Friday, July 11, 2008

Profit from the Peak.

The end of the oil game and the greatest investment event of the century.

Profit from the Peak is a book that I've been wanting to review for a while. An interesting premise is suggested in the sub-title. From some of the blogs that I follow it sounded like it may provide for an interesting read.

A little background on myself. With over 25 years of experience in the oil and gas industry I could see this "Peak Oil" energy train wreck starting. In August 2003 I came up with an idea on how to solve it. And in September 2003 started the research into using the oil and gas industry standard JOC (Joint Operating Committee) as the key organizational construct of the innovative oil and gas producer. If we moved the compliance and governance that the hierarchy managed, with the legal, financial, operational decision making and cultural frameworks of the JOC. We would achieve an alignment in all five frameworks that would enable the science and engineering needs of the industry to be the focus, and mitigate the effects of Peak Oil.

What does this mean. As most people know oil and gas is made up of partnerships between companies. This is to reduce the risks inherent in the business, and because the aerial extent of many of the properties, multiple owners work together. Since its beginning this has been the culture of the industry. And as one can imagine their are legal documents, financial distributions and operational decisions made with the input of the producers in the JOC. What isn't done is the competition to this software development project, SAP, Oracle and Qbyte, haven't a clue what a JOC is. Their focus is on the compliance and governance and therefore only provide the producer with at best 20% of the functionality.

The other major finding that I published was the software defines and supports the organization. Noting that SAP is the bureaucracy. To change an organization, one must first change the software. If we want innovative oil and gas producers, we need to build the software first. Or be relegated to manual systems. So this is what I have written about since the publication of my research in May 2004 and the posts in this blog. But enough about me lets review this book.

The first point I want to make is based on the following quotation in the Introduction and its associated implications. And regarding this graph entitled "Worldwide Oil Production".

For the past 50 years, we have explored the entire earth intensively looking for more oil. But despite the latest technology and the most elaborate efforts, global oil discovery peaked in 1962 and has declined relentlessly ever since. Generally we are finding less and less oil each year, and for the past 25 years, we have consumed more oil than we have found. In 2006 we found about 6 billion barrels of oil, but we consumed 28 billion, and the trends continue in the direction of increasing demand and decreasing supply. pp xvi - xvii
Although Peak Oil accurately captures where I think we may be in the history of the industry. My opinion is that we have established a high water mark that may be permanent. The graph clearly shows the discoveries peaked in 1962 and have declined since that time.

My question to the authors and everyone interested in this topic. Does this graph mean all the oil was discovered by 1962? Or did the industry stop looking for more oil after 1962. Now this is not an accusation that they purposely stopped exploring. But consider the world had an abundant volume of energy. Prices were in the very low single digits, and the need to "develop" these resources became the focus. This situation was followed by the 1980's and 1990's where low oil prices were causing no end of greif to the producers. The industry more or less cannibalized itself to survive over those two decades. To say that technologies in 1965 discovered all of the oil is an assumption that the Peak Oil theorists may have incorrectly assumed. Based on my current understanding of the oil and gas industry. And the process necessary to explore for oil and gas. The industry generally doesn't have a clue on what exploration is. The generation of oil and gas workers that started in the 1980's and 1990's never experienced an exploration mindset.

The next incorrect assumption of the authors is stated on page 4 of the book.
"Matthew Simmons, the top oil investment banker in the world" p. 4
Now I have read Matthew Simmons for many years and overall he is correct in many things that he states. However he is the worlds top investment banker in the oil and gas services industries. Based on Mr. Simmons comments about the need to publish the worlds reserves data. So that it can be pointed to as the gospel truth of the Peak Oil situation, unfortunately disqualifies himself from making any comments about reserves.

I have now worked in the industry for over 30 years and have gone through the accounting, audit and systems areas extensively. I have been a CFO of small producers and I have looked at my fair share of reserves reports. I can't tell you if the reserves are the greatest thing since Ghawar, or the latest scam. Looking at reserves reports is the same at looking at art. Why would someone pay that much for those reserves, or art, reflect the beauty is in the eye of the beholder. And indeed oil lives in the minds of oilmen.

The same criticism can be leveled against Dr. Daniel Yergin. He claims he and his 220 PhD's on staff have the best global oil and gas reserve data. This prompted him to make the claim in 2005 that "the world would soon see an unprecedented increase of 16 million barrels of oil". If I were you I would dig out some of those paintings your kids made in elementary school, I think I see a market for them.

Some minor criticisms as to the accuracy of some of the claims made in the book. On page 42 of the book it is claimed that "hydrogen sulphide (sour gas)" is in injected into oil formations. H2S is one of the most toxic substances known to man. One breath of it and your dead, instantly. I'm sure the safety concerns of injecting H2S are adequate to assure that no one is doing it.

Enough criticism of this book now lets get on to many of the jewels. On page 49 "Its as though the adults of the oil industry have been forced to sit and watch as the children take control." In reference to the industry being knocked aside by the National Oil Companies (NOC's) desire for control. I can't agree more with that statement, and I'll comment on this later in the review.

On page 67 the authors suggest "Essentially, it looks as though oil majors are running a shell game here, no pun intended. The question is: When will investors figure it out?" They have hit the pile driver on the pile with this one. As I have mentioned many times the management of the producers are acting in their best interests, not the investors or societies in general, with their muddling attitude toward the energy business. One has to take a jaded look at the stock options that are being distributed in many of these companies.

The first knock your socks off comment that is made by the authors, and I have not seen anything like this analysis before, but intuitively believed it to be so. And is the underlying reason why I blame the companies for the risks we now face. Is reflected in this quote;
"A strong man, working hard all day long, can do less work than an electric motor can with 10 cents worth of electricity." and "A barrel of oil contains the equivalent of 18,000 man hours of energy." p. 72
If the fact that the physical labor equivalent of energy is now static or declining doesn't scare you, then you must be a different type of animal. It was in 1870 when mechanical leverage exceeded the labor output of man. The reason we live in such a prosperous world is the fact that we have figured out how to mechanically leverage one barrel of oil so extensively. This however does not mean that we should consume most of it by hurtling a 4,000 lb. vehicle down the highway at 60 miles / hour. I'll have more to say on this point later.

I am not a believer in the scare tactics of the Al Gore's et al. To me climate change is real when the news of the day has video reflecting strange weather occurrences we only ever heard of before. Much in the way that the world thought the Japanese economy would rule the world in the 1980's; when the majority of people saw the world through a Japanese TV. Turn off the TV and go outside, notice any change? Nonetheless, that should not preclude us from coming up with solutions. The authors ring the bell with this next set of suggestions.
"The ultimate culprit is the American consumer culture that is responsible for most consumption in the world. At the end of the day, the culture of consumption must change." p. 88
and
"To heavily invest U.S. tax dollars in renewable energy production in China. Why? Because the Chinese have a chance to build their burgeoning economy on renewables from the beginning." p. 92
Brilliant! Although I would suggest not just the U.S. but the western world should subsidize renewable energy production in China. Not only does it limit the production of the highest levels of CO2 (China), but provides immediate value (reduction in CO2). Changing the western worlds infrastructure is not going to happen as quickly. These two authors should win an Academy Award and a Nobel Prize each for these comments. Its this out of the box type of thinking that we need a lot more of, if there is a climate change problem.

One of the key characteristics of this book is its focus on the facts. When it comes to the renewables, I find the activities in the U.S. so focused on keeping people in their cars that they can't see or think straight. Here the authors note that the value generated by ethanol is approximately equivalent to the inputs of oil. Therefore if the U.S. stopped producing ethanol. People would be able to afford food and a bunch of bureaucrats in Washington would lose their jobs. That's it, you'd have just as much energy. The facts are clear this is a foolish and dangerous game.

I have suggested in my blog many times that the oil and gas industry is in need of a desperate transition. One in which the survival and cannibalizing of the industry in the 1980's and 1990's be replaced by an exploration mindset that hasn't existed since 1962. A move to a science based industry and away from the banking mentality that pervades the incumbent management. The reason this hasn't happened is as I suggest. An organization today that doesn't have the software systems in place to make the transition, will be reduced to manual systems. Something that I know the incumbent management readily appreciate. I have also suggested many times that the investors will need to fund this software development project to ensure that there is an alternative method for them to manage their oil and gas assets.

This transition is necessary and time is wasting. What the industry did learn in the 1980's and 1990's was how to draw down the reserves of a field much quicker then they did in the 1960's. So not only are we not exploring, we don't know how to explore, can't get organized to explore, and, the past exploitation methods are the proverbial brick wall we are about to crash into.

I therefore disregard the comments of the authors made in chapter 6 "Twilight for Fossil Fuels" and suggest that oil lives in the minds of oilmen. On page 120 they note;
Ironically, one of the causes of the receding horizons problems is the very success of the oil and gas industry. Record oil revenues being raked in by oil producing countries of the Middle East are causing a boom in building and expanding their infrastructure.
Imputing, I think correctly, that the U.S. based oil and gas industry has not been welcome in the Middle East, Russia and China. I think it was reflected clearly around the time that Halliburton moved their head office from the U.S. to the Middle East. But was this transition away from western based capabilities a mistake? I believe it was. Since then the industry has had their head stuck in tar. The tar sands I mean. Their herd mentality is noted by the authors.
"In some cases the price of oil itself is stifling oil projects. For example, at Shell's Alberta oil sands project, the cost of producing a barrel of oil, after a planned 100,000 bpd expansion, will be six times higher than the cost when the project first started." and "Depending on a host of factors, the total net energy gain for tar sands production is in the range of 5 - 10 percent." p. 121
But hell, it is seen as the thing to do.

I think the energy executive, if that's not an oxymoron, is beginning to wake up to a brighter future. I note the following from Thursday July 10th's news. The Calgary Herald on Russia's changing attitudes towards western technology. ASPO International notes BP CEO Tony Hayward stating "He said the problem was a failure of supply growth to match demand growth." "Pemex oil output fell by 10% in May." And Total pulling out of Iran due to their fireworks.

The Russians are considering tax incentives for the western based companies! Is this an admission that the western technologies are superior? Russian production certainly leaped when they were invited in, now with Shell and BP more or less financially abused by the Russians the production declines. With Mexican production in steep decline it is fair to assume that the world could benefit from more western based producers and service industries. Iran wasn't expecting to be on the losing side of their missile launches, but western technology walked on a critical investment in Iran.

I would recommend this book to any and all oil consumers where ever you may be. It provides an understanding of the industry and its difficulties. But also educates them to use energy more wisely. In a globalized world we need everything that we can think of. If Ludwig von Mises correctly noted that the industrial revolution was the solution to hunger and over population, IT needs to be the solution to today's problems. Albert Einstein said, that today's problems are not solved by today's thinking. These authors give you the facts so that new thinking can begin to address these problems. I personally think that IT and Segway's are two of the real solutions.

On the topic of alternatives the book provides excellent information about the changing economics of some alternatives. On page 137 they note;
The portion provided by solar and wind energy -- what most people think of when they think about renewable energy -- is a fraction of 1 percent of the total mix.
And bio-diesel has the potential of producing;
400 million gallons a year of bio-diesel. p. 143
Or 26,000 barrels / day. We've probably wasted more energy thinking and talking about bio-diesel then it will ever produce. There are three good alternative energy sources noted in this book. Unfortunately none of these alternatives has the ability to propel a 4,000 pound vehicle down the road at 60 miles / hour. But they are commercial, have huge potential and as the authors note, companies are making money.

Chapter 9 Endless Energy: "Here comes the sun." Starts with a quotation of Thomas Edison "I hope we don't have to wait till oil and coal run out before we tackle that." The future is solar, but the issues are daunting and much research should be put into the field.
The price of solar power has fallen to less than 4 percent of what it was in the 1970's. It is already economically competitive in states where electricity is expensive, including Hawaii, Massachusetts, and New York, and states with good solar exposure and lots of land, like California, Nevada, and Arizona. p. 156
The entire chapter provides the comprehensive review of the solar industry with some very good recommendations on how to get in on the ground floor of this industry. Making Chapter 9 a must read for everyone who lives in a house.

The same can be said about Chapter 10 "Pressure Cooker: Tapping the Earth's Heat" on geothermal energy. And Chapter 11 "Nuclear's Second Act". Nuclear, solar and geothermal energy are now commercial, clean and available to be used in areas where gas and coal are used today. An opportunity to replace the electricity produced from gas and coal and leave those commodities to support industrial mechanized labor, or the 18,000 man hours per barrel.

Chapter 12 "What's Needed: A Manhatten Project for Energy. President Bush is quoted as saying "we need an energy bill that encourages consumption." and Vice President Dick Cheney "Conservation may be a sign of personal virtue but it is not a sufficient basis for a sound, comprehensive energy policy." Then the authors note the result of big government science based programs.
While both projects were famous for unprecedented technical achievements -- the Manhattan Project cracked the secret of the atomic bomb, and the Apollo Project put a man on the moon -- we need to do more than come up with new technology to solve the problems we now face. We also need to rethink and remake our entire infrastructure, our economies, and even our culture. p. 180
A Manhattan Project will only boost the bureaucrats in Washington. This is a global problem. As a part time wanna be economist, I would suggest the market price mechanism is motivating the forces necessary to solve this problem. There was no market for the Manhattan or Apollo projects, I suggest we leave these energy problems to the market to solve.

I therefore disagree with the authors on their call for a Manhattan styled project. And fundamentally agree with the President and Vice-President. If 18,000 man hours of effort are contained in each barrel of oil, then we should encourage its use at any cost. Its a competitive advantage to those who use it most effectively, which happens to be the U.S. The alternative is to hire 18,000 people to do the work of one barrel. Therefore the President and Vice President are absolutely correct.

If we look at the numbers of the oil dollars flowing to the Middle East we will be distracted into believing that we should reduce our consumption. I suggest we start using our heads here and employ the Information Technologies and stop waisting the energy hurtling vehicles down the road at 60 miles an hour. I repeat get a Segway as a supplement to your vehicle. Use it for the short trips (24 mile range on most models) and cut your costs substantially. (Segway's cost less then $1.00 of electricity for that 24 miles). Secondly the Segway runs at 12.5 mph which is 4 mph faster then a car stuck in grid-lock. I repeat, IT and the Segway are the solutions to the problems of today.

On page 193 Carbon Taxes and Cap-and-Trade Systems are introduced by the book;
Carbon taxes are probably the simplest, most effective, and least economically damaging option, because they let the market decide what the best solutions are.
July 11, 2008 the Wall Street Journal wrote an article entitled "Kyoto's Long Goodbye" which addresses these mechanisms silly and wasteful ideas.

The irony is that Kyoto has handed them every reason not to participate. Europe knew all along that it couldn't meet its quotas, so it created an out in "offsets." A British factory, say, buys a credit to pay for basic efficiency improvements in a Chinese coal plant, like installing smokestack scrubbers. This is a tax on the Brits to make Chinese industries more competitive. Sweet deal if you can get it.
and

It gets worse. The offsets are routed through a U.N. bureaucracy that makes them far more valuable in Europe than the cost of the actual efficiency improvements. So far, Kyoto-world has paid more than €4.7 billion to eliminate an obscure greenhouse gas called HFC-23; the necessary incinerators cost less than €100 million. Most of the difference in such schemes goes to the foreign government, such as China's communist regime.
Lets not chase any bunny trails that lead us down this ridiculous waste of money and energy. Recall that Al Gore hasn't reduced his personal large "carbon footprint", he just offsets his abundant use of energy with these bureaucratic Cap-and-Trade Systems. Enough said?

Gasoline taxes are are also recommended as deterrents to people using too much energy.
Most observers agree that the best, and possibly the only, way to achieve a reduction in the amount of oil used in this country is through the price mechanism, particularly in transportation fuels. It seems a pinch in the pocketbook is necessary to make consumers drive less.
It is well known that the U.S. has the lowest taxes on gasoline in the western world. This is the motivation in the authors desire to raise more taxes. I would assert this is the wrong direction on two fronts. Increasing the cost of fuel will impede the productivity of the U.S. economy. Taxes at high levels, such as in Europe certainly deter driving, however, the U.S. out performs Europe by a substantial margin. This is why China chooses to subsidize the use of fuel in their economy. At 18,000 man hours per barrel, the lowest cost producer will ultimately win. That is China in the developing world and the U.S. in the western world. For example France currently has a per capita GDP that is lower then Mississippi's, the poorest state of the union.

It seems the authors are on the other side of the political fence in terms of how and where the solution to these problems will come from. Thankfully they debunk the Hydrogen fuel source as an alternative. Through their calculations they show that Hydrogen requires 5 energy inputs for each energy output. Not a smart direction to turn. What the authors don't mention is the cost of building an appropriate delivery system that can scale to what gasoline is now distributed as. Hydrogen requires stainless steel in all of its pipelines, tanks everything that it touches. And the cost of that is beyond what we are able to calculate with modern computers.

But then again, maybe the authors and I are not so far off in our expectations. On page 239 under the heading "Never Sell Short Humanity" the authors note;
And that's the true moral of the story: Every crisis -- no matter how dismal it looks -- contains the blueprints for its own solution.
And with that I highly recommend this book. For the average consumer, little is known about the complexity and difficulty in bringing the abundant and valuable energy resources to their door, and place of work. This fact-based book refutes many myths on its own and I have pointed out some of where I think they may be a little short. Given the price of the commodities today. And given the volume of words that are being consumed by the energy issues. The solutions will soon be at hand and society as a whole will be able to profit from the peak.

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Thursday, July 10, 2008

Google Eclipse day.

Users who are interested in working with developers may be interested in viewing the state of software development tools available today. Google recently hosted a "Eclipse Day" which showed some of the more interesting developments of that tool.

Eclipse is a free software download. The product was originally donated by IBM. I use NetBeans which is a competitor to Eclipse, and is provided by Sun Microsystems. These tools are competing aggressively and provide an unbelievable level of software development capabilities, for free.

One area that will be of interest to Users is the collaborative nature of development today. We have all heard of software that is developed by people who have never physically met one another. That will be the case for the users and developers of the People, Ideas & Objects applications modules. Both will be able to communicate through the tool, the users not having to read or write any code, necessarily, maybe, but can share many different aspects of their work through the tools themselves.

I prepared a YouTube playlist of the five videos here. Each with about 50 minutes of viewing time. Enjoy.



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Wednesday, July 09, 2008

Interesting research at Intel

We are all heading towards cloud based computing. Billions are being invested in centralized processing and storage facilities to offer processing and storage on demand. For Google to run their services requires them to own the most processing and storage power in the world. And has anyone stood up and asked if this an effective way to conduct computer based functions? Well Intel has and the results are surprising.

In a document released yesterday, Intel documents the research they did on the processing and network bandwidth demands of the two prominent methods of computing. Comparing "Virtual Hosted Desktop" with "Embedded Application" which relies on remote processing on a virtual server, to "Stream OS" with "Stream Application" which relies on streaming of operating system software to hardware client platforms.

The results show that streaming the operating system and application to the client platform for user based actions was, from a server perspective, far more efficient. 20 clients accessing the server for these services used only 1% of the servers performance. Whereas the "Virtual Hosted Desktop" solution took up to 45% of the server processing requirements for the same 20 clients. Intel even crippled the script of the test for the Virtual Hosted Desktops to remove the high processing required for graphics. I assume that the network bandwidth of data would be small and therefore incidental to the performance of either method.

Sun Microsystems has moved in this direction with their SPARC based offerings, Solaris and Java products. Using the "Stream OS and Application" method provides us with a reduction in processing requirements, and, an increase in performance on the client desktop. The only caveat that Intel mentioned was the initialization of operating systems on the client side could cause momentary increases in processing and network demands. Suggesting that "if" all 20 clients logged on at the same time, the systems may have performance issues.

This "Streaming" architecture provides the People, Ideas & Objects application with the performance and reliability that is necessary for the users. This architecture also allows us to control all the required software necessary for the user to do their jobs. Such that if there were a bug in the systems we would know about it, and who to fix it.

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Monday, July 07, 2008

Tailor's to the Emperor

I have not been kind to the Emperor's (the oil and gas companies) in this high energy price era. I more or less follow the money in situations like these. And with the energy companies receiving 100% of the revenues from oil and gas, they are the ones that should have done something about it. With the industry leadership meeting in Spain last week, unaware of how this problem came about, I am reluctant to give them any slack at this point. However, in this entry I will provide the energy companies with a temporary benefit of the doubt, and focus on the SAP and Oracle applications, and more broadly the technology community.

To call these Information Technology companies the designers and tailors of the Emperors new clothes makes for the perfect analogy. Particularly SAP and Oracle who command such fees and mind share in the oil and gas market. These firms are complicit in providing systems that are woefully inadequate for the innovative oil and gas producer.

Being the "big" suppliers of systems to oil and gas does not provide their firms with an excuse to sell systems that are inadequate and inappropriate for the market. No one was ever was fired for recommending these big applications, does not give SAP and Oracle a license to sell something that doesn't fit. It is my opinion that you should at least try to understand the market you are selling to.

If the producers where provided with systems that supported the Joint Operating Committee and innovation in general, would the firms have been able to explore and maintain production for the markets demands? Instead they have provided systems that identify, support and entrench the bureaucracy.

There has been a technological revolution in the past 5 years. Has any of these new technologies been integrated into the oil and gas firms? Not that I am aware. It's Stampede week here in Calgary and I can assure you that the marketing arm of these "suppliers" have a good understanding of where their next meal is coming from. Role in another server or two and database licenses for all.

Witnessing this festival of greed during Stampede makes me think I am the only one out of step. Don't solve problems, just sell.

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Sunday, July 06, 2008

People's value proposition.

In last weeks entry I noted three items that were causing our software development budget to increase substantially. They are;

  • Paying the user.
  • Undertaking a global scope.
  • Employing a 36 hour work day.
This entry will note why these costs are not as onerous as they would be under past software development methodologies. And in turn defining our business model's value proposition.

I am critical of the software development methods used in the past. The SAP and Oracle model have proven successful for their companies, but recall they are applications from prior technology era's. And no one would suggest that the model of "build it and they will come" is relevant today. The two major constraints of an innovative software developer are the code of the application, and the customers that use it. Users that are looking at new and innovative ways of deploying either SAP or Oracle are met with a bureaucratic process that makes changing organizations a much easier task. Upgrading the software comes with high costs and many promises that do little but entrench the vendor further in your organization.

If SAP and Oracle were to spend the required budget to build this People, Ideas & Objects type of application, the producers would end up paying for this code several times over. There has to be a better way.

Why doesn't the oil and gas industry as a whole pay for the ERP system code just once. Why not share the costs of development over the entire industry on the basis of costs plus a percentage for the developer. A developer on this basis would only interest themselves in what makes the software better. And that is the ability to interpret the users demands and build the software they want. If the user wants to scrap a module and replace it with two new ones, based on this proposed business model the developer would be most pleased with that.

This is how I have proposed the People, Ideas & Objects application from the very beginning. An industry wide software development capability, designed and defined by its users, supported by distributing the costs of development across the global producer population. Has their been a software developer that has used this model today? I think Google does it this way and therefore this comparison imputes the development will never stop. The innovative process is iterative and it never stops, why does software development?

It is my opinion that using the Joint Operating Committee in the manner that is defined in the draft module specifications provides me with the competitive advantages that I need to build this software development capability. This advantage is not open to any other software development firm as I have the rights to the ideas secured. This IP based competitive advantage is necessary to ensure that a series of competitive look-a-likes to this development don't dilute the focus to get this right.

In summary this is the value proposition of this software development project.
  • Establish an innovative footing for the oil and gas producer.
    • Eliminate the constraints of code and customers.
    • A "software development capability" based competitive advantage.
    • User driven and focused developments.
      • Determining and interpreting User needs.
  • Charge the oil and gas industry on a software development cost-plus basis.
  • Focus the industries actions through management of Intellectual Property.

Join me here.

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Thursday, July 03, 2008

The IEA gets it.

The IEA has as their guiding principle "Energy Security, Growth and Sustainability through cooperation and outreach." This is the appropriate position for every energy consumer or producer. As consumers we should not limit ourselves in any manner. Acceptance of a lower standard of living, or a future that is constrained by energy, is a defeatist attitude and capitulation of the benefits of globalization.

As a producer the efforts to fulfill that promise to the consumer now comes with extremely attractive financial incentives. Isn't it too bad that the industry, which is at record levels of capital expenditures, is moving backwards in their production volumes. As is painfully obvious to most, the organizational methods of the industry do not enable them to participate in this market for much longer. This is not a job for the bureaucracy.

You can however mark me as surprised when I read the following in the Australian Business;

The IEA's outlook resonated with the views of oil company executives at an industry conference in Madrid, who said the red-hot oil market reflected deep-seated pessimism about the industry's ability to open the spigot to satisfy rising demand.
The industry actually kind of admitted they understand the problem. I have certainly made it clear that the producers management lack the motivation to do anything about it. And it will be the investor class that needs to fund these software developments in order to provide them with an alternative form of organization for their oil and gas assets. This quotation from a number of faceless executives at a conference is the first tangible recognition that a problem exists. We however, do not have the time to wait for these companies to do something about it. Our first act should be to axe the management of these failing firms.
Perhaps one of the most disappointing figures to emerge from the IEA report was its assessment of oil production by nations outside the OPEC cartel. Non-OPEC supply was "paltry to say the least", said Mr Eagles, the IEA's head of market analysis, and had been revised down since last year's market report. He said crude supply from non-OPEC countries would remain at or below 39 million barrels per day over the next five years, though it would rise after 2013.
The Wall Street Journal noted the following in their blog;
Project delays averaging 12 months, coupled with global average decline of 5.2% - up from 4% last year – are the factors behind these revisions. Over 3.5 mb/d of new production will be needed each year just to hold global production steady. “Our findings highlight again the need for sustained, and indeed, increased investment both upstream and downstream — to assure that the market is adequately supplied,” stated [IEA Executive Director Nabuo] Tanaka.
And Yale comes in with the following;
Global leaders fret about climate change and economic growth, throwing out blame in many directions. But finding fault or inequities does little to solve the problem of rising demand for energy and a declining supply, argues Chandran Nair, founder and CEO of the Global Institute for Tomorrow. The bottom line is that the world economy has become too dependent on fossil fuels.
It is tiresome to be reading these quotes about the problem. If you read the 2007 annual reports the companies could not be happier with the situation. They had the opportunity to do something about this almost five years ago. When I proposed this software development solution in September 2003, an idea that they clearly understood, and an idea they stole from me and handed over to Daniel Yergin's company, Cambridge Energy Research Associates to research. Isn't it also ironic that Daniel Yergin's "unprecedented 16 million barrels" of new production never showed up? Good thing CERA's 220 PhD's were'nt as quick as I was in publishing.

If the producers management thought it was such a good idea to spend money on the idea of using the Joint Operating Committee as the key organizational construct in September 2003 with CERA, doesn't this prove they are guilty of allowing this situation to occur? I repeat the management are not realizing this situation in a conference today. Matthew Simmons has been warning about it for almost a decade. These companies are not acting in anyones interest but the self-absorbed managements. Take any companies stock options and calculate the amount they "are in the money" and you'll see how effectively the scam has worked.

For example taking our favorite company in Canada, Petro-Canada, has options that "are in the money" for $410 million. And total 2007 option based compensation (Using $53.62, their end of year price) was $82 million. Just to make sure they don't seem too greedy, they did issue $255 million in dividends. (Note this was a topic of discussion on this blog in 2006, so it is fair to say the management did know about this.).

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Wednesday, July 02, 2008

Uh, actually it's three applications.

I was running through the options in how the People, Ideas & Objects application modules can be implemented with Solaris 10 and Java. What has quickly become obvious is that the application that we are building is actually three different applications. Categorized on the basis of either a Producer, a Person or a Joint Operating Committee (JOC). Each category having access to the eleven modules of the People, Ideas & Objects through different interfaces.

The Solaris operating system provides containerized virtual instances of the operating system. For all intents and purposes these virtual instances of Solaris are as separate and distinct to the two operating systems running applications in ExxonMobil and ChevronTexaco. A virtual instance of Solaris is created for each person, JOC and producer company. This provides the separation and access of resources to only those who are authorized. Interactions between instances is through the Java enabled transaction management capabilities.

This provides enhanced security flexibility to each person, JOC or producer company. With each virtual instance of Solaris accessible by the owner they can grant access privileges based on Solaris' 50 user definable roles. Root access is available to be granted to a variety of people who need that access, yet it only provides root access to those areas. Audit, compliance and others will be able to access what they need to do their jobs without the risk of granting global root access to people who need it.

Each of these virtual instance will provide a server side MySQL database that manges the data model for their type of user, a person, JOC or producer. I believe this helps in avoiding much of the complexity and confusion that "might" occur if we ran this application as one monolithic instance. One might assume that the hardware requirements would explode in terms of cost and complexity, and this is where Sun has obviously spent some engineering time. And why this will be run on Sun's network.com or cloud computing platform. Each processor could handle 16 virtual instances, and, are able to scale dynamically to use the number of processors any application may demand. Making the decision to use Sun's cloud computing the equivalent of a "doh!" as Homer Simpson would say.

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Tuesday, July 01, 2008

Optimists and Pessimists.

Does anyone still believe there is no problem in terms of our energy supply? Other then the companies themselves, I don't think anyone would assert that all is well, carry on. $140 oil and $13 natural gas are telling the market, "Houston, we have a problem."

Now the level of discussion of the problem is increasing substantially each day. Supply and demand focused discussion contrast the optimists point of view, others document the pessimistic scenarios. What this discussion doesn't provide is any focus on a solution.

Organizational changes, supported by the Information Technologies will provide a solution to the painfully slow, bureaucratic oil and gas producer's. Based on the producers comments over the past few years, that all is well, one can clearly conclude they haven't got a clue. What was reasonable performance for any firm in the 20th Century pales compared to the Global expectations of the 21st Century.

The Information Revolution is the solution to the problems of today, just as the Industrial Revolution was the solution to the over-population and hunger of its day. From an energy consumption point of view having x million drivers stuck in gridlock twice a day becomes one of silliest things that we humans do. From an energy consumption point of view, the car whether it is hybrid, electrical or hydrogen (all pipe dreams) is not the solution. The car died with the cheap energy era, get a Segway. Hauling 200 pounds is much more economical and energy efficient then hauling 4,000 pounds.

What are the potential results of a reorganization of the industry? Many times in my career I have been surprised by the collective capabilities of the industry. Several times they have been able to achieve and exceed the impossible in terms of their collective abilities. We need to tap into this collective capability and accelerate it to a speed that will provide the energy marketplace with reasonable volumes of petroleum. Reasonable volumes that a Segway rider could appreciate.

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Monday, June 30, 2008

What a difference a day makes.

I have quoted on several occasions the number of words that are "consumed" in this weblog. Previously I quoted 400,000 and most recently 350,000. Either one of these numbers is impressive in terms of the expression of the idea of using the Joint Operating Committee.

Google is always making changes to the Blogger service that I use. Recently I upgraded to their "Blogger in Draft" service and was able to download the .xml file for the entire blog. To my surprise there are now over 692,000 words in the blog. That's the equivalent of seven books! So much for my previous attempts to calculate this number.

The important aspect of this is the fact that this idea has created such a rich and fertile ground for new ideas in the oil and gas industry. What will be really surprising will be the volume of ideas that the global User and Developer community generates.

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Sunday, June 29, 2008

I swear, a day has 36 hours.

Going over the budget numbers for this software development project. In doing so I want to bring back a term that was used in the pre-2000 era technology. That is "burn-rate". Not something that you necessarily want to brag about but this project may have one of the largest "burn-rates" in technology history.

First off I want to note the costs of development in the May 2004 proposal was detailed at $70 - 85 million. Two changes have made these previous development numbers pale in comparison to what they will be in the future. A third change works to expand the number of hours in a day, which leads to even higher annual costs.

As I have mentioned on many occasions, the Users need to be involved in this software development. I have argued that SAP knows nothing of drilling wells and NGL operations. And as a result SAP doesn't work for oil and gas. The need to have the Users involved in development from the start is necessary to get this system right. There is no other way to deal with the issues of determining who, what, where, when, why and how the software has to work then asking the people who hold this tacit knowledge collectively.

OK so the users need to be compensated. Asking them to volunteer their time is an excessive request that extends well beyond the reasonable or even surreal. I have also noted here before that the oil and gas industry is headed towards an annual turnover of $4.5 trillion. I'll bet even Dr. Evil would choke on those numbers. The cost increase that I am talking about here is that the user-to-developer ratio will range from a low of five-to-one and an upper factor of ten-to-one. That's up-to ten User hours for each developer hour.

The second aspect of the original proposal was that it was just for Canadian operations. Back then my thinking was limited to that market, and rather quickly realized that the global audience needed to be targeted. Having only one geographic location being serviced by this application is a reduction in the real value of using the Joint Operating Committee. Besides the supply of energy is a global problem. Therefore, the royalty, tax and compliance requirements of the total population of global producers needs to be considered on top of just the Canadian operational environment.

Lastly I want to add fuel to the fire of my adversaries by noting that the compression of time is something that will be implemented in this application. Instead of budgeting for four years, I think it can be done in two and half years to initial commercial release. (Maybe even less!). We are approaching a systems use that may start the day in Russia and China, move to the Middle East, Europe and then the United States. Users from these regions will be able to collaborate in an asynchronous manner. Hence providing for potentially a "day" of user driven development that totals 36 hours.

To deal with this wealth of information we need the developers to be writing code at approximately the same pace. I have thought about this and have come up with a one-third, one-third, one-third solution. Each third of the time allocated to developers will be sectioned off in the following manner. Open-Source developers, Sun Microsystems and Indian based development houses.

Open-Source developers will be welcomed in this development and be able to add this project to their client list. These people are generally doing what they are doing because their recognized skill set is exceptional. The type of developers that are able to produce ten fold what other developers can do.

Sun Microsystems developers. And here we are accessing the Solaris, Java and MySQL developers. Sun has hired many of the best developers in the world. I also believe that this project will be the first test of Sun's integrated environment, and it is therefore incumbent upon them to prove to the world that it is a viable environment. Essentially setting the bar as high as has been attained in terms of technological risk and implementation.

Lastly I am a fan of the Indian based model of software development. That these are offered at a discount is only gravy for this projects budget. Although they may be fairly new to the overall development world (in terms of the fifty year history of computing) they have inherent advantages in that they speak on average 7 different languages and communication becomes their forte. After all Java is only another form of communication. Secondly they are able to fill in the gaps of time in our 36 hour clock. Lastly they will be a quick and efficient resource in terms of taking many of the boiler plate technological frameworks that exist today and implement them in our code. What I mean is the PPDM, (Petroleum Producer Data Model), XBRL, (Extensible Business Reporting Language) of the SEC, Alberta Crown Royalty frameworks etc. These have become the building block of many companies and we will be able to leverage heavily off this infrastructure.

That in a nutshell is how we will develop the eleven modules in the People, Ideas & Objects application. Anyone want to guess what the total cost will be? I think the annual costs are quoted in the B (Billion) range. This also does not impute the Users and Developers are chained to a desk for 8 hours a day. Some Users, and some developers may only contribute a total of eight hours to the project and some will find life-time employment with this project. Life time employment, as Google has shown, development never stops.

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Following up on Sun.

Yesterday's post commented briefly on Sun Microsystems software, hardware and service offering. Sun published their HPC (High Performance Computing) newsletter, and here are four excellent articles from that publication.

First is Sun co-founder Andy Bechtolshiem talking about the building of "commercial" grade systems for "cloud" computing. Andy makes the comment that he spends more of his time on physics these days. Bechtolshiem always provides fascinating talks.

Second is another pertinent article, "Big Data Changes the Rules," regarding this software development project. Recall the Technical Vision that is a key part of this application. How it predicts a data Tsunami will provide key competitive advantages to those in oil and gas that can manage and use this data. The article notes some of the details of how the unsuspecting oil and gas firm may have difficulty with these data volumes.

The third article is an interesting read on how Sun's network.com is being used in innovative ways.

Lastly a comparison of MySql database vs. Oracle. Our choice of database is to use MySQL since Sun purchased the company. This now provides us with a one system vendor solution for all our needs. SPARC chip-set, Solaris Operating Systems, Java and Databases are proprietary technologies of Sun. No more finger pointing as to who's fault it is.

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Saturday, June 28, 2008

Google, McKinsey & Sun

These three firms have been at the forefront of providing the resources for this software development project. Google never stops providing more robust and useful tools. Although the interfaces are simple and effective, understanding the global scope and scale of their applications, from simple account management to their many API's (Application Programming Interfaces), provides a challenge to the user. I am only now beginning to feel like I am using the full services of the applications offered.

McKinsey on the other hand are defining the Information Technology driven organizational changes for all industries in the 21st century. They like Google require a commitment to review their excellent resources on an ongoing basis. Three documents that were recently released provide further justification for the changes needed in oil and gas. The three documents are;

I have commented before on Sun Microsystems offerings here.These three firms are providing much of the ideas and infrastructure for the innovative oil and gas producer. They have defined this as a market of interest, and the users and developers of the People, Ideas & Objects application are the benefactors.

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Sunday, June 22, 2008

McKinsey Mobilizing Minds

During the writing of the Research & Capabilities and Knowledge & Learning modules I have stumbled across a McKinsey document that I should have reviewed back in 2006. Clearly this document has had significant influence over my thinking during the time I set out to define the draft specifications. The article is titled "The 21st Century Organization" and they have recently expanded the article into an excellent book called "Mobilizing Minds: Creating Wealth from Talent in the 21st Century". The information that I am looking at in this post is from Chapter 1 of the book. I have also reviewed the document in the Research & Capabilities and Knowledge & Learning module specifications.


One of the reasons that I am so confident in this project is, first of all, the need as reflected by the oil and gas prices. Secondly the effect that Information Technology is having on releasing the constraints within companies and industries. We are in a period of time where anything can be accomplished, and if done properly, with the People leading the way, we can solve these problems.

It was Professor Ludwig von Mises who noted that the industrial revolution was the solution to the problems of the day. I believe the Information Technology revolution is the solution to the problems of today. This book, which originated from the McKinsey article, speaks clearly to the time and place we find ourselves in.

Ask any mid-level professional or manager at almost any large company - even a successful one - and he or she will tell you that the growing complexity of work is becoming a greater and greater problem.

Starting off with a clear statement of how congested and constrained our traditional organizations have become.

One survey by the research firm Net Future Institute (NFI) showed that nearly 75 percent of senior managers consider the workload of people in their department to be too heavy. Another survey by the same firm found that most people do their best business thinking not while at work but while commuting to work or in their home. Why? Because that's when they finally get some time to think.

The problem in oil and gas is that the organization that brought us to this point in time can not deal with the complexity of the current business. The best term I have heard is that the easy or cheap energy era has ended. The firms as they stand have provided commercial volumes of energy to the markets for many years. When oil was valued at $9.00 to $22.00 a generations worth of time had past. The constraints of change and the complexity of the business are catching up to a generation of neglect in building the business. What brought us to this point is inadequate for our needs. The traditional Schumpeterian creative destruction has been delayed in this industry because of the current earnings of the producers. But if you listen closely, they are claiming their costs are inching towards the point where the bureaucracy will not be able to earn anything from their production.


The People who have worked in this industry are the ones that need to lead the changes in these organizations. These companies will never exercise the level of change that is necessary to bridge this new energy era. Are we to wait for this industry to turn to ashes before we are motivated to make the necessary changes?

The increasing frustration of the workforce is symptomatic of an even more fundamental issue: the organization of most companies today - and how it limits the ability of talented people to perform and take full advantage of the opportunities of the 21st century. The modern, "thinking" company should be a fluid and fast moving creature, in which its workers discover knowledge and exchange it with their peers collaborating with others to create value.

In many ways the industry is not just dealing with the difficulties of the business they are in, they also are faced with a "better way" to do their work as offered by IT.

The problem, however, is that most of today's large companies fall well short of creating conditions that maximize the productivity of their thinking, problem-solving, self-directed people. Too bad this thinking machine isn't working nearly as well as it should be.

And here is the paradox that most people face. The technology provides the opportunity to move to a "thinking, problem-solving, self-directed people" but also locks them into the traditional ways of the organization. As I have mentioned many times before "SAP is the bureaucracy".

Much of the communication is worthless noise: In a 2005 survey conducted by the McKinsey Quarterly, of senior and top executives, 60 percent said their company's size and complexity have made it somewhat difficult, or much more difficult, to capture opportunities than it was just five years ago. Little wonder, then, that ineffective bureaucracies develop within large companies, that the head office seems remote from the field, and that the "left hand doesn't know what the right hand is doing."

As Nobel laureate Herbert Simon stated. "What information consumes is rather obvious. It consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention."

A symptom of the problem companies face today is simply the amount of energy they waste. In the cities the problem is congestion. In companies, the problem is unproductive complexity.

It is opportune at this time to ask what happens next. In oil and gas we see the past leadership holding to the notion that they do not understand why the prices are so high. The fact is the market is allocating the financial resources to these firms to deal with the increased complexity involving the earth science and engineering disciplines. Information Technologies are enabling people within these organizations to do so much more, however, they have no authority to exercise any change. Is this situation to remain in the oil and gas industry for another five years? Or is there an alternative, such as this software development project?

The organization of most companies today bears limited resemblance to the original intended design. While there are plenty of well managed companies that are exceptions, most are struggling: Their hierarchical relationships have become so confused that the power of hierarchy to drive performance is compromised. This dysfunction is usually felt most severely at the front line, where the brainpower and the energy of front-line workers are significantly consumed in the struggle against the internal complexity of their organizations.

This is a software development project that has researched the problems in oil and gas and arrived at a solution to these problems. The five years that I have spent on this research is time that would have needed to be expended, and therefore, I am able to offer the industry the ability to turn back the clock on the past five years and establish this development as a priority.

The fact is that even the most self-directed, brilliant people can't create wealth by working alone. They need help mobilizing the talents of other thinking intensive people and securing crucial capital and labor. They need to be able to convert their thinking into moneymaking activities.

In order to proceed from here requires the People who are doing the work in these organizations to put their heads together and make this application capable of doing their jobs. This mass collaboration could start at anytime and the longer we wait, the longer the problems will fester. The involvement of the People is not something that can be replicated in any other manner. The industry needs to fund these developments and I can not do the work of thousands so time is now being lost.


A new problem


In this book McKinsey articulate further problems that are inherent in the bureaucracy. One that reflects that the lack of motivation to resolve these issues is rewarded by the price driven increases in profits of the producers.

Much of the underlying problem is the use of internal financial reports that do not reflect the underlying economic relationship of intangibles to profit making. Managers can look good on reported results, even as they take actions that hurt the enterprise. These issues are compounded by performance measurement approaches that reward selfish, divisive behavior at the expense of collaborative behaviors for the common good.

Mobilizing Mind Power


What would be the effect of having this software operational in an oil and gas concern? Would using the JOC revolutionize the performance of the science based oil and gas producer?

If your organization can harness this mind power -- if you can boost the profits from each thinking employee -- then your organization will be on the path to great success and competitive advantage in the 21st century world.

and

Most companies are tapping into only a small fraction of the potential to create wealth from the mind power of all the managers and professionals they employ. During the 20th century, the costs of coordinating work across large companies were so large that mind power was trapped in small pockets of people scattered throughout each company. But nowadays this is no longer true. As a result, today there is an opportunity to earn large "rents" (that is, profits disproportionate to the amount of labor and / or capital that are invested.)

Where the Money is


Obviously it is my belief that the changes in organizing the oil and gas industry will provide value to producers, individuals, and society. Alternatively we face a future led by the bureaucracy and its continued failure. Does anyone see how these organizations will survive until 2020?

It would be reason enough to develop better organizing approaches if all that was accomplished was to make the jobs of talented employees more rewarding. All business leaders know how important talent is to their current success. Furthermore, it could be argued, actions taken that will enable companies to attract, develop, and reward talent bring their own reward. Still, we believe developing a better organizing model is more that that. In the 21st century, its where the money is.

What I think is a critical component of this development is a refocus on the competitive advantages of the oil and gas producer. The land base and physical assets are the producers' competitive advantages. As I indicated in the Research & Capability module the intellectual property of how things get done is transferred away from the producers to the vendors, suppliers and People working within the industry. That is their competitive advantage and hence their motivation to develop the most advanced drill bits, rigs, etc. The producer does not have the scale and scope necessary to fully develop the idea, or the application to make the idea commercial. So lets stop playing the game of no one earns any intellectual property because the industry holds all the money. The producers have to actively spend the resources necessary to fully develop the support industries that will make the energy producer the most innovative and profitable. We won't get there if the intellectual property is passed around to the vendors competition by the producer firm. And that also applies to this software development project.

Because of the development of globalization and advances in technology, scale and scope effects have increased across the board -- particularly in those effects related to intangibles. By "intangibles" we mean such assets as the brands, intellectual property, and proprietary networks that are unique to individual firms.

If we don't allow the ideas that are a critical part of an innovative science based industry to be developed where and when they are needed, we will be stuck with the problems of the 20th century. The clock is now ticking.

The opportunity is to bring the entire firms [industries] mind power and the related intangibles to every job, to increase the value of every person's work, every day.

and

We are arguing that companies need to view investing in designing and building strategic organizational capabilities as means to capturing rents from everything they do. Companies are being constrained, unnecessarily, by the unproductive complexity of working in their organizations. We believe that investing in capabilities to relax these constraints, thus enabling a company to mobilize not just labor and capital but also the company's unique mind power, is the key to creating wealth in the 21st century.

and

Furthermore, we truly believe that companies have only begun to tap the opportunities to create wealth in the 21st century. Why? Because they are still using an organizing model designed for the industrial age rather than for the digital age. to create greater wealth in the future, we believe that all companies should make organizational design the centerpiece of their corporate strategies.

Please, join me here.


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Saturday, June 21, 2008

Two More Draft Specifications

I am pleased to submit to the community the Knowledge & Learning and, Research & Capability Draft Specifications. (Please note these modules are very similar and therefore each file contains both specifications). These are the eighth and ninth Draft - Specifications and I will complete the last two Performance Evaluation and Analytics & Statistics Modules before the end of July 2008.


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Friday, June 20, 2008

Why the companies.

In my last post I pointed the accusatory finger for this energy problem, at the oil and gas companies, particularly the majors. The first aspect of the accusation is that they knew, as I had pointed out, that their organizational constraints would limit their level of activity far below the market demands. This may seem a rather harsh point of view, which they should be given the benefit of the doubt about their knowing or not knowing. It was clear to many that this situation was inevitable, I was providing a solution, not identifying the problem.

The management of the companies knowing the situation would become as difficult as it is, undertook to do nothing. They were making money and would continue to do so when the prices went up. This lack of motivation to do anything was the choice of these managers. Show me a major producer that has earned any increase in their profits other then from higher prices.

Educating the public. Even today companies and their industry representatives claim to have no idea why prices are so high. What business are they in, do they mis-understand their markets so fundamentally? What could have been done in the past five years to mitigate the problems we face today? If consumers were given the real facts, would they have gone out to purchase the SUV they feel they are now stuck with? The duck and run from the truth policies of these organizations have allowed John Q. Public to walk blindly into the biggest issue ever facing mankind. The motivation to dip into the trough is strong with these managers.

In September 2003 I published a proposal to the industry to conduct the research of determining if the JOC was the key organizational construct. Given the opportunity to deal with this constructively, the industry represented by Petro-Canada, Encana, CNRL, Talisman and many others, chose to hire Cambridge Energy Research Associates (CERA) to research the idea that I proposed! Shows you the scope of what these people are capable of. And I was not dealing with some low level manager; I was speaking with CEO's of these firms. Luckily for me I was able to complete the research ahead of CERA. In publishing the May 2004 report the only question that was asked was who paid for the research? Well I did, and now I own it lock, stock and barrel.

It's been this last point that really bothers the companies. They have no desire to ever let anyone derive any value from Intellectual Property. It is since this time I have been forced to find employment in other industries. So here the industry was presented with a workable idea that made more sense then anything they had read before. (My words). And they hush it up and try to kill it. Each of these companies struggles with the inability of SAP to do any after sales service, why would they refuse any new idea? And that is the last point that these organizations are culpable for, their efforts to kill this opportunity to solve this problem before it affected the consumers.

These companies are more or less suffering from a grid-lock organization that long ago failed. Recall in 2007 even Exxon lost 10% of their production base after spending an additional $25 + billion in capital. These dinosaurs will never be able to keep up with the decline in their production base and are therefore slowly rapidly dying. So who else, other then the consumers are suffering as a result of the manager’s lack of accountability and motivation? Clearly the shareholders are at a sizable risk as they watch the managers slowly run the company into the ground.

I am calling on those investors to fund the developments of this software development project. A means for which the shareholders could be provided with the alternate organizational systems enabling them to manage their assets. The current oil company managers know that in today's business environment you must have the electronic systems in place first, or you will be relegated to manual systems to run your operation. The managers have their investors over a barrel.

How much longer will these managers be left in control will be determined by the investor class. An investor class that happens to be comprised mostly of John and Jane Q. Public, the people that are now facing the energy problem. What is needed is for them to act as I see no other alternative.


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Sunday, June 15, 2008

Very bad news.

I believe that the solution to the current energy difficulties is to eliminate the bureaucracy and replace it through the more natural form of organization, the Joint Operating Committee. Supporting that organization with these future software developments, will enable the markets to form and begin the process of eliminating the detrimental effects these bureaucracies have brought to our door.

I have fought with everything I have to make this situation as painless as possible. With $135.00 oil being a reflection of how I have failed to convince these bureaucracies to move to this alternative vision. Let me make it absolutely clear, these bureaucracies fully understood and agreed to the underlying hypothesis in my thesis. I originally floated this idea in September 2003 and published the full report in May 2004. What they have done since that point in time proves that they are incapable of acting in a responsible manner towards the energy demands of consumers.

The bad news that I feel is that the time has come where the real pain will soon begin. If the Saudi people have, as they announced this weekend, increased their production by a half million barrels, they have proven to me that they have done everything that they could or can. When the accusatory finger is pointed as to who's fault this is, I can assure everyone no one in the Middle East is to blame, the companies are.

The Saudi increase only shows their concern for the market. And I would have to state their concern is as genuine as mine. The system of how energy delivery in what we call the western world has reached a critical point where there is nothing left to give. A slight panic by drivers in North America will probably lead to excessive demand of the system that can not be addressed by the refiners, their inventories or the level of world oil production. This is a critical breaking point where the fallout will be permanent, and all the kings horses, and all the kings men, will never be able to put it back together again.

There is some difficulty ahead. If we are smart we would implement a consumer oriented rationing of gasoline. The primary priority should be to keep the transportation system operational at full capacity. I think a rationing is more then possible and will mitigate the disaster this may well become. The other task is the need for this software development, and the People who work in oil and gas today, get behind the re-organization of the energy industry to enable the production volumes that these economies need to function.

I believe that given the situation we have today, the resolve of the People in the next 5 - 10 years can restore the energy production our economies need and we can look back at this failure of the bureaucracies as one of the darkest periods of our civilization.

Today's problems will not be solved by today's thinking. Please, join me here, and pray for peace.


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Saturday, June 07, 2008

Management of IP (Intellectual Property) in oil and gas

I have a few thoughts on how IP is developed and used in oil and gas and why it needs to change, quickly. First, as I have documented in the Resource Marketplace Module. The competitive advantage that a producer has is contained within their land and production base. The application of the earth sciences and engineering knowledge, understanding, and capability to their land and production base are the means in which to build value. The IP (intellectual property) is how the market provides the commercial means of building the producers value.

And IP is the markets way of building value and key competitive advantages. The holding of IP within a producer company is redundant, of no value and an impediment to innovation. The market uses the tools of IP to prepare the state of art research and knowledge for its own monetary gain and competitive offerings. In the hands of a producer IP is useless.

What would holding a number of patents on drill bits provide a producer such as Exxon Mobil? Or in this case, the IP of using the JOC as the key organizational construct? Again in the hands of a single producer it makes the ideas unavailable and unusable. In the hands of an entrepreneur it can build value for the entire industry. Neither of these two examples provide the producer with any strategic competitive advantage. Nor does the producer have the economics of scale to make the innovation or research worthwhile. They are not in the drill bit or software businesses.

Until the producers realize the IP is not their competitive advantage, and accept the markets holding of these ideas, the market will not respond to the needs of the producers. If the markets efforts are in vein and the producer just hands over one vendors IP to the next, nothing will develop that is different from today's $138 / bbl marketplace.

Not recognizing the IP of others as a practice will need to change before the producers can begin to approach the market demand for energy. For the past number of years the management of IP by the industry has been catastrophic. Other then the large suppliers such as Schlumberger, BJ and Halliburton's ability to file for patents. Most of the IP has been ignored by the producers so that they do not have to grant the monopoly rights to the technology developer. Since the energy industry is a primary business and 100% of the resource value is received by them, does not mean they can strip, cherry pick, abuse or otherwise attempt to steal the IP of the market.


Over the past 5 years
my personal experience in this area has given me first hand knowledge of the depths of stupidity the companies taken the concept of IP ownership. This must stop for the betterment of society. If we continue in the fashion that we have, we will never be able to meet the markets demand for energy.

Central planning is dead, long live the market.


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Saturday, May 31, 2008

Draft Specification - Compliance & Governance™ Module

Compliance & Governance™ provides the methods that the firm deals with the investment community and its associated regulators. (SEC, Tax and Royalty). The unique attribute of how the People, Ideas & Objects™ application provides the compliance, is by using the advanced technologies available to automate as much of the processes as possible. Technologies that the industry inherits in this software development capability and the regulators embrace of technology through their published API's (Application Programming Interface) and Frameworks. The best example of which is the SEC's XBRL initiative.

In this module we are ensuring that the policies and procedures of the People, Ideas & Objects™ application and its users are in compliance with the various regulations and requirements of an organization. In essence, through building this application we are moving the compliance and governance framework of the firm to be in alignment with the four other frameworks of the Joint Operating Committee. Maintenance of the producer in compliance to the frameworks of the SEC, tax and royalty regimes is this applications compliance goals. The governance aspect of the application assigns the role and responsibilities of the People to their tasks based on the Military Command & Control Metaphor.

A key to the resolution of the industries ability to find and produce the energy the market demands is through the efficient application of capital. This point has been dealt with in the Financial Marketplace™ module and other modules in this specification. Raising money requires access to public funds. The size of the innovative oil and gas producer should not be an impediment or constraint of access to the markets of oil and gas activity, and, capital access. If a firm is a small partner in a few projects, their ability to raise capital will be dependent upon their level of compliance capability.

Copies of the specification with the other six module drafts can be downloaded from the old wiki .


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Wednesday, May 28, 2008

Robert Metcalfe on MIT Video

As I've mentioned in this blog before, Robert Metcalfe is someone that I find to be great interest to this energy problem. The introduction of Metcalfe in the Video provides a good summary of his background, and I would note that even despite his accomplishments his attitude remains fresh, and challenging to the status quo. The energy industry needs to be shaken and Metcalfe does a bit of shaking in this video.

Another aspect that Metcalfe was involved in was in participating in the MIT's founding of the Massachusetts Enertech Cluster. I held out high hopes that this was the necessary direction of the academic community, only to find soon after its forming it was hi-jacked by the climate and alternative fuels red herrings. I expressed my disappointment of this in this blog post here. Metcalfe is single handedly criticizing the Massachusetts Enertech Cluster in this one hour talk and returning the hope that I expressed of the MEC. Early on in the presentation @ approximately 9 minutes he states a few interesting points:

"Here are these trillion dollar markets (energy) that are poorly served."
"The people who have been doing energy investing for 50 years are annoyed with people like me, Internet people, invading the energy space." Stating, "look you guys have had your chance, and haven't solved it, move aside, here come the Internet people." (Here, here)

"In energy there are some particularly nasty people out there that are not going to welcome your technological developments."
Stating the goal should be that we pursue "clean" and "cheap" energy, Metcalfe summarily attacks the founding premises and objectives of the Massachusetts Enertech Cluster (MEC). Stating that;
  • Climate change is a "motivational bubble" that may be solved quickly.
  • Conservation should not be an objective of this project (MEC), we need abundant energy not conservation. Our economies need to grow, not be stifled by energy conservation.
  • No Nukes (MEC), which meets the clean and cheap energy objective. Technology can and will mitigate the effects of nuclear energy production.
  • Corn ethanol is a fraud.
  • The government needs to adopt a Manhattan styled project for energy. The government will have no solutions outside of taxes.
  • Only scale projects are needed, which of course is very foolhardy. Innovation will come from everywhere.
  • And lastly there are no silver bullets. Metcalfe suggests we spend more time finding the silver bullets instead of opposing their development.
Which leads me to this project. How is it that the energy industry can ignore the People, Ideas & Objects application as a solution?

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Sunday, May 25, 2008

Constrained Organizations

In a follow up post to the "Unconstrained Prices", I thought it might be a good time to reiterate the reasons that I see for the ever escalating oil and gas prices. Energy production is driven by the earth science and engineering disciplines. As one would expect, over a given period of time the science and engineering will be subject to new discoveries and findings, leading to further enhancements of the underlying sciences. Innovation plays a key role here in that the new sciences bring about new innovative uses, and in turn, lead to new science. This is the key area of long term value add in the oil and gas industry. A producer that is able to apply the science and ideas to the problem at hand will, over time, increase their production and reserves. I'd like to call this the "Capabilities Approach" to the oil and gas industry.


If we reduce the competitive nature of the industry down to this Capabilities Approach. We see the interactions and understanding of the industry as it developed over the past 100 years. Someone figures out how to drill deeper, then the subsequent wells expose more oil bearing formations and hence more opportunities for increased oil or gas production. As time has passed the more lucrative and "big" ideas have been applied in broader areas, and for longer periods of time.

As we have learned from Stanford Professor Paul Romer's new growth theory, "more" ideas are needed to progress forward from the current base of understanding. The supply / demand for these ideas is not linear, but logarithmic, and occur at a much faster pace through their life cycle. Enter the classic bureaucracy and realize its efficiencies are based on expansion of the underlying activity (growth) and continuous process improvement. Change, and particularly scientific and engineering change, are the hierarchy's deficiency. What we need is a new form of organizational structure that will support and enable the industry to compete in this dynamically changing and high demand marketplace. Until such time as we can change the performance dynamics of the organizational form for the oil and gas industry, prices of commodities will continue to rise.

It is these comments and ideas that I have asserted in this blog for the past few years. They are a direct result of my thesis that provides evidence that the Joint Operating Committee is the method of organization of the innovative energy producer. We need to start building the software that I have specified in the 11 module People, Ideas & Objects application and unleash the potential of the sciences for the betterment of society. I find these ideas are consistent with many of the industries leadership. The International Energy Agency recently made some comments that reflect these concerns.

The IEA states that by 2015 there will be a shortfall of 12.5 million boe / day.

"Future crude supplies could be far tighter than previously thought."

"Reflects an increasing fear within the IEA and elsewhere that oil producing regions aren't on track to meet future needs."

"The oil investments required may be much much higher than what people assume."

My personal favorite;

"This is a dangerous situation."

"We are optimistic in terms of resource availability, but wary about whether the investments get made in the right places and at a pace that will bring on supply to meet demand."

Yet nothing is done by these bureaucracies. They know what the problem is, there is just no motivation for them to make the necessary changes. Record profits at Exxon Mobil mask the 10% production declines. We need to consider who's responsibility this problem is, as the companies are unwilling to do so. After all it is not they who will be suffering with energy shortages but society in general.

On the other hand, and what I truly do not understand is that the $135 prices are rewarding those that find and produce the energy. This is an entirely new dynamic for the industry, when will we see the companies that are able to outperform the current crop of producers? The answer to that question unfortunately is not soon. Until this software is built to organize the efforts of the industry, our choices are limited to the status quo or manual systems. Join me here.

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