Documenting the Transformation Part III

With the prolific nature of the shale gas reserves. And the behavior of the bureaucracies. Natural gas will be selling for $0.15 in 2017. What’s to stop the bureaucracy from continuing to produce everything they can even though it only produces losses? Even with the existence of the Preliminary Specification they will not, on their own, begin the development of these systems to rectify the situation. The point here is to show that the oil and gas business has changed. And the bureaucracy hasn’t. And has resisted the changes proposed in the Preliminary Specification. And are leaderless, faceless and mindlessly going about filling their own pockets and fulfilling their own interests at the expense of the health of the industry.

If we look at the future of the industry in terms of the next 20 to 30 years we see that the demand and supply are both escalating. With so many people joining the middle class the demand for energy will be significant. China is now the largest consumer and importer of oil. Natural gas reserves in North America are impressive thanks to shale, however, given time the demand for gas will be as impressive. It is this future that we need to consider and prepare for. And that begins by profitably managing our assets today. Why would a producer lose money on any oil and gas operation? It shouldn’t in my opinion, if the prices don’t meet the marginal costs then the property should be shut-in until it can be determined how it can be produced at a lower cost, or prices move higher. That’s the platform in which an innovative and profitable industry can approach the kind of future that we face here in oil and gas.

You here CEO’s complain that the focus of the investment community is on the current quarter’s performance and that’s it. The CEO feels that no one is concerned about the long term anymore. That is probably a CEO, like we mentioned yesterday, that will be losing his job overnight. You have to perform in the short term for that there's no escape. But that does not mean that anyone is giving up on the long term. It’s the CEO who should be the one who is setting the agenda for the long term as well as meeting the short term performance. And in order to do that today it must include the ability to deal with the organization and how it performs. And so much of what an organization's DNA is defined by is the systems that it uses. If it expects to be flexible and dynamic but its systems are static, its performance will be static. It must affect the DNA of the organization first, the systems, in order to affect the performance of the firm.

Making the change to the Preliminary Specification will provide the industry with a level of innovation and dynamism that is missing in the industry today. And that is only the beginning. What People, Ideas & Objects are providing is a software development capability to the industry for the future. A capability to affect change to the software to change the organization. So that when the industry needs changes to deal with the business over the next 20 to 30 years it can turn to People, Ideas & Objects, to have the software developed to meet those changes. This will be a critical capability for the industry to acquire in the process of developing the Preliminary Specification and beyond.

If ever there was to be an Information Technology revolution, this is the time and People, Ideas & Objects is the place. IT can dramatically affect the performance of the oil and gas industry both in the short and long term. But we need to deal with the bureaucracy and the old ways that things were done. This transition is not being handled well because people believe, as a result of the dotcom meltdown, that technology doesn’t have that significant a place in our lives. Well it has and it’s here in the way that the Preliminary Specification defines an innovative and dynamic business model for the future of the oil and gas industry.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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.

Documenting the Transformation Part II

As we pointed out yesterday, there is a distinct conflict within the performance of the producer firm. The earth science and engineering professions are beginning to perform in an innovative manner and the bureaucracy are doing there thing, holding things back. This has led to the decline in natural gas prices from the discoveries from shale gas reserves and the bureaucracies inability to deal with the additional volumes of gas. As we noted in the Abstract of the Preliminary Specification the inability to deal with the changes from the cost control era to an innovative era would result in.

Changing the innovative behavior of one producer carries a scope of change that is as broad and as diverse as is contemplated in the business world. Change at this scale in many instances can not be managed within the organization but needs to be managed through the forces of creative destruction in the greater economy.

Change or the market will force change upon you. I think we are beginning to see the market deal with those producers that are unwilling to change. This past year many CEO’s and CFO’s were shown the door and not in the traditional courteous manner. Suddenly the announcement that the CEO had retired the day before has very rarely been heard. And the type of company that this applied to was not just the small oil and gas producer but it extended up to some of the very large independents. Particularly here in Canada. The boards are feeling the pressure of the shareholders to act to resolve the losses and do something about the natural gas side of the business.

Once again it has to be stated that the bureaucracy are fine. Although there were some announced layoffs in Talisman there doesn’t seem to be any follow through on the actual numbers of people. The bureaucracy know that they can’t be effectively dealt with unless the systems that are used in the oil and gas industry are changed first. They know this because I told them so. This was one of the breakthroughs in the Preliminary Research Report that in order to change the organization, you must first change the systems the organization used. My thinking was they would agree and begin the development of these systems based on the Joint Operating Committee. What the bureaucracy has done instead is used this thinking to seal their prospects even further. By ensuring they never change their systems they will never be challenged in their domain. Such is the responsible way in which to look at the future of the oil and gas business.

The shareholders are realizing the losses as a result of the bureaucracies inability to keep up with the changing dynamics of the business. Who cares? And who is going to do anything about it? And more importantly, how are they going to do anything about it? The bureaucracy are that powerful and that corrupt. As the shareholders see the value in their companies erode, the bureaucracy will still get paid and their pensions still get vested so in terms of the economic forces of creative destruction, they don’t currently exist. And if they do, the bureaucracy will just move on to another industry. Maybe mining, or finance, or retirement.

By that time the value that is held by the shareholders will be all but extinguished and there will be little left but the bits to cobble together. Not much fun from a productive oil and gas producer point of view. Or there is an alternative. For the shareholders to direct the bureaucracy to fund the Preliminary Specification and build the systems that are defined there. That way we can circumvent the bureaucracy and then fire the lot. They are redundant, have been for a long time and are an encumbrance to the business as reflected in the performance of the industry.

Either way the bureaucracy will be gone. Moved on after the bits are left, or fired after the systems defined in the Preliminary Specification are built. Its good to have choices and I’m pleased to be the one offering the choice to the shareholders of how the bureaucracies end is realized. The bureaucracy and I have been having a lot of fun these past few years and I have some particularly intense feelings for them. I vote we build these systems.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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.

Documenting the Transformation

In the Abstract of the Preliminary Specification I noted that the oil and gas producer would have a difficult transformation.

Changing the innovative behavior of one producer carries a scope of change that is as broad and as diverse as is contemplated in the business world. Change at this scale in many instances can not be managed within the organization but needs to be managed through the forces of creative destruction in the greater economy. A time of dynamic change driven by the organizational changes focused around the innovative Joint Operating Committee. How can a firm that has been developed in an era of cost control transform themselves into an innovative, dynamic, earth science and engineering capability focused producer? In many cases the will to do so might exist, however, with the speed and unforgiving nature of the business cycle, not much time will be provided to those that attempt the transformation. We see in this world the capital markets reflecting many interesting phenomenon since 2008. To suggest any trend or definitive result from these would be premature. Its just a different world in terms of being an oil and gas CEO or CFO than it was before 2008.

In the next few days I want to explore the difficulties and implication of this transformation. And where we stand in terms of this transformations transition. Why this topic is of importance to People, Ideas & Objects is due to the fact that the Preliminary Specification is designed for the innovative oil and gas producer. It does not resonate with the bureaucracy or the producer focused on cost control.

Focusing on the North American marketplace. We see a number of producers who have been successful in exploiting the shale technologies. In the natural gas business a collapse of the commodity price has lead to a severe crisis in the business. The inability to deal with the over production, a left over from the bureaucracy, is damaging the entire oil and gas sector. What an innovative oil and gas industry should do is to shut-in any gas that is producing below its marginal costs. And that should include conventional and unconventional resources.

I think it is reasonable to assert that the transition to an innovative firm has begun in the earth science and engineering aspects of the industry. However, within the remainder of the firm, the administrative areas, the bureaucracy reigns supreme. The transition in the earth science and engineering areas are the easiest and most natural areas of the industry in terms of its transition to an innovative posture. The scientific basis of those professions are always moving and these are the basis of the innovations that make up the industry. As time has passed we are seeing innovations moving the science and vice versa at a far greater pace than what has been the traditional norm in the industry. This is to be expected as time passes. This pace of change will only increase.

What we have in the Preliminary Specification is a number of modules designed to support and align the earth science and engineering disciplines with the Joint Operating Committee. These modules are also designed to support the innovative producer. It should therefore be expected that the speed at which a producer could move would accelerate as a result of the use of the modules such as the Resource Marketplace, Research & Capabilities and Knowledge & Learning. But what they also do is capture the major processes of innovation within the producer firm and Joint Operating Committee to ensure that they can be managed in more efficient and effective ways.

What we are seeing in the marketplace today is the separation of the earth science and engineering capabilities of the industry away from the capabilities of the bureaucracy. The speed and capabilities of the geologists and engineers is greater than what the accountants, business managers and administrators can handle. They are tied to systems, like SAP, that don’t understand the business of the oil and gas business, and are incapable of dealing with the situation we have today. And as a result the organization is set in concrete, whereas the earth science and engineering professions continue to accelerate.

These slow plodding bureaucracies are unable to deal with the pace and dynamism of today’s oil and gas scientist. What is going to happen when they are faced with tomorrow’s challenges. I think we need to think about these types of issues and that is why I developed the Preliminary Specification. So that producers can change and the administrative and business aspects of the producers can make the transition to a fully innovative producer.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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 Spirit of Compromise

The spirit of compromise is alive and well in the Preliminary Specification. The next step in its development is to include the user community. This will involve the investors, the producers, the users and the service industry to have input in how and what they need from the software. Many compromises will be the result. Its not that People, Ideas & Objects are unwilling to compromise. Its that we haven’t arrived at the point in time that we are able to. And when we arrive there we are completely open to the user community for their needs. For it is at that point that People, Ideas & Objects become a software developer and have no opinion or input into the user community whatsoever. My understanding and input into the process is complete and is reflected in the Preliminary Specification as it stands today. I have nothing more to provide. It is the result of my 35 years of oil and gas experience and the nine years of research that went into our product.

However, there are certainly some areas that we will be unable to compromise on. The movement from the “high throughput production” model to the “decentralized production” model provides no opportunity for compromise. This requires the ability to have the oil and gas producer stripped down to the C class executives, the earth science and engineering resources, some legal and support staff. With the remainder of the traditional oil and gas producer personnel being organized in service providers who provide their services across the industry. There they can provide their services with the tools of specialization and division of labor against the scope and scale of the industry wide processes, with the efficiency and effectiveness never before seen. Charging the specific Joint Operating Committee for the costs of the services directly as opposed to the overhead accounts of the oil and gas producer.

But who could be against such a change, and the dramatic implications of moving to the decentralized production model. When all the overhead and production costs are charged directly to the Joint Operating Committee. And when the commodity prices put the property in a situation where they are not covering the marginal costs of the operation. Shutting in the property also stops the charges for these overhead and production charges. Leaving only the costs of capital uncovered. Saving the reserves for a time when they can be produced profitably. Then an innovative oil and gas producer can go about the task of figuring out how to reduce the marginal costs of production and return the property to production profitably.

This approach is one of the fundamentally different ways in which the Preliminary Specification works. There are many other different aspects to the specification and some may be more open to compromise then the decentralized production model. There is a different way of operating in the 21st century. The higher commodity prices are reallocating the financial resources towards innovation. Producing below the marginal costs will become unacceptable. And the producer firm needs to be light and nimble. Compromise on these points is limited, but there are many other aspects of the Preliminary Specification that investors, producers, users and the service industry can find compromise. That is if they participate.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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 Fight Continues

With everything that is contained within the Preliminary Specification. With its business model that provides the oil and gas producer with the most profitable means of oil and gas operations. And the industry having such difficulty, particularly in the natural gas pricing area. One would think that People, Ideas & Objects would have the management of the oil and gas producers throwing money at this project to get it built. That I can assure you is not the case and the reason for our appeal to the investors in the oil and gas industry. The bureaucracy will have nothing to do with People, Ideas & Objects. That has been the case since we published the Preliminary Research Report (2004) and is certainly the case today. One would assume that I would get the message and just disappear.

But is my persistence in vain or should there be a change in the manner that the oil and gas industry operates. We are in the middle of annual report season and have a running total on the industries profitability. Is this performance acceptable, or are there better ways in which to make the industry profitable. The Preliminary Specification has detailed a solution that provides the most profitable means of oil and gas operations. And the differences are dramatic. We have calculated the opportunity costs in the region of $65 billion per year. Again this is not money that would be provided to support the bureaucracy. Their salaries and pensions are paid well before then.

People, Ideas & Objects have tried to appeal to the investor group as a whole. With the opportunity costs that are available to the industry the investors see it as a given that the bureaucracy would proceed with something so obvious. After all who wouldn’t pursue something that promised to generate so much value. What they fail to appreciate is the entrenched ways of the bureaucracy and the fact that they are not motivated by what is right. The bureaucracy needs to be directed to fund People, Ideas & Objects Preliminary Specification and then be physically removed from the field of play. And that is the investor's responsibility.

There is a storied history between the bureaucracy and People, Ideas & Objects. The force and effort taken by them to ensure that the Preliminary Specification does not see the light of day has been impressive. Other than the fact that I am still here, they have tried every trick in the book. And sometimes they tried twice. It is not just that they do not want to be challenged in their franchise, they also do not want to work at change, but most importantly they do not want someone outside of the industry to own the copyright to such ideas.

Quantification of the opportunity costs helps me to take this game to another level and clarify the purpose of the Preliminary Specification. This also makes the activities of the bureaucracy look bad. If you look back in the archive of this blog it goes back to 2005. All in discussion of using the Joint Operating Committee as the key organizational construct of the innovative and profitable oil and gas producer. It is a long and comprehensive fight that the bureaucracy has put up. Not one dollar has been forwarded in support of this project. This fact points to two possibilities. Either I am crazy or I am right. With the opportunity costs and the industry profitability in question, the answer to this question is coming into focus. At least I think so.

The fight will continue, for that there is no doubt. And now that it is quantified I expect that the bureaucracy will up its game and put up an even stronger offence. Its time for the investors to look at this argument and make a decision as to whether it something that they support. And therefore should direct the management to fund People, Ideas & Objects, or should learn to accept the losses as part of their business.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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 Pace of Changes in the Business Model

Some have argued that the vision prescribed in the Preliminary Specification is too radical. If it is too radical it would have to fall on the fact that its focus is on the business aspects of the oil and gas business. And I feel that that is an appropriate area to be too radical on. I would also agree that its detrimental aspects are highly disruptive to the entrenched bureaucracy. Hence the argument. However, if we look at the pace of business today and contrast it to what we might expect tomorrow’s pace will be like. The speed of a producer, in how they accommodate business change, will most certainly be an order of magnitude higher than what it is today. The question therefore is how are today’s bureaucracies handling the business of the oil and gas business today? Will the accelerating pace of change motivate the bureaucracies to pursue their retirement on an earlier schedule then we expect?

If we accelerate the speed of the current business model we’ll only lose money faster. That is the probable outcome of an accelerated future and the current state of affairs. The oil and gas business is already moving far too fast for the bureaucracy. They are at least two years behind a response to the natural gas pricing issues. The point that I am trying to getting at is there is a large contrast between the current situation and the vision provided by the Preliminary Specification. With the pace of change that has happened in the marketplace, and the probable change of pace in the future marketplace. The radical nature of the Preliminary Specification will become more mainstream as time passes. And that time will arrive very quickly.

Not only is the current business model unable to provide a solution to the current day issues. There are no controls for the investors to deal with the issues through that business model. Investors are left to accept the losses that are incurred with only the ceremonial removal of the CEO when things get too obvious. However with the Preliminary Specification there is not only solutions to the current day problems, as we have discussed here many times. The fact that People, Ideas & Objects are providing a software development capability to the industry is a key capability in which to deal with future issues. Organizations are supported and defined by the software that they use. In order to change the makeup of the organization requires that we change the software first. With a software development capability as provided by People, Ideas & Objects the investors will be able to exercise the changes they desire within the industry. A means to affect the business model and assure that they remain profitable as the industry changes. This is an appropriate posture for a dynamic and innovative oil and gas industry in the 21st century.

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 Business of the Oil and Gas Business

If we look at the industry from the point of view of its needs in the next 30 years, and particularly from the perspective of its business needs. The Preliminary Specification provides the means in which to organize and focus on the business of the oil and gas business. Whether that is being more innovative in the areas of earth science or engineering, being more profitable, or structuring the industry to be more efficient and effective. The vision that is expressed in the Preliminary Specification provides these attributes for the industry to pursue over the next three decades.

The investment community has therefore a vested interest in pursuing the development of the Preliminary Specification initiative put forward by People, Ideas & Objects. Its focus on the business provides the owners of the industry with the proper perspective, scope and scale to deal with the issues and opportunities that today’s oil and gas industry presents. And with the software development capabilities that are provided by People, Ideas & Objects the industry will be able to continue to develop the software to meet the issues and opportunities that the future holds. If the opportunity costs for one year were $67.4 billion what will they be for 30 years if the investors don’t act to establish this perspective for their industry. Trillions of dollars in value could be realized by removing the bureaucracy from their comfortable and destructive positions.

Assertion of the business perspective throughout this period should be of primary concern to the oil and gas investor. We see today large portions of the oil and gas industry regulated and controlled by governments. In Canada the development of pipelines has been conceded by the producers to their governments. The firms bureaucrat’s only concern themselves with producing facilities, pipelines are for someone else to figure out. Canadian producers are now realizing the large differentials in pricing as a result of their foolish capitulation of their business perspective to the governments. And that may not be the end of the governments involvement. What if the governments get wise to the power of software to organize key elements of an industry. And decide to develop software for the oil and gas industry that controls the emissions of CO2 as the key criteria, as opposed to the business perspective proposed here by People, Ideas & Objects.

As I mentioned a few days ago there is a revolution to be undertaken in the industry. The investors need to remove the bureaucrats and replace them with the software and business model that is expressed in the Preliminary Specification. They need to do so for their own self interests. After all what good will a bureaucrat provide in 5 years, or 25 years. The time to act is now.

The Preliminary Specification provides the oil and gas investor with the business model for profitable oil and gas operations. 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.

Time

The amount of time that is necessary to develop the Preliminary Specification is wholly dependent on the producers within the oil and gas industry. The need for the investors in the oil and gas industry to apply the pressure and compel the producers to develop this product in a timely manner is the priority that I am working on. When the opportunity costs are at $67 billion per year, and we have many years ahead of us, it is imperative that we begin as soon as possible. And right now we are not progressing in terms of the further development of the Preliminary Specification.

There are other developments that need to occur as well. The development of service providers and the organization of their service offering will need to be designed and developed during the next few years. The relationship with the service industry is impacted as well by the Preliminary Specification. In short there is a lot to do to address the issues in the industry and reorganize for the future of a dynamic and innovative oil and gas industry.

These are the time issues that we have to deal with. If it was just a time constraint based on software development deliverables the timelines would be estimable. Unfortunately these are not the critical points that will impede the development of the industry towards the changes to use of the Preliminary Specification. The changes that need to be undertaken by those within the industry will be the impediment to timely deliverables. However, what we are doing is moving closer, and by that I mean very close, to the cultural norm of the industry. People will be able to logically determine the location of an item when the Joint Operating Committee is the key organizational construct of the innovative and profitable oil and gas producer. It should therefore take less effort and time to make the changes noted above.

And these are big changes. No one has ever reorganized an industry, or two. The industry faces a critical decision. Either it must change or it will not prosper. And it has shown no capacity to change. No capacity to create a vision for the future. No capacity to even identify the issues that it is facing. It has stagnated for decades and this is proof that it will not change to address the demanding and difficult future. If we are calculating the opportunity costs of natural gas price declines in a decade then we’ll know that muddling along is the only strategy of the oil and gas bureaucracy.

I see things differently. To attempt this a decade ago would have been a failure. Both technically and from a business point of view. The technical risks have been mitigated since then. The business risks are still present, however, they are far more prevalent on the producer side if they don’t act. It is time that the industry considers the need to implement an Information Technology architecture and software development capability that will serve it for the next three decades. That is the Preliminary Specification and People, Ideas & Objects.

The Preliminary Specification provides the oil and gas investor with the business model for profitable oil and gas operations. 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.

Natural Gas Issues and Vested Pensions

These last few posts have allowed us to soar with the eagles and present the scope of the issues the oil and gas industry faces today. With Friday’s discussion of $64.7 billion in opportunity costs, and yesterday’s topic of revolutionary change, who could be against this project? The bureaucracy is standing in the way and is doing all that it can to ensure that it does not proceed. But let’s take it from their point of view, $64.7 billion in opportunity costs and revolutionary opportunities is nothing that should concern them. Their pensions are vested. They earn a decent if not spectacular salary that provides them with the opportunity to do everything they can think they want to do. The work that they do piles up on the left hand side of the desk in the morning. And in the afternoon it is collected from the bin on the right hand side of the desk. All is well and the only concern they have is with talk of doing things in different ways.

If the bureaucracy was asked to live off their pension as an alternative to dealing with the issues that are prevalent in the oil and gas industry, they would. Its only that they aren’t being asked to deal with these issues, and the game is still pretty easy so they’ll hang around before they shift to their pensions. I think “milking it for all its worth” is the appropriate term. After the natural gas prices were down for two years you would think there was some serious discussion as to the issue and possibly some discussion as to a solution. However, not a word. In what way is this acceptable? Let me be clear this is not by accident that its happening. Everyone knows that there’s overproduction. This is deliberate willful neglect.

But on the other hand what should we expect. We know that bureaucracies are leaderless. And its leadership that we need. The solution provided by the Preliminary Specification is the only solution that is offered in the marketplace. It enables the innovative and profitable oil and gas producer to remove their marginal oil and gas production from the marketplace through a variety of interfaces within the software. The first is the Marginal Production Threshold Interface. It allows the members of the Joint Operating Committee, who hold the operational decision authority, to make the decision to suspend production when the costs exceed the prices being realized.

The other aspects of the Preliminary Specification that make it the ideal choice for the market, where shale reservoirs are as prolific as they are, is in its use of the Decentralized Production Model. By stripping the producer firm down to the C class executives, the earth science and engineering resources, some support and legal staff. And organizing the remaining resources in service providers who are focused on processes across the industry. We can take advantage of the specialization and division of labor to make those processes as efficient and effective as possible. Then as the production, revenue and royalty accounting and lease rental and other processes are incurred by those service providers the charges for those services are charged directly to the Joint Operating Committee that the asset belongs to. That way when there is a time when the marginal cost exceeds the price realized and the partnership decides to suspend production then the overhead charges from the service providers are not incurred.

You can hear the bureaucracy screaming with indignation. My attitude towards them is similar to their attitude towards the issues in the industry. I don’t care. Their opportunity to offer solutions and deal with the problems has expired and as they say “they blew it.” They don’t have much credibility if you ask me. So I’ll continue on and I’m sure they will keep collecting that salary for a few more months, knowing that their future is set with their vested pensions.

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 Revolutionary Business Model

When we think of the many ways in which Information Technology has revolutionized the oil and gas industry. Well actually I can’t think of any changes to the ways that the industry has operated in the time that I have worked in the industry. There may be more iPads around and there are certainly greater volumes of data. And lets not forget about the volumes of paper. But in terms of how Information Technology has revolutionized the oil and gas industry there really hasn’t been any significant impact in terms of the ways and means of the industries operation.

What we do is faster, more timely and more accurate as a result of IT. And we may be able to conduct more analysis and deeper thought as to the cause and effect of certain actions. But just as we did in the 1940’s and 1950’s, we get out of bed and report to work at 8:00 for the same companies as yesterday, and conduct very similar, albeit more specialized jobs. At no time could anyone point to me when IT had such an impact on the effect of the industry that everyone would agree that “in 1978 when the PX798 was introduced” was when we really changed as an industry. So the sum total of the impact of IT in oil and gas has been a slow and casual improvement in the quality of information, but that’s it. Nothing more.

I say that because I think that the impact of IT on the oil and gas industry is about to have a dramatic effect. The Preliminary Specifications business model will be revolutionary in terms of the ways and means of oil and gas operations. Providing the oil and gas producer with the most profitable means of oil and gas operations is the key for the oil and gas investor, however, everyone in the industry is impacted as significantly. Focusing on the Joint Operating Committee aligns all of the resources of the industry on its legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks. Moving the compliance and governance frameworks of the hierarchy into alignment with the Joint Operating Committee makes the industry operate in a more natural manner than the current business model promoted by the bureaucracy. Muddling along doesn’t provide the value generation for anyone in the industry. Value that the industry should be providing for all of its stakeholders. Its time for a revolution.

There are significant changes that occur as a result of implementing the Preliminary Specification. Some will look at those changes and say that it is too radical to contemplate. But can we afford to continue on with the way that we are operating today? IT is providing an opportunity to implement a business model that moves closer to the cultural norm of the industry. If that is too radical then we are really stuck with the status quo. And if the status quo is having difficulty with the current industry situation, how will it deal with the future of the oil and gas industry? One in which the demands and expectations could be substantially higher.

I am biased of course, but I think that the Preliminary Specification will be looked upon as revolutionary in terms of its impact on the evolution of the oil and gas industry. Taking it from a sleepy go with the flow type of industry. To an industry that is dynamic and innovative, that generates value and efficiency to the world economy. That is what I think the opportunity is that is before us. And it is that change that we need to make, because if we don’t, there are bigger issues at stake.

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 Opportunity Costs of Natural Gas Prices

In this post we want to compare the two business models, the bureaucracies muddling along vs People, Ideas & Objects Preliminary Specification, in terms of the opportunity costs that are incurred by not having the Preliminary Specification operational. This calculation will be to determine what the opportunity costs would be for North American natural gas revenues assuming that producers were able to reduce production by ten percent and therefore raise the price of gas to $5.50 per MCF. Recall that the Preliminary Specification enables producers to shut-in production of marginal gas without incurring the penalty of production or overhead costs.

Currently natural gas production in North America is 78 Billion Cubic Feet (BCF) Per Day. That’s 78 x 365 days = 28.47 Trillion Cubic Feet (TCF) of gas for the year. We need to reduce this volume by ten percent to 25.88 TCF. With an estimated price of gas at $5.50, less an estimated average $3.00 realized per Thousand Cubic Feet (MCF) for 2012 leaves $2.50 of unrealized opportunity costs. Therefore the opportunity costs of 2012 natural gas prices is $2.50 x 25.88 TCF = $64.7 billion. A number larger than the costs to fund the Preliminary Specification.

The bureaucracy doesn’t need this money as they are adequately funded by the oil prices. However, the investors are entitled to this value nonetheless. It will require some work and effort, both to build and make the changes in the industry as a result of the Preliminary Specification. Work that the bureaucracy is not oriented towards. It’s not that the type of work is different to the work that the bureaucracy is familiar to, its that the bureaucracy is not that familiar to work itself. This situation has been with us now for a number of years. There is no proposed solution to its resolution. With the high costs of shale gas, and natural gas in general, this is not a situation that can continue. Yet the bureaucracy continues with no discussion of any possible resolution or even identification that this is an issue.

The fact of the matter is that the Preliminary Specification is new and not that well known in the marketplace, yet. The bureaucracy are not challenged by it as it is not seen by the marketplace as an alternative due to its relative newness. As we progress the bureaucracy will have a more difficult time in continuing on with their status quo do nothingness. I don’t expect that any solution to the over production will come about as a result of the bureaucracies handling of the situation in the next few years. There just not that smart and they are leaderless.

What the Preliminary Specification does is adopt the Decentralized Production Model. By doing so, all of the overhead costs are incurred by service providers who are organized based on a specialization and division of labor across the industry. That way they can organize their service offering based on the most efficient and effective process possible. These service providers then charge the Joint Operating Committee directly for their costs of production, revenue, royalty accounting or lease rental expenses, etc. Then when production is shut-in there is no service offering to be billed for the month and the overhead costs for the shut-in production doesn’t exist. Eliminating the High Throughput Production Model that the industry operates under today. Shut-in production therefore has no production costs or overhead costs incurred and therefore only the costs of capital are uncovered during periods when the production is shut-in. A producer can shut-in any production that does not meet the marginal costs and save those reserves for when the prices provide a return on investment. A much more rational way to approach the oil and gas industry during times when the shale formations are as prolific as they are. During times when production is shut-in producers can innovate and bring their costs down in their non-producing properties to bring those reserves back on production.

The irrational way in which the bureaucracy is producing oil and gas today is going to be looked upon as foolish in the near future. With so much potential reserves the bureaucracy seems to think that means it can be wasted. I think we should take the responsibility for producing those reserves out of the hands of the bureaucracy and put it in the hands of the investors and have it done profitably and responsibly through the 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.

2012 Earnings Season

We are at the beginning of the 2012 earnings season. I am hoping this will be a crucial point in People, Ideas & Objects history. A time when our ability to demonstrate our business model’s value meets with the investors demand for greater earnings from the producer firms. If, as I suspect, that 2012 was a bad year for the oil and gas producers. Maybe this will be the point that the investors will begin to look for answers to the problems of the producers poor performance.

We have been running a balance of those producers who have announced their 2012 earnings. To date we have recorded only Encana’s spectacular loss of $2.79 billion. We have two other firms to add to that total and they are ARC Resource earnings of $139.2 million and Marathon Oil earnings of $1.582 billion. This gives a net total for the industry of $1.07 billion of losses for 2012.

The next two weeks we will see the balance of the firms report results. As I said, I hope that it is a turning point in the attitudes of the investment community towards the bureaucracies lack of performance. And our opportunity to demonstrate the differences between People, Ideas & Objects Preliminary Specification and the status quo.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. 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.

Capabilities are the Results of Innovations

Now that we have finished reviewing the Research & Capabilities module we are going to take a short break from reviewing the Preliminary Specification to cover off some of the other aspects of this blogs discussion. I want to leave the Research & Capabilities with this last thought based on this quotation from Professor Richard Langlois.

The first, and most obvious, point is that it was an outside individual, not an organization, who was responsible for the reorganization of the industry. Lazonick is right in saying that genuine innovation involves reorganizing or planning (which may not be the same thing) the horizontal and vertical division of labor. But it was not in this case “organizational capabilities” that brought the reorganization about. It was an individual and not at all a “collective” vision, one that, however carefully thought out, was a cognitive leap beyond the existing paradigm. If SMH came to possess organizational capabilities, as it surely did, those capabilities were the result, not the cause, of the innovation. p. 46

It is that last sentence that stands out for me. That the information contained within the Dynamic Capabilities Interface would be the result of the innovations that were developed by the producer. Certainly there will be other capabilities that are listed within the interface but the key capabilities will be those that are developed as a result of the innovations that are developed by the firm.

The Preliminary Specification is designed to define and support the innovative oil and gas producer. It is an inherent part of the business model that People, Ideas & Objects are offering the oil and gas industry. A business model that provides the oil and gas producer with the most profitable and innovative means of oil and gas operations. Based on the Joint Operating Committee, the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the industry.

Contrast our business model with the one that the current bureaucracy are providing. One in which muddling along is the manner in which we approach the operational concerns. Is this how we address the future of the industry in this difficult energy era we are approaching? Our first step to addressing the future is to organize for it. And the first step in this advanced society is to build the software to define that organization. That is the objective here at People, Ideas & Objects and the Preliminary Specification is the design for the innovative and profitable oil and gas industry.

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 Primary Processes of Innovation

We have been discussing the coordination of operations and how that is organized in the People, Ideas & Objects Research & Capabilities module. Coordination of operations is only one of the things that is carried out in the module, innovation is another. To refresh our memory, the primary process in which innovation is carried out in the Preliminary Specification is as follows.

The producer firm through its interactions with the service industry develops new and innovative capabilities that are captured and documented in the “Dynamic Capabilities Interface.” The interactions with the service industry are through a variety of interfaces in both the Research & Capabilities and Resource Marketplace modules. Using the football analogy this is the practice field where the team is developing new and innovative plays to be worked on and perfected before game day. Game day is when the capabilities are published in the “Dynamic Capabilities Interface” which enables them to be seen in all of the pertinent Joint Operating Committees that the producer has an interest in. This process enables the producer firm to eliminate the unnecessary “trial and error” learning from being repeated in each and every Joint Operating Committee. The learning can be done once, and therefore limit the cost of the innovation by reducing the unnecessary experimentation. As I stated this is the primary process of innovation.

If there was a secondary or optional process of innovation in the Research & Capabilities module it would be based on the following. This is from Professor Richard Langlois’ paper “Innovation Process and Industrial Districts.”

Innovation is based on the generation, diffusion, and use of new knowledge. p. 1

Opportunities do occur at times and in places that are not planned for. Innovation is something that frequently falls within this description.

While it is possible to conceive of a firm that is so hermetic in its use of knowledge that all stages of innovation, including the combination of old and new knowledge, rely exclusively on internal sources, in practice most innovations involving products or processes of even modest complexity entail combining knowledge that derives, directly or indirectly, from several sources. Knowledge generation, therefore, must be accompanied by effective mechanisms for knowledge diffusion and for "indigenizing" knowledge originally developed in other contexts and for other purposes so that it meets a new need. p. 1

To preclude the opportunities for these types of discoveries to be acted upon would leave the spontaneity out of the oil and gas industry. When faced with the knowledge that is provided to the user of the “Dynamic Capabilities Interface” some things may become obvious that were not so before. Serendipity is a word that is used in economics quite frequently. We should adopt it here to ensure that a dynamic and innovative nature of the industry is the result.

But there is more that we are doing in this secondary process then we have done in the first process. We are building on the already well established capabilities of the producer firms of the Joint Operating Committees, and, we are exposing the collective knowledge to the broader community of earth scientists and engineers of the Joint Operating Committee. This broadening of the scope of users is at the same time there is limiting of the focus to just that Joint Operating Committee. Professor Langlois notes.

When accompanied by close social relationships, tight geographical proximity may affect innovation in ways that are less common in more highly dispersed environments. For example, an awareness of common problems can encourage several firms, or their suppliers and customers, to seek solutions, leading to multiple results that can be tested competitively in the market. pp. 1- 2

and

Relationships within industrial districts therefore lead to diffusion but also to the creation of new knowledge through shared preoccupations. Because many people or firms can work on a problem simultaneously, a number of different solutions may be found (Bellandi, 2003b). The results is a larger and stronger "gene pool" within the sector (Loasby, 1990, 117), with the further advantage that solutions that are originally regarded as competing may turn out to be complementary and well-suited to different niches within the district.  p. 7

What is therefore needed is a means to capture innovations that arise from this secondary process. Turn them into the primary innovation process so that they can be further populated throughout the various Joint Operating Committees that the firm participates in. That will limit the amount of trial and error learning costs that might occur if each Joint Operating Committee were to field test their own innovations based on the ideas they heard from so and so.

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.

Management and the Former Soviet Union

In the Preliminary Research Report (2004) I suggested that the oil and gas industry was not fundamentally different than the former Soviet Union in terms of its ways and means. Going through the motions and determining “best practices” shows a state of stagnation that is very close to death, in my opinion. We see the natural gas prices that everyone watches but no one does anything about. Everyone complains about the service industry, but no one does anything about it. The market system hasn’t existed in the oil and gas industry for so long, no one even knows what it would look like. From Professor Richard Langlois book “The Dynamics of Industrial Capitalism” chapter 1.

The question, then, is clear: why did managerial coordination supersede the price system? Why did “managerial capitalism” supersede “market capitalism” in many important sectors of the American economy beginning in the late nineteenth century? p. 9

To reinstate the market and the dynamism of the market system in the oil and gas industry will require new systems to identify and support innovative producers, suppliers and Joint Operating Committees. The Research & Capabilities module is designed to enable the systemic thinking that is necessary for the earth science and engineering capabilities of the producer and Joint Operating Committees to act in dynamic, innovative and market fashion.

The parallel of the current system to the former Soviet Union is striking when you realize the pervasiveness of the non-thinking environment. From Professor Langlois’ “Economic Institutions and the Boundaries of the Firm: The Case of Business Groups.”

Indeed, traditional command-style economies, such as that of the former USSR, appear to be able only to mimic those tasks that market economies have performed before; they are unable to set up and execute original tasks. The [Soviet] system has been particularly effective when the central priorities involve catching up, for then the problems of knowing what to do, when and how to do it, and whether it was properly done, are solved by reference to a working model, by exploiting what Gerschenkron . . . called the “advantage of backwardness.” ... Accompanying these advantages are shortcomings, inherent in the nature of the system. When the system pursues a few priority objectives, regardless of sacrifices or losses in lower priority areas, those ultimately responsible cannot know whether the success was worth achieving. The central authorities lack the information and physical capability to monitor all important costs—in particular opportunity costs—yet they are the only ones, given the logic of the system, with a true interest in knowing such costs. (Ericson, 1991, p. 21).

The opportunity costs realized in the natural gas business are horrendous. It is well within the scope of understanding of everyone within the natural gas business as to what the difficulties are, yet no solutions are discussed. If not for the Preliminary Specification there would be no solutions whatsoever. Including the market orientation into all aspects of the oil & gas and service industries are key components of the Preliminary Specification.

And in terms of the status quo that management continue to pursue. This is the one culture of the industry that we are moving against. It is also the most powerful. Management control the budget and have exercised it by not supporting People, Ideas & Objects. Show me an ERP system with the depth of research into oil and gas that the Preliminary Specification has, well there are none. They all get financed on relationships with maintaining the status-quo with management. The fact that there has been no funding proves that management are too conflicted to do the right thing in this regard. Therefore the decision to proceed will have to be taken out of management’s hands and put in the hands of the investors and the C class executives to make the decision to fund People, Ideas & Objects. After all they have some concerns with management as well.

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.

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.