We now focus on the Accounting Voucher module. The interactions between the Accounting Voucher and the Partnership Accounting modules of the Preliminary Specification are naturally quite significant. The Accounting Voucher is unique in that it provides the producer with the ability to design transactions and specific accounting voucher templates. For example, the Material Balance Report. These are not innovations producers will use to become more innovative. Instead, they are intended to ensure that innovative producer processes are actively defined and supported throughout the People, Ideas & Objects application modules. When business is a science, as it is in oil & gas, it would be in the producer's interest to remain open and flexible in both its scientific and business approach. The Accounting Voucher and Partnership Accounting modules provide this organizational flexibility.
These two modules operate as follows. The Accounting Voucher documents the transactions. Partnership Accounting reports on transactions. Accounting Vouchers remain open for one accounting period and are subject to the same closing process familiar and traditional in the accounting world.
We noted in the Partnership Accounting module how our Work Order provided producers with the ability to form and participate in working groups. Providing flexibility in participating and accounting for these working groups. This flexibility is what is being sought by the rest of the producer firm and Joint Operating Committee from these accounting modules. Elimination of bureaucratic inertia that impedes these activities today makes these modules critical to producers innovation as much as the Research & Capabilities or Knowledge & Learning modules contribute.
The People, Ideas & Objects Accounting Voucher module will provide the means for the Preliminary Specification to “manage the disparate inter-dependencies of modularity theory and Transaction Cost Economics.” That is a summary application of Professor Baldwin's comments and theories. And therefore this Accounting Voucher is one of the key crossroads to all other modules in People, Ideas & Objects, our user community and their service provider organizations Cloud Administration & Accounting for Oil & Gas software and service. What this means is people need to go beyond just processing transactions, through automation. Instead, they should move toward the definition and design of transactions to optimize the producer's business and Joint Operating Committees' performance.
One of the implications of using the People, Ideas & Objects system is that each partner within each Joint Operating Committee will have authorized access to the pertinent Accounting Vouchers during the time a Voucher is open or closed. Each of the producers involved in the Joint Operating Committee can therefore access the Accounting Voucher. This will enable them to have costs / revenues distributed to the other partners involved in the Joint Operating Committee based on the AFE or operations budget. This is one of the key differences we discussed in the Petroleum Lease, and Resource Marketplace modules. Partners contribute to the joint account as equal participants with the role of “operator” relegated to a thing of the past. (Note that each participant can charge their own account with their own 100% charges. These charges are to their private accounts and therefore not seen by any of the other participants.)
Cost control becomes an issue when everyone can charge freely to the joint account. A careful reading of the previous paragraph reveals that I did not say "charge freely." Cost control comes about as a result of the traditional budgetary control of AFE and the Work Order system that we’ve discussed in the Partnership Accounting module. Without pre-approval by the partnership, no transactions can be processed by the People, Ideas & Objects Preliminary Specifications Accounting Voucher. And as we’ve seen in the discussion of the Security & Access Control module, few will have authorization to “charge freely” to the joint account in any form or fashion. With the traditional ability to charge to an AFE or Cost Center, the need to have a purchase order system, ensuring that an appropriate bidding and contracting process is in place, no unauthorized amount will be accepted in the system. There is also the fact that each voucher needs to be approved for payment before any money is expended. This approval would need to consider the Joint Operating Committee budget authority.
As one can envision these Joint Operating Committee - Accounting Vouchers can become large as they include the entire month's business of the property. Accountants would be frustrated at month-end trying to get these Accounting Vouchers closed if they had to seek approvals and close each transaction within the appropriate small window of time involved at month-end. Needless to say that each transaction within an Accounting Voucher is a small subset of the larger Accounting Voucher. It can be dealt with as a stand alone individual item. Seeking its own approvals and authorizations that deal with just the transactions domain.
What is different in the People, Ideas & Objects Accounting Voucher system vs what exists today is the elimination of the operator designation. The capabilities for each producer to house the state of the art earth science and engineering resources necessary to run all of their properties within one oil & gas firm are believed to be beyond the scope of what is possible in the future. Our solution in the Preliminary Specification is the further specialization and division of labor of the earth science and engineering capabilities of each producer firm and the pooling of these resources of the partnership within the Joint Operating Committee.
The Material Balance Report is an Accounting Voucher that is unique and has the following characteristics. It is designed to automate the production, revenue, royalties, marketing and other processes of producer firms and Joint Operating Committees. It is this type of specialized use of an Accounting Voucher that our user community should consider applying to other situations when contributing to the Preliminary Specifications development.
What is proposed in the People, Ideas & Objects Material Balance Report is that for an Accounting Voucher to close it must balance the financial debits and credits. It must also balance from a volumetric perspective material balance, system balance and partnership balance. Each of these volumetric perspectives is accessed through a different “mode” within the voucher. This is to make the necessary changes to correct any volumetric imbalances or errors from that specific perspective.
The Joint Operating Committee exists as a result of legal agreements and in oil men and women's minds. It therefore doesn’t “own” anything or incur costs. All joint account charges must clear in the month they're incurred. It is the same for volumetric information. The Joint Operating Committee "Accounting Voucher" balances to zero in terms of costs and volumes each month by clearing its charges to the partnership and royalty owners of the property. Clearings are done after the balance has been reached. That does not guarantee that the facility will remain in balance. Adjustments and amendments to the Accounting Voucher may occur. These may happen and they can be subsequently balanced and cleared to the partnership accounts in the same manner as before. And that is on an automated basis. The point of the exercise is to have the Joint Operating Committee business captured in the Material Balance Report. This is an integral part of the Accounting Voucher. Essentially all three are the same thing, the Joint Operating Committee, Accounting Voucher, and Material Balance Report. An integrity of reporting that is embedded within the accounting systems that are as rigid as debits must equal credits.
We now discuss contracts regarding petroleum products produced by a specific Joint Operating Committee. Contracts that include marketing for gas, oil, natural gas liquids, or contracts for gathering, processing charges. If a stream of product flows through a facility, then a contract for processing or sale would be attached to it. The ability to attach the contract to the stream would enable the Accounting Voucher to establish the associated accounting for the gathering or processing of charges / sales for that stream. These charges (invoices) or sales (receipts) are generated in automated fashion by the Preliminary Specification.
The Accounting Voucher is for lack of a better term a template that is built upon as time passes. Each month as the property changes, these changes are captured within each Accounting Voucher. The template is renewed each month with the accumulation of the property history, data from the Petroleum Lease Marketplace and other modules. If an additional contract was added for production from an additional well, that contract stream and the newly acquired well would be represented in the next and every subsequent month's Accounting Vouchers. The Accounting Voucher template documents the property changes over time. Providing the base for the subsequent automation of business processes. These templates then provide a historical means to recreate transactions, amendments and adjustments in subsequent periods. This is based on the environment at that time.
Critical to the “definition and design” of transactions is the fact that they balance themselves out. If the debits and credits were not in balance at the end of the day, the automation of the systems and the accountants would not be doing their jobs. Volumetric reporting is no different. If in the Material Balance Reports was out of balance (call this material balance), or were not balancing the inputs and outputs to other Material Balance Reports (call this system balance), or the internal accounting of those volumes to the partners, royalty holders and others were out of balance (call this partnership balance) the accountants and systems would not be doing their jobs. Essentially, closing an Accounting Voucher involves not only balancing the debits and credits from a financial perspective. They will also need to ensure that the material, system and partnership volumes reported in the Material Balance Report are also balanced. Without these systems in balance, the Accounting Voucher will not clear or close.
This imposes a rather strict condition on the quality of the information accepted into the People, Ideas & Objects Accounting Voucher module. Precluding the acceptance of a voucher due to the inability to balance a volumetric requirement holds the system up for common occurrences. What if volumetric information is unavailable? What if the information is part of the normal amendment process? Then we are left with traditional accounting methods for these types of issues. An accrual of the volumes or values necessary to achieve the required balance should be processed in the current month. Most production processes are amended for up to 90 days. These accruals would then be automatically reversed in the following accounting months' Material Balance Report. What is different from existing systems is that we force them to be volumetrically balanced. Not just inputting key variables but imposing and enforcing the facts of what actually happened at the Joint Operating Committee. If it is subject to a comprehensive Construction, Ownership and Operation agreement, what is agreed to be accounted in terms of production allocation will be conducted before the close of the Accounting Voucher. And by that I mean specifically, from the point of view of either dealing with the contractual arrangement as dictated by the governing agreements. This is the determining factor for production allocation. Or if the agreement refers to chemical composition as the basis of production allocation, both of these methods will be available in the Material Balance Report of the Accounting Voucher in an either, or and mixed environment.
The difference may be subtle but the implications are significant. By enforcing the volumetric balance within the Accounting Voucher itself, the system is forced to keep track of volumes as they are produced and processed over time. Once this is achieved a certain level of unimpeachable integrity is achieved regarding the production data and the automation of detailed processes based on those volumes can begin and be assured to be based on the facts of the facilities and assets data and information captured in other modules. Any subsequent amendments will correct the record.
There are many aspects of this system's management of these processes that are unique and necessary. The reason they have not been undertaken is that the scope and scale of the development undertaken is extensive and beyond what technology could have provided. It is certainly from a budgetary perspective beyond the scale of what any individual major producer would undertake as the value gained would not be there for the individual producer to incur the entire cost, and most certainly well beyond the standard approach of an oil & gas ERP software development solution provider. People, Ideas & Objects aggregate North American producers' software development budgets to make these available through our ERP software and service provider organizations. Those with a comprehensive understanding of these processes will fully appreciate the points I make and the implications involved. This undertaking may be one of the most comprehensive features of the Preliminary Specification. Therefore it is done where development costs are shared and shareable, or non-rival, and driven by our user community vision.
The application of Professor Paul Romer's non-rival or shared software development costs, specialization and the division of labor, and high levels of automation to these complex processes will provide substantial cost savings to each producer. Adding unquantifiable incremental value beyond the specific quantifiable attributes of People, Ideas, and Objects.
One area of the Accounting Voucher where the Preliminary Specification is different is the concept of designing transactions. We should define what we're discussing. Where accountants will spend their time in the future is designing transactions and leaving the processing, mostly through automation as a result of the design of the transactions, to computers. If you’ve read the Preliminary Specification you’ll be aware of the shift towards increased reliance on the marketplace as an organizational method. You'll also understand how the Joint Operating Committee interacts with the market and the producer firm. It will be with that understanding that we can begin to understand the concept of designing transactions. So let us begin with a simple description of the transaction's makeup. From Harvard Professors Carliss Baldwin and Kim Clark’s paper “Where do Transactions come from? A Network Design Perspective on the Theory of the Firm.”
In summary, objects that are transacted must be standardized and counted to the mutual satisfaction of the parties involved. Also in a transaction, there must be valuation on both sides and a backward, compensatory transfer - consideration paid by the buyer to the seller. Each of these activities - standardizing, counting, valuing, compensating - adds a new set of tasks and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction.
Taken as a whole, standardizing, counting, valuing, and paying for transfers give rise to what we call “mundane transaction costs.” p. 15.
Let's use a scenario where a group of producers have several producing wells of natural gas with some liquids production. They are situated next to a large gas plant that processes their gas in exchange for the liquids and markets their gas on the spot market. In this scenario we are evaluating these properties from the perspective of implementing them into the Preliminary Specification. We begin by analyzing the production accounting elements in the Accounting Voucher with the related Production Accounting Service Providers. Production Accounting Service Providers assess their fees based on units of work incurred during a production month. This is for any of the many processes involved and however our user community configures the software during the development of the Preliminary Specification. At each point they’ll assess a fee for their service based on transaction design principles. Our user community designs their work flow from a transactional perspective. Professors Baldwin and Clark.
The user and producer need to deploy knowledge in their own domains, but each needs only a little knowledge about the other's.
If labor is divided between two domains and most task-relevant information hidden with each one, then only a few, relatively simple transfers of material, energy and information need to pass between the domains. The overall network structure will have a thin crossing point at the juncture of the two subnetworks. Furthermore, because the transfers are relatively few and not complex, mundane transaction costs will be low at the thin crossing point. Thus, other things equal, thin crossing points are good places to locate transactions. p. 18.
And
Placing a transaction - a shared definition, a means of counting, and a means of payment - at the completed transfer point allows the decentralized magic of the price system to go to work. p. 22.
Again if there is no production there is no basis for the Production Accounting Service Providers billing. Fulfilling the Preliminary Specifications' decentralized production model objective. This scenario shows how the Production Accounting Service Provider needs to design their transactions to produce the desired result. It also shows how to conduct their service and automate their billings. Additional transactions related to gas production, sales of natural gas, royalties, and payment of the processing fee are designed into an Accounting Voucher. This is the role of the Accounting Voucher for the producer firm and the Joint Operating Committee. Automation of innovative oil & gas industry business processes through transaction design. A production process creates an information unit that triggers the appropriate service providers to conduct their operations on the Joint Operating Committees behalf.
The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on... Frederick Hayek (1945) The Use of Knowledge in Society
The Accounting Voucher has a “Transaction Design Interface” that provides a worksheet for accountants to design transactions. There is a defined process for analyzing these transactions. We will discuss that as we develop the Preliminary Specification. It is worthwhile to note at this point that each Accounting Voucher is used as a template for subsequent months. So once a transaction is designed, it will be reused, and built upon through the implementation of it as an Accounting Voucher template. This will provide the automation invoked each month of production which is supervised through the service provider organizations.
The role of the Accounting Voucher in determining the source of the market or the firm as the originator of the transaction is minimal. However, it ensures the costs of these transactions are minimal. If there was a simple way to describe this purpose of designing transactions it would be as a tool to coordinate the firm's or Joint Operating Committees use of the market. This conceptually falls between transaction costs economics, capabilities, transaction design and automation. All areas Professor Richard Langlois includes in his research. We have also used Professor Carliss Baldwin for her transaction design work. Professor Richard Langlois in his paper "Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization."
However, a new approach to economic organization, here called "the capabilities approach," that places production center stage in the explanation of economic organization, is now emerging. We discuss the sources of this approach and its relation to the mainstream economics of organization. p. 1.
And
"One of our important goals here is to bring the capabilities view more centrally in the ken of economics. We offer it not as a finely honed theory but as a developing area of research whose potential remains relatively untapped. Moreover, we present the capabilities view not as an alternative to the transaction-cost approach but as a complementary area of research" p. 7.
The Accounting Voucher module of the Preliminary Specifications transaction design takes the accountant away from the benign scorekeeping role to the role of active participant in the operation. One that looks at the market from the point of view of how best to coordinate its various elements. This will provide the greatest added value to the firm or Joint Operating Committee. In Richard Langlois' “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization"
A close reading of this passage suggests that Coase's explanation for the emergence of the firm is ultimately a coordination one: the firm is an institution that lowers the costs of qualitative coordination in a world of uncertainty. p. 11.
And this is perhaps one of the most relevant considerations of the work we do here in People, Ideas & Objects, our user community and service providers. Is the realization that each producer firm and each Joint Operating Committee will be unique. That due to their makeup they’re going to be different in material ways. Innovation will have a dramatic impact on how it is measured against each firm or Joint Operating Committee. Specialization and the division of labor, and other aspects of the changes imposed on producers will lead to broad diversity of approaches. The approach will be anything but cookie cutter. However, that does not preclude it from the process of standardization.
Either way it boils down to the same common-sense recognition, namely that individuals - and organizations - are necessarily limited in what they know how to do well. Indeed, the main interest of capabilities view is to understand what is distinctive about firms as unitary, historical organizations of cooperating individuals. p. 17.
Therefore, according to Professor Langlois' research, controlling transaction costs to ensure they are immaterial to firms and Joint Operating Committees. That is to say that they will be the same in all instances. And People, Ideas & Objects assert they will be irrelevant due to standardization through Information Technologies. These costs of coordinating the market will differentiate between firms and Joint Operating Committees. Making the Accounting Voucher module a critical tool in offering the producer firm the most profitable means of oil & gas operations.
... while transaction cost consideration undoubtedly explain why firms come into existence, once most production is carried out within firms and most transactions are firm-firm transactions and not factor-factor transactions, the level of transaction costs will be greatly reduced and the dominant factor determining the institutional structure of production will in general no longer be transaction costs but the relative costs of different firms in organizing particular activities. p 19.
We have been discussing Accounting Vouchers' “Transaction Design Interface” and its purpose as a tool to coordinate the use of markets. We want to ensure that market coordination efforts are consistent with the firm's or Joint Operating Committee objectives. They don’t conflict with the objectives of those who initiate work in Research & Capabilities or Knowledge & Learning or other modules. As we can see coordination through the Accounting Voucher of the Preliminary Specification is focused on the business end of the transaction, not on the operational side. It is a follow-up process invoked once the appropriate qualified vendor has been selected by operations.
The first question most people will have is why are we concerned about the coordination of the markets in the Accounting Voucher? In a comment made to the editor of Capitalism and Society, Professor Richard N. Langlois wrote this comment in response to an argument made by Professors Giovanni Dosi, Alfonso Gambardella, Marco Grazzi and Luigi Orsonigo (2008).
Here again, I think the problem is one of conceptual imprecision. It is perfectly common, and often unobjectionable, to contrast a market and an organization, that is, to contrast the institution called a market and the institution called an organization (such as, notably, a firm). But the opposite of “organization” in the abstract sense is not “market” but disorganization. More helpfully, the opposite of conscious organization is unplanned or spontaneous coordination. In this sense the market-organization spectrum (and similar spectra one could imagine) are arguably orthogonal to the planned-spontaneous spectrum. One could well wonder, as I have (Langlois 1995), whether large organizations do not in fact grow far more as the unplanned consequence of many individual decisions than as the result of the conscious planning of any individual or small group of individuals. And it is certainly the case that, as Alfred Marshall understood, both firms and markets “are structures for promoting the growth of knowledge, and both require conscious organization” (Loasby 1990, p. 120). p. 3.
In today's globalized economy, there are large distances and other considerations between vendors and producers. Leaving market coordination to “spontaneous order” is asking too much of human ingenuity. Particularly with the focus of the industry on a further division of labor and specialization, where the risk and reward of oil & gas operations are so substantial, market coordination or transaction design will be a critical and necessary task to be carried out. Operations may involve more people. Once again it is from a business point of view that we are attempting to influence the operation. How will transactions and business be captured in such a manner that the firm and Joint Operating Committee incur the lowest possible costs from the most efficient methods of these business transactions? From Professor Richard Langlois Economic Institutions and the Boundaries of the Firm: The Case of Business Groups."
As Harvey Leibenstein long ago pointed out, economic growth is always a process of “gap-filling,” that is, of supplying the missing links in the evolving chain of complementary inputs to production. Especially in a developed and well functioning economy, one with what I like to call market-supporting institutions (Langlois 2003), such gap-filling can often proceed in important part through the “spontaneous” action of more-or-less anonymous markets. In other times and places, notably in less-developed economies or in sectors of developed economies undergoing systemic change, gap-filling requires other forms of organization — more internalized and centrally coordinated forms. p. 6.
And
Let’s take a closer look at the nature of the “gaps” involved. Adam Smith tells us in the first sentence of The Wealth of Nations that what accounts for “the greatest improvement in the productive power of labor” is the continual subdivision of that labor (Smith 1776, I.i.1). Growth in the extent of the market makes it economical to specialize labor to tasks and tools, which increases productivity – and productivity is the real wealth of nations. As the benefits of the resulting increases in per capita output find their way into the pockets of consumers, the extent of the market expands further, leading to additional division of labor – and so on in a self-reinforcing process of organizational change and learning (Richardson 1975; Young 1928). p. 7.
We’ve seen over the past several decades that producer firms lack the speed and capacity for change. People, Ideas & Objects asserts this is attributable to producer officers and directors' desire to maintain low accountability levels through poor ERP systems. Today organizations are defined and supported by software, and most particularly ERP software, and they are therefore constrained by them. The Preliminary Specification has chosen the market to deal with this issue instead of cultural difficulties of change and the firm's historical performance as the other choice. There needs to be a means to affect the producer firms' performance trajectory. Specialization and labor division have been the only proven methods to build economic value since 1776. There is a way to access this through the market, which disrupts the culture of the producer firms. A culture that counters profitability and must be dismantled. The addition of transaction cost economics and these tools will enhance the transition. This will facilitate the performance trajectory necessary to achieve profitable energy independence in North America.
The question as to which, the firm or market, to use as the means of production in oil & gas is academic. Geographic and technical diversity is necessary to operate in the North American oil & gas marketplace. This is due to the many levels and types of operations a producer could specialize in, even in today’s market. The answer has always been the market. There is significant conflict and contradiction in the relationship between producers and the service industry. This is due to the treatment the service industry has been subjected to over the past several decades. It is suggested that producers will need to make a deliberate effort to remediate and rebuild the capabilities and capacities necessary to provide profitable energy independence in North America.
The starting point of this rebuilding process for our user community is as follows: If we recall in the Resource Marketplace module the vendors and suppliers maintain their own contact data. Within that data is their key personnel which includes their field staff. They should also include their key business personnel for the purposes of the “Transaction Design Interface” to collaborate on these interfaces. In addition, their financial data and billing information, as well as other critical data and information. This will help the producer firm or Joint Operating Committee efficiently coordinate and process transactions. Lastly a collaborative interface should be provided for everyone within the Accounting Vouchers vendor pool to discuss how the transaction is designed and the template that is used by the specific vendor. Obviously, our software development for the service industry will begin here.
It's very 1970s to think of a Purchase Order system. The 1970’s is the last time I remember anyone using one. (It certainly might be applicable in larger firms, however, I am unaware of this.) The practicality and usefulness of these systems receded in the 1980’s and no one has considered their existence since. Now we talk in terms of Supply-Chains, however oil & gas doesn’t have a “supply-chain” as the term is used. Supply chains are for retail and manufacturing. Purchasing is for oil & gas. I would reiterate that our user community will need to research Oracle’s Purchase Order system to determine if the need and desire exists. I see substantial value in building one and seek to document how that value could be realized.
The Purchase Order system is part of the Accounting Voucher module, which is a necessary part of large capital item processing. The use and application of the AFE, Cost Center or Lease charge code remains the same regardless of Purchase Order existence. There is no change in the coding structure due to the purchase order number. The Accounting Voucher relies on the Purchase Order for further approval of the specific contract dealing with a particular vendor on a specific project. Think of Purchase Orders as designing transactions.
There are a number of cases where the management of the vendor relationship needs to be taken into account. Particularly in oil & gas where the project details are specific and large. Engineering contracts for gas plants, pipelines and facilities are some examples. Situations where the contract must meet certain criteria and the vendor must qualify during the construction process. Producers are concerned that the firm chosen be capable of undertaking the work described. It’s never the lowest cost and the bid wins the contract bidding process. This overall bidding process falls under the larger Purchase Order process of the Preliminary Specifications Accounting Voucher.
Once the vendor has been chosen, the approval of the costs is subject to the contract terms and conditions. Any prepayments or partial payments can be processed based on the strength of the Purchase Orders document. The final payment depends upon satisfactory contract completion. If the contract is subject to holdbacks and other conditions, those would be applied to the Accounting Vouchers payments automatically.
The Purchase Order system provides producers with control over large contracts. Something done frequently in oil & gas. By managing the bidding process and providing control over the contract in terms of making and controlling the payment process. The Purchase Order is a valuable tool in any producer's system. Having these contained within the Accounting Voucher of the Preliminary Specification is the natural placement and method to automate many of these control processes. See also the Resource Marketplace module for discussion of the Oracle Purchasing and Procurement module that has been included as the base of the Preliminary Specification.
Professor Giovanni Dosi’s paper discusses innovation's role in the market economy. It assumes companies in a free market are willing to invest in science and technologies to advance the competitive nature of their product offering or internal processes. The key aspects of Professor Dosi’s theories that make them directly applicable to oil & gas are the application of innovation theories to earth science and engineering disciplines. Oil and gas companies are dependent on these disciplines to search for and produce hydrocarbons successfully. Science and technologies are invested with the implicit expectation of a return on these investments. However, it is also to provide the firm with additional structural competitive advantages by moving their products' costs and / or capabilities beyond the competition. Professor Dosi notes:
Thus, I shall discuss the sources of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search, and the nature of the incentives driving private agents to commit themselves to innovation. p. 1121.
The producer firm is committed to developing earth science and engineering capabilities to advance their competitive advantages. This will enable them to earn a return on this investment? How within the People, Ideas & Objects application does the producer earn a return on their investment in these capabilities? Certainly through enhanced profitability of their land and asset base. This long-term value-adding process is enhanced through direct charges to their Joint Operating Committees to generate and sustain revenues to support their short-term capabilities. That is to say that the earth science and engineering resources pooled into a Joint Operating Committee, have been assigned a specific role within Industrial Command & Control. Their costs are captured in the Partnership Accounting module and produce a “revenue” stream from the producers' capabilities.
The question then becomes what is the charge for the individual during their time working on the Joint Operating Committee? It will be easy to determine the hours worked in the various Joint Operting Committees through the Preliminary Specifications Work Order system. The hourly rate charged would need to include a number of factors. The skills of the individual, the technical resources of the producer firm at the disposal of the individual, and also a measure of the level of innovation of their producer firm. People, Ideas & Objects developed the Revenue Per Employee factor which reflects the overall effective productivity of the firm.
The net result of this is that the revenues generated from this second revenue stream should at least cover the costs of the producer. In some cases, they will have captured a return on their investment in the capabilities they’ve developed within their firm. To proceed on any other basis would be unreasonable.
It comes down to what business the producer is in. Are they in the business of generating profits from producing oil & gas, or are they in the business of generating profits from providing geologists and engineers to the operations they have an interest in? If we look at the competitive advantages of the producer it is the land and asset base, and the earth science and engineering capabilities that they apply to that asset base. Clearly both production and capabilities development are within the scope of the oil & gas producers competitive advantages. To a large extent, the costing of technical resources is not fundamentally different from today's. In today’s market, the operator receives “overhead allowances” for some of these costs. And the payroll burden for individuals is charged directly to the Joint Operating Committee. A key difference between the model proposed here and today is the elimination of the operator role. This is in order to acquire the necessary overall capabilities by pooling technical resources committed by its members.
To take this opportunity to charge the costs of the producer firm's capabilities and earn a return on investment may be an issue for some. In a world where engineers and geologists are in high demand, producers are assessed on their performance based on Revenue Per Employee. This is a competitive and measurable factor. Acquisition of additional technical resources is a difficult process that has investment performance implications for the firm. The ability to at least offset some of the overall costs of technical resources helps to mitigate investments in the short term. This is the purpose for enabling the direct billing of technical resources to the joint account in the Work Order of the Accounting Voucher. The means to maintain and sustain these competitive resources for the long term by recovering their costs from capital and operation activities in the Joint Operating Committees.
When we get to the Research & Capabilities and Knowledge & Learning modules, we will see the development of these capabilities from an innovative point of view. This takes on a different perspective. The ability to capture the costs of a firm's technical resources as a competitive investment, and use them as a source of revenue through the Accounting Voucher is established. Looking at the development of the producer as it exists today, it is somewhat of a paradox as to which is developed first, the land base or the capabilities. With the ability to generate its own immediate source of short term revenue this paradox is resolved in the short term.
Some may suggest that these costs offset the Joint Operating Committee production revenues that would have flowed to the producer anyway. And that may be true. However, in a world where the demand for technical resources are expected to be as significant as some suggest, the need to deal with the problem on a wholesale basis, as the People, Ideas & Objects pooling concept does, is a requirement, and secondly, the assumption that each of the producer firms will develop their technical capabilities may be proven to be false. The cost of the capabilities incurred by the producers will also be realized by the Joint Operating Committees. They'll be challenged to earn a profit to maintain production. Accounting is concerned with accurate and timely recording of costs, this recognition is therefore appropriate.
One thing that we’ve not been able to discuss regarding the Accounting Voucher module of the Preliminary Specification, is that the module is used for entry of all transactions for accounting purposes. Whether it is through the Material Balance Report, which is encapsulated within its own voucher, or a simple accounts payable voucher, everything entered into the People, Ideas & Objects system is through an Accounting Voucher. And there will be different types of vouchers for different types of charges. Each with their respective voucher numbering. (For example all Material Balance Reports will be 200,000 series.) Business is also, in many cases, repetitive. The ability to reuse any Accounting Voucher as a template for subsequent months will be a feature of the People, Ideas & Objects Preliminary Specification.
Use of Oracle Cloud ERP as the base of the Preliminary Specification provides oil & gas producers, our user community and their service providers with a myriad of benefits. The sharing of Information Technology infrastructure includes Oracle’s premier software and services products. Their dedication to quality and performance. The addition of the Intellectual Property of the Preliminary Specification and specifically the seven Organizational Constructs it contains adds an element of oil & gas specific quality and performance. It is our user community and their service provider organizations that make the project more valuable to producers. Ability to share administrative and accounting infrastructure across the industry. Establishing an industry-wide capability available to all producers which will be supported and serviced by a permanent software development and user community.
One of the basic assumptions of the People, Ideas & Objects Preliminary Specification is the pooling concept that replaces the “operator” designation in use today. Therefore many of the participants in the Joint Operating Committee will actively manage the property on an ongoing basis. As a result some of the Accounting Vouchers will be open to charges from multiple producers represented on the Joint Operating Committees that the producer firm is a participant in. The revenue, capital and operations of each of the Joint Operating Committees accounts are open to the direct debit and credit charges of all of the participants in the Joint Operating Committee.
The ability for each producer to have the just-in-time earth science and engineering capabilities available for all the properties they manage requires them to have unused and unusable surplus capabilities. These unused and unusable capabilities, on an industry wide basis, are leading to unnecessary resource shortages that are no longer affordable. Specialization and the division of labor will need to be employed by the producer in terms of their earth science and engineering capabilities. Having these critical resources pooled into a Joint Operating Committee releases these previously hoarded unused and unusable resources. The People, Ideas & Objects pooling concept also implies some producers will contribute disproportionately to the property. Producers need to contribute their skills, knowledge, experience and ideas to an innovative oil & gas industry. Therefore each of these producers need to have the ability to charge for their earth science and engineering capabilities to the joint account. All charges are subject to the AFE, Lease or Work Orders budget requirements and cost control remains the domain of the Joint Operating Committees.
Professor Dosi (1988) states that profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives.” (p. 1135) Professor Dosi introduces the theory of Schmookler (1966) and asks “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both”? (p. 1135) Schmookler believed in differing degrees of economic activity derived from the same innovative inputs. It’s People, Ideas & Objects' assertion that "different incentive structures” and “different opportunities” can also be facilitated and constrained by the administrative ease in which producers operate.
It is within the Accounting Voucher where the Material Balance Report is embedded within the Accounting Voucher itself. Inheriting the ability to balance the financial aspects of the voucher, but also the volumetric information. It is at that point, when the volumetric information attains the integrity of the accounting system, that the automation of the various processes based on the volumetric data can begin.
If the producers are confident that the deal is accurately captured in the operation, it’s appropriately reported through the Accounting Voucher and throughout the Preliminary Specification. And the operation reports a substantial and consistent profit. Then they know that their innovations are working, their systems are working and the alignment of the legal, financial, operational decision making, cultural, communication, innovation, strategic, compliance and governance frameworks is achieved.