Focusing on Capabilities

We now want to discuss the boundary of the firm and markets with respect to the Petroleum Lease Marketplace of the Preliminary Specification. In this the section we are focusing on capabilities. And the question should be what capabilities are we seeking to achieve from the Petroleum Lease Marketplace? And why is there a need to transition to this new model of organization, a marketplace? For that let's begin with a quote from Professor Richard Langlois’ paper “Capabilities and Governance: The Rebirth of Production in the Theory of Economic Organization.”

The organizational question is whether new capabilities are best acquired through the market, through internal learning, or through some hybrid organizational form. And the answer will depend on (A) the already existing structure of capabilities and (B) the nature of the economic change involved. p. 21

What we currently have is a number of departments; Land, Legal, Land Administration, some Production and Exploration Administration and Accounting, that will become elements of the Petroleum Lease Marketplace. These departments will transition to new roles, some in new service provider firms, where they will be part of a marketplace environment. It will be within the marketplace they will provide their capabilities to those producers and Joint Operating Committees that are in demand for their services.

If a profit opportunity requires a configuration of capabilities different from what already exists in the economy, the Schumpeterian process of creative destruction may be set in motion. p.21

Its a marketplace, not a department within a bureaucracy. One within a dynamic, entrepreneurial and innovative oil and gas producer. A place where the act of buying and selling and trading leases or interests in properties, making deals or building companies can and will be done.

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

It is interesting that one of the roles of the firm, in this revised boundary of the firm and market, is the enhanced role that coordination will take on. This next quote states explicitly the need to enhance the coordination by way of routines and capabilities.

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

Since contracts are one of the key end products of the activities that are undertaken in the Petroleum Lease Marketplace module. It is these contracts incompleteness that will continue to demand the services of those employed in the marketplace and the firm. Services of “routines and capabilities as coordinating devices.” Making the “marketplace” a key interface of the Petroleum Lease Marketplace module.

We have noted the ability to build a company was one of the things that is being done while working within the Petroleum Lease Marketplace (PLM). Implying that the marketplace was an area where the active state of affairs was to build something as opposed to just fill file cabinets with agreements. This is the key point as to why the PLM has to be a marketplace. It must emulate the personality of the people who are building the firm. From Professor Langlois’ Industrial Dynamics, Innovation and Development.

Industrial economists tend to think of competition as occurring between atomic units called "firms." Theorists of organization tend to think about the choice among various kinds of organization structures - what Langlois and Robertson (1995) call "business institutions.” But few have thought about the choice of business institution as a competitive weapon. p. 1

The “Marketplace Interface” of the Petroleum Lease Marketplace module of the People, Ideas & Objects system provides the innovative oil and gas producer with the competitive weapon they need to build their firm.

On the other side of the ledger, an open modular system can more effectively direct capabilities toward improving the modules themselves (Langlois and Robertson 1992). Such a system harnesses the division of labor and the division of knowledge, allowing organizational units to focus narrowly and thus deeply; at the same time, it magnifies the number of potential module innovators, and thus can often take advantage of capabilities well beyond those even a large unitary organization could marshal. p. 19

The modular nature of the Preliminary Specification provides this ability to focus on the important attributes within the module. The Petroleum Lease and Resource Marketplaces are different just as the Financial Marketplace, Research & Capabilities and Accounting Voucher modules are unique. Each have their own unique people and activities that are separate and distinct from one another. Yet, they all interact to support the innovative oil and gas producer.

A complex systems product is underlain by an architecture: a set of parts and a way of fitting those parts together. An integral architecture is one in which the parts depend on one another in complex and often unpredictable ways: the system is a tangle of spaghetti. By contrast, a modular architecture is one that regularizes the dependencies among the parts, forcing them to interact only in relatively formalized and predictable ways (Lanlgois 2002b) p. 6

The point that I am struggling to get across is the interface in which users will access the marketplace in the Petroleum Lease Marketplace. It is the “Marketplace Interface” that I am highlighting in this discussion as to what I think is the value to an oil and gas concern. It is through this somewhat simple software representation of the market that much of the value will be gained.

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 Marginal Production Threshold Interface

Within the Preliminary Specification the capability for the producer to scale back their production in the face of poor commodity prices is made possible. This is part of the business model that provides the innovative and profitable oil and gas producer to optimize the value of their reserves. In the Resource Marketplace module we had discussed the implications of shutting in production would have on the costs of production. That is by moving to the “decentralized production model” from the “high throughput production” model it has the effect of turning the producers fixed costs of production, overheads, administration and accounting, into the variable costs of production, overhead, administration and accounting of the Joint Operating Committee. Therefore all of the costs of the Joint Operating Committee decline in line with revenues. With no production there are no revenues, however there are no other costs other than the costs of capital. Leaving the property, or Joint Operating Committee with no loss on operations during periods of shut-in production. It is in the Petroleum Lease Marketplace module that the capability to reduce production is acquired through the Marginal Production Threshold Interface and is the subject of this discussion.

The operational decision making authority lies with the Joint Operating Committee. And we have discussed throughout the Preliminary Specification how the decision may be made to shut-in production to mitigate the losses on the property and to help return the commodity markets to balance. With the Preliminary Specifications move to the “decentralized production model,” where all of the costs are variable, recorded in the Joint Operating Committee and therefore suspended with the production, the decision to shut-in production is something that should be possible, or to be triggered through the Marginal Production Threshold Interface.

The Marginal Production Threshold Interface would provide the collaborative means in which the Joint Operating Committee would agree to the criteria in which production would be suspended. We see today with Natural Gas prices in North America, a situation where no one is making any money. When prices meet the criteria that the partnership have agreed to, ie the marginal costs, then the decision to curtail production can be carried out. Whether that is manually issuing the order to reduce production, or if the systems are automated, then the system is automatically triggered at the beginning of the month when the criteria is met.

The ability to collaborate and agree among the partnership falls within the domain of the Joint Operating Committee. Having all of the Joint Operating Committees that you have an interest in located within the Marginal Production Threshold Interface in the Petroleum Lease Marketplace will provide you with an understanding of what your production profile will be at various price scenarios. This can be provided through a “what if” scenario page within the interface. Extensions of the prices and volumes will also calculate what your pro-forma revenues will be. Determinations can also be made of the overhead and production costs.

If each producer within the industry was able to manage their production in this manner there would be an end to the losses on operations as each marginal property would be financially and operationally at neither a profit or a loss situation. The reserves would be saved for a time when the production would be produced profitably. And the commodity prices would effectively have lower downside swings as a result of less production being available. The current situation which tries to manage prices by limiting capital spending is a very blunt instrument that leads to over and under production at the extremes. People, Ideas & Objects Preliminary Specifications business model and the Marginal Production Threshold Interface will enable the producers to stop producing the marginal production and save the reserves for the day when they can be produced at a profit. A little faith in markets is all that is required.

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 Strategy Interface

What People, Ideas & Objects is undertaking in developing the Preliminary Specification is the simple process of moving the compliance and governance frameworks of the innovative oil and gas producer into alignment with the Joint Operating Committees legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks. This discussion will deal with the strategic framework and how the Petroleum Lease Marketplaces “Strategy Interface” works to communicate the unique strategic direction of each of the Joint Operating Committees the producer has an interest in. In addition, the business model that is provided to the innovative and profitable oil and gas producer by using the Preliminary Specification will be discussed.

With the demands of the earth sciences and engineering necessary in each property. The ability for producers to apply generic corporate strategies to all of their properties is quickly expiring. The need to address each property's unique characteristics and accommodate those needs with the properties own unique strategy is becoming a necessity. Each property's unique strategy will be a result of the collaborations among the participants in the Joint Operating Committee and will be subject to change from time to time. The key determinate, or business model, will be to optimize the value of the reserves over the life of the property.

Placing the Strategy Interface in the Petroleum Lease Marketplace is the logical location for this information. Along with the agreements, leases, AFE’s, and other partner related information that shares several things in common with the “Strategy Interface.” Those common threads are the collaborative nature of the development of the documents, and the access privileges that will be used to access the information. Each producer having read / write access to each property that they have an interest in. Where they can collaborate within the partnership as to the overall strategy and tactical direction of the property. Where individuals who are authorized to work within the Joint Operating Committee through the Security & Access Control module, and who are authorized with read access to the Strategy Interface are able to determine their actions are in line with the strategic intent of the property.

From the producers perspective they have a database of strategic documents that are unique to each property. They are able to determine quickly what the strategy is for any property and engage the specific people responsible for further information. Although each property is following its own unique strategy, the producer firm is not without its input and is able to quickly determine the details of the properties key strategic direction.

We have now documented the “Strategy Interface” of the Petroleum Lease Marketplace module of the Preliminary Specification. This being a simple collaborative interface that documents the unique strategy of each and every Joint Operating Committee the producer has an interest in. This further discussion will deal with the positive attributes of the Strategy Interface, application of the business model and the difficulties that it will impose on the bureaucracies that are unwilling to consider the option of individual property strategies.

Natural gas is experiencing a unique situation with the prolific nature of the shale gas discoveries. And oil continues to experience high global demand and pricing with nominal supply growth. The earth science and engineering used to provide energy for today’s markets is an order of magnitude more complex than a few decades ago. This the land and asset base are the basis of competition for the innovative and profitable oil and gas producer. People, Ideas & Objects Preliminary Specification have provided an updated business model to the industry. One that is based on the decentralized production model that sees the producer firm reduced to the c class executives, earth science and engineering resources, some legal and support staff. The remaining administrative, accounting and overhead resources are reorganized into service providers who are focused on the industry wide process. Processes like lease rental payments, production, revenue and royalty accounting, etc.

It is in this way that when the service provider provides the services of production accounting they are then able to bill the Joint Operating Committee for the production accounting services. Note they bill the Joint Operating Committee and not the producer. If the property falls into a situation where it is not meeting its marginal costs then the property can be shut in, and all of the administrative, accounting and overhead cost that are usually incurred at the service providers will not be incurred and will not be billed. Causing the property to report no loss on operations, saving the reserves for a time when they can be produced profitably (and achieving the business models objective), removing the surplus commodity from the marketplace and putting a floor under the commodities price.

The combination of the Strategy Interface with the application of the People, Ideas & Objects Preliminary Specifications business model for innovative and profitable producers. Gives the producer the tools to effectively optimize the value they can achieve from the reserves they hold. This is the means in which producers can compete in the complex energy era.

It appears that the exploration and exploitation of oil and gas reserves has and always will be a function of the technology based on the underlying sciences. This is undeniable, and may also be the cause of the shorter-term life cycle which is agreed by most to be a trend that will continue. This reserve size and deliverability is paralleled in Professor Giovanni Dosi’s discussion of how innovations in industrial companies have been diluted by demand prediction and lower production volumes. Generic corporate strategies are therefore an impediment to the value realization of these petroleum and natural gas reserves. An innovative posture will also bring about different strategies in terms of timing of the investments. Professor Dosi notes;

Finally, empirical studies often show the coexistence, within the same industry and for identical environmental incentives, of widely different strategies related to innovation, pricing, R & D, investment and so on. Specifically with regard to innovation one notices a range of strategies concerning whether or not to undertake R & D; being an inventor or an early imitator, or “wait and see”; the amount of investment in R & D; the choice between “incremental; and risky projects, and so on (see Charles Carter and Bruce Williams 1957; Freeman 1982 and the bibliography cited therein). Call these differences behavioral diversity. p. 1157

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 the financial crisis of 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 then it was before 2008. However I am sure we can all agree that continued production of the shale gas reserves at a loss would be the beginning of the destruction component in creative destruction.

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.

System which System

Previously we documented how the division of labor might affect the lease rental payment process. It was there that we discussed the specialization of 20 individuals who were processing the lease rentals for all of the Joint Operating Committees who would use People, Ideas & Objects (PI&O). How these people would actively improve the process by identifying “gaps” and were supported by a PI&O software development team to amend the software to accommodate the changes they made to their processes.

The Petroleum Lease Marketplace is an area that is rich with processes like lease rental payments. All of these processes as well as those in other modules would be subject to similar changes as those noted for the lease rental payments. The Petroleum Lease Marketplace module deals with the administrative details of both the producer firm and Joint Operating Committee. Both of which will be undergoing significant changes as a result of innovation in other areas of the business. What has been a rather constant area in terms of its activity and change level, the lease rental payment and other processes, may take on a more dynamic feel for the business. When the producer and Joint Operating Committee are actively innovating, Professor Giovanni Dosi notes that two separate phenomenon are observed.

First, new technological paradigms have continuously brought forward new opportunities for product development and productivity increases. p. 1138

Secondly “A rather uniform, characteristic of the observed technological trajectories is their wide scope for mechanization, specialization and division of labor within and among plants and industries.” p. 1138

The dynamism of the Research & Capabilities process, documented elsewhere, must rely on the Petroleum Lease Marketplace for information and resources. The need for it to be responsive to the Research & Capabilities changing needs is a necessary requirement of the Research & Capabilities innovative-ness. Looking to model the management of these change processes across all producers within all geographical regions would seem to be a difficult task. To capture this change process within the People, Ideas & Objects software, an even more difficult task. However, Professor Dosi notes that there are other serious concerns that need to be taken into consideration.

The appearance of new paradigms is unevenly distributed across sectors and so are (a) the degrees of technical difficulties in advancing production efficiency and product performance, and (b) the technological competence to innovate, embodied in people and firms. pp. 1138 - 1139

Simply not everyone will be working off the same page when it comes to the types of innovation, the scale of their application and degree of complexity. In this next quotation it becomes clear that the processes under management by the software is the means in which to be able to deal with these underlying paradigms and trajectories. Therefore, in order for the producers to begin the path of innovative-ness requires that we resolve these process design issues, and build the software before they are implementable within the various disparate organizations.

These distributions of opportunities and competence, in turn are not random, but depend on (a) the nature of the sectoral production activities, (b) their technological distance from the “revolutionary core” where new paradigms are originated, and (c) the knowledge base that underpins innovation in any one sector. p. 1139

As the Preliminary Research Reports research question asked, can innovation be reduced to a quantifiable and replicable process, the answer was an unqualified yes. This last quotation is one of the reasons why. Having the process defined at the “revolutionary core” and at the “knowledge base that underpins innovation” are the requirements that we capture in the software. That does not mean that each and every producer will fully appreciate or understand the full scope or scale of what the system provides. Only those that are at the revolutionary core will be able to fully exploit its resources. That however, does not preclude the systems use by everyone within the industry. For example not everyone is at the revolutionary core of Microsoft Excel and that does not preclude them from gaining value from its use.

People, Ideas & Objects believes that if we engineer a software application to deal with these issues, we can accelerate the performance of the producer and the industry. From a systems engineering point of view this has been beyond the scope of one software development team working with the limited budget resources of one producer. For any producer to undertake the required analysis, let alone development of the systems, is beyond the scope of what was possible or desirable. It is well beyond the scope of any software developer to undertake on their own, in a speculative manner, and therefore has been beyond the imaginations and possibilities of the industry. I would also argue that, in the past, automation of this business process would have generated limited value. Today we can, as has People, Ideas & Objects, define a more specific division of labor and specialization and therefore, provide a more profitable means of oil and gas operation.

To state this point differently, we can focus the resources of the industry on the comprehensive engineering of these processes. Allocating these costs over the entire energy producing base presents opportunities to undertake the detailed development of software that has not been attempted before. This is the approach that is necessary to deal with the issues associated with the producers meeting the market demands for energy. Management of these processes is the key to enabling the organizational performance, technological paradigms and trajectories that Professor Dosi notes in this paper.

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.

Leveraging the Capabilities of Others

Our discussion on the capabilities that the producer holds has documented a number of processes through the Research & Capabilities, Knowledge & Learning and Resource Marketplace modules. These are comprehensive processes that enable the producer to develop and maintain their unique and valuable competitive advantages in terms of their earth science and engineering capabilities. These capabilities should be actively marketed to other producers as a potential partner in terms of the value add that could be contributed to a potential Joint Operating Committee.

We are in a period where the “easy energy era” has passed and it is generally agreed that the complex energy era has begun. The demand for earth scientists and engineers is substantial and challenges the ability for each producer to build the capabilities they need to operate all of their properties. Therefore the need to pool their capabilities with their partners in the Joint Operating Committee is not a nice to have but a necessity. This pooling can take on an ad-hoc disorganized mashing of two or more producers or can be a deliberate construct as a result of the meeting of minds at the beginning of a joint venture. Enabling each of the producers in the pooled partnership of the Joint Operating Committee to specialize on their earth science and engineering capabilities. People, Ideas & Objects Petroleum Lease Marketplace assumes the latter is the preferred choice and is providing the tools to develop these specializations and joint capabilities.

In Professor Giovanni Dosi’s paper he notes the following three factors involved in the development of innovation.

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

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

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

• 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.)

We are assuming for the purposes of these writings that the key stimuli is the commodity prices which are allocating the financial resources to fuel innovation. Throughout the Preliminary Specification we have focused on the capabilities of the producer. What the producer must now learn to do is to specialize on their own earth science and engineering capabilities and leverage the specialized capabilities of their partners in their Joint Operating Committees.

Within the Petroleum Lease Marketplace there needs to be an interface that lists the areas where the capabilities of other producers are being leveraged. These listings need to be based on the agreed to and documented exchanges of capabilities that are part of the CO&O or other agreements that make up the Joint Operating Committee. This same report could detail the commitments that the producer firm has made in terms of its capabilities to the partners in future years. This "Capabilities & Commitments" interface would of course be organized based on the Joint Operating Committee.

Within the Petroleum Lease Marketplace of the Preliminary Specification we have established two new interfaces. The first is what we have called the "Revenue Per Employee" listing that details the various calculations of revenue per employee by producer within the industry. These calculations are broken down to provide variances based on the commodity prices, volumes and number of employees. Further calculations are conducted on each of the Joint Operating Committees that the producer firm participates in. These calculations are broken down by the variances noted above and are confidential to the producers who are participants in the Joint Operating Committee. Recall we are looking for the trajectory change in the three variables over a period of time.

The second interface that has been developed in the Petroleum Lease Marketplace is what we are calling the "Capabilities and Commitments Report." It details the capabilities that are provided by agreement in the various joint venture agreements the producer participates in. This report also details the commitments that the producer has undertaken to provide in terms of its capabilities under those same agreements. This report enables the producer to fully leverage their partners capabilities and focus on developing their capabilities while contractually meeting their requirements.

These reports add value to the producer and the Joint Operating Committees that use the information that are contained within them. They are unique and provide information that can be used in innovative ways. Of note I think that a service provider could be established to complete the task of occasionally verifying the producer data for Revenue Per Employee on an industry wide basis. That way one service provider would need to verify the industry wide producer related information. However, there is more to the use of these reports when they are used in combination. And what we could provide is a hybrid report that sorts the information based on the Joint Operating Committee, having both the Revenue Per Employee calculation and the determination of the Capabilities & Commitments Report output together. Learning “who” and “where” the innovations were being developed.

In our review of Professor Dosi’s paper, he begins by summarizing that businesses commit to innovation stemming from...

“exogenous scientific factors and endogenously accumulated capabilities developed by their respective firms.” His general point is that “observed sectoral patterns of technical change are the result of the interplay between various sorts of market-inducements, on the one hand, and opportunity and appropriability combinations, on the other.” p. 1141

Recall that “appropriability” for the purposes of the producer include lead times and learning curves as more effective ways of protecting process innovations. Therefore appropriability and opportunity are clearly reflected in the Revenue Per Employee report. What the Capabilities and Commitments Report is reflecting are the “market-inducements.” The result of the “interplay” between these reports would be “patterns of technical change.” That might be a bit of leap for some to make on an industry wide level, and that I would agree, however, the devil would be in the details. On a Joint Operating Committee basis, which we would have the data for, both the capabilities from the partners, the producer and the revenue per employee, the information would be valuable.

Any “pattern of technical change” would be triggered by the trajectory changes in Revenue Per Employee. Most probably by any trajectory change in the volume variance. Therefore what was the reason for the change and was it as a result of any change in the capabilities of a producer due to any “patterns of technical change” or “market-inducements?” Maybe I am being too analytical and reaching to extend the value of innovation within the enterprise.

Highlighting what is effective within your organization, from an innovation standpoint, will be a difficult and important task. These reports will be able to highlight any success or failure within the current month. I think that provides ample time for the producer to determine the viability of the operation of either their or their partners innovative capabilities. Making these reports critical to the innovative oil and gas producer. In the future it will necessary to be successful, but also to be able to point to where the success originated from.

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.

Revenue Per Employee

In terms of evaluating the performance of a potential partner firm in a Joint Operating Committee. Or in determining the performance of a property over time. People, Ideas & Objects have developed “Revenue Per Employee” as the metric that provides an understanding of the state of the capabilities and innovativeness of a partner firm or Joint Operating Committee. If you calculate revenue per employee you will find rather dramatic differences in terms of the different factors for producers. Special consideration has to be given for integrated firms to ensure that you preclude the downstream operations and the smaller producers as the factor unfairly reflects their capabilities. Given the disparity in Revenue Per Employee for producer firms this factor is a valuable tool in determining the appropriate partner to select in a property and an effective tool for motivating teams towards higher capabilities, innovativeness and performance.

Professor Giovanni Dosi’s paper “The Sources, Procedures and Microeconomic Effects of Innovation” discusses the role of innovation in the market economy and assumes companies in a free market are willing to invest in science and technologies to advance the competitive nature of their product offering or internal processes. The key aspects of Professor Dosi’s theories that make them directly applicable to oil and gas are the innovation theories application to earth science and engineering disciplines. These disciplines are key to the capability and success of oil and gas firms search, and production of, hydrocarbons. The investment in science and technologies is with the implicit expectation of a return on these investments, but also, to provide the firm with additional structural competitive advantages by moving their products costs and / or capabilities beyond that of the competition. Ensuring that your partners in the Joint Operating Committee are of the same mindset and capability is a critical component to your future innovation strategies. Professor Dosi note:

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

A meeting of the minds with regards to innovation needs to be established in the Petroleum Lease Marketplace module and captured in the agreements and associated modules. We will be discussing the revenue per employee factor in the Analytics & Statistics and Performance Evaluation modules in the Preliminary Specification. Maybe what we need to do in the Petroleum Lease Marketplace module is find a place where we can compare the various producers revenue per employee factors to determine their appropriateness / suitability in terms of an innovative partner. A simple listing of the revenue per employee of your partners and potential partners on its own interface within the Petroleum Lease Marketplace module.

First we should ask ourselves does the calculation of revenue per employee provide a reasonable comparison of the innovativeness that exists in a producer? Or would this calculation reflect the quality of assets, the size of the firm or its actual innovativeness? That is the question that is hopefully being answered here.

Clearly the factor of revenue per employee would reflect many factors other than the innovativeness of the firm. However, would the comparison of revenue per employee over multiple periods be a determining factor of innovativeness? The increase / decrease in the factor would be as a result of an increase or decrease in price and volume, with the volume being particularly affected by the changes and innovations that occurred over the period in the firm. The one other critical determining factor is the number of employees the firm employs. Unreported changes in the number of employees would skew the results significantly.

If the Revenue Per Employee interface in the Petroleum Lease Marketplace module calculated revenue per employee for the participants in Joint Operating Committees of the producer. And calculated the factor for prospective producers there could be value in determining whom would be a good prospective match as a partner in which to deal with in the future. The report could also calculate the trajectories on the basis of the volume, price and employee variances during the periods under comparisons by the user.

So what have we got? We have run some elaborate calculations that “might” prove that one producer is innovative. What does that prove? That depends on what is imputed by being innovative. 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.”

Running this factor against the general population of producers within the industry provides value to the user. The ability to highlight who is solving the problems in the industry on an innovative basis and then partnering with them is positive for all concerned. However the real value in the Revenue Per Employee calculation would be the ability to run the report on the basis of the individual Joint Operating Committees that you are a participant in.

This is a more difficult task due to the calculation to determine the number of employees that worked on each property. That is it would be a problem until the People, Ideas & Objects Military Command & Control Metaphor and Work Order system were implemented. Then these systems will be recording the hours of the people from all of the various producers who are authorized to work on the JOC’s. Therefore the calculations that were run on the basis of the producers, can then also be run against any and all of the Joint Operating Committees that you have an interest in. This would also include the calculation of the volume, price and employee variances of the trajectories over the periods being compared. This being the first step in the process, determining which Joint Operating Committees were most innovative. The next step, and the most important step would be that Revenue Per Employee would be providing an understanding of who the innovations may be coming from.

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.

Different Perspectives on Data

There will be a large percentage of the data within the Petroleum Lease Marketplace that is public in nature. For example this data will include the lease documents themselves and reflect who the lessee is and the mineral rights held. Although this information is public in nature, that is its available from the lessor’s websites, there is little reason to hold it public in the Preliminary Specification from a producer point of view. Access to a producers or Joint Operating Committees data and information through the People, Ideas & Objects application modules via a public interface does not exist. Although the data and information may be accessible elsewhere, it is not available unless the individual has direct access granted through the Security & Access Control module.

Next there are areas where the data and information would be considered to be “partnership” or Joint Operating Committee in its nature. We have discussed the research project that the user community will undertake in the Preliminary Specification to determine if data will reside within the JOC or the producer. This is a good example of where the issue resides. If the agreements, leases and AFE’s are the same for all the producers why not store them within one location in the JOC and have access by the authorized producers? Then everyone is working from the same documents. Here’s where the Military Command & Control Metaphor will need to be sophisticated enough to enable the appropriate users from different producer firms to access these documents. Another consideration for the research project of the user community.

Then there is the private information that the producer generates that will be for strategic and tactical concerns that will be for the producers eyes only. These discussions could be regarding one of the agreements that should not end up in the “partnership” area. How does a firm maintain access to this critical information and ensure that it doesn't leak out to someone that it shouldn't? Please review the “Two Types of Data” section of the Security & Access Control module.

The Preliminary Specification also provides an interesting opportunity regarding the publication of aggregated data. It is in the context of the capital budgets of the producers. If producers were to maintain their expected capital budgets in reserve report format within the PLM, would they be interested in publishing that data in aggregate through the Resource Marketplace module. This data would be scrubbed of all pertinent proprietary information and only represent dollars, general geographical area and account classification. This information would provide the Resource Marketplace with information of approximately what the marketplace might look like in near future so that they could plan to meet the expected demand. And would provide the service industry with a better understanding of their marketplace.

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.

Specialization and the Division of Labor

I want to discuss the manner in which People, Ideas & Objects software development team will support the division of labor and specialization in the Preliminary Specification and particularly in the Petroleum Lease Marketplace (PLM). We had discussed earlier in the PLM that the determination of where the data would reside, and hence where the people would work in the industry. Would the data be stored within the Joint Operating Committee or the producer. This was to be determined by the community based on their research. We also noted that with the division of labor and further specialization of the people that work in the industry required that maybe individuals might not work for a specific producer or Joint Operating Committee but instead work for a process that was billed for example as a service to a 1,000 JOC’s representing 200 firms. This discussion assumes that both situations, the data is stored at the JOC, and a process is managed by a dedicated team that employs the people who work for a variety of JOC’s representing many producer firms, is the case.

When we consider the global experience and understanding of the people that are employed in the oil and gas industry. We have many people today with a diversity of experience and understanding of the industry. When we think of the future, in order to deal with the ability to handle the greater volumes of work, we generally feel that there is a need to have a wholesale increase in the overall experience and understanding of the industry. But is this necessarily the case? With the division of labor and specialization we are able to rely on a level of experience and understanding of a few that understand the entire process, and assign the specifics to those that can specialize in their own specific domain of understanding. With each person taking care of their part of the process, at a high level of understanding, the entire process is managed with an efficiency and understanding that aggregates the skills of all of those people within the process. This is the advantage of specialization. And it enables the industry to undertake greater processing loads with the same resource levels.

Now let's assume for a moment that you had a group that processed all the lease rentals for all the JOC’s and producers that used People, Ideas & Objects proposed software applications. And this groups was a very specialized team of 20 people who were supported by the software development team and user community that People, Ideas & Objects is based upon. How would you divide up that work to make it more efficient? Would it be based on producer or JOC? I don't think so. Probably on the basis of rental due date, or maybe geographical location. One thing for certain the way that the work was organized would be fundamentally different than the way that lease rentals were organized within any firm or JOC today. No matter how large the producers size. The specialization that this service provider would be able to present would reduce the costs of lease rental processing and also increase the quality of the service the data and information that was presented. This is how we need to begin reorganizing some of the processes the industry depends upon. Here’s why.

How does the division of labor expand? That is to say, this lease rental process continues on and they find if they make a small change in the way they process this element of it, then they could save x% of time. This is the process of “gap filling” which makes inherent sense. Then the boss says ok, sounds great go do it. The problem today is that all of our processes are highly automated. And it would seem that People, Ideas & Objects are taking the Preliminary Specifications process automation further. Therefore the ability to change a process is heavily dependent on a software change. Which in the current environment is next to impossible. People, Ideas & Objects however are providing a software development capability. One that is available for the purposes of gap filling and supporting the user community needs. One that is designed to support innovation. Therefore the ability to make the change in the process and have the software updated to support the process change is available.

Making these software development changes at one service provider makes the process manageable. As opposed to the methods today of having to do this within each producer firm which doesn’t provide any efficiencies. That is in today’s environment, there are no efficiencies in terms of software development changes, and there is no scale in terms of the division of labor and specialization to apply to the volume of lease rental activity. It is also assumed in this example that the data is stored at the JOC and therefore the amount of lease rental data that is held at the JOC is relatively negligible, providing more support for centralizing the lease rental process under one service provider.

People, Ideas & Objects have introduced the concept of the Community of Independent Service Providers or service providers to initiate these types of process services. This is how the industry needs to reorganize themselves in order to attain the efficiencies and quality processes in the future. The example of lease rentals is only one of possibly hundreds of processes that could be handled in similar ways. If fact all of the administrative, accounting and overhead processes of the producer would be handled this way. The key competitive advantage of the innovative oil and gas producer is their land and asset base, and application of their earth science and engineering capabilities. The efficient development of internal administrative processes are not going to provide any producer with any competitive advantage or disadvantage. By developing processes in the manner that People, Ideas & Objects proposes provides all the producers with the most efficient and cost effective means of administrative management. And is one of the cornerstones of how we provide oil and gas producers with the most profitable means of oil and gas operations.

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.

Introduction to the Material Balance Report

The working interest distribution for the production from a well is fairly straightforward. Other than the changes that might occur such as before and after casing point elections, before and after payout etc, the values remain relatively constant over the life of the well. However, for gas plants and related facilities the distribution of production to the owners of the facilities is anything but constant. This brings into play a multitude of different ways to treat the ownership of the production and the costs of processing. The manner in which the accounting for that production and the cost of processing is of material concern to the owners of those facilities. In fact it is the difference between making a profit. The inability to grasp the scope of the concern has led many to disrupt the facility owners business.

The problem comes down to the fact that there are two different ways in which to calculate the working interest distribution of the throughput of the product through the facilities. One is to take the literal chemical reality of the situation, the other is to take what is agreed to by the owners and operators of the facilities in the Construction, Ownership & Operation (CO&O) agreement. The two worlds could not be more different. As you can imagine the agreed to situation has to rule the day. The facts of the agreed situation are very dynamic and create variances that are unique and depend on the situation that is in play that day. Irrespective of the production allocation, the Material Balance Report, a key report of the Partnership Accounting and Petroleum Lease Marketplace modules of the Preliminary Specification, will still balance and will also balance to the various other reports. The issue is the owners of the facility or the producers who have production processed through that plant or facility will have either sold or purchased product, or had conducted some transaction with their production at that facility that needs to be accounted for.

Now to handle that day-to-day activity there needs to be an ability for the plant owners to account for the transactions that are occurring within the plant based on the CO&O. Relying on the Partnership Accounting module will be part of what they will use for the handling of the plants accounting. However, because they can’t take a literal working interest distribution and they have to rely on a dynamic distribution based on the CO&O, a special algorithm will need to be built within the PLM to deal with the CO&O. This algorithm will capture the agreements production allocation methodology. This algorithm will be dynamic based on the gas composition, production factors and activities at the plant, but it is also is not fixed. There are changes to the algorithm on a month to month basis. As new wells are brought on, new functional units are brought on, new products are sold to new purchasers etc. these need to be taken into consideration into the algorithm.

In the current accounting world these “algorithms” are managed within spreadsheets. Not my favorite place to put a critical piece of business. I think that the user community can do something to embed these algorithms within the system so that they are more “mission critical” and less subject to human error. The Material Balance Report is the location for these algorithms.

As a plant owner the days of major changes are not over yet. There are still the equalizations that have to be calculated. These equalizations are sometimes run monthly but mostly done on an annual basis. They are done to correct any of the owners over / under capacity utilization during the year. If an owner owns 25% of the facility then generally they would not be billed processing for any of their throughput. However, at the end of the year it is determined that their actual throughput use was 29% then they would need to be charged for that 4% capacity that they overused. These calculations would also have an “algorithm” within the PLM for the Partnership Accounting module to use.

I would reiterate this is an area of extreme importance to the owners of the facilities in oil and gas. To handle these transactions appropriately is the manner in which People, Ideas & Objects is approaching this issue. As it stands today, I am certain no other software vendor fully comprehends the significance of these points and does not provide anywhere close to the level of functionality as we have proposed in these modules. See also the discussion of the Material Balance Report in the Partnership Accounting and Accounting Voucher modules.

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.

Introduction to the Petroleum Lease Marketplace

The Petroleum Lease Marketplace (PLM) is I think the most interesting marketplace module as its objective is to replicate virtually what the physical oil and gas marketplace is. That begins of course with Petroleum Leases.

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 PLM.

When we look at the types of work that is carried out in the PLM we see a large group of administrators working within different areas within a producer firm. Whether it be the Land or Legal department, Production or Exploration Administration staff or Accounting people; all of these groups have an interest in the information, people, assets, documents, processes and functionality contained within the PLM.

The primary concern of the people in these groups is the information and data contained within the module. Its accuracy, access, and use by those within their firm, but also within the Joint Operating Committees that their firm has an interest in. Some of this data will be similar to the data that is held by their firms partners, and much of the data has been generated in a cooperative and collaborative manner by those partnerships.

For example AFE’s, Mail Ballots, agreements, are generated through interactions by each of the participants in the Joint Operating Committee. How much of this data and information could therefore be held by the Joint Operating Committee with an interface to the firm? This is a question that should be answered with significant research during the Preliminary Specification. To answer that question would also answer; for whom do those people we mentioned, the Land, Legal, Production and Exploration Administration and Accounting staff work for. The implications would be significant.

One of the greatest opportunities that we have in developing this system is to address the division of labor and specialization. To take these people’s work and to reorganize it across the industry, so that it was focused on the Joint Operating Committee but very specialized in terms of the tasks that they conduct. And apply those skills across the entire industry, or a geographical region, or some other classification. This is something that could provide significant increases in oil and gas industry productivity and overall cost savings. That is to say that an individual would work for a process that is billed to 1,000 Joint Operating Committees that might represent 200 Companies. By doing so the profitability of the industry is materially enhanced. For 2012 the opportunity costs from these changes were calculated at $94 billion. (Primarily through the ability to raise natural gas prices.)

When we were conducting our research. Professor Langlois noted that expansion of the division of labor and specialization was through the simple act of “gap-filling.” Work that wasn’t being done before, could-should-would, be nice if it was done now. In this day and age it might be easy to put the person in place, but what about the user community and software development capability to support that person? As I have suggested before, should we consider these administrative positions from the point of view that these people will work for a process as opposed to any one company or Joint Operating Committee?

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 user communities contribution and commitments.

When I sat down to write the Draft Specification I wanted to incorporate the marketplace metaphor into the modules that made up the People, Ideas & Objects systems. There had been discussion of exchanges and web services in the past and those never quite captured the reality of what was possible. I think exchanges are technological solutions attempting to resolve non-existent business problems. Whereas the marketplace is a business reality. A reality that we can build a virtual technical environment that emulates the real marketplace. A big difference in terms of how we approach the building of these systems.

The next aspect was to determine what marketplaces existed in oil and gas that the technology would need to replicate? The answer to that question became quite simply. The marketplace for financial resources, secondly for the people, vendors and the service industry or as we have called them resources, and thirdly the P&NG leases. We therefore simply created three modules that replicate these three markets within the People, Ideas & Objects application. Talking about the output of the system should probably keep this simple fact in mind. That these are marketplaces. Marketplaces that are backed up by a user community and software development capability that can evolve the applications as these markets evolve.

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.