OCI Executive Summary, Part III
Partnership Accounting
The Partnership Accounting module is a pure accounting module in the traditional sense. However, I think there are many attributes and concepts in this module that make it unique and of interest to everyone in the industry. The standard list of outputs from an accounting system is included, and this is standard fare for any software provider in oil & gas. Our user community will provide the details, data, reporting and process management that producers and others demand from their system. As we see in the Partnership Accounting module the difference in the People, Ideas & Objects software application is substantial in that the Joint Operating Committee is managed as the partnership that it is. Each Joint Operating Committee will be provided with full financial statements, complete with depletion calculations and actual overhead, not estimates, to evaluate its actual, factual, and detailed performance. This will ensure that only profitable production is produced everywhere and always.
- Knowing which properties are not profitable and shutting those in.
- Applying their efforts and innovations towards returning their inventory of shut-in properties back to profitable production.
- Losses on properties will no longer dilute corporate earnings.
- Reserves are kept until they can be produced profitably.
- Reserves costs do not have to carry additional losses if the property continues to produce at a loss.
- The cost of surplus production and storage decreases when the commodity is kept as reserves.
- Commodity markets find a marginal price when unprofitable production is removed.
- All the information in the commodity market, the inventory, production, demand and reserves is captured and presented to the producer in the commodities market price.
- Marginal prices earned for all properties across North America. Therefore maximizing corporate profits through production discipline.
- Which provides the adequate financial resources to fund the replacement value of all profitable production.
- This provides producers with the financial resources to satisfy their investors, bankers and capital expenditure programs. Running a profitable business will provide all the financial resources officers & directors could ever want or need.
The scope of operations managed under the Partnership Accounting module includes everything in upstream oil & gas. The cut-off would be at the inlet to any refinery and point of sale for natural gas. To be more specific about geography and the type of operation managed by the People, Ideas & Objects application. If we look at the North American oil & gas infrastructure we see a variety of oil & gas installations designed to serve both producers and consumers of oil & gas. Wells, gathering systems, gas plants, pipelines, storage facilities etc. At each point along these systems there may be additional deliveries of product, or sales of product or products inventoried. What seems to be an obvious business becomes incredibly complex when each asset is owned by a Joint Operating Committee itself. This asset may hold different products on behalf of other Joint Operating Committees. This summary glosses over the incredible complexity of this business when the volume of transactions that occur in these businesses make it a crucial part of oil & gas operations.
Critical to controlling this business is our Material Balance Report. This is a key part of the Partnership Accounting module of the Preliminary Specification. It is the central document that so much of the subsequent process activity is based upon. It acquires from the source documents the volume, contract or spot price, allocations and other data for the Joint Operating Committee. Its integrity cannot be questioned. If someone is to be charged for storage of butane for example, or if someone is to be charged a marketing fee for delivery of product to a customer. Or if a sale of a raw gas stream at the wellhead is deemed to have occurred. The Material Balance Report records these transactions and initiates the flow of documents to be generated. Once this data is captured, its integrity secured and balanced, automation can begin. It is the scope of the Partnership Accounting module that captures all of the data and activities for all of these North American facilities. Each Material Balance Report must balance, and each report's inputs and outputs must balance with other Material Balance Reports. The key to the Material Balance Report is that it provides a means to ensure that volumes are in line. That what is reported is factual. Which is the necessary requirement for much of the subsequent Partnership Accountings process automation, including amendments.
Reviewing the Partnership Accounting module further will explain why we take such a broad scope of operations into consideration. It would be an understatement to state that the Material Balance Report has been poorly served by IT. To approach it from a global perspective that includes production operations, accounting and the other areas that depend on this information would be ideal. However, the complexity of the business has always been in the way. Software budget and engineering has never been available, affordable or valuable enough for any individual producer to approach the type of problem this area presents. It exists now with the Preliminary Specification and People, Ideas & Objects. And the Partnership Accounting and Accounting Voucher modules of the Preliminary Specification provide a vision of how this engineering solution solves this problem.
We’ve also introduced the Work Order in the Partnership Accounting module. The Work Order enables producer firms to participate in informal and ad-hoc working groups to conduct studies and research. These informal groups can be established and formed without the traditional accounting nightmare they've normally created, which hinders their formation. An innovative oil & gas industry needs to have these studies and research working groups formed and developed on an exponential scale in order to expand the overall science of the industry. The Work Order is also an internal cost control mechanism that producers and Joint Operating Committees can rely on to manage the costs, and recovery of those costs, of the producers' internal earth science and engineering resources being charged directly to the Joint Operating Committees.
Accounting Voucher
We now focus on the Accounting Voucher module. The interactions between the Accounting Voucher and the Partnership Accounting modules of the Preliminary Specification are naturally quite significant. Accounting modules naturally have high integration levels. The Accounting Voucher is unique in that it provides the producer with the ability to design transactions and the Material Balance Report. These are not innovations producers will use to become more innovative. Instead, they are intended to ensure that innovative producer processes are actively defined and supported throughout the People, Ideas & Objects application modules. As a science-based business, oil & gas producers need to remain open and flexible in their approach to both science and business. Accounting Voucher and Partnership Accounting modules provide that organizational flexibility. The Accounting Voucher captures transactions. Partnership Accounting reports on transactions. Accounting Vouchers remain open for one accounting period and are subject to the same closing process familiar and traditional in accounting. A Joint Operating Committee will have many Accounting Vouchers each month. Examples include both Material Balance Reports and Work Orders. The Material Balance Report and others will also form templates for subsequent months with persistent memory of the prior months' fixed variables.
We’ve noted in the summary of the Partnership Accounting module how the Work Order enables producers to form and participate in working groups. Providing flexibility in participating and accounting for these working groups. This flexibility is what is being sought by the rest of the producer firm and Joint Operating Committee from both of these accounting modules. Elimination of the bureaucratic inertia that impedes these activities today makes these modules critical to producing innovation as much as the Research & Capabilities or Knowledge & Learning modules will.
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 Preliminary Specification. What this means is that people must cease, by way of automation, processing and recording transactions. Instead, they must move toward the definition and design of transactions to optimize the producer's business and Joint Operating Committees' performance. Designing transactions is best described in the Preliminary Specification as coordinating the marketplace.
As a result of the pooling concept, which is a basic assumption developed for the People, Ideas & Objects Preliminary Specification. Some Accounting Vouchers will be open to charges from multiple producers represented on the Joint Operating Committees that a producer firm participates in. The revenue, capital and operations of each of the Joint Operating Committee accounts are open to the direct debit and credit charges of all of the authorized participants in the Joint Operating Committee.
The pooling concept has been developed as a replacement for the "Operator" designation that currently exists. This is a necessity as a result of the ability for each producer, as a properties designated operator, to have the just-in-time capabilities available for all the properties they operate, demand that they have surplus capacity, or as we describe them as unused and unusable earth science and engineering capabilities and capacity. The ability to pool these critical resources from participating producers of the Joint Operating Committee enables each producer to use specialization and the division of labor to expand the industries capabilities and throughput capacity and releases these hoarded unused and unusable capabilities. This pooling concept also implies that producers will provide resources to the property in disproportionate amounts to their working interests. Any over or under participation equalized monthly.
Producers need to contribute their skills, knowledge, experience and ideas to an innovative oil & gas industry. Each of these producers within a Joint Operating Committee will be able to charge their earth science and engineering capabilities to the joint account. Opening a secondary revenue stream for all producers, being the deployment of their earth science and engineering capabilities to their Joint Operating Committees and to other producers who may be looking to augment their specialized capabilities. All charges are subject to the AFE, lease, budget and cost control requirements which remain the domain of the producers participating in the Joint Operating Committees.
Professor Dosi (1988) states that profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives.” (p. 1135) Professor Dosi introduces the theory of Schmookler (1966) and asks “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both”? (p. 1135) Schmookler believed in “differing degrees of economic activity derived from the same innovative inputs.” People, Ideas & Objects assert that "different incentive structures” and “different opportunities” are facilitated or constrained by the administrative ease with which the producer operates. If the producer is confident that the deal which was conceived is accurately captured in the Accounting Voucher and associated modules of the Preliminary Specification. And the operation is now reporting a substantial, actual profit. Then they know that their innovations are working, their systems are working and the alignment of the legal, financial, operational decision making, cultural, communication, innovation, strategic, compliance and governance frameworks is achieved. This is in addition to the other six Organizational Constructs inherent in the Preliminary Specification design.
Research & Capabilities
The Research & Capabilities module enables the producer firm to structure a division of labor between those people that develop the research and innovations within the producer firm (Research & Capabilities), and those that will implement the innovations within the Joint Operating Committees (Knowledge & Learning). This is one of the major processes of innovation that are carried out in the Preliminary Specification. Another major process is that it provides the innovative oil & gas producer with the ability to move knowledge and capabilities to where decision rights are held, the Joint Operating Committee. Enhancing accountability for decisions. This module is at the core of the innovative oil & gas producer. Identifying and supporting the key elements of “what” and “how” innovation requires. The Research & Capabilities module is the focus of producers' competitive advantages to develop and deploy earth science and engineering capabilities. What we’ve learned about capabilities is that they are "knowledge, skills, experience and ideas.” And that “knowledge begets capabilities, and capabilities beget action.” This being part of the cure that People, Ideas & Objects, our user community and their service provider organizations are applying to resolve producers' chronic inaction.
There are a variety of interfaces in the Research & Capabilities module that enable and encourage innovation, and develop the producer firm's capabilities. These capabilities are ultimately captured in the “Dynamic Capabilities Interface” which is the key to both the Research & Capabilities and Knowledge & Learning modules. What the “Dynamic Capabilities Interface” captures, documents and enables the deployment of producer firm capabilities. These are the firm's knowledge, skills, experience and ideas. These capabilities are deployed or tagged according to their pertinent geological zone, geographical area, etc. And as a result these capabilities will be populated into the various Joint Operating Committees that meet that criteria in the Knowledge & Learning module. Each producer within the Joint Operating Committee will populate the Knowledge & Learning module in this manner. It is pertinent to note that the information documented is explicit or implicit knowledge developed regarding that producer's capabilities and innovations. The tacit knowledge is the capabilities and capacities inherent in the contributing producers' competitive advantages.
The far more valuable tacit knowledge can not be captured by any medium. It is resident in the earth science and engineering resources of the producer firms. These resources are referenced and documented through the explicit knowledge of their Research & Capabilities module and form the distinct competitive advantage of the producer. Just as our user community can capture explicit knowledge of the oil & gas industry and codify that in the Preliminary Specifications ERP software. It is their tacit knowledge they’ll deploy through their service provider organizations. Offering People, Ideas & Objects software and their services as the comprehensive implicit and tacit knowledge solution that producers and Joint Operating Committees require in our Cloud Administration & Accounting for Oil & Gas software service. Ensuring the producer is dynamic, innovative, accountable and profitable everywhere and always on the North American continent.
An objective that we are fulfilling in the Research & Capabilities and Knowledge & Learning modules is that we are moving knowledge to where decision rights are held. The Joint Operating Committee is the industry's operational decision making framework. With the current method of designating one of the producers in the Joint Operating Committee as the operator there is an attempt to move the decision rights of the Joint Operating Committee to where knowledge resides. In the Preliminary Specification we have eliminated the concept of operator and replaced it with the pooling concept and therefore we are able to align the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee with the compliance and governance framework of the producer firm. Providing us with speed, accountability and profitability missing and unavailable in current organizational structures. This therefore will require that we move knowledge to where decision rights are held. By doing so we eliminate a major point of conflict between the partnership represented on the Joint Operating Committee and the producer designated as operator.
The Research & Capabilities module of the Preliminary Specification provides the means by which the producer can take their inventory of shut-in wells. These are those wells that have been shut-in due to profitability issues. And determine if there are means within the producers' earth science and engineering resources to move the property back into profitable production. It is also a testing ground where the focus is on the issues at hand. Where new ideas can be tested and applied if they succeed. Where those successful ideas can be further developed within the producer's earth science and engineering resources capabilities. This will enable the producer to successfully replicate the revised methods across the entire production profile. Test, prove, develop and then deploy. Innovative processes always involve mistakes. And if the innovations failed, which is the precursor to success, these will be documented in this interface to provide organizational learning from that failure, not replicate it. The division of labor between the Research & Capabilities and Knowledge & Learning modules ensures that these updated procedures are fully proven, documented and deployed successfully. And the producer doesn’t have everyone attempting to be innovative in an environment where things may be learned over and over again at great cost and disruption. It is these innovation processes captured throughout the Preliminary Specification, based on the primary research of those listed in our bibliography. This will ensure that the costs of oil & gas exploration and production remain cost effective for consumers.
Please note the proprietary information contained within these modules is copyrightable and the process of putting them within the Research & Capabilities module is an act of publication. The Research & Capabilities module is technically implemented using blockchain technology. In this way, the control of the information can be managed. Any additions or deletions to the information will be aggregated in the interface by reading subsequent blocks in the chain that amend the information.
Knowledge & Learning
We now move onto the Joint Operating Committee-focused Knowledge & Learning module of the Preliminary Specification. This module shares many similarities with the Research & Capabilities module. In fact, it is populated with capabilities from the “Dynamic Capabilities Interface” as its base of information. Recall that one of the objectives we're working to achieve is to move knowledge to where decision rights are held, the Joint Operating Committee. As noted, the Research & Capabilities module organizes producer knowledge based on geologic zones, geographical areas, etc. This is so that the information pertinent to each zone can be separated into its own “packaging” within the Knowledge & Learning module. Additional ways data may be sorted in the Research & Capabilities module include vendor geographical location, conventional or unconventional, drilling, completion, etc.
With each Joint Operating Committee concerned with one or two geologic zones, the focus of the Joint Operating Committee can be limited to just those specific areas and capabilities. What is particularly different about the Knowledge & Learning module, however, is that the information contained within the module is aggregated from multiple producers. Any of the producer participants within that Joint Operating Committee who have pertinent information contained within their Research & Capabilities module will have that data and information for those geologic zones, geographical regions etc, of that specific Joint Operating Committee populating the Knowledge & Learning module for that property.
With the potential to have multiple companies' contributions of research and capabilities related to that area. It is critical to have the information organized within the Knowledge & Learning modules in a manner that when the multiple producers' data is merged, use of the data is possible. Each capability contains the knowledge, skills, experience and ideas of the people who are part of that producer firm and the service industry representatives. People, Ideas & Objects have developed the football analogy where operational decision makers are presented with a list of these capabilities in the "Dynamic Capabilities Interface" and can select and deploy them in much the same fashion as the head coach in a football game.
As we have learned “knowledge begets capability, and capability begets action." Quotes are from Professor Richard Langlois' book “The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy.”
Indeed, the job of the entrepreneur is precisely to introduce new knowledge. The “Circular Flow of Economic Life” is a state in which knowledge is not changing. Economic growth occurs at the hands of entrepreneurs, who bring into the system knowledge that is qualitatively new – knowledge not contained in the existing economic configuration. p. 27
Here we begin to see the role that people have in the makeup of the oil & gas industry. And to sum it all up, it’s everything. One also needs to consider the role of computers in these “actions” and that it amounts to not very much. People, Ideas & Objects divides the jobs between what people do well, thinking, generation of ideas, leadership, collaborating, deciding learning, etc and leaves memory and processing to computers.
There has to be a mechanism by which new knowledge enters the system. And that mechanism cannot be rational calculation, for as David Hume (1978, p. 164) long ago observed, “no kind of reasoning can give rise to a new idea.” p. 27
There is much to be done in the oil & gas industry and much of it involves blazing trails. People will need to work hard. The challenges and opportunities are of historical significance and will require dedication from many people.
What has been done already has the sharp-edged reality of all things which we have seen and experienced; the new is only a figment of our imagination. Carrying out a new plan and acting according to a customary one are things as different as making a road and walking along it. p. 27
The Research & Capabilities and Knowledge & Learning modules work hand in hand to provide producer firms and Joint Operating Committees with an innovative footing. One that does not replicate errors continuously and learn what’s already learned last year, and the year before or just over there. Providing a structure that ensures that innovation is the focus and results of the activities that drive profitability across the continent. However, it ensures that costs are managed in a manner that provides consumers with the lowest possible costs of oil & gas exploration and production.
People, Ideas & Objects appreciate industries' concern about documenting, publishing and adopting this method of operation. The conclusion regarding the Research & Capabilities and Knowledge & Learning modules is that producers “knowledge begets capability, and capability begets action.” It is through the successful implementation of exploration and production processes on their land and asset base that producers will be competitive. Operational excellence is a producer's focus and concern. Ownership of a recipe or music doesn’t make anyone a world-class chef or conductor. It is equally true that ownership of how and what land, engineering, or earth science and service industry vendors offer does not secure a profitable oil & gas enterprise. What is necessary is to be able to effectively, efficiently and successfully coordinate these resources in the manner necessary for dynamic, innovative, accountable and profitable oil & gas producers to compete. The evidence of this is in the fact that the service industry extends the producer firms geographical and technical capabilities, using their latest innovations and dynamic resources. They are active in their marketplace which provides for the oil & gas industry. Where those that provide producers with their products and services are from the most innovative and competitive providers. There are thick and prosperous markets available for those providers to compete and satisfy their customers, the oil & gas producers. The choice is quite logical. Producers can participate in these markets or extend their internal domain to account for all they need. This is not to suggest to the producer's officers and directors that the latter is a viable business model.