Investor Concerns About Overhead Costs

The allocation of resources within the industry are possibly one of the largest issues that the investors in the industry are dealing with. They have consistently raised the point that the administrative costs involved in oil and gas are high and need to be addressed. The finer point of their argument is that the ability of the producer to reduce their production does not affect their overhead costs and should. This has become a particularly difficult point with low natural gas prices.

One could argue with a quick review of most annual reports that the amount of administrative costs carried by a producer, that the point is moot. In a capital intensive industry they would have a point. And they do have a point, the payroll burden in oil and gas is not large. And we have shown through our Revenue Per Employee analysis that the majority of the producers employees are carrying their weight in a substantial way. These are all valid points and I don’t think that that is the point that is being argued by the investors. I think they are seeing the redundancy of building similar organizations within each producer firm and there is no sharing of skills or capabilities between the producers. I think this is their frustration. I think that, like me, they see the majority of the people involved in these jobs doing a fantastic job that could maybe be organized better.

It is not the cost of these resources that is at issue. It is the implication of not being able to deal with the costs that is. If the opportunity costs for 2012 are $94 billion it would be agreed by everyone that we should address these. And none of these opportunity costs are to do with reductions in overhead. They are all as a result of increases in the price of natural gas. But they only arise as a result of the ability to deal with the marginal production of any facility. Something we can do as a result of not incurring any of the operating or overhead costs on shut-in production through the Preliminary Specification. This flexibility is what the investors are after.

To have the capabilities to conduct the administrative and accounting functions inherent within the industry. And to have that capability as a result of service providers who are specialized and organized based on a sophisticated division of labor. Would provide a capability that is much higher than any organization that exists today. And that capability would be available to any producer firm or Joint Operating Committee for the cost of a service fee. That is how the industry needs to be organized for the next century.

In terms of how this affects the people who work in the administrative and accounting fields of oil and gas. The impact would be significant. They would in turn cease to work for one producer and begin to work for many. They would specialize on specific capabilities and become very detailed in their work. Working with large volumes of data and sophisticated systems they would be able to build value for their clients, the producers and Joint Operating Committees who employ them. They may find that at any time their population of data might be reduced by 10% due to the need of the producers to shut-in production due to low commodity prices. This reduction affecting their revenue streams, however, something that they budgeted for.

The investors are asking is there a better way? There has been no response from the industry for years. Now we can point to the Preliminary Specification which I think answers the question for all concerned.

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.

How the Preliminary Specification Deals With Overhead

Within the Preliminary Specification we provide the oil and gas producer with the means to deal with low natural gas prices. This is through the reallocation of the resources of the industry into service providers that are focused on the individual processes and subprocesses. Charges for these services are made directly to the Joint Operating Committee. This enables the producer to shut-in their marginal production, and as a result, the administrative and accounting charges from these service providers would not be incurred. Enabling the producer to shut-in production without incurring the losses on operations that they would incur today on shut-in production. And limiting the downside in terms of the natural gas pricing.

This is the solution for the natural gas pricing difficulties being currently experienced in the oil and gas industry. These overhead type of costs however are part of a much larger issue to the investors of the oil and gas industry. The issue is with the high administrative costs associated with oil and gas exploration and production. The Preliminary Specification deals with this issue as well as the natural gas pricing issue. The issue arises as a result of the current use of the high throughput production model that is in use today. The Preliminary Specification uses the decentralized production model as its method of organization.

The differences in these two models is best described in Professor Richard Langlois definition.

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

The current oil and gas producer is tasked with developing administrative and accounting capabilities that are state of the art. That is each individual company, there is no shared resource, each company in isolation must achieve these capabilities in order to attain the necessary requirements in the marketplace. With the level of compliance and governance requirements, the needs of the earth science and engineering requirements of the firm this places a significant burden on each producer no matter their size. This is the high throughput production model and any interruption in production leaves no opportunity to diminish the producers administrative or accounting capabilities.

What the Preliminary Specification does is relocates these administrative and accounting resources on the basis of specialization and the division of labor across the industry. A service provider would therefore have the entire industry as its client base and it would be responsible for the determination of eligible capital for gas cost allowance purposes. The industry as a whole therefore may hold the entire administrative and accounting capabilities that are needed at anyone time and by any one producer. The need for these capabilities will be available for a service fee at any time that the producer requires them. At any time that the producer does not need the services of any specific provider, then that service and its associated fee is not incurred.

What we have done here is we have specialized and divided the labor of the industry in terms of the capabilities of its administrative and accounting functions. These services will be far more capable than any organization that exists today and will be able to solve the most difficult of technical problems. What has also been done is we have removed the redundancy of having each producer building the unnecessary capabilities within each producer firm to accommodate the producers needs in terms of their administrative and accounting capabilities. This unnecessary duplication, like that which we have eliminated in the earth science and engineering resources, is unused and unusable as it stands today.

Freeing up these resources will allow them to pursue the higher level tasks that are necessary in an innovative and profitable oil and gas industry. We need to begin these developments to enable the industry to capture this value and free these resources for the challenging work ahead.

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.

Participation has its Benefits

The advantage of using the Joint Operating Committee as the key organizational construct of the innovative and profitable oil and gas producer. Is that it is the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. By adopting this framework as the organizational construct in the Preliminary Specification we are able to approach the issues and opportunities that exist in the industry, such as the current natural gas pricing problems. And the future issues and opportunities that are just around the corner. Such is the nature of the alignment that we achieve between the systems represented in the Preliminary Specification and the organization, the Joint Operating Committee.

This alignment provides a fundamental competitive advantage to those producers who chose to use the Preliminary Specification. Having this alignment will enable them to address the issues of the day and to configure their organizations towards the opportunities they see. It should be noted that those producers that choose to participate in the developments of the Preliminary Specification will receive even greater benefits. They will attain the ability to have the software consider their particular circumstance and include within the definition those unique attributes. In addition they will be able to have those attributes within their organization reinforced through the development of the software. Participation should be considered a unique and one time opportunity for producers within the industry.

Additional benefits will accrue to those who participate when the time comes to be operational on the software. The transition to the software will be seamless and more natural as a result of being familiar and oriented to the changes that will be needed in the organization. Those producers who think they might be best served by sitting out the first iteration might find that those that participated in the first round will have gained the competitive advantages and are already moving the software in new directions that are derived from being operational on the Preliminary Specification. Taking a producer from the bureaucratic ways to the second iteration of the software, without the benefit of being involved in the initial development efforts, as there would also be no basis of organizational similarity, would be difficult. These iterations will be quick, and the organizational development will be approximately equivalent to the speed at which the industry changes.

There is participation and there is competitive oblivion in my opinion. If we can substantiate opportunity costs of $94 billion in one calendar year. This shows the power of Information Technology in its current form. The speed and effectiveness of the technology and organizational developments will only begin to accelerate. Participation in these software developments should be considered a necessary part of the producers core competitive advantage. Would anyone launch a producer firm with the stated purpose of not using calculators or computers. The use, deployment and development of these technologies needs to be part of the core producer firm.

Convincing the oil and gas producers that this is the case will be difficult. They think that drilling more wells will be the future of the industry. And they are hard to argue with. In reality they are not making any money and the day when they can raise money on the value they generate by drilling wells passed a few years ago. Investors are wise to their ways. What is needed is for the industry to get with the times and start looking at what is profitable. Start managing the business as a business and begin participating in the management of that business by getting involved in People, Ideas & Objects Preliminary Specification.

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.

A Sub-Industry

In terms of Information Technology infrastructure the People, Ideas & Objects Preliminary Specification fills the traditional role of an ERP (Enterprise Resource Planning) applications space. That is to say that it operates to manage the businesses day to day operations and administrative aspects of an oil and gas producer. But it also fills other key roles in the industry that are not currently handled by any software vendor. Those are the business operations and administrative aspects of the partnerships as represented by the Joint Operating Committee. And the infrastructure of the industry in terms of the interactions, identification and support of the activity between the service industry, service providers, oil and gas producers and Joint Operating Committees.

This infrastructure is derivative of the Intellectual Property that is inherent in the Preliminary Specification. The business model that captures the annual opportunity costs that are valued at $94 billion for the 2012 calendar year is part of that Intellectual Property and therefore will be provided by People, Ideas & Objects from a software point of view and licensed service providers in terms of the services. This is not just a business that is being started, but a sub-industry.

There is a need for this scope and scale in the oil and gas industry today. The oil and gas industry is poorly served by the technology firms. The technology firms are providing good products and services, however, have become so specialized in their offerings that they have little understanding of their clients business operations and needs. This gap between the oil and gas producers and the technology companies is as broad and deep as could possibly be. It is necessary that a new sub-industry form to fill the gap between the oil and gas producers and the technology companies. That is what People, Ideas & Objects and the service providers will be able to do. With our understanding of oil and gas, and technology, and the service providers understanding of their oil and gas clients we will be able to deal with the issues and opportunities that the producers face on a day to day basis and in the long term.

The basis of competitive advantage for this sub-industry is the Intellectual Property that is formed around the Preliminary Specification, this blog and elsewhere. Key to that IP is the use of the Joint Operating Committee as the key organizational construct of the innovative and profitable oil and gas producer. This form of organization is what everything else is derived from and to compete with People, Ideas & Objects someone will have to come up with an alternative form of organization.

This infrastructure will naturally be of the cloud configuration. Having ubiquitous access, anytime, anywhere and on any device will be necessary for any 21st century system. One can see the scope of the application and how the costs begin to escalate to the budgeted total that is defined in the Preliminary Specification. Having industry, the service industry and the new service providers working together on one infrastructure will require a budget of at least that size. I would again emphasize that there is significant value there for the producers.

And we are using that value to motivate the industry to complete this project. There is only one way in which we can earn those opportunity costs. And that is to complete the development of the Preliminary Specification. Organization of the industry in this fashion, and the development of the software will need this motivation in order to ensure that it is complete. With everyone pushing toward that goal. A clear, and well understood goal, that everyone can get behind and complete.

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.

Constructive Change to Capture Value

People, Ideas & Objects Preliminary Specifications claim is that we provide the oil and gas producer with the most profitable means of oil and gas operations. This is through an innovative business model that is identified and supported through our ERP system as expressed here. Producers who choose to join the community of users of the Preliminary Specification will find that their competitive position will be enhanced in comparison to those producers who choose not to join People, Ideas & Objects. We have discussed these differences in a recent blog post.

The quantification of these changes from using the Preliminary Specification is the $94 billion in opportunity costs for the North American natural gas marketplace. These are the opportunity costs that would have been earned for the 2012 calendar year. They are in essence the losses that were incurred, and the profits that should have been earned, in the natural gas business, but were not because of the low natural gas prices. The Preliminary Specification provides the ability for all producers to deal with low natural gas prices by removing the marginal production from the marketplace. It does this by reducing the producer to the C class executives, earth science and engineering resources, some legal and support staff. The remainder of the resources of the traditional oil and gas firm are reallocated to service providers who focus on the industry wide process or subprocess. There they are able to apply the principles of specialization and the division of labor to their work and provide the Joint Operating Committees with the most efficient and effective means of administrative and accounting services. These services charge their fees directly to the Joint Operating Committee during the month that the service is incurred. This provides the producer with the flexibility that if they shut-in production for that month, none of the administrative or accounting overhead charges are incurred or billed to the Joint Operating Committee. Leaving only the costs of capital uncovered during periods when the production is shut-in.

This IT infrastructure provides significant competitive advantages to the oil and gas producer. During periods when production is shut-in the property does not incur a loss that has to be added to the reserves and recovered from further operations, making the economics of the property more difficult. And the marginal production is removed from the natural gas marketplace having an effect on the market supply of natural gas. Therefore having an effect on the natural gas prices and returning the prices to the point where profitable production will resume sooner. Companies that don’t participate with People, Ideas & Objects will continue to lose money on operations during production or when they are shut-in. What is needed is this fundamental reorganization of the industry infrastructure to accommodate what is called the decentralized production model, which is part of the Preliminary Specification, and leave the high throughput production model that the industry is currently using.

The time horizon necessary to make these changes is the issue at hand. The vision as it is articulated in the Preliminary Specification is sound. Use of the Joint Operating Committee as the key organizational construct of the innovative and profitable oil and gas producer is the necessary ingredient to make all of this happen. What is needed from People, Ideas & Objects point of view is the resources that are spelled out in the Preliminary Specification. In an industry with an annual turnover of $2.5 trillion and opportunity costs of $94 billion you would think that these costs would be incidental. And they are. The real impediment to making the industry profitable as described above and in the Preliminary Specification is the ability for the industry to change.

I have an optimistic point of view on that possibility. The mindless brutality that people are subjected to daily to make things work today would welcome something that makes sense. The Joint Operating Committee is the cultural way of the industry. People intuitively understand it. And the technologies are mature in comparison to what is used in the industry today. That is to say I think we are not taking any technical risk in developing the Preliminary Specification. Therefore my optimism is grounded in what is possible and probable and the industry needs to approach the difficulties that it faces today and in the future with a new structure, and that is the Preliminary Specification.

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.

Economic Improvements

Since 2008 the financial markets have been providing no end to the difficulties in our economy. In a capital intensive industry such as oil and gas the global financial meltdown has had significant implications. Producers continue to experience difficulties in terms of raising capital from both the debt and equity markets. These financial recessions are usually long term cycles and can last five to ten years. Well its been five years now and we have no sign that there is any substantial pickup in the global economy. There are two things that I am seeing in the economy that will create difficulties for those that are unprepared in the coming few years.

The first is that markets appear to be beginning to roll over. That is interest rates are no longer dictated by central banks, but by the markets themselves, and they want a return. Or in other words interest rates are rising. If the oil and gas producer found it difficult to find capital in the past five years, it may be more difficult if they have to compete with market rates. This will also have adversarial effects if the producer is heavily indebted as the ability to service the debt will become more costly.

It has been an exceptionally long period of time that the Federal Reserve's Zero Interest Rate Policy has been in place. Wise individuals and companies should have taken the past five years to reduce their debt burden and build their balance sheets. This should have included the sale of assets and trimming of the organization to be able to handle the inevitable rise in interest rates. I say inevitable because it is inevitable. The Federal Reserve can only do so much for so long. And the market, which is so much larger and more powerful than the Federal Reserve, will eventually decide that they have had enough of zero interest rates.

We should look to this as the first step in a healing market. The fact that interest rates are rising is a sign that the animal spirits are starting to show themselves again. The fact that grandma and grandpa want more on their T-bills means their feeling secure again and want to stop eating dog food. For the unprepared producer, of which I see a fair number of, this will be painful. These animal spirits are the second aspect of the marketplace that I see rising.

There is however a conflict that needs to be worked out in the marketplace in the next year as a result of these two items. The rising interest rates will have a dramatic effect on all asset classes on a global basis. How will this affect the animal spirits, and will they be strong enough to offset the higher interest rates. I think they will as we are entering a new phase in which the economy is beginning to develop real value from new organizational methods.

It is my hypothesis that 2008 was a result of the fact that the bureaucracy as a form of organization has ceased to build value. Like the former Soviet Union and its collapse was a result of a defunct method of organization. The bureaucracy is going through the motions and not responding to the needs of society. This hypothesis can be debated. What is happening now is that the replacement to the bureaucracy is beginning to show itself. It is the Information and Communication Technologies that are able to replace that bureaucratic form of organization. And although they are not in place as of yet. They are seen to be the method to move industries forward and build value. Just like People, Ideas & Objects Preliminary Specification.

So is the Information and Communication Technology revolution really here? And can it lead to the animal spirits that will offset the increase in the market rates? I think we’ll find out fairly soon.

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.

An Improvement in our Quality of Work Life

With so much discussion of the elimination of the bureaucracy. And the installation of systems that will reduce the overhead burden of the oil and gas producer. Its not surprising that some people are concerned that People, Ideas & Objects Preliminary Specification spells the end for their long term employment and career prospects in the oil and gas industry. It does not take a lot of imagination to see the administrative efficiencies will require less people in the traditional roles that an oil and gas producer employs today. And I would agree with that. But I would also ask are those roles the ones that we really want to hang onto for the long run. Is there not some things that we could be doing better with our time?

There has always been a concern that computers would take away peoples jobs and leave us with nothing to do. And that is the concern that is being expressed today. And just as we don’t post to ledgers, or add up endless columns of numbers, today’s tasks will fade into the distance as well. Taken over by computers as we move to the higher quality work that is necessary for us to increase the productivity of the oil and gas industry with the same resources we have today. For that is the real constraint. We can’t rely on any greater volume of people in order to staff up for any increase in demand or higher level of activity. We must rely on higher levels of productivity from the same resource levels we have today.

So what kinds of work will we be doing when we release the tasks that we do today to the computers of tomorrow. I think the first and most difficult one is innovation. And this requires a structure within our organizations that enables the innovation to occur. And that is what People, Ideas & Objects has built within the Preliminary Specification. The necessary ingredients to enable, support and identify the key elements of innovation within the earth science and engineering disciplines. As these innovations lead to further expansion of the science they will lead to further innovations in a constantly changing and dynamic nature. This will put particular difficulties on all producers and that is where much of the resources need to focus on.

Collaboration within the organization and between the partnership representing the Joint Operating Committee. As the base of the sciences expand the scope and scale will become too broad for one firm to capture all that is necessary. Certainly too broad for them to capture in a commercial environment. The ability to partner with others is a fundamental aspect of the oil and gas business. The future will see a dependence on partners for elements of the earth science and engineering aspects that producers do not have housed within their organizations. This will also open the industry to the ability to organize the earth science and engineering resources on the basis of specialization and the division of labor. Easing the excessive demand for these critical resources.

Thinking carried out throughout the organization. It surprises me at times that the amount of thinking that goes on in the oil and gas industry right now is very limited. Its all about doing. We need to leave a lot of the administrative doing up to the computers and start thinking of better ways to do things. And lets not limit it to just that domain, thinking about the whole scope of the business. A little thought into what and how we are doing what we are doing will go a long way to making the industry more efficient and effective in the long run.

These are the types of things that we will be involved in the future with the Preliminary Specification operational. They are an improvement in our quality of work life. A move away from the redundant and repetitive nature of the work that we are involved with today. Concerns that we are going to lose a large portion of the resources of the oil and gas industry are some of the same concerns that were aired forty years ago when we were one quarter the size we are today. I think we can disregard these concerns and look forward to a far more interesting future as a result of the Preliminary Specification being a part 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.

The Revised Competitive Nature of the Oil and Gas Producer

One thing that producers should consider in terms of the developments of the Preliminary Specification. Is the differences between those that will willingly participate in the development of these systems and their deployment. And those that will choose to sit and wait until “more information” is available. With the opportunity costs at $94 billion in 2012 those that choose to wait are setting themselves at a significant competitive disadvantage compared to those that participate.

Lets be honest there will be some effort expended in the development and deployment of the Preliminary Specification. No one said it would be easy. From a producer point of view it will be difficult. It will however be more difficult to take the software to implement within an organization that did not participate in the development of the software. Participation in the developments will enable the producer to have their needs met and capture those needs in the software. It will also make the transition less abrupt and more of a day to day occurrence.

The real value will be when they are operational on the software and they are able to realize their share of those opportunity costs. Then they will have increased their profitability and have opportunities open to them that were unavailable to them before. Opportunities like the acquisition of laggard producers who choose not to participate in the development and deployment of these software developments. In these acquisitions they could acquire the further opportunity costs and other synergies from the takeover of other producers.

What will be established in the industry will be a division between those that are capable with the new Information Technologies provided by People, Ideas & Objects. And those that have chosen, or are unable to deal with the new technologies and business models that are provided. But it will have more competitive impact than just that at the corporate level.

In terms of operations those producers that use the Preliminary Specification will also have advantages. Recall we provide the oil and gas producer with the most profitable means of oil and gas operations. We do this by optimizing their revenues and reducing their costs. Therefore in the field producers using our systems will be able to have greater flexibility in their operations in terms of how they approach their business. For instance, in the acquisition of land they may be more competitive than what others might be able to bid.

The opportunity costs are material in scope and scale. The speed, innovativeness and accountability that is acquired when we move the compliance and governance frameworks to the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee are substantial. Eliminating the bureaucracy and replacing the administrative structure of the organization with the Information Technology management that is available today is the trend that is sweeping all industries across the globe.

There will be those that will choose not to make the changes in their organizations. There is little that we can do for them. However there are many things that can be done for the producers and Joint Operating Committees that know that there is a better way and the Preliminary Specification is that better way.

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 Bureaucracy is Opting Out

Understanding that the probability that our prayers for a cold winter will more likely be answered this year. The bureaucracies plans for the natural gas business can ride through these summer months with the knowledge that this time its different. Their plan therefore will consist of soaking up some sun and enjoying the usual vacation. Don’t forget the usual career planning that includes the family budget and retirement planning. These are the things that occupy the bureaucracy in the natural gas business in these summer months. Don’t get me wrong, I don’t think these things are wrong, its just having a plan for the natural gas business would be something that might add some value.

Its reasonable to assume that in July of 2013 without any reasonable proposal to deal with the natural gas prices, we will continue on with unacceptably low prices for the foreseeable future. This situation will not correct itself with the prolific nature of the shale gas formations. And with more reserves and greater deliverability being brought on stream, the decline in natural gas prices will only become worse from a producer's point of view. Everyone knows what the problem is, they just don’t want to recognize the Preliminary Specification as the solution. That is the bureaucracy doesn’t want to recognize it as the solution.

The bureaucracy doesn’t want to recognize the Preliminary Specification because it kind of leaves them at the curb with their bags packed. There is nothing for them in the People, Ideas & Objects Preliminary Specification and its pretty obvious that their days are numbered. Like so many of the Information & Communication Technologies today, it will get the job done without the fanfare and noise. What has gone on before in terms of Information Technology systems development have been to identify and support the bureaucracy. Is it any wonder that they are not supporting this initiative?

That is why they will never support these developments and why we need to appeal directly to the investors and the owners in the oil and gas industry. It is also why these developments need to be driven by the user community. If the bureaucracy supports the Preliminary Specification then the bureaucracy will have their ways and means implemented within the software. And that is what we don’t want. So in a way they are doing us a big favor by self selecting.

Its as if the bureaucracy will muddle themselves out of existence. Given their lack of desire to address the big problems that they face on a day to day basis, and preference to just muddle along and let the big things just work themselves out. The natural gas prices will motivate the ownership to act to do something about the problem, and the thing that they will do is fund the development of the People, Ideas & Objects Preliminary Specification. Action will become the manner in which the industry addresses its big issues as opposed to inaction and passivity.

When an industry sits and prays for years on end for a cold winter. And does nothing to correct what is evident to all. The era of passivity will have passed. The time for a dynamic and innovative industry is what is necessary. We first however need to build the structure of that industry and define and support it with the systems that will enable that dynamism and innovativeness. That is People, Ideas & Objects Preliminary Specification. And the time is now.

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 Transition Between Business Models

We have been discussing the transition between the current corporate model and the Preliminary Specification. How the differences between these two models do not allow for any compromise and the move to the Preliminary Specification is an all in type of proposition. Where the Preliminary Specification needs to address all of the issues of the industry in a comprehensive nature. Where the service providers are established and their services are able to replace the overhead operations of the oil and gas producers. These are the types of changes that are necessary in order to make the industry more efficient and effective. Oh, and there are those annual opportunity costs which for 2012 were calculated at $94 billion.

And its not that the service providers are being asked to shoulder the bulk of the opportunity costs. The majority of these opportunity costs come in the form of higher natural gas prices as a result of the producers ability to remove the marginal production from the marketplace. Raising natural gas prices to where producers are profitable. The transition to the Preliminary Specification is stark in its contrast between the business models because it has to be. There needs to be a radical remake of the industry for it to begin to deal with the issues that it faces in its future and the issues that is deals with today.

But how much of this transition is going to be foreign to the ways and means of the industry. That is the question we should be asking ourselves and trying to determine the results based on what the structure is as proposed in the Preliminary Specification. The first thing we should consider is the move to the Joint Operating Committee. This is cultural norm of the industry. Everything is based on partnerships and these partnerships all have Joint Operating Committees. They are the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. By moving the compliance and governance frameworks into alignment with the seven frameworks of the Joint Operating Committee we are achieving a speed, innovativeness and accountability in our organizations. This would be consistent with the way the industry partnerships are structured and having the Preliminary Specification aligning, defining and supporting the Joint Operating Committee would be a first in terms of ERP systems.

Innovation is a necessity for the oil and gas industry. That is a fact and it must become systemic throughout the industry. Innovation is also an engineering discipline that can be enabled or disabled by the organizational structures and systems that a producer or Joint Operating Committee uses. The Preliminary Specification is built around the necessary organizational and systems elements to identify and support innovation within the producer firm and Joint Operating Committee. That does not guarantee innovation within the oil and gas producer firm or Joint Operating Committee, it just won’t hinder it. If the resources are within the organization to fuel innovation, then they will have the organization and systems that enable that innovation to occur.

Stripping the producer firm down to the earth science and engineering focused organization that the Preliminary Specification does. And moving the accounting and administration of the producer firm and Joint Operating Committee to service providers that are focused on the process that is industry wide in scope and scale. Enables the producers and Joint Operating Committees to focus on innovation and the science. And leaves the service providers to focus on their specialization and division of labor of their tasks.

These are changes that are necessary for the industry to compete in the 21st century. They can make the choice to build the Preliminary Specification and proactively deal with their future. Or they can continue on in the manner that they are today and be fully disintermediated. Either way I don’t care as I see the Preliminary Specification being the solution for the industry which ever road they choose to take.

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.

Cost Control by the Service Providers

In addition to not taking any shortcuts in terms of the approach to the development of the software for the Preliminary Specification. There are the changes that are needed for the service providers to form and begin delivering their services to the oil and gas producers and Joint Operating Committees. These service providers do not exist today. Entrepreneurs need to establish them and begin the process of building them. These businesses will be a significant opportunity for those that have the ability and capability to form these firms. These firms will need to be in place for the oil and gas producers and Joint Operating Committees to be fully functional with the Preliminary Specification. Again there are no shortcuts from our current structure to the one in which the industry needs to move to.

It is within the service providers that we have discussed the fact that the cost control for the overhead costs of the oil and gas producers is shifting to. They will be undertaking the burden of the costs of overhead that was previously the domain of the oil and gas producers. And with the producers having the opportunity to shut-in production and reduce their costs, the reduction in costs is realized by the service providers. These costs being realized by the service providers appears unfair and unreasonable at first until one realizes that they, the service providers, have full control of the costs and have within their domain the ability to deal with these costs. Understanding that the industry may not be operating at 100% capacity at any month will become the new normal and the means to manage the day to day of the service providers activity levels. They have their budgets and they have other tools in which to shift their costs and deal with the potential declines in any of the producers production volumes.

Consider the effectiveness of a service provider that is dealing with a portion of the Texas Railroad Commissions royalty calculation. Their base of data is the entire state of Texas in terms of the number of producers who are their clients. This is due to the specialized nature of their service. With only 10% of the states natural gas volumes shut-in for marginal pricing concerns, and this being considered the new normal. This does not materially disrupt the service providers revenue stream. If the service provider budgeted for these situations then the situation would be a normal part of their business and they would have considered these in these in their staffing levels and other areas. The service provider having full control of their costs throughout the year.

Contrast this situation with today’s producer and their ability to control their costs. Without the ability to specialize and use the division of labor in such a way as the service providers. The producer has had to build a capability within their organization that has the ability to deal with all of the accounting and administration needs of the producer. A decline of 10% in the production volume does not affect the fact that the producer still requires the full accounting and administrative capabilities that were present at 100% capacity. Therefore the producer firm has no capabilities whatsoever to deal with the costs that are associated with the accounting and administration of their firm.

This is the difference between the two business models. One provides the ability to deal with the costs associated with oil and gas production and operations. The other, the corporate model does not. The current structure is old and tired and needs to be retired. We need to develop the Preliminary Specification and begin the creation of the service providers that will provide these services to the oil and gas producers and the Joint Operating Committees.

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.

There are no Short Cuts

Let’s assume for a moment that the support from the industry for the Preliminary Specification existed and we were proceeding with its development. The pressure would be on the user community to focus on the areas that provide the oil and gas producers with the greatest value generation. And we have been noting here that that is in the area where we can raise the natural gas prices above the marginal costs. The problem is that the Preliminary Specification is a comprehensive solution that affects all aspects of an oil and gas producer, the service industry, the service providers and most of all the Joint Operating Committees. It is also a solution that addresses more than just the natural gas pricing issues, and although these other areas may not be as materially pressing at this time, they need to be addressed in a timely matter as well.

Taking shortcuts and focusing on only the issues that are present in the current mindset are two of the dangers that we need to address in the developments of the Preliminary Specification. If we look at the scope and scale of the application we can see that taking the approach of addressing only one issue will be highly counter productive and lead to failure in the long run. Much of the Preliminary Specifications ability to solve the issues of the industry is due to its comprehensive nature and the ability to provide the key elements to the issue. These key elements can’t be cherry picked and brought about for one issue, or alternatively bring forward just the key elements necessary for one issue to be resolved. It just can’t be done that way.

The move to the Joint Operating Committee is comprehensive in its nature. Moving the compliance and governance frameworks of the hierarchy to the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee is a complete change in the oil and gas producers makeup. It is a disassociation of the corporate model and an adoption of the business model that is inherent in the Preliminary Specification. There can be no shortcuts between the business models for the purposes of acquiring the value that is available from the business model in the Preliminary Specification.

Just as other industries are being disintermediated by technologies and innovative business models. There are no shortcuts and there are no compromising choices. It is one or other. You either win with the new one, or atrophy and die with the old. That is the only choice that you have. And I would suggest that that is the choice that the oil and gas producers will be faced with in terms of dealing with People, Ideas & Objects. You're either with us or you're not.

The opportunity costs of $94 billion for the calendar year of 2012 are probably something that will remain with us for the time that the corporate business model remains in place. The bureaucracy does not have a solution for the natural gas business. They do not recognize it as an issue as it doesn’t affect their salary or pension benefits. The profitability of the industry is maintained as long as the oil prices remain high enough to offset the losses in the natural gas business and that should be satisfactory for the investors. That is the bureaucracies attitude and mode of operations and that will continue from now on. Therefore it is reasonable to assume that we will see these opportunity costs on an annual basis for the foreseeable future.

The choice is to begin the developments of the Preliminary Specification and all that entails. Understand that there are no shortcuts and that we must address all the issues of the industry within the application modules. That way we can deal with the future of the industry in the appropriate manner and identify and support the innovative and profitable oil and gas producer and Joint Operating Committee.

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.

Three Marketplace Modules

There are many other elements in the Preliminary Specification. In addition to recognizing the Joint Operating Committee as the key organizational construct of the innovative and profitable oil and gas producer. The Preliminary Specification has three marketplace modules. The Petroleum Lease, Resource and Financial Marketplace modules. Each dealing with one critical component of the producers needs of petroleum leases, resources and capital. These marketplaces seek to replicate the marketplace that exist and provide interfaces to the producer to interact and participate in these dynamic marketplaces.

When we are replicating the physical oil and gas marketplace, the Petroleum Lease is the source document that is the common denominator of all activity and ownership within the industry. Any physical oil and gas assets will be attached to some lease, agreement, rights or concession granting the holders the rights and privileges of ownership, lease or rental. These are the things that are contained within a marketplace. They are what are purchased and sold, bargained and traded for. They are the things that people are recruited to provide services for. Generally a marketplace is a dynamic and evolving commercially oriented hub of activity. That is what we are replicating in the Petroleum Lease Marketplace.

The types of documents that are generated within the Petroleum Lease Marketplace are somewhat self-evident. (Recall we are including Land, Legal, Production Admin, Exploration Admin, Accounting and Others in the classifications.) Most of them are created in collaboration with the participants of the Joint Operating Committee and include: Authority for Expenditures (AFE"s), Capital Budgeting (Firm and JOC), Construction Ownership and Operating Agreements, Mail Ballots, Daily Drilling Reports, Lease Bonus, Lease Rental, Lease Taxes, Areas of Mutual Interest are some of the forms, processes and attributes of the Petroleum Lease Marketplace Module. A more detailed specification will be the result of the communities contribution and commitments.

The Resource Marketplace module is a marketplace to support contracting from A to Z. To deal effectively with the Resource Marketplace the producer will need tools to effectively engage with the suppliers for the resources they need. The Resource Marketplace Module provides a window on the “Resource Marketplace” for Joint Operating Committees (JOC) and producers. Anything of value that is contracted between “actors” in the oil and gas, service, software and user community generated businesses will be found, contracted, managed and developed through this module. It's simply a virtual representation of the marketplace. Therefore the negotiation, determination of available resources, determination of transaction costs, contract execution and effective software tools to monitor and verify compliance to the contract are all part of the Resource Marketplace module and its interfaces to other modules of the Preliminary Specification.

Similar interfaces will be provided to the service industries. After all transactions have two parties, the efficiencies of the producers would inherently include the efficiencies to the service provider. If we have an accounting system, then certainly offering these services to the suppliers would only make sense. It is not just producers in the Resource Marketplace. Key to the efficiencies in the Resource Marketplace are the mitigation of transaction cost friction. Friction on both sides of the transaction, because transaction costs in the Resource Marketplace are costs that will ultimately be borne by the producer.

The primary point that the Financial Marketplace module is making is that there are competing interests and motivations in the industry in attempting to get things done. With different strategies being deployed by different partners within a Joint Operating Committee, is it any wonder that the financing of a project can ever fall into place. What the Financial Marketplace module proposes is that instead of the property being funded by several different company bankers, each taking a working interest share claim against the firm. The Financial Marketplace module would see one bank fund the property in its entirety on behalf of the partners represented in the property. Aligning of the bank financing to the innovative oil and gas producers and Joint Operating Committees legal, financial, operational decision making, cultural, communication, strategic, innovation, compliance and governance frameworks.

Today that may or may not be an objective or opportunity worth pursuing. However, I think that the freedom of having the attributes of the Financial Marketplace module still reside within the oil and gas market, and possibly even more as a result of the financial meltdown of 2008. Why? The demand for capital will continue to be strong, and the supply will continue to be tight. What we seek to prove in this module, is that through its use we can provide the innovative oil and gas producer and the Joint Operating Committee with the ability to ensure that their capital structures are more efficient than what can be attained in any other system.

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.

Competing on the Business Model

There has been some discussion in the marketplace regarding the impact that Information Technologies are having on the greater global economy. These are some of the effects that People, Ideas & Objects Preliminary Specification are bringing to the oil and gas industry. We however are not focused on the technologies themselves as the change agent or as the elements that are providing the value to the oil and gas user, producer or Joint Operating Committee. We are depending on a competitive business model that competes on the basis of a fundamental value proposition that is business focused and creates value for people, organizations and society.

These are interesting times when new and innovative business models can be identified and supported by today’s Information Technologies. We have seen many industries disintermediated in the last decade as a result of the changes in technology, but most importantly the value generated by new business models. I don’t think that any industry is immune from the power of these technologies and business model innovations. And that would include the oil and gas industry.

If People, Ideas & Objects claim that the Preliminary Specification can provide $94 billion in opportunity costs for the 2012 calendar year. We are either delusional or have a business model that fits the disintermediation mold. I think it is the latter. As natural gas prices continue to look weak and head into the slow summer season, time will tell if the bureaucracy have fixed their business model. Or we can change to one, the Preliminary Specification, that enables the producer to deal with the natural gas prices and begin to manage the oil and gas business appropriately.

I feel it is inevitable that the changes from the Preliminary Specification will be made to the business of the oil and gas business. Does anyone foresee the bureaucracy dominating the industry in the year 2020, or how about 2030. As it stands now that will be the case as they are unchallenged in their control of the industry. Unless and until the investors can have the Preliminary Specification funded and built, the bureaucracy will maintain their control over the industry until those time horizons arrive. There is nothing stopping them.

It would be constructive to proceed with the development of the Preliminary Specification as an industry despite the consequences to those that are affected. However those that are affected have opposed these ideas, have known of them for almost a decade, and have forwarded no resources towards these initiatives. On the contrary many initiatives have been sponsored by the bureaucracy to obstruct and derail this initiative in the past decade. They have chosen to fight these ideas not to constructively work towards solutions.

Now is the time that the industry must make a choice. The bureaucracy has a history of how it has managed the industry. It also has a plan on how it will continue to operate the industry. We have proposed an alternative business model with a compelling value proposition. The future awaits the bold and the brave. There is much work to be done and we need to begin these efforts to make the oil and gas industry innovative and profitable.

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.

A Quick Journey Down the Work Order Part II

This is the second and final post of our quick summary of the work order. We are reviewing this element of the Preliminary Specification to show the ability of the organizations systems effect on the producers innovativeness.

As I indicated the ability for an accountant to follow on with the necessary accounting for these transaction requires significant recreation of the “deal” and time of the parties who conceived of the deal in the first place. A bureaucratic waste of time. The interface of the Work Order should be sophisticated enough to be able to capture the substance of the deal in whatever permutation and combination that is conceived of by the originators. I understand the myriad ways that these can be done and the difficulty in making an interface that captures these. That I don’t think is the difficult part. What I think would be the difficult part would be to make an interface that provides these services in a manner that is simple and easy to use, and captures the deals substance. I, however, know it can be done, and the reason it hasn’t been done is that the budget for software developments like these have not been set out. Its at times like these that people should revisit our revenue model and rethink People, Ideas & Objects approach based on our projected budget.

Continuing on with the scenario of using the Work Order system across multiple producers. I will use this scenario to show how the Partnership Accounting modules integrated nature with the other modules of the Preliminary Specification provides value to these ad-hoc working groups. Also why they are such an important element of innovation in oil and gas.

We used the scenario in the context of engineering, however it could just as easily be used in the area of geology or any other area of oil and gas interest. It could also include the supplier or vendor marketplace to form a working group in that area. The importance of the way the Work Order works is that the producer or participant is able to designate how they are going to participate in the working group. Prior to their approval they are to allocate the source of the funds and where the costs will ultimately go as a result of their participation. This being conducted by each participant or producer in the working group, all within the same interface for the same Work Order in the People, Ideas & Objects Partnership Accounting module.

One of the most obvious areas that this interface will interact with the other modules is the Security & Access Control module. Access to the Work Order will need to be unlimited for a certain point in time and then need to be closed to everyone but the existing members of the working group. This will need to be an interesting point in time when the search for participants reaches a threshold and the people feel the substance for a working group exists. Then only those who are within the working group, or are subsequently granted direct access are able to participate directly in the working group.

With the Security & Access Control module we also inherit the Military Command & Control Metaphor that allows the people to impose a chain of command across the working group. This might be something that they want to do if they have a difficult task or a large group of people. The opportunity to do so is available to them if they so desire as this is part of the Security & Access Control modules core functionality.

The designation of the source of the funds and where the costs will go is coded directly to those accounts. This has the Work Order taking on elements of the Accounting Voucher module in terms of how it operates. Each producers accounting system will be charged, upon approval of the Work Order, according to the way in which they have coded the Work Order. Therefore in that instance it will take on many of the attributes of the Accounting Voucher module.

I see these working groups, as we have called them here, as an important element of how an innovative oil and gas industry identifies and solve the problems that it faces. 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.”

It is therefore asked specifically, how can the knowledge, information and capability of oil and gas firms solve the technical and scientific problems of the future? How can a firm more effectively employ its capability to solve problems and facilitate the discovery of new problems and creation of their solutions? Clearly some companies are more effective at this process than others, but this research in oil and gas asks, is there a means for an organization to provide a quantum increase in its ability to innovate that leads to higher trajectories of performance based on production revenue per employee?

Having these working groups spawn at will without the bureaucratic and accounting logistical nightmare that they instill today will be an important first step in making the industry more innovative.

The complexity of the relationships within the Joint Operating Committees has to be captured and accounted for in the Partnership Accounting module of the Preliminary Specification. Whether we are talking about the various forms of contribution that a producer may make to the joint account, or how they may participate in a working group, the bureaucratic machinations of the accounting for these transactions can’t stand in the way of innovativeness of the producers.

The freedom to participate is inhibited by the fact that the business arrangements are difficult to capture and account for. What is needed is the ability to develop software that captures the substance of the manner in which the contributions are being made, and then the manner in which they are accounted for. That is the purpose of the Partnership Accounting module, to support the innovative oil and gas producer in the innovative actions they need to participate in. Once again Professor Giovanni Dosi points out specifically the need for the business aspects to support the technical aspects of the business.

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

Capturing the context of the deals made in both the Joint Operating Committee and working groups as described here in the Preliminary Specification can’t be done on an historical basis. What is needed is for the software to be sophisticated enough for the dealmakers to be using while formulating the deal, to capture the substance of the deal, so that it will be used to allocate the costs and charge their accounting systems for these costs when they are incurred. Then and only then will the accountants have a chance of keeping up with the speed and innovativeness of the industry as it is contemplated here.

This is the necessary part of the People, Ideas & Objects software development team and most importantly, the user community. It won’t be too difficult to capture the multiple and myriad ways in which a deal can be formulated. The algorithm will be complex but with time and money it can certainly be done. The real difficult aspect of making this critical part of the Partnership Accounting module work is the user interface. Having the ability of the user to intuitively use the module to capture their understanding of their part of the deal, capture it in the People, Ideas & Objects system and account for it on that basis. That is what is necessary to make this innovation possible.

There was one area that I thought that we needed to go back and clarify. It was in the area of budgets for the work that might be done in various projects through the Work Order system or in AFE’s. I thought that we should add another data element to the budgeted information, an “Unallocated Budget $” which reflects the amount of the budget that has not been spoken for.

We discussed previously how a number of producers would collaborate on a project to conduct some research. The Work Order system of the People, Ideas & Objects Partnership Accounting module enabled the producers, who may not have been affiliated in any form or fashion until this working group was formed, to be able to form and contribute to the project. The capturing of the meeting of the minds was the objective of the Work Order system, in that it would capture the manner of each producer's contribution and method of payments at the time the project was being formed. This enabled them to be free of the bureaucratic difficulties that come along with participating in these types of working groups. The accountants have a capacity to make participation in these more difficult than they are worth, and therefore, the working groups are avoided. The reason that we have to cut through the bureaucracy and encourage the use of working groups is that participation in these types of activities are critical to an innovative oil and gas industry.

The way that the interface for the Work Order will work is there will be two elements to the accounting interface. One will be the accounting for the costs. This will list the costs of the working group and your working interest share based on your participation rate. Fairly simple so far. The second element is where the problems come about. The participation can be funded from a variety of different sources and contributions. Some will have a key piece of research that is the foundation of the project. Some will contribute time and some will be able to contribute cash. The combinations and permutations are really unlimited. The one constant in these contributions is that they all have budgets. The second element will identify the source of funds or contribution that is to make up your participation in this working group. It will need to be determined if that means cash will be transferred from your firm to others by simply clicking on a box in the interface. Once all of the producers have completed their interfaces the balancing of the Work Order will be attempted with any variances worked out to determine who will make up any shortfalls. Once all the shortfalls are resolved the work can begin.

The issue of the budget is the point of this discussion and remains somewhat outstanding. How does the user know that the account that they want to draw from still has budget dollars available? We need to have some numbers available to the user that tells them the amount that is in the account, the budget for the account, and the amount that has been committed to other working groups but has not been expended yet. Enabling the user to not overextend that account and find that they can not use it when the time comes to pay the bills. And once they have made a claim on those resources, by selecting that account for use in a Work Order, that their Work Order will have a priority claim on those budgeted resources. Therefore when the user in a Work Order or AFE in a manner such as described here, sources a budgeted amount for use in a working group, that budgeted amount, upon approval of the Work Order, is allocated to that working group.

These are the beginnings of how the Work Order system will provide the innovative oil and gas producer and Joint Operating Committees with the ability to increase their innovativeness. 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.

A Quick Journey Down the Work Order Part I

As a small example of how the Preliminary Specification enables greater levels of innovation I want to point out the Work Order Systems interface. It provides the opportunity for producers to collaborate on the earth science and engineering disciplines in terms of projects and working groups. The projects and working groups are something that are believed to be a critical aspect of what an innovative oil and gas industry will need to be involved in. Therefore for the next two days we will provide an understanding of how the Preliminary Specification handles these.

We are discussing the role that the Work Order system would have in clearing up the administrative minutiae of the accounting related issues of the Partnership Accounting module in the Preliminary Specification. I want to continue on with that discussion and ask what that has to do with innovation? Lets look at the Work Order system from the perspective of a successful producer who is active in the marketplace and has developed an earth science and engineering capability that scores well in terms of Revenue Per Employee. The CEO is approached by one of the engineers who hears of several other producers who are conducting a study on something of interest to your firm. They are looking for other participants to join in and you want the engineer that brought the news to join in the project. Assuming everyone of the producers was using the Work Order system they would be able to pool the resources they have within the Work Order that was setup to manage the project. You were able to commit to a 10% share of x costs and would offset those costs with your engineers time and use of office space and some computer resources. (Note all costs are pre-approved and budgeted from other accounts.) With the Work Order you were able to make these commitments subject to the other 90% being committed to, and then your approval would be automatic.

We have here the means of which the people who are working within the industry to commit to programs and projects in a manner that is natural to their business. This is the way that the systems should be working today. What we have is an impediment to the operator in the industry who feels that participation in the study with the other producers would be worthwhile, however, the accounting and approval nightmare will haunt him for the next three quarters and subject him to such regulatory oversight as to question his moral integrity. So instead the project doesn’t get proposed, funded, participated in or done.

In Professor Dosi’s paper “The Sources, Procedures and Microeconomic Effects of Innovation” he discusses the role that such administrative minutiae have on innovation.

The discussion will aim to identify (a) the main characteristics of the innovative process, (b) the factors that are conducive to or hinder the development of new processes of production and new products, and (c) the processes that determine the selection of particular innovations and their effects on industrial structures.

In our example the financial resources are there. The motivation exists within the organization to do a spectacular job on the project. What happens is the bureaucracy gets in the way and slows things down and makes it a task that requires superhuman effort to even try. And maybe one or two projects will get done each year on the basis of sheer will. But what is needed is the ability to conduct a volume of projects that is far in excess of one or two, and that is beyond the scope of the organizational context as the producers are organized today. Without the ERP systems to define and support these innovative processes, these processes will not spontaneously appear.

Let’s continue on with the scenario that we have been discussing regarding the Work Order system in the Partnership Accounting module of the Preliminary Specification. We discussed how one producer could participate in a study with other producers by setting up a Work Order to capture their involvement. Their contribution involved one engineer, some office space and computer time. That they would contribute some cash was also a possibility as they signed on for a total of 10% of the projects projected costs. I want to talk about the other producers involvement and how the Work Order system, being a multi-organizational system, is able to capture the different ways in which each producer will participate and account for these differences within the People, Ideas & Objects Partnership Accounting module.

The emphasis is once again on the ability of these producers to innovate. The collaborations and interactions between producers and participants in the industry will be the source of many of the innovations that occur in the future. The impediment to doing these as a result of the bureaucracy and the current suite of accounting systems in use in the oil and gas industry is what I want to draw a contrast to in this scenario using the Work Order. Its time in this day and age that the systems become as complex and as sophisticated as what is being described here so that the innovation in the earth science and engineering disciplines can occur. Professor Giovanni Dosi expands on this point further in the following quotation.

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

Within the project that the producers want to participate in. Some want to contribute a variety of different resources, some have specialized capabilities that are critical to the project and others are more or less along for the ride and are willing to participate by paying cash. Some have an AFE that has been approved that can direct the funds to pay for their participation. Some will incur the costs as part of their annual payroll budget for engineering. Still others have a working interest partner that are willing to share the costs over a number of Joint Operating Committees. The combinations and permutations of how a Work Order gets financed and funded are unlimited when we consider the number of different ways producers can participate.

Now to have a Work Order system that takes the information from these various parties and assimilates the understanding of the deal from the five or six people who have the “meeting of the minds” to initiate this project is the critical point in which to start. Each needs to codify their understanding of how their participation of the costs are funded and costed to their People, Ideas & Objects Partnership Accounting modules Work Order. All of the participants are using the one Work Order that is shared across all of the producers. This agreements understanding needs to be captured within the Work Order system prior to its approval by all of the producers. Much like an Accounting Voucher in the Preliminary Specification the costs need to be coded, but also the sources of the funds need to be identified. This way the system can process the charge within the firm in the manner that it was expected to be. For any charges that are above the threshold that a firm was willing to commit to, that imputes that another firm's cash commitment would be provided to cover those costs. The Work Order should make these cash transactions between these producers as a result of the approval of the document. The point of the exercise is that once the Work Order is approved, the understanding of the deal, as captured by the interface, is executed.

Tomorrow we will continue our discussion of this important topic of how innovation is initiated in 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.

A Brief Synopsis

The Preliminary Specification is an eleven module software application that is designed to support the innovative and profitable oil and gas producer. It will be built with Oracle technologies on top of Oracle Fusion Applications. Its key organizational construct is the industry standard Joint Operating Committee, the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. By moving the compliance and governance frameworks of the hierarchy into alignment with the seven frameworks of the Joint Operating Committee. The Preliminary Specification achieves a speed, innovativeness and accountability in the producer firms and Joint Operating Committees.

This simple alignment has significant repercussions across the industry. Hardly any position that is involved in the day to day of the oil and gas industry is unaffected by the changes of moving to the Joint Operating Committee. This includes the oil and gas industry and the service industries that support the oil and gas producer. It also affects what we call service providers, a new sub-industry of process oriented organizations that provide services to the oil and gas producers and particularly, the Joint Operating Committees. These service providers are critical to the changes made in the industry to increase its profitability.

Innovation in the earth science and engineering disciplines are enabled in the Preliminary Specification. The research that preceded the Preliminary Specification determined what was needed in an organization in order for innovation to be enabled. These elements have been implemented into the software that is the Preliminary Specification and will be available to the producers that use the software. Innovation is as much an engineering discipline, and it can be reduced to a defined and replicable process if the organization is designed to enable it. The Preliminary Specification has taken this approach.

One of the key elements of the Preliminary Specification is the use of the “decentralized production model.” Use of this model enables us to provide the industry with the majority of the $94 billion in 2012 opportunity costs. It sees the producer firm stripped down to the C class executives, earth science and engineering resources, some legal and support staff. The remainder of the firms resources are allocated to service providers who are focused on the industry wide process, or subprocess. There they can apply the toolset of the division of labor and specialization to the global or industry wide data set as their client base. Billings for their services will be charged directly to the Joint Operating Committees in the month they are incurred.

The real value of the “decentralized production model” comes about when the Joint Operating Committee decides to shut-in production due to commodity prices not meeting the marginal costs. It will be at that time, when there is no production, that none of the associated overhead that is usually incurred by the service providers would be processed. And as a result no billing for that month will be sent to the Joint Operating Committee for the usual overhead costs. Therefore the property will have no production, no production costs and no overhead incurred during times it is shut-in. Only the costs of capital will be uncovered. This will reduce the downside to commodity prices as it reduces the commodities supply. And it reduces the losses on the property that would otherwise have to be added to the reserves costs to be made up in the future. If the industry were to adopt the Preliminary Specification they could mitigate the current natural gas pricing declines and deal with the prolific nature of the shale gas formations.

These are just some of the highlights of the Preliminary Specification. There are many more contained within its 175,000 words and the pages of this blog. I would encourage you to have a look and see for yourself if this is something that the oil and gas industry needs for today and the future.

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.

Some of the "What" and "How"

When it comes to the future organizational configuration of the oil and gas industry. “What” and “how” are the two key questions to ask in terms of its configuration. The Preliminary Specification uses the Joint Operating Committee as the key organizational construct in order for the industry to focus on its innovative and profitable needs. Those would be a large part of the answer of “what” is required. “How” it obtains these is through the Preliminary Specification and maybe most importantly, through the cultural ways that the Joint Operating Committee is used throughout the industry. We are moving to the cultural norm of the industry as the key organizational construct, and building the systems that identify and support that organization and culture. A radical shift in the way the industry is managed, to one that is consistent with the industry makeup.

Change within the industry is happening at a rapid rate and the current bureaucracy are at a loss to deal with the issues and opportunities. The earth science and engineering capabilities are moving faster than the organizations ability to address the changes. The best example is the shale revolution bringing on deliverability issues that are unidentified and unaddressed by the bureaucracy. We would expect that once the earth science and engineering resources are unencumbered by the bureaucracy that they will accelerate their capabilities even further.

The constraints to these resources may not be obvious at this time but there would be many. The critical resource constraints of time and money are controlled by the bureaucracy and they are expert in allocating the limits of time and effort. In an industry based on engineering principles, time and effort is a principle of unlimited expenditure. However, the unnecessary cutting off of time and effort in the time of the shale revolution and other discoveries is a destructive process, not one in which builds value. The future of the industry will be based on innovation in the earth science and engineering arenas and will be profitable to those that can compete on the principles in these disciplines.

Having an organization that supports this type of producer will be the organization that we set out to build today. It will be the organization that we set out to build the software that identifies and supports that organization. If we set out to build that software today we can have that industry tomorrow. It’s that simple. These are the steps that need to be taken in the 21st century for the innovative and profitable oil and gas industry. It doesn’t happen by chance anymore. That was in previous generations. The world has become too complicated to leave it to chance. There are too many vested interests that are working against the best interests of everyone to have the right things happen.

With the opportunity costs being $94 billion for the calendar year of 2012. The time is well past due that we begin down this road. The costs of these developments are incidental to the costs that the industry is already incurring by employing tired and outdated modes of organization. The Information Technology revolution is here for the oil and gas industry and its name is the Preliminary Specification, brought to you by People, Ideas & Objects. These are bold claims based on innovative ideas inherent in the Preliminary Specification. Ideas such as using the Joint Operating Committee as the key organizational construct and many others.

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.