Agreement to Withhold Capacity

One area that has been difficult for the oil and gas producer to deal with is the volatile energy prices. With the costs of production and reserve replacement increasing and the reserve depletion on such a rapid pace, the decline in energy prices can have a material effect on the value captured from an oil and gas field. With every producer producing at capacity, this risk of price declines comes into play more frequently than maybe needs to be realized. The question is therefore asked, what if, there was agreement in the Petroleum Lease Marketplace module and implementation in the Accounting Vouchers Material Balance Report of the Preliminary Specification, to limit the production at certain thresholds based on predetermined commodity prices?

We can accurately tell what the costs of reserves and production costs are and there are many times when these exceed the prices that are received in the marketplace. The North American natural gas marketplace is a very good example of this situation. Selling at a loss may fuel the short term cash flow situation however, it is at the long term expense of reserve replacements. In a highly innovative oil and gas marketplace, the costs of innovation are being funded by the commodity prices. However, these costs may exceed the temporary fluctuations in the market prices for the commodities. Is it wise for the producer to continue to produce at capacity?

What if the agreement that governs the Joint Operating Committee has the partnership agreeing to shut-in production when the price of the commodity drops below x value. The situation would help to mitigate the loss of earnings on the reserves and not materially affect the cash flow of the producer if they were using the Preliminary Specifications decentralized production model. The global implications of many producers implementing this type of price based production profile would put a floor on the commodity prices. A floor based on the marginal costs of reserve replacement.

Recall the decentralized production model was best defined by Professor Richard Langlois as.

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

In the Preliminary Specification the typical producer is reduced to the C class executives, the earth science and engineering resources, the land and legal, and some support staff. The remainder of the producers resources are reorganized across the industry into service providers that are focused on a process and who use the industry as their client base. Therefore resources such as production accountants might be located within a geographic region where there are a number of gas plants, and provide production accounting to the Joint Operating Committees that have production at those facilities. That way each month the Joint Operating Committee will receive a billing from the production accounting service provider for their services. If however there is no production, there is no production accounting service provider billings, or any billings from any of the other service providers, and as a result those Joint Operating Committees will have no revenues, no operating costs, no administration or accounting costs, and as a result report no profits and no losses on operations.

The decentralized production model moves the fixed administrative and accounting capabilities of the producer to be the variable administrative and accounting capabilities of the industry. Charging the Joint Operating Committee directly for the service fees of the service providers ensures the industry gets an exact accounting of the costs of operations. No more administrative overheads will be charged to the Joint Operating Committees. By employing the decentralized production model the industry, the producer and the Joint Operating Committee gain a number of key advantages. First it enables producers to match costs to revenues on a monthly basis. Second it eliminates all losses on operations in oil and gas, and these losses are not added to the costs of the reserves. Third it saves the reserves that have been shut-in for a time in which they can be produced profitably. And fourth, it removes the marginal production from the marketplace, putting a floor on commodity prices. For the 2012 calendar year People, Ideas & Objects calculated the opportunity costs of not using the decentralized production model at $94 billion.

The Accounting Voucher’s Material Balance Report, the Marginal Production Threshold Interface of the Petroleum Lease Marketplace and the performance reporting in the Partnership Accounting module work together to ensure that no marginal production is produced. That production is withheld for the full month, as the entire months overhead associated with production will be incurred with just one day of production. And the producer remains profitable and innovative throughout their production profile. That is to say a producer may be producing 100,000 boe / day today, and tomorrow be producing 80,000 boe / day and be profitable and innovative in doing so. The value generated from the reserves under the decentralized production model would be materially higher than under the current environment. The producers share of the annual opportunity costs over the life of the reserves is what is being lost today. All to a bureaucracy that is too self absorbed to concern themselves with anything outside of their pay-check.

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.

Two Distinct Sources of Revenue

Professor Giovanni Dosi’s paper 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. 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.

The producer firm is committed to developing their capabilities with the understanding that they advance their competitive advantages, and, earn a return on their investment. How within the People, Ideas & Objects application does the producer earn a return on their investment in their capabilities? Through direct charges to the joint account. That is to say that the people (representing the producers capabilities) who are pooled into a Joint Operating Committee, have been assigned a role within the Military Command & Control Metaphor and whose costs are captured in the Partnership Accounting module are producing a “revenue” stream for the producers capabilities.

The question then becomes what is the charge for the individual during the time that they are working in the Joint Operating Committee. It will be easy to determine the hours that have been worked in the various JOC’s. Whether through the Work Order or through other means, the ability to capture the time spent will be available and accurate in the People, Ideas & Objects system. The hourly rate would need to include a number of factors. The skills of the individual, the technical resources of the producer firm that is at the disposal of the individual, and also a measure of the level of innovativeness of the producer firm, say something like Revenue Per Employee that reflects the overall productivity of the firm.

The net result of this is that the revenues should exceed the costs and the producer will have captured a return on their investment in the capabilities that they have developed within their firm. To proceed on any other basis would, I think, be unreasonable.

It comes down to the question of what business is it that the producer is in? Are they in the business of generating profits from producing oil and gas, or are they in the business of generating profits from providing geologists and engineers to the operations they have an interest in? If we look at the competitive advantages of the producer it is the land and asset base, and the earth science and engineering capabilities that they apply to that asset base. Clearly both production and capabilities development are within the scope of the competitive advantages of the oil and gas producer. And to a large extent the costing of the technical resources is not fundamentally different from what occurs today. In today’s market, the operator is provided with “overhead allowances” for the capture of some of these costs. The difference from today and what is proposed here is that the elimination of the concept of an operator by “pooling” the technical resources of the Joint Operating Committee participants to acquire the necessary capabilities. The direct costing of these technical resources is in some ways a replacement to the operator overhead allowances.

To take this opportunity to charge the costs of the capabilities of the producer firm and earn a return on investment may be the issue that some people will have with the concept. In a world where the market for engineers and geologists is highly competitive. And you as a producer are assessed on your performance based on Revenue Per Employee. The acquisition of additional technical resources is a difficult process that has investment performance implications to your firm. The ability to offset some of the overall costs of your technical resources helps to mitigate the costs of these investments in the short term. This is the purpose for enabling the direct billing of technical resources to the joint account in the Accounting Voucher.

When we get to the Research & Capabilities and Knowledge & Learning modules. We will see the development of these capabilities from an innovative point of view will take on a different perspective. The ability to capture this development of a firm's technical resources as an investment, and have them as a source of revenue here in the Accounting Voucher is what I want to establish. Looking at the development of the producer, it is somewhat of a paradox as to which is developed first, the land base or the capabilities. With the ability to have the capabilities generate their own revenue stream the paradox is resolved in the short term, in that capabilities development is expected to earn a return on investment.

Some may suggest that these costs offset the production revenues of the Joint Operating Committee that would have gone to the producer anyways. And that may be true. However, in a world where the demands for the technical resources are expected to be as significant as some suggest. The need to deal with the problem on a wholesale basis, as People, Ideas & Objects pooling concept does, is a requirement, and secondly, the assumption that everyone else will develop their technical capabilities may be false.

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.

Purchase Order Systems

Its very 1970’s ish to be thinking of a Purchase Order system. The 1970’s is the last time that I can think of anyone ever using one. (It certainly might be used in the larger firms, however, I am unaware of this.) The practicality and usefulness of these systems seemed to have receded in the 1980’s and no one has considered their existence since. Now we talk in terms of Supply-Chains, however oil and gas doesn't have a “supply-chain” as the term is used. Supply chains are for retail and manufacturing. Purchasing is for oil and gas.

I would reiterate that the use of a Purchase Order system is something that the user community needs to determine if it wants one. I see substantial value in building one and have attempted to document how that value can be realized.

The Purchase Order system is part of the Accounting Voucher in that it is a necessary part of the processing of any large capital item. The use and application of the AFE, Cost Centre or Lease charge code remains the same irrespective of the Purchase Orders existence or not. There is no change in the coding structure as a result of the inclusion of the purchase order number. The Accounting Voucher relies on the Purchase Order for further approval of the specific contract dealing with a particular vendor on a specific project.

There are a number of cases where the management of the vendor relationship needs to have special considerations. Particularly in oil and gas where the details of the project are specific and large. Engineering contracts for the building of gas plants, pipelines and facilities are some of the examples. Situations where the contract must meet certain criteria and the vendor must qualify to meet those criteria during a bidding process. Its of concern to the producers that the firm that is chosen is capable of undertaking the work that is described. It is not just a lowest cost and the bid wins type of contract bidding process. This overall bidding process falls under the larger Purchase Order process of the Preliminary Specifications Accounting Voucher.

Once the vendor has been selected then the approval of the invoices is subject to the terms and conditions of the contract. Any prepayments or partial payments can be processed on the basis of the strength of the Purchase Order document and the final payment is subject to the satisfactory completion of the contract. If the contract is subject to any holdbacks and other conditions, then those would be applied within the Accounting Vouchers payments.

The Purchase Order system is designed to provide the producer(s) with a level of control over large contracts. Something that is done frequently in oil and gas. By managing the bidding process and providing a level of control over the contract in terms of making and controlling the payment process. The Purchase Order, I think is a valuable tool in any producers system. Having these contained within the Accounting Voucher of the Preliminary Specification is the natural placement of these control processes. See also the Resource Marketplace module for discussion of the Oracle Purchasing and Procurement module that has been included in the Preliminary Specification.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

The Material Balance Report

The Material Balance Report is an Accounting Voucher that is unique and has the following characteristics. It is designed to deal with the automation of the production, revenue and royalties of the producer firm and Joint Operating Committee. It is this type of specialized use of an Accounting Voucher that the user community should consider applying to other situations when contributing to the Preliminary Specification.

What is proposed in People, Ideas & Objects Material Balance Report is that for an Accounting Voucher to close it must balance the financial debits and credits, but must also from a volumetric perspective material balance, system balance and partnership balance. Each of these volumetric perspectives being accessed through a different “mode” within the voucher to make the necessary changes to correct any volumetric imbalances or errors.

The Joint Operating Committee is a thing that exists as a result of legal agreements and in the minds of oil men and women. It therefore doesn’t “own” anything or incur any costs. All of the charges to the joint account must clear in the month they are incurred to the producers. It is the same situation for the volumetric information. The Joint Operating Committee "Accounting Voucher" balances to zero in terms of costs and volumes each month by clearing its charges to the partnership and royalty owners of the property.

Note that the clearing is done after the balance. That does not guarantee that the facility will remain in balance. Adjustments and amendments to the Accounting Voucher may occur. These may happen and they can be subsequently cleared to the partnership accounts.

The point of the exercise is that you have the business of the Joint Operating Committee being captured in the Material Balance Report which is an integral part of the Accounting Voucher. Essentially all three are the same thing, the Joint Operating Committee, Accounting Voucher, and Material Balance Report. An integrity of reporting that is embedded within the accounting systems that is as rigid as debits must equal credits.

We now want to talk about the contracts that the products produced may have associated with that Joint Operating Committee. Contracts that would include marketing for gas, oil, natural gas liquids, or contracts for charges for gathering, processing etc. I don’t know what the correct term that should be used, but stream seems to me to be the most intuitive. If a stream of product was flowing through a facility, then a contract for processing or sale could be attached to it. The ability to attach a contract to a stream would enable the Accounting Voucher to establish the billing of gathering or processing charges / sale for that stream. These charges (invoices) or sales (receipts) being generated in an automated fashion by the People, Ideas & Objects software.

The Accounting Voucher is a for lack of a better term a template that is built upon as time passes. Each month as the property changes, these changes are captured within each Accounting Voucher and the template is renewed each month with the accumulation of the properties history. If a new contract was added for the production from a new well, then that contract stream and the new well would be represented in the next month's Accounting Vouchers. The Accounting Voucher template documents the changes in the property over time.

Critical to the “definition and design” of transactions is the fact that these transactions are balancing themselves out. If the debits and credits were not in balance at the end of the day, then the automation of the systems and the accountants would not be doing their jobs. The same could be said for the volumetric reporting. If in the Material Balance Reports, they were out of balance (call this material balance), or were not balancing the inputs and outputs to other Material Balance Reports (call this system balance), or the internal accounting of those volumes to the partners, royalty holders and others were out of balance (call this partnership balance) the accountants and systems would not be doing their jobs. Simply the process of closing the Accounting Voucher will need to consider not only the balancing of the debits and credits from a financial point of view. They will also need to ensure that the material, system and partnership volumes reported in the Material Balance Report are also in balance. Without these systems in balance, the Accounting Voucher will not close.

This imposes another rather strict provision on the quality of the information that is accepted into the People, Ideas & Objects Accounting Voucher module. Precluding the acceptance of a voucher due to the inability to balance a volumetric requirement holds the system up for what could be a fairly common occurrence. What if the volumetric information is unavailable in a timely fashion? What if the information is part of the normal amendment process? Then we are left with the traditional accounting methods of dealing with these types of issues. An accrual of the volumes in order to achieve the balancing necessary should be able to be processed in the current month. These accruals would then be automatically reversed in the following months Material Balance Report. What is different from existing systems is that we are enforcing the systems to volumetrically balance. Not just inputting key variables, imposing the facts of what actually happened at the facility, or if the facility is subject to a comprehensive Construction, Ownership and Operation agreement, what is agreed to.

The difference may be subtle but the implication is significant. Locking the volumetric balancing, over the long term, into the Accounting Voucher itself enforces the system to follow the volumes as produced and processed. Once this is achieved a certain level of unimpeachable integrity is achieved and then the automation of detailed processes based on those volumes can begin and be assured to be based on the facts of the facilities and assets.

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.

Vouchers, Open to all Within the Partnership

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

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

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

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

What is different in People, Ideas & Objects Accounting Voucher system vs what exist today is the elimination of the designation of operator. The capabilities for each producer to house the state of the art earth science and engineering resources necessary to run all of their properties within one oil and gas firm is believed to be beyond the scope of what is possible in the future. The solution in the Preliminary Specification is the further specialization and division of labor of the earth science and engineering capabilities of each producer firm and the pooling of these resources of the partnership within the Joint Operating Committee.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Introduction to the Accounting Voucher

We now shift our attention to the Accounting Voucher module. The interactions between the Accounting Voucher and the Partnership Accounting modules of the Preliminary Specification are naturally quite significant. They both being accounting modules, it is natural that they have high levels of integration. The Accounting Voucher is unique in that it brings to the producer the ability to design transactions and specific accounting vouchers such as the Material Balance Report. These are not innovations that the producer will use to become more innovative but are provided to ensure that the innovative producers processes are actively defined and supported throughout the People, Ideas & Objects application modules.  When the business is a science, as it is in oil and gas, it would be in the producers interest to remain open and flexible in both its scientific and business approach. The Accounting Voucher and Partnership Accounting modules provide that organizational flexibility.

The manner in which these two modules operate is as follows. The Accounting Voucher captures the transactions. Partnership Accounting reports on the transactions. Accounting Vouchers remain open for one accounting period and are subject to the same closing process that is familiar and traditional in the accounting world.

We noted in the Partnership Accounting module how the Work Order enabled the producer with the ability to form and participate in working groups. Providing a flexibility in participating and accounting for these working groups. This flexibility is what is being sought after in the rest of the producer firm and Joint Operating Committee from these accounting modules. Elimination of the bureaucratic inertia that impedes these activities today makes these modules critical to a producers innovation as much as the Research & Capabilities or Knowledge & Learning modules do.

The People, Ideas & Objects Accounting Voucher Module will provide the means for the application to “manage the disparate inter-dependencies of modularity theory and Transaction Cost Economics.” That is a summary application of Professor Baldwin's comments and theories. And therefore this Accounting Voucher is one of the key cross roads to all other modules in the People, Ideas & Objects application. What this means is it’s necessary for people to cease in processing transactions, by way of automation, and move toward the definition and design of transactions to optimize the business of the producer and Joint Operating Committees performance.

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.

Conclusion to Partnership Accounting

We should note that the Partnership Accounting module is the source of all accounting information for both the producer and Joint Operating Committees. This includes General Ledger detail, Trial Balance and anything and everything accounting related for producers and Joint Operating Committees. It is the source for all accounting related information. The key difference between the Partnership Accounting and Accounting Voucher modules is the difference between “what” and “how” of accounting.

Our discussion in the Partnership Accounting module included the following topics.

• Generic Reporting
• Material Balance Report
• Pooling of Technical Resources
• Decentralized Production Model
• Work Order
• Specialization and the Division of Labor
• Accounting Cutoffs and Differences
• Oracle Fusion Application Modules

Additional topics will be added by the user community. One of the key objectives of the Preliminary Specification is achieved within this module. By using the Joint Operating Committee we are able to align the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks into alignment with the compliance and governance frameworks of the hierarchy. This alignment provides the oil and gas producer with the speed, innovativeness, accountability and profitability that is necessary in this new era of oil and gas that we find ourselves in.

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.

People, Ideas & Objects and Oracle Corporation

It’s the accountant in me that gets excited when I look at the Oracle technologies that will be used in the Partnership Accounting module of the Preliminary Specification. Under the Oracle Fusion Application Financial Management Suite there are the following six modules that are included in the Preliminary Specification. General Ledger, Accounts Payable, Accounts Receivable, Asset Management, Payments & Collections and Cash & Expense Management. It is unknown at this time if the last three modules will provide any value to the oil and gas producer, and therefore will leave it to the larger community to determine whether they remain.

What we need is a solid mission critical, as they used to describe it, general ledger for the innovative oil and gas producer, Joint Operating Committee and service providers. Oracle has competed in this arena since the late 1980’s with their own technologies. They have also focused their energies outside of their core database technologies on ERP systems by acquiring a number of the top vendors in the business. When it comes to the business of ERP systems there are SAP and Oracle as the two titans in the industry. 

When it comes to the technologies that these systems are built upon Oracle, in my opinion, wins out in a very big way. Their new strategy is hardware and software engineered together. And they have the industry leading products to do just that. With Oracle Servers, Oracle Operating Systems, Oracle Database, Java, Oracle Fusion Middleware and Oracle Fusion Applications all being industry leading proprietary technologies. SAP is only able to compete on the application layer. And Oracle’s technologies are new. All of the Fusion products have been written within the last five years as a result of a significant investment in Java and their database technologies. 

When we developed the Preliminary Specification we used modularity theory extensively. Both for the organizations involving the firm, the market and the Joint Operating Committee; and the technology as defined in the modular definitions of the Preliminary Specification. Oracle has also used modularity theory in the development of their Fusion products. Enabling us to build industry specific functionality that works seamlessly with their technologies. Everything that we need to build from scratch will be built from their Oracle Fusion Middleware layer. Which is exactly the same point where Oracle started in the development of their Oracle Fusion Application modules. 

So when we begin to write the code for the Material Balance Report we will be standing on the shoulders of giants by using the Oracle Fusion Middleware as the basis of where we start. And we will be using the General Ledger, Accounts Payable and Accounts Receivable, as a minimum to provide the innovative oil and gas producer, Joint Operating Committee and service providers, no matter their size, with the mission critical capabilities of the industry leader in all of these product categories. 

Let's turn now to the comprehensive nature of the accounting that is done in the Partnership Accounting module of the Preliminary Specification. Whatever kind of accounting that is done in the Preliminary Specification, whether it be for the producer firm, the Joint Operating Committee or the service provider, the Partnership Accounting and Accounting Voucher are the two modules that capture everything the accountant will need. From the General Ledger to the Financial Statements of the producer and Joint Operating Committees everything a user needs, from management accounting to financial accounting will be here. 

To provide for this we will be using the Oracle Fusion Application Financial Management Suite of modules as the base of the Preliminary Specification. Included within that are the General Ledger, Accounts Payable and Accounts Receivable modules that will be used extensively. It will be here in the Partnership Accounting module that the People, Ideas & Objects user community will determine the need for the other Oracle Financial Management Suite modules of Payments & Collections, Asset Management and Cash & Expense Management. 

It is important to stress the users involvement in determining the input, process management, function and output of the Partnership Accounting module. As with all of the modules within the Preliminary Specification this is your opportunity to define what it is that you need and want in terms of Information Technology in your firm. This should be looked upon as a once in a lifetime opportunity and there will be little opportunity to join the community once the Preliminary Specification begins. The time to participate is now, if you can see value in the development of the People, Ideas & Objects systems then you should begin the process and start to participate as soon as possible. 

Outside of the core Oracle modules we will be doing a significant amount of development that will be key to the oil and gas industry. This will require us to drop down into the Oracle Fusion Middleware layer and access what is a very elaborate Java EE server. This will be used to provide the revenue and royalties systems that will build off of the Material Balance Report. Recall that the Material Balance Report is also being crafted at this layer. Management of the firm and Joint Operating Committees capital and operating costs. And of course the revenues, royalties, capital and operating will all have the capacity to be reported in gross and net values. Users may have extensive ideas as to how they want their data to be displayed, and they may want the traditional formats like the Statement of Operations and Statement of Expenditures. This of course being just a small example of the feature set of the Preliminary Specification.

As we will see in the Compliance & Governance module there are extensive capabilities in the Oracle Fusion Applications that enable the Balance Sheet, Income Statement and Statement of Changes in Financial Position to automate the process of compliance. Updates to the regulations are done through Oracle and affect the Financial Statements that are submitted to the regulators. Such is the nature of dealing with automated systems. All in all providing the producer with an automated system from field data capture to financial statement is as broad a scope, and one that should motivate everyone to participate in this worthwhile endeavor.

In addition to the Oracle Fusion Application Financial Management Suite General Ledger, Accounts Payable and Accounts Receivable modules we will be using the Oracle Fusion Application Human Capital Management Global H & R Payroll module. There the costs of the resources can be billed out to the joint account at their actual costs. Technically it will need to be worked out by the user community how each producer is able to charge the joint account for these costs. However, that does not present too difficult a task when we have the control being handled through the Joint Operating Committee and the Security & Access Control modules Military Command & Control Metaphor. 

There is another assumption that is made in the People, Ideas & Objects Preliminary Specification regarding specialization and the division of labor. And that is the division of labor between computers and humans. I suggest we cease operating in large part, from an accounting point of view, as quasi computers and let the computers handle the work that computers do best. Storage and process management are their domain and the sooner we leave these tasks to computers I think the better off we will be. The things that we are better at are the decisions, the ideas, the innovations, the change management, the planning, the creative process among many other things. These are the elements of our work that we should be focusing on and leave the computers to do the work that they do best.

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.

Costs Like Strategies Are Different

We should note that the cost structures of each producer within a Joint Operating Committee could be unique and mutually exclusive to each of the other producers in the property. When we expand the geographical view of the facilities owned in the area we see that the ownership of associated infrastructure by producers can be remarkably different. This cost situation provides us with an opportunity to discuss the strategic choices that producers have within a Joint Operating Committee -- and adjoining facilities which are their own JOC’s -- and how each producer can maintain their own unique strategy.

In addition, since each Joint Operating Committee is autonomous to each other, a producer is able to choose unique strategies for each JOC they have an interest in. That is not to suggest that each JOC within a facility would have their own strategy. They could, however that would be unproductive. What is suggested is that a producer could have each of their major properties operated under their own unique strategies that are developed to optimize the assets unique character. To reiterate, each producer within a Joint Operating Committee within a major area pursuing their own unique strategy irrespective of each other's strategy.

Lastly we most recently noted that the Joint Operating Committee was the strategic framework of the producer and it joined the legal, financial, operational decision making, cultural, communication and innovation frameworks within the JOC. This framework alignment has been unrecognized in any existing ERP systems that operates in the oil and gas industry today. People, Ideas & Objects is the only system to recognize, identify and support the Joint Operating Committee’s frameworks. In addition, People, Ideas & Objects aligns the hierarchies compliance and governance frameworks into alignment with the seven frameworks of the JOC. This alignment provides the innovative oil and gas producer with the speed, innovativeness, accountability and profitability necessary to compete in the insatiable energy era of oil and gas exploration and production.

Application of global or generic corporate strategies are what companies did in the twentieth century. Today producers need to respond at the asset level in order to ensure the optimal value is realized. These findings are based on the extensive research that has been conducted here at People, Ideas & Objects.

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.

Accounting Differences

In Canada at least, there is the accounting month and production month to deal with the delay in reporting of production volumes. The logistics of reporting volumetric information creates a lag of one month in the data so that July’s production data will be reported in the August accounting month. And I'm sure that everyone is familiar with the much loved amendment process for that volumetric data. The adjustment process never seems to end, I wonder if we'll ever find a solution to it.

I think we have an interesting solution in People, Ideas & Objects. We have talked briefly about the Material Balance Report. While we noted the need to balance each report, and each input and output with the input and output of other Material Balance Reports. And that each Material Balance Report essentially represented a Joint Operating Committee. We should note that there are some problems that need to be addressed in the Partnership Accounting module that are a result of the adjustments to the Material Balance Reports. That is that these Material Balance Reports do shift and amend volumes of products around as time goes by and things are found to be incorrect. When the physical world is found to be inconsistent with the reporting, the reporting must change.

I want to add to the discussion of the Material Balance Report by detailing the scope of the engineering problem that we have to solve. The first area of concern is that there are both daily and monthly volumes defining a period of time. Some of these volumes are “spec” vs. raw, products and by-products. Volumes are processed and gathered based on ownership and non-ownership of the processing facilities. There are in North America two, units of measure, British vs. metric reporting standards. How gas is nominated (daily) and marketed (annually). Finally the royalty holders and the ownership of the properties expect to earn something for their efforts. And each of these variables could generate their own amendment processes.

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

The second aspect of the solution of this issue is to limit the scope of it. That is what we have done in People, Ideas & Objects. First by using the Joint Operating Committee as the key organizational construct of the innovative and profitable oil and gas producer. What we are doing is adopting the Material Balance Report as a function of the Joint Operating Committee. Which in reality it is. If however we separate it from other Joint Operating Committee’s from an accounting perspective then we can begin to deal within just that JOC as its own autonomous legal entity, which it is. This simplifies the solution from an accounting perspective and helps to deal with the complexity of the business. This discussion may initially not make sense until we get into the Accounting Voucher module, and we get into the final aspect of this solution which is where we encapsulate all of this reporting within the accounting system itself.

In a globalized oil and gas industry we have to deal with currency conversions in the modern era. And these are not your regular currency issues. The example I have used in the past is that a producer based in Texas (U.S. Dollar) with partners in Britain (British Pound) and Canada (Canadian Dollar) share an interest in facilities and production in Turkey (Lira). Transactions through the joint account will be in the Turkish Lira and recorded in the producers native currencies based on the exchange rate at the time.

Another aspect of this problem is the currency conversions have different treatments for asset & liabilities than they do for revenues & costs. Revenues & costs are converted at the time they occur and require no further action. Whereas asset & liability accounts maintain a balance over a longer period of time and may need further specific treatment to ensure they are recognized and recorded correctly. If, for example, a producer has finished inventory in a country with a volatile currency, what subsequent value should be assigned to the inventory? This may possibly be answered by the ability to record the finished inventory in US$. But the operational costs may be valued in the domestic currency. And what about items that are of a capital nature? These currency issues are predominantly producer related as they are cleared out of the Joint Operating Committees accounts each month. Therefore the accounting for each producer in this scenario is unique.

I would however caution users in the community that the oil and gas industries use of the Joint Operating Committee is unique, and these currency issues are not something that are realized in other industries. And although I believe it is a fair assumption that the Oracle Fusion Applications management of currencies would be state of the art. That state of the art would be for other industries like retail and other industries that would not have the scenario that is noted in this discussion. That because of the oil and gas industries use of the Joint Operating Committee, currencies are an area that can be built upon substantially from the point of view of what and how the community could contribute. We are only beginning to scratch the surface of the currency issues that are experienced daily in the oil and gas industry. These issues are what this community is after in terms of engineering solutions that identify and support innovative and profitable oil and gas producers.

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.

Working Interest Distribution Changes

Producers have used a variety of mechanisms to determine a point in time when the working interest distribution of the Joint Operating Committee would change based on the financial performance or activity level of the property. These triggers have been used extensively in the past and I would suggest with the greater dependence on using Joint Ventures in the oil and gas industry, these mechanisms will expand in their use and type. What is therefore needed is a reliable means in order to calculate and invoke the necessary changes to the working interest distribution at the time of the change. With People, Ideas & Objects we have the user community to define the level of control that producers want to build into the Preliminary Specification for these types of accounting cutoffs.

Whether it be an activity level trigger like a Before or After Casing Point Election where the leaseholder has the opportunity to join the other working interest owners. The Partnership Accounting module will not necessarily provide any information to enable the decision makers any better decisions. However, it is still important to ensure that whatever decision is made, that the costs are allocated correctly before and after the decision point in the accounts. This is more of an accounting determination in current systems and if the community wants to automate this level of trigger by including the casing point election from the agreement from the Petroleum Lease Marketplace module. Then that is a possibility that can be easily accommodated in a community of user based systems development such as People, Ideas & Objects.

In some accounting cutoff situations the point at which the change in working interest distribution is a result of a payout or penalty situation. These require the calculation and determination of when the property has achieved a prescribed financial performance. And then at that point the distribution would reflect the revised working interest. These calculations, determinations and revised distributions are to be automated in the People, Ideas & Objects application modules.

Since these impute performance based calculations. Expanding the performance reporting of the property is an area where I think the user community may have significant influence in building valuable and innovative reporting. Traditional reporting of Statement of Expenditures and Statement of Operations are standard requirements, and included in this systems development. However I'm sure the community of users that are built around the development of the Preliminary Specification are able to expand on this reporting and provide real value for the innovative producer.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

The AFE

One area that we have not discussed in any detail are the processes around the Authority for Expenditure or AFE. I am going to break the AFE discussion down into two parts, one here in the Partnership Accounting module and the other in the Research & Capabilities and Knowledge & Learning modules. What we will discuss are the partnership accounting aspects of the document, and later we will discuss the “capabilities deployment” elements in the other modules.

As with any interface in the Preliminary Specification the user has the opportunity to right click on an item and pull up a menu item called “Create an AFE.” The system will have intelligence and be able to populate elements of an AFE template with the information that you right clicked from. For the purposes of this scenario, lets suggest that you clicked on a well description. The system will then populate the AFE with the information for that well and the partners that are in that Joint Operating Committee. The suggestion was made that another lateral and fracing job be done to increase the production from the shale gas zone. And you populate the AFE with the appropriate account codes that would be used to account for the costs. Note: due to the extensive work done in the Preliminary Specification it should be anticipated that the industry would have access to a global chart of accounts. Budgeted costs were worked out with a number of vendors that you were working with who have developed some enhancements to the re-entry and fracing of multi-lateral wells. You think these are significant innovations and the costs make it a potentially valuable enhancement to the wells production profile.

To present the AFE to the partners you have asked them to join you in the “Marketplace Interface” at the vendor's facility to view a presentation of their new tool. All having confirmed their attendance. At the end of the presentation you digitally sign the AFE which releases the document to the other partners. (All with the data elements that are consistent with their data naming conventions. Global AFE #’s, account #’s, etc.) You indicate the cost estimates and time frame that this can be done to the one well, the poorest performer in the facility. You also submit the engineering and geological analysis of why you think the formation will perform well to the work that is proposed.

Within the AFE document itself there is a collaborative interface for the partners to discuss issues and opportunities related to the document. During the month this discussion focused on how the existing lateral could be protected from any damage during the drilling and fracing of the second lateral. Several partners expressed concern that the program did not do enough to ensure that no damage occurred so a supplemental was raised. After the supplemental there seemed to be a consensus amongst the members of the Joint Operating Committee that the risk was certainly worth the effort and the AFE was digitally signed by all the participants.

During the collaboration it was determined who was available from the producer firms to work on the project and a team was set up to manage the engineering and geological aspects of the program. These peoples time, as well as the accounts for the vendors for that AFE were now able to accept the charges for them. Cost overruns were not expected as an arrangement with the vendor for a fixed price was agreed.

This is a simple scenario of how the firm will raise an AFE and have the members of a Joint Operating Committee approve / disapprove of it. In larger firms there would be an automated routing of the document to the various internal departments for approval. This could be done simultaneously as multiple people can be reading one electronic document at the same time. Therefore accounting, production and exploration could each be approving the AFE all on the same day with none of the paper shuffling that normally goes on. Even within each department the various people who need to see and sign off on the information can do so at any time.

This routing of the document will of course be conducted at each of the producers who are party to the Joint Operating Committees. Each also having access to the collaborative interface of the AFE document between the partners.

In this discussion I want to clarify some of the similarities and differences between the AFE and Work Order in the Partnership Accounting module of the Preliminary Specification. And to point out an important difference in the People, Ideas & Objects systems documents that is different than those that operate today.

Another aspect of how both the Work Order and AFE are different in the People, Ideas & Objects system in comparison to other systems that exist today is the manner in which documents are stored. Everyone is familiar with multiple copies of files that have been edited by different people. A disappointing and troubling problem when it comes to electronic files, a disaster when it comes to documents. No one can have different electronic versions of a document. Therefore there can only be one copy of the document that is used by everyone. (Exclusions for backup etc.) Since its electronic, multiple people can be using the same document at the same time.

The best example of a system that uses this exact manner of file management is Google Docs. Where users have access to a list of files in which they or others they grant access to can edit the same file. Any conflicts in the editing of those files are resolved by the users while editing and the file stays as one complete edited file at all times. There is no need for someone to take edits from many files and put them into one file as is the case with Microsoft Word or Excel.

Instead of files People, Ideas & Objects will present the user with documents like AFE’s and Accounting Vouchers that they have authorized access to. They and others will have the ability to view, edit and delete based on their authorization level and be assured that only those documents exist. No other more advanced copies, or copies that are less advanced, are being worked on. The amount of time and energy that will be saved in knowing that just one document exists is not only satisfying but highly productive.

We have discussed many times that the People, Ideas & Objects application modules are moving the compliance and governance frameworks of the hierarchy into alignment with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee. By doing so we are recognizing and adopting the culture of the industry in its many forms. The change that we are exercising is the removal of the bureaucracy. When it comes to the AFE process there is little in the current process used by companies that is not representative of the culture of the industry. It is optimal that People, Ideas & Objects and the user communities capture that culture in these software developments when developing the AFE process.

One area that we will provide an enhancement to the AFE process is through the elimination of the “operator” designation. People, Ideas & Objects operates on the concept of a pooling of the resources of the partnership represented in the Joint Operating Committee. This is done to help mitigate the technical resource shortfalls, particularly in the earth science and engineering areas. As a result of this pooling an AFE will be open to any one of the participants in a Joint Operating Committee to post charges to. Those charges could be for their staff who are working on the project or for costs they incurred on behalf of the project.

With each producer potentially contributing unequal shares to the joint account or AFE during a month, or over the course of an AFE’s term. The possibility that an over or under contribution of their participation might occur. Therefore monthly equalization's will need to be a necessary part of the reconciliation of the accounts of the AFE. For example, if one of the partners was to pay for the drilling day rate, and their working interest share was only fifteen percent, then they would have paid in excess of fifteen percent of the budgeted AFE. In a case such as this, the producer should be compensated to the point where their contribution does not exceed the approved budgeted amount.

All of this is consistent with the culture of the industry as it operates today. What we are proposing is aligning this culture within the Joint Operating Committee with the other eight frameworks. We are not resisting this well ingrained highly functioning “inertia” as Professor Langlois would call it.

Inertia is the focus of this paper. As is explained in more detail below, inertia has two major functions in the cycle of punctuated equilibrium. Inertia result from, and in a sense embodies, the best feature of the stable phase of the cycle because it is based on the learning process in which producers determine which procedures are most efficient and effective. Once people are satisfied that the know how to do things well, they have very little incentive to look for or adopt new methods. In the words of Tushman and Romanelli (1985, pp. 197, 205), "those same social and structural factors which are associated with effective performance are also the foundations of organizational inertia..., success sows the seeds of extraordinary resistance to fundamental change." Inertia also provides the tension, however, that leads to the (relatively) short, sharp shock of the revolutionary period (Gould, 1983, p. 153) because the pressure required to displace a successful but inert system is considerable and takes time to accumulate. When there is little inertia, change can be assimilated in a gradual and orderly fashion, but an entrenched system may need to be vigorously displaced. p. 3

I began with a discussion of the culture of the industry and how the inertia of the industries routines and capabilities made for formidable obstacles to change. Thankfully we are not focusing on changing any of the cultural inertia in the oil and gas industry. We are trying to change the bureaucracies and the systems to recognize the routines, capabilities and inertia of the Joint Operating Committee. This does however require the retirement or fading of the bureaucracy in its current form.

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

Thankfully the bureaucracy does not sustain its own inertia. It is a forced or contrived existence that serves the purposes of a few within the organization, and these needs can be replaced by the Joint Operating Committee. I’m thinking of the command and control, budget and finance functions. What we have said we are doing with the Preliminary Specification is moving to the natural form of organization of the oil and gas industry, the Joint Operating Committee. I don’t foresee difficulties in making the transition from the bureaucracies forced ways to the more natural way of doing things with the Joint Operating Committee.

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

And the proposition that this transition will occur has been threatened by the bureaucracy. They hold the budget and have exercised it in not providing any funding towards People, Ideas & Objects. In this fashion the bureaucracy has been self-serving and looking after its own interests and has abandoned the future of the industry. What will the situation be like in five or ten years. Will their ways still be the methods in which the industry functions? What if they fail?

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

McKinsey Consulting suggest that large populations will be joining the middle class in the next 20 years. This will have a dramatic effect on the levels of demand for energy. If the oil and gas industry fails to respond to these demands due to the bureaucracies lethargic ways, will anyone note that there were alternatives proposed?

Whereas major competence enhancing innovations may, in time, be assimilated, the creation of entirely new organizations may be needed to deal with innovations that undermine the capabilities or competencies of existing firms. p. 11

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 Decentralized Production Model

Traditional oil and gas accounting systems have sought to identify and record the costs of operations and allocate those costs to the rightful owners. And these of course will be some of the objectives in the Partnership Accounting module of the Preliminary Specification. We are also seeking to transform the producers from a “high throughput production” model to a “decentralized production” model where the costs of operations decline in line with revenues. Then during periods of low commodity prices, if the marginal costs of the property are not covered by the revenues, production is shut-in. And when the property is shut-in the operating, administrative and accounting costs will track revenues. That is they will be zero and the property will not report a loss or a profit. This is necessary in the highly volatile pricing situations the commodity markets get themselves into. As Professor Langlois describes the model.

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

Recall in the Petroleum Lease Marketplace we have the “Marginal Production Threshold Interface” that enables the partners within a Joint Operating Committee to agree on a pricing point where production would be curtailed. We have also discussed in the Resource Marketplace module the use of the Production Accountant and other roles in terms of how the costs of those resources would be reduced to zero in the case of shut-in production. What we haven’t discussed in detail is the need to charge the Joint Operating Committee directly for the charges of the Production Accountants service provider. This will be a change as a result of using the Joint Operating Committee and the elimination of the “operator” designation for any one specific producer.

Many of these costs would have traditionally been incurred by the “operator” as administrative overhead; and were to be covered by the various provisions of calculating overhead allowances for the operator. These overhead allowances will be eliminated in the future as a result of using the Joint Operating Committee. These administrative and accounting costs may be incurred by any one of the producers in the Joint Operating Committee. Either directly by their staff or through a service provider. Either way they should be directly chargeable to the Joint Operating Committee. Costs such as production and revenue accounting, or partnership accounting in general is a cost of doing the business of the JOC. There would also be costs associated due to the administrative areas of the production and exploration activities done on the property.

What we have learned from our review of Professor Richard Langlois is that markets are the ideal situation in which to source the capabilities the producers need. That would be the case for these administrative roles as well. By hiring individuals in a dedicated fashion incurs the costs during the time production is shut-in. By hiring service providers the costs associated with these administrative duties would be reduced to zero when the production was shut-in. Attaining the “decentralized production” model in terms of the operating and administrative costs of the property.

As we noted in the transition to a “decentralized production” model, it would enable the innovative oil and gas producer to match the operational and overhead costs to any decline in revenues due to the shut-in of production. By using accounting and administrative service providers the various Joint Operating Committees would be able to control their costs in the event that commodity prices were unfavorable. We want to discuss the configuration of those accounting and administrative service providers and how they will fulfill the needs of the innovative oil and gas producers.

When we talk about the Service Providers we are highlighting their independence from any one specific producer. With the elimination of the designation of “operator” from any one specific producer in the Joint Operating Committee no accounting, production administration or exploration administration is provided to the Joint Operating Committee in a dedicated manner as it is today. This creates a fundamental change in the manner of how the work is approached in the industry. It is liberating when we consider the use of technology that is available today and the standardization of the processes that has occurred in the oil and gas industry. A Joint Operating Committee is therefore free to engage a service provider to fulfill these administrative duties, independent of any one of the specific participating producers in a Joint Operating Committee.

From the accounting perspective we have already talked about the Production Accounting role and how that could be specialized to the point where a service provider is working in one geographical area for a large number of Joint Operating Committees. That is the most logical manner in which to organize that type of work. We have also discussed the royalty accounting requirements. And how a service provider would be able to specialize on that specific royalty legislation enabling the producers that use that service provider to pay the lowest possible royalty obligations. And we have talked about an accounting service provider that specializes in the compliance requirements to the SEC. The point being that we are seeing a further break down in the types of accounting service providers that are specializing on a variety of different criteria for the oil and gas producers. This is the required next step in the evolution of the economic output of the oil and gas industry. The further division of labor and specialization are the only means in which an economy can expand its output.

With the specialization of individual service providers based on unique accounting specialities. [I’m not familiar with production or exploration administrative needs and therefore can’t comment on those.] A Joint Operating Committee would engage these service providers to provide for the services that are required for their property. There they could choose a Production Accountant who is located in the region. A revenue and royalty accountant who is known for their ability to keep royalties down. And if the price of natural gas drops to the threshold price determined by the Joint Operating Committee, to where the facility will be shut-in, these accounting service providers are not engaged during that time and incur no billings for the property.

The alternative is for each producer to hire the necessary accounting staff as they do now. This is bureaucratic and wasteful in that it builds capacities in each firm to handle x contingencies. The problem is that each firm only needs those capabilities for a few hundred hours a year. These capabilities are recreated within each producer firm and are unshareable between producers. Capturing unused and unusable capacity within each producer firm. It's time to look at alternatives, and the time to look is when we are designing systems for the Joint Operating Committee.

We have now conveniently reorganized the administrative and accounting services provided to oil and gas producers. Such is the way of the 21st century technologies. Closer to the practical realities of the day we find that many of the administrative and accounting functions are driven by standards of practice. These standards of practice are critical elements in the market supporting institutions necessary for the administrative and accounting firms to operate in the manner that was recently described here. It is the capabilities of the administrative and accounting marketplace, the skills, knowledge, experience and ideas that the Joint Operating Committees will acquire through what Professor Richard Langlois and others call Transaction Cost Economics. A good summary of the concept is provided in Professor Carliss Baldwin and Kim Clark’s paper “Where do Organizations Come From? A Network Design Perspective of the Theory of the Firm.”

...objects that are transacted must be standardized and counted to the mutual satisfaction of the parties involved. Also in a transaction, there must be valuation on both sides and a backward, compensatory transfer - consideration paid by the buyer to the seller. Each of these activities - standardizing, counting, valuing, compensating - adds a new set of tasks and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction.

However, within a system such as the Partnership Accounting module of the Preliminary Specification. The costs associated with standardizing, counting, valuing and compensating a new set of tasks and transfers into a transaction are minimal due to the advanced use of Information Technologies. These costs are incurred by both the service provider and the Joint Operating Committee and are for their mutual benefit. If the accounting service provider is posting a journal entry for this month's revenue for a number of JOC’s, then the costs for that transaction are minimal once the initial engineering of the systems are complete. The value comes about for the service provider in having their billings being generated for these transactions processed in an automated fashion during the month.

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

We have discussed how the People, Ideas & Objects Preliminary Specification is designed to accommodate the needs of the producers, the suppliers and vendors in the service industry, society and individuals. These administrative and accounting service providers will need special interfaces in order to process their work with the producer firms and Joint Operating Committees that employ them. For instance, if a Production Accounting service provider is providing services to all of the Joint Operating Committees at three major gas plants then they might want to have special interfaces that display the information in different formats to what any one of those individual JOC’s or producers might want to look at the information. These types of interfaces will be to support the further division of labor and specialization that is a founding principle of the way in which the service providers were organized. To expect that they will fit within the generic system configuration of what a “producer” needs would be probably incorrect. This being another reason that People, Ideas & Objects provides a dedicated “software development capability to the innovative oil and gas industry” as a necessity.

We have also discussed in the Accounting Voucher module the design of transactions. This work of determining where the point of the transaction should occur is part of that process. It is more complex and detailed then it appears and if done appropriately it can have significant process efficiencies on both the producer or JOC, and service provider sides of the transaction.

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)

Through the process of moving the industry to a “decentralized production” model as we are proposing in the Partnership Accounting module of the Preliminary Specification. We have been able to match the operational and the actual overhead costs of the Joint Operating Committee to the production and revenues of the property. Now we have achieved a dynamic whereas, conceptually, no production would occur in the industry that was not profitable. As the prices declined production would be moved off of the market as it became unprofitable. And as prices rose production would return to the market when it was again profitable. It would be at this point that the market would achieve a certain dynamic that is not present in the marketplace today. And the oil and gas producers would be able to claim that their operations were capable of providing the returns to their investors that were real.

In today’s marketplace the management's focus on cash flow is designed to deceive those that will believe they are productive. However, it is only management that believe that cash flow reflects any value. It is simply a factor of how much cash the firm has generated. Included in that cash is an invisible amount of investment needed to maintain the assets. So although cash flow can be a big number it comes with big commitments as well. Sometime those commitments can exceed the amount of cash that is generated. Yet that never stopped management from promoting their cash flow numbers.

What is needed is for the producer and Joint Operating Committee to focus on the earnings, that is the real earnings of the property. Those based on the revenues less royalties less operating and overhead expenses, after tax. When a firm focuses on those and leaves the Wall Street analysts to go play by themselves then good things can happen to the value of a property or a producer. The valuation of a property could be based on the present value of its earnings. Having a lot of production with no earnings has no value to anyone. It's an exercise in activity. Anyone can drill a well and produce oil or gas. It takes an oil man to make money. That’s the tough part of the business, making some money, despite what the Wall Street analyst might think of you.

If our focus is on the properties ability to generate a profit. And based on the shutting in of any unprofitable production, the property will only produce a profit. Therefore, how do we ensure the property always produces? By lowering the costs of the properties operations. That is the next step in the ability of this “decentralized production” model to make the Joint Operating Committee the innovative framework of the oil and gas industry. With this understanding and operation the engineers and earth scientists will be able to turn to the Knowledge & Learning module of the Preliminary Specification to determine what capabilities exist within the producer population represented in the Joint Operating Committee to see if there is any operation that they can conduct to enhance the profitability of the property. In essence each property is standing alone as its own unique cost centre. Being evaluated as its own separate business based on business values and expectations.

In recent discussions we saw that the accounting costs that are prepared for each Joint Operating Committee are the actual accounting costs incurred for that property, not an overhead allowance as it is today. By moving the accounting and administrative functions to the market, we are able to identify the exact costs to each of the Joint Operating Committees. The other implication is that neither the producer firm nor the Joint Operating Committee has to directly employ or house these accountants within their offices, only accommodate them when and where it's required. These are some of the advantages of the Partnership Accounting module of the Preliminary Specification, and modularity in general.

When we have discussed modularity it has been in the context of the eleven module Preliminary Specification. However, it could easily be that we are discussing the concept of the Joint Operating Committee. Each JOC is isolated and exclusive to all other JOC’s. As Professor Richard Langlois noted in his paper “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

To have the entire accounting provided by accounting service providers who are not present in either the producer firm or the Joint Operating Committee seems too great of a stretch. Dare I ask when was the last time you saw someone from accounting in an operations environment? Aren’t these people sequestered on their own floors or in other buildings for most of the time? A revenue and royalty accounting service provider operating on behalf of several dozen Joint Operating Committees and representing fifty producers would need their own office space to organize themselves in a manner that would provide for the most efficient way in which to do their job.

These accounting services are not core to the producers or Joint Operating Committees core competitive strategy. Focusing on the land and asset base, the engineering and earth science capabilities which make up the value proposition is where the time and energy should be expended. Accountants can complete their work through meetings, emails and telephone calls no matter where they are located. The producers objective is to have these accounting overhead items match the revenues within a Joint Operating Committee when the production is shut-in. The decentralized production model will ensure that the operational and overhead costs are reduced during times of shut-in production.

In order to achieve the specialization and division of labor that will provide the efficiencies in their accounting services. The accounting service providers will need to organize themselves in a manner that provides the best service to their customers. These configurations will in no way represent the way the work is done today. In addition People, Ideas & Objects and the user community are designing systems to be as highly automated as possible. That’s not to suggest the role of the accountant is diminished in this environment. Their role will be more high level value added work, not transaction oriented. And they will have the support of the People, Ideas & Objects software development capabilities available to develop new and innovative systems interfaces. Enabling them to innovate and evolve their services to the producers.

We’ve uprooted the accountants from their homes within the comfortable hierarchy. And expected them to develop their own businesses with their own self sustaining revenue streams. In the movement of the administrative functions from the firm to the market there will be the generation of what Professor Richard Langlois in his paper in the Journal of Industrial and Corporate Change describes as “Dynamic Transaction Costs.”

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

Recall in other modules, we established an account to collect the charges for Dynamic Transaction Costs so that they can be identified and controlled. These costs will be incurred in the beginning stages of the transition from the firm to the market configuration.

"F.A. Hayek (1945, p. 523) once wrote that 'economic problems arise always and only in consequence of change.' My argument is the flip-side: as change diminishes, economic problems recede. Specifically, as learning takes place within a stable environment, transaction costs diminish. As Carl Dahlman (1979) points out, all transaction costs are at base information costs. And, with time and learning, contracting parties gain information about one another's behavior. More importantly, the transacting parties will with time develop or hit upon institutional arrangements that mitigate the sources of transaction costs." p. 104

What I would imagine will happen will be the accounting staff of an oil and gas firm will be cast adrift to find its own footing. Based on unique specializations and Service Level Agreements they will be free to organize and approach other producers for similar services and attempt to discern where their specializations exists. Sounds pretty dramatic but should this not have happened a long time ago?

It will be during this time when the Dynamic Transaction Costs are high. It will need to be determined within the Service Level Agreement how these costs are recovered. And as time passes and the work that is undertaken by the various accounting service providers that provide services to the producer fall into a routine, then we will know the transition to the market is complete. Professor Langlois notes.

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

and

Such tacit knowledge is fundamentally empirical: it is gained through imitation and repetition not through conscious analysis or explicit instruction. This certainly does not mean that humans are incapable of innovation; but it does mean that there are limits to what conscious attention can accomplish. It is only because much of life is a matter of tacit knowledge and unconscious rules that conscious attention can produce as much as it does. p. 106

and

In a metaphoric sense, at least, the capabilities or the organization are more than the sum (whatever that means) of the 'skill' of the firm's physical capital, there is also the matter of organization. How the firm is organized - how the routines of the humans and machines are linked together - is also part of a firm's capabilities. Indeed, 'skills, organization, and technology are intimately intertwined in a functioning routine, and it is difficult to say exactly where one aspect ends and another begins' (Nelson and Winter, 1982, p. 104). p. 106

To remove ourselves from the detail of the Partnership Accounting module we find that the real value is gained by the oil and gas producer. There are three elements that are affected in very positive ways by using the decentralized production model. Having the option of removing the marginal production from the marketplace enables the producer to attain the following three attributes.

The first attribute is the ability to avoid the financial losses that occur as a result of producing the property when the commodity prices are below the properties marginal costs. The fact that today the properties marginal costs exceeds its commodity price, and the property continues production has significant downward influence on the current market prices for the commodity. In addition, losses on operations can become quite significant as a result of the large overheads that companies are required to carry to meet the demands of their organizations at full production. Therefore they are compelled to produce at full capacity to justify their high overheads. Moving to the decentralized production model will enable producers to shut-in production on any property that is not meeting its marginal costs. Under the decentralized production model of the Preliminary Specification the associated administrative and accounting overhead, and operating costs will match the revenues of the property, and the property while shut-in will neither report a profit or a loss on operations.

As a result of the property being shut-in the reserves of the property will be saved for a time when they can be produced profitably. Instead of producing the reserves at a loss, as they are today, the shutting-in of production will save those reserves for the time in which they will produce profits. Reducing the capital costs of those reserves as the operating losses that might otherwise have been incurred are not added to the capital costs of the reserves.

By shutting-in production the commodity pricing will find a floor around the marginal costs. There will no longer be dramatic declines in commodity prices as experienced in the past few years. Commodity markets will be healthier and provide appropriate returns for the risks taken by producers. Producers will have to impose a capital discipline that sees only profitable operations are carried out. Unprofitable producers should be dealt with harshly by the investment community.

These three attributes are significant in terms of the value they provide the oil and gas producer. For 2012 People, Ideas & Objects calculated that if the Partnership Accountings decentralized production model was available. The opportunity costs for the year would total $94 billion in additional revenue and profits for the North American producers. This is based on removal of 15% of the annual natural gas production volumes which leads to what is believed to be an increase in the commodities price towards the expected marginal cost of $6.70 / mmbtu.

With the high costs and prolific nature of the shale formations the need for the decentralized production model is a necessity. The oil and gas industry is currently run by a bureaucracy that has no idea how to produce the shale formations. Other than at significant losses. But they don’t care about that. They still get paid either way. They are entrenched and will fight People, Ideas & Objects Preliminary Specification with everything they have. Theirs is a comfortable and convenient life that doesn’t want to be disturbed. With so much to be gained, we can be sure that this fight will be a long one.

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.