Energies importance.

I have a very interesting paper that is being published today. The paper is entitled

"Special Report: On the Precipice: Energy Security and Economic Stability on the Edge."

By Daniel L. Davis

July 17, 2007 (Click on the title of this entry to downlaod the .pdf)

This paper is unique in that it is written by someone who only has an interest from the point of view of how the lack of energy may affect people. Being that he is a Major in the U.S. military provides him with really little first hand knowledge of the energy industry. What prompted him to start researching and writing this paper is unknown, but it he does a spectacular job in framing his concerns, concerns that should be shared by all. In the final part of his paper, Major Davis reflects on many of the governmental failures that have occurred in the 21st century. How these failures reflect that in today's environment there is little in terms of warnings, and if you choose to ignore the warnings, the results can be catastrophic.

I will highlight the key points in Major Davis' paper and tomorrow will have a quick report on the National Petroleum Committee's report.

"That's why it is so critical that we recognize the potential scale of the problem today and take immediate action. As pointed out by Dr. Hirsch, if we begin taking action before the onset of the peak, the damage done and the pain incurred will be mitigated; if we fail to act until production at the wellhead announces the decline has begun, the pain endured will be markedly worse, and the risk of global instability will increase to a dangerous level. Dr. Hirsch clarified the scope of the problem in remarkably clear but sober terms in his February 2005 report when he wrote: p. 17

Mitigation will require an intense effort over decades. This inescapable conclusion is based on the time required to replace vast numbers of liquid fuel consuming vehicles and the time required to build substantial number of substitute fuel production facilities. Our scenarios analysis shows: p. 17

• Waiting until world oil production peaks before taking crash program action would leave the world with a significant liquid fuel deficit for more than two decades.
  
• Initiating a mitigation crash program 10 years before world oil peaking helps considerably but still leaves a liquid fuels shortfall roughly a decade after the time that oil would have peaked.
  
• Initiating a mitigation crash program 20 years before peaking appears to offer the possibility of avoiding world liquid fuels shortfall for the forecast period.
  

The obvious conclusion from this analysis is that with adequate, timely mitigation, the economic costs to the world can be minimized. If mitigation were to be too little, too late, world supply / demand will be achieved through massive demand destruction (shortages), which would translate to significant economic hardship. There will be no quick fixes, Even crash programs will require more than a decade to yield substantial relief." p. 17

"If we are hit with a peak flat footed, having taken none of the mitigating measures recommended in the Hirsch reports, the cost to the United States will be extraordinary by any measure." p. 17

"The Logic for Action"

"No serious scientist, geologist or economist believes that the cheap crude oil upon which our society runs will last forever; all believe it will someday end. Since it is clear that an effective transition will be measured in decades, given that all agree the world has pumped approximately on trillion barrels of oil from the ground thus far, it is an imperative that we begin immediately to analyze, conceive, and then implement a plan to transition to alternatives before being forced to do so as a result of a supply in terminal decline." p. 17

"Impediments to Action"

"In a telephone interview Dr. Campbell made a point to clarify an important fact covering his projection of a 2010 peak: "There's only on thing I can tell you with certainty regarding my assessment: it's probably wrong! The question is, by how much. He explained that because there exists no globally enforceable single standard for reporting individual reserves, each nation and / or oil company is free to choose their own definitions of what they report, and to report whatever numbers supports their economic or political purposes." pp. 17 - 18

"Compulsion for Action"

"After playing out three disruption related scenarios, the group arrived at two key conclusion. In the 2005 report summary Dr. Gates wrote:" p. 20

"First, the economic and national security risks of our dependence on oil - and especially on foreign oil - have reached unprecedented levels. The threat is real and urgent, requiring immediate and sustained attention at the highest levels of government.

Second, if we wait until a crisis occurs to act, the nation will have to few, if any, effective short term remedies. To protect ourselves, we must transcend the narrow interests that have historically stood in the way of a coherent oil security strategy and implement policies that will meaningfully address both the supply and demand aspects of our current oil dilemma." p. 20

"This study was not conducted by some fringe group or obscure participants: it was carried out by individuals with premier levels of education and direct experience serving the government at the highest levels. And yet, despite their stark warnings of our country's vulnerability to reductions in oil supply and their clarion call to action, two years after the publication of this report nothing has been done. Whether the drop in supply comes as a consequence of disruption above ground or as a result of declining supplies below ground, the result on the global economy is the same. It is beyond question that immediate action to mitigates this vulnerability is require. But as hard as it might be to imagine, the threat to the economy may not be the greatest danger we face." p. 20

Dr. Gates of course being the president of Texas A & M, one of the premier engineering schools in the world, and is now Secretary of Defence.

"Unexpected Danger"

"But there is one other significant issue to take into consideration when contemplating the impact of a terminal decline in fossil fuels: the danger to food production." p. 20

"But in fact, without petroleum, we would only be able to produce a fraction of today's crop yields." p. 20

"The report begins by explaining that from the settlement of the US until the 19th Century, virtually all increases to crop production came as the result of increasing the cropland used. But of the quadrupling production since then, it states:" pp. 20 - 21

"As manufacturing developed, production of chemical fertilizers like super phosphates and, later, urea and anhydrous ammonia replaced most fertilizers produced from recycled wastes. Commercial fertilizers provided low cost nutrient to help realize the yield potential of new crop varieties and hybrids (Ibach and Williams,1971). Since 1960, yields per unit of land area for major crops have increased dramatically. For example, average corn yield has increased from 55 bushels per acre in 1960 to 139 bushels in 1994 and average wheat yield from 26 to 38 bushels per acre. If nutrients were not applied, today's crops would rapidly deplete the soil's store of nutrients and yields would plummet." p. 21

"The nutrients cited in the foregoing are almost all petroleum derived. The importance of those inputs was made even more clear in an updated version of the USDA publication in 2003." p. 21

"Large shifts occurred in particular inputs over 1948 - 96. Although intermediate inputs (fertilizers, pesticides, energy, feed, seed, and livestock) as a groups increased 1.42 percent per year over the period energy inputs increased less than 0.9 percent while pesticides increased at nearly 5 percent per year. Synthetic pesticides were just beginning to be used in the late 1940's, but adoption occurred rapidly, and by the early 1970's most acres in major crops were being treated. total pounds of pesticides applied peaked in the early 1980's, and have been relatively stable since then." p. 21

"It is crucial to note that energy inputs increases almost one percent per year, and pesticides increases an average of 5% per year for the 48 years of the study. What would happen if those inputs were suddenly curtailed one to two percent per year? What about a decade later when they were reduced 10 - 20%? 40 - 50%? The 1996 report explicitly stated that if the inputs were not applied, "yields would plummet." When we likewise consider the compounding issues like the impact of decreasing fuel supply to power the irrigation pumps - or fuel for the tractors and combines, the for transport rigs, the delivery trucks, and other declining - fuel supplies issues - it becomes clear that food production would become severely crimped by declining oil production. To further compound the situation, while the production of crude oil declines, the population will continue to rise." p. 21

"Population Effects"

"Consider that from the year zero until 1850 the global population increased from about 300 million to 1.5 billion – an average increase of about 65 million per century.59 From 1850 to 2006, the increase was from 1.5 billion to 6.5 billion – an average of 32 million per year. But in just the 12 years from 1987 to 1998, the population increased from five to six billion for an average of 83 million per year, or 18 million more than previously increased in a century."

"As seen on the below graph,60 the global explosion of population since 1900 has roughly tracked the rise of the oil age, and since the mid 1980s, has exactly mirrored the growth in crude production. Why are these facts significant when discussing peak oil? Because far and away the primary driver for the “Green Revolution” have been its petroleum-based inputs; without these inputs it would be impossible to generate the volume of produce per acre of ground we currently enjoy. If petroleum inputs decline, so too will the ability to produce food, and at a correlation comparable with the ascension." pp. 21 - 22

"Next, notice the graph below depicting the oil depletion curve presented by Dr. A.M. Samsam Bakhtiari, former senior executive at the National Iranian Oil Company, at the International Oil Conference in Copenhagen, Denmark on December 10th, 2003.62 Particularly note the barrels of oil projected for the year 2020 – approximately 55mbd. Now look back up at the World Oil Production and Population graph, and read down the right hand column and find 55mbd, which last occurred in 1985. Next read over to the left hand side of the graph to ascertain what the population was the last time the world saw production of 55mbd: approximately 4.75 billion. Again, note that from 1985 through 2006 the line of population increase and million barrels per day of oil production have been virtually identical. Now lets look forward again to the year 2020." p. 23

"Dr. Bakhtiari projects global production of 55mbd in 2020. Looking back to the UN population projection for the same year we find the expected population is 7.5 billion people – three billion more people to feed as the last time the world produced this amount of oil. I chose this model to demonstrate (though there are many others with similar projections) because of the location of the peak: the year 2006. When one considers that in 2003 Dr. Bakhtiari predicted that the peak would occur in 2006 and at approximately 83mbd – and then combined with the fact that since June of 2004 global production has plateaued at approximately 85mbd63 (more on that in a subsequent section) – his projections of future production must also be given serious consideration." p. 23

"While these facts portend a dire future, a bit of encouragement might be in order: man’s capacity to solve challenging problems. As has been the case since the dawn of mankind, when faced with overwhelming problems, man is capable of great feats: there’s nothing like the prospect of one’s death to focus the mind. There is little doubt that when the reality of the decline of oil begins to soak into the public consciousness, the best efforts of our finest minds, national governments, and billions of dollars of investment will materialize and mitigating solutions will be found. However, even the good news is tempered: the longer we wait to begin that intensive effort and significant investment, the narrower the gap between discovery of the problem and the onset of its consequences." p. 25

"The IEA now expects demand for oil to rise by 1.7 m barrels a day this year compared to last year – an increase of about two per cent.”69 But as shown on the above graph, there has been no increase for almost three years." p. 26

"Less than a month later another Financial Times article reported that a combination of tightening supplies and faster-than-expected depletion in existing fields was causing alarm among many in the oil industry. “In its starkest warning yet on the world’s fuel outlook, the International Energy Agency said ‘oil looks extremely tight in five years time’ and there are ‘prospects of even tighter natural gas markets at the turn of the decade’. The IEA said that supply was falling faster than expected in mature areas, such as the North Sea or Mexico, while projects in new provinces such as the Russian Far East, faced long delays. Meanwhile consumption is accelerating on strong economic growth in emerging countries.”69.4 If demand is increasing faster than expected, supplies are being used up quicker than predicted, and existing oil fields are depleting faster than predicted, it is possible the peak of oil may already have been reached." pp. 26 - 27

"The oil majors (ExxonMobil, Shell, Texaco, etc) do not have to view this process as antagonistic to their interests – though they presently do." p. 29

"Conclusion"

"The consistent factor in all the above was the inability of Government officials at all levels to properly assess the seriousness of the issue when time was available to take appropriate action. Had FEMA Director Michael Brown realized the magnitude of the problems associated with a Category 4 hurricane plunging into New Orleans, he would have mobilized his assets much earlier, in larger volume, and more quickly after the storm than he did; Had George Tenet really believed that Al Qaeda was preparing an attack within the United States, he would not have remained silent when Condoleezza Rice allegedly ignored his warnings; had Donald Rumsfeld listened to those that predicted the US would not be welcomed in 2003 Iraq as liberators but rather opposed as occupiers, he would have put a great deal more effort into Phase IV planning and an entirely different outcome might have played out." p. 30

"But in all cases, key officials grossly underestimated the gravity of the impending problem, even when credible information was given them that argued to the contrary. We are in just such a situation now." p . 32

"Presently there is sufficient information available warning that a problem exists, but too little detailed information upon which decision-makers could act. It is critical, therefore, that the recommendations to conduct detailed analysis previously cited be initiated immediately. We must have the most qualified experts in various fields ascertain the consequences that would occur if the global supply of crude oil began to decline as a result of depletion. Only if our leaders – and the American people – are armed with facts and information can we make the rational decisions necessary to prepare for what lies ahead." p. 32

"It is a documented fact that we failed in adequately preparing for the September 11 attacks; we failed in adequately preparing for the Katrina hurricane; we failed in our appreciation of the difficulty of post-war Iraq: we can not fail to prepare for post-peak oil." p. 32

"In closing, I include the following quotes from two reports issued this year; the first from the latest of the three Hirsch Reports, and the second from the GAO. Both of these reports will be useful to the post-peak commission that will be formed to determine how we so badly missed the warning signs before the onset of the peak. These two reports will be used as evidence that reports were conducted, measures recommended, but no action taken:" p. 32

"Hirsch 2007: It is our sincere hope that readers will look beyond the conflicting forecasts and focus on the consequences of underestimating the enormity of the peak oil problem. Effective mitigation means taking decisive action well before the problem is obvious." p. 32

"GAO 2007: While public and private responses to an anticipated peak could mitigate the consequences significantly, federal agencies currently have no coordinated or well-defined strategy either to reduce uncertainty about the timing of a peak or to mitigate its consequences. This lack of a strategy makes it difficult to gauge the appropriate level of effort or resources to commit to alternatives to oil and puts the nation unnecessarily at risk."p. 32

This leads me to think that if Major Davis can see these points, how come Daniel Yergin can't?

Technorati Tags: Genesys, Failure, Peak-Oil, Yergin, Call-to-action, Vision

Aberdeen has it right.

I want to firstly go back and review what Professor Langlois' said in his ESNIE slides. It is contained in the first slide and I would like to emphasis an important point of it. The quote is;

"He (the master gun maker) purchased material from the barrel makers, lock-makers, sight-stampers, trigger makers, ramrod forgers, gun furniture makers, and if he were engaged in the military branch from bayonet-forgers. All of these were independent manufacturers executing the orders of several master gun-makers. Once the parts had been purchased from the "material makers", as they were called, the next task was to hand them out to a long succession of "setters-up", each of whom performed a specific operation in connection with the assembly and finishing of the gun. To name only a few, there were those who prepared the front sight and lump end of the barrels; the jiggers, who attended to the breech end; the stocker's, who let in the barrel and lock and shaped the stock; the barrel strippers, who prepared the gun for rifling and proof; the hardeners, polishers, borers and riflers, engravers, browner's, and finally the lock-freer's, who adjusted the working parts." Slide no. 1

The individual is the key to the organization of the market. No companies, hierarchies, corporations or bureaucracies. Just individuals and markets. This is how I see the energy industry developing further in the future. More of a movement away from the silo'ed BP, Shell, and Exxon's to rely on the individual capabilities of the market. Certainly there will be BP, Shell and Exxon, however, their ownership and development of their reserve and land base will be their key concern, and how to employ the market towards their objectives will be how they achieve them. They key to their capability will of course be through their participation in the Joint Operating Committee of each property.

What we have here in the barrel maker example is a division of labor that is very fine. And this division of labor would provide the gun making industry with production volumes that would exceed the productive ability of the group of individuals acting independently. A further division of labor is how the oil and gas industry will increase its capability, throughput, and growth necessary for the commodity markets demands.

Reading now from the Economist about the state of affairs in British oil and gas, they note the following regarding the headquarters of Aberdeen.

"Yet even though oil and gas output is declining the local businesses that have sprung up to support it have bright prospects. The North Sea was one of the earliest offshore oil basins to be developed. Many of the technologies needed to produce oil from underwater wells - especially in the difficult, gale prone waters off the British coast - were developed in Scotland. Around 90% of oil industry workers are employed not by the big international companies such as BP or Total that operate the fields but by local businesses."

I want to state, what I see for this software development project is this software being built for the industry that includes Calgary, Houston and Aberdeen. These three centers will provide the European and North American industries with both the supply and demand for energy on a go forward basis. Houston has had a traditionally more global role in the energy business, but I am of the opinion that they have seen their people, assets and capabilities somewhat repatriated through the variety of nationalizations, in Venezuela and Russia, and China and the Arab countries adopting a more progressive attitude. An attitude that they will develop the capabilities to manage their industries for themselves. That American technology is better, but they choose to use their own resources for the long term.

Aberdeen is seen in this example as more capable, as the Economist article points out, in offshore operations, Canada in EOR, Heavy Oil and remote gas, and Houston filling in where its size and capabilities, particularly financially, are required. These three cities will operate in the Atlantic, Pacific, Gulf of Mexico, Mexico, Canada, the U.S. and the Arctic as their base. Versus Russia, China and the Arab countries will co-exist with little or no transfer of knowledge or capabilities between the two disparate groups, yet both will market their commodities to the highest bidders.

As the Economists article best reflects, Aberdeen may be the most able of the three to meet their needs through the "market" and less through the "firm". The latter two cities, Calgary and Houston, needing a more radical reconfiguration towards the market. Markets made up of individuals.

Technorati Tags: Genesys, Firm, Market, Langlois, Cluster, Capabilities, People

Houston we have a problem.

Clicking the title of this entry will take you to the Energy Bulletin's summary of the International Energy Agencies (IEA) report. Much is currently being written about this report as it recognizes the problem the energy industry is facing. For the purposes of this post I will state what my opinion of the situation is.

• Demand is growing due to the effects of globalization.
• Supply is constrained by the nature of the reserves that exist today.
• After almost 30 years of aggressive exploitation of petroleum reserves, current deliverability is not sustainable in the mid and long terms. (We need new discoveries, and lots of them.)
  

The point of this blog is;

1. The energy industry is constrained by the size of its work force. This is a long term problem that will accelerate as time passes and the current brain trust retires.
2. The organizations are driven by the demands of compliance and regulatory regimes. The business of the business, oil and gas, has become the second priority of the bureaucracy.
3. SAP and Oracle build systems that enable producers to move "closer to their customers". This inane statement reflects they, and their software solutions, haven't got a clue about the energy business.
   
4. Systems define the organization. Or as I like to say, "SAP is the bureaucracy". The systems vendors and the bureaucracy have a self defining, symbiotic relationship that has stifled any and all innovation or initiative.
   
5. The management of the industry boasts healthy profits, yet has done nothing to earn them. The profits are 100% attributable to pricing, not management. The profits have enabled management to ignore any concern for the industries health beyond their planned retirement party.
   
6. The earth scientists and engineers need to get to work in earnest to provide the commodity markets demands for energy.
   

I have lived with the implications of saying these things for forty six months. Being ostracized is liberating. I can say this today because I know the current management has had every opportunity to rectify the situation and has chosen to do nothing. They have been given the opportunity to deal with the problems and they have failed in their duty. The IEA report is a summary of this management failure, and it's time for a change.

I propose that we build systems that meet the unique and well established ways of how the industry operates. To build software that aligns the "business" with the legal, financial, cultural and operational decision making frameworks of the industry. The Joint Operating Committee is the natural form of organization for the upstream oil and gas industry. And that is stated on a global basis. This blog has shown the academic and logical support for this concept. The time, as defined by the IEA, is now.

Based on these points I will be preparing a summary of this blog and propose we move forward on the building of these systems. I will publish this document in September 2007. The energy business has fundamentally changed in the last 5 years, its now time to deal wih these changes. To my way of thinking, the only other alternative is to give the bureaucracy and its symbot's, Oracle and SAP, another chance, and that is fundamentally unacceptable.

Anyone that is interested in these ideas can keep up, and participate, with this blog. If you would like a copy of the proposal just email me (paul dot cox at gmail dot com) and I will forward a .pdf when it is published in September 2007.

Technorati Tags: Genesys, Failure, IEA, Software, Call-to-Action

ESNIE update, 5 down 6 to go.

I have now completed the review of the materials for both Professor Sidney G. Winter and Professor Richard N. Langlois. There are a few more documents that I will be reviewing and those are as follows, after that, I will return to the LEM Working Paper series and any other works of Professor Langlois' that I find. The documents that I will be reviewing are;

The first one is a non ESNIE file of Professor Langlois that he co-authored with Professor Paul Robertson of University College in New South Wales in 1994.

• Institutions, Inertia and Changing Industrial Leadership. This document appears to be related to the March 2007 "Organizing the Electronic Century" that I have reviewed.

After that the next review is of Professor Oliver Williamson of the University of Berkeley. His ESNIE presentation was after Langlois' and as Langlois states in his lecture summary, his lecture was a precursor to the lectures of Williamson and Winter.

• I am unable to source the paper that may be the topic of Professor Williamson's lecture. I am assuming that his March 2007 document "Transaction Cost Economics: An Introduction" captures the context of his lecture.

The final review I will do on the ESNIE presentations (2007 Conference) is three documents and one set of slides of Professor Giovanni Dosi. As you may recall, Professor Dosi was the primary source of material for my thesis, which is the precursor or base of understanding of this blog. The documents are listed as; (download them from this site.)

• Hierarchies, Markets and Power: Some Foundational Issues on the Nature of Contemporary Economic Organizations.
• The institutional embeddedness of economic change: an appraisal of the 'evolutionary' and 'regulationist' research programmes. Benjamin Coriat and Giovanni Dosi.
• Institutions and Markets in a Dynamic World. Giovanni Dosi.
• Slides, "Hierarchies, markets and power structures: some foundational issues on the role of institutions."

Technorati Tags: Genesys, Langlois, Winter, Dosi, Williamson

The Sistine Chapel of software.

Time Magazine's comment regarding Apple's new iPhone.

The user interface is crammed with smart little touches — every moment of user interaction has been quietly stage-managed and orchestrated, with such overwhelming attention to detail that when the history of digital interface design is written, whoever managed this project at Apple will be hailed as a Michelangelo, and the iPhone his or her Sistine Chapel.

I don't think Time magazine is known for overstatement, and we will have to wait and see what the final outcome of the iPhone will be. What can be stated today is this software development for oil and gas must implement this level of quality of interface. Nothing less is acceptable.

The days of when Microsoft pretended to emulate the Mac, and provide user interfaces to the bulk of users is over. The amount of time and effort that both Apple and Google spend on the user interface seems over the top for most of their competitors. The user interface is the reason for Google and Apple's success.

Technorati Tags: Genesys, User, Apple, Google, Development, Interface

Langlois ESNIE Slides

Continuing on with our review of the European School on New Institutional Economics conference. Professor Langlois' three ESNIE documents which I have reviewed are referenced here. There is a fourth, his slide presentation entitled "Dynamic Transaction Costs". These appear to be a subset of Lanlgois' University of Connecticut Economics 486 class slides.

On the ESNIE Personal Page Professor Langlois introduces his lecture as;

"This lecture will have two main objectives. First, it will introduce the two principle approaches to the economic organization of the firm: the transaction cost approach and the capabilities or knowledge based approach. The lecture will thus serve as an introduction to the lectures of Oliver Williamson and Sidney Winter. Second as the title suggests, the lecture will set forth the theory of dynamic transaction costs, which one can think of as an attempt to bridge the gap between transaction cost and capabilities approaches."

Firstly, I recommend downloading the file for future reference. There are many worthwhile points in the presentation. Professor Langlois starts with a simple example of a master gun maker in the 19th Century. This example shows how complex and sophisticated markets are, and accurately reflects Adam Smith's division of labor, and the extent of that division in the 19th Century.

On slide number 22 Langlois introduces two different scenarios, "The Visible Hand" of Chandler, and "The Vanishing Hand" of Langlois. Scenario 1 supports Chandlers "Visible Hand" in which "organizations" needed to approach scale. The "management" then used vertical integration to reorganize the capabilities necessary to mitigate the "Dynamic Transaction Costs". (The costs of negotiating, teaching, coordinating etc. through the market.) Slide 28 is where Langlois introduces the second scenario. A scenario that accurately replicates the situation in the energy industry.

Scenario 2

• Creative destruction of existing internal capabilities.

Although I may be the only one declaring the destruction of energy corporations existing internal capabilities, I would find it difficult for anyone to justify a 250% increase in relative activity, with an associated 17% production replacement, a success. I think calling it an "activity" accurately reflects my concern for the long term needs of the energy marketplace.

• Modularity and a high level of external capabilities.

Through my review of Langlois' "modularity" papers (here and here) I have been able to define the necessary software modules that should be built. Modules like the "Resource Marketplace", "Petroleum Lease Marketplace", and "Compliance and Governance" modules. Langlois noted one of the key benefits of modularity was the users ability to clearly see "what" and "how" they could accomplish there needs. And modules also provide interfaces for interaction between these users and other modules.

External capabilities is the primary if not the only method the energy industries acquires its capabilities. These capabilities are accessed by the firms use of contracts. Drilling a well may set in motion up to 100 different vendors operating in various capacities to drill the well for the producer. Little outside of supervision and application of the scientific theory (the key competitive advantage) is conducted by the firm. This was the only viable way in which the industry could have developed, and to facilitate this reality the industry created the Joint Operating Committee, the primary organizational focus of the "market" in this software development proposal.

• Development of institution to support market exchange.

Standards and the culture of the industry have developed as a result of the Joint Operating Committee. Agreements are culturally systemic, data models are standard, accounting and operating procedures are implemented through industry associations dedicated to the unique needs of, one more time, the Joint Operating Committee. As I have claimed and determined in my thesis, SAP is the bureaucracy, organizations are defined and supported by the software systems they use. For the energy industry to move to a more innovative footing requires that the industry make this blog's software development proposal, be made real.

On slides 31 - 34 Langlois introduces his "Vanishing Hand Hypothesis".

"The Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets. But the components of that process - technology, organization, and institutions - change at different rates."

"The managerial revolution was the result of an imbalance between the coordination needs of high throughput technologies and the abilities of contemporary markets and contemporary technologies of coordination to meet those needs."

"With further growth in the extent of the market and the development of exchange - supporting institutions, the central management of vertically integrated production stages is increasingly succumbing to the forces of specialization."

And on slide 35 Langlois notes what I think is the key to the oil and gas' future competitiveness;

"Extent of the market is about learning."

Learning about the changes in the earth sciences and engineering disciplines. Disciplines that are the key competitiveness of the future of the industry. If our knowledge of x is doubling each y years, how will the hierarchy maintain an understanding of the changes in the science. How will the firm innovate and apply these new findings, and in turn assist in the sciences further development?

Finally on the last slide Langlois provides a summary of the three phases of Smith's "Invisible Hand", Chandlers "Visible Hand" and Langlois "Vanishing Hand". Again I recommend reviewing these slide to capture the full extent and significance of these concepts. Therefore, I will not recreate the slide here and only refer to his description in "The Vanishing Hand: The Changing Dynamics of Industrial Capitalism".

"More or less arbitrarily, I have labeled 1880 as the point at which the path crosses the firm-market boundary. This is the start of the Chandlerian revolution. Equally arbitrarily, I label as 1990 the point at which the path crosses back. This is the vanishing hand. Far from being a general historical trend, the managerial revolution - in this interpretation - is a temporary episode that arose in a particular era as the result of uneven development in the Smithian process of the division of labor." p. 56

How much longer will the industry be held captive to the hierarchies management, is the only question I have. It has now been fourty six months since I first proposed these concepts! The necessity to reorganize the energy industry to approach the commodity markets demands for more is clear to me. Doing more "activity" as I have labeled the doubling of drilling activity, may become known as more of the same thing but expecting different results, and runs the risk of not being classified as a failure, but as insanity.

Technorati Tags: Genesys, Langlois, Ideas, ESNIE, Markets, Firm, Failure, Energy

Stanford University Statistical Course

Google video is hosting a statistics course;

"Statistical Aspects of Data Mining (Stats 202) Day #"

This course is being taught by Professor David Mease and is being broadcast on Google video. Click on the title of this blog entry for the URL of the first lecture.

This course provides valuable means of which to automate the processing of data. With most software developments, the amount of data that is produced is high. The ability to review it all in text is impossible without the use of advanced tools available to the developer / advanced user. Logs and stack traces alone will inundate even the most enthusiastic. This statistics course provides hands-on use of the statistical applications of Microsoft Excel and particularly "R". Those that are able to install and use "R" will have distinct advantages over those that are unable to review these large and growing files.

The professor is young and well organized. Using real world data such as Safeway Club cards, and hands on use of the real data within the two applications themselves. He has an entertaining fast paced style.

The time spent in reviewing these course materials and videos will pay large dividends as we move more and more into the IPv6 enabled world that is a fundamental part of the "Genesys Technical Vision". Finding errors and problems may only be able to be sourced through the types of data manipulation discussed in this course. I can assure that in 5 years these types of skills will be as generic as using a spreadsheet and word processor are today.

Technorati Tags: Genesys, Education, Software, Video

China Energy, A Guide for the Perplexed

From The Peterson Institute for International Economics

Written by Daniel H. Rosen, Visiting Fellow, Peterson Institute for International Economics, China Strategic Advisory
and
Trevor Houser, Visiting Fellow, Colin Powell Center for Policy Studies, China Strategic Advisory

This a comprehensive summary of the markets, pricing and use of energy in China. This document provides an insight into many of the anomalies of the Chinese market that provide an understanding about their future demands. I highly recommend downloading this file and keeping it handy for reference in the next few years. Anomalies such as;

• "What's Driving Demand"
  
• Just as the US' energy use is very efficient. "By 2000, Chinese economic activity required two thirds less energy per unit of output than in 1978."
• "Energy consumption grew four times faster than predicted, to over 15 percent of global demand in 2006. (nearly twice as large in absolute terms as forecast in most 2002 estimates.)"
• "Under this scenario (2030), China will account for 20 percent of global energy demand, more than Europe and Japan combined, and easily surpass the US as the largest energy consumer."
• It is assumed that consumption and transport are the big users of energy. "This is not correct. Consumption led energy demand will be the major driver in the future and is already significant in absolute terms, but the main source of today's growth is energy intensive heavy industry."
  
• "The number of passenger vehicles on the roads has doubled since 2002 to more than 25 million, with over 5 million new cars sold in 2006 alone."
• "While the vehicle fleet in China is still less than 20 percent as large as the United States, the gap is narrowing. Based on experience elsewhere, car sales in China are set to grow faster than GDP until income levels reach about $20,000 per capita." (Currently $2,000 / year.)
  
• "For a considerable period therefore we foresee consumption growth as additive to investment, rather than substituting for it."
• "And with several more decades to go before China reaches the urbanization level of Latin America, this secular driver is here to stay awhile."

• "China's Energy Supply Systems"
  
• "As a result, until the mid 1990's was not only able to produce enough energy to fuel its own development, but had enough for export."
• "A number of small bureaucrats try to plan supply while markets are determining more and more of the demand."
• "China's relatively meager proven reserves suggest that annual oil output is near peaking at the current 3.7 million barrels per day."
• "China will not be able to meet its medium term gas needs through LNG alone. A number of potential pipelines from Russia and Central Asia are under discussion, but both the economics and politics of these projects are challenging."
• "With limited reserves and relatively flat domestic production, China now relies on international markets for nearly half of the oil it consumes."
• "For the purposes of our discussion here, the point we wish to emphasize is that the domestic resource endowment and industry structure create a market incentive for Chinese oil companies to expand their upstream portfolios overseas."

• "Global Impacts"
• "China's energy markets and policies, as they exist today, are failing to reliably supply the country's explosive demand growth or adequately address its environmental consequences."
• "Blackouts resulting from poor planning and management in the domestic power sector send ripples through international oil markets."
• If these costs (environmental) right themselves in the years ahead, some heavy industry will no longer be viable in China and global metals and chemicals markets could be shaken up once again as excess Chinese capacity is subtracted."
• "Going from one of Asia's largest energy suppliers to one of the world's largest energy importers in little more than a decade, China is a major force at the margin in global oil, gas and coal trade flows."

• "Conclusion and Policy Recommendations"
• The authors draw four principle conclusion from our study of China's energy situation.
  
• The main energy challenge for China today is the shifting industrial structure of its economy, not factory inefficiency, new air-conditioners or more automobiles. These issues are systemic in nature and thus only China can effectively correct them.
  
• We do not expect China to adequately fix the root causes of its structural over allocation into energy intensive industry in the next decade.
  
• Structural adjustment is necessary but not sufficient to address China's energy issues.
  
• Regardless of how successful Beijing or others are in altering the country's energy trajectory, in 20 years China will likely be the world's largest energy consumer and polluter.
  

"A point of context should be kept in mind when contemplating these recommendations: China is an 800 pound gorilla on the world energy stage that cannot be ignored; but there is a 1,600 pound gorilla in this room too - the United States. Instead of treating that fact defensively, US policymakers might see it as an opportunity. The changes needed on China's behalf seem impossibly ambitious as unilateral adjustments, especially since China feels entitled to follow an industrial path that many OECD nations have trod. Even if progressive Chinese leaders recognize a self enlightened interest in unilateral reform, there exists a natural tendency to focus more on a rival getting off easier than they should than one's own best interest. The necessity for the United States to improve the sustainability of its own energy profile may be by far the most powerful lever it has for impelling change elsewhere: The opportunity for a grand bargain in energy and environment exists to give policymakers in both China and the United States political cover for painful choices."

I think that the energy industry needs to recognize the 800 pound gorilla in the room. I am a staunch believer that the energy challenges we face require the reorganization of the industry to meet these new global realities. China is in direct competition to our way of life. Are we to let the hierarchy whittle away the time that we do have?

Technorati Tags: Genesys, Environment, Energy, China

The Vanishing Hand: the Changing Dynamics of Industrial Capitalism

Continuing on with the review of Professor Richard N. Langlois' submission to the 2006 ESNIE Conference. This article is the third of the four that I will be reviewing and is available for download at this location. My review of the first document was published here, and the second document in this series was reviewed in a series of posts here, here, here and here. The fourth document that will be reviewed in this ESNIE series of Professor Langlois' will be the slide presentation he made at the conference.

In the first of Langlois' four documents "Transaction Cost Economics in Real Time" we learned the Dynamic Transaction Costs were incurred during times of change. The important takeaway was that the Dynamic Transaction Costs would include the software development expenses that will be incurred in the software developments discussed on this blog. That the role of the software vendor would also need to include the learning process of the entire industry. The learning of "what" and "how" it does and needs to do as an industry.

In the second article, we learned of the need for both markets and firms in the makeup of an industry. The definition of production and transaction costs, and that there could and should be appropriate organizational constructs for the market (the JOC) and the firm (the enhanced management role in the Compliance & Governance Module). This paper was written by Langlois in 2002 and begins with the Invisible Hand of Adam Smith, and the Visible Hand of Alfred Chandler.

"In The Visible Hand (1977) and subsequent worlds, Alfred Chandler focused the spotlight on the large, vertically integrated corporation. He did this not merely to chronicle the rise of that institution but also to explain it and give it a prominent place in American economic growth during the last century and a half. The force and originality of Chandler's ideas coalesce in the book's title, a provocation in the direction of Adam Smith (1776). Smith had predicted an increasingly fine division of labor as the response to a growing extent of the market; and, although he was actually quite vague on the organizational consequences of the division of labor, Smith was clear in his insistence on the power of the invisible hand of markets to coordinate economic activity. Chandler's account appears to challenge this prediction: internal organization and managerial authority became necessary to coordinate the industrial economy of the late nineteenth and early twentieth centuries. The visible hand of managerial coordination had replaced the invisible hand of the market." p.2

and

"History is never kind to historicist's, however; and the facts of the last quarter century have made life uncomfortable for those who would project the Chandlerian model into the present. It has become exceedingly clear that the late twentieth (and now early twenty-first) centuries are witnessing a revolution at least as important as, but quite different from, the one Chandler described. Strikingly, the animating principle of this new revolution is precisely an unmaking of Chandler's revolution." p. 2

and

"We are left with the choice of abandoning Chandler or reinterpreting him. This essay takes the latter course. If we take the first reading of the The Visible Hand - that the managerial revolution was an adaptation to particular historical circumstances - then we can explain the organizational revolution of the new economy by embedding Chandler's story within a roomier account that admits of a range of possible historical circumstances. As a byproduct, such a reinterpretation can hope not only to explain the new economy but also to shed light on the organizational changes of the original Chandlerian revolution." pp. 2 - 3

Let the reinterpretation begin. But firstly I would like to re-introduce Dr. Anthony Giddens Structuration Theory and Professor Wanda Orlikowski's Model of Structuration. Recall that Structuration notes that society, organizations and people will move in harmony during periods of change, and if not, failure will be the result. Professor Orlikowski's model asserts that technology is an element of society that "Interaction with technology influences the institutional property of an organization, and this influence is more likely to be reinforcing rather than a transforming one." (p. 235 The Duality of Technology: Rethinking the Concept of Technology in Organization). Which supports my assertion that SAP is the bureaucracy. Lanlgois' comments appear to be reflective of these theories in that they impute a failure may be imminent.

"The basic argument - the vanishing hand hypothesis - is as follows. Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets, much as Allyn Young (1928) claimed long ago. But the components of that process - technology, organization, and institutions - change at different rates." p. 3

It is at this point that I reflect on the conflict between those ideas and the reality of managements response to the ideas surrounding the use of the Joint Operating Committee (JOC). Society and individuals to a large extent have moved on, fueled by the available information technologies. Langlois suggests the following changes to central management.

"But with further growth in the extent of the market and the evolution of institutions to support exchange, the central management of vertically integrated production stages is increasingly succumbing to the forces of specialization. Rather it is an argument that, in a population sense, large vertically integrated firms are becoming less significant and are joining a richer mix of organizational forms." pp. 3 - 4

The consumers energy demands are outstripping supply at a remarkable rate. A decade ago OPEC was believed to be choking back production by 10 million barrels per day. No one today would argue that we are not at full capacity. The market prices are providing ample incentive for the producers to enhance their capacity. And the producers are attempting to increase their production with essentially the same methods that were marginally successful in the past, only at a metric of two and one half times as many wells drilled. Is the numerical increase in the number of wells drilled the solution to the markets demands?

The industry in Alberta is beginning to realize the old methods do not work. Even with today's current commodity prices few companies are able to make any money! Drilling 25,000 wells as they did in 2006,(vs. approximately 10,000 in 1997) replaces only small (in the teens) percentages of the production. Many of the producers have scaled back as a result. (And this situation only applies to the wells drilled today. Production from older fields, drilled under other lower pricing scenarios are of course far more profitable then before.) Has the time and costs to effectively find oil and gas now exceeded the capability of the industry, or is it time to consider different approaches to the problems at hand?

"As in Chandler, secular changes in relative prices attendant on "globalization" (driven by technology or politics) affect economic organization not only directly but also, and perhaps more importantly, indirectly through changes in technology. Production costs matter as much as transaction costs (Langlois and Foss 1999) Moreover, the kind of transaction costs that matter in history are often not those of the Williamson kind but those I have labeled dynamic transaction costs (Langlois 1992b). Costs of coordinating through markets may be high simply because existing markets - or more correctly, existing market-supporting institutions - are inadequate to the needs of new technology and of new profit opportunities. But when markets are given time and a larger extent, they tend to "catch up," and it starts to pay to delegate more and more activities rather than to direct them administratively within a corporate structure." p. 5

And it would be through this fundamental belief in the "Invisible Hand" of the market, that this problem will be corrected in the manner that Lanlgois states. Maybe my expectations of the hierarchy to fall on its sword is the misguided part of my idea. That the opportunity to proceed with these software developments will come from different sources and alternate calls. If the individual can figure out a way to get another 5 bbls of oil per day onto the market through his own innovations, the financial motivation certainly exists for him to do so. Is this the transition that management desires to see?

"The evolutionary design problem."

I feel that I would not stand alone in determining that the energy industry is an advanced state of failure. This I have postulated many times before and suggested it strongly in my original May 2004 document. Failure was a real possibility and today it is in my opinion a reality. The market demand for energy is very high and the commodity pricing continues to escalate. But as much as the consumers disappointment at the pricing, the producers are unable to respond. The suppliers costs have doubled primarily out of excess demand. In addition, the effort necessary to produce a barrel of oil or mcf of gas has also increased. What may have been done with two hours of engineering, and because of the difficulty of the remaining and prospective reservoirs, may now take four hours. When an industry is operating at 100% production and exploitation capacity. And expects that it can double its drilling activity with no requisite changes in the organization or methods of doing so. The commodity prices will escalate as an incentive to bring on the higher capacity. Drilling more wells does not provide a solution to the problems of the industry, just as the Hamster is at risk to fail at the higher speed of the wheel. A new approach is required. A new organization based on one that is optimized to handle the expansion in the earth sciences and engineering disciplines, and innovative on those new findings. An organization that uses the modern information technologies supporting the JOC as the key organizational construct of the market. An organizational model that provides the specialization and division of labor that are necessary for the increase in capacity.

"Industrial structure, then, is really about two interrelated but conceptually distinct systems: the technology of production and the organizational structure that directs production. Industrial structure is an evolutionary design problem. It was one of the founding insights of transaction-cost economics that the technological system does not fully determine the organizational system (Williamson 1975). Organizations - governance structure - bring with them their own costs, which need to be taken into account. But technology clearly affects organization. Like a biological organism, an organization confronts an environment that is changing, variable and uncertain. Also like biological organisms, business organizations differ in the mechanisms they use to process information and to deal with variation and uncertainty. Nonetheless, as James Thompson (1967, p. 20) argued, all organizations respond to a changing environment by seeking to "buffer environmental influences by surrounding their technical cores with input and output components." pp. 6 - 7

Lanlgois goes on to note many of the advantages of this modularization and definition of the boundaries of the firm as follows.

"A decomposable system is one that is cut into pieces or "modularized" in such a way that most interactions (which we can think of as flows of information) take pace within the modules; interactions among modules are kept to a minimum and are regularized through formal "interfaces." One of the prime benefits of decomposability, in Simon's view, is that it allows for greater stability in the face of environmental uncertainty: a single piece can be altered, replaced, or even destroyed with out threatening the survival of the whole. This is already a kind of buffering. Levinthal and March point out that decomposition entails (or at least allows) "loose coupling" between organization units, which effectively simplifies the information - processing problem the organization faces." p. 9

and

"Indeed, I will suggest before long that the decomposition of organization into market can sometimes confer additional buffering benefits well known to economists, notably the ability to spread risks." p. 9

and

"The managerial revolution of the nineteenth century was one solution to the buffering problem, appropriate to its time and place. But it is by no means the only solution industry has found; and it is certainly not the approach toward which the new economy is gravitating." p. 10

I would point to the modular breakdown that I have proposed for the software developments I am writing about. This breakdown of modules was on the basis of Langlois' paper "Modularity and Technology, Organization and Society" and the modularity label containing all the posts on that topic.

"Antebellum Organization." and "The Managerial Revolution"

For purposes of this review there is little in the way of value regarding the "Antebellum" period. Langlois puts this back to the early 1800's or 19th Century and reflects on the ways of progress from an organizational point of view. The one point that he does assert is that the market was more sophisticated then it appeared and the beginning of specialization was a welcomed and possible activity as the populations in Europe and the US began to expand. I would highly recommend downloading the file and reviewing it in its entirety. The section entitled "The managerial Revolution" has been scrubbed for similar reason.

"From scale to scope: the corporate century."

Langlois, through his description of the origins of the organization in the last hundred years, brings up a fascinating quotation from John Kenneth Galbraith.

"Although the problems of buffering high - throughput production have not made much impression on the mainstream literature on government and business, there is a line of thought along the fringes that takes this problems as central. Running roughly from Thorstien Veblen (1921) to William Lazonick (1991), this literature sees it as crucial that managers be insulated from the vagaries of the environment, especially those caused by financial and other markets. Veblen considered financial markets "industrial sabotage." the most eloquent voice in this tradition belonged, however, to John Kenneth Galbraith, whose 'New Industrial State' distilled through hyperbole the essence of the corporate century he could see stretching behind him in 1967. Galbraith takes it for granted that technological change always leads to greater complexity and scale. This complexity and scale requires "planning"; such is the imperative of technology, an imperative that can only grow stronger in the future. Planning means not only the attempt to foresee and prepare for future contingencies but also the removal of transactions from the market to the realm of managerial authority. "If, with advancing technology and associated specialization, the market becomes increasingly unreliable, industrial planning will become increasingly impossible unless the market also gives way to planning. Much of what the firm regards as planning consists in minimizing or getting rid of market influences" (Galbraith 1971, pp. 42 - 43)" pp. 35 - 36

And it is in this description of "planning" that we see the alternative for today's organization. Planning for all contingencies and removal of transactions from markets. Its hard to imagine that Galbraith lived in what we call Western Civilization. The level of planning certainly provided the Former Soviet Union (FSU) with the means to continue on with its form of organization. In my thesis I postulated that the Western methods of organization looked as old and tired as the FSU in the 1980's and therefore should realize a similar history. The logic of supporting the Joint Operating Committee is compelling on its own. These quotations here open a new debate on how the alternatives, that seem to be operated in the organizations today, are truly limited and futile, as I can foresee no alternative to the vision of Galbraith's methods.

"It is perhaps a fitting reward for the hubris this view of planning implies that the not too distant future had in store a picture of technology and organization that would be virtually the diametric opposite of the one Galbraith painted." p. 36

"From internal to external capabilities: the new economy."

So much of what I wanted to comment on begins at this point in Langlios' document. If I should find an audience for the work that I am doing here, it is very evident that it is not sourced from the traditional powers within the corporate community. They have been given plenty of opportunity to act, and indeed have collectively not acted. How then will these remarkable new concepts and technologies influence the organizational manner of the oil and gas industry.

"Ruttan Hayami (1984) have proposed a theory of institutional change that is relevant to my story of organizational and institutional change. As they see it, changes in relative scarcities, typically driven by changes in technology, create a demand for institutional change by dangling new sources of economic rent before the eyes of potential institutional innovators. Whether change occurs will depend on whether those in a position to generate it - or to block it - can be suitably persuaded. Since persuasion typically involves the direct or indirect sharing of the available rents, the probability of change increases as the rents increase. And the more an institutional or organization system becomes misaligned with economic realities, the more the rents of realignment increase." pp. 36 - 37

But of course. It is not the corporation that will fall on their swords but the people who are active in the oil and gas industry. They will be motivated by how they can add value to the process for the betterment of themselves. And as those employees and managers in the organizations today will retire soon to undertake those opportunities for themselves. Literally with the majority of the industry retiring in the next 5 to 10 years, the opportunity for them to keep themselves active and earn a living on top of their retirement funds. That possibility would make their lives very prosperous and full. Accessing this system through the Internet would enable them to work from home, or if they wanted to travel, anywhere there is electricity. When we think of this opportunity with this next quotation in mind, it makes it even more evident that this is the way to go.

"The American corporations mechanisms of environmental control and its charmed life in the 50s and 60s had permitted it largely to ignore ongoing changes in the scale of technology as well as the increasing thickness and realignment of markets. In startling contrast to Galbraith's (rather nineteenth-century) view of technological change, innovation often - and perhaps mostly - proceeds by simplifying and by reducing scale." p. 38

Applying this method of participation "simplifies" and "reduces" the scale of the industry. Markets are what will spring up and make things happen. Does this mean chaos and anarchy for the corporation?

"Driven by the Chandler-Penrose imperative to apply existing managerial skills and other capabilities more widely, the corporation in the 1960's took the idea of diversification to new levels." p. 40

"Conglomerates were assembled from separate firms, with a central headquarters directing the firm. Their widespread use in the 1960's taught managers that it was possible to mix and match corporate divisions. It was only a small leap of an organizational idea for a conglomerate to bring in an outside firm via a hostile acquisition by buying up the target's stock and tucking the formerly independent firm in as one now managed from the conglomerate headquarters. Form there it was only another small mental jump in the 1980's to understand that once the pieces of a conglomerate had been assembled, they could be disassembled as well. (Roe 1996, p. 114)" p. 40

and

"By and large," write Bhagat, Shliefer, and Bishny (1990, p. 2), "hostile takeovers represent the deconglomerization of American business and a return to corporate specialization." p. 41

And, to a large extent we have seen the integrated oil and gas firms fade to the background. The Tenneco's, Canada Development Corporation, Canadian Pacific and Dow Chemicals with extensive interests in oil and gas as well as farm machinery and railroads are broken down, or deconglomerized. The oil & gas firms that are considered integrated today, the Shell's, Exxon's, BP's and Chevron Texaco's are integrated from the point of exploration, exploitation, production, refining and marketing. I could see the latter two, refining and marketing, being further deconglomerized in the future. But this vision of Langlois' goes further then that. Such that my interpretation would be the corporation is the rightful interest owner in a number of JOC's. These firms, in turn, are provided the resources necessary to conduct the exploration, production and exploitation operations through the market. The corporation would also be in compliance with the various legislation and regulatory requirements. And this compliance would be automated to a level where the compliance was a natural fall out of the firm's participation in the market activity. Furthermore, the firm would focus on its key competitive advantage and capabilities, that being the capacity to innovate on the various earth sciences and engineering disciplines. In summary, the firm would be charged with the areas of research, compliance and governance responsibilities.

"As G. B Richardson (1972) pointed out, it is highly unlikely that the various vertical stages of a production process should all call for similar kinds of capabilities. And this is what has happened. "even a cursory examination of the industrial system of the United States in the 1990's reveals organizational patterns that look not at all like the modern corporation," writes Timothy Sturgeon." pp. 41 - 42

"If what we see today seems to have little relation to the ideal type of the modern corporation, there may be good reason. Perhaps the American industrial system has begun to adapt to the new, more intense global competitive environment that triggered the competitive crisis in the first place. Perhaps we are witnessing the rise of a new American model of industrial organization, and not simply the resurgence of the old (Sturgeon 2002, p. 454)" p. 42

And to a large extent, that is the point. Change driven by the need for higher productivity, a forced reduction in human resource availability, and greater financial returns through lower costs. These are the practical issues the industry will be faced with. Will the model of today's corporation meet these needs and demands?

"Decentralization implies an ability to cut apart the stages of production cleanly enough that they can be placed into separate hands without high costs of coordination; that is to say, decentralization implies some degree of standardization of "interfaces" between stages. In an extreme - but far from rare - case, standardized interfaces can turn a product into a modular system (Langlois and Robertson 1992)." p 46

Lanlgois' discussion of modularity rings a strong note of truth with respect to the proposed modular structure of this software application. Looking at the competitive choices (Only Oracle is 'in' the market) their modular breakdown shows how the past model of industrial organization is supported, defined and constrained within their modular description. Comparison of these two software definitions reflect the fundamentally different worlds of which they operate in. There will be no JOC or market in the Oracle software version, and hence no benefits.

"When a modular product is embedded in a decentralized production network, benefits also appear on the supply side (Langlois and Robertson 1992)." p. 47

and

"Moreover, because it can generate economies of substitution (Garud and Kumaraswamy 1995) or external economies of scope (Langlois and Robertson 1995), a modular system is not limited by the weakest link in the chain of corporate capabilities but can avail itself of the best modules the wider market has to offer. Moreover, an open modular system can spur innovation, since, in allowing many more entry points for new ideas, it can create what Nelson and Winter (1977) call rapid trial and error learning. From the perspective of the present argument, however, the crucial supply side benefits of a modular production network is that it provides an additional mechanism of buffering." pp. 47 - 48

"Transaction costs and the new economy."

It would be difficult to effectively argue that transaction costs and dynamic transaction costs (those that are incurred during times of change), of negotiating, persuading, coordinating and teaching have not been a large part of the oil and gas industry for many years. The capital intensive nature of the industry requires relatively few head office staff, key field personnel and almost all operations conducted through contracting. This software system does not therefore ask for radical change. It asks that we should align ourselves more clearly with the manner in which the industry is run. The JOC, the contractors and suppliers are how the industry develops and commercializes its latest land acquisition and scientific theory. None of the competitors of this software development proposal even partially recognize these facts. So when the discussion of whether the industry should make or buy, the buy decision is almost unanimously taken. It would be a fool who would attempt otherwise.

"In his famous 1937 paper, Coase had argued that transaction costs drive the make-or-buy decision; thus, since the Internet has reduced transaction costs, Coase had effectively predicted a principal feature of the new economy: the increasing devolution of transactions from firms to markets. Of course, what Coase actually said is that the scope of the firm is determined in Marshallian fashion at the margin: the firm will expand (in terms of number of activities internalized) until the costs of internalising one more transaction just balance the costs of an equivalent transaction on the market." p. 51

The concepts that originated in the minds of the software developers for SAP and Oracle were different then what has been stated here. I believe that whatever that vision may have been, for oil and gas it is misguided as it does not recognize the unique nature of the business. The unique nature of the industry had developed solutions to the problems and manner of operation. Those solutions consist of the JOC and the dependence on the market to provide its needs. I can't think of an industry that comes close to the nature of the energy business. Where even a start up may pursue global operations.

Today the technologies involved in the Internet provide the industry with the opportunity to realize the fashion that it operates is unique, and deal with those anomalies in the best Interests of the industry. A dedicated software developer to build the systems that mirror the manner of the industries operations, will enable greater innovation by relying on the marketplace and allowing the innovation to flow from where-ever and whomever.

"The coordination technologies of the industrial era - the train and the telegraph, the automobile and the telephone, the mainframe computer - made internal transaction not only possible but advantageous." It is only with the very recent development of powerful coordination technology - personal computers and broadband communication networks - that markets have been favored. "Because information can be shared instantly and inexpensively among many people living in many locations, the value of centralized decision making and expensive bureaucracies decreases. (p. 147)". pp 51 - 52

The prescription of the software development proposal is not something that can be argued as revolutionary. But in reviewing these papers of Lanlgois' it is important to remember that he is discussing all industries and all businesses. For oil and gas this prescription is not revolutionary but the results will be.

"Thus the vanishing hand is driven not just by changes in coordination technology but also by changes in the extent of markets - by increasing population and income, but also be the globalization of markets. Reductions of political barriers to trade around the world are having an effect analogous to the reduction of technological barriers to trade in the America of the nineteenth century (Findlay and O'Rourke 2002). Is this a revolution or the continuation of a long - standing trend? Again, the answer depends on one's perspective. My argument is that, just as the American "globalization" after the Civil War was revolutionary in its systemic reorganization of production toward standardization and volume, the new era is revolutionary in its systemic de-verticalization in response both to changes in coordination technology and to plain-old increases in the extent of markets."pp. 52 - 53

Change is demanded of us from many directions, but particularly the consumers demand for more energy. Whether there is a greater capacity or deliverability is questionable, but even if energy production has peaked, the remaining reserves of oil and gas are almost exactly equal to what had been produced before. With a 140 year history of providing the world with its energy needs, the industry can look forward to many new innovations, fields and methods of capturing the remaining oil and gas. That although the energy is there it will require the industry to apply much more effort in producing each barrel. The hierarchies attempt in the last 5 years has accelerated the number of wells drilled by a factor of 2.5 times. Impressive. However, only 17% of the production was found, with 33% annual decline rates, the future looks very shallow for this type of activity. For it has failed in any metric you could ask. What the industry appears to be moving towards is a more focused move into the areas of exploration. Exploration in the remote areas with complex politics, logistics and scientific challenges. In order to address these enormous tasks, I believe the industry should require that any and all producers re-organize themselves first. The first bit of good news is the following comments from Professor Langlois.

"In my view, the relationship among coordination technology, transaction costs, and industrial structure remains an open research agenda." p. 54

and

"Over time, two things happen: (a) markets get thicker and (b) the urgency of buffering levels off and then begins to decline. In part, urgency of buffering declines because technological change begins to lower the minimum efficient scale of production. But it also declines because improvements in coordination technology - whether applied within a firm or across firms - lower the cost (and therefore the urgency) of buffering." pp. 55 - 56

It is probably best that I mention that I discovered Professor Langlois' work through him being awarded the Schumpeter Prize. The changes we face are clearly in line with one of Professor Schumpeter's more famous theories, that of creative destruction.

The last article in this four article review of Professor Langlois' ESNIE presentation are his slides. These slides provide an interesting summary of all the concepts that he has generated and reflects the open research agenda that we all face.

Technorati Tags: Genesys, ESNIE, Market, Langlois, Research

Photo Courtesy: David Sifry

Plurality should not be assumed, without necessity.

This quotation is "Occam's razor" which I used as the title of my thesis that this blog is based upon. Click on the title of this entry for the Wikipedia entry.

I've found a few comments that bring about a different perception of where we are in this technologically induced, changing world.

"If we get this wrong, it doesn't matter what else we get right."

I read that for the first time on the Singularity Institute weblog. I found it highly reflective of the times that we live in, and the critical nature of some of today's technologies influence over our future.

Another interesting point was put across by Stanford Professor Paul Romer. Instead of economies being driven by "Land, Labor and Capital," it was now "People, Ideas and Things" that mattered.

And in a critical review of Thomas Friedman's best seller "The World is Flat", Professor Edward E. Leamer states the following.

"The speed at which ideas are exchanged determines the pace of progress."

and

"If you think of humans on Earth as a single thinking organism, then until the 1980's we have been using only about 1/3 of our global brain because 2/3rds of humanity were shut in closets where they couldn't communicate with the rest of us."

And maybe, I am thinking, the future has arrived.

Technorati Tags: Genesys, Plurality, Romer, Ideas

Markets and the Primal-Dual Paradigm

Another Google Video presentation.

The title of this presentation is in line with the current research being done on this blog. Markets in particular are the area that is primarily "new" in determining the boundaries of the oil and gas firm and the markets it operates in. This speaker is well regraded in his work, yet very nervous in his presentation. Although he jumps around a fair amount, I think the areas that he is discussing is something of value in opening the discussion of the algorithms that are needed to be built here. Particularly when we move forward with the software developments.

The topic of discussion is markets, from the context of the algorithms that are used to determine and maintain "General Equilibrium". Much of his work seems to be based on the Nobel Prize winning economists Kenneth Arrow of Stanford University, and Gerard Debreu (deceased) and their 1954 Arrow-Debreu Theorem. The algorithms that will be used in this development will be complex. The complexity is nothing short of what appears like a very large "Manhattan Styled" project. But with the computational power available today, I am certain that it is only a matter of time, and a bit of money too.

The area of research that this presentation opens up is the area of the algorithms for this application. And I would suggest that it does not necessarily need to be discussed extensively at this point, only to be noted and added to the long list of work that needs to be done. The presenter of this material felt that their was a current revolution in the definition of markets. Noting that Google's AdWords was an algorithm of this new revolutionary area, where new "Market Models" are emerging.

If I were to summarize the one hour talk, I would present it in this introductory, yet pertinent, formula.

Total utility of a bundle of goods = equilibrium prices = each buyer gets an optimal bundle of goods + no deficiency or surplus of any good.

A formula that provides an initial understanding of the direction of the work we will need to eventually do in algorithms.

Technorati Tags: Genesys, Development, Market, Algorithms

Steve Job's Keynote Address.

Click on the title of this entry to go to Apple's CEO's delivery of his Keynote presentation to the Apple developers conference.

I am a Mac person, I have never purchased a PC, and thankfully will never have to. The manner in which I work can not be replicated on a Windows machine. I can break the Windows machine within a few minutes and have an inability to move at the PC's induced slow pace. As a result in order to do my work I can achieve more then double the productivity on a Mac. If this is vendor based lock-in, then I admit I am a dupe. Such that I would also recommend everyone discover the advances on the Mac. By purchasing a Mac and using it exclusively for the six months necessary to make the transition from Windows. Most people will experience an increase in their personal, and work, productivity.

The beginning of this process should start with the number one salesman of Apple doing his trademarked presentations. Steve Jobs shows many of the ways that the Apple interface is superior and provides this bump in productivity. The one and half hours to view this video is time well spent, and will provide an understanding of why his products are so different. I highly recommend viewing the presentation and starting on the transition to a Mac as soon as you can.

Technorati Tags: Genesys, Apple, Developer, Productivity

The Software Concurrency Revolution

Another Google video in advanced programming languages. Click on the title to view the video.

Advanced Topic in Programming Languages Series: Effective Static Race Detection
Stanford Professor Alex Aiken

I am certain that I share a concern with many of my potential customers. That concern is of using a "web service" that services the commercial business needs of an entire industry. The concern is that not all the bugs are worked out and as a result things begin to be recorded incorrectly. One of the unique ways in which these bugs could be exposed is by pushing the science further then it has been pushed before. And, taking into consideration, the understanding of how Moore's law is being achieved through threading and multi-core processing that "concurrency" becomes an issue.

A Race Condition is defined as;

"The same location may be accessed by different threads simultaneously without holding a common lock. (And at least one access is a write.)"

Concurrency (Race Condition) is essentially the ability to have one variable overwritten by another unrelated variable and corrupting the data. This has been handled well in the various relational databases with a number of locking scenarios that ensure that the inserts, updates and deletes are done effectively. But what about the memory registers in the program itself. With multi-core and threading enabling multiple reads and writes to those memory registers, how does the program ensure that the ordering of those memory items maintains the programming logic? One particularly nasty point about these bugs is that they may be random, no one is aware of their existence and sometimes they are unique and therefore not re-creatable as other bugs are. How common are they? Professor Aiken said he found 392 race conditions in the open source Derby Database. An open source product originally developed by IBM.

As we progress down this road, and start development, these "race" conditions are of grave concern. These bugs are state of the art in terms of the types of problems that the academic community and developer of the Java Programming Language (Sun Microsystems) are working on. This video discusses this problem and the difficulty in identifying and resolving "race" conditions. Professor Aiken does an excellent job in making it known that identification of race conditions is the tough part, with their resolution very easy from a programmatic point of view.

As the tools, policies and techniques continue to develop we will be spending more time on this critical issue. The need for data integrity is first and foremost in the usability of this system. I trust the majority of these issues will be resolved and rectified when we go into commercial use of this needed software.

Technorati Tags: Gensys, Video, Development, Open-Source, Bugs

Devon Energy gets it.

Speaking to Reuters Global Energy Summit, Devon Energy president John Richels made the following comments.

"We are fairly bullish, we don't see any large amounts of natural gas coming on in the near term."

and

"He said new oil wells being discovered around the world are coming from very complex plays that require considerable skill and expense to produce oil."

Guess the hierarchy will have to redouble their efforts. Oh wait, it can't, it's already at capacity.

Then it must be time to leave the laggards behind.

Technorati Tags: Genesys, Innovation, Engineering, Geology, Failure

Where's Yergin's Response?

Clicking on the title of this entry and it will take you to "econobrowser" for a post mortem on Yergin's comments. Some excellent analysis has been done on the "econbrowswer" blog that puts in perspective the poor, if not comical predictions of one Dr. Daniel Yergin, the alleged number one analyst in the energy business. He's on Maria Bartoroma's speed dial and every other network news anchor.

I am referring to Yergin's comments he made in July 2005. According to him there was to be an unprecedented increase in the productive capacity of the energy industry. Some 16 million barrels per day of additional capacity to an overall capacity of 101 million barrels per day. Not only were these ridiculous predictions, they are in hindsight, the most irresponsible words uttered in the 140 years of the energy industry.

When the rest of the analysts were talking about Peak Oil theory, Yergin was the go to guy for all the press minions who didn't want to share any bad news. Repeatedly he was called upon to give his analysis of how his data, information and knowledge showed that Peak Oil Theory was bunk and that all was fine in the energy industry. As a result, the consumer, investment and business environments have this assumption about this new found capacity to expect from their favorite energy company. These expectations are completely unfounded. The deliverability of the worlds fields are in dire need of support from new fields. Fields that will have to be discovered when people realize the importance of energy in the western lifestyle. (i.e. without it were all dead) A need that has been severely retarded by Yergin's comments.

Today the industry continues to produce 85 million barrels per day and is only down 1 million barrels from its peak in May 2005. The efforts and tasks ahead for the industry are much greater as a result of Yergin's comments. The need is greater and we are 2 years further behind in a very difficult job ahead.

"Econbrowser" made another post today about who the Congress will probably accuse of price fixing the gasoline prices. I hope they find Yergin cowering in the corner of his office, too ashamed to show his face. He has a lot to account for.

Technorati Tags: Genesys, Yergin, Capabilities, Peak-Oil, Failure