Who's Making Money?

Clearly no one is. And that has been our assertion here at People, Ideas & Objects for many years. Capitalizing everything that moves in an oil and gas company leads to high asset balances, low cost operations and overhead, and high profits. Doing this over the life of the organization leaves assets on the balance sheet from the beginning of time, an overstatement of the value of the producer and overstatement of the producers earnings. When you add in low commodity prices from natural gas for the past 5 - 6 years these losses on those properties could be hidden by the higher priced commodity operations in oil. Now with oil being in decline as well, there is no hiding the losses that will be stated in this third quarter of 2015. Producers have bloated their balance sheets to the full value of all of their future revenues. Which is ridiculous. But when they were recorded at the previous commodity price highs and now need to be “impaired” to reflect current commodity pricing realities. The write downs in oil and gas that will begin this quarter, and must be reported this fiscal year, are going to be spectacular. The full scope of how much of a scam oil and gas has been will be on display.

Oil and gas always lived on OPM, or other people’s money. Have a capital budget? Better have a stock offering to go with it. Those were the good days. Just dilute your existing shareholders on an annual basis and eliminate any hope of them earning their share of the company's earnings. Now as the tide has begun to go out, as they say, we’ll see who has been swimming naked. Look at any producer today and you’ll see a firm with property, plant and equipment that is so much higher than their revenues. So much higher than the market capitalization of the producer. So much higher than anything that could ever be justified. Remember it is potentially as high as the highest prices ever attained in the marketplace times the reserves that are able to be produced. Or, all of the future revenues of the producer. And this is what has kept the stocks so high. It hasn’t been based on earnings. The value of the producers has been based on the balance sheet which justified the stock's performance and the annual stock offering. This has been a modified Ponzi scheme. Modified in the sense that in a Ponzi scheme there is money that goes out.

So here we are with a situation where the powers that be have hoodwinked the investors on an industry wide basis for decades. Who’s responsible? I’ve pointed to the SEC and the public accounting firms and will continue to suggest that they are the ones that implemented these ridiculous rules and audited to them. Most of the producers are run by engineers and geologists. They don’t understand what it is that I am talking about here. They think they pass their annual audit and therefore everything is fine. They don’t understand the nuance of valuations or accounting. Spending is not the development of value. The industry has been on a spending spree for decades and the chickens are coming home to roost.

We are starting to see the effect of this situation becoming the norm. PennWest is trading at about $0.50, formerly at about $9.00 in 2014 and $20.00 earlier. Encana is at $6.98 formerly at about $90.00. Everyone is down about 50% in the past year. The cracks have been showing for a while. There are a few high profile bankruptcies in the states. This third quarter will show a few who have been frolicking in the nude. And the annual report will show that all of the producers have been. How did this happen? How could this have happened?

A better question is what are we going to do about it. I think investments in oil and gas will be all but lost based on a lack of confidence in the numbers. If the bureaucrats have their way that’s not a bad thing. They will still manage the carcasses. What we need to do is to start building the industry on the basis that is focused on providing the oil and gas producer with the most profitable means of oil and gas operations. And in that way we can forget about this nightmare and move on.

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 VI

Through People, Ideas & Objects the accounting that is carried out will change significantly when we implement the Preliminary Specification. With the decentralized production model enabling the price maker strategy for all oil and gas properties. Producers will be able to shut-in those properties that are unable to produce a profit in a low commodity price environment. And the determination of what the costs of that property will include is the capital costs on an accelerated amortization schedule. This will bring the costs per barrel much higher and into the territory of what it actually costs to produce. Requiring higher commodity prices for the producers to meet the criteria of producing any property.

At some point in every industry this transition has to be made. In the beginning the build out of the industry has to be undertaken by the investment community. Then when the assets of the industry mature, it is then time to earn the profits from what has been developed. Oil and gas is a mature industry. The bureaucrats continue to consider that it is other peoples money that they need in order to fund their operations. This is inconsistent with reality. The industry should be providing the investment community with a return on the invested capital, and an annual profit on those as well. Instead the bureaucrats let the assets sit on the balance sheets to eternity and never let the costs flow to the income statement. This subsidizes the consumers of oil and gas by paying for the capital costs of the industry. The prices of the commodities never adjust to the real costs of the industry.

Under this change to People, Ideas & Objects methodology the makeup of a producers balance sheet will ultimately change. From having a dominant position in terms of fixed assets, and negative cash positions. To having high values of liquid investments and much smaller amounts of fixed assets. They will be financially much healthier. They will be able to dividend out large portions of their earnings to the investment community. Pay down debt. And fund large portions of their own capital expenditure programs. All as a result of finally realizing the real cost of oil and gas exploration and production!

It will be the level of capital expenditures in the past three years that dictate the oil and gas prices. It will be these properties that carry the higher costs per barrel due to the large balances of capital they still have to amortize to each barrel of oil equivalent produced. If we are generally writing off all of the properties assets in the first three years of the life of the property. It will be these that have to meet the criteria of being produced or shut-in first in a low commodity price environment. Those properties that have exhausted their asset balances will be able to produce large profits no matter what the oil and gas price is in the marketplace. However, it will generally be the work done in the past three years that dictates what the actual costs of production are. And it will be that higher threshold that the oil and gas prices will have to reach to bring on the past three years production. In an industry that has the elasticity of supply and demand characteristics that the oil and gas commodities have, it will be the higher prices that the industry will need to realize in the People, Ideas & Objects accounting methodology and decentralized production model.

The SEC and public accounting firms detail the methods that capital assets are written down today. They define what the limit of reasonableness is in terms of what is Generally Acceptable Accounting Practices. Their position is to define the limit and ensure that the producer firm does not breach that limit. However, the bureaucracy are taking the limit as the standard in terms of what “should be” used as a method of depleting the capital assets. This, I believe, is unreasonable when it is taken to the extent that the bureaucrats have. Bloated balance sheets provide no value to anyone. It will be People, Ideas & Objects service providers, the sub-industry that we are creating to replace the bureaucrats, that will use a much more aggressive three year method of writing down all of the capital assets. That way prices will reflect the real cost of the commodity. Producers will be able to “make” the necessary prices to recover their costs through the decentralized production model. And the investors can freely invest in the oil and gas producer knowing that the money they invest will be returned to them with the bonus of an annual profit as well.

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 IV

Allowing the producers to have their balance sheets bloated with assets that are never written down. And as a result, their income statements realizing only small portions of the real costs of capital incurred in the production process. Leaves the investors twisting in the wind waiting for a return of their capital from the industry. Although the bureaucrats may report profits. They really are just the gross margins of the producer firm. The actual overhead and the capital costs of the property are never moved to the income statement. The overhead of the producer is capitalized to the balance sheet and sits there for eternity to pass. The net result of this process is the producers look spectacularly effective in their operations. Their assets continue to grow as long as they spend. Their profits are high no matter what they do. However in terms of really producing anything of value, forget it. As the investors are now learning, oil and gas is a lost cause.

The focus of People, Ideas & Objects derision of this process has been squarely on the SEC and the public accounting firms. They want to relate to the world that they are cool and understand the sciences of geology and engineering. So they've come up with this contrived process of capitalizing everything that the producer does and recognizing almost nothing in terms of the annual depletion of its capital costs. But who is it to say that what they do is wrong? And what’s to say the manner in which People, Ideas & Objects calculates profits at the property is the more appropriate method of dealing with the costs of capital?

If you look at the average oil and gas producer. And yes I am making generalizations here. The producer is expending approximately one third of their asset base in current year capital expenditures. These capital costs are what are required to sustain and grow the deliverability of the firm. These are all being added to the asset classes on the balance sheet. In addition the accountants capitalize most, if not all, of the overhead that is incurred in the head office. You will then notice, that most producers, take approximately 6 - 10% of their asset base as their depletion for the year. These capital costs are moved to the income statement of the producer. Leaving the asset life approximately equivalent to the reserve life index of the reserves. In most cases the reserve life index is ten years and the assets on a simple mathematical basis would therefore also be written off in ten years. This is what the public accountants would say they are doing. Matching the capital costs of the business to the life of the business.

To whose benefit does this provide any value. In a capital intensive industry the oil and gas producer needs to deploy their capital effectively. When every producer capitalizes every dollar spent each year. How do you assess the effectiveness of their capital deployment? According to the accountants using their process, you need to look at the firm from the point of view of the capital assets life, or reserve life index, or in this example the ten years. I feel the horse has bolted from the barn and locking the gate is useless. Investors need to have a more timely gage in which to assess the capabilities of the management of the producer firm. I would also suggest that the assets at the ten year mark will probably sit for a while longer yet. I suggest that we look at what the costs that were incurred to maintain and expand the deliverability. That this cost in the current fiscal year is the cost of capital necessary to maintain and grow the deliverability of the firm. And is therefore a cost that is spent. That this cost has been expended and is irretrievable, and therefore should be expensed in the current fiscal year. Or in other words the size of the capital asset depletion should be the same or even much larger than what the amount is expended in the current year to maintain and grow the deliverability of the producer.

Only then, when the capital costs of the producer firm flow from the balance sheet to the income statement, can the investor assess the performance of the producer. It will become apparent quickly who is wasting money and who is building a sustainable firm. All of the producers will be passing large costs to their income statements each year. If they are unprofitable then they are not going to be in business for long. Something that we can not assess of the current crop of producers. If they are profitable then they are operating the firm in a manner that is consistent with good business practices. If this is done in the short term as suggested by People, Ideas & Objects method of accounting for all of the costs at the property level. Then the investor has the ability to make the assessment of the producers performance. And they will conclude, as I have, that the investor will need to stop subsidizing the oil and gas industry in terms of the prices that are received for the oil and gas commodities.

Measurement of a firms assets and the timing of their movement to the income statement is a key principle in accounting. I think the public accountants and the SEC have messed it up badly in oil and gas. Leading to the investment community essentially subsidizing the oil and gas consumer by funding the capital expenditure programs of producers with no expectation of any return on investment, ever. This has to change if the industry is going to approach the needs of society in the next 25 years. Undertaking the $40 trillion in investment that is alleged to be necessary with nothing but disgruntled investors is not going to do it. Sure investors sit on producers that are well capitalized in terms of their assets on the balance sheet. But they never make any real money. And at the end of the day, all that happens is that a new day begins with the bureaucrats who run this business. We need a change.

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. 

A Conversation in the CEO's Office

If we had the opportunity to listen in on a conversation that may be taking place between the CEO and the CFO of the oil and gas producers. The topic of discussion would be the financial statements that have been in the process of being prepared over the past month. These will have to be reported for the 2014 calendar year in a matter of weeks and the situation is rather dire due to the losses generated from the decline in oil prices, and the continued losses on natural gas. This conversation is designed to reflect the biases in the industry and why we are in the situation we are in.

CEO: So what you're saying is if we publish these financial statements. The losses that are reported will trigger certain covenants in our banking agreements and requirements with our bondholders. 

CFO: In addition our cash flows are negative, and at these prices, we will run out of operating capital in the second half of 2015. I recommend we shut-in these properties representing 30% of our production profile to ensure that we maintain a positive cash flow for the remainder of 2015.

CEO: No we are not going to shut-in any production. We’ve worked to hard and too long to bring the company to this level of production. I don't understand why you don’t appreciate the work that has been undertaken here. Let the other producers shut-in their production. 

I also don’t understand why we have to take such a large write down. Our assets are just as good as they were in 2013. Writing off half of our assets in one year seems extreme to me. 

CFO: Its a requirement based on the prices that were realized at the end of the year. The reserves valued at the lower prices dictate the value of the company. Lower prices equals lower value. 

CEO: You’ll note that these are accounting losses and don’t affect our cash position in the announcement, right. 

CFO: We’re limited in what we can say, but I’ll see what we can do. 

CEO: And get those bankers in line. They can’t put all the producers out of business at the same time. 

And that will be the end of the discussion regarding the financial statements and strategic changes made at the oil and gas producers. Nothing. Carry on with the status quo. The one aspect of this that should be obvious is that the production profile of the firm is a technical achievement that the engineers are very proud of. And they should be. The amount of work and effort that goes into the discovery and production of one barrel of oil or gas is phenomenal. The CEO knows this. And as is typical in the oil and gas industry, the industry is operated by engineers who have limited understanding of the accounting side of the oil and gas business.

That’s not to say they are uneducated. Most have MBA’s and are able to develop strategy and implement plans and create successful operations. However their accounting understanding in oil and gas is distorted by the requirement that companies follow the Full Cost Accounting requirements dictated by the Securities and Exchange Commission. These requirements have become so polluted as to be the issue responsible for the significant write downs that we will be seeing. When everything that an oil and gas producer does is capitalized it inflates the assets of the firm to fill the void of the value of the reserves times the price of the commodity. A value that has no basis in cost or the accounting world. Secondly with everything being capitalized, little is left to be expensed so that the firm shows revenues and small costs. Or high profitability. But oil and gas hasn’t been “highly” profitable. Thats correct, however they have been using a metric that creates “easy” profitability and high asset valuations.

These high valuations and easy profits have distorted the engineers view of their own performance. It encourages them to think that they are doing better than they truly are. If you took their performance on a purely cost basis, such as successful efforts, where only successful operations are capitalized and anything unsuccessful is expensed. It imputes a more conservative frame of mind due to the lower asset value and lower profits. This however would be closer to what a traditional accounting function would replicate in other industries. What full cost accounting attempts to do is determine what a market capitalization is for the oil and gas producer. Which is not what an accounting policy should be doing. For example Apple has a market capitalization of $646 billion and a book value of $111 billion. Investors are wise enough to know what the difference is. In oil and gas the disparity between market and book is not that significant as the assets are inflated by capitalizing everything in the firm.

The accountants responsible for these accounting policies want to ensure the engineers that they are cool, hip and “with it.” So they have bought into an accounting methodology that distorts the thinking of those that are not fully trained in accounting. That do not have a conservative point of view of performance. Therefore an engineer without these perspectives sees his assets building, his profits soaring and thinks they're doing everything right. When in reality the accounting is not reflective of the performance of the firm. And the CEO is being deceived. Leading to the kind of conversation that we noted above. And to the inevitable over production that we are seeing in the commodity markets.

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

Capitalizing Royalties?

I certainly support any innovation in the oil and gas industry. However there was a bit of a dust up in Canada last week regarding PennWest’s treatment of their royalties over the past few years. It seems that their accounting will need to be restated for a few hundred million dollars of capitalized royalties. On what universe would a producer firm consider that royalties would be eligible to be capitalized? I know, its the only expense item that’s not capitalized! I guess that is what passes for logic in the rarified air of the bureaucracy in oil and gas these days. PennWest’s stock took a tumble as a result of this revelation and there was the comment by one investor that “if there’s one cockroach, there'll be others.” I think that investor has the substance of the issue appropriately in focus. Lets have a closer look at the facts as we know them.

A review of PennWest’s 2013 MD&A, Financial Statements and Notes reveals no discussion of any capitalization of royalties. Therefore no direct admission of the practice. The amounts quoted as being required for the restatement for 2013 were $70 million and are therefore material and would otherwise require disclosure. Unless they were Generally Accepted Accounting Principles used throughout the industry. Interestingly however there is no discussion of the amount of G&A that is capitalized either. Capitalized G&A is about as bread and butter an issue in oil and gas and I would be surprised if PennWest was not capitalizing any G&A, but capitalizing royalties. The logical conclusion is they are not disclosing the capitalization policies of any of their costs due to the fact that they are Generally Accepted Accounting Principles. Otherwise someone is in deep, deep trouble for nondisclosure of material misstatements.

Some discussion of the issue came out on Thursday July 31, 2014 between the past CFO Todd Takeyasu and the new CFO David Dyck who is the one who issued the press release about the restatement of earnings. The text of the conversation was run in the Globe and Mail and is as follows.

Penn West did not say which employees are “believed responsible” for these accounting practices, but noted they are no longer working for the company. The review arose from information brought to the attention of chief financial officer David Dyck, who started on May 1, taking over from Todd Takeyasu. In an interview, Mr. Takeyasu said the committee’s concerns could be a result of different interpretations of accounting methods. 

“Some of this stuff is grey, but I'm probably not at liberty to say much,” he said. “Some of that is possibly a matter of documentation.” 

He added: “The new people might just have a different view of it.” 

New board members and executive officers may have a “will to do things slightly differently,” he said.

Indicating that it would seem that there appears to be a different point of view on the treatment of capitalizing royalties between the two CFO’s. Of note it is important to point out that Mr. Takeyasu retired in March of 2014. That Mr. Dyck’s resume does not have him as the CFO of an oil and gas producer in any of his previous positions. Now I know Todd Takeyasu very well. Todd is the type of guy that has never taken a risk in his life. He would never have crossed the street unless the crossing guard whistled and motioned directly to him to cross, twice. And had a stamp from that crossing guard to prove it. Therefore it is reasonable to assume that this is not a rogue CFO blazing across the horizon looking for fame and fortune. Todd would have ensured that PennWest would have had this well documented. I have been personally witness to years of Todd’s audit files. And I'm sure Todd’s lawyer has copies of that documentation as well. The other conclusion to make from this is that the initiation of these ideas are a result of an industry wide initiative. The other roaches hiding in the background.

So lets conclude from this that we might look forward to an industry wide summer of restatements and late nights for the accountants in the energy industry. Their attempt to earn some profits might have seemed innovative to some, however, lets put this in perspective. You can fool some of the people some of the time, but you can't fool all of the people all of the time.

The Preliminary Specification and user community 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. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Authority and Responsibility in Oil and Gas

One area that we have not discussed in terms of capabilities in the Resource Marketplace module of the Preliminary Specification. Is where the authority and responsibility for any field operations falls as a result of the revised boundaries of the firm and market. If we have dynamic markets providing innovative products and services to the producers and Joint Operating Committees. How does this affect the authority and responsibilities that are established in the business today.

The clearest example to provide direction to this issue is the BP Gulf of Mexico well blowout. The findings established that BP was 100% responsible for the cause of the well blowout, and that clearly is the way that the business is run. The earth science and engineering resources are within the producer firms, and Joint Operating Committees, to design and engineer the operations to meet the safe and profitable operations of the oil and gas facilities. Without an appropriate engineering design there is little that a vendor can do in the field with a program that is destined to fail. With the changes being made in the Preliminary Specification, where reliance on an innovative Resource Marketplace for the service industry products and services, nothing will change in terms of this responsibility. The engineering staff at the oil and gas producer or Joint Operating Committee will have more choice in terms of products and services in terms of what they can do in the field. A second point on this discussion, is also the changes within the producer firm in terms of the reduction in the bureaucracy. From Professor Richard Langlois book “The Dynamics of Industrial Capitalism.”

History is never kind to historicists, of course; and the facts of the last quarter century have made life uncomfortable for those who would project the Schumpeter-Chandler model into the present. It has become exceedingly clear that the late twentieth (and now early twenty-first) centuries are witnessing a revolution at least as important as, but quite different from, the one Berle and Means decried and Schumpeter and Chandler extolled. Strikingly, the animating principle of this new revolution is precisely an unmaking of the corporate revolution. Rather than seeing the continued dominance of multi-unit firms in which managerial control spans a large number of vertical stages, we are seeing a dramatic increase in vertical specialization — a thoroughgoing “de-verticalization” that is affecting traditional industries as much as the high-tech firms of the late twentieth century. In this respect, the visible hand, understood as managerial coordination of multiple stages of production within a corporate framework, is fading into a ghostly translucence. p. 7

Management having less influence in the day to day of an oil and gas producer does not affect the authority or responsibility either. The engineers are qualified and regulated in terms of their qualifications and certifications. If they are signing their programs then they have their career on the line which to me is worth substantially more than the controls a manager may have established.

In highly developed economies, moreover, a wide variety of capabilities is already available for purchase on ordinary markets, in the form of either contract inputs or finished products. When markets are thick and market-supporting institutions plentiful, even systemic change may proceed in large measure through market coordination. At the same time, it may also come to pass that the existing network of capabilities that must be creatively destroyed (at least in part) by entrepreneurial change is not in the hands of decentralized input suppliers but is in fact concentrated in existing large firms. p. 14

Substantial change, creative destruction and innovation throughout the service and oil and gas industries. That is what is required to resolve the problems of the day. It's important to remember that doing so is as Professor Langlois states “Economic growth is about the evolution of a complex structure (Langlois 2001).” p. 6. For the last number of posts we have been discussing the desired changes in the makeup of the various marketplaces that provide services to the innovative oil and gas producers. These changes are necessary and ongoing throughout these industries. It is imperative that the oil and gas producer build the market supporting institutions, of which People, Ideas & Objects Preliminary Specification are part of, to identify and support these service industries. What is also necessary, and what will be detailed in the Research & Capabilities and Knowledge & Learning modules is that there is a time for change and there is a time when things need to remain static. Such as during specific field operations. And that is provided in those two module through the tools that are provided there for operational control. We won’t get into them now, I only want to mention that a changing marketplace is desired to configure innovative solutions for the oil and gas industry. And there is the need for tight operational control which is provided in the Preliminary Specification. What we have learned in our research is that an innovative footing is not inconsistent with tight operational control. In fact it is difficult to have one without the other. Using the Preliminary Specification provides that innovative footing and tight operating control, and therefore is the appropriate model for the innovative oil and gas producer.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. 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.

2013 Here We Come!

2013 marks the eighth year that we have been writing this blog. And since it is still relatively early in our marketing, that is seven full years of research that went into the Preliminary Specification. All of it contained here in this blog, and all of it having to do with using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. Who would have thought so much could be written about just one idea. As I mentioned in my last post, I’m looking forward to what 2013 provides us. Marketing the Preliminary Specification to the industry will take on many forms and we are uncertain and unknowing what those will be. A truly exciting time.

Ideally we will be tasked with developing a system with the focus on North America and the Gulf of Mexico as its geographical scope. Developing a system for this region presents a level of technical risk that is manageable with today’s Information Technology, and is something that fits with the objective of making this region energy self-sufficient. To expand beyond this scope does not present any business justification that warrants taking on the additional IT risks. And to leave areas within this region unaddressed would cause producers to have to manage multiple systems in order to cover off their domain of operations.

This objective shows the scope of the projects ambition. I am satisfied with the levels of technical and business risks that it presents. If we look at the future of the industry I think it will be seen as a reasonable approach to the issues that we face. We have seen many industries being disrupted by technology in the last few decades, why would oil and gas be immune. And what exactly is the compelling vision that is keeping the bureaucracy in place today? What People, Ideas & Objects provides is a means in which the oil and gas investor can choose how they manage their oil and gas assets.

The choice we provide the oil and gas investor is between the current corporate model and the Preliminary Specifications use of the Joint Operating Committee. The corporate model is proving to be unsustainable and unprofitable. This puts the oil and gas investors investment at risk. In the corporate model the investors are the ones that are the last in terms of attaining any value in a breakup. The management leave to pursue opportunities elsewhere and the banks and bondholders end up with the assets. Leaving just the losses for the oil and gas investor. Under the Preliminary Specifications use of the Joint Operating Committee the oil and gas investor has the opportunity to manage their assets in a manner that is consistent with their needs. And contrary to the corporate model, those decisions will be made with a vested interest in those assets.

This is part of the vision that is inherent in the Preliminary Specification. That an oil and gas investor can operate their oil and gas assets themselves. That their ownership of interests in a variety of Joint Operating Committees can be managed through the People, Ideas & Objects Preliminary Specification. Where they could have a hands on control of their assets and manage them in the best interests as they see fit. Having the expensive, slow and un-accountable management of the corporate model doesn’t fit in the future of the innovative oil and gas industry.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. 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.

McKinsey, When Failure is not an Option, Part 2

McKinsey have published the second part of this highly applicable series on Joint Ventures. Our review of the first part of this McKinsey series was published in September 2010. Part 2 of this article discusses several points that are in direct support for People, Ideas & Objects. A bold statement, however, one that will be proven valid through our review of this document. Specifically the three points that are verified in this post are.

1. The need to have a third party provide the software development service that People, Ideas & Objects proposes. 
2. The Military Command & Control Metaphor, that was developed in the Draft Specification, provides an industry wide governance model that is directly supported in this article. 
3. Compliance, on an automated scale, is a necessary component of the governance and third party nature of the offering noted in 1) and 2). 

We begin with a quotation that summarizes the state of affairs in the oil and gas industry.

As we discussed in the first article of this series, the scale, complexity and risk associated with the execution of large scale projects frequently leads to joint venture constructs as a way to introduce expertise, diversify risk and gain access to capital. We also observed that, up until recently, the majority of these partnerships consisted of a dominant, operating partner that provided the bulk of the resources and leadership, paired with one or more relatively silent partners in the background. Interestingly, this trend has shifted dramatically over the last decade, and project JVs are increasingly becoming a “partnerships of equals”, with shared governance, staffing and execution responsibilities distributed among the participants.

McKinsey use the example of a large refinery to show the difficulty in managing a large Joint Venture today. They detail the four major risk factors that are evident in the case example, and I would note that these are the issues, to a greater or lesser extent, that are pre-eminent in all oil and gas ventures;

• Cross-cultural challenges associated with the introduction of sovereign nationals and international corporate employees
• Inter-company incentive and strategic misalignment between two (or more) principle investors
• Expertise, system and process friction between the various contractor and subcontractor teams, who may have alliances or other preferred relationships with one of the JV partners
• Normal” start-up risks associated with the scale-up and development of a project “new-co”, the on-boarding of new JV employees, integrating staff from the partners who have been seconded to the JV, and greenfield development of new systems and processes, among others.

There’s no denying these are the issues that all oil and gas projects are facing. McKinsey offer a four step solution that dovetails with the Draft Specification. If we ask first hand, “what if” there were standard systems and procedures that were used for all Joint Operating Committees across the oil and gas industry? Where the ability to assign a generic template of assignable roles and responsibilities. Where the compliance and governance of each jurisdiction is embedded within the third party vendors (People, Ideas & Objects) software's policies and procedures. Where the generic management of the Joint Operating Committee was handled through software provided by a third party that represented all producers. Software that managed each of the producers compliance for the various jurisdictions in which they operated, to the governance of the people that were pooled by the various firms represented in the Joint Operating Committee. This brief vision of what People, Ideas & Objects is proposing in the Draft Specification is being mirrored in this discussion of McKinsey’s four steps. We begin.

Step 1 Define and Align

Alignment is difficult to attain within the oil and gas industry for the many reasons cited in the subsequent McKinsey quote. We need to begin by aligning the compliance and governance frameworks of the hierarchy, moving these two frameworks into alignment with the legal, financial, operational decision making, communication, cultural and innovation frameworks of the Joint Operating Committee. Talk of alignment with out building the software that identifies and supports the alignment of these eight frameworks, first and foremost, is just more talk. One of the key benefits of doing this is the alignment of compliance with operational decision making. The net benefit of which is greater accountability. But by combining all eight of these frameworks we are making the Joint Operating Committee capable of dealing with the all aspects of the producer(s) needs.

McKinsey note:

...project JVs often begin by bringing together unlikely allies whose goals, cultures, operating models, risk appetites, and financial strengths are apt to vary widely. Identifying the disparate goals, models and strengths and weaving them into a single, aligned and broadly-communicated vision is critical for an effective JV to function effectively. This vision supported by a number of underlying organizational themes and parameters creates a common language for the JV, and is a reinforcing mechanism for maintaining alignment across all partners.

What I am asserting here is the need to have the generic business aligned around the Joint Operating Committee so that the vision of the JV can become the focus of those working within the project / property.

Step 2 Build

I want to limit the discussion to the governance related points. I will therefore note the following McKinsey quote and refer to the related discussion in Step 3 Execute, below.

The process of building the team should start with recruiting the best people from each participating partner. This can be quite a challenge, as top talent often see joining the JV as a career- limiting move, putting them “out of sight, out of mind”, for years. And, since the JV’s priorities differ (by necessity) somewhat from those of the parent organization, even the successful achievement of those objectives by secondees may not be viewed as credible or be given the same merit by those in the parent organization.

Step 3 Execute

The Draft Specification developed the Military Command & Control Metaphor to replace the Governance of the hierarchy with a usable model within the Joint Operating Committee. A governance model that worked similar in fashion to that which the NATO forces use. One that has the various countries military forces used to deploy troops from various countries in many different theatres of war and other technically difficult operations. Looked at from both the micro and macro level, the oil and gas producer can attain the ability to deploy and redeploy resources as required across the various JOC’s they participate in. The ability to have the partnerships pool their resources, and these resources have a deemed chain of command that is recognized on an industry wide basis, with a defined roles and responsibilities that are agreed to, can provide a strong governance model to the issues that McKinsey ably addresses in the industry.

In addition to meeting these technical deliverables, team members must also

• effectively scale the organization quickly 
• establish a culture of self performance, and 
• continuously adapt and evolve.

These are very different types of work, requiring a loose – tight governance model which provides the JV and project team with sufficient flexibility to grow while at the same time maintaining a rigid link to the parent companies’ governance and control mechanisms.

As the project team moves into execution, it must define a model for itself that allows it to be independent while continuing to deliver on parent companies’ needs. During execution, the leadership team also needs to think proactively about how to implement its newly constructed culture, processes and systems. Frequently complicated by a fragmented and globally disperse geographic footprint, the introduction of multiple new contractors and sub-contractors, and the fast pace at which the project evolves, it is easy to let the execution of these systems slip and to allow their effectiveness to wane. The JV leadership must establish a disciplined steering committee with direct accountability to the CEO to oversee successful implementation.

Step 4 Renew

I know I share with most people that have worked in oil and gas a feeling of frustration at the value that is occasionally lost in various Joint Operating Committees after phase changes or other transitions where people, teams, systems and procedures that were build up are left behind, dropped, shredded or forgotten. Very wasteful in the big scheme of things. Or how about the other situation that creates waste. That being the work done to manage the Joint Operating Committee, that was put together and was built as a one off installation of software and systems. Much of this work was done in recreating the wheel and as such it was “rebuilt” in order to address the unique characteristics of the property. McKinsey notes.

Perhaps the most overlooked success factor in constructing a successful project JV is to create clear opportunities for renewal. This renewal is both personal, for the individuals in the project team, as well as technical, for the systems and processes that we mentioned previously. While any project professional will readily acknowledge the dynamic and evolutionary nature of a project as it moves through its lifecycle, many frequently fail to recognize that people and systems need to evolve correspondingly. World class project JVs, on the other hand, establish clear breakpoints and formal evaluation steps, during which the leadership team evaluates the effectiveness of its people, tools and processes, and takes steps to inject fresh energy, capabilities and structure into the team where needed.

The purpose of People, Ideas & Objects is to provide a third party software development capability based on the Draft Specification. Using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. This provides a means for all producers to mitigate these losses of value. One in which the use of a third party software vendor providing the software to run the JOC is available to all the producers of the venture. Where the software vendor is independent of each producer. Where what is learned and developed is able to be used in the future, in not just the JOC but potentially elsewhere. And what is learned elsewhere could potentially benefit the JOC.

Compliance as a potential fifth step.

Lastly I want to comment about compliance which is not directly addressed in this McKinsey article, it is a related topic that falls in with the discussion of governance. And when we are talking about compliance we are talking about the compliance of the Joint Operating Committee and its operations in whatever jurisdictions that it may be operating within. This therefore also involves the partners compliance for these operations as well.

People, Ideas & Objects as software developers could assure thousands of producers who might provide us with the financial resources to develop a software development capability that is focused on maintaining the compliance of thousands of producers with the thousands of regulatory bodies those producers have, or may have, operations in. What plans do each of these individual producers have to ensure their operations will be in compliance with these jurisdictions where the compliance requirements continue to expand? The movement of the compliance framework to the Joint Operating Committee should be seen as an opportunity to address the automation of compliance and an opportunity to integrate compliance within the other frameworks of the JOC.

To what extent can this type of automation be implemented is the question that needs to be answered. With each piece of legislation that is contemplated these days, potentially totalling several thousand pages, where the ability for people to manually keep up with the demands of the regulatory process of governments and regulators being potentially past, full automation of the compliance framework is a necessity, in my opinion.

McKinsey note toward the end of the document these possibilities exist, if only.

While JVs and projects are both uniquely challenging to execute well, there are similarities that enable world-class project managers to effectively build world-class JVs, and vice versa.

It is now time for producers to act. Review of our Revenue Model will inform producers how they can participate in the development of People, Ideas & Objects Preliminary Specification. Producers can contact me here for further information, or to begin the process of their participation.

What is Structuration?

The Preliminary Research Report reviewed a variety of papers that fall under the topic of Structuration. What is this and why is it important to People, Ideas & Objects and the innovative oil and gas producer. Here are excerpts from the review and how they affect this project.

Professor Anthony Giddens initially published “The Constitution of Society: Outline of the Theory of Structure”, Berkeley, University of California Press and his theory is well articulated through the following excerpt from “Using the Structurational Model of Technology to Analyze an ERP Implementation” by Olga Volkoff, of the Richard Ivey School of Business.

From the perspective of structuration theory, adaptation is the joint effect of the actions of individuals and the institutional structures within which those actions take place. Structures such as business strategies, organizational culture, reward and control systems, patterns of communication, and professional norms both enable and constrain the daily activities of people, but do not wholly determine them. At the same time, while individuals can choose to act in ways that will either reinforce or alter those structures, their choices are not independent of the structures within which they take action. This “duality of structure” - the recursive (re)production of institutional structures through the ongoing daily social practices of individuals - allows change to emerge in ways that are not wholly predictable. 

I think within this quotation we see the reasoning why the oil and gas producers have such difficulty in meeting the demands of innovation. The Joint Operating Committee holds the “actions of individuals, and the institutional structures” that are not recognized by the ERP systems that are available in the marketplace. Therefore you have two disparate organizations, the JOC and the bureaucracy, operating in two different structures, creating conflict and contradicting one another.

Giddens’ theory of structuration is further define by Professor Wanda Orlikowski’s 1992 comments: “the duality of structure refers to the structure of social systems: human actions create a social systems institutional properties and these properties then serve to shape future human actions.” The notion of structuration has three aspects.

• It refers to a social process that involves the reciprocal interaction of humans with the structural features of an organization. 
• Human actions are enabled and constrained by structures, yet these same structures are the result of previous actions.
• Structural properties mediate human action and, at the same time, are reaffirmed through human use. In other words, institutional properties are both the medium and the outcome of interaction.

The Preliminary Research report looked at structuration from the perspective of how the current oil and gas organizational structure is defined through the social, legal and environmental influences that provide that structure, and of how the organization in turn provides structure to the social and human elements. People, Ideas & Objects are focused on building ERP systems that identify and support these organizations.

The JOC has explicit legal, ownership, financial and procedural authority and control of the field operations as the standard of operations and conduct in oil and gas, on an international basis. Financial investment in an oil and gas property qualifies for participation on the committee where the operational control is agreed to and implemented. This research asserted that this operational control has significant implications on the internal operations of the participating organization. The facility design, capital budget, legal agreements and the decision making processes are constrained, Giddens’ theory would suggest, by a variety of forms and structures that comprise the basis of operations for the entire industry.

As Thomas Davenport noted in his paper “The Strategy and Structure of Firms in the Attention Economy” 2002,

Strategy and structure are mental constructs, important not in themselves, but for their impact on the people in the organization. Strategy and structure are also the vehicles for focusing attention. 

Clearly stating that by moving the compliance and governance frameworks of the bureaucracy to be in alignment with the legal, financial, operational decision making, cultural and communication frameworks of the JOC. This realignment will eliminate the conflict and contradictions that occur between the two organizational constructs. This realignment will also increase the attention and focus of the individuals involved within the producer firm and the JOC, and by moving compliance to be in alignment with the operational decision making authority, accountability is enhanced. Lastly, as we will document as this review progresses, innovation is enabled.

Another key component of Giddens theory is that there is an inherent risk of failure if the progress of one element is out of step with the other two. Society, organizations and people need to move in lock step to avoid failure. This has been explicitly interpreted for the purpose of this research that the progress of society and people is either inhibited or facilitated through the actions that form the organizations. Currently individuals and society are dictating larger volumes of energy be sourced and provided by the market. If the bureaucracies that exist today, are unable to meet these demands then we will most certainly see failure.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

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McKinsey, When Failure is not an Option

McKinsey Consulting are publishing a three part series on what they describe as the Joint Venture (JV). Entitled “When Failure is not an Option: Making Joint Ventures work for capital projects.” The article notes the role of JV’s in oil and gas and other industries, JV’s are of course one in the same as the Joint Operating Committee (JOC), the key organizational construct of People, Ideas & Objects Draft Specification.

This paper provides further support for the development of the Preliminary Specification and the research that has been conducted by People, Ideas & Objects. It is satisfying that the worlds number one consulting firm are publishing these types of articles. Prospective users and  members of the Community of Independent Service Providers need to see this type of support to ensure their efforts are put towards providing success for the innovative oil and gas producer.

Joint Operating Committees are initiated for a variety of reasons, to reduce capital risk, to include other producers throughout the aerial extent of the property, or to include needed resources and capabilities. Industry has established a culture around using the Joint Operating Committee that is reflected in many of the processes that are used. This culture has developed as a result of the Joint Ventures that are systemic throughout the industry. Whether it’s through agreement, the Operating or Accounting Procedure, partnerships are what the Joint Operating Committee was designed to reflect. McKinsey states;

Historically, project developers have relied on the operating versus non-operating partner construct. However, companies are also increasingly leveraging JV constructs as a way to bring broader expertise into the project, build local talent and industries and retain sovereign ownership. In the oil and gas industry for example, a major project is likely to include a “supermajor” international oil company (for whom this project is part of a very large portfolio), an independent (who may be betting the company on this project), a passive investor (with a purely financial focus), and a national oil company (owned by the government where the project takes place). 

The Draft Specification has specific attributes that resonate with this perspective. First there is the enhanced participation enabled by the Partnership Accounting module. This module deals with the various ways in which partners may contribute to the Joint Operating Committee. Noting in the quotations example the passive investor, national oil company and international oil company each have differing costs and contributions. Permitting each of the firms to contribute fully, in their own unique way, to the successful development of the project. Secondly, the participants that are noted in the McKinsey quote, independents, start ups, international and national oil companies, are the targeted market for the People, Ideas & Objects software applications. Having each of the partners within a JOC with the same software development capability is a necessity, and the key deliverable of People, Ideas & Objects.

Noting the need for change, McKinsey details what is required for these organizations to deal with the enhanced participation enabled by the Partnership Accounting and other modules of the Draft Specification.

On top of the massive scale and obvious technical complexity, these new, multi-operator constructs

• increasingly embody multi-cultural perspectives (both corporate and sovereign),
• frequently represent divergent strategic priorities for the individual owners,
• generally struggle with the governance and performance management challenges associated with any multi-parent structure and
• often lack a single point of accountability for key decisions.

Addressing each of these points has been the topic of discussion in our Review. Having differing types of participants and cultural influences within the Joint Operating Committee is becoming commonplace. We had determined that each participant could pursue their own unique strategy within the property. We developed the Military Command & Control Metaphor to deal with the governance and performance management challenges. And lastly addressed the accountability for the decisions that are made within the JOC and the producer firm. Most importantly, the Draft and Preliminary Specifications are developed to address and resolve these very issues.

Next, consider that the “new generation” of project JV has multiple layers, as both the owners and contractor teams rely on individual partnerships to deliver the project. As this phenomenon evolves, it should be no surprise that we see an explosion of risk and management complexity, given the sheer number of stakeholders involved and the more sophisticated tools and processes needed to deal with project intricacies.

In the Resource Marketplace module of the Draft Specification we have included the service industry as critical elements of the success of the innovative producer. McKinsey are right to suggest the level of risk and complexity will increase further as a result of having the need to develop the support industries. Innovation at the producer level needs the service industries to be intimately involved in developing the products and services the producer demands.

Studies show that about 50 percent of all JVs do not succeed. Moreover, studies of large capital projects indicate that cost overruns from 50 to over 100 percent are common. So, when we consider this double-barreled risk of often-unsuccessful JVs managing often- unsuccessful mega-projects, we recognize that the difficulty project JVs have in aligning and operating effectively is a major reason why large capital projects often fail. Given the strategic importance these projects represent to participating partners, it is clear that JV organizations must be effective if a project is to meet expectations for predictability and performance.

There we have it, the world’s number one consulting firm clearly stating that joint ventures fail due to the difficulty in aligning and operating effectively. People, Ideas & Objects, its prospective users, the Community of Independent Service Providers through the Draft Specification are moving the compliance and governance frameworks of the hierarchy into alignment with the cultural, legal, financial, operational decision making and communication frameworks of the Joint Operating Committee. Laying the groundwork for the producers involved in the JOC to be successful. McKinsey quote a Harvard Business Review article that reflects these elements are necessary at the commencement of the JOC.

In their seminal article in the Harvard Business Review, Banford, Ernst and Fubini suggest four areas on which to concentrate the early planning and launch of any JV:

1. Strategic alignment. This ensures that each partner’s disparate goals, priorities and business models are recognized and reconciled.
2. A “loose-tight” governance model. This ensures that each partner’s needs for accountability and control are met, while at the same time, the project’s need for independence and authority is also respected.
3. The economic interdependencies between the project JV and each partner. They will impact the extent and means by which human, technical, and other resources are invested in the project.
4. Building the project organization. The parent organization should contribute their best people to the considerable challenges a major project presents, overcoming the frequent perception that such assignments are not always the best path to promotion.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

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Eliminating the Conflict

In the Preliminary Research Report, in addition to the advantages of using the Joint Operating Committee (JOC) we listed the disadvantages of the conflict between the JOC and the traditional hierarchy. What becomes clear in listing these disadvantages, is the overriding focus on compliance and governance by the hierarchy. Tax, SEC and Royalty requirements at times appear as the sole focus of the organizations. The operations within the JOC are a distant second in terms of dealing with the business of the producer.

I am speaking of course from the business perspective dictated by the use of the ERP system of the producer, not the technical perspective of the earth science and engineering production operation. The separation between the administration and the earth science and engineering focus within the producer is something that is being eliminated in the Draft Specification. Lets call this well known phenomenon of “no one reading from the same page”.

Oil and gas operations are unique based on their geographic and geological makeup. Applying blanket corporate strategies to these operations was possible in the easy energy era. In today’s marketplace the need to have unique operational strategies for each oil and gas property is a necessity and is accommodated in the Draft Specification. What is not needed is the conflict and confusion within the producer that is as a result of no one reading from the same page.

One of the breakthroughs from the research People, Ideas & Objects has conducted is that the differing operational strategies that are employed by each of the producers in a JOC are possible and appropriate. Each producer has a unique make up of assets and strategies and those can be enabled through the use of People, Ideas & Objects Draft Specification. Without the systems needed to support these differing strategies, the confusion and conflict will only grow, potentially in exponential ways.

The conflict between the separation of the compliance and governance of the hierarchy and the five frameworks of the JOC are reflected in each of the following points.

Introduces political and bureaucratic conflict.

This is the first and most damaging aspect of no one reading from the same page. When strategy, operations and administration are all moving in different directions within the organization, conflict is the result. The solution in the Draft Specification is provided by moving the compliance and governance from the hierarchy and aligning them with the legal, financial, operational decision making, cultural and communication frameworks of the JOC.

Compromises and muddles internal decisions.

What may be ideal strategy to optimize the property may be unknown to many of the decision makers within the producer firm. The operational decision making resides with the JOC. The decisions made by these organizations are not communicated effectively through the producer firm. Time necessary to make decisions and the bureaucracy have the effect of slowing the capacity of the producer.

Lacks the direct support from the hierarchy.

When no one is reading from the same page, it seems that the administration is moving in different directions from the technical groups. For cost reasons, having everyone reading from the same page isn’t a luxury but a necessity.

Successes and / or failures are not identified, shared or learned explicitly by any of the participating organizations. Knowledge is held tacitly, limited amounts of knowledge is codified or make explicit.

As decisions and strategies are confused, the ability to learn from the decisions is lost. Innovation is an iterative process based on the success and failure and the history of the property. In a science and applied engineering business that requires more scientific effort for each barrel of oil produced, the decision history and understanding of the underlying knowledge of the property become necessities.

Eliminates initiative and innovation. No tolerance for risk taking or experimentation that is required for innovation.

Building on the previous point regarding success or failures, when no one is held accountable for the decisions that were made, initiative and innovation fall to the sidelines.

No regulatory or internal financial reporting requirements.

The standard reporting of an interest in a JOC is fairly standard. People, Ideas & Objects have published a Technical Vision of how Information Technology will change in the near future. This Technical Vision foresees a substantial increase in the volume of data that is available to a producer. With the Performance & Evaluation and Analytics & Statistics modules, the producer can expand their use of this data in innovative ways.

The hierarchically based organization is an impediment to future progress.

This has been discussed by many. Although People, Ideas & Objects subscribe to this thinking, we are offering a viable solution by recognizing the Joint Operating Committee and developing an alternative governance structure in the Military Command & Control Metaphor in the Draft Specification.

Capacity to replace reserves has become logistically, operationally and organizationally constrained.

The long term perspective of a producer firm is reflected in their reserves. To expand their reserves a producer has a scientific capability, that in addition to their reserves, are its critical competitive advantages. These capabilities are the differences between success and failure.

Capacity to meet the market demand is diminishing.

The overall effect of these points is that the ability of the industry to expand its productive capability has stalled. As the world has more people entering the middle class, the lack of market supplies of energy will bring significant societal issues to all concerned.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

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Royalty Policies & Procedures

In 1992 the Alberta Legislature enacted "Royalty Simplification". Conceived as a benefit for industry and the administration to reduce the burden in calculating and filing gas royalties. This initiative was to be achievable through a heavy reliance on Information Technology. A significant and ambitious program that promised greater ease for both government and industry. It's now almost eighteen years since that legislation was passed, how have things gone? The only conclusion that you could come to is; why would industry ever want to develop an accurate system in determining and remitting royalties? Is accuracy of royalty payments within their business interests?

Apparently not. To date nothing tangible has been built by any producer or software vendor and no plans currently exist to build a system. Within People, Ideas & Objects there is no calculation of royalties included in the Draft Specification. There is a place in the Joint Account to record the royalties that are due, but it will have no basis in fact or necessarily be in compliance with the regulations supporting those royalty assessments. It's an all-or-nothing proposition in terms of making the correct calculations. Therefore in today's marketplace the burden has fallen to the Alberta Government to assess invoices to the producers based on what they believe to be volumetric variances.

In 2009 Alberta's Auditor General reported the amount of royalty deficiencies may be upward of a quarter billion dollars. To be honest he really didn't know! What is known is that the industry will not spend a penny on royalty compliance software. Therefore why would People, Ideas & Objects expend producers money to meet the Alberta or any other jurisdictions royalty calculation? Who's responsibility is to ensure compliance and accuracy? Although it was conceived as a self assessing system, the governments ability to assess invoices for deemed deficiencies alleviates the producers of the responsibility to accurately calculate the royalty obligation.

In 1997 the Alberta government held a meeting with the software developers and asked why there was no usable software in the market. It was suggested that to build royalty based compliant system it would cost $40 million per software vendor. Where would this money come from? No investor or producer is willing to pay that cost. And therefore that is where we stand.

Unless Alberta, Saskatchewan, British Columbia, Mexico, Texas, Louisiana, Libya, Saudi Arabia, Petronas and others want to fund the systems development costs of royalty compliance, People, Ideas & Objects would not use any producer funds to build a system that is the responsibility of the royalty holder. In Alberta that is the provincial government and they have over $10 billion in annual royalty income, it is therefore their responsibility to ensure that they are collecting the right amount from the producers.

Whether the Alberta government would fund the costs of developing royalty compliance in People, Ideas & Objects is unknown. If the Auditor General has a perceived shortfall, that is the government's problem. How much an individual producer is overpaying could also be unnecessarily high. Royalties like taxes, have opportunities and issues with how the royalties are calculated. Those producers that are able to approach their royalty strategy aggressively have a substantial benefit in lower royalties and as a result, higher margins then other producers.

People, Ideas & Objects would like to build a fully compliant and accurate royalty system for all the jurisdictions in the world. Software, as we see in this discussion, is a small portion of the entire picture. The Community of Independent Service Providers is where the tacit knowledge exists in calculating accurate and fair royalty obligations. They are the ones that can employ the aggressive strategies on behalf of their producer clients, using the People, Ideas & Objects prospective Royalty Modules for the calculations. Software that is funded by the Alberta Government and verified to be accurate by Alberta's Auditor General.

If your an enlightened producer, an oil and gas investor or shareholder, who would be interested in funding these software developments, please follow our Funding Policies & Procedures. If your a government that collects royalties for oil and gas, and are concerned about the accuracy of your royalty income, please email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Framework Alignment

One of the attributes of an SAP system is the ability to maintain the corporate entities compliance and governance. When a firm needs reporting to the SEC or the various tax authorities, SAP provides a solid foundation or framework for that requirement.

In oil and gas the Joint Operating Committee is the legal, financial, cultural, communication and operational decision making framework. It is the business of the business of the oil and gas industry and SAP knows nothing of its existence.

What People, Ideas & Objects is developing is a replacement for the SAP ERP system. One that is purpose built and designed by its users for the oil and gas producer. A system that aligns the compliance and governance frameworks with the five frameworks of the Joint Operating Committee. An alignment that eliminates the conflict between operational authority and accountability. An alignment that identifies and supports the key attributes of an innovative oil and gas producer.

In my opinion SAP provides the compliance and governance that is necessary for the public oil and gas producer. But these are not the drivers of the business. The Compliance & Governance Module of the People, Ideas & Objects Draft Specification provide the same compliance and governance that SAP provides, however, with several differences. Instead of being the driving reason of the administration of the firm, the compliance and governance are processes that fall out of the actions and processes conducted within the Joint Operating Committee.

One of the major issues that is presented by using the Draft Specification is the governance model. With the Joint Operating Committee taking a larger and more prominent roll in the day to day management of the asset. Influence and contributions come from many different corporate entities. What is needed is a governance method that can appropriately manage the asset and meet the compliance and governance needs of the producers who make up the JOC. These are the reasons that the Draft Specification has developed and introduced the Military Command & Control Metaphor governance model.

Although moving to identifying and supporting the JOC brings issues like the compliance and governance model into question. Methods to overcome these issues are sound and are enabled for one reason, in my opinion. And that is the natural way that the JOC operates within the industry. The Draft Specification is simply aligning itself with not only the five frameworks of the JOC, but the natural way in which the industry operates. This is also the reason why SAP fails in oil and gas, please join me here in building this worthwhile system.

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Exploration facts.

There's news from Reuters and the Calgary Herald that Canadian oil and gas companies costs of finding and producing oil are expected to fall this year. What has to be record prices is the announcement that the cost of replacing one barrel of oil rose to $22.72. It does not mention whether this was attributable to the higher level of engineering and earth science per barrel of oil, or, the lower volume of discoveries of reserves from exploration and production activities.

Irrespective of the specific reason why the price is rising, the same costs in 1999 were only $4.38. (All prices are reflected in Canadian dollars.) What the two articles subtly suggest is the costs associated with drilling and field work were up substantially. I have mentioned many times that the oil and gas company manager operates more as a Seal trainer then someone interested in developing the business they are in. They are only more interested in making themselves look more important by doling out the fish food to the service companies based on a "what have you done for me lately" basis. Between holding their captive audience over lunch to hear how wonderful they are, and talking to the press about how greedy the service industries have become, these oil and gas company managers pretend to have a full slate of work. Nothing could be further from the truth and I would suggest, again, that these people be shown the street as soon as possible. 

I have addressed these issues in the Draft Specification. The ability to develop the service industry is a critical part of an innovative oil and gas industry. The constant boom and bust cycles, and the "this quarter closing" ritual have made it difficult for service companies to develop any long term vision. Make hay while the sunshine's and hunker down when the storms role in are the only two operational strategies. To move forward from an engineering and earth science point of view. The oil and gas companies must approach the service industries with an eye to developing usable and innovative technologies together. The companies receive 100% of the revenues associated with producing oil and gas. When it comes to paying the royalties for those that are entitled to them, or the service companies that help in the exploration and development, the oil and gas company manager treats them as if they are a leach on their otherwise unearned fortune. The Resource Marketplace Module and Research & Capabilities Module address these issues and offer a solution of how the oil and gas and service industries can achieve greater throughput, innovation and capabilities. 

To speak to the elements in the main part of the Reuters and Herald articles. I suggested in the Preliminary Research Report that the engineering and earth science costs per unit of production were going to escalate as a result of the lapsing of the cheap energy era. This difficulty is showing itself in the five fold increase in costs over one decade. If anyone believes this trend will continue, that would bring a $110 / barrel of oil cost within the next decade. I happen to believe the number will be substantially more then five fold, although I have given up my gambling and fortune telling careers.

The power hungry primates that serve as managers at the Canadian oil and gas companies will have much larger budgets to play with. People, Ideas & Objects research shows that oil and gas companies are organizationally constrained. For them to increase their throughput requires more resources. Consistent throughout the Draft Specification is an understanding that re-organization is the only proven method of increasing productivity. Adam Smiths pin shop proved this in the 1700's and we have benefited from specialization and the division of labor since. The need is evident to me. Please join me here.

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Operational Control with Accountability

In an April 16, 2009 podcast on Bloomburg, Nobel Laureate Joseph Stiglitz said;

... I think the depth of the problems remind us of how badly the system functioned before 2007. I mean I think this is the real lesson here, the lesson is not that we've had a little trauma today, the lesson is the system didn't work before the trauma, and it was the failures that were working before the trauma that have lead to the trauma. 

A certain eloquence is the liberty of economists who win the Nobel Prize. We have been in a very backward economy from at least the mid 1990's, in my opinion. If you can imagine trying to raise funds to eliminate the bureaucracy when employees homes were hitting the stratosphere along with there stock options. Some guy suggesting failure of the oil and gas firms. And the need to build systems to support a more innovative and scientific focus; received the old heave-ho. 

But times are changing, people are not so much sold on their home, stock options, retirement and other pipe dreams. The security that was attained by having shortages of eligible workers in the industry, provided a false and diversionary motivation. They now see the writing on the wall and it is here at People, Ideas & Objects where they see a more realistic future by participating in the Community of Independent Service Providers. This is at least an alternative future they are now willing to consider. 

The number of issues that were clearly evident to Joseph Stiglitz will be captured in many of his future papers. One of the issues that I was seeking to resolve is the separation of accountability and operational control. Once you remove the accountability for decisions, you lose the ability to learn from the success and failure of those decisions. Learning is the key to innovation. Where are the decisions made in the energy sector?

If we recall, it is the Joint Operating Committee (JOC) which holds the authority for the operational decisions. For the past number of years I have marvelled at the skill and audacity of the CFO's of the producer firms standing up and stating that the firm would grow production by 10%. This always struck me as comical as the individual generally has no authority to make that promise come true. How is a CFO going to increase production by 10% in the current fiscal period? If they were legitimately able to attain what they boasted, why have they stopped the bravado? We certainly could stand to have a number of CFO's stand up today and state, unequivocally, that production would increase. Please join me here. 

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