Removing the Business Risk

In yesterday’s post we contrasted the two business models that the oil and gas investor has to choose from. The current bureaucracies muddle along business model and the Preliminary Specification from People, Ideas & Objects. It was suggested that the investor could take the assets under management by the bureaucracy and in turn manage them through the People, Ideas & Objects software. There is one problem with that in that the oil and gas business is inherently risky and the investor would be taking on the full scope of the risk associated with the business. And that would not be a good idea. Instead what we need in addition to the software is for the investor to have the software, the organization and the people needed to run the industry for the investor to reduce the risks inherent in the business. What we should seek to do is to remove the bureaucracy in the transition to the new business model. And for clarity purposes this is what we are attempting.

Since the publication of the Preliminary Research Report in May 2004 and its proposal in August of 2003, the bureaucracy has declared war on People, Ideas & Objects. Using the Joint Operating Committee puts the writing on the wall for the archaic ways in which the industry is currently run. They have done everything in their power, their budgets primarily, to ensure that what has become the Preliminary Specification does not see the light of day. The bureaucracy chose to fight instead of participate. I don’t see them changing their tune now. As for the C class executives I think they are in a difficult position. The pressures of the job are far greater now as a result of the crisis in 2008 and I get the sense that they don’t have the bandwidth to take on anything with the scope and scale of the Preliminary Specification. There is also the feeling that even if they could support the Preliminary Specification the bureaucracy would not follow them. A mutiny if you will.

So why would the investor class be successful in making the transition to the Preliminary Specification, if even the C class executives are unable to do so. Simply it comes down to the health of the industry. The profitability is not a temporary situation. It is a permanent structural problem that requires a new business model to address the issues. Continued losses over the short to mid-term, particularly when the costs of, and reserves of shale are being brought onto the market are unacceptable. The industry needs to position itself for the insatiable energy era, to be innovative and dynamic. Not an industry losing money based on a business model of muddling along. The bureaucracy can’t support their justification for these losses. They have done nothing in the face of these challenges. And will do nothing as a result of these challenges. They are leaderless and faceless. They are also the first to leave when the trouble really begins. So we should act well before then and relieve them of their duties.

Back to the original point of the inherent risk of the business being taken on by the investor. By removing the bureaucracy we have a stripped down version of today’s oil and gas producer. The C class executives, the earth science and engineering resources of the firm, some legal and support staff would be directly employed. And the remainder of the needs of the producer, the accounting, production administration, land administration etc would be obtained through service providers organized across the industry. These service providers would be able to achieve levels of service and cost metrics that would make the current bureaucracies embarrassed at their inefficiencies and ineffectiveness. This organization would not only provide the business model for the innovative oil and gas producer, but would also provide the organization that would mitigate the inherent risks that the investors would seek to use an organization for. And after all if the business model doesn’t provide the means to mitigate the risks in the business, what good would it be?

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Indirect Control of the Business Model

There is a storied history with respect to how the bureaucracy has handled their ERP systems. To say that it was poorly is giving them credit for having an overall strategy. And it would be generous to grade them as poorly based on their history. The only first tiered vendor with a presence in the marketplace is SAP. IBM and Oracle left decades ago. Second tiered vendors such as P2’s Qbyte provide large portions of the markets offerings. P2 in fact purchased the Qbyte application from IBM when they decided to leave the business.

There has been an attitude that ERP systems are a basic necessity in business and they are purchased for primarily the producers compliance and governance requirements. No one sees these purchases as a strategic competitive strategy, only something in which it is necessary to ensure that the ERP system checks off all the right boxes. Get the application installed at minimal costs and ensure we are compliant with all of the firms requirements. Check. This is the way business was done. Might I suggest there has been a change and the ERP system is front and center in terms of the way in which the firm operates. That it defines and supports the organization's business model.

The bureaucracies business model that was pursued in the past was one of a low cost producer which was consistent with how the ERP systems approach was taken. Now the business model of the producer firm must focus strictly on the competitive advantages of the firm and ensure that these are front and center in the minds of its people. To focus the resources of the firm requires the software that connects them to be built with that business model and competitive advantage in mind. And it is because the existing tier one and two software vendors offerings do not support a competitive business model for oil and gas, that they are inadequate for the innovative oil and gas producer.

I would argue that the bureaucracies have not been able to establish a business model in either their current ERP systems, or in their businesses. And certainly not one that is consistent with the needs of the innovative producer. And are therefore rudderless and adrift. Indeed as 2012 will most certainly prove to be one of the worst years in terms of profitability. And one in which there are no plans or actions to deal with the situation. Control of the industry must be taken by some group. I expect that the investors will eventually declare they have had enough of this mindless, leaderless group of zombies and take control. But how.

Simply by taking control of the business model through the development of the ERP systems necessary to support that business model. Such as People, Ideas & Objects Preliminary Specification. One in which we provide the oil and gas producer with the most profitable means of oil and gas operations. Through use of the industry standard Joint Operating Committee. Which is the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. And when we move the compliance and governance framework from the hierarchy into alignment with the seven frameworks of the Joint Operating Committee we will achieve a speed, innovation and accountability in our operations that is necessary for the 21st century.

It is through the development of the Preliminary Specification with People, Ideas & Objects that the investor can achieve the profitability in their operations that they desire. It is also the means in which they can wrestle control of the oil and gas asset from the bureaucracy. To control the business model is through the development and use of the ERP software. And the bureaucracy have neither control of their business model or participation in an ERP system that is providing them the necessary means to control their business model. If the investors were to support People, Ideas & Objects, taking control of the innovative oil and gas producers business model from the hands of the bureaucracy would be like taking candy from a baby.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

A Summary of Our Competitive Advantage

For the last number of days we have been highlighting our competitive advantage of providing the oil and gas producer with the most profitable means of oil and gas operations. I thought today would be a good day to summarize the six points.

1) Our Value Proposition

We are the lowest cost ERP systems provider in the marketplace. That is by charging for the one time costs of software development, plus an element of profit as our fee structure. Therefore the industry is only paying for the one time cost of software development.

2) Specialization and the Division of Labor

If we review the Preliminary Specification there is a defined restructuring of the industry that takes place throughout the modules. The oil and gas producer is a stripped down version of itself that has the C class executives, earth science and engineering resources, a bit of legal and minor support staff. And that’s it. The rest of the producers needs are provided by service providers. And each of these service providers are focused on one process, or one element of a process, that is organized through the toolset of specialization and the division of labor across the industry. So for example there would be a lease rental payment processor that handles all of the industries lease rental payments. Where the cost of the lease rental payment, and the billing for the lease payment processor is billed directly to the appropriate Joint Operating Committee. Not to the individual producer.

What the advantages of moving to a system or methodology such as this is the lower cost and efficiency. The costs associated with the lease payment processor would be a small percentage of what is incurred by the industry today. By focusing on the most efficient way to process lease rental payments, and only lease rental payments, the processor would become so specialized as to reduce the time and effort in administering these tasks as to be a small component of the costs today. In Adam Smith’s pin factory, his research yielded a 240 fold increase in productivity from the changes that he made in the process of making pins. Having the lease rental payment process, and most particularly the administrative and overhead processes in the industry subject to this type of analysis, complete with a software development capability as proposed by People, Ideas & Objects, similar results in productivity would be attained.

3) Capability to Remove the Marginal Production

With the costs associated with exploration and production, its no surprise that producers are reporting losses on operations. What is surprising is that producers have done nothing to mitigate the overproduction that has caused the decline in natural gas prices. The reason for this chronic overproduction is the producers have to generate the revenues to cover the overheads they incur in the “high throughput production” model they employ. This model has the overhead costs of the producer firm being incurred whether there is production or not, and as a result, it makes their operation a high cost operation, even at full production. At lower production volumes it skews their earnings and their overhead costs appear out of place.

In the Preliminary Specification the “decentralized production” model is employed. As we mentioned in the second point above, the service provider charges for their services directly to the Joint Operating Committee the costs of their service. In most cases if there is no production, there is no charge for the overhead item and neither the producer or the Joint Operating Committee is incurring any of the overhead during times of shut-in production. Therefore the only costs that are not covered during times of shut-in production are the costs of capital. The producer can therefore shut-in production that is not meeting the marginal cost and save those reserves for a later time. And keep that production off the market until the prices rise to the point where they cover the marginal cost.

If producers across the industry follow this process then prices would not have the significant declines that we have experienced in the last eighteen months. If the downswing in natural gas prices were averted by way of a ten percent reduction in production volumes, the total revenues of the industry would have been substantially higher than what they have been. Making the production that would have continued exceed the marginal cost and be profitable, and for that production that was shut-in, no loss on operations would have been incurred because there would have been no overhead or production costs.

4) Innovation for Profits

As the fourth element of our competitive advantage of providing the innovative oil and gas producer with the most profitable means of oil and gas operations. We focus on innovation as the way in which to enhance the profitable nature of the producer. Innovation for profit, particularly from the science basis of the business, is the successful perspective for the 21st century oil and gas producer. It is within the DNA of the Preliminary Specification how the processes of innovation are identified and supported that enhance the ability of the innovative oil and gas producer. From Professor Giovanni Dosi.

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

5) Lower Costs of Exploration & Development

The oil and gas industry needs a successful, dynamic and innovative service industry in order for it be successful, dynamic and innovative. Today we have producer firms accusing the service industry of being greedy and lazy due to the high costs that are being experienced. A huge gap between what is required and what exists. The Preliminary Specification works to mitigate this conflict by addressing the issue of how the producer firm deals with the generation and management of ideas in the service industry. Currently the producers ignore the rights of the ideas developers and as time has passed, the number of companies that have initiated new products, services and competition have dwindled. Leading to the situation today where the producers have a limited number of participants who have the pricing power on their side.

It is through the Preliminary Specification that the producers begin to respect, sponsor and support the ideas of the service industry. In this way the marketplace will respond with new and innovative products, services and competition. Through a variety of interfaces in the Resource Marketplace and Research & Capabilities modules the producers are able to participate and lead the creation of new and better products and services by clearly expressing their needs.

When the oil and gas industry has a successful, dynamic and innovative service industry supporting the oil and gas industry then the profitability of the oil and gas producer will be enhanced, further contrasting People, Ideas & Objects business model to the current bureaucracies.

6) Earth Science and Engineering Resources

It is through the use of innovation, specialization and the division of labor that we leverage the earth science and engineering resources of the producer firm. As with the fourth and fifth point above, investment in innovation are undertaken with the express intent to return a profit. Innovation on the sciences of oil and gas are the express purpose of the modules within the People, Ideas & Objects Preliminary Specification.

In terms of specialization and the division of labor, the producer firm must approach the issue of the limited resource base of earth science and engineering resources. People, Ideas & Objects have developed the pooling concept to eliminate the unused and unusable surplus capacity that is trapped within the silo’s of each bureaucracy. In addition we have used specialization to reorganize certain skills within these professions to service providers who can specialize on the specific skill. It is with the pooling and specialization that the demand for engineers and geologists will be more manageable in the insatiable energy era.

A quick note about software

All of these components of our competitive advantage require the software known as the Preliminary Specification to be built. As we learned in the Preliminary Research Report (2004), software defines and supports the organization. Without the software to run the industry as described above, it will not happen.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

The Earth Science and Engineering Resources

We now move on to the final component of our competitive advantage of providing the oil and gas producer with the most profitable means of oil and gas operations. Today’s focus is on the earth science and engineering resources of the producer firm and how these are more efficiently and effectively employed in comparison to what we call the standard corporate business model employed by the bureaucracy. There are many aspects of this component of our competitive advantage, however, they all generate their profitability for the producer firm through innovation, specialization and the division of labor.

In the area of innovation we look to the Research & Capabilities and Knowledge & Learning modules to highlight the processes that are managed within those modules. Focused on the documentation and deployment of capabilities within the Joint Operating Committees. It is there that the research and development of those earth science and engineering capabilities are funneled into the Joint Operating Committee for their ultimate deployment. From an innovation standpoint there is also the Work Order that enables the innovative producer to participate and sponsor working groups to research and study various earth science and engineering based projects. Designed to eliminate the bureaucracy and the inherent difficulty in managing the logistics in accounting for the ad hoc nature of these groups. The Work Order is an interface that enables the user to allocate their overhead and AFE budgets to these studies in a manner that is consistent with the nature of the opportunities.

These innovations are made with the understanding that they will develop revenues in the long run that will exceed the costs. And with the focus on capabilities, the ability to build on previous innovations and maintain a corporate focus is a key part of the process. In addition to innovation we learned a significant amount about capabilities, and that has been incorporated into the Preliminary Specification. My favorite has to be what we have done with the phrase from Harvard Professor Carliss Baldwin “Knowledge begets capabilities, and capabilities begets action.”

The specialization and division of labor of the producer firms earth science and engineering resources takes on the difficult issue of the constraint of these resources. Over the next couple of decades the demand for these resources will outstrip supply due to retirements and the inability to bring on any increase in the numbers of new recruits. There just isn’t that percentage of the population that gets geology or petroleum engineering. The need therefore to deal with the resource constraints is a problem that the industry must resolve and the Preliminary Specification has used specialization and the division of labor to do so.

One of the key difficulties is what I call the hoarding problem. Each producer is building the capabilities within their firm to deal with any contingency at any time. This hoarding of earth science and engineering resources, when taken across the industry, builds unused and unusable surplus capacity within each producer firm. With each producer firm attempting to provide all of the capabilities necessary for their producer firm, they are the master of none. The solution that is provided within the Preliminary Specification is what is called the pooling of technical resources. Each member of the Joint Operating Committee commits the technical resources, based on their capability, to the property. Any deficiency is made up from service providers or outside producers who provide the capabilities for a fee.

Which brings up the last aspect of the division of labor and that is as it applies to the bread and butter geology and engineering work. Much of this work can be turned over to service providers who are organized on the basis of providing a service to the industry. Organized around a process or skill that is common or generic and could be specialized to high level if the scope and scale could be brought into the picture. Having each producer conduct all the earth science and engineering necessary for all of their properties will seem like a business model from the dark ages in a few years. What is being proposed here in the Preliminary Specification is the only reasonable solution to the real issue of the limited resource base.

It is the earth science and engineering capabilities that form a critical part of the innovative oil and gas producers competitive advantage. The Preliminary Specification enables the firms resources to focus on the research and development of ideas, and the deployment of those ideas in the properties that are held by the firm. This is the appropriate posture for a profitable oil and gas firm, and the sixth component in how People, Ideas & Objects provides the oil and gas producer with the most profitable means of oil and gas operations.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Lower Cost of Exploration and Development.

We now come to the fifth component of our competitive advantage of providing the oil and gas producer with the most profitable means of oil and gas operation. There are certainly other aspects of our competitive advantage, I am only highlighting the major ones. Today’s component is the lower costs associated with any field work done for exploration or development. This would also include the field operations on producing properties that were covered by a workover or an AFE.

There have been many complaints from the oil and gas producers about the high costs of field operations. I have written about the accusations made by producers toward the service industry and how the situation has developed and what needs to happen in order to correct it. Everyone would agree with the need for a more productive environment to be developed between the service industry and the producers. And I have put the onus on the producers to begin the process of building the capabilities for a more dynamic and innovative service industry. This can begin by developing the Preliminary Specification and implementing the changes within it to start the ball rolling.

There are a variety of interfaces within the Resource Marketplace and Research & Capabilities modules that provide windows to the service industry representatives. These collaborative interfaces are designed to deal with the one issue that is systemic throughout the industry. That issue is the manner in which the oil and gas producers deal with the ideas of others who have developed them. They ignore them. And they use them without respect to who the rightful owners are. This is counter to their own best interests. What has happened is that those that know the time and effort necessary to develop a new idea will not take the effort because the oil and gas industry will not respect their efforts, and therefore they don’t bother developing the idea. No new ideas are coming into the service industry at a critical time when the science is becoming paramount. And to add to the problem the oil and gas producers will not hire anyone for field operations that is not of size and scope to handle the job. So all of the money is going to the larger firms in the service industry, no new competition is being developed and no new ideas to support that new competition. Is it any wonder that the producers complain about the costs associated with field operations?

In order for People, Ideas & Objects to claim that we provide the most profitable means of oil and gas operations. We need to show that the costs associated with field operations would be lower in an environment where the Preliminary Specification would exist. By having the oil and gas producers respecting the ideas of others in the service industries will be all that is required to make the changes from the current status to a dynamic and innovative service industry. There are a variety of interfaces and modules that are dedicated to the initiating, sponsoring and supporting of ideas throughout the Preliminary Specification. As I indicated, these are what are necessary for both an innovative oil and gas and service industry. When drilling a well in a shale formation can cost ten to fifteen million dollars the opportunities for innovation are strong. Today no one is motivated to do so because the producers will not respect the owner of the idea. So everyone just picks up their paycheck and carries on. Its a simple matter of you reap what you sow. Recall in yesterday’s quotation of Professor Giovanni Dosi that investments in innovation is for the purpose of profits. That reasoning applies in this instance as well in that the innovation will reduce the time, effort and costs of field operations by finding a better way.

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Innovation for Profit.

As the fourth element of our competitive advantage of providing the innovative oil and gas producer with the most profitable means of oil and gas operations. We focus on innovation as the way in which to enhance the profitable nature of the producer. Innovation for profit, particularly from the science basis of the business, is the successful perspective for the 21st century oil and gas producer. From Professor Giovanni Dosi.

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

The Preliminary Specification has been designed to capture the “what” and “how” of innovation within the software that is used by the innovative producer. Throughout the modules the principles and understanding of innovation were researched and incorporated into the software. Our research included the works of many but most particularly Professor Giovanni Dosi and his paper “The Sources, Procedures, and Microeconomic Effects of Innovation” (1988). It was there that we learned many of the fundamental aspects of what is necessary for the oil and gas producer to focus on innovation. Recall that it was in our Preliminary Research Report (2004) that we learned that innovation can be reduced to a defined and replicable process.

To highlight a few of Professor Dosi’s work, in this next quotation he notes the opportunities, the processes of innovative search, and incentives to investments in innovation.

Thus, I shall discuss the sources of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search, and the nature of the incentives driving private agents to commit themselves to innovation.

To capture all of the research within one blog post would not be possible. I am only highlighting the fact that the Preliminary Specification was designed and developed with these principles in mind. Reference to the pertinent research of Professor Dosi and other researchers is presented throughout the eleven modules of the Preliminary Specification.

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

1) Capabilities and stimuli generated with each firm and within the industry of which they complete.

2) Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.

3) Additional issues include the conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulation, tax codes, patent and trademark laws and public procurement.)

Innovating for profit as the fourth element of People, Ideas & Objects key competitive advantage of being the most profitable means of oil and gas operations. It is within the DNA of the software how the processes of innovation are identified and supported that enhance the ability of the innovative oil and gas producer. We are beginning to see the substantial nature of People, Ideas & Objects competitive offering. With our value proposition of being the lowest cost ERP system provider, using specialization and the division of labor to reorganize the administrative and overhead resources of the industry, to use the decentralized production model to remove the marginal production from the marketplace, and today’s innovation for profit. No wonder the bureaucracy is so upset with me.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Organizational Constraints

At People, Ideas & Objects we state that organizations are defined and supported by the Information Technologies that are used by that organization. This post will discuss this point further and detail the nature of the constraints that the current oil and gas producers are experiencing as a result of the poor quality Information Technology they are using.

First of all it is necessary to state that the organization is going to be enabled and constrained by the IT that it uses. That is the nature of IT in that it does limit the organization in certain ways, even though it enables it in others. This is why it is important that the industry adopt the Preliminary Specification which includes the People, Ideas & Objects software development capability to ensure that these organizational constraints are removed through further development of the software.

In the current environment of the oil and gas producer I see a number of similarities in both the Canadian and U.S. marketplaces. And that is an incapacity to deal with the same old issues that have been dealt with before. Its like we have been here before, but the same players are executing the same difficulties over and over again. These issues are the inability to effectively plan for the appropriate takeaway capacity, and the inability to scale back production during pricing difficulties. These old issues are systemic in their application because they have no systems in place to deal with them. What is the producer to do. They have nothing to change to. Change requires that the systems be built to deal with the situation first, and then the change can be implemented. We live in a time and a place where the use of Information Technology is that important to our lives. Organizations don’t change when SAP or any other system doesn’t change.

The other aspect is the ability to deal with the future issues of the industry. Such as we mentioned a few days ago of how the unconventional reserves were going to be produced. Or how the relationship with the service industry was going to develop so that the reserves could be developed in a more cost effective manner. If the industry were to rely on the current systems then the expected outcome would have to be on the basis of the fact that the current systems would return the same outcome. There can be no change in outcome from the status quo until you change the systems to reflect the changes that you want in the organizations first and foremost. Dealing with the same old routine of the day to day is the only way that the current bureaucracy can deal with it because that is the only the thing that the system is programed to do and that is the only thing in terms of software development capability that the industry has developed.

Until such time as the industry has adopted and developed the Preliminary Specification and the software development capability that People, Ideas & Objects is offering. It should expect more of the same. It is that simple. Otherwise we are in this endless programming loop without an exit.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Commodity Prices Above the Marginal Cost

We have been discussing how use of the Preliminary Specification provides the innovative oil and gas producers with the most profitable means of oil and gas operations. Last Thursday we mentioned how People, Ideas & Objects were the lowest cost ERP system provider. And on Friday we discussed how the administrative and overhead costs of the industry would be reduced through the specialization and division of labor that are defined and supported through the Preliminary Specification. Today we want to discuss the manner in which higher profits are attained through the use of the Preliminary Specification by way of ensuring oil and gas production is sold only when its marginal costs are recovered.

It's been eighteen months since natural gas prices have declined. And its not that the prices that were being realized before then were all that spectacular. With the costs associated with exploration and production, its no surprise that producers are reporting losses on operations. What is surprising is that producers have done nothing to mitigate the overproduction that has caused the decline in pricing. The reason for this chronic overproduction is the producers have to generate the revenues to cover the overheads they incur in the “high throughput production” model they employ. This model has the overhead costs of the producer firm being incurred whether there is production or not, and as a result, makes their operation a high cost operation even at full production. At lower production volumes it skews their earnings and overhead costs which appear out of place.

In the Preliminary Specification the “decentralized production” model is employed. As we mentioned on Friday the service provider charges for their services directly to the Joint Operating Committee the costs of their service. In most cases if there is no production, there is no charge for the overhead item and neither the producer or the Joint Operating Committee is incurring any of the overhead during times of shut-in production. Therefore the only costs that are not covered during times of shut-in production are the costs of capital. The producer can therefore shut-in production that is not meeting the marginal cost and save those reserves for a later time. And keep that production off the market until the prices rise to the point where they cover the marginal cost.

If producers across the industry follow this process then prices would not have the significant declines that we have experienced in the last eighteen months. If the downswing in natural gas prices were averted by way of a ten percent reduction in production volumes, the total revenues of the industry would have been substantially higher than what they have been. Making the production that would have continued exceed the marginal cost and be profitable, and for that production that was shut-in, no loss on operations would have been incurred because there would have been no overhead or production costs.

Adding the ability to shut-in production on marginal operations to the ways in which People, Ideas & Objects provides the innovative oil and gas producer with the most profitable means of operations. Is a substantial part of our competitive advantage. Shutting in production is the logical thing to do but producers refuse to do it due to the impact on their performance. The method used by People, Ideas & Objects would actually improve the profitability of the producer, retain the reserves for the future when prices rise, and reduce the costs of operation.

Whereas today’s continued unprofitable production maintains high cost operations, and adds the losses on operations to the cost of the reserves to be recovered from future operations, requiring even higher prices. Yet the bureaucracy is happy with the status quo, so there is that. Instead of doing what it needs to do, the bureaucracy will continue to do what it know’s how to do, particularly when it lacks strong leadership. But lets be honest, maybe their strategy of hoping for a cold winter will come through this year.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Making Oil and Gas Profitable.

We continue our discussion of how People, Ideas & Objects provides the most profitable means of oil and gas operations. Today’s discussion will focus on the areas of specialization and the division of labor and how these tools will be highly effective in reducing all of the costs incurred in the producer firm. Bold claims, but that’s my job.

What we do know is that today we stand on the shoulders of giants and benefit from a very sophisticated and complex specialization and division of labor. Everyone in oil and gas has attained skills from education and training, and gained experience from years of working within their chosen field to conduct very select and highly specialized work. To disrupt this in any fashion without a full understanding of the global aspects of how specialized this work has become would be a failure. At the same time, with the corporate model proving to be unsustainable, the focus will be on cutting costs. Cutting too deep could have greater implications than what were intended. The point is to move to higher level of specialization and division of labor will not be done, and can not be done without significant forethought.

Secondly we have to consider the role of software in our society. If we intend to move to a high level of specialization and division of labor. Then the software that we use, and particularly the ERP software, is going to have to define and support those changes. Therefore we are not only going to have to deliberately plan the next level of specialization and division of labor, we will need to build the systems that define and support it first, before the implementation of any changes or benefits will be seen. This is one of the defined benefits of having the software development capability which is proposed by People, Ideas & Objects.

If we review the Preliminary Specification there is a defined restructuring of the industry that takes place throughout the modules. The oil and gas producer is a stripped down version of itself that has the C class executives, earth science and engineering resources, a bit of legal and minor support staff. And that’s it. The rest of the producers needs are provided by service providers. And each of these service providers are focused on one process, or one element of a process, that is organized and specialized across the industry. So for example there would be a lease rental payment processor that handles all of the industries lease rental payments. Where the cost of the lease rental payment, and the billing for the lease payment processor is billed directly to the appropriate Joint Operating Committee. Not to the individual producer.

What are the advantages of moving to a system or methodology such as this. Cost and efficiency are the reasons. The costs associated with the lease payment processor would be a small percentage of what is incurred by the industry today. By focusing on the most efficient way to process lease rental payments, and only lease rental payments the processor would become so specialized as to reduce the time and effort in administering these tasks as to be a small component of the costs today. In Adam Smith’s pin factory, his research yielded a 240 fold increase in productivity from the changes that he made in the process of making pins. Having the lease rental payment process and other processes in the industry subject to this type of analysis, complete with a software development capability as proposed by People, Ideas & Objects, similar results in productivity could be attained.

When we consider the current corporate model attempts to provide the producers administrative needs for all that falls within their domain. And the understanding that is necessary to support those administrative tasks. The ability to build that administrative capability is costing each and every oil and gas producer their profitability. What will become to be seen as an archaic business model will be the way in which the industry is operated today. It has to because it is unsustainable. And a more effective and efficient business model based on a higher definition of specialization and division of labor will become the norm through the adoption of the Preliminary Specification. The industries survival requires it. And this assures our targeted market, the oil and gas investor that we do indeed offer the most profitable means of oil and gas operation. As without the software to define and support this higher level of specialization and division of labor, it will not happen.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Unconventional Oil and Gas Reserves

The Oil and Gas Journal reports the following unconventional reserves information.

BP’s latest energy outlook, which it released on Jan. 16 in London, said that worldwide, there are an estimated 240 billion bbl of technically recoverable tight oil resources and 200 trillion cu m (tcm) of shale gas. Asia’s resources total an estimated 50 billion bbl of tight oil and 57 tcm of shale gas, compared with North America’s 70 billion bbl of tight oil and 47 tcm of shale gas, it indicated.

That is certainly a lot of oil and gas. Add the 70 billion bbl of tight oil to the 170 billion bbl in oil sands and North America has adequate supplies to meet its needs. Conversion of the North American gas reserves brings in 1,659 tcf of gas which is mind numbing. To give some context, the amount of estimated conventional gas reserves for all of Canada was at one time around 153 tcf with cummulative production of approximately 80 tcf, leaving 73 tcf remaining. The amount of remaining U.S. gas reserves is estimated at 317.6 tcf. What these numbers show is the value of the shale revolution in meeting the demands of the energy consumer.

What is also apparent is these reserves will not be produced inexpensively. If anything the discussion around the Preliminary Specification in terms of the relationship with the service industry and the profitability of the oil and gas producer are or should be the primary concern of the industry. Approaching the development of these reserves should be the topic of discussion, but it isn’t. The way we approach the development of these reserves should be based on the new organizational and market basis as presented in the Preliminary Specification. This is the first step in developing these reserves.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.