Sunday, February 24, 2008

"Democratizing Innovation"

Professor Eric Von Hippel of MIT

There are two free books that help provide an understanding of how People, Ideas & Objects software development project will proceed. And most importantly the role of the Users and Developers involved. The first book is the above titled and can be downloaded from here. The second book "The Future of Ideas" is also down-loadable, and written by Professor Lawrence Lessig of Stanford University.

Professor von Hippel's book documents the means to attain the innovation that we seek. In Chapter 1 he provides a summary of the entire book. This summary provides coverage of the points that I want to make, so lets begin.

Chapter 1

Professor von Hippel starts off with framing the context in which he sees innovation occurring. Defining both User centred innovation vs manufacturer centric innovation. For the purposes of this blog entry, von Hippel's focus on the use of "manufacturers" is consistent with our understanding of oil and gas user based innovation.
Users that innovate can develop exactly what they want, rather than relying on manufacturers to act as their (often very imperfect) agents. Moreover, individual users do not have to develop everything they need on their own: they can benefit from innovations developed and freely shared by others. p. 1
This software development project is global in scope, use of the Joint Operating Committee is the cultural norm throughout the industry. The People, Ideas & Objects project is conceived in the open source model and will provide the Users, developers, and producers with innovations developed elsewhere. I believe this is possible and Professor von Hippel indicates how this is happening.
At the same time, the ongoing shift of product-development activities from manufacturers to users is painful and difficult for many manufacturers. Open, distributed innovation is "attacking" a major structure of the social division of labor. Many firms and industries must make fundamental changes to long-held business models in order to adapt. p. 2
This very point was addressed in my original thesis. Anthony Giddens is currently more famous as an adviser to British Prime Minister Tony Blair, however, in 1984 he published "The Constitution of Society" which introduces his structuration theory. Structuration suggests that people, organizations and society progress at the same rate, any imbalance in one would lead to failure in the others. I had suggested that the energy industries use of the hierarchical organizational model had exceeded its useful life, and indeed was inhibiting both people and society. I think that we are beginning to see and understand the failures that the energy bureaucracies are having on society. Moving to the industry standard Joint Operating Committee is the fundamental change that is necessary to avoid these failures. How these changes are implemented is through a clean break from the old business model.
Innovation user and innovation manufacturer are the two general "functional" relationships between innovator and innovation. p. 3
We need these two types of innovations. One is the systems, developed by its users, that support the innovative energy industry, and in turn support the innovations that need to take place in the earth sciences and engineering disciplines. Professor Giovanni Dosi shows that science is influenced by innovations which in turn leads to new sciences and new innovations. Consumers and producers of innovations may be more a reflection about a point in time rather then an individuals role in the long term. Software systems need to adapt to changes like these. This is what I am setting out to provide to this user community.
In figure 1.1, the increased concentration of innovations towards the right indicates that the likelihood of innovating is higher for users having higher lead user index values. The rise in average innovation attractiveness as one moves from left to right indicates that innovations developed by lead users tend to be more commercially attractive. (Innovation attractiveness is the sum of the novelty of the innovation and the expected future generality of market demand.) p. 4
Who these innovation leaders are is unknown at this time. But as this project continues to achieve mind-share in the energy sector, I think we will begin to soon find out.
Mass manufacturers tend to follow a strategy of developing products that are designed to meet the needs of a large market segment well enough to induce purchase from and capture significant profits from a large number of customer. When users' needs are heterogeneous, this strategy of "a few sizes fit all" will leave many users somewhat dissatisfied with the commercial products on offer and probably will leave some users seriously dissatisfied. p. 5
A drive that I am attempting to lead away from the generic industry software solutions of IBM, SAP and Oracle. The energy industry is too unique to share any similarities to other industries.
The social efficiency of a system in which individual innovations are developed by individual users is increased if users somehow diffuse what they have developed to others. p. 9
Encapsulating the value of today's collaborative Information Technologies.
When we say that an innovator freely reveals information about a product or service it has developed, we mean that all intellectual property rights to that information are voluntarily given up by the innovator, and all interested parties are given access to it - the information becomes a public good. p. 9
This is how the second book "The Future of Ideas" written by Professor Lessig's comes into play. If everyone is only concerned about the access rights to their own ideas this entire community will be eventually reduced to a place where only Lawyers will be happy. The licensing model for this project simply enables the free and unencumbered access to the ideas and intellectual property contained within this project. This is derived through myself granting Users and Developers free access to all of the intellectual property. In turn each User and Developer assigns the rights in their ideas and innovations back to the copyright holder enabling immediate re-distribution of the idea. This is necessary to maintain the free access for all concerned, and, that I have a strong position to assess the energy producers for the appropriate financial resources necessary to pay the Developers and Users to do this work.
Innovation by users tends to be widely distributed rather than concentrated among just a very few very innovative users. As a result, it is important for user-innovators to find ways to combine and leverage their efforts. Users achieve this by engaging in many forms of cooperation. Direct, informal user to user cooperation (assisting others to innovate, answering questions, and so on) is common. Organized cooperation is also common, with users joining together in networks and communities that provide useful structure and tools for their interactions and for the distribution of innovations. Innovation communities can increase the speed and effectiveness with which users and also manufacturers can develop and test and diffuse their innovation. They also can greatly increase the ease with which innovators can build larger systems from inter-linkable modules created by community participants. pp. 10 - 11
I think that this is by far the best method in which this community should be built and achieve what is possible in this time and place. I would challenge anyone to suggest a more effective means of this communities innovations, and avoid the following.
Intellectual property law was intended to increase the amount of innovation investment. Instead, it now appears that there are economies of scope in both patenting and copyright that allow firms to use these forms of intellectual property law in ways that are directly opposed to the intent of policy makers and to the public welfare. p. 12
This discussion is the method that Open Source projects have used in the technology environment. Not all open source projects fall within this category, only what I perceive as the commercially successful ones.
User's ability to innovate is improving radically and rapidly as a result of the steadily improving quality of computer software and hardware, improved access to easy to use tools and components for innovation, and access to a steadily richer innovation commons. Today, user firms and even individual hobbyists have access to sophisticated programming tools for software and sophisticated CAD design tools for hardware and electronic. These information based tools can be run on a personal computer, and they are rapidly coming down in price. As a consequence, innovation by users will continue to grow even if the degree of heterogeneity of need and willingness to invest in obtaining a precisely right product remains constant. p.13
and
I conclude this introductory chapter by reemphasizing that user innovation, free revealing and user innovation communities will flourish under many but not all conditions. What we know about manufacturer - centered innovation is still valid; however, lead user centered innovation patterns are increasingly important, and they present major new opportunities and challenges for us all. p. 17
Thank you Professor von Hippel for noting these key points and the free access to these important concepts in your book. If we miss this opportunity it will not be as a result of a lack of access to the intellectual property.

Professor Lessig has a unique understanding of some of the legal implications of the Internet. I recommend reading his book as a companion to Professor von Hippel's book. Lessig's book provides an understanding of many of the issues and opportunities around intellectual property. I think that the most effective way in which these ideas can be populated and built upon are addressed in Professor Lessig's book, and implemented in People, Ideas & Objects.

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Sunday, February 17, 2008

Why Sun Microsystems is our vendor.

This may be possibly one of the most important technology announcements ever made. (Click on the title of this entry for the article.) If it's not the biggest, I can assure you that it is the largest that I've seen and probably ever will. This announcement tells the current bunch running IT the party is over. Pack your bags your out the guard is changing.

Information Week reports Sun's CEO Jonathon Schwartz states Sun's vision and strategy are now focused on providing support to the start up software firm. In doing so Schwartz expressly calls his current key partner Oracle, the competition.

Schwartz said Sun is repositioning itself as a disruptive software supplier, using freely downloadable open source code to initiate relationships with developers in young Internet companies. With MySQL in its arsenal, Sun has become "an arms dealer" for the next generation of those companies, said Rich Green, the vendor's executive VP for software.

But Sun may find itself offending some communities even as it builds new ones. Oracle is an old partner that has sponsored Solaris sales to customers that want to run the Oracle database. By offering free or low-cost MySQL subscriptions, Sun is now a threat to Oracle's database cash cow. "MySQL will work fine alongside Oracle," Schwartz said in response to an InformationWeek question, "but I prefer to focus on acquiring new customers, not on the competition."

This hurts Oracle. Oracle could see the Open Source writing on the wall and launched a massive takeover of established software vendors. Sun has driven database sales for Oracle for many years. Oracle is now forced to hang its hat on the old generation technologies as the key to their sales growth.

I have documented the two constraints of a software vendor in this blog before. The constraints of code and customers motivate the "established" software vendor to sell the status quo. Change becomes unspeakable in terms of innovation or progress. Old generation software companies had to die in order for change to occur. This has been reflected in IBM's jettison of Qbyte a few years ago. So how does a software vendor compete in this new generation?

As you can imagine the business model has to change, or should I say has changed. Open Source software shows the way. The code base is never settled. It is in a constant state of development. Go to any open source project and you can select any version of the software that you like. The bleeding edge, the alpha, the beta and a few versions of the supported code base in "stable" condition. Innovation doesn't stop, how could the code? The customers demand that the software be reliable and operate as promised in their firm. Any variation needs to be addressed with very specific processes. And no two companies are ever the same. This is where the constant development model meets the reality of the installation and the software User becomes the key in the Open Source community.

To many people in the oil and gas industry, dealing with a start-up on such a large-scale project is not something they thought they would have to do. But how else can you approach such a difficult task as is faced by the energy industry as a whole. Can you continue to live with software that was conceived in Germany for manufacturers? If you believe you can then you know who to call.

Sun's Schwartz has legitimized People, Ideas & Objects as the key to the future generation of IT enabled oil and gas producers. And completely de-legitimized the non Open Source vendor. And in the process has told the Emperor he has no clothes. In my books that is a big announcement.

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Thursday, February 14, 2008

Yesterday's thinking.

Cambridge Energy Research Associates (CERA) are having their annual conference in Texas this week. The CERA / IHS line that a tidal wave of petroleum is about to hit the consumer continues without much basis in fact or reality. Its been too many years of this monotonic claim of theirs to consider the message as valid.

Irrespective of CERA's message, there are those that suggest more spending is needed. I think more spending has been tried by Chevron and others, and also proven invalid. Doing more and more is rarely the right choice. Change is certainly in the air, it is important to note this point in time is an opportunity for new thinking and actions to take place.

As Einstein stated, today's problems are not solved by today's thinking. I think it is reasonable to assume that the earth sciences and engineering disciplines have increased in complexity. As the bar is raised substantially for successful oil and gas exploration and production. Eventually the structured hierarchy, which is inefficiently efficient, will prove to be inadequate to meet the needs of the science and the industry. What is needed is new forms of organization where the science can develop within the organizations, and be used effectively to produce more oil and gas. This challenge has been the key issue that has driven the writings in this blog. The research to determine if the Joint Operating Committee can fulfill this role is proven, at least academically.

The management, and most importantly the system's like SAP and Oracle, have been developed in the old "banking" type thinking of the energy industry. Invest a dollar today, and you'll receive a 10% return on almost a guaranteed basis. This thinking is a product of the excessively low oil and gas prices of the 1980's and 1990's. The business today is more science oriented then the banking orientation can comprehend. The systems that were developed in the past are designed to accommodate the governance and compliance of the SEC, Tax and Royalty regimes. Neither SAP or Oracle recognize the existence of the Joint Operating Committee. Yet the JOC is the legal, financial, organizational decision making and cultural way of the business on a global basis. If we moved the compliance and governance of the bureaucracy to the the four frameworks of the JOC this science and innovation mindset of the industry will be accommodated.

But there are more benefits to be had. With the systems that are available in today's marketplace. And the current population of oil and gas workers. We can organize in ways that have been proven time and again to increase productivity. Adam Smith's Division of Labor is based on his re-organization of a pin making shop. Smith's reorganization of the pin factory rendered 240 times the volume of pin production. Division of labor is also known as the primary method of how economies grow. Further division of labor holds the greatest opportunity for the industry to deal with the age and retirement of the workforce.

The times that we now live in are too complex to move to a new organization without the proper preparations being made. Key to those preparations are the software developments that are built to accommodate these changes. Change must first be implemented in the software, or any unprepared change will be relegated to manual systems. I am in the process of publishing the eleven draft module specifications of the People, Ideas & Objects application. This application is under development here to incorporate these ideas and opportunities.

Ludwig von Mises noted the industrial revolution was the solution to the problem of over-population. We are faced with these same problems today, and I would suggest the Information Technology Revolution will only begin when it is deemed to be the solution to the problem of over-population. For oil and gas, please join me here.

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Tuesday, February 12, 2008

New Module's in People, Ideas & Objects Specification

I have been working on the draft specification of the Petroleum Lease Marketplace Module, which may be finished in as little as one month. A number of ideas were generated by the specification process, and two new modules have been added to the specification. Also, by designating the Accounting Voucher as a module in itself, the specification now includes eleven unique modules.

Recall that all these modules recognize the Joint Operating Committee (JOC) as the cornerstone of the business of oil and gas. These modules adopt the culture that exists today in oil and gas. And reflect what is in the legal, financial, cultural and operational decision making frameworks. These eleven module specifications embrace and extend these four frameworks of the Joint Operating Committee.

The original eight modules were specified and detailed in these blog entries here.

The two new modules that have not been mentioned before are named appropriately "Analytics & Statistics Module" and "Performance Evaluation Module". Just as many may think "what's the difference?" I would answer that the two modules reside in the differing domains of the Firm and JOC. Just as the Research & Capabilities Module and Knowledge & Learning Module are designated to the Firm and JOC. Since my next blog entry will be "A quick summary of where we are at" I will only introduce these three new modules here and follow up with the next posting.

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Thursday, February 07, 2008

Chevron's Reserves

CNN reports that Chevron Texaco's 2007 reserve replacement ratio was only 15% of production. This in spite of $12.2 billion in capital expenditures. Profits of $18.7 billion were attributed to higher prices.

I published my thesis in May 2004. It was based on the hypothesis that "The corporate hierarchical organizational structure is an impediment to progress and most particularly, innovation." and to "Determine if the Industry Standard Joint Operating Committee, modified with today’s information technologies, provides an oil and gas concern with the opportunity for advanced innovative-ness.” Based on the Chevron, BP, Shell and Exxon 2007 annual reports, I believe this hypothesis has now been proven correct. And the industry business model is fundamentally flawed and terminal.

For the past two years I have been writing about these theories and asking "what if" the industry did move toward using the Joint Operating Committee as the key organizational construct? And "how" would these changes affect the industry. From this analysis I have been able to publish the modular breakdown of the People's, Ideas & Objects application, and what is necessary to make this application function for the oil and gas industry.

Amongst the most important needs is the financial resources of the industry to support the users and developers of this application. If now is not the time, when? I would like to think that the work that I did over the past 4 years provides some value for the industry. Particularly from the point of view of giving them a head start on solving their reserve replacement ratios.

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Tuesday, February 05, 2008

I'm not getting this...

BP reports a decline in earnings, and the result is a 5% reduction of their workforce? We saw Shell announce smaller layoffs, but is this how the remnants of the seven sisters will deal with the current energy problems? What will happen next year?

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Wednesday, January 30, 2008

Succeeding at open-source innovation.

An interview with Mozilla Chairman Mitchell Baker.

McKinsey remains very topical with the work that is being done here. In this interview, Mitchell Baker reflects on the successful innovation she has experienced at Mozilla. A Lawyer by training she has been involved with Netscape / AOL / Mozilla for over 10 years.

The interview begins with the focus on Mozilla's participation model. With a staff of 120 and an army of volunteers, each group contributes to the code base, Ms. Baker credits both elements as critical and key to Mozilla's success.

McKinsey asks, "How do you motivate people to contribute to Mozilla, especially after ten years?" Ms. Baker notes the evolution of the browser, its dark side of pop-ups, spam and spyware and the greater conflict that Microsoft brought to the browser arena. And the elimination of gate-keepers in accessing the Internet. If not for Mozilla, Microsoft may have intimidated browser vendors to the point of extinction. These are the reasons that many have joined the Mozilla community and contributed. And;

Second, our product makes a giant difference in the lives of our volunteers, and they take ownership of it. I don't know if you could build this degree of motivation for something that really didn't change people's lives, something that they weren't emotionally committed to. But the number of people who feel that Firefox is partly theirs is very high.
I know this emotional commitment exists within the oil and gas User community.

I want to highlight these comments of Ms. Baker's and draw a parallel to the community that is being built here. No one individual knows all there is about oil and gas. To build a comprehensive system as I have described here needs the diverse and robust community to define it and build the software. I can't think how that can be done without the Users of the software emotionally involved in the manner that Ms. Baker speaks about her volunteers. And as I have stated before, this community has to be financially supported by the oil and gas industry. Both developers and Users need to be, and will be, compensated for their time and efforts.

In answering the McKinsey question "What has been the biggest surprise in the time you've been working at Mozilla? "Ms. Baker states;
That we had exactly what was needed at exactly the right moment. You often see this in start-ups that burst onto the scene and grow dramatically. There's a lot of hard work and smarts, but also some piece of timing is right. Those things, you can't control; you need to be ready.
I hope that I would not be considered presumptuous in stating that I think we are ready. Join me here.

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Sunday, January 27, 2008

It's important to remember.

We have happened upon a time where there is much to be concerned about. Whether it is China, Britain, Australia or South Africa; Oil, Natural Gas, Coal or Gold, many problems are arising that are swiftly affecting the way of life that we have come accustomed to. James Slessinger was the first Energy Secretary in the US and is prescient in his statement that there are only two modes in energy, complacency and fear. As we move from one mode to the other we need to remember a few important points that I have commented on here before.

First as Albert Einstein famously said, "We can't solve problems by using the same kind of thinking we used when we created them." Or, we need to use new and innovative thinking in order to approach a solution to today's problems. That is what I've attempted to do here in this blog and software developments.

Secondly, Professor Carlota Perez has shown us the direction we are heading is towards a much better place. Her long wave economic theories have been written about extensively in this blog. I think her ideas provide sound comfort to the systemic unwinding of these energy market failures.

If we only focus on the problem, and the problem of energy supply shortages is possibly the biggest problem we have ever faced, we will be caught up in an emotional and viscous downward spiral. That is the last thing we need. Please join me here.

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Thursday, January 17, 2008

President Bush in Saudi Arabia

The President's trip to the Middle East gave him the opportunity to ask the Saudi King if he would consider increasing their oil production. The Presidents response was honest and candid and reflected the seriousness of the times that we now find ourselves in. In an exclusive ABC News interview he stated;

"If they don't have a lot of additional oil to put on the market, it is hard to ask somebody to do something they may not be able to do."
In a related story an official of BP Energy was quoted as saying that oil demand would peak before supply. If that is what passes for intelligent discussion at BP. The world is in much more dire of a situation than I thought. BP should be absolutely ashamed of itself.

Anyone, in my opinion, with 10 or more years of oil and gas experience will know intuitively the peak oil situation. Companies like BP appear to choose to lie about it. When this problem becomes "real" and the world in turn asks you what you did about it, you can turn and say you helped to build the systems solution that is documented in this blog. Join me here.

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Wednesday, January 16, 2008

MySQL it is.

Sun Microsystems today announced the acquisition of MySQL database. Therefore this project will move to that database platform. The reasons are fairly straight forward and include;
  • MySQL has the Open Source community fully engaged in its development.
  • MySQL has a feature rich offering proven in both the critical web and enterprise marketplaces.
  • Sun is committed to Open Source. Java with MySQL offers opportunities for further integration.
I also am in receipt of a recommendation from one of the readers regarding the GlassFish Server. Apparently there is a version of GlassFish that is designed for light weight deployments. Named the HK2 (Hundred KiloByte Kernel) it was suggested that this could provide some significant opportunities for the developers to use HK2 on the client side with embedded MySQL.

I have revised the Draft Security & Access Control Module Specification to reflect these changes. The revised specification includes these changes reflected in blue text, and the V2 of the specification is downloadable on the wiki.

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Thursday, January 03, 2008

A test of Hayek's theory of spontaneous order.

I have referenced Professor Russell Roberts on this blog before. He is an economics Professor at George Mason University, and a Fellow at Stanford's Hoover Institute. His best work is available freely through his blog Cafe Hayek, and podcast EconTalk. I highly recommend subscribing to both feeds.

One of the concepts that Hayek developed was "Spontaneous Order". In the last month this blog has morphed from somewhat of an academic exercise of extending the thinking of my thesis, to a project that is actively searching for funds, Users and Developers. Over the past year the number of people who subscribed to this blog grew slowly into a handsome audience.

Since I published the call for action in December, it is clear this community was waiting for me to exercise this change. That I may have been limiting the response is obvious to me now. The numbers of people who share an interest in these writings continues to increase. And I can now see that Hayek's concept of spontaneous order is possible. Professor Roberts provides clarity on the interaction of "spontaneous order."
When we talk about spontaneous order, the adjective is trying to capture the fact that no one is in charge, controlling the economic system - the order we see around us is spontaneous, organic, emergent, rather than controlled, directed or managed.
and
But I've been thinking lately about a different sense of the word spontaneous. It's the ability of the modern economy to deal with our spontaneity as economic actors, or, it's how order re-emerges in the face of our spontaneity as economic actors.
and
What happens when there's an unanticipated, essentially spontaneous change of behavior?
What should spontaneous order mean to Users and Developers? Action! Action not only in proceeding with the development of this software, but also learning what could be done. Action on behalf of the producers to sponsor this development, action on behalf of the Developers to get involved and action for the User groups to form and move forward.

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Wednesday, January 02, 2008

McKinsey on Business Technology Trends.

As we embark on the development of these software modules. The technologies that we are using bring new dimensions and new opportunities to those that use them. Pursuing technology for technologies sake has proven to be a path of disappointment. This doesn't mean they are to be ignored, and I think if they are ignored, then these dimensions, opportunities and possibilities can and will be missed. Each of us should take the time to understand the technologies and apply them in this development in the most creative and value adding way. This is an opportunity for each of us to make this industry as profitable as possible for all concerned. The market, the producers, and the people who will earn their living in applying these software offerings to their day to day businesses.

It is in that vein that McKinsey has and is developing a competitive advantage. The application of technology is a cornerstone of their offering and much can be learned from their perspectives and research. This article, to me, reflects some of the opportunities that exist in today's marketplace. I hope that my readers see how they can capture some of McKinsey's ideas and incorporate them into these software components.

8 Business Technology Trends to watch.

McKinsey starts with noting;
"Technology alone is rarely the key to unlocking economic value: companies create real wealth when they combine technology with new ways of doing business."
Since we are calling for the industry to be re-organized in a manner that explicitly recognizes the Joint Operating Committee (JOC). Recognized as the key organizational construct of the marketplace. A place where the market and firms are well defined and have roles that are actively supported in the software we are building. McKinsey continues with eight trends that I think are very pertinent to the work that we are doing here.

Managing relationships.

1. Distributing Co-Creators

Again McKinsey hits a home run with their first sentence, reflecting the possibilities we have in this time and space.
The Internet and related technologies give companies radical new ways to harvest the talents of innovators working outside corporate boundaries. Technology now allows companies to delegate substantial control to outsider - co-creation - in essence by outsourcing innovation to business partners that work together in networks.
And hence, why we have begun development.
By distributing innovation through the value chain, companies may reduce their costs and usher new products to market faster by eliminating the bottlenecks that come with total control.
Software products that will make the oil and gas producer able to move faster and more innovatively.

2. Using Consumers as Innovators

Users are the consumers of the applications developed here. The Users are the ones who will use the applications to do their job in the most optimal fashion. The tacit knowledge of the industry resides in the people who make it work and get the job done. To exclude them from the development process makes no sense, and here McKinsey captures why.
Consumers also co-create with companies; the online encyclopedia Wikipedia, for instance, could be viewed as a service or product created by its distributed customers.
3. Tapping into a world of talent.

The Users as consumers hold the tacit knowledge and talent necessary to make it valuable. This combination, when aggregated by today's collaborative technologies, can solve any problem in the oil and gas industry. These tools and technologies have to be developed by the Users. And like the developers, compensated for their time and efforts in the development. The use and services of the People, Ideas & Object applications modules must be provided to them free of charge, and that begins here with these software developments. It is the producer who will fund these development costs.
As more and more sophisticated work takes place interactively online and new collaboration and communications tools emerge, companies can outsource increasingly specialized aspects of their work and still maintain organizational coherence. Much as technology permits them to decentralize innovation through networks or customers, it also allows them to parcel out more work to specialists, free agents, and talent networks.
4. Extracting more value from interactions.

And as McKinsey so eloquently states;
As companies improve the productivity of these workers, it will be necessary to couple investments in technologies with the right combination of incentives and organizational values to drive their adoption and use by employees. There is still substantial room for automating transactional activities, and the payoff can typically be realized much more quickly and measured much more clearly than the payoff from investments to make tacit work more effective. Creating the business case for investing will be challenging - but critical - for managers.
Managing Capital & Assets

5. Expanding the frontiers of automation.

The four cornerstones of People, Ideas & Objects technical vision consist of Wireless Networks, Java, Asynchronous Process Management and IPv6. These four technologies combine to provide and enable higher levels of automation in ideas, data and information.
Companies still have substantial head-room to automate many repetitive tasks that aren't yet mediated by computers - particularly in sectors and regions where IT marches at a slower pace - and to interlink "islands of automation" and so give managers and customers [Users] the ability to do new things. Automation is a good investment if it not only lowers costs but also helps users to get what they want more quickly and easily, though it may not be a good idea if it gives them unpleasant experiences. The trick is to strike the right balance between raising margins and making customers happy.
6. Unbundling production from delivery.

The examples cited in the McKinsey document don't necessarily apply to the situation in oil and gas. Unless I am missing some key point here, however, this certainly applies to the joint industry development model proposed in People, Ideas & Objects.
Unbundling is attractive from the supply side because it lets asset-intensive businesses - factories, warehouses, truck fleets, office buildings, data centers, networks, and so on - raise their utilization rates and therefore their returns on invested capital.
Leveraging information in new ways.

7. Putting more science into management.

Studies have shown consistently that the truth lies within the data. Using intuition and luck as the keys to a competitive advantage have been soundly defeated. Education and data analysis has proven superior in making decisions. With more data and information soon to be available, this trend will need to be met with more effective and efficient tools, and, knowledgeable Users who are well equipped with the software they need to do their jobs and make the right decisions.

8. Making businesses from information.

This last point makes it clear how I see many of the Users and Developers of this system will launch new and innovative businesses within the oil and gas market. They will be able to create an ecosystem and environment in which to earn a living from this development and software application. How their relationship with producers may change and where they will find the demand for their skills.
Accumulated pools of data captured in a number of systems within large organizations or pulled together from many points of origin on the Web are the raw material for new information-based business opportunities.
What is possible at this time and age is reflected well in this McKinsey article. It begins the process of discovering what can be done to make oil and gas producers more innovative, and faster at what they do. There are also economic principles that originate with Adam Smith in the 1700's. Economic growth is accelerated by defining ever-greater divisions of labor and organizational models. Join me here.

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Monday, December 31, 2007

Draft - Security & Access Control Module

I am pleased to present to this community the draft of the Security & Access Control Module. This is the first of eight modules that will be developed for People Ideas & Objects. This critical first module will provide the collaborative, security and access enabled components for the remaining seven modules development. This allows people to become familiar with the tools, processes, the means and methods of developing open source software. I am providing copies of the specification in .pdf format. Please download it from the wiki or email me to get a copy.

The process will follow this schedule:

- Open for Community submissions and nominations to Expert Group and Executive Committee until May 30, 2008.

- Final Draft approval by the Expert Group, August 31, 2008.

- Executive Committee Approval, September 30, 2008.

- Commence development October 1, 2008.

Further time-lines and deliver-ables will be specified by the Expert Group.

To participate please review the first section of the Specification entitled "Innovation in oil and gas" and review the Developer and User tasks. The community should then nominate candidates to fill the Security & Access Control Module Expert Group and the Developments Executive Committee. Review of the time-lines and commence development. I will be spending my time securing the financial resources necessary to pay for these developments. Writing the specification for the Petroleum Lease Marketplace Module. Assistance in these would be greatly appreciated.

The purpose of this process is to get as much input as possible. Please do not hesitate to ask questions of myself and the other people who will be joining. Thank you.

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Sunday, December 30, 2007

A picture, and a thousand words.


Unsustainable! That is the only conclusion one can draw from this EIA Chart. Comparing the volumes of BOE (Barrels of Oil Equivalent) discovered to the capital expenditures expended by FRS (Financial Reporting System) companies. No one would want to extend this charts trend out further. Why have oil and gas exploration and development become unsustainable? I believe it is as a result of the engineering and earth sciences underlying the industry have become so complex, and the remaining reserves are skinny and difficult. That an annual acceleration of the amount of engineering and earth science effort needed per barrel of oil is increasing.

I don't believe the increase in the effort of these tasks can be conducted in the thick bureaucracies that have housed the engineering and earth sciences during the cheap energy era. What is required? The answer to that question is very easy and that is; more data, more eyeballs and most importantly exponentially more ideas. Implying a tidal wave of data and ideas will swamp the already constrained capacities of the bureaucratic energy industry. This projects vision of the future considers the increase in the volumes of data and ideas, and provides a solution that enables companies to employ the information and ideas in their optimal fashion.

Whether we call this changing marketplace peak oil, plateau's or valleys is not the point. It is a reality that faces those in the know within the industry. Where are tomorrow's barrels of production going to come from? I think from a lot of difficult and very hard work. My vision of how the industry faces these challenges is through the development of the software described in the archives of this blog. I will be publishing the Security & Access Module specification this week. People interested in this software development project will then be able to see how they can actively participate and make a difference in these systems developments.

There are no short-term solutions today. Just as there are no short-term solutions to climate change. People who need the oil and gas will just have to go without while the industry reorganizes and retools itself for the future. That process starts here with the People, Ideas & Objects software modules. I made the call for sponsorship of this project in mid-December. This call was followed by a similar call from ASPO-USA. Both of these organizations share a few similarities and differences. Both believe the time for their projects to be funded by the industry must begin. ASPO-USA has been a voluntary effort as have my efforts to date in this blog. This too is unsustainable and it is time for these projects to go forward, be funded, organized and built. Does anyone want to continue on with the trends reflected in EIA's chart?

I can't think of two more worthwhile projects for anyone in the energy industry to move forward with. Clearly since 2001 throwing more money at the problem hasn't provided, and never will be, a solution. The first thing we need to do is come up with better methods of organizing ourselves for these future challenges. Join me here in these tasks.

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Thursday, December 27, 2007

Ralph Waldo Emerson

Continuing on with my end of the year tradition, posting one of Ralph Waldo Emerson's works. This year is the "Divinity School Address". Enjoy.

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Tuesday, December 11, 2007

Commercialization 101

Throughout the past three and a half years, the development of the theories surrounding the Joint Operating Committee as key organizational construct, have been developed based on my efforts and resources. To commercialize the development of this software has always been with two key assumptions. Users as principle consumers of the software would always directly and indirectly control the direction and quality of the software. The second assumption was that industry would financially support the development and ongoing needs of the software.

This time has now arrived and it is therefore necessary for industry to begin their involvement with resource commitments to this project. I have documented several dozen calls-to-action that show this type of development will become the mainstream business model. These calls have also included the dire warnings of our energy future from the National Petroleum Council and International Energy Agency.

I am therefore canvassing the producers in the Calgary, Texas and Aberdeen areas for sponsorship of this software development project that I call "People, Ideas & Objects". Sponsorship is open to any company willing to pay the fee of $10,000.00. These funds will go toward the development as I have described in this blog. Those companies that choose not to participate will not have a seat at the table and will be unable to influence the direction of the software, or use it. The past year has seen my time in terms of completing this work evaporate from the scope of this challenge. Any company not participating at this critical sponsorship stage will have difficulty in garnering the future attention of this community.

Contacting me at my email address will commence the process of registering your firm in the sponsorship round. The sponsorship round ends January 15, 2008.

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Thursday, December 06, 2007

YouTube video on Object Capabilities

An report update on the development of the Security & Access Module being developed for People, Ideas & Objects. Of particular note I want to highlight the work of Berkeley Professor David Wagner in the above noted video. (Click on the title for the YouTube video). At one point he indicates that he is very interested in securing alpha users for his research and use of "Joe-e" programming language. I will be emailing him soon and offering this module's development for consideration as an alpha-user of his research.

The Joe-e programming language is an offshoot of the Java Programming Language, just as JavaFX and Groovy are. It incorporates a higher level of "Type Safety" as no "global" or "static" variables are permitted; it is single thread safe and has a number of other enhancements that make it ideal for the development of "Object Capabilities". What are "Object Capabilities" Professor Wagner points to two excellent papers that describe in detail the concepts. I will be reviewing these as both research and development of the module.

Mark Miller "Robust Composition: Towards a Unified Approach to Access Control and Concurrency Control." Johns Hopkins University 2005
and
Jonathon Rees "A security kernel based on the Lambda Calculus" MIT 1995
It will be worthwhile to look at the tie-in that we can make to Professor Carliss Baldwin's work on transactions. Recall the matrix's she introduced in defining the scope of transactions. And how "Vouchers" were how I would implement these elements of the transaction. Object Capability would define the access and concurrency of the interactions between users within that voucher as well.

In the process of this development it has become necessary to define the level of virtualization that is possible and needed for the operations of this application. Virtualization on Solaris provides the ability to have an instance of the OS and associated technology stack operate for one specific user-defined unit. The size of the unit could be the entire application, or I could define the virtualization level that would have each person, company and JOC have a virtualized OS and associated technology stack for each of those units. I would do the latter if it provided an enhanced level of security, and this will be determined through the research of this module.

What I hope to be able to do with Professor Wagner is to define the manner in which we layer the Military Command & Control structure of the Compliance & Governance Module over the Assets, People, Geography, JOC's, Companies, Disciplines etc. Much in the same way that the Military denotes in the "Sgt. 1st Class, Rick Emert, 1st ACB, 1st Cavalry Division, PAO". This definition is necessary for the application and the industry to function. The value and need of the end users to define these elements will be incalculable.

Lastly IPv6 is one of the cornerstones of the Technical Vision that I have put forward for this project. I want to review the impact of that technology on the policies and technologies mentioned in this post. Also, the level of encryption available in the Java Programming Language provides very high security. The cryptography available is well documented here.

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Wednesday, December 05, 2007

Open Office, not the software type.

The SiliconValley.com news (click on the title of this entry for the article) reported on a trend that is occurring at many of the offices in Silicon Valley. Companies such as Cisco, Sun and Intel, have been experimenting and implementing the "Open Office" or cubicle-less workplace. Unlike the cubicle world of before, the Open Office space provides work areas that can be transformed by any of the people assigned to the floor. The motivation for doing this is the company "saves space and money, and encourages collaboration among workers".

On any given day, said Neil Tunmore, Intel's director of corporate services, 60 percent of the company's cubes are empty because people are visiting customers, telecommuting, vacationing or in meetings. Employees work in assigned buildings only three days a week on average and spend 20 of the work hours telecommuting.
and
Already at Sun, about 56% of the workforce, or about 19,900 employees, work without assigned office space.
and possibly the most prescient comment of the article;
"My office isn't a space in a building", Livengood said. "My office is the space where I am."
I think this type of office layout would be ideal for the energy industry. In many of the same ways that the technology companies are experiencing benefits, the energy industry would as well. If we accept the reasoning that each incremental barrel of oil from this point forward will require increasing levels of engineering and earth science effort, then collaboration will be necessary. I wonder how long before employee demands begin to expect these types of working conditions.

According to the article, the companies that have been experimenting with this method of Open Office have experienced substantial savings, productivity increases, quicker decision making, and innovations from the collaborations. Cisco experienced a 40% increase in the number of people they could put on one floor. A savings that could help many of the major cities where oil and gas companies reside, relieve the demand on costly square footage.

The ways and means of work is changing. In oil and gas, using the Joint Operating Committee with collaborative information technologies, supported by a dedicated software development team, new office layouts enabling high levels of collaboration, ah the future.

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Monday, December 03, 2007

McKinsey on the Worlds New Financial Power Brokers

Authored by Diana Farrell, a director of the McKinsey Global Institute and Susan Lund, a McKinsey consultant. I have read many articles of Ms Farrell's and included a review of her October 2003 Harvard Business Review article in my original thesis. I find her articles to be on topic and earth shattering in their accuracy and scope. This article does not disappoint either. The global "money" business is changing rather rapidly. As witnessed by the anticipated losses in the U.S. housing industry, the financial resources that are available globally are jaw dropping. With the kind of money being discussed in this article, globalization faces a very bright future. (Click on the title of this entry for the McKinsey article, free subscription required.)

If as I had suggested here, the global oil and gas industries financial needs were pegged at $32 Trillion, this seems more then possible and well within the realm of reality based on the size of the global financial markets. This then begs the question, how best should the energy industry organize for this future? Should we stay with the structured hierarchy and its close cousin the bureaucracy? I think I'm going to continue looking for like minded people that want to joint me here.

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Sunday, December 02, 2007

Transaction Cost Economics: An Introduction


Professor Oliver E. Williamson, University of California, Berkeley.

It has been a while since I've been able to get back to a normal level of research. If you recall we were had begun a very large review of the "Laboratory of Economics and Management Sant'Anna School of Advanced Studies" or LEM Working Paper Series. This group of papers has many worthwhile documents to review, and our interest in them falls primarily on the topic of innovation, and as an extension to the work we have done in reviewing Professor Giovanni Dosi. We are also the majority of the way through Professor Langlois' works with 26 blog entries so far. And finally we had just completed the 2006 ESNIE conference presentations of Langlois' and Professor Sydney Winter, and were to review a document of Professor Oliver Williamson and a number of papers and slide presentation of Professor Giovanni Dosi. Last but not least I have one more blog entry to complete for Professor Dosi's "Sources Procedures and Macroeconomic Effects of Innovation" which was the cornerstone paper of my thesis. This entry is the sole working paper presented by Professor Williamson at the 2006 ESNIE Conference.

Now back to Williamson's "Transaction Cost Economics (TCE): An Introduction". With this review I hope to show that much of the past history in the oil and gas industry systems development area has been compliance and governance. SEC regulations, Tax Regulations and Royalty Regulations are what consume most of the managements time in an oil and gas company. This compliance focus is the fault, in my opinion, of the software provided to the industry by SAP, Oracle and IBM. The business of the energy business has been ignored, more or less, by the software vendors focus on compliance and governance.

Nonetheless the culture of the industry continued to evolve, with the methods and means of getting the work done existing within the working interest ownership groups. These processes to a large extent were required for the interaction between the oil and gas producers, as represented in the Joint Operating Committee. This area of how the business of the energy business operates has largely been excluded by the competition of this software development proposal. It is this culture of the Joint Operating Committee that is the natural form of organization in oil and gas. If we define the JOC as the key organizational construct, and support it through this software development proposal. The compliance and governance aspects of the producers interests can be automated and actively support the work that is the key and necessary aspects of the business of the energy producer at the Joint Operating Committee.

A few introductory comments from Professor Williamson.

This overview of transaction cost economics differs from prior overviews to which I have contributed in two respect: it presumes little previous knowledge of the transaction cost economics (TCE) literature; and it is organized around the "Carnegie Triple" - be disciplined; be interdisciplinary; have an active mind. It is partly autobiographical on that account. p. 1
As I have discussed elsewhere (2002a), the lens of contract divides into two related branches: public ordering and private ordering. The latter further divides into ex ante incentive alignment (agency; mechanism design, property rights) and ex post governance branches. Although these two are related, TCE focuses predominantly on the governance of ongoing contractual relations. pp. 2 - 3
..."the ultimate unit of activity ... must contain in itself the three principles on conflict, mutuality and order. this unit is a transaction" (Commons, 1932, p. 4). This prescient two sentence statement prefigures the study of governance in two respects: not only does the lens of contract / governance take the transaction to be the basic unit of analysis, but governance is viewed as the means by which to infuse order, thereby to mitigate conflict and realize mutual gains. This is a recurrent theme. p. 3
Hmm, Williamson must have done some work in oil and gas.
The third quotation goes to the importance of economizing, broadly in the spirit of Frank Knight's observation that (1941, 0. 252; emphasis added): "Men in general, and within limits, wish to behave economically, to make their activities and their organization "efficient" rather than wasteful." p. 3
I read this last point as the motivation and manner that people have created the "work-around" between the ERP system and actually getting the job done. Or as I have stated, the natural way of getting things done in the oil and gas business. If we reflect back to the work that Professor Langlois concluded, where the boundaries of the firm and market, taken in the larger scope of defining where the transaction should occur. And the division of labor necessary to achieve the greatest level of efficiency. The balance would appear to be dictated by a fulcrum of innovation, and I am stating that this efficiency and innovativeness can be captured and enabled within this software development proposal. And this is also reflected in the next quotations from Williamson's paper.
Of the various forms that economizing can take, TCE is predominately concerned with economizing on transaction costs - drawing inspiration from Ronald Coase (1937, 1960) in this respect. p. 3
and
Herbert Simon: "Nothing is more fundamental in setting our research agenda and informing our research methods than our view of the nature of the human beings whose behavior we are studying" (1985, p. 303) p. 4
and
Jon Elster's dictum that "explanations in the social sciences should be organized around (partial) mechanisms rather than (general) theories (1994 p. 75 emphasis in original). p. 4
People, Ideas & Objects is the name of this software development proposal. A modification of Professor Paul Romer's Economic Growth theory of "People, Ideas and Things". I think that I have captured some of the brilliance of the work that has been done in the area of organizational economics, and specifically the many ideas in which we are able to stand on the shoulders of.
TCE shares a good deal of common ground with game theory (Kreps, 1999, p. 127), in that the parties to a contract are assumed to have an understanding of the strategic situation within which they are located and position themselves accordingly. TCE nevertheless differs in that contractual incompleteness sets in as the limits on rationality becoming binding in relation to transactional complexity. Also, TCE views governance as a means by which to relieve the oppressive logic of "bad games," of which the prisoner's dilemma is an exemplar. p. 5
Pragmatic methodology

In many ways what I am suggesting with this software development process is that an energy producer do away with their current systems through a long process of atrophy. As this software development initiative replaces the needed functionality and capability to do their work. Using today's new technologies, with an energy industry focused technological vision, and based on the simpler methods of doing "the business of the energy business" through the Joint Operating Committee as the key organizational construct.
Describing himself as a native informant rather than as a certified methodologist, Robert Solow's "terse description of what one economist thinks he is doing" (2001, p. 111) takes the form of three precepts: keep it simple: get it right; make it plausible. Keeping it simple is accomplished by stripping away inessentials, thereby to focus on first order effects - the main case, as it were - after which qualification, refinements, and extensions can be introduced. Getting it right entails working out the logic. And making to a plausible means to preserve contact with the phenomena and eschew fanciful constructions. p. 6
I believe the track that current systems are on is one that leads to a systemic meltdown of both the application (such as SAP) and the client companies. The complexity of operating the systems has already reached an excessive point and the future only sees more of the same technical solutions to the technical problems and the business of the business falls further from the focus of the systems providers.
Solow Observes with reference to the simplicity precept that "the very complexity of real life ... [is what] makes simple models so necessary"(2001, p.111). Keeping it simple requires the student of complexity to prioritize: "Most phenomena are driven by a very few central forces. What a good theory does is to simplify, it pulls out the central forces and gets rid of the rest" (Friedman, 1997, p. 196). Central features and key regularities are uncovered by the application of a focused lens. p. 6
So yes, I am the current author of the idiotic and irresponsible comments of starting over with the systems used in oil and gas. But maybe I am also the first to tell the Emperor he has no clothes. The latter naturally seems more probable from my point of view. And more and more of the users that are being subjected with the types of work-arounds that I have discussed in this blog are beginning to see and appreciate the alternate perspective discussed here. Professor Williamson now emphasizes the need to get this right, and I will assert the role of the user in making, assuring and demanding that these systems are appropriate for the oil and gas producers.
Getting it right "includes translating economic concepts into accurate mathematics (or diagrams, or words) and making sure that further logical operations are correctly performed and verified" (Solow, 2001, p. 112). p. 6
For it is the user, who understands the job at hand and what is required. It is the user that can best define their needs and ensure that what is developed meets those needs. SAP may be able to formulate good software in Germany but their understanding of the geology, engineering and administrative aspects of an oil and gas producers pipeline, drilling, miscible floods and NGL business are very limited. And lastly my primary concern is that large gaping holes in SAP's understanding of the oil and gas business may lead to further operational failures of the type that BP has experienced in the last two years.
Plausible simple models of complex phenomena ought "to make sense for 'reasonable' or 'plausible' value of the important parameters" (Solow, 2001, p. 112). Also, because "not everything that is logically consistent is credulous" (Kreps, 1999, p. 125), fanciful constructions that lose contact with the phenomena are suspect especially if alternative and more veridical models yield refutable implications that are congruent with the data. p. 7
And it is my assertion that SAP would not be able to pass this simple test. To me this software development project should be self evident, and although a bit before its time, the ultimate demand will surface as a result of a failure of "business as usual" to meet the demands of energy consumers. Do we need to prove the failure is real before we proceed with the development of this software?
This last brings me to a fourth precept: derive refutable implications to which the relevant (often microanalytic) data are brought to bear. Nicholas Gergescu-Roegen had a felicitous way of putting it: "The purpose of science in general is not prediction, but knowledge for its own stake," yet prediction is "the touchstone of scientific knowledge" (1971, p. 37). p. 7
Most of my career I have found the contradictions and conflicts within the work I did in the oil and gas industry, frustrating. It was clear why things needed to be done from a systems point of view when the abilities of the technology, and the real constraints of the organizations where evident. When things get stressed to the limits, as I believe they are close too now, will those conflicts and contradictions compel people to deal with these problems as I have done. Where the time, energy and money necessary to start over, pales in comparison to the resource demands necessary to continue on with the futile systems of yesteryear. This reality also considers the sustained inability to increase the organizational performance in terms of time and innovativeness. One that is unable to adopt the ideas prescribed in this blog, based on the advanced research of the Economists we follow. A future where change and innovation within the producer organizations is desperately needed.
Most social scientists know in their bones that theories that are congruent with the data are more influential. Milton Friedman's reflections on a lifetime of work are pertinent: "I believe in every area where I feel that I have had some influence it has occurred less because of the pure analysis than it has because of the empirical evidence that I have been able to organize. p. 8
Be interdisciplinary

Professor Williamson brings the topic of being interdisciplinary to the economist. I would like to add to his list of disciplines the information technologies that are a foundation and enabler of these concepts. The browser's of the Internet have brought sophisticated information to the user. The future Information Technologies see an extension and continuation in the underlying concepts of the Internet. Concepts that are critical to the user to fully understand and comprehend. The list of technologies is too long for the purposes of this blog entry. I would suggest that each individual begin the long-term critical review of the Information Technologies that are available today, and continue with that curiosity / sense of discovery in the future.
The injunction to "be interdisciplinary" actually overstates. The qualified version is this: be prepared to cross disciplinary boundaries if and as this is needed to preserve contact with the phenomena. Being interdisciplinary is conditional, therefore, on a perceived need and is introduced strictly in a pragmatic way. Such conditionality not withstanding, training in one or more of the contiguous social sciences is instructive for all students of economic organization. The pragmatic reason for such training is this: economists who lack an appreciation that some of what is going on out there has non-economic origins will be neglectful of or will misinterpret forces that are responsible for consequential regularities that ought to be taken into account. As hitherto indicated, TCE joins economics with organization theory and selected aspects of the law (especially contract law).
Organization theory

In this next section Professor Williamson ties Transaction Cost Economics (TCE) in with organization theory. The two disciplines fit together and are inherently related. I would point to this software development proposal as evidence of the relationship. Professor Williamson now brings in Human actors as a further related item and clarifying the assumptions about those actions.
Human Actors: Attributes of human actors that bear crucially on the lens of contract / governance are cognition, self-interest, and foresight (where the last can be considered an extension upon cognition). Human actors are described as boundedly rational, by which I mean "intendedly rational, but only limitedly so" (Simon, 1957, p. xxiv). So described, boundedly rational human actors lack hyper-rationality but are neither non-rational nor irrational. Rather, such human actors are attempting rationally to cope. For TCE purposes, the key ramification of bounded rationality for the study of contract is that all complex contracts are unavoidably incomplete. The analytically convenient fiction of complete contracting is thus disallowed. p. 9
and
Self interest is described in a two part way. Routine events are described as benign - in that most people will do what they say most of the time and some will do more. Outliers, however, pose tensions. The spirit of cooperation that facilitates ongoing adaptations to routine disturbance prospectively gives way to a more calculative orientation as the stakes increase. The hazard of opportunism - defection from the spirit of cooperation in favor of the letter of the contract - thus arises. p. 9
and
Boundedly rational human agents who possess feasible foresight will thus attempt to mitigate contractual hazards in cost effective degree, as a result of which the efficacy of contracting is extended over a wider range. Fewer transactions are taken out of markets and organized internally on this account. p. 10
My perception of how this system is built reflects that the oil and gas "market" is the Joint Operating Committee. The bureaucracy, or hierarchy or what remains of it as a result of the changes to the "Military Command & Control" styled structure, is responsible for the "Compliance & Governance" of the market operations, and the "Knowledge & Research Module". I believe the need to move or adapt to this definition is necessary to facilitate the speed and innovativeness that the energy market is now demanding of the producers. Here Professor Williamson suggests two types of "Coordinated Adaptation".
Coordinated Adaptation: Adaptation is taken to be the main problem of economic organization, of which two kinds are distinguished: autonomous adaptations in the market that are elicited by changes in relative prices, as described by the economist Friedrick Hayek (1945), and coordinated adaptations of a"conscious deliberate, purposeful kind" accomplished with the support of hierarchy, as described by the organization theorist Chester Barnard (1938). Conditional on the attributes of transaction, adaptations of both kinds are important - which is to say that TCE examines markets and hierarchies in a combined way (rather than persist with the old ideological divide between markets or hierarchies). Explicating the differential efficacy of alternative modes of governance - whereby markets enjoy the advantage in autonomous adaptation respects, the advantage shifts to hierarchy as transactions pose a greater need for consciously coordinated adaptations, and hybrid modes are a compromise mode that display adaptive capacities of both kinds (albeit in intermediate degree) - is central to a predictive theory of governance. p. 10
I take this to be explicit validation of the boundaries of the firm as determined by the analysis reflected in this blog. And the means and mechanisms to this change is this software development proposal. And I am certain that the power within these ideas have the capacity to exercise these adaptations with or without the current organizations in the oil and gas industry. That is to say I can see building this software in a number of different ways.
Awaiting a demonstration that superior feasible and implementable alternatives can be devised, social scientists need to come to terms with, rather than denounce, unwanted path dependent outcomes. p. 12
Contract Law

A key understanding of the implications of contract law, TCE and markets / firms is made by Professor Williamson.
Whereas the details of firm and market organization are scanted under lens of choice setups, the lens of contract / governance describes each generic mode of governance (market, hybrid, hierarchy) as a distinct syndrome of attributes, each of which differs in incentive intensity, administrative control, and contract law respects. These differences give rise to different adaptive strengths and weaknesses. p. 12
Thus, whereas the contract law of markets is legalistic (corresponds to the ideal transaction in both law and economics, whereby disputes are settled by court-ordered money damages, after which each party goes its own way), hybrid transactions and especially, hierarchical transactions are ones for which continuity is valued. The common view of contract as legal rules thus gives way to the more elastic concept of "contract as framework," where the framework "never accurately indicates real working relations, but ... affords a rough indication around which such relations vary, an occasional guide in cases of doubt, and a norm of ultimate appeal when the relations cease in fact to work." (Llewellyn, 1931, p. 736). p. 13
Not only does TCE hold otherwise, but the contract law differences that TCE associates with alternative modes of governance are among the reasons why governance structures differ in discrete structural ways. p. 14
Obviously the legal profession has dealt with these differences many times. These differences were evident to them, however, now the general population of users within the oil and gas industry will need to recognize these subtle differences. The Compliance and Governance module will have to incorporate these changes. As it is responsible for all three domains (market, hybrid and hierarchy) in terms of how things get done in the industry.

Operationalize

Key to the redefinition of the energy industry is the boundary between the firm and market. It is here where the definition of the market is the Joint Operating Committee begins and ends. No individual is truly an employee of a JOC, they are seconded from the various producers who hold a financial interest. The majority of the work that is conducted is of a large capital nature and specialized type, or, operational and require a finite skill set that is spread out over a number of JOC's. It is the market definition that is the driving element of the energy producer. The JOC is where the business of energy exploration and production is conducted. To support this business with the software development and collaborative information technologies, the market definition can be the driving element in Compliance & Governance.
Ronald Coase's 1937 paper on "The Nature of the Firm" expressly confronted an embarrassing lapse: whereas the distributing of activity between firm and market had been taken as given by economists, the boundary of the firm should be derived from the application of economic reasoning to the make-or-buy decision. pp. 15 - 16
Using this definition of the boundary of the firm, no one would suggest the JOC's of a petroleum producer make the drilling rigs and such used in the industry. Purchasing and using contractors is the only way a producer can effectively operate. This is among the most common sense and application in oil and gas. What has been missing in my opinion, is the compliance and governance frameworks dictating the management time and focus away form the business of the energy business. Compliance and Governance should be automated to the level of what the SEC is implementing in their new XBRL framework. This is the purpose of developing this software, to define the market and firm, Professor Williamson now summarizes these benefits for business in general.
Both the longstanding neglect of transaction costs and ad hoc-uses of transaction cost reasoning were unsatisfactory. What to do? The unmet need was to operationalize the concept of transaction cost, broadly with reference to the four precepts of pragmatic methodology. Addressing the issues in a comparative institutional way with applications to specific phenomena facilitated operationalization efforts. Comparative analysis, moreover, relieves the need to take absolute measures of transaction cost, since the object is to ascertain the factors that are responsible for differential transaction costs as between alternative modes of governance. Efforts that begun in the 1970's continue to this day. As elaborated elsewhere, key operationalizing moves include the following: p. 16
1) Rather than proceed in a fully general way, TCE focuses on specific phenomena, of which vertical integration (the make-or-buy decision) is the paradigm problem. This choice had two advantages: it addresses the puzzle to which Coase (1937) referred; and transactions in intermediate product markets are less beset by contractual complications (such as asymmetries of information, resources, expertise, and risk aversion) than are other transactions. pp. 16 - 17
2) The transaction is made the basic unit of analysis and is thereafter dimensionalized (with emphasis on asset specificity, contractual disturbances (uncertainty), and frequency). p. 17
3) Alternative modes of governance are described as internally consistent syndromes of attributes to which distinctive strengths and weaknesses - in autonomous and coordinated adaptation respects - accrue. p. 17
4) Economizing on transaction cost is taken to the cutting edge, where this is implemented through the discriminating alignment hypothesis, to wit: transaction, which differ in their attributes, are aligned with governance structures, which differ in their cost and competence, so as to effect a transaction cost economizing outcome. p. 17
5) The basic regularities are captured in the simple contractual schema (see the Appendix), to which many other contractual phenomena can be interpreted as variations on a theme. Indeed, any issue that arises as or can be re-conceptualized as a contracting problem can be interpreted to advantage in transaction cost economizing terms. p. 17
6) Empirical test of the predictions of the theory have ensued. By contrast with theories of economic organization that yield few refutable implications and / or are very nearly non-testable, transaction cost economics invites and has benefited from empirical testing. Indeed, "despite what almost 30 years ago may have appeared to be insurmountable obstacles to acquiring the relevant data [which are often micro-analytic and require primary data], today transaction cost economics stands on a remarkably broad empirical foundation" (Geyskens, Steenkamp, and Kumar, 2006, p. 531). There is no question but that TCE is more influential because of the empirical work that it has engendered. pp. 17 - 18
7) Public policy has been transformed by working up the efficiency / inefficiency ramification of TCE for complex contract and economic organization. p. 18
Conclusions

Professor Williamson's paper provides clear and unequivocal support to the ideas of using the JOC as the key organizational construct of the market definition in oil and gas. I would reiterate that the need to develop systems first is a necessary and critical aspect of the ways and means of society and its people function. Holding out, as the industry has done, and denying the validity of the theories that I speak of here will only permit greater failures of the organization on which people and society depend upon. This may seem like an author who is over-reaching in expressing his ideas and views, or maybe not. Your choice.
Although still undergoing development in fully formal modeling respects (Bajari and Tadelis, 2001; Tadelis 2002; Levin and Tadelis, 2004; Tadelis and Williamson, 2007), the combination of semi-formal models (Riordan and Williamson, 1985), diagrams (such as the simple contractual schema), and a widely shared verbal understanding of the logic of discriminating alignment have provided the impetus for the numerous TCE application described elsewhere (Williamson, 1990, pp. 192 - 194; 2005b; Macher and Richman, 2006). Indeed, the move from words to diagrams to mathematical models is what the natural progression contemplates. p. 18
Using words and diagrams I have started the process of building this software brick by brick, and stick by stick. Join me, please.
Headway in the future will be realized as it has in the past - not by the creation of a general theory but by proceeding in a modest, slow, molecular, definitive way, placing block upon black until the value added cannot be denied. It is both noteworthy and encouraging that so many young scholars have found productive ways to connect. TCE, moreover, has benefited from rival and complementary perspectives - especially those that subscribe to the four precepts of pragmatic methodology. Such pluralism brings energy to the elusive ambition of realizing the "science of organization" to which Chester Barnard (1938) made reference to almost 70 years ago. As the forthcoming Handbook of Organizational Economics (Gibbons and Roberts, 2007) reveals, the economics of organization, of which TCE is a part, is a vibrant research agenda. pp. 18 - 19
Appendix
The Simple Contractual Schema

This appendix has significant value in verifying the JOC is able to function effectively in this market and firm definition of their boundaries. Professor Williamsons analysis in this appendix is definitively able, in my opinion, to document why the JOC is able to function in the manner described through out this blog.
The paradigm transaction for TCE is vertical integration (or, in more mundane terms, the make-or-buy decision). Not only is vertical integration the obvious candidate transaction (Coase, 1937), but, because it is less beset with asymmetries of information, budget, legal talent, risk aversion, and the like than are many other transaction, it is simpler. Not only are transaction cost features more transparent for the make-or-buy decision, but the simple contractual schema described below applies (with variation) to the study of transactions more generally. p. 20
Thus assume that a firm can make or buy a component and assume further that the component can be supplied by either a general purpose technology or a special purpose technology. Letting k be a measure of asset specificity, the transactions in Figure 1 that use the general purpose technology are ones for which k = 0. In this case, no specific assets are involved and the parties are essentially faceless. Transactions that use the special purpose technology are those for which k > 0. Such transaction give rise to bilateral dependencies, in that the parties have incentives to promote continuity, thereby to safeguard specific investments. Let s denote the magnitude of any such safeguards, which include penalties, information disclosure and verification procedures, specialized dispute resolution (such as arbitration) and, in the limit integration of the two stages under unified ownership. An s = 0 condition is one for which no safeguards are provided; a decision to provide safeguards is reflected by an s> 0 result. p. 20
Node A in Figure 1 corresponds to the ideal transaction in law and economics: there being an absence of dependency, governance is accomplished through competition and, in the event of disputes, by court awarded damages. Node B poses unrelieved contractual hazards, in that specialized investments are exposed (k >0) for which no safeguards (s = 0) have been provided. Such hazards will be recognized by farsighted players, who will price out the implied risks. pp. 20 - 21
Added contractual supports (s > 0) are provided at Nodes C and D. At Node C, these contractual support take the form of inter-firm contractual safeguards. Should, however, costly breakdowns continue in the face of best bilateral efforts to craft safeguards at Node C, the transaction may be taken out of the market and organized under unified ownership (vertical integration) instead. Because added bureaucratic costs accrue upon taking a transaction out of the market and organizing it internally, internal organization is usefully thought of as the organization form of last resort: try markets, try hybrids, and have recourse to the firm only when all else fails. Node D, the unified firm, thus comes in only as higher degrees of asset specificity and added uncertainty pose greater needs for cooperative adaptation. p. 21
Note that the price that a supplier will bid to supply under Node C conditions will be less than the price that will be bid at Node B. That is because the added security features at Node C serve to reduce the contractual hazard, as compared with Node B, so the contractual hazard premium will be lowered. One implication is that suppliers do not need to petition buyers to provide safeguards. Because buyers will receive goods and services on better terms (lower price) when added security is provided, buyers have the incentive to offer credible commitments. p. 21
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