Oil and Gas Pricing

With the Preliminary Specification, our user community and the service provider's operational in the oil and gas industry. Pricing of the commodities of oil and gas will be different than what is currently occurring in today’s marketplace. People, Ideas & Objects provide oil and gas producers with the most profitable means of oil and gas operations. On the issue of pricing we ensure this profitability through two key differences in the way we operate the industry. The first is we enable the producer to use the “price maker” strategy of our decentralized production model. Secondly we include all of the costs of production in the determination of the commodity prices. Capital, royalties, operating and overhead. Not just the royalties and operating costs to calculate the margins as is done today. It is these differences that enable us to make the claim that we provide over $45 trillion (thats correct with a T) in incremental value with our value proposition over the next 25 years. This post will detail how we earn that difference.

There are a number of fundamental changes that occur when the Preliminary Specification is implemented into the industry. The producer firm is organized to focus on their competitive advantages of their earth science and engineering capabilities, and their land and asset base. We do this by stripping out the administrative and accounting resources of the producer firm and establishing service providers who are focused on a single process and use the entire industry as their client base. The service providers are in turn able to focus on their competitive advantages of specialization, the division of labor, automation and making the computers work for us, as opposed to the other way around. This reorganization of the industry opens up many opportunities and enhancements to the way that the producer operates through the Preliminary Specification. The decentralized production model is one area where our value proposition is affected greatly.

With this industry configuration in place, it provides the ability for each property to determine the actual cost of operations. The costs will include the capital, royalty, operations and overhead that is incurred in that property. Overheads are incurred by the Joint Operating Committee, not the producer firm. The overhead is incurred by the service providers who will conduct their services when they receive an activity from the property that starts their work, and subsequently issues their billing. For example, when there is production, the revenue accounting service provider will conduct their process in accordance with the needs of the producer, and then issue their billing to the Joint Operating Committee for revenue accounting services for that property. If the property is shut-in, then none of the service providers are receiving any information from the “task and transfer” network and no work is conducted by any of the service providers. Creating a null operation; no operating costs, royalties or overhead are incurred during times when a property is shut-in. Only the cost of capital is uncovered. This increases the overall profit of the producer as it is assumed that the only reason the property was shut-in was that it was not producing a profit.

If each producer produced only profitable properties in this manner then they would only have properties that were profitable. ;) Their shut-in inventory would provide them with ample opportunities to innovate in an attempt to bring those properties back into production. On an industry wide basis the marginal cost of production would be determined. And the commodities prices would find their equilibrium. In the case of natural gas this would be at least double and maybe triple the price of natural gas in North America. On oil it would have a significant impact as well. This would not only make the producer profitable in the current environment, it would reduce their capital costs of the property by reducing the amount of losses that have to be recovered tomorrow on properties that are losing money today. We have valued this price making capability from our decentralized production model at $5.7 trillion over the next 25 years in our value proposition.

The other critical aspect of our Preliminary Specification that provides the dynamic, innovative and profitable oil and gas producer with our significant value proposition is the manner in which we calculate the costs of the property. It is our assertion that the producers are being misguided by the SEC and accounting firms in their use of full cost and successful efforts. They are essentially bloating the balance sheets of all producers by implementing these accounting policies. Even with these poor prices the producers are able to report profits on operations because they include none of the costs of capital in their calculations. In determining prices we will use a more appropriate means to recognize the cost of capital in the pricing mechanisms used by producers. Then they will be able to capture these values in their price making strategies and recover their costs of capital for their investors.

Just because the industry is reporting accounting profits and stock traders are claiming to have made money, does not mean that oil and gas is a healthy industry. There is a difference between the two of these domains. The business of making money in oil and gas has been fundamentally flawed since the accountants implemented their accounting voodoo many years ago. Never recognizing the full cost of capital in a business is foolish and the investors in the business itself have been made to pay as a result. Until we include a capital allocation, on a reasonable basis, in determining the commodities pricing, this business will not be able to provide an investor with a return on their investment. It is stated that the industry requires $40 trillion in investment in the next 20 years. Where is this money coming from when all you have are accounting profits. With producers sitting on big, fat, bloated balance sheets holding onto capital costs that never see the income statement. Sure I’ll volunteer my capital, let me put my money down, where do I sign up. With the Preliminary Specifications decentralized production model. The capital costs are considered and included in determining the commodity prices. Therefore the capital is being returned to the investors in the long term. The other $40 trillion in our value proposition. Today the bureaucrats say the investments are a sunk cost, and they don't consider sunk costs in their decisions. I suggest we don't consider bureaucrats in ours.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful 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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Our Solution Part XVI

“Plurality should not be assumed without necessity.” Occam's Razor which simply states that the simple solution is the right one. Those reading the Preliminary Specification may find the 175,000 words anything but a simple solution. However those with a sizable amount of oil and gas experience know that using the Joint Operating Committee in the manner that we are provides a very simple and elegant solution. It is the way that the industry is structured. Around partnerships that mitigate risk and enable the pooling of assets. The Joint Operating Committee is the organization that the industry operates under. Yet none of the ERP systems that exist today recognize this. They define what we call the corporate model. How does the corporation manage their compliance and governance requirements. SAP doesn't even know that partners exist! They work around this “anomaly” in their software. What is needed is an industry specific development of the software to meet the unique needs of the oil and gas producer, the Joint Operating Committee and the industry.

The need to have the software developed for these needs is only the beginning. The changes that occur within the business. The developments of concepts that will occur in a dynamic, innovative and profitable oil and gas producer need to be accommodated as well. That is why the People, Ideas & Objects software development capability is a permanent addition to the toolkit of the industry. Included within that toolkit is a user community and a number of service providers that not only define the software, but also run the industry administrative and accounting operations. It is under this basis that we are able to bring the Joint Operating Committee, the natural form of organization to the industry, and our business models to the producer. These businesses enable the dynamic, innovative and profitable producer to reap the benefits of our significant multi-trillion dollar value proposition. One that provides the producer with price maker strategies. That define the full cost of the exploration and production process in determining what those prices should be.

The next 25 years is going to be different for the industry. Investors may not be around to continue to “build” the industry. As a mature industry they may expect that they finally begin to see a return on their investment. The chronic overproduction and bloated balance sheets that the bureaucracy are providing today don’t impress anyone in the investment community. Debt or equity investors. They can see the performance of the industry over the past fifteen years and know they would have been better off investing in just the commodity. The bureaucracy provides no value increase beyond the increase in the commodity prices. And I would argue that they have destroyed significant capital in the past fifteen years. A business model that provides no upside over the commodity price increase is not a business. Its a failure that is complete in every sense of the word.

And there is nothing being discussed from the bureaucrats in regards to the size and scope of the problems that they are dealing with. Absolutely nothing. The only issue they are concerned with is getting through the annual report and annual general meeting season so that they can resume their personal plans of planning their retirement. They know they sit on top of a failed state and will do nothing to fix it. Their plan is to escape when the troubles become too obvious and too difficult to hide. Leaving the industry in even worse condition than what they are currently managing it to be in. This is not their concern because no one will be able to state specifically that it is their fault. They were just bureaucrats.

Some might ask if shale reservoirs are financially viable? Not in the current business model, managed by the bureaucrats. And bureaucracies don’t change. We offer a business model and form of management that deals with the nuances of shale and makes it viable. Shale is a necessity. With 55% of the natural gas production now coming from shale. And a large percentage of oil coming from shale. There is no turning back now. That however doesn't mean that we have to produce shale at a loss.

The number of times that I have been told that what we are doing can't be done is probably historic at this point. Our current “impossible-to-do” is harnessing enough disgruntled oil and gas investors to start with the funding of our budget. It might work, or we might figure out a better way to raise our budget. One way or the other we'll get our budget funded. What I do know is there is a problem that exists in the industry and I think the Preliminary Specification and decentralized production model is the solution.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful 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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Our Solution Part XV

Yesterday we stated that there had to be more consideration given towards the service industry in terms of the work that is done for the oil and gas producers. During the good times the bureaucrats are frequently expressing their dissatisfaction about the costs and availability of the service industry resources. During the downturn in the industry these same bureaucrats think of none of the consequences of slashing their budgets and ceasing all field operations. The flow of people into and out of the fields can cause severe traffic jams in the most remote areas. Bureaucrats need to begin to think a little more clearly at the real cost of turning the taps on and off in this manner. Calling out the service industry as leeches on their revenue streams doesn’t help to endear the service industry to the key role they provide.

After all if not for Packers Plus and coil tubing, to name a few, there would be no innovation in the oil and gas industry. Many of the bureaucrats are claiming that they are innovating at a tremendous rate at this point in time. The fact of the matter is that they are only conducting operations at lower day rates than they were when the rigs were fully contracted. The real innovations came years ago by these service industry providers who begged and pleaded for the bureaucrats to try their ideas, for free, to get an understanding of what could be done with coiled tubing, or what Packers Plus was providing. The ideas that started in the field were ignored and laughed at by the bureaucrats for many years, possibly a decade, before they were finally accepted by that rarified being, the oil and gas bureaucrat. You can also be certain that most of these people were funding their ideas themselves and found that most of their ideas eventually ended up in their competitor's shop as a result of a “technology transfer” that was hosted by these oil and gas industry bureaucats.

So why would someone fight these bureaucrats for decades to have their technology eventually adopted in the industry. Only to have their technology copied by their customer when it is accepted. And to generally be treated like a virus for the rest of the time? I can only speak for myself, and that is, we have a job to do. Without oil and gas, as a society, we are in a real mess. So we do the job that we are able to do, irrespective of the bureaucrats. The fact of the matter is it’s a very hostile environment. On the service industry side it's become work to rule. Collect your check and that’s it. I don't see anything positive being developed out of the service industry in the next decade. And the same would go for the bureaucrats. This is not how the industry should operate, particularly at a critical time such as now.

What is needed is the Resource Marketplace module of the Preliminary Specification. Within this and the Research & Capabilities module are a variety of interfaces in which the oil and gas producers and service industry representative can collaborate on future needs and desires of the producers. Respect for the Intellectual Property that is generated from the ideas that are raised is also provided in the module. No more will the bureaucrats be able to wash the ideas and innovations of individuals and service providers in the great ether of industry based knowledge. There has to be respect for the ideas that are developed in order for people to want to invest in them. If they continually see their customer poaching their ideas and handing them to their competitors. We will continue to see a hostile and unproductive relationship. Now we all know this is done in the field and in head offices of the oil and gas producers. And it has to stop. The victims of this “theft” is the producers themselves in that they are denied the prosperous and abundant marketplace of service industry innovations.

Review of the Resource Marketplace module of the Preliminary Specification provides the means in which to develop this prosperous and abundant marketplace. It is also where I place the blame for the breakdown in this relationship solely on the bureaucrats. Its what they do, blame others and cut costs in the short term. And as I said it has to stop if we are going to solve the problems that we will have to in the next 25 years in dealing with society's demands for energy.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful 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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Career Risk for the User

Members of our user community have exposure to significant career risk as a result of being associated with People, Ideas & Objects. The bureaucrats have identified this project as being counter to their best interests. That is because we are working diligently to remove the bureaucrats from the landscape in the oil and gas industry. Therefore anyone who would be clearly identified as being associated with this project would be subject to the same warm and fuzzy feeling that I get each day from our good friends. Therefore the people who are associated with this project are kept confidential and are not exposed for any reason. Their career risk is significant and not something that can be mitigated. The bureaucrats, like elephants, have long memories.

This is also the key reason that our budget needs to be funded in its entirety. No one is going to commit to the level of career risk necessary to make this project viable without a viable going concern in which to move to. Since the only way that People, Ideas & Objects can be a viable going concern is to have the software developed, the user community developed and the service providers organized. The budget to bring those resources into being is necessary before we will be able to solicit the numbers and quality of user community participation to make this project a viable going concern. Classic issue in a modern manifestation.

To expect that people would volunteer for a project such as this is something that the bureaucrats would expect. They sit on a primary industry where the revenues are generated from oil and gas. And look down their nose at everyone of the tertiary industries that depend on the oil and gas industry for their revenues. What the producers need to begin to realize is that the ability for them to generate the oil and gas revenues depends on the members of the tertiary industries. Their behavior of turning on and off the tertiary industries revenue stream when oil and gas prices are up or down is a detriment to their own best interests. When prices were high they complained bitterly that the service industry was lazy and too expensive. Now with the prices being low they can't cut the flow of funds to the service industry fast enough. What will be the bureaucrats complaint next time oil and gas prices are high and people don’t want to work in the cyclical oil and gas industry? You really do reap what you sow.

The bureaucrats also have the attention span of the current quarter’s financial performance. Our project unfortunately spans a few of those quarters and therefore will be subject to the wandering minds of the bureaucrats. If we proceed on a pay as you go basis, once we are in full software development mode, the bureaucrats attention will no doubt turn to other “more pressing issues” and cut the funding to this development. Our ability to recover from a funding cut and resume developments would never exist. Its different when you have a physical asset like a drilling rig as the asset that you can idle for a few months. Our asset is our user community and software developers. Their Intellectual Property. Once this is stalled, it can not be restarted in my opinion. Therefore we must have the entire budget funded before their is any development work done.

The point about the boom / bust cycle and its impact on the service industry is something that we address in the Resource Marketplace module of the Preliminary Specification. There has to be a means in which the service industry can rely on the oil and gas industry to fund them. This method of turning off and on the taps is causing too many difficulties in terms of the service industries ability and capabilities that the oil and gas producers need. A dynamic, profitable and innovative producer needs to have the service industry innovating at the speed at which they are innovating. It doesn’t help to come up with the next great earth science innovation when all the rigs are idled, or, when all the rigs are contracted and you can't find a qualified crew. Tomorrow we will discuss the Resource Marketplace module in more detail in our “Our Solution” series.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful 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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Change is in the Air

We see that there is an aptitude and an appetite for change in people’s acceptance of the status quo. The Progressive Conservative party in Alberta is no more. With the former Premier, Jim Prentice quitting the cabinet, quitting the leadership of the party and quitting his just elected seat in the legislature. No one will ever vote for a Progressive Conservative candidate again. Thankfully we have the Wild Rose Party which is the upstart that will probably form the next government. People had to vote for the socialist New Democrats as they were the only other choice they could vote for, and get rid of the bureaucracy. I find the change dynamic parallels to what we are doing here in People, Ideas & Objects with our Preliminary Specification to be very strong. People are looking for better ways in which to be governed, better ways in which to be organized in their businesses and their careers. We might just be timely in our approach to the market!

We've also seen the devastation that low oil and natural gas prices have done to the income statements of the producers. Many are reporting losses, however, everyone is definitely feeling the effect. If producers only provide the upside from the increases in the commodity prices, why take the risks of investing in them at all. Why not just buy the commodities on the commodity exchanges and trade those instead. If you think the bureaucracy is there to build value beyond the increase in the commodity prices. You have the past fifteen years to convince you otherwise. Our suggestion is, that the book value of the producers are significantly bloated for no other purpose than to support high debt levels. This bloating of the asset value of the producers also allows them to report higher earnings than what would otherwise be possible.

With the Preliminary Specifications decentralized production model we are able to calculate the appropriate costs of capital in determining the total costs of each property. As we have documented here before the bureaucrats are calculating the margins on their properties and leaving out the overhead costs and the cost of capital in determining their properties overall costs. This miscalculates the prices needed to produce the commodities. Leaving the producers reporting some profits, however with large asset balances on the balance sheet with little or no cash or working capital being generated. With the Preliminary Specification adding the costs of overhead and capital into the properties costs, and pricing mechanism the producer will be able to earn the cash flow required to return the investors their investments and an element of profit as well. This is how we are able to provide the industry and oil and gas producers with the most profitable means of oil and gas operations.

Oil prices rallied this week for some unknown reason. I think it was on the basis of hope that the U.S. shale producers were soon to see their production decline. As I have stated before, the natural gas side of the business will show us the way in terms of what we can expect the oil deliverability from shale will be. And that is continued production increases and overproduction. The bureaucrats are using the high throughput production model. Which requires full production at all times to offset the high overhead costs of their operations. There is nothing but full throttle production as the means of operations. And for the bureaucrats to discern what is profitable and what is not has never been necessary or possible in the industry before. This current method of industry organization needs to change to the decentralized production model. Where every property is subject to the determination of the full costs of operations and if those costs can be covered profitably by the current commodity price it will continue production. If the prices don't cover the costs then the property can be shut-in until the prices rise to the point where they do cover all of the costs and provide for a profit. And if the producer has an inventory of shut-in properties they will be more profitable than they would be under the current high throughput production model.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful 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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Our Solution Part XIV

With the Research & Capabilities module developing the capabilities for later deployment within the various Joint Operating Committees that the producer has an interest in. We need a module, the Knowledge & Learning module, that is used within the Joint Operating Committee that has a view of those capabilities and will enable the deployment of them. The significant point of the Knowledge & Learning module is that it will have a view of each of the producer participants capabilities within that Joint Operating Committee. Therefore enabling the selection of the best capabilities for the needs of the Joint Operating Committee. This is done with the understanding that each producer will be focused on developing their own specific earth science and engineering capabilities on a specialization and division of labor basis.

There are limited numbers of earth science and engineering resources available at any time in the industry. With the demands of more science and engineering effort per barrel of oil, these demands will not subside anytime soon. It is therefore necessary to resolve this mid to long term shortfall with the tools of specialization and the division of labor. That way more throughput can be achieved from the same resource. There are also demands for these resources from the way in which the producers are structured. Each producer firm is attempting to build the capabilities necessary to fulfill their commitments at any and all times. This requires them to cover off the entire scope and scale of earth science and engineering needs within the organization. With any further specialization and division of labor within the sciences and engineering professions themselves. The scope and scale of the demands on the producer to obtain and maintain their capabilities in the manner that they do today may exceed what is commercially obtainable. The size of their teams will exceed their budget capabilities. Therefore specialization within the producer firm itself is not an option.

However specialization and the division of labor when applied across the industry is able to solve this issue. What the issue is is that each producer has unused surplus capabilities resident within their organizations. These are used for just in time instances where a specific properties demands for resources may peak. Taken across the industry these unused surplus capabilities incur substantial unused and unusable resources. Therefore in addition to specialization and the division of labor being applied within the professions. It is also necessary to apply these principles to the producer firms themselves. Where one producer will specialize in one area and another producer covers off another area. Where the needs of the property can be obtained through a pooling of the capabilities from the members of the Joint Operating Committee. And if there are further shortfalls, other producers who have those capabilities can be hired to fill out those requirements.

This pooling requires that each producer is able to charge their resources to the various joint accounts. And that the producer firm has two distinct sources of revenues. Oil and gas revenues, and revenues from the development and deployment of their capabilities. It will be in this way that the industry can meet the shortfall in these critical professional resources. Specialization and the division of labor are the only proven methods to resolving resource shortfalls. Hoarding these resources within each of the producer firm only leads to further shortfalls on an industry wide basis. As the retirements of the brain trust occurs in these professions. An answer to the way in which the industry will deal with them has to be answered by the ERP system that the industry selects. By designating operatorship to one firm producers have been reliant on other producers capabilities from the beginning of the industry. Few companies will have the budget to fund the scope and scale of an operation that will support the full science and engineering capabilities that will be demanded in the future. The Research & Capabilities and Knowledge & Learning modules are the solutions provided by the Preliminary Specification.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful 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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Our Solution Part XIII

For today’s post I went into the Research & Capabilities module to a get a quick refresher of some of the elements within that module. I have to say that I could not select which module is my favorite. Maybe my favorite will always be the last one I read. Anyways, the value that this module provides the dynamic, innovative and profitable oil and gas producer is not as quantifiable as the other areas. It will however have a significant impact on the performance of the oil and gas producer. The elements that I want to point out are the key issue that it resolves in the oil and gas industry. And the detail regarding the two major processes of innovation.

There are two material processes that the Research & Capabilities module controls. The first is to divide the labor between research and development and the execution of those resulting capabilities. This process is separated into the Research & Capabilities and Knowledge & Learning modules. The other material process is to move the knowledge to the area where the decision rights are held, the Joint Operating Committee. Professor Richard Langlois notes in the following.

The question then becomes: why are capabilities sometimes organized within firms, sometimes decentralized in markets, and sometimes coordinated by a myriad contractual and ownership arrangements like joint ventures, franchisees, and networks? Explicitly echoing Hayek, Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 9

The Research & Capabilities enables the movement of knowledge to where the decision rights are held. The Joint Operating Committee is the operational decision making framework of the industry. There is a major conflict occurring in the industry when the Joint Operating Committee's decision rights are attempted to be moved to the producer firm by the bureaucracy. This conflict, or rights assignment issue, is unresolved in the current industry structure. By the Preliminary Specifications aligning the compliance and governance frameworks of the hierarchy with the Joint Operating Committees legal, financial, operational decision making, cultural, communication, strategic and innovation frameworks. We resolve the many conflicts and problems, such as the rights assignment issue, that exist within the industry.

We also define what a “capability” is in the Research & Capabilities module. Professor Carliss Baldwin of Harvard University states that “knowledge begets capability and capability begets action.” Professor Richard Langlois defines it as the “knowledge, experience and skills of the organization.” To which we have added “knowledge, experience, skills and ideas.” It is the capture of the firm's capabilities that is achieved in the Research & Capabilities module. However, only the explicit knowledge, the tacit knowledge of the firm is deployed through the Job Order system that we will be developing.

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

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

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

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

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

These are the highlights of the Research & Capabilities module. There are many other aspects of the module that are of interest and more specifically the modules makeup in terms of its software configuration. With a revised organizational structure where the C class executives, earth science and engineering resources, some land and legal, and support staff are the stripped down, lean producer firm. They will be able to focus on their key competitive advantages of their earth science and engineering capabilities, and their land and asset base.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful 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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Our Solution Part XII

I have a few ideas lurking in the background that need to be discussed. These ideas don't warrant an entire blog post of their own and seem to be orphaned from the conversation to this point. I thought therefore that I would dedicate a paragraph to each one and ensure they didn't fall through the cracks.

The first is the discussion of the service providers and how they will support themselves. One look at our budget and it is noticeable that the user community is fully supported within our budget, however, People, Ideas & Objects provide no funding to the service providers. Each of the service providers generate their revenue from the services that they provide to their clients, the oil and gas producers. They are replacing the administrative and accounting resources that are present in the North American oil and gas industry. These resources currently cost a large percentage of the $40 to 60 billion in annual G&A costs of the producers. It will be a reallocation of these G&A costs to the service provider firms as their source of revenue. The user community participant will have a financial interest in these service provider firms. They are the key individual we are looking too to establish these firms. They will also be generating revenues from their work with People, Ideas & Objects software developers. Therefore having two distinct sources of revenue.

It may have been confusing in terms of discussing the investments made in oil and gas. And my assertion of how the investors have not been able to make any money in the business. This has been my point in the discussion regarding bloated balance sheets and the fact that none of the capital costs are considered in the calculations of the prices of oil or gas. I have asserted that the investor is being short changed in terms of their investment by the bureaucrats in this scenario. However, as many are able to point out, many individuals, as investors, have been able to earn large returns on their investments in oil and gas. And that is most certainly the case. What we need to do is to separate the investor who is building the business and is making the long terms investments necessary for that purpose. And those investors who are trading in equities on the stock exchanges. What I am focused on is the investors who are investing in the business of the oil and gas business not the traders of stocks. The best analogy would be to state that used car salesman can always make a living, that doesn't make GM profitable.

There are 5,000 man hours in terms of mechanical leverage in every barrel of oil. The 130 million or so barrels of oil and natural gas that we use each day therefore provides us with approximately 382 million man years of physical work per day. That’s 140 billion man years of work that we benefit from each year. Twenty times the world's population. What would we do without the oil and gas industry? Do the bureaucrats, and their zeal for the biggest cottage, understand the responsibility they have to ensure society continues to have these resources available to them at all times? Are we dependent on oil and natural gas? Yes, and Tesla batteries will not do a thing about this. They need oil and gas to fill them just as everything else does. We might like to think of oil as “icky” and “dirty.” However there is really nothing that we can do about this situation. The oil and gas industry has constructively approached the environmental situation at every turn. What we need to consider is the possibility that we are focusing on the wrong issues of alternative energy initiatives and not on the most important issue to us. Maintaining our capabilities to keep the 140 billion man years of effort going forward. There are no alternatives to our use of that much energy. So if that energy costs $100.00 or $300.00 per barrel. People will know that it truly is the deal of the century. We have a job to do, lets do it profitably.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful 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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Our Solution Part XI

People, Ideas & Objects argument that bloated balance sheets don’t provide any value to anyone may miss the essential point for their existence. Large balance sheets can more easily support inordinately large amounts of debt. That is, the large debt will look less out of place if there are assets, and plenty of them, to offset them. The primary benefactor of the large debt balances would of course be our good friends the bureaucrats. Not being able to generate real profits, the money that fuels their machine has to come from somewhere, and that somewhere is either the debt or equity markets. Since 2008 the equity markets have not been friendly to the oil and gas producers. That is to say it wasn’t fueling the party the way it used to. The movement to debt instruments was the logical choice, and hey, look at those interest rates.

The lessons that were being dished out in 2008 were related to the volumes of debt that were being created. Too many people were buying too many houses they could not afford. Mechanisms in which to finance the probable defaults became innovative and this party carried on for a decade or two to long. The solution of course was to drop interest rates to zero and ease the burden on those who were indebted. This would buy them the time they needed in order to repair their financial position and then the economy would continue on. Well its been six years and the problem is that no one is repairing their financial positions. For example the Chinese who entered the great recession in pretty good shape have quadrupled the amount of debt that the governments, industries and people now owe. Just in six years. Oil and gas producers have to have a strong source of capital in order to fund a capital intensive industry. But when they run it with the commodity prices so far underwater, then they really need money. So debt is what has fueled the party for the past six years. But remember its at low interest rates!

And here we are today. The bureaucrats cabin is in fine shape. Able to handle the retirement years of the average bureaucrat in the style of a king. The only real concern to their retirement plans is what will it cost to fuel the boat? If you believe that the bureaucrats are going to be sticking it out through the disaster that they've created then you have a higher opinion of them than I. If they could have fixed these problems in the past, don't you think that they would have? The fact of the matter is that change is not their forte and they are being forced to perform now, or will be soon. And that’s hard. Don't assume that the situation that exists today will last much longer and for them to be able to deal with the outcome. Here is a comment from the Wall Street Journal regarding the Fed and the ability to deal with the poor performing economy.

It’s heresy to say so, but maybe after six years of zero-interest rates, and long after the financial crisis ended, the Fed should wonder if its policies haven’t become an impediment to faster growth. Maybe letting markets begin to set interest rates again would lead to a better allocation of capital and less economic uncertainty. At the very least the Fed should start analyzing why its forecasts have been so wrong for so long.

If interest rates do rise. Something that is a given because they certainly can’t go down. Those with bloated balance sheets, whose purpose is to hide the high levels of debt. Who have not been honest with the total costs of what it takes to produce. Have been overproducing for many years. With that overproduction being undertaken to cover the cost of the overhead of the huge bureaucracy. It should be clear to most that this is the brick wall that is a few feet away from the bumper of the speeding vehicle. We should have made the changes in our velocity a while ago, but their was also the cottage that needed many, many things.

2008 was a wakeup call for everyone regarding the debts that they were carrying. Time was provided through quantitative easing and other antics to deal with our debts, not to incur more. How much longer will low interest rates go on for is the question. Its kind of like during that game of musical chairs that we played when we were younger, anticipating when the music would stop. Has anyone told the investors and bankers that there are no chairs? If anyone expects the bureaucrats to come with a plan, a vision or an excuse, don't wait too long. It doesn't matter what the bureaucrats do. These forces are well in play and will have them removed from, or see them leave, the scenery. What we need to do is to continue to focus on the development of our user community, and then to rebuild the industry around the Preliminary Specification.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful 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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Our Solution Part X

People, Ideas & Objects service providers are the sub-industry that we are developing in our ecosystem that will provide for the oil and gas producers administrative and accounting functions. These will be in replacement to the internal capabilities that the producer has currently developed. Making the change from a reliance on these internal capabilities to a reliance on an industry wide administrative and accounting capability. As we have mentioned this is a key element in our ability to provide the value proposition that we are able to provide the industry. And it should be noted here that the scope and scale of the processes that are managed by the service providers would include those that fall under accounting, land, production and exploration administration domains. Some have argued that this would never work. That the broad scope and scale across the industry would be too difficult to undertake. I would point to our value proposition is well within the trillions of dollars and that the service providers have as their competitive advantages several tools that are not otherwise available to the current producers.

Take for instance the principle of specialization. Most producers do not have the scale in terms of their processes management that can use this principle in their organization. What may be required is a production accountant for the new property and the work required by that property would total 1200 man hours per year. You would naturally assign that work to one individual and there would be no means in which you would be able to apply specialization to any of those processes involved in the position. Whereas with the service providers, we can take each element of a producers accounting and administration and strip it down to the basic elements and design them to be managed by one specific service provider. That service provider will then staff that process in the manner that provides the most effective and efficient means of processing the industries transactions and data. The service provider isn't manually processing these transactions and data, they are applying the most advanced management sciences to reduce the costs and increase the quality of the information that they provide. Specialization and the division of labor are the two principles that are responsible for all of the economic growth that we have experienced in the past 250 years. Constraining ourselves by using just the capabilities of the producer provides us with no capacity to improve the performance of the administrative and accounting capabilities. By establishing the service providers we are able to apply the principles of specialization and the division of labor to the administrative and accounting processes. And in so doing, increase the throughput of the industry.

Currently computers are used within the oil and gas producer to assist in the management of the processes that they are responsible for. Up to this point in time they have been of great assistance in helping people to do their work. However, they have never really been able to have an impact on the productivity of the people that are employed in the industry. In many ways the people who are working in the industry are doing the same things that were done in the industry in the 1960’s and 1970’s. To make any changes requires a wholesale investment of time and money, like what People, Ideas & Objects budget requirements dictate, in order to achieve the differences that are required. These investments in software development and process definition have been too expensive for one producer firm to undertake on their own. There has also never been an initiative that undertakes to raise the funds and organize these developments across the industry until People, Ideas & Objects has. The service provider who works to enhance the process they manage with specialization and the division of labor. Who also has the software development capabilities, and user community of People, Ideas & Objects permanently available to them. Has a new and robust environment in which to conduct the constant development of their processes.

It is harder for me to see how the industry continues on in the fashion that it is. The ability to develop software for each producer's individual administrative and accounting capabilities has quite obviously failed. As there is no one who is successful in the business. There are limited scope and scale applications available to the producer firms, however none that provide an overall vision or value proposition such as People, Ideas & objects. What is expected from the existing software developers is that producers will cobble together the works of several independent software developers in order to cover off a reasonable amount of the scope of the producer. So that it is impossible for People, Ideas & Objects, given our budget and value proposition, to put together the process management of the industry with the help of our user community and our service providers. However, it is expected that each producer does this within their own shop with their limited budgets, out of applications that have no shared vision or value proposition. It sounds to me that the arguments that are against People, Ideas & Objects, our user community and service providers are coming from bureaucrats who are defending their own turf! Not some reasoned explanation as to why our solution won't work.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful 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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.