the market forces is the appropriate and timely solution to the problems that they are facing. Particularly when it comes to the difficult topic of innovation. Outsourcing is a term that poorly represents these concepts.

Modularity and Organization

The mechanisms that were used to aggregate the property rights of large corporations were the justification of the hierarchy over the past 100 years. It is the 100 years of its dominant form that has made possible the hierarchy. Now IT enables the means to more ideally place the boundaries of the firm at the optimal point, one that is consistent with Langlois theories. As I have indicated here before, the JOC is comprised of like minded producers who are motivated by their financial interest in the property. Achieving consensus is surprisingly not an issue.

"In the property rights tradition, the theory of the firm is simply an application of the theory of the coalescence of property rights. Although it is seldom clearly spelled out, the starting point for analysis is typically a world of completely modular atomistic production: each stage of production consists of an individual who owns the necessary physical capital (tools) and who coordinates his or her actions with other stages of production through arms-length transaction. Why is not all production carried out this way? Coase's (1937) famous answer is that their is a transaction cost to using the price mechanism. If transaction costs are the costs of a bad modularization, what can go wrong with the atomistic modularization?" pp. 22 - 23

What follows is a quotation that deals specifically with the joint ownership represented on the JOC. That in other industries there may have been leakage of externalities, oil and gas has had to deal with these issues since its inception, and have provided the JOC with the means, and importantly the standards, to deal with it.

"This formulation focuses on the incentive aspects of property, and it takes ownership to be equivalent to a claim on residual income (Foss and Foss 1998). Another view, originating as early as Coase (1937, pp. 391 - 392), sees ownership as involving not residual income streams but residual rights of control. Oliver Hart (1989) and his coauthors have lately championed this approach in a series of formal models. Because of uncertainty, no contract can foresee all possible contingencies. Thus there must be a residual right to make decisions in situations not covered by contract. That right is ownership, and ownership should be allocated to the party whose possession of it would maximize the joint surplus of production." pp. 23 - 24

The ownership interest within a property provides many of the attributes of a modular society. Specifically the owner of a property could be completely withdrawn from the operation of his property, and may involve himself in cashing the checks each month. Or, should the need arise, the sphere of influence over his property can be exercised. Langlois notes these rights are inherent in ownership.

"Frank Knight (1921) suggested that comparative advantage might arise if one party possesses the superior faculty of judgement (Langlois and Cosgel 1993). But, ceteris paribus, genuine uncertainty - the prospect of or need for radical change - may by itself call for a consolidation of ownership. Stephen Littlechild provides one example. p. 24

"If I am quite sure what kinds of actions my neighbour contemplates, I might be indifferent between his owning the field at the bottom of my garden and my owning it but renting it out for him to graze his horse in. But once I take into account that he may discover some new use for the field that I haven't yet though of, but would find objectionable, it will be in my interest to own the field so as to put the use of it under my own control. More generally, ownership of a resource reduces exposure to unexpected event. Property rights are a means of reducing uncertainty without needing to know precisely what the source or nature of the future concern will be. (Littlechild 1986, p. 35)" pp. 24 - 25

and

"There is also a flip side. Ownership may not only insulate one from certain kinds of unforeseen change, it may also enable one to generate radical change. I have tried to suggest on a number of occasions that concentrated ownership can overcome what I call the dynamic transaction costs of significant economic reorganization (Langlois 1992b). This is a motive for vertical integration little noticed in the literature." p. 25

This discussion strikes at the heart of the reason for this blog and the proposed software development. The energy industry employs assets that are highly specific, or asset specificity in economic terms. Many participants are involved in a project and all have the property right and title managed by a JOC. These interests are easily divisible with the ability to buy, sell or trade the interests on an open market. Little can be done without the consent of the majority ownership, the percentage of which is defined by the JOC. Other rights and obligations are detailed through the establishment of the JOC and then subsequently through additional agreements, AFE's, Mail Ballots etc. From my non-technical point of view, having change hoisted on the property has been usually welcomed. The major properties are in a constant state of change in order to optimize the resources. This would normally pose a challenge to the management of the property, however, I have to say it doesn't. The JOC is systemic throughout the industry on a global basis. We have all heard of company x getting our of country y for political reasons. This is how the industry operates.

So why is the industry in need of the Joint Operating Committee to be defined as the organizational construct? Because it isn't recognized in its appropriate manner within the software applications that are in use in the industry. The perspective of the ERP vendors is that the corporation needs to file tax returns, SEC requirements, local government legislation's and other statutory and regulatory requirements. The corporation has evolved to the point where the only thing they are managing is these processes. The participation in the JOC's is an engineering and geological focus that are not directly recognized within the organizations systems and procedures. To be specific, the JOC is the legal, the financial, the operational decision making, and cultural frameworks of the industry. These are what drive the business, not the tax and royalty legislation. If we moved the accountability framework and sub frameworks over with the JOC's frameworks, the alignment of these frameworks would enable, greater organizational speed from the Information Technologies that are available today, and greater innovativeness on the earth sciences and engineering fields.

From a modularity point of view, the properties that are owned by the corporation are neatly encapsulated within their own environment. One facility does not leak out any information to another facility that it should not. The staff of the producer are able to move about these modules where and when they are required. A producer would know their access to the areas of which they operate would limit their exposure. Modularity to me is not just a concept that can be implemented in the systems we develop. It is a concept that is applied universally throughout the domains of the industry.

Langlois has these points;

"Jensen and Meckling (1992) agree that the concept of ownership must involve not only the possession of decision rights but also the right to alienate those decision rights. Granting an individual both control and alienability is clearly a more complete modularization than granting control alone, since the owner with alienability needs to engage in less explicit coordination with others to use the asset effectively under all circumstances. In economic terms, it is alienability that solves both the problem of knowledge decentralization and the problem of incentives: the asset may be placed under the control of the person whose knowledge best equips him or her to use it, and alienability disciplines the owners use of the asset by making its value (to which the owner has a residual claim) measurable on a market." pp. 26 - 27

"This is the basic modularization of the market economy. It accords well with the modularization G. B. Richardson (1972) suggested in offering the concept of economic capabilities. By capabilities Richardson means "knowledge, experience, and skills" (1972, p. 888), a notion related to what Jensen and Meckling (1992) call "specific knowledge and to what Hayek (1945) called "knowledge of the particular circumstances of time and place." For the most part, Richardson argues, firms will tend to specialize in activities requiring similar capabilities, that is, "in activities for which their capabilities offer some comparative advantage" (Richardson 1972, p. 888)." p. 27

"So why don't we observe everywhere a perfectly atomistic modularization according to comparative advantage in capabilities - with no organizations of any significance, just workers wielding tools and trading in anonymous markets? We have already seem the outlines of several answers. The older property rights literature, we saw, would insist that the reason is externalities, notably the externalities of team work arising from the nature of the technology of production itself. The mainstream economics of organization is fixated on another possibility: because of highly specific assets, parties can threaten one another with pecuniary externalities ex post in a way that has real ex ante effects on efficiency (Klein, Crawford, and Alchian 1978; Williamson 1985). Richardson offers a somewhat different, and perhaps more fertile, alternative. Firms seek to specialize in activities for which their capabilities are similar: but production requires the coordination of complementary activities. Especially in a world of change, such coordination requires the transmission of information beyond what can be sent through the interface of the price system. As a consequence, qualitative coordination is necessary, and that need brings with it not only the organizational structure called the firm but also a variety of inter-firm relationships and interconnections as well." pp. 27 - 28

As I indicated in the pre-amble of this entry the theories of Giddens and Orlikowski were consistent with the theories of Langlois in this article. In my thesis I noted that SAP is the bureaucracy and that is generally agreed too. How the industry obtains these benefits being discussed here requires the industry to first develop the software to recognize the organizations that are necessary. I would also at this time note that the failure of industry to act in a prospective manner on developing software. Will leave their organizations susceptible to failure before they have alternatives in place. Whether this is a chaotic or orderly world will be left to the readers imagination.

"Whichever story one chooses, organization (in the broadest sense) arises as a non-modular response to the fact of, or the need for, interactions among the modules. Organization is always a de-modularization and repartitioning that severs the right of alienation from at least some of rights of decision. And, in all cases, the technology of production both causes and shapes the resulting no-modular interconnections." p. 28

Modularity, organization, and technology.

"Sanchez and Mahoney (1996) contend that products design organizations. In a sense, however, this is a variant on what the mainstream economics of organization has long believed: production processes design organizations. If the production process requires team production or calls for highly specific assets, a non-modular structure ("hierarchy") is in order; otherwise, a modular structure ("the market") is more appropriate." p. 28

The energy industry is a unique business. An industry that operates with the full cooperation of the other producers. Others producers are necessary to aggregate a land position, process production, or to meet regulatory requirements. As a result it has established a variety of non-profit organizations that define the operations and procedures. The JOC is the means for the industry to meet these requirements. If as Langlois and others say, "production processes design organizations" the JOC should be more involved in the day to day interactions of the producers. If we designate the scope of authority of the JOC as being the "market" and have the software developed to support this classification, it is clear in the writings of Giddens, Orlikowski and Langlois that the performance of the industry would change. For as the JOC is the legal, financial, operational decision making and cultural means of the industry.

Although I have not included much discussion regarding the technology and its role in defining modularity in the oil and gas industry. It is surprisingly close to the writings here of Langlois. Today it can generally be considered that the collaborative technologies are superior to the current methods of meetings, memo's, and snail mail. The business is the efficient discovery and production of hydrocarbons. It truly has nothing to do with the SEC, the Tax authorities or for that matter the shareholders. These are secondary to the primary role of the business. The focus should be on the primary responsibilities and let the secondary requirements flow from the actions of the former. The technology, as has been detailed here by Langlois, enables this.

I hopefully have also laid to rest the concept that the manner of this software development project does not provide any producer with a strategic advantage. The advantage is earned through the competitive and difficult process of acquiring land and establishing commercial hydrocarbons. Generic transaction processing is a requirement of the business, not a strategic or competitive advantage. It's ultimate role should be the deployment of the most efficient methods.

Technorati Tags: Genesys, Modularity, Collaboration, Langlois, Strategy

Photo Courtesy Troels Myrup