People, Ideas & Objects proposes Revenue Per Employee as a discretionary method for determining the charge-out rates of engineers and geologists deployed by producer firms to Joint Operating Committees. Its purpose is to establish a consistent commercial basis for compensating the producer supplying the capability. That compensation supports the continued development of the people, knowledge and organizational capabilities on which profitable oil & gas operations depend.
Producers maintain two principal competitive advantages: their land & asset base and their earth science & engineering capabilities. Synallagi provides the means to earn revenue from both. Alongside petroleum production, a producer can earn a second revenue stream by deploying its specialized capabilities to the Joint Operating Committees in which it participates. This second revenue stream is intended, at a minimum, to recover the full cost of building, maintaining and advancing those capabilities. Achieving that objective requires appropriate commercial terms, sufficient demand and effective deployment.
Pooling establishes the organizational basis for this arrangement. Within Synallagi’s design, the Joint Operating Committee assembles the expertise its properties require from participating producers and the marketplace or Pangea. Each producer can deepen its specialization while drawing on complementary capabilities contributed by others. This reduces the duplication associated with expecting every producer to maintain the full range of technical resources required for every operating circumstance. Revenue Per Employee provides one proposed means of pricing the producer’s contribution to that pooled capability.
The sharing of non-rival costs supports this approach. Professor Paul Romer distinguishes reusable knowledge from the human effort required to develop and apply it. A method can inform work on several properties, while the specialist’s time remains scarce. Synallagi combines wider authorized use of knowledge with identifiable assignments and compensation for the people applying it. The costs of developing a capability can therefore be recovered across the engagements that benefit from its use. Romer, “Human Capital and Knowledge.”
An engineer or geologist brings more than an isolated set of personal qualifications to an engagement. Their contribution may draw on the producer’s research, operating experience, technical methods, software, data and supporting expertise. The proposed Revenue Per Employee factor recognizes this organizational setting when establishing a charging reference. The engagement must identify the capability being supplied and the resources and rights included in its price.
At its simplest, Revenue Per Employee relates a producer’s defined revenue to its defined employee base over a specified period. Using that relationship for charge-out purposes requires an industry-based standard methodology. Our user community must establish which revenues are included, how employees are counted, the measurement period, the conversion to a time-based rate and the treatment of professional grades. Comparability also requires consistent treatment of material changes in the business and its use of external resources. An annual revenue figure alone is insufficient to establish an hourly charge.
Use of Revenue Per Employee is discretionary. Where participants select it, they apply the common methodology and agree to the resulting commercial terms. Consistency in the calculation allows the parties to understand the basis of a proposed charge and compare engagements meaningfully.
The original proposal illustrates how professional grades might differentiate rates within a producer:
Professional grade
Illustrative percentage of the applicable factor
Junior
50%
Intermediate
75%
Senior
90%
These percentages remain proposals for evaluation and agreement. Their application requires a defined time conversion and an approved rate basis. The producer’s reference factor can be common to its participating personnel while the applicable grade, responsibility and agreed terms distinguish individual charges. The resulting charge-out rate is the price of the supplied service; employment compensation remains a separate arrangement.
The proposal provides for monthly updates to the Revenue Per Employee factor. Each engagement must retain the factor, methodology, grade, authorized rate and effective period supporting its charges. Subsequent updates must preserve the basis on which earlier work was commissioned and performed. Any amendment must be identifiable and authorized through the applicable arrangements. Detailed calculation and amendment rules remain part of the methodology to be developed with our user community.
Synallagi supports producers of every size through their participation in Joint Operating Committees. No special small-producer or start-up rate floor applies. A new producer may possess valuable capabilities before establishing a representative petroleum revenue history. Its access to capability deployment remains available, with compensation established through an appropriate agreed arrangement. The detailed methodology must address the circumstances in which Revenue Per Employee can provide a meaningful charging basis.
The Work Order connects the commercial arrangement with the work performed. It identifies the supplying party, the individual’s assignment, authorized time and resources, the applicable rate and the account benefiting from the work. Charges follow their approved purpose to the appropriate AFE, Lease or internal account, with capital and operating treatment preserved. The Work Order is an implementation of the Accounting Voucher, linking deployment with the accounting evidence required to process the transaction. Partnership Accounting addresses the applicable joint-account allocations, and the responsible Accounting Voucher processes carry the consequences into the General Ledger.
This provides a traceable basis for recognizing the cost to the Joint Operating Committee and the revenue earned by the producer supplying the capability. The producer’s actual costs of developing and maintaining that capability must also remain visible. Comparing those costs with deployment revenue shows whether the second revenue stream is achieving its intended purpose. Shared costs and other authorized charges require explicit treatment so that the same expenditure is not recovered twice through overlapping charges.
Revenue Per Employee also requires careful interpretation. Commodity prices, the quality and maturity of the asset base, prior capital investment, outsourcing and employee-count conventions can all affect the ratio. A producer’s revenue may increase substantially without a corresponding change in an individual specialist’s contribution. The factor therefore serves as a charging reference whose usefulness must be assessed alongside the underlying business circumstances. Profitability and the value of a particular engagement require further evidence.
That evidence begins with the work commissioned. The Joint Operating Committee needs an identifiable technical objective, an agreed scope and an expected commercial benefit. Subsequent evaluation connects the work performed with the observed result, including relevant costs and changes in assumptions. Profitable reserve expansion, improvements in production economics, avoided expenditure and cost reductions provide more useful evidence than an increase in gross revenue alone. Commodity-price changes, concurrent work and allocation changes must be considered when assessing the specialist’s contribution.
The Synallagi Targeting Framework is being developed to support the evaluation, monetization and distribution of proven incremental value created by engineers and geologists. Compensation under that framework is additional to the agreed hourly charge-out arrangement or salary and depends on authorized commercial terms. Revenue Per Employee does not establish an automatic entitlement to that additional compensation. Where intellectual property contributes to the result, the engagement must preserve the applicable ownership, licensing and use rights. The detailed methods for attribution, verification and compensation remain for development.
Professor Giovanni Dosi’s research helps explain why these distinctions matter. In Sources, Procedures, and Microeconomic Effects of Innovation, he describes technological innovation as problem solving that combines discovery, creation, experience and formal knowledge. Much of the capability involved is tacit and specific to the people and organizations undertaking the work. Our application of this reasoning is that useful innovation must be evaluated through the problems addressed and the results achieved. Dosi (1988), pp. 1125–1126.
People, Ideas & Objects’ criticism of the industry concerns the organizational and commercial conditions under which its technical capabilities are employed. Engineers and geologists work within the investment decisions, operating priorities, information systems and authority structures established around them. Their ability to improve results depends partly on whether those arrangements allow them to identify a problem, obtain the necessary resources and carry an economically sound response into effect.
If an architect specifies an inadequate design and unsuitable materials, the engineers subsequently asked to correct the consequences inherit constraints created before their work began. Oil & gas professionals face an equivalent difficulty when technical achievement is measured by production growth while capital recovery and property profitability remain unresolved. Greater technical effort cannot, by itself, correct an organizational model that continues to direct resources toward uneconomic outcomes.
Synallagi connects technical responsibility with operational authority, financial visibility and compensation. Revenue Per Employee contributes to that architecture by providing a proposed commercial basis for deploying and sustaining producers’ specialized capabilities. Its success must be judged by whether those capabilities remain economically viable and improve the results of the properties they serve. Everything undertaken in Synallagi is focused on providing the most profitable means of oil & gas operations, everywhere and always.
People, Ideas & Objects developed a factor that defines what price engineers and geologists in producer firms will be charged out to the various internal or external Joint Operating Committees. What objective criteria could be used to determine the value of an individual's time while working for a joint account? How representative is that factor of the firm that employs them? Would all resources of that firm be assessed at that same rate? What about start-ups and small producers? What rate would they use? These questions are answered in the Preliminary Specifications Revenue Per Employee as the basis of determining these charge out rates.
The Preliminary Specification resolves the anticipated shortfall in earth science and engineering resources by eliminating the “operator” role in the industry. People, Ideas & Objects believe that automation, specialization and the division of labor are the only means to approach this limited resource base and the challenging volume of work our future demands. Having each producer firm build its own specialized "operator" level of capabilities and capacities would be too burdensome for any commercial organization. Therefore we used Professor Paul Romers’ non-rival cost approach. Where we’ve made these resources shared and shareable across the Joint Operating Committees the producer firms participate in. Each member of the Joint Operating Committee pools their own specialized expertise to aggregate what the property needs. Consulting firms fill in the lower level capacities and capabilities to complete the overall offering.
Revenue Per Employee is a unique attribute in oil & gas. It has a wide range of variance between producers and we can draw significant meaning from these values. Although I have not run the numbers lately, it can easily vary between $1 and $4 million per employee. Which denotes an hourly revenue of $571 to $2,285. It is therefore reasonable to assume that each of these individuals would generate the level of value represented by the producer firm that employs them. This value is represented in each producer's employees' individual skills, knowledge and talent but also in the firm's capacities and capabilities. If we assume that an industry agreement is reached in which percentages of those revenues per employee can be assigned to, for example, junior, intermediate and senior engineers at 50, 75 and 90% of the Revenue Per Employee factor then these would form the individuals charge out rate for purposes of the time they spend on any Joint Operating Committee or other activity. Their hours being aggregated in the Work Order, the percentage value of Revenue Per Employee their position is charged out at. In addition, the monthly updated Revenue Per Employee value is contained within the Work Order. The allocation of employee costs and billing to joint accounts will be handled through a Work Order, which is an Accounting Voucher. This is based on the AFE, Lease or internal account the employee assigns their work to. Revenue Per Employee minimum values attained by the lowest 25 producers might be averaged. This is so that start-up and small producers are not adversely affected by their firm's size and its production profile. Establishing a floor for charge-out rates across the industry.
So what do we have? We’ve run some calculations that “might” prove that one producer is innovative. What does that prove? That depends on what innovation means. Professor Giovanni Dosi states
In very general terms, technological innovation involves or is the solution to problems. In other words, an innovative solution to a certain problem involves ‘discovery’ (of the problem) and ‘creation’ since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or ‘tacit-ness’ on the part of the inventors who discover the creative solution. pp. 1125 - 1126.
People, Ideas & Objects argue oil & gas has been mismanaged by its officers and directors. The resources available to industry in the fields of earth science and engineering are unparalleled. I’ve never stated otherwise. However, if an architect specifies a building will be built with subgrade materials and poor design, the engineers assigned to correct the consequential issues of those initial poor decisions, half way through the project are limited in what they can do. If People, Ideas & Objects have learned anything from the obstinance and inaction of these officers and directors, it is that engineers and geologists are well aware of the issue.
Additionally, they know the culture that secures it and the need to eliminate it. Are working constructively within these constraints and dealing with them. People, Ideas & Objects Preliminary Specification attempts to resolve the issue by changing the industry culture to performance. Our goal is to provide the most profitable means of oil & gas operations for dynamic, innovative, accountable, and profitable producers everywhere and always. To fulfill their obligations and duties, engineers and geologists must operate in the current financial environment. In a hostile financial environment, a successful career is unlikely. They are therefore aware that the current culture cannot handle the complex and challenging issues the oil & gas sector faces in the future.