Technologies Role in Societies Demand for Energy

Lets go back a bit to look at the “Dynamic Capabilities Interface”of the Research & Capabilities module from a different perspective. One in which we are looking more high level at the attributes of what we are attempting to achieve. With this perspective it should be possible to see how the Preliminary Specification relies on the dynamic marketplace of the service industry, and defines and supports the framework to execute field operations with military precision. This seemingly inherent contradiction is anything but. The two are fundamentally different with the field operations being a temporary snapshot of the marketplace’s offerings. Once that operation is complete, that temporary organizational construct developed for the field operations and its capabilities will never exist again. That is not to suggest that the capabilities are deleted from the “Dynamic Capabilities Interface,” it's just that they do not exist in the organization that was used for that specific field operation.

We want to maintain all of the elements of a dynamic and innovative service industry. The Preliminary Specification has set out to provide for this by ensuring the service industry receives strong support from the oil and gas industry. This is also necessary for the energy industry to ensure that the demands of society, in terms of energy, are met. Once this financial marketplace recession is over the demand for energy will resume a steady pace. We have discussed Professors Anthony Giddens and Wanda Orlikowski theory of Structuration and model of Structuration. That people, society and organizations must move together or there will be failure. It should be asked if these societal demands for energy can be met by the current oil and gas organizations? Technology can have a role in this. From Professor Orlikowski’s paper.

Interaction with technology influences the institutional property of an organization, and this influence is more likely to be reinforcing rather than a transforming one. (p. 235 The Duality of Technology: Rethinking the Concept of Technology in Organization). 

In order to achieve the organizational performance necessary to meet society's demands, it will require the technologies to be put in place first. This was one of the key findings of the Preliminary Research Report. This same theme is picked up by Professor Richard Langlois in his paper “The Vanishing Hand: The Changing Dynamics of Industrial Capitalism.”

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

So where are we? The People, Ideas & Objects Preliminary Specification is designed to support innovative and dynamic markets that will enable the oil and gas industry to meet the surging demand for energy. But neither the surging demand nor the software exists. 12 million cars were sold in China last year. Probably the same number will be sold this year. The point is that the markets for energy are developing and the demand will grow. The question will be who will be the first to volunteer to keep their economy stagnant due to a lack of energy? And just as the markets for energy develop the software too needs to be developed.

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

There will be significant changes made to the markets during the times we are developing the People, Ideas & Objects software. Changes that will need to be captured in the software. There is never a best time in which to approach these changes, however, now might be a good time.

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.

What is a Capability

In today’s post we try to answer the question what is a capability? It is in the “Dynamic Capabilities Interface” of the Research & Capabilities module that we are seeking to document the “what” and “how” of the operation the Joint Operating Committee will undertake. It is very important to note at this point that the tacit knowledge that makes up that operation can not be documented. It will however be invoked through the orders in the Job Order system. The depth of “knowledge, skills and experience” that is documented in the “Dynamic Capabilities Interface” includes the members of the Joint Operating Committee, their roles and responsibilities, and the field operations personnel. Detailing what and how they need to do their jobs in order to attain the objective of the operation. In a paper entitled “Transaction Costs in Real Time” Professor Langlois notes:

Although one can find versions of the idea in Smith, Marshall, and elsewhere, the modern discussion of the capabilities of organization probably begins with Edith Penrose (1959), who suggested viewing the firm as a 'pool of resources'. Among the writers who have used and developed this idea are G.B. Richardson (1972), Richard Nelson and Sidney Winter (1982), and David Teece (1980, 1982). To all these authors, the firm is a pool not of tangible but of intangible resources. Capabilities, in the end, are a matter of knowledge. Because of the nature of specialization and the limits to cognition, organizations as well as individuals are limited in what they know how to do effectively. Put the other way, organizations possess a pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities. pp. 105 - 106.

That’s an effective way to state what it is that we are trying to achieve here. The “Dynamic Capabilities Interface” is a how-to database of capabilities the firm has for getting things done. Or;

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

Now here is the point where we need to pay attention. Both figuratively and literally. In this discussion as well as in any and all oil and gas field operations. The ability to do any of these tasks on autopilot doesn’t exist. And the implications of the next quotation is far reaching.

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

It will need to be the explicit instruction contained within the “Dynamic Capabilities Interface” that guides the field operation. The conscious attention necessary to follow the program is a necessity.

In a metaphoric sense, at least, the capabilities or the organization are more than the sum (whatever that means) of the 'skill' of the firm's 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

One thing I can say for certain is that the technology begins with People, Ideas & Objects. By developing the Preliminary Specification the producers will be able to attain the level of innovativeness and operational control that is described here.

It has been a long and difficult process to detail what it is exactly that we are capturing in this interface. Capabilities are a difficult concept to quantify and qualify. Add to that difficulty is the need to keep innovation at the forefront of the producers and Joint Operating Committees capability, and the challenge ahead is well defined.

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.

Operational Control Part II

In terms of operational control the “Dynamic Capabilities Interface” of the Research & Capabilities module provides a means to have everyone on the team operating from the same hymn sheet. Everyone knows what the plan is and everyone knows what everyone else is doing. Now we need a means in which to execute the plan. A way in which to deploy the tacit knowledge held by the team. In the “Planning & Deployment Interface” as well as in some other interfaces users will have access to the “Job Order System” of the People, Ideas & Objects Preliminary Specification. This will provide the ability for a member of the operational team, with the operational authority as designated in the Military Command & Control Metaphor, to issue a Job Order to execute a certain operation. Simply nothing is done during the field operation without the Job Order being issued.

And there is the budget. The AFE that was raised and approved for the operation is also at the hands of those that are in control of the operation. As has been mentioned many times throughout the Preliminary Specification. Within any interface certain aspects of the People, Ideas & Objects Preliminary Specification can be obtained by right clicking within the interface to pull up a contextual menu of items that enable certain actions. One of those actions could be the ability to approve an additional aspect of the operation for completion in the AFE.

The Work Order system will also be operational during these times. It will be providing the means in which to control the costs of the internal resources as those people charge their time to the AFE. The Work Order and Job Order are two separate and distinct systems. The Work Order aggregates the time that people are working on a specific project and bills them to the specific AFE or Work Order that is set up. It also works closely with the Military Command & Control Metaphor to layer a means to execute authority and responsibility within the resources that are committed to the project. These resources may be from different participants who are members of the Joint Operating Committee.

This next quote might be confusing without some discussion. It is from a Berkeley study and is dated in 1989, a time when the Japanese and the Americans were fighting over dominance in the microchip manufacturing industries. Apparently the two industries were configured quite differently, as Berkeley notes below. And it is the Americans that grew to dominate the industry at the Japanese almost total capitulation. The organizational structure of these industries is interesting to see some twenty three years later.

In one of the few contemporary academic examinations of this industry, a study by the Berkeley Roundtable on the International Economy concluded that; ... with regard to both the generation of learning in production and the appropriation of economic returns from such learning, the U.S. semiconductor equipment and device industries are structurally disadvantaged relative to the Japanese. The Japanese have evolved an industrial model that combines higher levels of concentration of both chip and equipment suppliers with quasi-integration between them. whereas the American industry is characterized by levels of concentration that, by comparison, are too low and [by] excessive vertical disintegration (that is, an absence of mechanisms to coordinate their learning and investment processes) (Stowsky, 1989) p. 3

My point in highlighting this is that we are relying heavily on the decentralized marketplace in the service industry to provide the oil and gas industry with the products and services it needs. We are however, also providing the Joint Operating Committee with high levels of coordination of the operation during the times it is employing the service industry. This is not a contradiction, one is a market, the other is an operation. The oil and gas industry depends on a highly innovative service industry and this will be expected from the marketplace. It also demands precision from the field operations that it conducts. Innovation will arise from both.

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.

Operational Control Part I

One aspect of innovation is tight operational control. Just because the firm is innovative doesn’t mean that it has a loose handle on operations. Apple is very innovative and is tightly controlled. These two attributes are not mutually exclusive. One aspect of the Research & Capabilities module is the ability to attain tight operational control during any field operation.

Reading of this next quotation shows that we have a job to do here in the “Dynamic 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 (or tight operational control) 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

It would be People, Ideas & Objects assertion that the current bureaucracy are motivating the service industry through incentive clauses in their contracts. 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.

What could only be described as a breakthrough, how we documented the Preliminary Specifications coordination of capabilities or tight operational control through the “Dynamic Capabilities Interface” of the Research & Capabilities module. This relieving the incentives problem that contracting of the service industry is presenting to the oil and gas industry. As we learned, coordination will provide oil and gas producers with the control over field operations. Coordination through the “Dynamic Capabilities Interface” provides the alternative means in which to ensure the science of the oil and gas business is effectively controlled as opposed to motivating the service industry through incentive clauses in the contracts. We will continue with this concept of the “incentive problem” and test it further with Professor Richard Langlois paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.”

More generally, we are worried that conceptualizing all problems of economic organization as problems of aligning incentives not only misrepresents important phenomena but also hinders understanding other phenomena, such as the role of production costs in determining the boundaries of the firm. As we will argue, in fact, it may well pay off intellectually to pursue a research strategy that is essentially the flip-side of the coin, namely to assume that all incentive problems can be eliminated by assumption and concentrate on coordination (including communication) and production cost issues only.

It is through the producers documentation of the capabilities in the “Dynamic Capabilities Interface” of the Research & Capabilities module that the “knowledge, experience and skills” are captured. From the engineers and geologists that are part of the Joint Operating Committee to those that are in the field, each should have an understanding of what is required of them from the capability that is listed in the “Dynamic Capabilities Interface.” Recall that in the Knowledge & Learning module these capabilities are called like plays in the football analogy. Everyone on the team knowing what is happening and what their role and task is. That is what needs to be documented in the “Dynamic Capabilities Interface” for each of these roles, for each of the capabilities that are captured there.

In a world of tacit and distributed knowledge - that is, of differential capabilities - having the same blueprints [or software] as one's competitors is unlikely to translate into having the same costs of production. Generally, in such a world, firms will not confront the same production costs for the same type of productive activity. p. 18

And that becomes obvious when we consider that the capabilities that are available to each Joint Operating Committee, and the Military Command & Control Metaphor that is used, is going to be unique to each situation it is applied to. Using the same team to apply the same capability over and over again however should yield the same results. Therefore, if you were running a ten well drilling program then the consistency of the capabilities and the MCCM would provide the same precision and the same results.

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.

Who Does the Innovation

Its important to remember that the people who are operating in the Joint Operating Committee are not experimental lab rats. That to leave a capability that was untested and untried for them to sort out is counter to the purpose of the “Dynamic Capabilities Interface,” the Knowledge & Learning module and the Joint Operating Committee. They are there for execution and not for the purpose of developing concepts or experimenting. To use the football analogy, the Joint Operating Committee is game day, and what the research and study area needs is a metaphorical practice field. One in which the opportunity to explore failure is welcome and where a producer can attain a learning experience to the ultimate solution or capability.

The question becomes who in the industry should be conducting the innovations. Some might assume that the majority of the innovation in the oil and gas industry is developed within the large producers. However, I think that is generally considered to be untrue. The small and start up oil and gas firms along with the intermediate producers are probably responsible for the majority of the innovations in the last 20 - 30 years. Professor Giovanni Dosi’s reference to the Schumpeterian hypothesis, “that bigness is relatively more conducive to innovation, that concentration and market power affect the propensity to innovate” and his rejection of that premise is evident in his paper’s following three points.

• First, although “there appears to be roughly a log linear relation within industries between firm size and R & D expenditures,” upon closer investigation, “estimates show roughly non-decreasing return of innovative process to firm size.” This is probably attributable to the fact that very large and very small firms conduct most R & D. p. 1151
• Second, although the expenditures in R & D incurred by large firms are impressive from a total expenditure perspective, the aggregate expenditures of small firms on a global basis becomes far greater in aggregate than the large business. p. 1151
• Third, money is not necessarily a good indicator of innovativeness. Large variances within industries can clearly be identified irrespective of firm size. p. 1152

Therefore “bigness” is not necessarily an element that enhances innovation. This might be intuitively understood by the small oil and gas producers ability to punch above their weight. In the software development business, SAP may do significant generic research in the software development arena. However, they do very little in terms of specific oil and gas research. On the other end of the scale People, Ideas & Objects have completed substantial oil and gas specific research and have commenced the development of oil and gas specific software with the publication of the Preliminary Specification. And I can assure you that at this time we are a very small firm, proving Professor Dosi’s first point.

If we look at Professor Dosi’s second and third point together. It is clear that money is not necessarily a determining factor in innovation. Although large firms spend impressively on R&D, that does not produce a number of usable innovations. And it may be the lack of financial resources that motivate the smaller firms to innovative problem solving on the other end.

Professor Dosi (1988) provides three caveats to the three differences noted.

• Statistical proxies cannot capture aspects of technical change based on informal learning. p. 1152
• Secondly, “differences in businesses and business lines (and business or product life cycles) may provide discrepancies in comparison of “like” firms. p. 1152
• Thirdly, many firms are expending significant research dollars in keeping up with other firms innovations.  p. 1152

Or in summary, proof that money is not necessarily a determinant of innovative success and that all producers need to be represented in an innovative oil and gas industry. There is a determining paradox for the ability to innovate based on imitation or on the basis of strict Research and Development. Companies can copy others innovations in industries with minimal asymmetry, (where competitors are all the same). Whereas industries that are asymmetric (like oil and gas) or have large variances in their capabilities are best served by differentiating themselves by pursuit of Research and Development.

This is why the focus on the capabilities is critical to the success of the oil and gas concern. They are able to differentiate themselves by research and development and the focusing on capabilities. Passing these capabilities on to the Joint Operating Committee through the Knowledge & Learning module allows the producer to initiate these capabilities “just in time” and where they are needed. This can be done without the concern that they are exposed or risked to potential competitors through the Joint Operating Committee. It should be clear through this analysis that those that would attempt to copy others capabilities will be expending extensive resources to do so, as much or even more then it would cost to develop the capabilities on their own, however, those that chose to copy will remain static within their competitive position within the industry. Its just not that easy to copy someone else, and it's not that valuable to their firm. 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.

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 Planning & Deployment Interface

It is reasonable to assume that any operation will be using multiple capabilities from the “Dynamic Capabilities Interface” and some of the capabilities may be from different participants. What is therefore needed is the “Planning & Deployment Interface” which is included in both the Research & Capabilities and Knowledge & Learning modules. It is an interface that enables the user to pull the individual capabilities into another interface and organize them in a manner in which they can be used during the operation.

The “Planning & Deployment Interface” has been about the known knowns to this point. There are a variety of known unknowns and unknown unknowns. To document these, if possible, is the role of the team members once the project interface has been processed and assigned. Recall that Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.” A section of the interface should be set aside where the team can collaborate on these points and provide some innovative solutions for the producer or Joint Operating Committee.

I want to reinforce the point that innovation will develop from the interactions and collaborations in the “Planning & Deployment Interface.” We note that the people assigned to the project would discuss the project and raise any issues that they may have and innovation would stem from these interactions. This process that is captured in the “Planning & Deployment Interface” is how the Preliminary Specification reduces innovation to a defined and replicable process.

Professor Dosi notes that innovation is developed through the interactions between the “capabilities and stimuli” and “broader causes external to the individual industries such as the state of science.” These are captured in the “Planning & Deployment Interface” (capabilities and stimuli) and the Work Order system (state of science) of the Preliminary Specification. As time passes the producer augments their capabilities with the findings from their research undertaken in the various Work Orders that are issued. Capabilities are implemented in the day to day activities that the firm is involved in. It is the interaction within the firm and Joint Operating Committee, and the broader causes that create the innovations. But there’s more.

We take the concept of a trajectory, define it, and apply it to oil and gas. The definition of a technological trajectory is the activity of technological process along the economic and technological trade offs defined by a paradigm. Dosi (1988) states “Trade-offs being defined as the compromise, and the technical capabilities that define horsepower, gross takeoff weight, cruise speed, wing load and cruise range in civilian and military aircraft.” People, Ideas & Objects assumes the technical trade-off in oil and gas is accurately reflected in the commodity pricing. Higher commodity prices finance enhanced innovation. These “trade-offs” are very much an engineering approach and therefore I want to reiterate the point that they are “defined as the compromise, and the technical capabilities.”

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 would assert 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.

Therefore the ability to collaborate in the “Planning & Deployment Interface” of the Research & Capabilities module is critical to the innovativeness of the producer firm. And by extension, this would also apply to the Joint Operating Committee through the “Planning & Deployment Interface” in the Knowledge & Learning module. Innovation is as much an engineering discipline as it is anything else. And that is how we can reduce it to a defined and replicable process.

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 Dynamic Capabilities Interface

The “Dynamic Capabilities Interface” of the Research & Capabilities module is designed to document the capabilities of the innovative and profitable oil and gas producer. Capturing the explicit knowledge of the producer for later deployment by the various Joint Operating Committees in the Knowledge & Learning module. The tacit knowledge, which can’t be documented, is deployed in the Joint Operating Committee through the various tools such as the budget, the Military Command & Control Metaphor, the Work Order and Job Order systems.

The “Dynamic Capabilities Interface” is a wiki style interface that details the specific aspects of the firms capability. Details such as who, what and how of the capability and its implementation. Details that fall within the domain of the earth science and engineering disciplines. Users are then able to view the state-of-the-art of the firms capabilities by reviewing the information that is contained within the “Dynamic Capabilities Interface.” Users are also able to augment the “Dynamic Capabilities Interface” when the firm has achieved additional capabilities through further research, participation in working groups or acquisition of capabilities. Capabilities are sorted based on their key criteria and geological formation so that if those criteria are selected by a Joint Operating Committee, those capabilities from the producer firms that are participants in that Joint Operating Committee will have those capabilities made available to them in the Knowledge & Learning module. The Dynamic Capabilities Interface also has serial numbers for each capability that are unique across the industry. Then users can select a capability and have it easily deployed and communicated with what the Research & Capabilities module calls the football analogy.

It is the transfer of the information from the producer firm to the Joint Operating Committee that we achieve the “moving the knowledge to where the decision rights reside.” Having the Joint Operating Committee select from the many participants aggregated “Dynamic Capabilities Interface” in the Knowledge & Learning module gives them the opportunity to decide the most innovative and profitable route for the property. Knowing what is available to them in terms of capabilities is consistent with Harvard Professor Carliss Baldwins finding that “Knowledge begets capabilities, and capabilities beget action.”

The last thing a firm wants its capabilities to be is static, hence the interfaces name of “Dynamic Capabilities Interface.” It is reasonable to assume that each time the capabilities are used there may be some changes that should be reflected in the documentation of the information. The information contained by the Joint Operating Committee in terms of the “new” information may be held by members of a different firm then the one that is the proprietor of the capability. It is therefore necessary that a “Lessons Learned” interface is developed in the Knowledge & Learning module. This “Lessons Learned” interface captures this new information for the owner of the capability to review and document for inclusion in the “Dynamic Capabilities Interface.”

That is how the Research & Capabilities module enables the producers to develop, implement and integrate advanced capabilities within their organization. The research undertaken by the firm should not interrupt the day to day of the operation. However, when the research augments the firms capabilities the “Dynamic Capabilities Interface” is updated with that information. With these newly augmented capabilities, they will be deployed through to the Knowledge & Learning module, where they can be used and reused by the organization. If the research conducted by the firm is unresolved or undetermined in its conclusion then it would not belong in the “Dynamic Capabilities Interface.” If it remained unresolved or undetermined then it would indicate that further work was required and therefore remain open in a Work Order for completion or resolution.

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 Marketplace for Ideas

It is within the Research & Capabilities and the Knowledge & Learning modules that the user has access to the “Ideas Marketplace Blog” interface. An interface that aggregates the ideas from the service and oil & gas industries representatives in terms of “how” and “what” their ideas are for solving the issues within their industries. It is a marketplace from the point of view that the owners of the ideas are publishing them and in turn are earning the rights to those ideas through their publication. That is how copyright works, it is the act of publication that earns the owners the legal right to their ideas that are presented there. In an industry based on science, ideas are an important element of the business.

Now what is so significant about ideas? First it's one of the few areas that computers are unable to provide any assistance in. People are the necessary ingredient in idea generation and application. The second important aspect of ideas is that we are going to need a lot more of them. The volume of ideas that are necessary today are an order of magnitude higher than what were required a generation ago. And the volume will need to be an order of magnitude higher in just a few years time. That is the nature of ideas.

If the innovative oil and gas producer is going to be iterating on the science and technology of the oil and gas industry. They will need to participate in a marketplace that is very dynamic. One that deals in every kind of idea, good, bad, brilliant, dumb or new. For if today it takes one idea to build one unit of value, tomorrow it will take two ideas to hold that value, and five ideas to build another unit of value. Such is the nature of where we are heading. If you’re not participating in the marketplace of ideas then you won't be participating in a market of value.

Having a marketplace for ideas within the Research & Capabilities module is designed to focus the industries attention in one area for all of the latest ideas. It will not be necessary to search the Internet for the next big thing, you know it will be in the “Ideas Marketplace Blog.” That is where the people with the ideas are going to post them, in order to earn the rights and find the market for those ideas. Granted there will be a lot of ideas that will not see the light of day, but with failure there is usually the seeds of success.

Once an idea looks promising the owners and the industry can then move forward with plans to commercialize the product or service and bring it on to the market. This is a role that the oil and gas producers will have to be more involved in. They are the primary industry. They source all of the revenues from the oil and gas sales. They need to support the research and development of products and services in the services industries if they are going to be the ultimate benefactors. Having the service industry divert capital expenditures to R&D activities is not working, will not work, and the expectation is that the service industry customers, the producers themselves, must carry these costs.

One of the advantages of respecting the Intellectual Property of the individuals or companies that present ideas within the “Ideas Marketplace Blog” is that the funding for Research & Development costs will be small. The need, as the producer firms do now, of educating multiple firms on the same technology won’t exist. And as such the producers will be able to focus all of their resources on the one with the ideas and therefore the costs to anyone of the producers will be immaterial in terms of direct costs. The development of the product or service will be able to aggregate the entire industries attention and resources and therefore be able to bring it to market faster and with less cost than in today’s market.

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.

Key Elements of the Research & Capabilities Module

It was in the Preliminary Research report (2004) that we learned the influence that Information Technology (IT) had on organizations. That IT defined and supported our organizations, and therefore it both enabled and constrained them at the same time. The need for the innovative and profitable oil and gas producer to remove these IT constraints requires the People, Ideas & Objects software development capabilities. Then as these constraints are identified they can be dealt with by developing new software to deal with new opportunities.

We have also discussed the current producers capacity to deal with issues are constrained by the systems that are in use today. That we see a repetitive inability, or lack of capacity to deal with the existing issues of the industry. Highlighting just the takeaway capacity and commodity pricing as the two premier issues that we seem to be reliving from the 1990’s. There is also an inability to approach new issues that industry is faced with; such as planning for the unconventional reserves development, and the relationship with the service industry. I have suggested that the industry seems to be in a never ending programming loop of which it is unable to exit. The systems that exist today have us operating from a day to day basis and they are unable to deal with the long term perspective, or any other aspect of the business that is not currently programmed.

This cycle of day to day existence is hurting the industry. The ability to deal with this problem is by adopting the Preliminary Specification and acquiring the software development capability proposed by People, Ideas & Objects. Then the innovative and profitable oil and gas producer will be able to break the cycle of systems dependence and effectively plan and execute the business of the business. Until will we do this, its best to become familiar with the various elements of the repetitive loop that we seem to be in.

The Research & Capabilities module provides another exit from this endless cycle. How does the firm break away from what it has done before and develop its capabilities to enhance its business in the long term. There are a number of things we do in the module that make that happen. The first is brought to us by Professor Giovanni Dosi in the Preliminary Research Report.

• That new science fuels new innovations, and new innovations fuel new science.
• Technical trade-offs facilitate the ability for industries to innovate on the changing technical and scientific paradigms.

It is reasonable to assume that the industry will undergo a large change in the underlying science. This will fuel significant innovations, which will lead to further sciences. In an industry that is based on science its “capabilities” become a key competitive advantage and how that science is implemented within the organization (and IT) becomes one of the primary concerns. Our next quote comes from Professor Richard Langlois.

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

To be specific, what we are doing in the Research & Capabilities module is “moving the knowledge (contained within the producer firms) to those with the decision rights (held within the Joint Operating Committees).” And this is where the alignment under People, Ideas & Objects begins. What the bureaucracy is trying to do is “moving the decision rights to those with the knowledge.” And that is where the current conflict is being created.

It is these two elements, capturing the iterations of scientific capabilities and moving the knowledge to where the decision rights are held that the Research & Capabilities module undertakes. Although there are other elements involved in the module these are the key concerns and the focus of the module.

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.

Leakage vs. Hoarding

Yesterday we discussed the division of the short term and long term perspectives through the Research & Capabilities module of the Preliminary Specification. But we are talking about more than just the capabilities that each Joint Operating Committee demands when we are talking about the capabilities of the producer firm and the use of the Research & Capabilities module. McKinsey put it well in this quotation.

Ongoing multi-year tasks such as launching new products, building new businesses, or fundamentally redesigning a company's technology platform usually call for small groups of full-time, focused professionals with the freedom "to wander the woods," discovering new, winning value propositions by trial and error and deductive tinkering.

We have detailed that the focus of the producer firm is on its asset base and its earth science and engineering capabilities. This area of focus of the Research & Capabilities module is therefore a key focus of the producer organization. We are not talking about the people that will be deployed in the day to day of the various Joint Operating Committees. These are the core scientists of the firm. The ones who are responsible with developing the key competitive advantage of its earth science and engineering capabilities.

We discovered something very interesting in our research. When we deploy teams of people in a fashion like we are with People, Ideas & Objects use of the Joint Operating Committee. The earth science and engineering capabilities of each Joint Operating Committee will atrophy. They need to be fed a constant stream of new and innovative ideas and possibilities to remain “current” with the science. This of course has to be steered by the mother ship so as to not duplicate errors or replicate blind bunny trails unnecessarily in each and every Joint Operating Committee.

Now it may seem that I have contradicted myself by stating that the firm needs to develop the capabilities necessary “in-house.” But I didn't say that. The Research & Capabilities module should be considered to be from an industry perspective. That although each firm will have specific people defined to support each firms needed capabilities, the service industry will take on a greater role in providing much of the innovative capabilities that are developed through the mindset employed by the producer firms. The in-house capabilities will be from the earth science and engineering point of view.

We’ve talked about the role the producer would have in determining the long term horizon of the firm. How the Research & Capabilities module would provide a window on the various Joint Operating Committees to provide the ability to apply systemic earth science and engineering innovations at each JOC without the risks of unnecessary duplications or repeated following of blind bunny trails. I now want to discuss the risks and rewards of the leakage of earth science and engineering information from the firm through the Research & Capabilities module. As it would be apparent that the level of discussion and collaboration through the partnerships in the Joint Operating Committees, through the industry itself and the service industry in particular would lead to significant leakage of the producers proprietary earth science and engineering knowledge, understanding and capabilities.

Hoarding of Information

In the Preliminary Research Report we learned an interesting point about the producers proprietary earth science and engineering knowledge, understanding and capabilities.

In Brown & Duguid (1998) they make the following observations: “The leakiness of knowledge out of and into organizations, however, presents an interesting contrast to internal stickiness. Knowledge often travels more easily between organizations than it does within them. For while the division of labor erects boundaries within firms, it also produces extended communities that lie across the external boundaries of the firms. Moving knowledge among groups with similar practices and overlapping membership can thus sometimes be relatively easy compared to the difficulty in moving it among heterogeneous groups within the firm. Similar practice in a common field can allow ideas to flow. Indeed, it’s often harder to stop ideas spreading then to spread them.” (p. 102) p. 32

We all know this leakage of information to be inherently true. When someone discovers something that is “news” within the industry, it is generally well known within industry associations for the geologists or engineers as soon as it is known in the firm. It is either imputed through what is known, or the leakiness is as porous as it is. What is a producer firm to do to ensure that the information they have does not leak? I think that the point lies in the meaning of “capabilities”; which is “an aptitude that can be developed” or “knowledge begets capabilities, and capabilities begets action.” Simply it is not possible to stop the leakage. The question therefore becomes, is it best to develop your aptitude by curling up with a text book or to participate in a marketplace. People, Ideas & Objects believes that innovative producers, instead of hoarding the information, will deploy the right information to the right people at the right time.

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.

Separating the Long and Short Term Perspective

We went through the four points from the McKinsey article as to why we should use the Research & Capabilities module for the long term perspective of the innovative oil and gas producer. We now want to revisit the first point of that article and highlight the significance of the opportunity that is presented by separating the long term perspective into the Research & Capabilities module, and the day to day into the Knowledge & Learning module. In the McKinsey article "The 21st Century Organization" it is noted;

The first design principle is to clarify the reporting relationships, accountability, and responsibilities of the line managers, who make good on a company's earnings targets, for all other considerations will get short shrift until short term expectations are met.

By making the Joint Operating Committee the key organizational construct of the innovative oil and gas producer. By aligning the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee with the compliance and governance frameworks of the hierarchy. By providing an extension of the governance structure over the partnership with the Military Command & Control Metaphor. We have isolated the Joint Operating Committee as the day to day operation of the oil and gas producer. This frees up the remaining portion of the producer to concern itself with the long term value generation of the firm.

Recall that these Joint Operating Committees are autonomous in the sense that they are focused on providing the greatest performance. They are driven through the Performance Evaluation module that allows them to determine where and how they can build the greatest value each month. Because they are operated by the partnership, which all the participants are motivated equally by financial gain, the producers will have faith that the “line managers will make good on a company's earnings targets.”

The Research & Capabilities module is looking at the interests the producer has in any number of Joint Operating Committees. This number may total into the thousands. To concern themselves with the operational performance of each would be a daunting and impossible task. And based on the previous paragraph their involvement is limited. However, there may be systemic corporate similarities that can be applied to each that bring value to the overall producer firm. Systemic similarities that can only be seen from the perspective of the firm, and in the long term. These are where the business value can be generated through the use of the Research & Capabilities module. McKinsey notes;

Dynamic management and improved collaboration, as we show later, are better ways of accomplishing the purposes of these ad-hoc structures. A company that aims to streamline its line management structures should create an effective enterprise wide governance mechanism for decisions that cross them.

It is through an iterative and collaborative approach to dealing with the various Joint Operating Committees that the users of the Research & Capabilities module is able to extract the value in the long term. By passing on new innovations or the results of experiments for the JOC to implement. The ability to influence any and all variables and to see any aspect of the firm and to analyze it is the domain of this application module. To define it as a set of fixed functionality will ultimately be the result of what the user community is able to provide, however, I am certain that they will also recommend that the application module remain open to analyzing any and all data.

If we reduce the business of the oil and gas producer down to the activities of the Joint Operating Committee. And concern ourselves only with the day to day activities of the property then we can generally be satisfied that we will know where our next meal will come from. But what about everything else. This is the classic conflict that a business must satisfy, the struggle between the long and short term horizon of the business. How much should be sacrificed in the long term and how much should be sacrificed in the short term? It should be noted that the name of the module is Research & Capabilities, this discussion focuses on the capabilities component of the module.

What is the firm capable of and how can that capability be enhanced? And more importantly since we are so dependent on our partners in the Joint Operating Committee and the service industry how is this apparent contradiction resolved? The traditional steps of the producer was to build the in-house capability. The assumption that is used in People, Ideas & Objects is that the resource constraints do not permit the luxury of each producer building these capabilities. The need to collaborate with partners to build the capabilities needed for the Joint Operating Committee is how these needs are met.

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.

An Introduction to Research & Capabilities

A quick pass through the Accounting Voucher brings us to what has to be my favorite module, Research & Capabilities. This module shares many similarities with the Knowledge & Learning module. The difference is that the Research & Capabilities is a firm, or producer, facing module and the Knowledge & Learning module is a Joint Operating Committee module.

We discussed how the Research & Capabilities module would be used to help build value by managing the transition from the hierarchy to the aligned producer organization under the People, Ideas & Objects software. Where the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee were aligned with the hierarchies compliance and governance. Making this transition will create opportunities for people to make changes to the work that they do in order to be more efficient and effective. What and how the software will do this little bit of magic is best described in a McKinsey article entitled “The 21st Century Organization”. In a four part recommendation McKinsey sets out in broad strokes what is required.

Streamlining and simplifying vertical and line management structures by discarding failed matrix and ad hoc approaches and narrowing the scope of the line manager's role to the creation of current earnings.

The process of using People, Ideas & Objects software will achieve these objectives by aligning all of the Joint Operating Committee and the hierarchies frameworks, imposing the military chain of command and having the financial interests of the producers drive the management of the Joint Operating Committee. We are “narrowing the scope of the line manager’s role to the creation of current earnings.” These are the focus of the Knowledge & learning, Partnership Accounting, Accounting Voucher, Petroleum Lease Marketplace and Performance Evaluation modules.

Deploying off-line teams to discover new wealth-creating opportunities while using a dynamic management process to resolve short and long term trade offs.

These are the critical new roles that are being discussed in these “new” modules “Research & Capabilities” and “Knowledge & Learning.” Providing valuable insight to their users about the business that is above the day to day noise. Where the long term vision of the organization can be set, executed and realized through these two advanced software modules.

Developing knowledge marketplaces, talent marketplaces, and formal networks to stimulate the creation and exchange of intangibles.

Within the Preliminary Specification, if we include the Research & Capabilities and Knowledge & Learning marketplace definitions, we have five marketplace modules in People, Ideas & Objects. Marketplaces are things that people will be doing more of in terms of participation in the future. Computers can assist, but again are generally very poor at making decisions, bargaining, knowing what to do, etc. The other three marketplace modules in the Preliminary Specification include the Petroleum Lease, Resource and Financial Marketplaces.

Relying on measurements of performance rather than supervision to get the most from self directed professionals.

Handing the Performance Evaluation module to the team that is running the Joint Operating Committee will enable them to manage the property in the best possible fashion. They are going to be able to figure out what it is that makes the most sense in terms of value, and begin to generate more of it. It is as simple as that. Except it is a very complex business. And that’s why you have your best earth science and engineering staff on the job. And the best business / geological / engineering minds running the Research & Capabilities module.

It should be coming clearer that it is no longer the 20th century. That to manage an enterprise requires a different approach, and the first thing that is needed to manage that enterprise is the software to enable that approach. With real shortages in the quality human resources necessary to maintain the markets demand for energy, it will be the producer that is able to maintain a high performing organization based on criteria such as these.

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.

Open Charges to the Accounting Voucher

Following on the Partnership Accounting module, the Accounting Voucher is unique to oil and gas systems due to the nature of recognizing the Joint Operating Committee (JOC) as the key organizational construct of the innovative and profitable oil and gas producer. One of the implications of using the People, Ideas & Objects system is that each partner will have access to the Accounting Voucher during the time that a Voucher is either open or closed. Each of the producers involved in the JOC are therefore able to access the Accounting Voucher and have costs / revenues distributed to the other partners involved in the Joint Operating Committee. This is one of the key differences that we had discussed in the Petroleum Lease, and Resource Marketplace modules. Partners are all contributing to the joint account as equal participants with the role of “operator” being relegated to a thing of the past. (Note too of course, that each participant is able to charge their own account with their own 100% charges. These charges are to their private accounts and therefore not seen by any of the other participants.)

Cost control becomes an issue when everyone is able to charge freely to the joint account. A careful reading of the previous paragraph reflects that I didn’t state “charge freely." Cost control comes about as a result of the traditional budgetary control of AFE and the Work Order system that is part of the Partnership Accounting module. Without pre-approval by the partnership nothing is able to be processed by the People, Ideas & Objects software applications. And as we have seen in the discussion of the Security & Access Control module, few will have the authorization to “charge freely” to the joint account in any form or fashion.

With the traditional ability to charge to an AFE or Cost Center, and possibly during the development of the People, Ideas & Objects Preliminary Specification, the user community determines the need to have a Purchase Order system, ensuring that an appropriate bidding and contracting process is in place, no unauthorized amount will be accepted in the system. There is also the fact that each voucher needs to be approved for payment before any money is expended and that approval would need to consider the authority of the joint account.

As one can envision these Joint Operating Committee - Accounting Vouchers can become large as they include all of the business of the property. Accountants would be frustrated at month-end trying to get these Vouchers closed if they had to seek approvals and close each of the transactions within the appropriate small window of time of their month end. Needless to say that each transaction within the Accounting Voucher is a small subset of the larger Accounting Voucher and can be dealt with as a stand alone individual item. Seeking its own approvals and authorizations that deal with just the domain of the specific transaction.

What is different in People, Ideas & Objects Accounting Voucher system vs what exist today is the elimination of the designation of operator. The capabilities for each producer to house the state of the art earth science and engineering resources necessary to run all of the properties within one oil and gas firm is believed to be beyond what is possible in the future. The solution prescribed in the Preliminary Specification is the further specialization of earth science and engineering skills and pooling of the resources of the partnership within the Joint Operating Committee. Therefore charges from each of the participants will need to be processed and paid just as if they were the operator in today’s systems. This will include not only internal costs but also for the field work being done on AFE’s and Work Orders. It may be that any one of the participants will be incurring charges on behalf of the partnership. Therefore the need to have the Accounting Voucher open to the partnership is a necessary evolution of the pooling concept that is part of People, Ideas & Objects Preliminary Specification.

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.

User Based Developments

The comprehensive accounting for the producer firm and Joint Operating Committee is conducted in the Partnership Accounting module of the Preliminary Specification. It is here that you will find the many traditional accounting reports, activities and information for the innovative and profitable producer and Joint Operating Committee. It will be this module and the Accounting Voucher that will be used by the producer, Joint Operating Committee and various service providers to carry out the accounting requirements for those concerns. Each will have access to their domain of information necessary to conduct their jobs whether that is at the producer, Joint Operating Committee or service provider. Security and access control being provided through the Preliminary Specifications Security & Access Control module.

In the high level discussion of the past few months we have discussed the material balance report and its automation of the production, revenue and royalty process once the production volumes are settled. We have also discussed the decentralized production model and how it enables the innovative and profitable producer to eliminate the overhead during times when production is shut-in. These are areas that are part of the Partnership Accounting module, and with the generic nature of the accounting, don’t need to be repeated here. There is one area that we haven’t discussed and that details the global scope of the accounting information of an ERP system. And that is the manner in which the developments have been approached in the industry before.

The myriad combinations of accounting possibilities that happen within oil and gas have to be captured and handled within the systems that are used in oil and gas. These combinations have not been captured in any of the existing ERP systems as of this date. The first aspect of solving this problem is to engineer the solution. Many have tried and have found their budgets to be too small for the job. Approaching this from the one producer perspective may seem like adequate funding, however, no one today is declaring success. If, as we have proposed in People, Ideas & Objects, aggregate the resources of the industry towards engineering the solution, this scope can be scaled, the costs to each producer will be incidental, and the results will be that each producer will realize the full scale of that software development effort.

When an individual producer has approached the development of an ERP system they have been granted a budget that is less than what is desired to deal with the potential issues. When the development begins, the issues become greater than what was expected and the need to simplify the application to meet the budget is the skill of the project manager. Users are rarely consulted as to their needs and are told as to what and when they will transition to a new system. Everyone grits their teeth until someone declares it a success and you hope for a better system next time. At least that is how I see most system integrations.

The first issue is the budget is inadequate to deal with the size and scope of the problems. Once the developers get into the problems, its time to quit and get out. What is needed is a concerted effort that is a quantum of size and effort to determine the issues and resolve them. Aggregating the budgets across the industry from like minded producers presents the possibilities that a budget can be presented to the developers to approach the issues and resolve them.

The second issue, and possibly the biggest is the fact that the user is not a member of the development team. People, Ideas & Objects are user community developments. Having the collective understanding of thousands of individual jobs that are present within the oil and gas industry can only be gained by the direct involvement of those users. To have developers spending time without the direction of users is a waste. They collectively do not understand, nor does any individual, the thousands of jobs that are done in the industry. Therefore the limited budgets that have been used in ERP systems development have been unable to deal with the user environment. And that has been to their detriment.

People, Ideas & Objects have put forward a vision of how the innovative and profitable producer and Joint Operating Committee can function in the future oil and gas industry. It is now for the user community to take that vision and build the systems that they need to make that vision real. This is their opportunity to have the systems necessary to do their jobs and provide the industry with the means to meet the future energy demands.

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.

Two Distinct Lines of Business

We move now to the Partnership Accounting module of the Preliminary Specification. Our first topic of discussion relates to the recent discussion in the Financial Marketplace module regarding the funding of the development of the capabilities of the producer firm. In today’s post we are discussing the second line of business of the innovative producer firm and that is the billing of the earth science and engineering capabilities to the various Joint Operating Committees that it has an interest in. These direct charges are in replacement to the overhead allowances that have been the standard in the industry. And are a result of the “pooling” concept that has been developed in the Preliminary Specification to meet the shortfall in supply of geologists and engineers. There is also the secondary issue of dealing with the specialization and division of labor as it applies to the earth science and engineering work that is conducted in the industry.

If partners are contributing human resources to the Joint Operating Committee then the systems that the partners use should be able to cost these resources, charge them to the joint account, and have their costs recovered by the Joint Operating Committee the resource was provided to. This also brings up the point that if the operator classification has ceased to be valid, the charges for operator overhead, where the recovery of these costs are realized today, the operator overhead charges should also cease to be valid. If three different producers are providing engineers and geologists to the Joint Operating Committee each should be able to recover the direct or standard costs of these individuals for the time they spent working on the property.

The ability to contribute technical resources from each of the members of the Joint Operating Committee and have their costs recovered by the producer firm will help to offset the costs in maintaining their capabilities. In addition the excessive costs of maintaining the capabilities of meeting any and all contingencies as firms do today, are not carried on any specific producers payroll. The bread and butter geological and engineering work can be conducted by specialized service providers in a division of labor that bills these services directly to the Joint Operating Committee as and when required. Understanding that genius is 1% inspiration and 99% perspiration, the 1% can be conducted within the producer firms and be focused on the generation of ideas, and the 99% can be focused on the work of developing those ideas and charging the Joint Operating Committee for the work in a highly specialized, and hence lower cost, manner.

The Partnership Accounting module provides the innovative and profitable producer firms with the ability to capture the time their resources spent on projects within the Joint Operating Committees. We have discussed the Work Order system and its ability to capture the time spent on any AFE or Cost Centre. This time will be automatically aggregated, calculated based on actual payroll burden or alternatively standard costs depending on how industry determines, and bill the Joint Operating Committee for the costs. During the monthly distribution these costs will be equalized and the net contribution will be a revenue stream as an offset for the producer firms capabilities.

This second revenue stream will never cover the costs of the capabilities of the producer. But it will go a long way to providing a base in which to support the firm in terms of the costs of its capabilities. In developing a producer firm it may be possible to rely on the revenues from its capabilities before the revenues from oil and gas begin. The Partnership Accounting module of the Preliminary Specification provides the ability for this charging out of capabilities, capturing the costs, billing and recovery within the system as a base feature of the module.

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 Friction Between Capital and Innovation.

Within the Financial Marketplace module we are creating lines of communication between the producer firm and the investment community. This is to aid in the objectives of speed and control that we set out earlier in this module. Much of this communication can be focused around the publication of the Revenue Per Employee calculation that we have discussed in the Petroleum Lease Marketplace module. A factor that reflects the innovativeness of the producers earth science and engineering capabilities, and also as a result of the expanded division of labor and specialization that is available as a result of using the People, Ideas & Objects Preliminary Specification.

Revenue Per Employee is therefore a reflection of value. When we discussed the factor in the Petroleum Lease Marketplace module it was for internal consumption purposes. The purpose of using Revenue Per Employee in the Financial Marketplace module is to publish it and allow the investment community to compare your performance against your peers. As we discussed in the Petroleum Lease Marketplace module there would be three types of variances that could be calculated on the comparisons between periods. There would be the volume, price and number of employees variance. Each would impute a different result, or trajectory, in terms of what the comparison of the variable meant over time.

Does Revenue Per Employee reflect a more innovative footing. That may be debated for some time. I think it clearly does, and I can’t think of a more effective means of answering how innovative a producer is. Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or “tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.” The net result of this, in a laboratory setting would be great experiments. The net result of this in a commercial setting like an oil and gas firm would be increased revenue over the period without the additional burden of increased overhead. Therefore Revenue Per Employee, in my opinion should have its own interface in the Petroleum Lease Marketplace, and be published as well on the Financial Marketplace module.

With such a focus on the earth science and engineering capabilities of the innovative oil and gas producer we run the risk of becoming too focused on the science. Revenue Per Employee will go a long way to keeping the producer focused on the business end of the calculation. But there has to be more. And sometimes that “more” comes from the cold hard slap in the face from the money markets telling you that you’ve been wrong about something for a long time. How can we incorporate some feedback within the Financial Marketplace module of the Preliminary Specification, so that it doesn’t get to the point where the producer has to sustain that humbling cold hard slap from the financial community.

We have discussed the promotion of the producers team of earth science and engineering capabilities on the Financial Marketplace module. It is through that interface the producer communicates to the financial marketplace the capabilities that they have assembled and what they as a producer are able to accomplish. I see the long term development of the producer as an extension of this capabilities development. The application of the capability and its development to a geographic area where the risks are of a certain nature and are unknown and unknowable for the foreseeable future. This is the nature of the oil and gas business and to embark on such an adventure without the financial marketplace committed to your team would be unwise and certain to fail. What is needed is a means to communicate on top of the “Dynamic Capabilities Interface” of the Research & Capabilities and Knowledge & Learning modules, and include what Professor Giovanni Dosi states here.

Internalization and routinization in the face of the uncertainty and complexity of the innovative process also point to the importance of particular organizational arrangements for the success or failure of individual innovative attempts. This is what was found by the SAPPHO Project (cf. Science Policy Research Unit 1972 and Rothwell et al. 1974), possibly the most extensive investigation of the sources of commercial success or failure of innovation: Institutional traits, both internal to the firm - such as the nature of the organizational arrangements between technical and commercial people, or the hierarchical authority within the innovating firm - and between a firm and its external environment - such as good communication channels with users, universities, and so on - turn out to be very important. Moreover, it has been argued (Pavitt 1986; Robert Wilson, Peter Ashton and Thomas Egan 1984) that, for given incentives and innovative opportunities, the various forms of internal corporate organization (U form versus M form centralized versus decentralized, etc.) affect innovation and commercial success positively or negatively, according to the particular nature of each technological paradigm and its stage of development. p. 1135

It sounds simple, and reasonable, to include “good communication channels” as a necessary part of any relationship between an innovative producer and its financial backers. To include these within the ERP systems is the key to making them effective. What originates as a result of these “good communication channels” is defined by Professor Dosi.

In general, each organizational arrangement of a firm embodies procedures for resource allocation to particular activities (in our case, innovative activities), and for the efficient use of these resources in the search for new products, new processes, and procedures for improvements in existing routines; however, the specific nature of these procedures differs across firms and sectors. For example, the typical degrees of commitment of resources vary by industry and so do the rates at which learning occurs. I now turn to the interpretation of these phenomena. p. 1135

Professor Dosi states that profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives.” (p. 1135) Professor Dosi introduces the theory of Schmookler (1966) and asked “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both”? (p. 1135) Schmookler believed in differing degrees of economic activity derived from the same innovate inputs. One would assume that this is the calm guiding hand of the capital markets providing leadership to the producer.

If the role of capital in the innovative oil and gas producer is going to change as we suggested in yesterday’s post. Then the influence of the investment community will need to be present in terms of the earth science and engineering capabilities of the firm. The risk that ideas become a self-serving science project with no commercial grounding is something that I think the investment community can safeguard against. The enhanced communication provided through the Financial Marketplace module, and particularly the focus on the factor of Revenue Per Employee will aid in making the investors returns from the capabilities, and the oil and gas properties continue to accelerate.

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.

What Role Will Capital Play?

It has been argued throughout the writings in the Preliminary Specification that commodity prices are allocating the financial resources to fuel the innovative oil and gas producer. If that is so, then what role will the capital markets play in the future of the oil and gas industry?

Taking this thinking to its extreme then the most innovative firm would also be the most profitable. As the costs of capital would be lower than its competitors, and with their innovations being on a steeper trajectory, and therefore more effective, and would be at less cost than the competitions. The investment in science and technologies is with the implicit expectation of a return on these investments, but also, to provide the firm with additional structural competitive advantages by moving their products costs and / or capabilities beyond that of the competition. Professor Dosi notes:

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.

What you are capable of achieving as an innovative oil and gas producer is possibly the most valuable asset that you have in the very near future. This capability is what you are investing in and how you expect to earn a return on your investments in oil and gas. Although much of your capability may be funded by the day to day of your operation, it represents a critical part of your firm's investments. In answer to the question posed earlier, this investment in your capabilities is a future role for the capital markets to make investments in.

Let me restate what has been said for clarity purposes. The costs of field operations will be offset, both from a capital and operations point of view by the higher commodity prices. The investment in capabilities, the earth science and engineering resources of the firm, will be augmented through capital investments made by the capital markets.

We noted that the producer firms engineering and earth science team was being highlighted in an interface on the Financial Marketplace module. Is it time that the producer was able to financially leverage these capabilities in the capital markets? If innovation is the result of the team that is put together, then the ability to fund that team and earn a return on the basis of their performance might be something that should or could be considered in this new insatiable energy era.

To facilitate that possibility an interface in the Financial Marketplace module could have performance metrics that reflect the results of their efforts. These could be quantified over a certain period and verified by reserve reports prepared by independent engineers. The point of the exercise would be to increase the value of the producer firm based on the intangible value of its capabilities. In a world where ideas matter, the ability to quantify them and qualify them within a marketplace brings real value to the oil and gas producer and investor.

To make dedicated investments in the firms capabilities, and to expand on their current capabilities will take significant efforts. Muddling along over a number of years will see the reserves and possibilities pass before an inexperienced team. That will be the cost of failure, the price for success will be the highly capable team.

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.