OUR PRELIMINARY SPECIFICATION MAKES SHALE COMMERCIAL. THROUGH AN INNOVATIVE BUSINESS MODEL SUPPORTING THE JOINT OPERATING COMMITTEE, WE PROVIDE OIL AND GAS ASSETS WITH THE MOST PROFITABLE MEANS OF OIL AND GAS OPERATIONS, EVERYWHERE AND ALWAYS. ENABLING THEM TO ACHIEVE ACCOUNTABLE AND PROFITABLE NORTH AMERICAN ENERGY INDEPENDENCE.
OIL AND GAS’ VALUE PROPOSITION IS AT A MINIMUM, LEVERAGED TO THE POINT OF 10,000 MAN HOURS PER BOE. WE KNOW WE CAN, AND WE KNOW HOW TO MAKE MONEY IN THIS BUSINESS.
The speed and performance of the innovative and profitable oil and gas producer come about as a result of the demands from the capital markets. Investors want to deploy their capital at that critical moment when the results are about to be achieved. Such is the way of their business. Having their capital turnover quicker is a means to making it more effective. The innovative and profitable producers that are able to replicate this turnover within their organization will gain market recognition for their speed and performance. Speed is good, but not at the expense of performance. Quickly drilling a series of dry wells doesn't impress anyone. It is easy to understand what a reasonable approach involves when it comes to making this trade off.
There also needs to be a means to control what the firm is involved in in terms of investment criteria. This will be managed through the “Capital Allocation Interface” of the Financial Marketplace module. All investments are assessed based on their expected returns and provide for certain risk profiles. It is imperative that the firm evaluate every opportunity and critically review the results to ensure their investment selections are appropriate and within the framework of what the producer is able to carry out.
And let’s be clear, most if not all the producers have these processes operating within their organizations. However not within the financial domain of the organization. What is proposed here in the Financial Marketplace module is controversial because of its administration of these processes will be within the financial jurisdiction of the organization. One in which this falls under the responsibility of the Chief Financial Officer and is administered in the Financial Marketplace module. It is my opinion, that the CFO will continue to move away from the financial to a more technical background. Having a geologist or engineer as the CFO will become the norm in the future. The CFO will have the technical accounting aspects provided to them by their accounting firm, the service providers and the staff that they employ. Their ability to discern which projects to proceed with will be as a result of the collaborations conducted within the speed, performance and control decision processes and their participation in the senior management or C class executive meetings. However, having these decision processes managed by a CFO who is an accountant would be the same as giving the keys to your Ferrari to a teenager, what positive outcome would you be expecting?
To manage these processes we turn to the Oracle Middleware layer and specifically the Oracle Business Process Management Suite. We need to take these from the spreadsheet and ad hoc nature that they are currently managed under and put them through a defined and rigorous process that meets the organization's needs. From the C class executives to the people who are grinding out the calculations. The decision process needs to be defined and managed by the software within the organization. It also needs to be highly collaborative with the decision making process well documented. It will be in this way that a firm can then learn from what it may be doing wrong, maybe most importantly. But also from what it is doing right. Right down to the detail of who came up with the idea and who pushed it through. And then you'll begin to be able to answer who it is that is responsible for that last big success in your firm.
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.
Let’s get to the real issue that has to be dealt with within the Financial Marketplace. The cash. With each Joint Operating Committee being funded and operated through its own bank the cash of the producers will be scattered through a variety of accounts that are held within the various Joint Operating Committees they have an interest in. Or will they? Through this discussion we will trace the cash that is generated through the properties and the various operations that occur in the day-to-day of an oil and gas operation. What we will find is that from a cash balance point of view, the balances that the producer holds will be fundamentally unchanged between the People, Ideas & Objects method of conducting business and the way in which it is done in the majority today.
What happens today is the net proceeds from the operation of the property are determined, each working interest share of those proceeds are calculated, and depending on if the property is generating or consuming cash a check or an invoice is sent. The difference in the People, Ideas & Objects system is that in the case where the property is generating cash instead of issuing a check, the balance will be transferred to the individual producers. In the case of where the property was consuming cash it would still send an invoice, and there would have to be some operating advance provided for the Joint Operating Committee to deal with the short falls while these invoices were being processed by the producer firms. In times when there are capital expenditures, cash calls which are the norm in the industry, will offset the demand for cash.
One of the other key differences in the People, Ideas & Objects application modules is that the Joint Operating Committee is open to contributions from all of the participants. Producers are pooling their resources in order to fulfill the requirements of the property and that requires that each producer participate in some form or fashion. This is the pooling concept that has been developed in the Preliminary Specification to deal specifically with the resource restrictions in the earth science and engineering disciplines. Each month these contributions are equalized in the process of determining the net cash payable or receivable, and will be accounted for in the joint venture billing in that manner. These equalized amounts will affect the cash balance in terms of the size of the payment and a producer could be compensated for the two components, the net proceeds of the property and their contribution through the pooling, through the joint venture billing process.
We have specified the Oracle Fusion Application Financial Management Suite as part of the Preliminary Specification. For purposes of these cash management activities we will be using the Oracle Suite for these cash management purposes. I would caution readers that the manner in which these accounts are cleared have not been worked out. That is the purpose of the Preliminary Specification. These are still early days and it is problems such as these that need to be resolved within the Preliminary Specifications budget. Today, the optimal method of dealing with clearing the balances in the joint account is through clearing accounts in the general ledger. There is no reason that we can’t modify that concept to allow for the contributions of all of the producers within a Joint Operating Committee to contribute to the joint account, be cleared as they are today, and then add the additional step of equalizing the contributions.
From another perspective, the interfaces to the variety of banks and producers accounts for deposits and withdrawals will be an area that will need to be worked through. Although this is not offering a technical issue, as all of this is being done today, the volume of transactions will be high in comparison to today’s traffic. Banks are well prepared for this. Producers not so much. Particularly in the area of Compliance & Governance. Having automation of this type and at this level will make many people wince. They can continue with the paper based systems if they choose, the practical solution is that we build these systems with the appropriate internal controls to ensure that the process is managed efficiently and effectively and without the risks associated with this type of activity. The end result at the end of the day is that in today’s systems the Joint Operating Committee is essentially cleared of any cash balance and that will be the case in the future under the Preliminary Specifications Financial Marketplace module.
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.
We continue with our discussion of the “Gap-Filling Interface” in the Financial Marketplace module of the Preliminary Specification. And how a software development capability like that which is proposed by People, Ideas & Objects is necessary to support the changes that are instituted by the gap-filling process. But before we get to that I found these quotes from Professor Richard Langlois in his paper “Economic Institutions and the Boundaries of the Firm: The Case of Business Groups.” They detail exactly what the gap-filling process is.
As Harvey Leibenstein long ago pointed out, economic growth is always a process of “gap-filling,” that is, of supplying the missing links in the evolving chain of complementary inputs to production. Especially in a developed and well functioning economy, one with what I like to call market-supporting institutions (Langlois 2003), such gap-filling can often proceed in important part through the “spontaneous” action of more-or-less anonymous markets. In other times and places, notably in less-developed economies or in sectors of developed economies undergoing systemic change, gap-filling requires other forms of organization — more internalized and centrally coordinated forms. p. 6
and
Let’s take a closer look at the nature of the “gaps” involved. Adam Smith tells us in the first sentence of The Wealth of Nations that what accounts for “the greatest improvement in the productive power of labour” is the continual subdivision of that labor (Smith 1976, I.i.1). Growth in the extent of the market makes it economical to specialize labor to tasks and tools, which increases productivity – and productivity is the real wealth of nations. As the benefits of the resulting increases in per capita output find their way into the pockets of consumers, the extent of the market expands further, leading to additional division of labor – and so on in a self-reinforcing process of organizational change and learning (Richardson 1975; Young 1928). p. 7
As gaps are discovered they will be published by users in the “Gap-Filling Interface” of the People, Ideas & Objects Preliminary Specification. There they can be seen by the banks and investment houses that are providing the products and services to the producer firms and Joint Operating Committees. And in turn, develop a product or service to fill that gap in a manner that meets the need that was identified. The reverse is also the case, that the banks and investment houses may initiate the discovery of a gap and have the producer or JOC fill the gap. In either of these scenarios the division of labor and specialization doesn’t consider the fact that the 21st century organization requires software to identify and support the roles and responsibilities within it. If we are to have “gaps” filled, its not just a matter of having someone fill in the new position. It also requires that a dedicated software development team be available to prepare the software for the role to be productive and functioning within the greater system. This is the role that People, Ideas & Objects is providing in the Preliminary Specification. It is not a destination in terms of what the specification will be, but more a journey where the end result is a continuously improving system driven by its users needs.
The other aspect of this software development capability is that this is prospectively an innovative oil and gas industry. Currently, management operate on the basis of what is considered the acceptable norm in terms of operations. They will need to break this mindset and become the innovative producers we all know deep down they want the industry to be. Either that or the forces of creative destruction will be set upon them. Either way the need for a dedicated software development capability will be necessary. Professor Langlois notes the following.
The second hypothesis, which has resonances at least as far back as Gerschenkron’s famous “backwardness” thesis (Gerschenkron 1962), is that the way an economy responds to the problems of coordinating economic development depends not only on its own institutions and capabilities but also on institutions and capabilities elsewhere. It depends not only on an economy’s own history but on the history of other economies as well. The force of this observation is that an economy at the frontier of economic development (however we care to define that) is likely to respond to the coordination problem differently than an economy lagging behind that frontier. Specifically, an economy at the frontier is arguably more likely to rely on decentralized modes of coordination. This is so because uncertainty is greater at the frontier — uncertainty about technology, organizational form, market direction. p. 18
To pursue this economic frontier, the innovative and profitable oil and gas producer must have the tools at which to develop their “institutions and capabilities.” It will be the “Gap Filling” interface in the Financial Marketplace module that provides for this.
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.
To provide for these market-supporting institutions and to bring in new services, when and if they are needed, I want to introduce the “Gap-Filling Interface” that has been introduced elsewhere within the Preliminary Specification. The further specialization and division of labor is achieved through the process of filling gaps. Jobs that were not done before are filled by new tasks and people who then expand the division of labor. This is the simple process of how it is done. The “Gap-Filling Interface” allows the producer firm or Joint Operating Committee who sees a Gap within the service industry offering, to publish their finding within the “Gap-Filling Interface” for those product or service providers to configure their organization to provide. The key is that with the time and distance that exists within the oil and gas industry, the demand for a service and its supply might never know of the others existence. With the “Gap-Filling Interface” there is a reduction in the time and space by using the Information Technologies that are available today. The “Gap-Filling Interface” can also be used from the other perspective of the service provider configuring a product or service that fills a gap, then publishing that to the producers and JOC’s. In addition the People, Ideas & Objects developers are able to join in the discussion and accommodate the changes from a software perspective.
As we continue to document the capabilities of the various financial communities. And how these capabilities will be sourced from the marketplace by the producer firm and Joint Operating Committees. We see that technology is a large part of the organization. Particularly in People, Ideas & Objects Financial Marketplace module where the “Marketplace Interface” brings everything together. We continue with our review of Professor Richard Langlois’ “Institution, Inertia and Changing Industrial Leadership.” And discuss whom it is that will find the “Marketplace Interface” the most valuable in their pursuit of oil and gas innovation.
If we look at the scope of the changes that are made as a result of Preliminary Specification they are substantial. The movement to the Joint Operating Committee has a remarkably significant impact on every aspect of an oil and gas concern. Added to that is the use of advanced technology and the innovative oil and gas producers operations are more in alignment with what an innovative oil and gas producers operations should be than ever before. Yet there is no support from the oil and gas companies. They remain trapped in concrete with their SAP installations. Living a bureaucratic life that is so far removed from the oil and gas business it is mind numbing. Adopting any change to People, Ideas & Objects is counter to the inertia that is built within the organization and something that will only happen through the forces of creative destruction.
And institutional change, we argue, can often take place through the more or less slow dying out of obsolete institutions in a population and their replacement by better-adapted institutions - rather than by the conscious adaptation of existing institutions in the face of change. p. 6
Therefore the people that will be attendant in the “Marketplace Interface” of the Financial Marketplace will be those that are able to accept the dynamics of industrial change and begin the process of renewal. Those looking for ways that are efficient and innovative in which to operate their oil and gas land and asset base, and deploy their earth science and engineering capabilities. Those that will be able to make a claim on their share of those $94 billion in annual opportunity costs that are currently being lost through doing business the “old way.”
Another aspect of capabilities that has recently received a great deal of attention is organizational culture. In practice, not all organizations may be equally able to cope with change, as existing patterns of behavior involving both executives and subordinates may be resistant to change. Organizations develop collective habits or ways of thinking that can be altered only gradually. To the extent that a given culture is either flexible or consistent with a proposed change in product or process technology, the transition to the new regime will be relatively easy. If, however, the culture is incompatible with the needs posed by the change and is inflexible, the viability of the change will be threatened (Robertson, 1990; Langlois 1991; Camerer and Vepsalainen, 1988). p. 9
Here we have the advantage of moving towards the industry culture. The Joint Operating Committee is the cultural framework of the industry. People, Ideas & Objects Preliminary Specifications use of the Joint Operating Committee aligns its legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks with the compliance and governance frameworks of the hierarchy. This alignment is toward the culture of the industry and therefore will be successful. The constrained, obscure and difficult systems that are in use today are in no ways aligned to any of the frameworks of the oil and gas industry.
Can anyone portray a vision of how the existing bureaucracy will survive and prosper in the coming decade? Have these bureaucracies taken any steps to deal with these issues? What is the future of the oil and gas industry? Do these bureaucracies even care? Many questions that can be answered by selecting and supporting the People, Ideas & Objects software development capability and Preliminary Specification.
Teece... fails to note that the inflexibility, or inertia, induced by routines and the capabilities that they generate can raise to prohibitive levels the cost of adopting a new technology or entering new fields. Such inertia can develop to the extent that existing rules are both hard to discard and inconsistent with types of change that might otherwise be profitable. p. 10
I may yet be surprised that one or two of these behemoths might be able to break these chains of their own mindset and self interest. I will be surprised if that happens. Until then our appeal is to the C class executives and investors in the industry to make the decision for the bureaucracy. And for the users who are tired of the ways and means of what can best be described as the “old ways.”
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.
We now want to discuss “Dynamic Transaction Costs” in the Financial Marketplace module of the Preliminary Specification. Dynamic Transaction Costs are the technological and organizational innovation costs that are incurred when capabilities are moved from the firm to the market or vice-verse. These are the costs that are incurred when we establish a “Marketplace Interface” like that which we are discussing for the Financial Marketplace module. But first in a paper entitled “Transaction Cost Economics in Real Time” Professor Richard Langlois provides us with this definition of capabilities.
This is the basic modularization of the market economy. It accords well with the modularization G. B. Richardson (1972) suggested in offering the concept of economic capabilities. By capabilities Richardson means "knowledge, experience, and skills" (1972, p. 888), a notion related to what Jensen and Meckling (1992) call "specific knowledge” and to what Hayek (1945) called "knowledge of the particular circumstances of time and place." For the most part, Richardson argues, firms will tend to specialize in activities requiring similar capabilities, that is, "in activities for which their capabilities offer some comparative advantage" (Richardson 1972, p. 888). p. 27
People, Ideas & Objects have also added “ideas” to “knowledge, experience and skills” for the definition of capabilities. The financial marketplace, that is the banking and investment communities, capabilities are currently accessed by the oil and gas industry through the marketplace. Therefore the changes and the Dynamic Transaction Costs will be as a result of adapting to the “Marketplace Interface” of the Financial Marketplace module, and will be minimal. This is in comparison to the Dynamic Transaction Costs that will be incurred in the Petroleum Lease Marketplace module where the marketplace currently doesn't exist and the capabilities are held within the producer firms. What Professor Langlois describes as Dynamic Transaction Costs is as follows.
Over time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost - the cost of transferring the firm's capabilities to the market or vice-verse. These "dynamic" governance costs are the costs of persuading, negotiating and coordinating with, and teaching others. They arise in the face of change, notably technological and organizational innovation. In effect, they are the costs of not having the capabilities you need when you need them. p. 99
What we therefore need is to record these technological and organizational innovation costs for both the producer firm and Joint Operating Committees. To have an account that clearly defines the Dynamic Transaction Costs, whatever they may be, within the chart of account of the firm or JOC. This would help to identify and control the costs. This would also be the case for the Resource and Petroleum Lease Marketplace modules. Although some of the producers costs for “change, notably technological and organizational innovation” would be associated with the fees that are paid to People, Ideas & Objects. There are other out of pocket expenses that the firms are incurring to make the changes to the “Marketplace Interfaces” and it is these costs that need to be captured in the accounts.
We are now going to discuss the manner in which the changes from the firm to the marketplace will occur and the importance of having a software development capability like that provided by People, Ideas & Objects. We will also be discussing some of the interfaces that were previously introduced in the Resource Marketplace module that will be needed here in the Financial Marketplace module. The quotations are from Professor Richard Langlois’ “The Vanishing Hand: the Changing Dynamics of Industrial Capitalism.” We begin by noting that although the marketplace for banking and investment dealers is well established, the coordination capabilities within the producer firms and the “Marketplace Interface” of the People, Ideas & Objects Financial Marketplace module are not currently available.
The basic argument - the vanishing hand hypothesis - is as follows. Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets, much as Allyn Young (1928) claimed long ago. But the components of that process - technology, organization, and institutions - change at different rates. p. 3
Part of the process of developing the Preliminary Specification will be to identify the various standards that affect the markets and firms within the industry. These standards are part of the market-supporting institutions. It may be through this process that it is determined that the market supporting institutions are inadequate for the producers and Joint Operating Committees needs. And it will be the responsibility of the user communities that are part of the People, Ideas & Objects software development to identify additional standards that are needed to ensure these markets are established and operating appropriately. It will also be necessary to ensure that this is a continuous process in which the evaluation of the market-supporting institutions are undertaken frequently to ensure that the producers and JOC’s needs are continually met and an iterative software development approach is taken.
As in Chandler, secular changes in relative prices attendant on "globalization" (driven by technology or politics) affect economic organization not only directly but also, and perhaps more importantly, indirectly through changes in technology. Production costs matter as much as transaction costs (Langlois and Foss 1999) Moreover, the kind of transaction costs that matter in history are often not those of the Williamson kind but those I have labeled dynamic transaction costs (Langlois 1992b). Costs of coordinating through markets may be high simply because existing markets - or more correctly, existing market-supporting institutions - are inadequate to the needs of new technology and of new profit opportunities. But when markets are given time and a larger extent, they tend to "catch up," and it starts to pay to delegate more and more activities rather than to direct them administratively within a corporate structure. p. 5
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 first thing we want to do in the Financial Marketplace is to start the “Marketplace Interface” for this module. Just as in the Petroleum Lease and Resource Marketplace modules, the Financial Marketplace will use the user vision to create a virtual instance of the financial marketplace that exists. This will be of the banking and investment communities that we have discussed in this module. Creating an environment where the marketplaces capabilities in terms of banking and investment dealing are made available to the producers and Joint Operating Committees through a “Marketplace Interface.”
(Please review the video below.)
Within the “Marketplace Interface” producers will be able to engage banks to conduct the banking that they do today. The interface will provide the medium of communication and transaction support that is currently available in two separate medium. With the user vision focused on your bank and their representatives, all of your banking documents that you have with the bank will be available to you in the tiles that populate your screen. The items that are outstanding or at issue with the bank will also be populated in other tiles and are a simple click away from your full attention. You are able to resolve the outstanding issues and transactions with the bank and move your focus onto the next group.
While still at your desk, the next area of your focus is the investment group that you have been working with on a financing in your firm. They have been undertaking a review of your firm and have some detailed questions for you and your representatives to answer. Those representatives are available and are brought into the virtual meeting and are recorded for the archives. It would seem that the investment group want to take your firms offering on speculation and would appreciate it if you would increase it by 30%. Such is the way for innovative producers.
The point of the “Marketplace Interface” is to provide a virtual environment that accelerates the pace of the producers financial capabilities. If the producer and Joint Operating Committee are to pursue the oil and gas marketplace in the future then the pace of their operations will most certainly have to accelerate. The demands for more energy will be insatiable. The prices realized by the producers will reflect this demand and those prices will be rewarding enhanced innovation. It is therefore necessary to ensure that the producer has the capabilities within the financial communities to finance this level of activity.
It would seem that the majority of the costs of transacting within the banking and investment community are fixed. That is there is little a producer can do to offset the costs associated with these services. And they are usually priced as a percentage of the transaction for loans and investments, or service fees based on banking practices that are global in terms of their competitive offering. Therefore the need to leverage these services should be the key to optimizing the value of these services.
Before we go any further we should note that the People, Ideas & Objects Preliminary Specification aligns the seven frameworks of the Joint Operating Committee with the compliance and governance frameworks of the hierarchy. This alignment includes the financial framework as we have discussed in this the Financial Marketplaces Preliminary Specification. Having the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks aligned with the compliance and governance frameworks permits the speed, accountability, innovativeness and profitability that we are seeking in the oil and gas industry. Therefore the probability that a Joint Operating Committee will be using the Financial Marketplaces “Marketplace Interface” is a certainty.
Offsetting as much of the logistical and transaction related costs associated with the banking and investment management to the banks and investment managers will enable this marketplace to operate more efficiently. Imputing that the division of labor and specialization will fall within the domain of the bankers and investment managers, and the fee for their services will be one charge for that service. From a paper by Harvard Professor Carliss Baldwin.
The user and Producer need to deploy knowledgeable in their own domains, but each needs only a little knowledge about the other's. If labor is divided between two domains and most task-relevant information hidden with each one, then only a few, relatively simple transfers of material, energy and information need to pass between the domains. p. 17
and
Placing a transaction - a shared definition, a means of counting, and a means of payment - at the completed transfer point allows the decentralized magic of the price system to go to work. p.22
By leveraging the marketplace in this manner helps to mitigate the increased logistical load on a producer as a result of the many Joint Operating Committees undertaking their own banking and investment management needs. This leveraging, and the aid of Information Technology, make this a minor irritant when compared to the benefits achieved when the financial framework is aligned with the other six frameworks of the Joint Operating Committee and the governance and compliance frameworks are also aligned. (Speed, Accountability, Innovativeness and Profitability vs. a minor logistical irritant.)
The most significant fact about this system, is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on... Frederick Hayek (1945).
We have noted how the banking and investment dealers were providing their services to the oil and gas producers and Joint Operating Committees through what Professor Richard Langlois would call Transaction Cost Economics. The services were provided at a fixed service cost that was passed to the producer / JOC as a transaction on the completion of the service. The division of labor and specialization of the service was the responsibility of the bank or investment dealer and they were free to organize themselves in any fashion based on a competitive pricing of their services. We want to explore the “Marketplace Interface” a little further and how the transaction costs will impact the way in which the marketplace will operate for the producers and JOC’s.
The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. ...The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more that is reflected in the price movement. (Hayek 1945, pp. 526 - 527)
With producers maintaining relationships with possibly each and every bank. This as a result of banks financing all of the Joint Operating Committees partners in a property. And possibly the same situation occurring with multiple investment dealers. The need for the marketplace to deal with the logistical aspects of the finances with each bank and investment house will be necessary. There is however not much of an issue with respect to this manner of handling the finances. The majority if not all of the payments and receipts of the banking can and should be managed in the People, Ideas & Objects Preliminary Specification electronically. The need to print checks or to make physical deposits is something that occurred last century. Another thing that happened last century was the need to manage the cash in the various accounts. The Financial Marketplace module will provide an “Advanced Cash Management Interface” to enable the appropriate cash management is applied to the producers cash resources.
One of the other aspects of this marketplace is the topic of discussion and type of transaction that can be undertaken in the marketplace. With so much activity in the oil and gas producers domain. (This as a result of the volume of work needed for each barrel of oil equivalent produced and the associated increased demands on everyone's time.) The amount of travel may be limited in the future with the reliance on the “Marketplace Interfaces” of the Preliminary Specification as a replacement for some of the face to face time that is done now. If a transaction can be done as efficiently virtually, and might I suggest even a closing, then the “Marketplace Interface” would be worthwhile building just for that purpose. Let alone for the day-to-day transactions of paying bills and depositing money. People, Ideas & Objects calls the “Marketplace Interface” the ultimate collaborative environment.
The “Marketplace Interface,” Standardization and the Division of Labor
When we talk about the capabilities that the producer firm or Joint Operating Committee acquire through the “Marketplace Interface” of the Financial Marketplace module. It is the full scope of the financial capabilities and money management that the banking and investment dealers provide. These are acquired through the simple process of paying a fee when necessary. These markets are “thick” and there are many standards that support them, the costs in terms of executing the transactions are negligible, or in other words, ideal for the “Marketplace Interface.”
When we think in terms of the boundaries of the firm and the markets, there is not much ambiguity as to which lays in which domain. Banking is banking and oil & gas is oil & gas. Would any producer attempt to provide the services of a bank as a value added process for its shareholders today? Why would it assume that it would be able to provide a better lease rental payment process than one that can be done on an industry wide basis as in the “Marketplace Interface” of the Petroleum Lease Marketplace?
Just as in the Petroleum Lease Marketplace in which the marketplace infrastructure, or standards and other market supporting institutions are already in existence. The marketplace in the Petroleum Lease Marketplace needs to be created, whereas here in the Financial Marketplace it already exists and in essence only needs the virtual interface, the “Marketplace Interface,” built to emulate the marketplace. In the Petroleum Lease Marketplace the entrepreneur’s need to establish the service offerings and provide the services to the producers and Joint Operating Committees, whereas in the Financial Marketplace that infrastructure, the banks and investment houses, already exist.
Acquiring the capabilities of a bank or a lease administrator through the marketplace is a choice that the 21st century oil and gas producers need to make. The People, Ideas & Objects Preliminary Specification have assumed that these processes are best left to the markets to provide for the producers and Joint Operating Committees. The producer and Joint Operating Committee are best left to focus on their land and asset base, and earth science and engineering capabilities as key competitive advantages and the majority of the processes that support those tasks can be provided by robust marketplaces.
This manner of operations is consistent with the means of how innovative organizations are able to operate in other industries. It is also wholly inconsistent with the current bureaucracies thinking of the oil and gas industry today. Theirs is an attitude that will maintain command and control of all aspects of the oil and gas producer firm to ensure that they maintain their “power” for a while longer. If not for the Internet these ideas from People, Ideas & Objects would not be communicated to like minded individuals, and the bureaucracy would remain unchallenged in their position. There are distinct advantages to relying on the marketplace for the administration of these administrative processes.
I think we have firmly established that by placing a virtual interface, the “Marketplace Interface” over the financial marketplace we would be able to provide the capabilities of that market to the innovative oil and gas producer and Joint Operating Committees. Having this marketplace would provide access to the skills, knowledge, experience and ideas of the banking and investment communities in an environment that is administratively more efficient, effective and timely. This is a critical aspect of the innovative oil and gas producer and therefore a critical aspect of the Financial Marketplace module of the Preliminary Specification.
The oil and gas industry is a capital intensive industry. The access to capital is a necessary and primary ingredient to any producers success. Without the needed access to capital, unfortunately, its just ideas. Unfortunately as well there are skills that are needed to access the capital markets that are not evenly distributed. These “access” privileges are holdouts of the last century. In the future the strength of the ideas and the potential of the deals will be what drive the frothing at the mouth of investment dealers. Therefore creating marketplaces where access is open to all parties is how things will get done.
By accessing the banking and investment community through the “Marketplace Interface” the innovative oil and gas producer and Joint Operating Committees acquire the financing and banking capabilities that they need. Allowing them to focus on their key competitive advantages of their land and asset base, and earth science and engineering capabilities. The scope of what is called for to succeed within their domain of competitive advantages is broad enough. To expand it unnecessarily into other areas is incomprehensible in today’s business environment.
Either way it boils down to the same common-sense recognition, namely that individuals - and organizations - are necessarily limited in what they know how to do well. Indeed, the main interest of capabilities view is to understand what is distinctive about firms as unitary, historical organizations of co-operating individuals. p. 17
And that would include areas that are part of the Resource Marketplace module. No producer would own their own drilling rigs as part of their competitive advantage, yet some Canadian producers like Encana Corp. think that is part of their competitiveness.
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 organizational 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” in the Financial Marketplace module of the Preliminary Specification provides a window for the producer and Joint Operating Committee on the banking investment communities. A virtual world where the interactions and transactions are unlimited and undefined. Watching this video from Open Wonderland will provide you with an understanding of how the interface would operate.
(Please review the video below)
The “Marketplace Interface,” and Modularity
What we have described so far in the Financial Marketplace is a comprehensive area where the banking and investment communities conduct all of their business with the producer firms and Joint Operating Committees. This would involve not only the day to day payment of bills but also the closing of a major financing. We have also discussed this would enable the alignment of the seven frameworks of the Joint Operating Committee, which includes the financial framework, with the compliance and governance of the firm. The “Marketplace Interface” being a place where people would go to have their financial “things” taken care of. From Professor Richard Langlois’ “Modularity in Technology, Organization and Society.”
What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to modularity in the design of the organizations that produce such products. p. 1
and
Why are some (modular) social units governed by the architecture of the organization and some governed by the larger architecture of the market? p. 2
What we have learned from Professor Langlois is that modularity depends on interdependency and standards. If we include compliance and governance within the standards definition, then the Financial Marketplace, with banking and investment capital standards, are ripe with standards. Interdependency reduces the focus of the user to just banking. If the user wants to find a P&NG Lease then they go to the Petroleum Lease Marketplace, the Financial Marketplace has nothing for them. Interdependency reduces the interactions between the elements within the modules to simplify the systems within each module. If everything was contained within one module the interdependency would be so high that the system would not function as effectively.
In organizational and social systems - and perhaps even in mechanical ones as well - it is possible to think of interdependency and interaction among the parts as a matter of information transmission or communication. p. 5
Lastly Professor Langlois provides us with a clear understanding of what is required within a modular system design. These are some of the guiding principles that I am using to write the Preliminary Specification.
An architecture specifies what modules will be part of the system and what their function will be.
Interfaces describe in detail how the modules will interact, including how they fit together and communicate.
And standards test a modules conformity to design rules and measure the modules performance relative to other modules.
I now want to take the opportunity to discuss the videos that were presented. Specifically the one which is reposted below. It has the commentator highlighting the different buildings that he has built, and the terrain that he has set out in his virtual world. Here is how the “Marketplace Interface” will start out. Banks or investment houses will set up a building and their people will be able to set up demonstrations and marketing presentations to those who may be just walking around to the various buildings within the “Marketplace Interface.” When they see something of interest they will be able to engage one of the bank or investment house representatives and begin a discussion of how they could help their producer firm or Joint Operating Committee. Once the relationship has begun the producer / JOC could return and have their needs met virtually by the firm represented in the “Marketplace Interface.”
(Please review the video below.)
The advantage of this is obvious to me, however, it may not be obvious to everyone. This is not technology for technology's sake. This is a marketplace for business purposes. A completely different situation to the current social media experiments which appear to have no business purposes behind the interactions. Within the “Marketplace Interface,” which is full of interactions the People, Ideas & Objects ERP systems are available for use by the parties within the virtual world. If they conduct a transaction then it can be handled virtually. If they close a deal that can be handled virtually within the “Marketplace Interface.” The transaction management is what makes this video transform from a useless technological experiment to a potential for so much more.
The “Marketplace Interface,” a Scenario
By way of a scenario I want to impart an understanding of how I see the Financial Marketplace modules “Marketplace Interface” providing the innovative oil and gas producer, and Joint Operating Committee with banking and investment dealing products and services.
You are the Chairman of the Joint Operating Committee for an area where you have a mutual interest with five other companies to conduct exploration in some shale gas. After many years of acquiring land and drilling to identify the scope of the reserves your companies have announced a major discovery of significant reserves. A vote was passed by 80% of the participating companies to undertake bank financing by a general assignment of those reserves to fund the gathering, compression and tie-in to a company owned gas plant. It was approved that these funds can be sourced from any bank that is willing to competitively bid for the business.
A specification and a detailed cost proposal has been developed to support the application for funds. Two individuals from the other companies who have participated in the Joint Operating Committee will be joining you in making the proposal to the banks. You have arranged to make the proposal to 16 banks located in New York, London and Hong Kong next Tuesday through the “Marketplace Interface” of the Financial Marketplace module. Three of the banks have relationships with two of the producers that are represented in the proposal.
It quickly becomes evident that there are technical questions regarding the nature of shale gas and the financial situation of company B. You are able to call upon the geologist for the project and the CFO of company B within the “Marketplace Interface” to answer these questions. This however causes you to overrun your time limit and you send the other two participants to the next meeting without you for now. Eventually bank A is satisfied and you return to the second meeting to find that the same questions have arisen. You quickly contact the CFO and geologist and ask them to edit video excerpts from the previous meetings answers, and include them with the proposal to satisfy bank B, and move on in time to bank C and so on.
Days later you have received offers from 4 of the banks that you visited virtually. However, one of the banks offer stands out to the other three banks, and is accepted by those 80% of the participants in the Joint Operating Committee. The CFO’s, Lawyers, accountants and bankers of all of the participating companies of the Joint Operating Committee are informed of a closing weeks from today. The closing will be held within the “Marketplace Interface” of the Financial Marketplace module. You have also scheduled the virtual signing of the AFE’s for the project to commence once the closing is complete.
What this scenario shows is the alignment of the financial framework is consistent with the legal and operational decision making frameworks. The decision to leverage the property with debt is the appropriate one from a business point of view. What the scenario also shows is the time required to make this bank debt happen. Even though there are more people involved in the decision making process, because of the number of companies in the Joint Operating Committee, the time needed to deal with everything is compressed and the exposure to the best deal was obtained with minimal administrative time incurred.
Another Scenario
We invoke the “Marketplace Interface” with the technologies that are provided to us from Open Wonderland. The open source Java toolkit that creates the collaborative environment we call the “Marketplace Interface.” Sitting on the Oracle Fusion Middleware layer, this toolkit provides our users with simultaneous interaction for the Resource, Petroleum Lease and Financial Marketplace modules. The “Marketplace Interface” simulates a market where buyers and sellers engage, buy, sell and trade products and services. It is the ultimate collaborative environment. The user will have at any time the opportunity to option click to create a transaction, an AFE or some other form of business based on the interaction they are simulating in the marketplace. This discussion is to detail some of the activities that will be carried out within the Financial Marketplace module of the Preliminary Specification.
We fast forward a few years to where the demand for energy is very strong. Therefore the demand for capital in a capital intensive business is even more difficult. The need to promote the performance and speed of your company's capabilities is one of the necessary elements of the innovative oil and gas producers toolkit. What you want to do is engage the investment community in a discussion around the various elements of your performance. To do that you turn to your location within the “Marketplace Interface” that you have set up for selling / promoting oil and gas assets and the producer firm itself. It is here within the oil and gas property district that you have acquired some virtual real estate to house the distribution and promotion of your properties and company.
(Please review the video below.)
When you have engaged a qualified and interested buyer you are able to provide them with and execute a confidentiality agreement. Then you begin the presentation of the properties that you have in the package without leaving your desk or travelling anywhere. Next, an investor wants to know more about your team and what is the performance over the past three years and their current capabilities. All of this information can be easily compiled from within the “Marketplace Interface” as they are all part of the People, Ideas & Objects ERP system. Whether it be from the Oracle Fusion Middleware, Oracle Fusion Application Financial Management Suite or the People, Ideas & Objects application modules themselves, all of these application features interact and operate as one.
Or maybe the shoe is on the other foot, sort of speak, and you're in the market to acquire some properties. The ability to shop around the oil and gas property district in the “Marketplace Interface” gives you the opportunity to find the right property with a lot less time and cost involved. Having producers from around the world located in the district enables you to search globally as well as locally on all the criteria that meet your needs. Reviewing hundreds of reserve reports and evaluating the porosity of every formation has its rewards, but sometimes in a marketplace, it's something that someone says that piques your interest in a property. Having this marketplace open on your desktop and available all day would open a new world of opportunity to the innovative oil and gas producer.
The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.
In our review of Professor Giovanni Dosi’s paper, “Sources, Procedures, and Microeconomic Effects of Innovation“ we should ask what are the incentives for the financial marketplace to invest in the producers discovery of innovations and their development? Will these depend on incentives that interested and motivated investors perceive in terms of expected economic returns? Professor Dosi calls “appropriability those properties of technological knowledge and technical artifacts, of markets and the legal environment that permit innovations as rent yielding assets against competitors imitation.” Previously we have documented that producers have lead times and learning curves as process innovations. Are these incentives enough of a market inducement for profit motivated agents?
The competitive advantages of the producer are its land & asset base, and its earth science & engineering capabilities. To develop its capabilities it has been suggested here in the Financial Marketplace module that the financial community will have an incentive in funding the development of the producers capabilities. These competitive advantages, the capabilities, when applied to their land & asset base will generate the rent yielding assets the financial community is seeking. To hold the land & asset base is the alternative the investor has to consider. However, without the capabilities to develop the properties the assets are of little use. The investor must acquire the capabilities in some fashion and that will cost them. To develop them through a producer may be the most effective and lowest cost alternative available to them.
Another aspect of the understanding that we have learned about innovation is that innovation is the result of a quantifiable and replicable process. Taken from the perspective of an investor, the value this understanding provides is that the means of production, the scientific capability is within the scope of his / her undertaking. The risks still exist. However, the ability to develop the innovation from a known capability exists and is a possibility based on quantifiable and replicable process.
Money is not necessarily the determinant of innovative success. If it were there would be more innovation occurring in the large firms. Innovation can and does come from anywhere and does not necessarily require the vast financial resources that are believed to be necessary to make them real. From the financial marketplace perspective this would provide them with the evidence they don’t need to throw a lot of money around to make the producers innovative. A lot of the capabilities that are needed can and will be developed in innovative ways as a result of not having an unlimited capital budget. This might be the key point that draws the capital marketplace into the Financial Marketplace module and participates in the development of the capabilities and innovations of the producer.
What we have learned about innovation is well summarized by Professor Giovanni Dosi in the following quotation.
...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
The manner in which the oil and gas investor earns a return on their investment will be on the basis of the producers earth science and engineering capabilities and innovativeness applied to their land and asset base. From the investors point of view, using the public interface of the People, Ideas & Objects Financial Marketplace module they can quickly determine whom has the highest trajectory change in terms of Revenue Per Employee. They will then be able to engage with that producer in terms of what their team is capable of in the earth science and engineering disciplines. And then commence collaborations with those producers that are of interest to the investor on the basis of what they have seen in the Financial Marketplace module. Then the producer and the investor can discuss how the financing of the “interplay between various sorts of market-inducements, on the one hand, and opportunity and appropriability combinations, on the other” can come about.
The efficient financing of innovation on an industry wide basis should be the result of the overall processes managed by the Financial Marketplace module. As described here the ability to focus on the producer with the highest level of innovation, as reflected in the trajectory change in Revenue Per Employee, will be quick. The pace of change in the science will need to be mirrored in the pace of change in the producers. And the pace of change in the producers will only be matched if the investment community is able to respond to the market changes at the same speed as the producers are able to. Therefore in order to accelerate the producers it is necessary to accelerate the pace and speed of the financial community in terms of their capabilities in understanding the producers business. This is the focus of the Financial Marketplace module.
In terms of what the capabilities of the producer are, and what they are able to achieve, I can see some producers unwilling to document and publish this material for reasons that they will leave themselves exposed to competitive exploitation. That’s always possible, however, as with any competitive advantage they can be actively developed and marketed or hidden and atrophied. The ability to market these competitive advantages to the investment community and in turn develop them further is the opportunity being discussed here. The paradox of Revenue Per Employee is the area where the difficulties really lay and where the producers and investors attentions should really be focused.
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.
We asked an important question of what role will the capital markets play in the future of the oil and gas industry? More specifically, we should ask what role will they play in funding innovation? Will they value the capabilities of the innovative producer and fund them as was suggested earlier? Will the demand for capital be diminished as a result of the high commodity prices allocating the financial resources towards an innovative producer? What role will banks fill in this costly science and engineering based environment? These are all difficult questions that have to be asked in funding the oil and gas producer.
Recently we discussed in the Petroleum Lease Marketplace module the factor that was developed in People, Ideas & Objects Preliminary Research report of Revenue Per Employee. The Financial Marketplace module will publish the producers Revenue Per Employee factor for the current and past periods, and include some of the future projections of where the producers factor is heading. This would provide the investors and bankers with an understanding of the innovative standing that the firm has and its future expectations over the next few periods.
Revenue Per Employee is therefore a reflection of value. When we discussed the factor in the Petroleum Lease Marketplace module it was for internal consumption purposes. The purpose of using Revenue Per Employee in the Financial Marketplace module is to publish it and allow the investment community to compare your performance against your peers. As we discussed in the Petroleum Lease Marketplace module there would be three types of variances that could be calculated on the comparisons between periods. There would be the volume, price and number of employees variance. Each would impute a different result in terms of what the comparison of the variable meant.
Does Revenue Per Employee reflect a more innovative footing. That is debatable. I think it clearly does, and I can’t think of a more effective means of answering how innovative a producer is. Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or “tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.” The net result of this, in a laboratory setting would be great experiments. The net result of this in a commercial setting like an oil and gas firm would be increased revenue over the period without the additional burden of increased overhead. Therefore Revenue Per Employee will have its own interface in the Petroleum Lease Marketplace, and be published as well in the Financial Marketplace module.
One of the attributes of Revenue Per Employee is that a producers history becomes a significant part of the calculation. If a producer has a poor factor then the performance of those fields will continue to affect the performance in the calculation from that point forward. Laggards remain laggards. To change requires significant and radical changes to the way the firm operates. Those firms that have a high factor are those that are able to truly state that they are innovative. And they have the benefit of that history in which they will be able to live off those high factors for the short and medium term. This factor can be a significant selling point, or alternatively, highlight the real stinkers.
The variance in the marketplace of the factor of Revenue Per Employee is truly remarkable. To have a variance of fivefold is not uncommon. When a producer has five times as much revenue per employee as its competitor then it reflects that something is fundamentally different in terms of what theyre doing. As we stated in the Petroleum Lease Marketplace module, although Revenue Per Employee itself is not necessarily an overall reflection of innovativeness, the trajectory of the factor over a period of time is definitely a reflection of innovativeness, or the lack of it.
We have discussed the promotion of the producers team of earth science and engineering capabilities on the Financial Marketplace module through the publication of their Revenue Per Employee factor. It is through that interface the producer communicates to the financial marketplace the capabilities that they have assembled and what they as a producer are able to accomplish. I see the long term development of the producer as an extension of this capabilities development. The application of the capability and its development to a geographic area where the risks are of a certain nature and are unknown and unknowable for the foreseeable future. This is the nature of the oil and gas business and to embark on such an adventure without the financial marketplace committed to your team would be unwise and certain to fail. What is needed is a means to communicate on top of the “Dynamic Capabilities Interface” of the Research & Capabilities module, and include what Professor Giovanni Dosi states here.
Internalization and routinization in the face of the uncertainty and complexity of the innovative process also point to the importance of particular organizational arrangements for the success or failure of individual innovative attempts. This is what was found by the SAPPHO Project (cf. Science Policy Research Unit 1972 and Rothwell et al. 1974), possibly the most extensive investigation of the sources of commercial success or failure of innovation: Institutional traits, both internal to the firm - such as the nature of the organizational arrangements between technical and commercial people, or the hierarchical authority within the innovating firm - and between a firm and its external environment - such as good communication channels with users, universities, and so on - turn out to be very important. Moreover, it has been argued (Pavitt 1986; Robert Wilson, Peter Ashton and Thomas Egan 1984) that, for given incentives and innovative opportunities, the various forms of internal corporate organization (U form versus M form centralized versus decentralized, etc.) affect innovation and commercial success positively or negatively, according to the particular nature of each technological paradigm and its stage of development. p. 1135
It sounds simple, and reasonable, to include “good communication channels” as a necessary part of any relationship between an innovative producer and its financial backers. To include these within the ERP systems is the key to making them effective. What originates as a result of these “good communication channels” is defined by Professor Dosi.
In general, each organizational arrangement of a firm embodies procedures for resource allocation to particular activities (in our case, innovative activities), and for the efficient use of these resources in the search for new products, new processes, and procedures for improvements in existing routines; however, the specific nature of these procedures differs across firms and sectors. For example, the typical degrees of commitment of resources vary by industry and so do the rates at which learning occurs. I now turn to the interpretation of these phenomena. p. 1135
Professor Dosi states that profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives.” (p. 1135) Professor Dosi introduces the theory of Schmookler (1966) and asked “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both”? (p. 1135) Schmookler believed in differing degrees of economic activity derived from the same innovate inputs. It is the capabilities that make the determining difference.
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.
We now focus on innovation and review Professor Giovanni Dosi’s 1988 paper “Sources, Procedures and Microeconomic Effects of Innovation.” It has been argued throughout the writings in the Preliminary Specification that commodity prices are allocating the financial resources to fuel the innovative oil and gas producer. If that is so, then what role will capital markets play in the future of the oil and gas industry?
Taking this thinking to its extreme then the most innovative firm would also be the most profitable. As their costs of capital would be lower than its competitors, and with their innovations being on a steeper trajectory, they would therefore be more effective causing them to be less costly than the competitions. The investment in science and technologies is with the implicit expectation of a return on these investments, but also, to provide the firm with additional structural competitive advantages by moving their products costs and / or capabilities beyond that of the competition. Professor Dosi notes:
Thus, I shall discuss the sources of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search, and the nature of the incentives driving private agents to commit themselves to innovation.
What you are capable of achieving as an innovative oil and gas producer is possibly the most valuable asset that you have in the very near future. This capability is what you are investing in and how you expect to earn a return on your land and asset base, and earth science and engineering capabilities. Although much of your capability may be funded by the day to day of your operation, it represents a critical part of your firm's cumulative investments. In answer to the question posed earlier as to what role will the capital markets play? It will be to make the investments in your capabilities. Your capabilities are what provide you with your highest return on investments.
We noted that the producer firms engineering and earth science team was being highlighted in an interface on the Financial Marketplace module. Isn't it time that the producer was able to financially leverage these capabilities in the capital markets? If innovation is the result of the team that is put together, then the ability to fund that team and earn a return on the basis of their performance should be considered in this new energy era.
To facilitate that possibility the interface in the Financial Marketplace module could have performance metrics that reflect the results of their efforts. These could be quantified over a certain period and verified by reserve reports prepared by independent engineers. The point of the exercise would be to increase the value of the producer firm based on the intangible value of its capabilities. In a world where ideas matter, the ability to quantify them and qualify them within a marketplace brings real value to the oil and gas producer and investor.
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 first item of information that a marketplace should tell a producer is what is an acceptable rate of return for an investment in oil and gas. This is the criteria that all producers should use to evaluate their oil and gas investments. If the rate of return and capital allocation does not exceed the producers expected rate of return then the project should not proceed. There is no more important factor or information that a producer needs to know. The producers discipline and methodology in its capital allocation is how the successful producers succeed. This is how the Financial Marketplace module incorporates the calculations of return on investment and capital allocation in the Preliminary Specification.
First of all there are no more confidential, in my opinion, information then these calculations. Particularly the capital allocation can be a complex algorithm that is usually contained within multiple spreadsheets. Centralizing these calculations within the Financial Marketplace module would be opportune as it's managed by the Security & Access Control module and has general access to the historical accounting data. Data elements would therefore be live and provide real time performance. There is however much more to the decision making process than just the numbers. The management's discussion, based on the calculations is sometimes the important feature. Therefore having robust features for discussion throughout the calculations of return on investment and capital allocation will be necessary. This might best be represented as a blackboard feature of the module.
There is more to the process then just blue sky thinking and number crunching too. What I am suggesting here is that the process of capital allocation is an art as much as it is a science. The process needs to be rigorous and thorough enough to ensure that every rock has been overturned and inspected. That process can and should be automated to the highest level in the Preliminary Specifications Financial Marketplace module. It is up to the individual producer to either follow the process or to ignore it, as much as they do the capital allocation process today. These facilities will be built within the module.
Astute readers will note the obvious contradiction that is inherent in the Financial Marketplace module. Doesn’t the speed we discussed contradict the deliberate pace of the capital allocation process described here? No, that is to say it shouldn't, or they should be one in the same. Having the speed that was described earlier was desirable only if you had some measure of control. The control is attained through the capital allocation process that is described here. These two forces, speed and control, are in the hands of the management of the firm and are reflected in the performance of the assets. The marketplace will see this performance and respond appropriately and that will be reflected through the Preliminary Specifications Financial Marketplace module.
Another contradiction might be suggested that with banks funding Joint Operating Committees on a semi-autonomous nature, this will interrupt the capital allocation process and affect the return calculations of the firm. That is correct, however they will disrupt it in a good way. Banks funding the Joint Operating Committee as opposed to taking general claims against the individual producers would be more motivated and aligned to develop the individual property. Since the producers are using borrowed money to invest in that Joint Operating Committee they are leveraging the investment of the producer. An investment that had previously attained the acceptable rate of return of the producer. Therefore the actual return to the producer would be leveraged to the point that it would most certainly exceed the producers expected return.
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.
In a capital intensive industry, financing is a critical issue for any producer. In an industry where innovation is providing significant value add, and with escalating capital and operating costs the relationships with your investors need to be of premier concern in your business. Speed will become a major criteria on how you will be evaluated in the marketplace. If you as a producer are unable to perform in terms of competing, or participating at the speed of the marketplace, you will be left behind, very quickly. Reputation has a permanence to it that is difficult to change. The speed in which you conduct your financing can give you a head start and provide you with the ability to participate at the speed of the marketplace, and maybe even set the pace for those to try and follow. The speed at which a producer is able to execute would be reflected in the Financial Marketplace module. Transparent marketplaces are a two way street. And it is here that the Financial Marketplace module will enable those producers with superior performance to attain a real speed advantage.
Our discussion of how one bank would finance all the producers within a Joint Operating Committee as opposed to today’s method of each producer having their own banker. Provides a focus for the bank that is unconstrained by any of the other properties of the producers, or concerns other than the property at hand. We also discussed, with the technology automation that is available today, that both the producers and the banks could automate most of the increased logistical banking requirements that this would cause. I also suggested that the disenchanted oil and gas investor might be better served by providing them with the ability to invest directly in the property, giving them the opportunity to circumvent the bureaucracy. A bureaucracy that has provided no upside on 400% energy price increases. And lastly that these changes, made through the Financial Marketplace module, provide a focus for the alignment of the financial interests to the Joint Operating Committee to achieve some of that speed, innovative capability, accountability and profitability.
Now let's explore that speed aspect. The Financial Marketplace module is one of three of People, Ideas & Objects marketplace modules. Which imputes a line of communications is open between the financial marketplace and the producer firm that is above and beyond that of the statutory compliance requirements. It is therefore going to have to be authored by the senior people of the firm who know what it is that they are authorized to state. Some of these current investors who have a direct investment interest with the producer would be able to source historical accounting data and information on their Joint Operating Committee from the producer from the Partnership Accounting module. Future plans and investments, the difficult situations to discuss, could be published and promoted in the Financial Marketplace and meet the regulations requirements for full disclosure. Thereby giving no investor or group any unfair advantage in terms of quality of information.
The point of the marketplace is the opportunity to establish significant and rich relationships with investors and bankers of all shapes and sizes. Make no mistake, the ability to attract capital will be on the basis of performance, for that there is no alternative. However, the speed and effort at which a producer is able to raise the funds necessary to develop their assets depends on the quality of those assets and the quality of the relationships they have with the investment community. The Financial Marketplace module helps to establish a stronger relationship with the investment community, raise the required capital, align the stakeholders interests and account for these investments. Therefore in a significant way increasing the speed at which you can approach the oil and gas business.
The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.
I want to briefly discuss the logistical implications of having relationships with many banks operating in an oil and gas firm. To suggest that this would make the financial aspects of a producer firm simpler would be contrary to the reality of a system that is providing these types of opportunities. Simply the legal and financial reporting and logistical requirements would be an order of magnitude more voluminous. It is fair to assume that the producer firm would need to maintain a banking relationship with most of the banks that had a presence in the oil and gas business. That relationship would include loans, accounts and all of the banks services. Managing for each of the loans financial requirement would become unbearable. Causing all kinds of administrative and management burdens that would otherwise not be incurred in today's systems.
All of these are done today, albeit on a smaller scale, in most companies. Adding a multiple of volume through automated systems such as what is being discussed in the Preliminary Specification makes the prior discussion a mute point. What is not realized is that the Joint Operating Committee is the key organizational construct of the innovative and profitable oil and gas producer. By enabling the financial constraints of the property to be just the financial constraints of the property and the only financial constraints of the property. The participants in the Joint Operating Committee are free to deal with those that are financially motivated in dealing with the issues of that Joint Operating Committee. There are no more discussions about “them,” who are never in attendance at meetings anyway. When it comes time to make a decision, a decision can be made.
Its not that the decisions are made in the Financial Marketplace module. What this module is doing is aligning the financial interests of the Joint Operating Committee so that the decision rights are in alignment with the operational decision making authority. The financial, legal and operational decision making authority resides in the Joint Operating Committee and the alignment of these interests makes the ability to decide the best course of action possible. Currently, the muddling of these frameworks by general assignments to banks by each producer, and some nameless and faceless investor, limit the flexibility of the decision making authority of the engineers and earth scientists who are responsible for the performance of the property. By focusing the ownership and operating resources on the assets of the Joint Operating Committee, the consensus can be achieved and decisions can be made.
Our discussion of the costs of administering high levels of banking due to using the Joint Operating Committee as the key organizational construct of the innovative producer is an important consideration in this discussion. We have two choices to deal with these potentially higher administrative costs. We can hire a lot of people, or alternatively we can highly engineer the software that the industry will use to deal with the potentially higher administrative burden. A highly engineered software solution, backed up with a software development capability such as is proposed by People, Ideas & Objects would earn, I think, the general consensus as to how to deal with the issue.
Understanding the marketplace metaphor and the discussion regarding bankers and investors, the module would include, but in no way would be limited to, the following.
Joint Operating Committee perspective.
Banking deposit and payment processing.
Account reconciliation and analysis.
Short term asset reconciliation and management.
Dynamic working capital determinations.
Short term liabilities accounts and management.
Long term liabilities accounts and management.
From the producer perspective.
Banking deposit and payment processing.
Account reconciliation and analysis.
Short term asset reconciliation and management.
Dynamic working capital determinations and allocations.
Short term liabilities accounts and management.
Long term liabilities accounts and management.
Shareholder equity accounts and management.
Consolidated JOC working capital.
Uncommitted consolidated JOC working capital.
People, Ideas & Objects are moving the compliance and governance frameworks of the hierarchy into alignment with the Joint Operating Committees legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks. We are doing this to achieve greater speed, innovative capabilities, accountability and most importantly profitability. Speed is achieved by reducing the financial constraints and the time required that financing has traditionally taken in oil and gas.
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.
It is the Financial Marketplace module in which I really throw the cat amongst the pigeons when I talk about the redundancy of the bureaucracy. Yet when I reflect on the past five years, I see the investment marketplace holds the oil and gas producers bureaucracy in not much better esteem. There is a general dissatisfaction within the oil and gas investor community. How much of this dissatisfaction is to do with the overall financial crisis, and how much is to do with a general dissatisfaction with the oil and gas industry itself is unknown at this time.
The fact of the matter is that with the run up in the commodity prices there has been an even greater run up in the costs of production and operations. The bureaucracy have provided no upside from the price increases. A bureaucracy that has provided no upside on 400% commodity price increases will not provide any upside on any further price increases. And it is quite probable that significant financial losses will arise as a result of any price declines. So there is much to be concerned about when it comes to the current state of affairs in the manner in which the oil and gas industry is managed.
I’m glad that I am on record for being critical of the bureaucracy, and that I am the one that they have been kicking with such vigor. It’s one thing to be right, another for them to have been so wrong for so long. Nonetheless, the industry is going through a fundamental change. One in which the earth science and engineering resources needed to discover and produce the base commodities are under increasing demands. We therefore need to organize ourselves first and foremost for this new challenge. And in today’s marketplace that begins with the development of the software that defines the organization, that being People, Ideas & Objects Preliminary Specification. The question that should be asked at this critical time is what is the bureaucracies plan for the future?
The Financial Marketplace module provides a window for the producer to deal with the bankers within the Joint Operating Committee. Whether a producer chooses to have each participant maintain their own bank representative. Or, each Joint Operating Committee has one banker for all the producers represented in the Joint Operating Committee is a choice provided by the Financial Marketplace module.
Our discussion now shows the critical role of the investor in the long term health of the oil and gas industry. I think in order to have them participate in the industry, again, will require they are provided with new tools and opportunities to invest in oil and gas. Earlier it was suggested that possibly the working interest share might be a securitized investment. I think on the basis of the past five years history, that it should be considered that the investment community might have some enhanced tools and interfaces to the producer through the Financial Marketplace module of the People, Ideas & Objects software application. After all it's a marketplace.
The interfaces and tools that I am thinking of are not of the statutory type that are required by various regulatory agencies. These are provided through the Compliance & Governance module of the People, Ideas & Objects application. The type of interfaces that I am thinking that may be used in the Financial Marketplace module would be more of the marketing style. Where the producer is out selling their investment to the “financial marketplace” in order to secure future capital investments. Ways to initiate dialog and for information and discussion to start the relationship between the investor and the producer.
The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.
Please note throughout these writings our reference to bureaucrats represents the CEO, CFO, COO and directors of the producer firms. These are the people that we see who have the authority to correct these issues and are the individuals responsible for the damage and destruction in the industry.
Please review this software applications Preliminary Specification, in which we provide an overall vision of how a producer would operate using the Joint Operating Committee as the key organizational construct.
If you are interested in joining People, Ideas & Objects user community then please follow this process. Lastly you can contact me at paul.cox@people-ideas-objects.com or (587) 735-2302 and (713) 965-6720.
