The Preliminary Specification Part CCXXVII (R&C Part XXXVII)

In yesterday’s post we noted how the information detailed in the “Capabilities Interface” of the Research & Capabilities module would provide the “knowledge, experience, and skills” of the operation. That these details were provided to all of the members of the temporary organization that was put together for the purpose of that specific operation. From the lease hands on the drilling rig to the engineers and geologists of the participating producers of the Joint Operating Committee. Everyone would be on the same page in terms of what and how the capabilities of the firms and market were being deployed. In today’s post we want to discuss these points further and relate how the People, Ideas & Objects Preliminary Specification enables the innovative producer to successfully complete these field operations.

[I]t seems to me that we cannot hope to construct an adequate theory of industrial organization and in particular to answer our question about the division of labour between firm and market, unless the elements of organization, knowledge, experience and skills are brought back to the foreground of our vision (Richardson 1972, p. 888).

Before we get too much further into this discussion let us also bring in the Military Command & Control Metaphor that was developed by People, Ideas & Objects. The MCCM provides a means for the “pooled” technical resources within a Joint Operating Committee to immediately adopt a command and control structure that is recognizable. It is expected that this command and control structure would also extend over the field personnel from the field contractors that were hired for the operation being conducted. This would therefore provide a level of control to the engineers and geologists that would attain the precision necessary. Such that once the engineer gave the order to drill to a TD of a certain depth, then that would be achieved at exactly the  point where the engineer expected it.

Here in the next quotation Professor Langlois raises an interesting point about “incentive alignment”. We’ll be talking about this more in tomorrow’s post as well. But in essence he is saying that at a certain point its not about a matter of incentives that motivates a team to succeed.

As we will argue in more detail below, there are in fact two principal theoretical avenues closed off by a conception of organization as the solution to a problem of incentive alignment. And both have to do with the question of production knowledge. One is the possibility that knowledge about how to produce is imperfect - or, as we would prefer to say, dispersed, bounded, sticky and idiosyncratic. The second is the possibility that knowledge about how to link together one person's (or organization's) productive knowledge with that of another is also imperfect. The first possibility leads us to the issue of capabilities or competencies; the second leads to the issue of qualitative coordination. p. 11

Reading of this next quotation shows that we have a job to do here in the “Capabilities Interface” of the Research & Capabilities module. That is we need to replace this critical function that was done by the “firm” in the previous organization. As much as I want to criticize the current management they are doing the job to a certain level. And to not respect that level would be a failure on our part. What we need to do is to capture what the firm does now by “lowering the costs of qualitative coordination in a world of uncertainty.”

A close reading of this passage suggests that Coase's explanation for the emergence of the firm is ultimately a coordination one: the firm is an institution that lowers the costs of qualitative coordination in a world of uncertainty. p. 11

Going back to the incentives issue for a moment. Lets put in context the conflict between the service industry and the oil and gas producers. They have been in disagreement for a number of years as to the pricing of the services for field operations. Read this next quotation with this in mind.

All recognize that knowledge is imperfect and that most economically interesting contracts are, as a consequence, incomplete. But most of the literature considers seriously as coordinating devices only contracts and the incentives they embody. It thus neglects the role- the potentially far more important role - of routines and capabilities as coordinating devices. Moreover, the assumption that production costs are distinct from transaction costs and that production costs can and should always be held constant obscures the way productive knowledge is generated and transmitted in the economy. p. 14

Professor Langlois is 100% correct. The producers are relying on contracts to incentivize the contractors and its not working. What is required is better coordination. And that begins with systems like the People, Ideas & Objects Research & Capabilities module that details the capabilities of the producers and field staff in a manner that constructively deals with the problems of a scientific based business.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXXVI (R&C Part XXXVI)

It was during the Preliminary Research Report that we determined two important elements that we should point out here in the Research & Capabilities module of the Preliminary Specification. The first was the oil and gas industry was moving away from an “easy” energy era where producers were able to provide for bankable returns on investments. And moving to a much more difficult scientific basis of the business based on the earth science and engineering capabilities as the key determining competitive advantages. The other element that was determined in the Preliminary Research Report was that organizations are defined and supported by the software that they used. And we coined the phrase that SAP is the bureaucracy to reflect this fact. Therefore in order to change the organization it is necessary to first change the software that defines the organization.

It is in the Research & Capabilities module that we are defining and supporting the science basis of the oil and gas business. How the earth science and engineering capabilities of the firm are acquired and deployed are the roles of this and the Knowledge & Learning modules. It is with that in mind that we begin our review of Professor Richard Langlois paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization”.

However, a new approach to economic organization, here called "the capabilities approach," that places production centre stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization. p. 1

It is by way of a scenario that a producer was able to document the internal and external components of the capabilities needed to conduct multi-lateral and multi-frac shale gas operations. Through a series of tests and trials they have been able to secure these processes to the point where the capabilities are deployed successfully with minimal interruption. These processes documentation in the “Capabilities Interface” is subsequently populated to all of the shale gas zones of all the Joint Operating Committees they participate in and are available to be deployed at any time. The Joint Operating Committees know they can rely on a fully tested process based on their publication in the “Capabilities Interface”. By selecting the code in the “Capabilities Interface” everyone from the engineers and geologists from the Joint Operating Committee participants to the lease hands on the drilling rig can see their role and responsibilities in making the operation a success. It is through the Knowledge & Learning’s “Planning & Deployment Interface” that the individual codes of each of the capabilities are accumulated and the program is designed to be executed.

One of our important goals here is to bring the capabilities view more centrally in the ken of economics. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as complementary area of research p. 7.

What we had not discussed, until now, in the previous entries of the Research & Capabilities or Knowledge & Learning module is an important element of the “Planning & Deployment Interface”, the AFE. It will naturally be the AFE that is a large part of how the business and operational end of the deployment is initiated. Therefore the AFE template is a simple part of the “Planning & Deployment Interface”.

In sum, whether we see it from the perspective of the capabilities perspective or from the perspective of the modern economics of organization, there is an exciting theoretical frontier ahead. p. 31

The obvious comment that I want to make at this point is for clarity. And that is that the marketplace is the source of the capabilities, with operational coordination coming from the producer firm and Joint Operating Committee. If the business is a science, having everyone read from the same, unique in each instance, hymn book will not only be necessary, but will be the only way in which to be successful.

Seldom if ever have economists of organization considered that knowledge may be imperfect in the realm of production, and that institutional forms may play the role not (only) of constraining unproductive rent seeking behaviour but (also) of creating the possibilities for productive rent-seeking behaviour in the first place. To put it another way, economists have neglected the benefit side of alternative organizational structures; for reason of history and technique, they have allocated most of their resources to the cost side. p. 6

You have a unique, one time, temporary organization which is derivative of the Joint Operating Committee. Isn’t it worthwhile to make sure that that organization is able to understand everything that it is working to accomplish.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXXV (R&C Part XXXV)

Starting off with our fourth, or capabilities, pass through the Research & Capabilities module of the Preliminary Specification. For background I went through the thirty four posts to date and have to say that I am very pleased with the content so far. We have much more to document, however the substance of the module is becoming quite strong. What I expect that we will be able to do is to detail what a capability is within the “Capability Interface” and many other things by reviewing Professor Langlois research material. But for today I thought I would highlight some of the areas that stood out for me when I was reviewing the module.

There are a couple of “big” things that the module does. The first is to divide the labor between the research and development processes and the execution of those processes. These are separated in the Research & Capabilities and Knowledge & Learning modules. The other “big” thing that is done is to move the knowledge to the area where the decision rights are held, the Joint Operating Committee. Professor Richard Langlois notes in the following.

The question then becomes: why are capabilities sometimes organized within firms, sometimes decentralized in markets, and sometimes coordinated by a myriad contractual and ownership arrangements like joint ventures, franchisees, and networks? Explicitly echoing Hayek, Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 9

Another point that jumped out at me was the quote from Professor Carliss Baldwin of Harvard University. That “knowledge begets capability and capability begets action” seems to capture the objective of what it is we are after in the module. We need to remember to keep this focus in mind when we are working in the “Capabilities Interface”. That the data elements that we bring in to the interface are designed to initiate action.

During our review of Professor Giovanni Dosi we learned of technical trade-offs. And how these trade-offs facilitate the ability for industries to innovate on the changing technical and scientific paradigms. Crucial to the facilitation of these trade-offs is a fundamental component that spurs the change and is usually abundant and available at low costs. For innovation to occur in oil and gas, People, Ideas & Objects asserts that the ability to seek and find knowledge, and to collaborate are two “commodities” that are abundant today. With their inherent low direct costs, knowledge and collaboration are the triggers for a number of technical paradigms which will provide companies with fundamental innovations. There are many knowledge and collaborative interfaces in the Preliminary Specification, making the People, Ideas & Objects ERP system the ideal candidate for the innovative oil and gas producer.

Lastly we should note that when markets such as oil and gas are asymmetric, research & development are the ways in which to differentiate capabilities and build an innovative oil and gas producer. Tomorrow we will begin our review of Professor Richard Langlois work in the Research & Capabilities module of the Preliminary Specification.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXXIV (AV Part XV)

We have been discussing the Accounting Vouchers “Transaction Design Interface” and its purpose as a tool to coordinate the use of the market. We want to ensure that the efforts in coordinating the market are consistent with the objectives of the firm or the Joint Operating Committee and don’t conflict with the objectives of those who are initiating the work in the Research & Capabilities or Knowledge & Learning or other modules. As we will see in this post the work in the coordination through the Accounting Voucher of the Preliminary Specification is focused on the business end of the transactions, not on the operational side.

The first question that most people will have is why are we concerned with the coordination of the markets in the Accounting Voucher. Here Professor Richard Langlois made the following comment in response to a question on his “Vanishing Hand” paper.

Here again, I think the problem is one of conceptual imprecision. It is perfectly common, and often unobjectionable, to contrast a market and an organization, that is, to contrast the institution called a market and the institution called an organization (such as, notably, a firm). But the opposite of “organization” in the abstract sense is not “market” but disorganization. More helpfully, the opposite of conscious organization is unplanned or spontaneous coordination. In this sense the market-organization spectrum (and similar spectra one could imagine) are arguably orthogonal to the planned-spontaneous spectrum. One could well wonder, as I have (Langlois 1995), whether large organizations do not in fact grow far more as the unplanned consequence of many individual decisions than as the result of the conscious planning of any individual or small group of individuals. And it is certainly the case that, as Alfred Marshall understood, both firms and markets “are structures for promoting the growth of knowledge, and both require conscious organization” (Loasby 1990, p. 120).

In this day and age, with such large distances, geographic, size, language and other, between vendors and producers leaving the coordination of the markets to “spontaneous order” is asking too much of human ingenuity. Particularly with the focus of the industry to a further division of labor and specialization, where the risk and reward of oil and gas operations are so great, market coordination or transaction design will be a critical and necessary task to be carried out. Each operation may be the result of more people being involved. Once again it is not from an operations point of view that we are attempting to influence the operation, it is from the business point of view. How will the transactions and business be captured in such a manner that the firm and Joint Operating Committee are incurring the lowest possible costs of the most efficient methods of these business transactions.

As Harvey Leibenstein long ago pointed out, economic growth is always a process of “gap-filling,” that is, of supplying the missing links in the evolving chain of complementary inputs to production. Especially in a developed and well functioning economy, one with what I like to call market-supporting institutions (Langlois 2003), such gap-filling can often proceed in important part through the “spontaneous” action of more-or-less anonymous markets. In other times and places, notably in less-developed economies or in sectors of developed economies undergoing systemic change, gap-filling requires other forms of organization — more internalized and centrally coordinated forms. p. 6

and

Let’s take a closer look at the nature of the “gaps” involved. Adam Smith tells us in the first sentence of The Wealth of Nations that what accounts for “the greatest improvement in the productive power of labour” is the continual subdivision of that labor (Smith 1976, I.i.1). Growth in the extent of the market makes it economical to specialize labor to tasks and tools, which increases productivity – and productivity is the real wealth of nations. As the benefits of the resulting increases in per capita output find their way into the pockets of consumers, the extent of the market expands further, leading to additional division of labor – and so on in a self-reinforcing process of organizational change and learning (Richardson 1975; Young 1928). p. 7

If we recall in the Resource Marketplace module the vendors and suppliers are maintaining their own contact data. Within that data is there key personnel that include their field staff. They should also be including their key business people for the purposes of the “Transaction Design Interface” to collaborate on these interfaces. In addition their billing information and banking data, as well as other critical data and information that will help the producer firm or Joint Operating Committee efficiently coordinate and process the transactions they are involved in should be included. Lastly a collaborative interface should be provided for everyone within the Accounting Vouchers vendor pool to discuss how the transaction is designed.

Tomorrow we will begin our fourth pass through the Research & Capabilities module.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXXIII (AV Part XIV)

We continue today with our discussion of designing transactions in the Accounting Voucher module of the Preliminary Specification. The role of the Accounting Voucher in defining the source of the market or the firm as the originator of the transaction is minimal. However, it has a role in ensuring the costs of these transactions are minimal and are a source of the firms profitable operations. We can all envision a power mad accountant with an entourage of underlings going off to solve the next great accounting issue. These costly nightmares occur every once in a while, maybe People, Ideas & Object is the latest manifestation of this sickness. Having the ability to design transactions should be a value added process, not an exercise with no purpose. If there was a simple way to describe this purpose it would be as a tool to coordinate the firm or Joint Operating Committees use of the market.

This conceptually falls between transaction costs economics, capabilities and transaction design. All three are areas that Professor Richard Langlois has included within his area of research. We have also used Professor Carliss Baldwin for her work in transaction design. Professor Richard Langlois in his paper "The secret life of mundane transaction costs."

However, a new approach to economic organization, here called "the capabilities approach," that places production centre stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization. p. 1

and

"One of our important goals here is to bring the capabilities view more centrally in the ken of economics. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as complementary area of research" pp. 7.

It is the Accounting Voucher module of the Preliminary Specification that takes the accountant away from the benign score keeper role to the role of active participant in the operation. One that looks at the market from the point of view of how best to coordinate the various elements to provide the greatest value add to the firm or Joint Operating Committee they are employed by. In Richard Langlois “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization"

A close reading of this passage suggests that Coase's explanation for the emergence of the firm is ultimately a coordination one: the firm is an institution that lowers the costs of qualitative coordination in a world of uncertainty. p. 11

And this is maybe one of the important considerations of the work that we do here in People, Ideas & Objects. Is the realization that each producer firm and each Joint Operating Committee are going to be unique. That due to their makeup they are going to be different in material ways. Innovation will have a dramatic scale in how it is measured against each firm or JOC. The approach will be anything but cookie cutter.

Either way it boils down to the same common-sense recognition, namely that individuals - and organizations - are necessarily limited in what they know how to do well. Indeed, the main interest of capabilities view is to understand what is distinctive about firms as unitary, historical organizations of co-operating individuals. p. 17

Therefore, according to the research of Professor Langlois the transaction costs will be an immaterial item in comparison between firms or Joint Operating Committees. That is to say that they will be the same in all instances. And People, Ideas & Objects have asserted that they will be immaterial due to the application of Information Technologies. However the differentiating costs between firms and JOC’s will be these costs of coordinating the market. Making the Accounting Voucher module a critical tool in the ability to offer the producer firm the most profitable means of oil and gas operations.

... while transaction cost consideration undoubtedly explain why firms come into existence, once most production is carried out within firms and most transactions are firm-firm transactions and not factor-factor transactions, the level of transaction costs will be greatly reduced and the dominant factor determining the institutional structure of production will in general no longer be transaction costs but the relative costs of different firms in organizing particular activities. p 19

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXXII (AV Part XIII)

One area of the Accounting Voucher that we have not been very clear in getting our point across is the concept of designing transactions. With this fourth pass through the Preliminary Specification we should be able to spend some time on defining what it is that we are speaking of. What accountants will be spending their time on in the future is the designing of transactions and leaving the processing of transactions to the computers. If you have been reading the Preliminary Specification you will have an understanding of the methods of organization of the marketplace and the producer firm. And how the Joint Operating Committee interacts with these. It will be with that understanding that we can begin to understand the concept of designing transactions. So let us begin with a simple description of the transactions makeup. From Harvard Professors Carliss Baldwin and Kim Clark.

...objects that are transacted must be standardized and counted to the mutual satisfaction of the parties involved. Also in a transaction, there must be valuation on both sides and a backward, compensatory transfer - consideration paid by the buyer to the seller. Each of these activities - standardizing, counting, valuing, compensating - adds a new set of task and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction.

Lets use a scenario where a group of small producers have four producing wells of natural gas with some liquids production. They are situated next to a large gas plant that processes their gas in exchange for the liquids and markets their gas on the spot market. In this scenario we are evaluating these properties from the perspective of including them in the Preliminary Specification. And we begin by analyzing the production accounting elements in the Accounting Voucher with the Production Accounting Service Provider in the area.

The Production Accounting Service Provider assesses their fees on the basis of a unit of work incurred during the production month. For example this might include reading a gas chart, meter reading, material balance report etc. At each point they assess a standard fee for service. This then goes to their billing process and at the end of the month is billed to their clients based on the work output. This imputes that someone has designed their billing and work flow from a transaction design point of view. Professors Baldwin and Clark.

The user and Producer need to deploy knowledgeable in their own domains, but each needs only a little knowledge about the other's. If labor is divided between two domains and most task-relevant information hidden with each one, then only a few, relatively simple transfers of material, energy and information need to pass between the domains. p. 17

and

Placing a transaction - a shared definition, a means of counting, and a means of payment - at the completed transfer point allows the decentralized magic of the price system to go to work. p.22

Again if there is no production there is no basis for the Production Accounting Service Providers billing. Fulfilling the decentralized production model objective. This scenario shows how the Production Accounting Service Provider had designed their transactions to produce their billings. Their accountants were not concerned about the processing of transactions, but the processes of billings in a fully automated manner. This is the role of the Accounting Voucher for the producer firm and Joint Operating Committee. Automation of the business processes of the innovative oil and gas industry through transaction design.

The most significant fact about this system, is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on... Frederick Hayek (1945)

The Accounting Voucher has the “Transaction Design Interface” that provides a worksheet for accountants to design transactions. There is a defined process of analysis of how to break down these transactions and we will get into that as we proceed through the Preliminary Specification. It is important to recall at this point that each Accounting Voucher can be used as a template for subsequent months. So once a transaction is designed, it can be reused through the implementation of it as an Accounting Voucher template.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXXI (AV Part XII)

When we talk about the capabilities of the innovative oil and gas producer. The Accounting Voucher module of the Preliminary Specification doesn’t necessarily come immediately to mind. Yet it is an important element in the capabilities that we have been detailing here in the Preliminary Specification. Particularly when we are moving to the “decentralized production” model from the “high throughput production” model that the industry is currently configured as.

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p. 58

In other modules we have detailed how the overhead costs of production, revenue and royalty and other accounting related costs associated with the property would not be incurred during periods when the facility was shut-in. The accountants these costs are representative of, are part of service providers and not directly employed by any of the specific producers. As such their service offerings were based on billings that were transaction driven, and therefore without production, no transactions were created to drive their billings. Hence no overhead, like accounting costs, would be incurred at the facility where the production was shut-in. The Accounting Voucher can be a further check and balance on the “decentralized production” model by ensuring that no overhead charges for the months are incurred if no production occurred.

Recall too that we have the Material Balance Report that balances the Joint Operating Committees volumetric inputs and outputs. Encapsulating these volumes within the Accounting Voucher itself as a means of enforcing the integrity of the systems balance. Where the “Material” balance, the “System” balance and the “Partner” balance for each of the participants in the Joint Operating Committee are as integral to the Accounting Voucher as debits and credits.

And the Purchase Order system that provides a means in which to control the costs for large projects. Ensuring that the contracts that govern these projects are adhered to in terms of payments, with-holding's and discounts. I think the Purchase Order capabilities provided, through an effective user interface, in the Accounting Voucher will provide significant value for the Joint Operating Committee.

We have also introduced the concept of costing the earth science and engineering resources of a producer firm to the joint account. These are in replacement to the overhead allowances that are provided for today. To charge these resources through the Accounting Voucher as a cost recovery and return on investment of the producer firms capabilities. With the elimination of the operator designation and the pooling of technical resources this charging of these resources to the joint account will be a necessary element of the pooling concept.

Lastly we have also discussed the concept of designing transactions in the Accounting Voucher. There are two different concepts here, and both are captured in the Accounting Vouchers implementation. The first is the same as the determination of who, for example, the drilling contractor, a third party or the producer will provide the product or service in the drilling contract. And the second concept is the determination of the thin crossing point of where the transaction should occur between the two firms. Although we want to select the “thinnest” point, with today’s Information Technologies we can also populate the transaction with a variety of data that makes for a much more valuable interaction between firms.

That brings to a close a quick high level review of the points to date in the Accounting Voucher module of the Preliminary Specification. We will commence our fourth, or capabilities, pass tomorrow.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

2012 Funding Update

The results of our 2012 first quarter funding campaign can now be reported. As was expected, none of the oil and gas firms chose to participate in the funding or support of People, Ideas & Objects. From our perspective, as with 2010 and 2011, we see this as evidence that management are too conflicted to participate in this project. The only way forward through this deadlock will be from the explicit direction of the ownership class of the oil and gas firms. It is therefore anticipated that this project will proceed on a somewhat brick-by-brick and stick-by-stick basis. Stay tuned.

It is now time for producers to act. Review of our Revenue Model will inform producers how they can participate in the development of People, Ideas & Objects Preliminary Specification. Producers can contact me here for further information, or to begin the process of their participation.

The Preliminary Specification Part CCXX (PA Part XXX)

Yesterday’s post began a discussion of the culture of the industry and how the inertia of the industries routines and capabilities made for formidable obstacles to change. Thankfully we are not focusing on changing any of the cultural inertia in the oil and gas industry. We are trying to change the bureaucracies and the systems to recognize the routines, capabilities and inertia of the Joint Operating Committee. This does however require the retirement or fading of the bureaucracy in its current form.

And institutional change, we argue, can often take place through the more or less slow dying out of obsolete institutions in a population and their replacement by better-adapted institutions - rather than by the conscious adaptation of existing institutions in the face of change. p. 6

Thankfully the bureaucracy does not sustain its own inertia. It is a forced or contrived existence that serves the purposes of a few within the organization, and these needs can be replaced by the Joint Operating Committee. I’m thinking of the command and control, budget and finance functions. What we have said we are doing with the Preliminary Specification is moving to the natural form of organization of the oil and gas industry, the Joint Operating Committee. I don’t foresee difficulties in making the transition from the bureaucracies forced ways to the more natural way of doing things with the Joint Operating Committee.

Another aspect of capabilities that has recently received a great deal of attention is organizational culture. In practice, not all organizations may be equally able to cope with change, as existing patterns of behavior involving both executives and subordinates may be resistant to change. Organizations develop collective habits or ways of thinking that can be altered only gradually. To the extent that a given culture is either flexible or consistent with a proposed change in product or process technology, the transition to the new regime will be relatively easy. If, however, the culture is incompatible with the needs posed by the change and is inflexible, the viability of the change will be threatened (Robertson, 1990; Langlois 1991; Camerer and Vepsalainen, 1988). p. 9

And the proposition that this transition will occur has been threatened by the bureaucracy. They hold the budget and have exercised it in not providing any funding towards People, Ideas & Objects. In this fashion the bureaucracy has been self-serving and looking after its own interests and has abandoned the future of the industry. What will the situation be like in five or ten years. Will their ways still be the methods in which the industry functions? What if they fail?

Teece... fails to note that the inflexibility, or inertia, induced by routines and the capabilities that they generate can raise to prohibitive levels the cost of adopting a new technology or entering new fields. Such inertia can develop to the extent that existing rules are both hard to discard and inconsistent with types of change that might otherwise be profitable. p. 10

McKinsey Consulting suggest that large populations will be joining the middle class in the next 20 years. This will have a dramatic effect on the levels of demand for energy. If the oil and gas industry fails to respond to these demands due to the bureaucracies lethargic ways, will anyone note that there were these alternatives proposed.

Whereas major competence enhancing innovations may, in time, be assimilated, the creation of entirely new organizations may be needed to deal with innovations that undermine the capabilities or competences of existing firms. p. 11

Tomorrow we will begin our fourth pass through the Accounting Voucher.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXIX (PA Part XXIX)

We want to continue to discuss the differences and similarities of the AFE process in the Partnership Accounting module of the Preliminary Specification. In particular we want to focus on the culture of the Joint Operating Committee and how the AFE process represents a large portion of the culture of the oil and gas industry. Lastly we’ll tie this discussion into the paper written by Professors Richard Langlois and Paul Robertson entitled “Institutions, Inertia and Changing Industrial Leadership”.

We have discussed many times that the People, Ideas & Objects application modules are moving the compliance and governance frameworks of the hierarchy into alignment with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee. By doing so we are recognizing and adopting the culture of the industry in its many forms. The change that we are exercising is the removal of the bureaucracy. When it comes to the AFE process there is little in the current process used by companies that is not representative of the culture of the industry. It is optimal that People, Ideas & Objects and the user communities capture that culture in these software developments when developing the AFE process.

One area that we will provide an enhancement to the AFE process is through the elimination of the “operator” designation. People, Ideas & Objects operates on the concept of a pooling of the resources of the partnership represented in the Joint Operating Committee. This is done to help mitigate the technical resource shortfalls, particularly in the earth science and engineering areas. As a result of this pooling an AFE will be open to any one of the participants in a Joint Operating Committee to post charges to. Those charges could be for their staff who are working on the project or for costs they incurred on behalf of the project.

With each producer potentially contributing unequal shares to the joint account or AFE during a month, or over the course of an AFE’s term. The possibility that an over or under contribution of their participation might occur. Therefore monthly equalization's will need to be a necessary part of the reconciliation of the accounts of the AFE. For example, if one of the partners was to pay for the drilling day rate, and their working interest share was only fifteen percent, then they would have paid in excess of fifteen percent of the budgeted AFE. In a case such as this, the producer should be compensated to the point where their contribution does not exceed the approved budgeted amount.

All of this is consistent with the culture of the industry as it operates today. What we are proposing is aligning this culture within the Joint Operating Committee with the other eight frameworks. We are not resisting this well ingrained highly functioning “inertia” as Professor Langlois would call it.

Inertia is the focus of this paper. As is explained in more detail below, inertia has two major functions in the cycle of punctuated equilibrium. Inertia result from, and in a sense embodies, the best feature of the stable phase of the cycle because it is based on the learning process in which producers determine which procedures are most efficient and effective. Once people are satisfied that the know how to do things well, they have very little incentive to look for or adopt new methods. In the words of Tushman and Romanelli (1985, pp. 197, 205), "those same social and structural factors which are associated with effective performance are also the foundations of organizational inertia..., success sows the seeds of extraordinary resistance to fundamental change." Inertia also provides the tension, however, that leads to the (relatively) short, sharp shock of the revolutionary period (Gould, 1983, p. 153) because the pressure required to displace a successful but inert system is considerable and takes time to accumulate. When there is little inertia, change can be assimilated in a gradual and orderly fashion, but an entrenched system may need to be vigorously displaced. p. 3

Based on this quotation, bureaucracies have little inertia and can be changed, therefore we will continue.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXVIII (PA Part XXVIII)

In this post I want to clarify some of the similarities and differences between the AFE and Work Order in the Partnership Accounting module of the Preliminary Specification. And to point out an important difference in the People, Ideas & Objects systems documents that is different then those that operate today.

I had mentioned previously that at no time should any of the staff at a producer firm or Joint Operating Committee be working and not having their time charged to a Work Order. The People, Ideas & Objects system will have the ability to charge your time to a valid Work Order and it is incumbent on the employee or contractor to ensure that they have their time charged to a valid Work Order number. These statements were made earlier on in the Preliminary Specification and now I can state that this also applies to the AFE. So the statement should read that it is incumbent on the employee or contractor to ensure that they have their time charged to a valid Work Order or AFE.

Some may wonder what is the difference between a Work Order and an AFE. AFE’s within the Partnership Accounting module are fundamentally no different then the industry understanding of an AFE. And that is, its a means to deploy the Joint Operating Committees capital within the Joint Operating Committees domain. A Work Order is different in that it is not affiliated with any formal partnership model. It is an informal group of producers that have come together to participate in a small project that is a one time event. Which will require the need to aggregate and distribute costs and revenues based on a working interest distribution. It has a formal approval process, but not as rigid as the AFE’s in that it requires budgetary approval only. They can be internal or external and are used to control the deployment of the budget of the firm / Joint Operating Committee.

Another aspect of how both the Work Order and AFE are different in the People, Ideas & Objects system in comparison to other systems that exist today is the manner in which documents are stored. Everyone is familiar with multiple copies of files that have been edited by different people. A disappointing and troubling problem when it comes to electronic files, a disaster when it comes to documents. No one can have different electronic versions of a document. Therefore there can only be one copy of the document that is used by everyone. (Exclusions for backup etc.) Since its electronic, multiple people can be using the same document at the same time.

The best example of a system that uses this exact manner of file management is Google Doc’s. Where users have access to a list of files in which they or others they grant access to can edit the same file. Any conflicts in the editing of those files are resolved by the users while editing and the file stays as one complete edited file at all times. There is no need for someone to take edits from many files and put them into one file as is the case with Microsoft Word or Excel.

Instead of files People, Ideas & Objects will present the user with documents like AFE’s and Accounting Vouchers that they have authorized access to. They and others will have the ability to view, edit and delete based on their authorization level and be assured that only those documents exist. No other more advanced copies, or copies that are less advanced, are being worked on. The amount of time and energy that will be saved in knowing that just one document exists is not only satisfying but highly productive.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXVII (PA Part XXVII)

One area that we have not discussed in any detail are the processes around the Authority for Expenditure or AFE. In this the fourth pass through the Preliminary Specification I am going to break the AFE discussion down into two parts, one here in the Partnership Accounting module and the other in the Research & Capabilities and Knowledge & Learning modules. What we will discuss today are the partnership accounting aspects of the document, and later we will discuss the capabilities deployment elements in the other modules.

As with any interface in the Preliminary Specification the user has the opportunity to right click on an item and pull up a menu item called “Create an AFE”. The system will have intelligence and be able to populate elements of an AFE template with the information that you right clicked from. For the purposes of this scenario, lets suggest that you clicked on a well description. The system will then populate the AFE with the information for that well and the partners that are in that Joint Operating Committee. The suggestion was made that another lateral and fracing job be done to increase the production from the shale gas zone. And you populate the AFE with the appropriate account codes that would be used to account for the costs. Note: due to the extensive work done in the Preliminary Specification it should be anticipated that the industry would have access to a global chart of accounts. Budgeted costs were worked out with a number of vendors that you were working with who have developed some enhancements to the re-entry and fracing of multi-lateral wells. You think these are significant innovations and the costs make it a potentially valuable enhancement to the wells production profile.

To present the AFE to the partners you have asked them to join you in the “Marketplace Interface” at the vendors facility to view a presentation of their new tool. All having confirmed their attendance. At the end of the presentation you digitally sign the AFE which releases the document to the other partners. (All with the data elements that are consistent with their data naming conventions. Global AFE #’s, account #’s, etc.) You indicate the cost estimates and time frame that this can be done to the one well, the poorest performer in the facility. You also submit the engineering and geological analysis of why you think the formation will perform well to the work that is proposed.

Within the AFE document itself there is a collaborative interface for the partners to discuss issues and opportunities related to the document. During the month this discussion focused on how the existing lateral could be protected from any damage during the drilling and fracing of the second lateral. Several partners expressed concern that the program did not do enough to ensure that no damage occurred so a supplemental was raised. After the supplemental there seemed to be a consensus amongst the members of the Joint Operating Committee that the risk was certainly worth the effort and the AFE was digitally signed by all the participants.

During the collaboration it was determined who was available from the producer firms to work on the project and a team was set up to manage the engineering and geological aspects of the program. These peoples time, as well as the accounts for the vendors for that AFE were now able to accept the charges for them. Cost overruns were not expected as an arrangement with the vendor for a fixed price was agreed.

This is a simple scenario of how the firm will raise an AFE and have the members of a Joint Operating Committee approve / disapprove of it. In larger firms there would be an automated routing of the document to the various internal departments for approval. This could be done simultaneously as multiple people can be reading one electronic document at the same time. Therefore accounting, production and exploration could each be approving the AFE all on the same day with none of the paper shuffling that normally goes on. Even within each department the various people who need to see and sign off on the information can do so at any time.

This routing of the document will of course be conducted at each of the producers who are party to the Joint Operating Committees. Each also having access to the collaborative interface of the AFE document between the partners.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.

The Preliminary Specification Part CCXVI (PA Part XXVI)

We’ve uprooted the accountants from their homes within the comfortable hierarchy. And expected them to develop their own businesses with their own self sustaining revenue streams. Now we’re going to get them to ask themselves how best to address the industries accounting needs. Imagine that, accountants considering how best to address the industries accounting needs. It’s not that we’re being mean to the accountants, its just in their nature. In the movement of the administrative functions from the firm to the market there will be the generation of what Professor Richard Langlois in his paper in the Journal of Industrial and Corporate Change describes as “Dynamic Transaction Costs”.

Over time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost - the cost of transferring the firm's capabilities to the market or vice-verse. These "dynamic" governance costs are the costs of persuading, negotiating and coordinating with, and teaching others. They arise in the face of change, notably technological and organizational innovation. In effect, they are the costs of not having the capabilities you need when you need them. p. 99

Recall in other modules, we established an account to collect the charges for Dynamic Transaction Costs so that they can be identified and controlled. These costs will be incurred in the beginning stages of the transition from the firm to the market configuration.

"F.A. Hayek (1945, p. 523) once wrote that 'economic problems arise always and only in consequence of change.' My argument is the flip-side: as change diminishes, economic problems recede. Specifically, as learning takes place within a stable environment, transaction costs diminish. As Carl Dahlman (1979) points out, all transaction costs are at base information costs. And, with time and learning, contracting parties gain information about one another's behavior. More importantly, the transacting parties will with time develop or hit upon institutional arrangements that mitigate the sources of transaction costs." p. 104

What I would imagine will happen will be the accounting staff of an oil and gas firm will be cast adrift to find its own footing. Based on a Service Level Agreement they will be free to organize and approach other producers for similar services and attempt to discern where their specialization exists. Sounds pretty dramatic but should this not have happened a long time ago?

It will be during this time when the Dynamic Transaction Costs are high. It will need to be determined within the Service Level Agreement how these costs are recovered. And as time passes and the work that is undertaken by the various accounting service providers that provide services to the producer fall into a routine, then we will know the transition to the market is complete. Professor Langlois notes.

‘Routines,' write Nelson and Winter (1982, p. 124), 'are the skills of an organization.' p. 106

and

Such tacit knowledge is fundamentally empirical: it is gained through imitation and repetition not through conscious analysis or explicit instruction. This certainly does not mean that humans are incapable of innovation; but it does mean that there are limits to what conscious attention can accomplish. It is only because much of life is a matter of tacit knowledge and unconscious rules that conscious attention can produce as much as it does. p. 106

and

In a metaphoric sense, at least, the capabilities or the organization are more than the sum (whatever that means) of the 'skill' of the firms physical capital, there is also the matter of organization. How the firm is organized - how the routines of the humans and machines are linked together - is also part of a firm's capabilities. Indeed, 'skills, organization, and technology are intimately intertwined in a functioning routine, and it is difficult to say exactly where one aspect ends and another begins' (Nelson and Winter, 1982, p. 104). p. 106

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification. 

The Preliminary Specification Part CCXV (PA Part XXV)

In yesterday’s discussion we saw that the accounting costs that are prepared for each Joint Operating Committee are the actual accounting costs incurred for that property, not an overhead allowance as it is today. By moving the accounting and administrative functions to the market, we are able to identify the exact costs to each of the Joint Operating Committees. The other implication is that neither the producer firm nor the Joint Operating Committee has to directly employ or house these accountants within their offices, only accommodate them when and where its required. These are some of the advantages of the Partnership Accounting module of the Preliminary Specification, and modularity in general.

When we have discussed modularity it has been in the context of the eleven module Preliminary Specification. However, it could easily be that we are discussing the concept of the Joint Operating Committee. Each JOC is isolated and exclusive to all other JOC’s. As Professor Richard Langlois noted in his paper “Modularity in Technology, Organization and Society”.

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

To have the entire accounting provided by accounting service providers who are not present in either the producer firm or the Joint Operating Committee seems too great of a stretch. Dare I ask when was the last time you saw someone from accounting in an operations environment? Aren’t these people sequestered on their own floors in other buildings for most of the time? A revenue and royalty accounting service provider operating on behalf of several dozen Joint Operating Committees and representing fifty producers would need their own office space to organize themselves in a manner that would provide for the most efficient way in which to do their job. Besides they could always visit. If you wanted them to.

These accounting services are not core to the producers or Joint Operating Committees core competitive strategy. Focusing on the land and asset base, the engineering and earth science capabilities which make up the value proposition is where the time and energy should be expended. Accountants can complete their work through meetings, emails and telephone calls no matter where they are located. The producers objective is to have these accounting overhead items match the revenues within a Joint Operating Committee when the production is shut-in. The decentralized production model will ensure that the operational and overhead costs are reduced during times of shut-in production.

In order to achieve the specialization and division of labor that will provide the efficiencies in their accounting services. The accounting service providers will need to organize themselves in a manner that provides the best service to their customers. These configurations will in no way represent the way the work is done today. In addition People, Ideas & Objects and the user community are designing systems to be as highly automated as possible. That’s not to suggest the role of the accountant is diminished in this environment. Their role will be more high level value added work, not transaction oriented. And they will have the support of the People, Ideas & Objects software development capabilities available to develop new and innovative systems interfaces. Enabling them to innovate and evolve their services to the producers.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification. 

The Preliminary Specification Part CCXIV (PA Part XXIV)

Through the process of moving the industry to a “decentralized production” model as we are proposing in the Partnership Accounting module of the Preliminary Specification. We have been able to match the operational and the actual overhead costs of the Joint Operating Committee to the production and revenues of the property. Now we have achieved a dynamic whereas, conceptually, no production would occur in the industry that was not profitable. As the prices declined production would be moved off of the market as it became unprofitable. And as prices rose production would return to the market when it was again profitable. It would be at this point that the market would achieve a certain dynamic that is not present in the marketplace today. And the oil and gas producers would be able to claim that their operations were capable of providing the returns to their investors that were real.

In today’s marketplace the managements focus on cash flow is designed to deceive those that will believe they are productive. However, it is only management that believe that cash flow reflects any value. It is simply a factor of how much cash the firm has generated. Included in that cash is an invisible amount of investment needed to maintain the assets. So although cash flow can be a big number it comes with big commitments as well. Sometime those commitments can exceed the amount of cash that is generated. Yet that never stopped management from promoting their cash flow numbers.

Another key criteria that management hang their hat on is their production targets. Wall Street will punish anyone who does not meet their production targets. It doesn’t matter if the firm is profitable or generate any value, as long as it makes it production targets the stock will rise. We’ve seen companies play this game for the 2 - 3 year run that the firm can do this before it completely runs out of gas. Inevitably the production numbers are missed and the ability to keep all the balls in the air are lost and the whole game collapses. Not only is production off, but the earnings were never there and the cash flow was a hoax as well. This game unfortunately is played by most of the firms. Most don’t get too convinced of the Wall Street analysts influence and maintain a bit of objectivity, however, most do get caught up in the game.

What is needed is for the producer and Joint Operating Committee to focus on the earnings, that is the real earnings of the property. Those based on the revenues less royalties less depletion less operating and overhead expenses, after tax. When a firm focuses on those and leaves the Wall Street analysts to go play by themselves then good things can happen to the value of a property or a producer. The valuation of a property could be based on the present value of its earnings. Having a lot of production with no earnings has no value to anyone. Its an exercise in activity. Any idiot can drill a well and produce oil or gas. It takes an oil man to make money. That’s the tough part of the business, making some money, despite what the Wall Street analyst might think of you.

If our focus is on the properties ability to generate a profit. And based on the shutting in of any unprofitable production, the property will only produce a profit. Therefore, how do we ensure the property always produces by lowering the costs of the properties operations. That is the next step in the ability of this “decentralized production” model to make the Joint Operating Committee the innovative framework of the oil and gas industry. With this understanding and operation the engineers and earth scientists will be able to turn to the Knowledge & Learning module of the Preliminary Specification to determine what capabilities exist within the producer population represented in the Joint Operating Committee. To see if there is any operation that they can conduct to enhance the profitability of the property. In essence each property is standing alone as its own unique cost centre. Being evaluated as its own separate business based on business values and expectations.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification. 

The Preliminary Specification Part CCXIII (PA Part XXIII)

In yesterday’s post we conveniently reorganized the accounting services provided to oil and gas producers. Such is the way of the 21st century technologies. Closer to the practical realities of the day we find that many of the accounting functions are driven by standards of practice. These standards of practice are critical elements in the market supporting institutions necessary for the accounting firms to operate in the manner that was described here yesterday. It is the capabilities of the accounting marketplace, the skills, knowledge and experience that the Joint Operating Committees will acquire through what Professor Richard Langlois and others call Transaction Cost Economics. A good summary of the concept is provided in Professor Carliss Baldwin and Kim Clark’s paper “Where do Organizations Come From? A Network Design Perspective of the Theory of the Firm.”

...objects that are transacted must be standardized and counted to the mutual satisfaction of the parties involved. Also in a transaction, there must be valuation on both sides and a backward, compensatory transfer - consideration paid by the buyer to the seller. Each of these activities - standardizing, counting, valuing, compensating - adds a new set of tasks and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction.

However, within a system such as the Partnership Accounting module of the Preliminary Specification. The costs associated with standardizing, counting, valuing and compensating a new set of tasks and transfers into a transaction are minimal due to the advanced use of Information Technologies. These costs are incurred by both the service provider and the Joint Operating Committee and are for their mutual benefit. If the accounting service provider is posting a journal entry for this months revenue for a number of JOC’s, then the costs for that transaction are minimal once the initial engineering of the systems are complete. The value comes about for the service provider in having their billings being generated by these transactions being processed during the month.

The user and Producer need to deploy knowledgeable in their own domains, but each needs only a little knowledge about the other's. If labor is divided between two domains and most task-relevant information hidden with each one, then only a few, relatively simple transfers of material, energy and information need to pass between the domains. p. 17

and

Placing a transaction - a shared definition, a means of counting, and a means of payment - at the completed transfer point allows the decentralized magic of the price system to go to work. p. 22

We have discussed how the People, Ideas & Objects Preliminary Specification is designed to accommodate the needs of the producers, the suppliers and vendors in the service industry, society and individuals. These accounting service providers will need special accounting interfaces in order to process their work with the producer firms and Joint Operating Committees that employ them. For instance, if a Production Accounting service provider is providing services to all of the Joint Operating Committees at three major gas plants then they might want to have special interfaces that display the information in different formats to what any one of those individual JOC’s or producers might want to look at the information. These types of interfaces will be to support the further division of labor and specialization that is a founding principle of the way in which the accounting firms were organized. To expect that they will fit within the generic system configuration of what a “producer” needs would be probably incorrect. This being another reason that People, Ideas & Objects provides a dedicated software development capability to the innovative oil and gas industry is a necessity.

We have also discussed in the Accounting Voucher module the design of transactions. This work of determining where the point of the transaction should occur is part of that process. It is more complex and detailed then it appears and if done appropriately it can have significant process efficiencies on both the producer or JOC, and service provider sides of the transaction.

The most significant fact about this system, is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on... Frederick Hayek (1945)

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification. 

The Preliminary Specification Part CCXII (PA Part XXII)

As we noted in yesterday’s post the transition to a “decentralized production” model in the Partnership Accounting module of the Preliminary Specification would enable the innovative oil and gas producer to match the operational and overhead costs to any decline in revenues due to a shut-in of production. By using accounting service providers, predominately through People, Ideas & Objects Community of Independent Service Providers (CISP), the various Joint Operating Committees would be able to control their costs in the event that commodity prices were unfavorable. Today we want to discuss the configuration of those accounting service providers and how they will fulfill the needs of the innovative oil and gas producers.

When we talk about the Community of Independent Service Providers we are highlighting their independence from any one specific producer. With the elimination of the designation of “operator” from any one specific producer in the Joint Operating Committee no accounting, production administration or exploration administration is provided to the Joint Operating Committee in a dedicated manner as it is today. This creates a fundamental change in the manner of how the work is approached in the industry. It is liberating when we consider the use of technology that is available today and the standardization of the processes that has occurred in the oil and gas industry. A Joint Operating Committee is therefore free to engage a service provider to fulfill these administrative duties, independent of any one specific producer.

From the accounting perspective we have already talked about the Production Accounting role and how that could be specialized to the point where a service provider is working in one geographical area for a large number of Joint Operating Committees. That is the most logical manner in which to organize that type of work. We have also discussed the royalty accounting requirements. And how a service provider would be able to specialize on that specific legislation enabling the Joint Operating Committees that use that service provider to pay the lowest possible royalty obligations. And we have talked about an accounting service provider that specialized in the compliance requirements to the SEC. The point being that we are seeing a further break down in the types of accounting service providers that are specializing on a variety of different criteria for the oil and gas producers. This is the required next step in the evolution of the economic output of the oil and gas industry. The further division of labor and specialization are the only means in which an economy can expand its output.

The recording of operating and capital costs for the joint account will not take too much of a specialization for a service provider to acquire. Most smart phones can now code an invoice to a fairly high level of detail. The interaction between vendor and producers is something that can capture the high levels of detail that are needed in an ERP system. Particularly one in which we are setting out to design. The real value for a service provider might be in the area of transaction design which falls under the Accounting Voucher module. Another area might be in Audit’s and reviews.

With the specialization of individual service providers based on unique accounting specialities. [I’m not familiar with production or exploration administrative needs and therefore can’t comment on those.] A Joint Operating Committee would engage these service providers to provide for the services that are required for their property. There they could choose a Production Accountant who is located in the region. A revenue and royalty accountant who is known for their ability to keep royalties down. And if the price of natural gas drops to the threshold price determined by the Joint Operating Committee, to where the facility will be shut-in, these accounting service providers are not engaged during that time and incur no billings for the property.

The alternative is for each producer to hire the necessary accounting staff as they do now. This is bureaucratic and wasteful in that it builds capacities in each firm to handle x contingencies. The problem is that each firm only needs those capabilities for a few hundred hours a year. Its time to look at alternatives, and the time to look is when we are designing systems for the Joint Operating Committee.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle (private circle, accessible by members only) and begin building the community for the development of the Preliminary Specification.