The Petroleum Lease Marketplace is the most interesting marketplace module as its objective is to replicate virtually what the physical oil & gas marketplace is. That begins with Petroleum Leases.
When we replicate the physical oil & gas marketplace, the Petroleum Lease is the source document that is the common denominator of all activity and ownership within the industry. Any physical oil & gas assets will be attached to some lease, agreement, rights or concession granting the holders the rights and privileges of ownership, lease or rental. These are the things available in a marketplace. They are what is purchased and sold, bargained and traded for. They are the things people are recruited to provide services for. A marketplace is a dynamic and evolving commercially oriented hub of activity. That is what we replicate in the Petroleum Lease Marketplace.
When we look at the types of work carried out in the Petroleum Lease Marketplace we see a large group of administrators working within different areas within a producer firm. Whether it be the Land or Legal department, Production or Exploration Administration staff or Accounting people, all of these groups have an interest in the information, people, assets, documents, processes and functionality contained within the Petroleum Lease Marketplace.
These groups are concerned with the information and data contained within the module. Its accuracy, access, and use by those within their firm, but also within the Joint Operating Committees that their firm has interests in. Most of this data will be similar to their firms' partners' data. A significant amount of the data has been generated cooperatively and collaboratively by those partnerships, as well as through the involvement of regulatory bodies.
For example AFE’s, Mail Ballots, agreements, are generated through interactions by each participant in the Joint Operating Committee. How much of this data and information could be held by the Joint Operating Committee with an interface to each firm? This is a question that should be answered with significant research during software development. To answer that question, we need to answer who those people we mentioned, the Land, Legal, Production and Exploration Administration and Accounting staff work for. The implications would be significant. In the Preliminary Specification these resources are reorganized into service providers owned and operated by our user community members.
One of the greatest opportunities in developing this system is to address automation, the division of labor and specialization. To take these people’s work and reorganize it across the industry. This is so that it was focused on the Joint Operating Committee but very specialized in their tasks. And apply those skills across the entire industry, a geographical region, or another classification. This could increase oil & gas industry productivity and cost savings. That is to say that an individual would work for a process that is billed to 1,000 Joint Operating Committees that represent 200 Companies. By doing so the industry's profitability is materially enhanced by making these costs variable, based on profitable production. Ensuring the industry realizes People, Ideas, and Objects' $25.5 to $45.5 trillion value proposition.
When we conducted our research, Professor Langlois noted that the expansion of the division of labor and further specialization were through "gap-filling." Work that wasn’t being done before, could-should-would, be nice if it was done now. The process of putting a person in place today might seem simple. However, what about our user community and software development capability to support that person in their newly created position? As I’ve suggested before, should we consider these administrative positions from the point of view that these people will work for a process? As opposed to any one company or Joint Operating Committee?
Employing the marketplace metaphor in the modules that make up the People, Ideas & Objects Preliminary Specification was deemed necessary. There had been discussion of exchanges and web services in the past and those never quite captured the reality of what was possible. I think exchanges are technological solutions to resolve non-existent business problems. While the marketplace is a business reality. A reality that we can build a virtual technical environment that emulates the marketplace. A difference in how we approach building these systems.
The next aspect was to determine what marketplaces existed in oil & gas that the technology would need to replicate? Firstly, the marketplace for financial resources, the marketplace for people, vendors and the service industry, and finally, P&NG leases. We developed three modules that replicate these three markets within the People, Ideas & Objects Preliminary Specification. These are marketplaces backed up by our user community and software development capability that can evolve the applications as these markets evolve.
The working interest distribution for production from a well is fairly straightforward. Other than the changes that might occur such as before and after casing point elections, before and after payout, acquisitions etc, the values remain relatively constant over the property's life. However, for gas plants and related facilities the distribution of production to the owners of the facilities is anything but constant. This brings into play a multitude of different ways to treat ownership of production and processing costs. The manner in which accounting for that production and processing costs is of material concern to the owners of those facilities. It is the difference between earning a profit. Inability to comprehend the scale of the problem has led many to disrupt facility owners' operations.
The problem comes down to the fact that there are two methods to calculate the working interest distribution of the product throughput through the facilities. One is to take the literal chemical reality of the situation. The other is to take what is agreed to by the owners and operators of the facilities in the Construction, Ownership & Operation (CO&O) agreement. The two worlds could not be more different. When it's different, the agreed-to situation rules the day. The facts of the agreement are dynamic and create unique variances. These variances depend on the situation that day. Irrespective of the production allocation, the Material Balance Report, a key report of the Partnership Accounting and Petroleum Lease Marketplace modules of the Preliminary Specification, will still balance. It will also balance with other reports. The issue is the facility owners or producers whose products are processed through that plant or facility. Will have either sold or purchased product, or conducted some transaction with their production at that facility that needs to be accounted for.
To handle that day-to-day activity there needs to be an ability for the plant owners to account for the transactions occurring within the plant based on the CO&O. Relying on the Partnership Accounting module will be part of what they will use for plant accounting. However, because they can’t take a literal working interest distribution and have to rely on a dynamic distribution based on the CO&O, a special algorithm will need to be built within the Petroleum Lease Marketplace to deal with the CO&O. This algorithm captures the production allocation methodology used in agreements. This algorithm will be dynamic depending on the gas composition, production factors and activities at the plant, but it is also not fixed. The algorithm is updated monthly. As new wells are brought on, new functional units are built, new products are sold to new purchasers etc. These need to be considered as part of the algorithm.
In the current accounting world these “algorithms” are managed within spreadsheets. Not my favorite place to put critical business information. I think that our user community can embed these algorithms within the system so that they are more “mission critical” and less subject to human error. People, Ideas & Objects Material Balance Report contains these algorithms.
As a plant owner the days of major changes are not over yet. There are still equalizations to calculate. These equalizations are sometimes run monthly, but mostly annually. They are done to correct owners' over- or under-utilization. If an owner owns 25% of the facility, they will not be billed for their throughput. However, at the end of the year it was determined that their actual throughput use was 29%. Therefore, they would need to be charged processing for that 4% capacity beyond their ownership percentage. These calculations would also have an “algorithm” within the Petroleum Lease Marketplace for the Partnership Accounting module to use.
I would reiterate that this is an area of extreme importance to oil & gas facility owners. Handling these transactions appropriately is how People, Ideas & Objects approaches this issue. Due to a variety of reasons, comprehensive software engineering of this process has not been undertaken until this proposal. See also the discussion of the Material Balance Report in the Partnership Accounting, Accounting Voucher modules and in the background section of this wiki.
Discussion of how People, Ideas & Objects software development will support the division of labor and specialization in the Preliminary Specification. This is especially relevant to the Petroleum Lease Marketplace. We discussed earlier in this module that the Joint Operating Committee determined where the data would reside. And hence where people work in the industry. Is the data stored by the Joint Operating Committee or by the producer? This was to be determined by the community based on their research. We also noted that with the division of labor and further specialization of the people that work in the industry, it required that individuals not work for a specific producer or Joint Operating Committee but instead work for a process that was billed for example as a service to 1,000 Joint Operating Committees representing 200 firms. This discussion assumes that in both situations, the data is stored at the Joint Operating Committee. Cloud Administration & Accounting for Oil & Gas process management, as proposed, is a dedicated team of people working for multiple Joint Operating Committees.
When we consider the global experience and understanding of oil & gas industry employees, currently, we have a large number of professionals with diverse experience and understanding of the industry. When we think of the future, in order to deal with the ability to handle increased volumes of work, we generally feel that there is a need to increase the overall experience and understanding of the industry. But is this necessarily the case? With the division of labor and specialization we can rely on the level of experience and understanding of a few that understand the entire process. We can assign the specifics to those that specialize in their own domain. With each person taking responsibility for their part of the process, at a high level of understanding, the entire process is managed with efficiency and understanding. This aggregates the skills of everyone involved in the process. This is the advantage of specialization. And it enables the industry to handle increased processing throughput at the same resource levels.
If we assume a group that processed all the lease rentals for all the Joint Operating Committee’s and producers that used People, Ideas & Objects' proposed software applications. And this group was a very specialized team of 20 people. They were supported by the People, Ideas & Objects software development team and our user community. How would you divide that work to make it more efficient? Would it be based on the producer or Joint Operating Committee? It may be based on the rental due date and geographical location. One thing is for certain, the way the work was organized would be fundamentally different from the way lease rentals are organized within each firm and Joint Operating Committee today. No matter how large the producer is, and therefore the specialization that this service provider could provide would reduce lease rental processing costs. It would also increase the quality of the service, data and information. This is how we need to reorganize many industry processes.
How does the division of labor expand? That is to say, this lease rental process continues under the service provider group identified above. They find that if they made a small change in the way they process a certain element, they could save x%. In addition, by adding this attribute producers would have a better product. Changes in the process in this instance are the result of information reorganization. This is the process of "gap filling". The problem today is that most processes are highly automated through software. And People, Ideas & Objects are taking Preliminary Specifications process automation further. Therefore the ability to change a process is heavily dependent on a software change. Which in the current environment is impossible. People, Ideas & Objects provide our software development capability, our user community and their service provider organizations. A comprehensive service that fills a gap and supports the needs of the dynamic, innovative, accountable and profitable oil & gas producer. Therefore the ability to make a change in the process and have the software updated to accommodate the process change is readily available.
Making these software development changes at one service provider makes the process manageable. As opposed to the methods currently used within each producer firm which provide no efficiency. In today’s environment, software development changes are not efficient. In addition, there is no scale in terms of division of labor and specialization applied to a single producer's lease rental activity. It is also assumed in the People, Ideas & Objects example that the data is stored at the Joint Operating Committee. Therefore, the amount of lease rental data held by the Joint Operating Committee in today’s case is relatively negligible. This provides more support for centralizing the lease rental process under one service provider through our Cloud Administration & Accounting for Oil & Gas.
By introducing service provider organizations through our user communities, we are initiating these types of process services.This is how the industry needs to reorganize itself to achieve efficient processes in the future. Lease rentals are only one example of many possible processes that could be handled in similar ways. In fact, all the administration, accounting, and overhead processes would be handled this way. Innovative oil & gas producers have as their distinct competitive advantages their land and asset base, and coordination of the market for earth science and engineering capabilities. The efficient development of internal administrative processes will not provide producers with a competitive advantage or disadvantage. By developing processes in the manner that People, Ideas & Objects propose, all producers have access to the most efficient and cost effective administrative management. And it is one of the cornerstones of how we provide oil & gas producers with the most profitable means of oil & gas operations.
There will be a large percentage of public data within the Petroleum Lease Marketplace. For example this data will include the lease documents themselves and reflect who the lessee is and the mineral rights held. Although this information is public in nature, readily available from the lessor's website, there is not much reason to hold it public in the Preliminary Specification from a producer perspective. Access to producers' or Joint Operating Committees' data and information through the People, Ideas & Objects application modules via a publicly accessible interface does not exist. Although the data and information may be accessible elsewhere, it is not available unless the individual has direct access granted through the Security & Access Control module.
Next there are areas where data and information are considered "partnership" or Joint Operating Committee in nature. We have discussed the research project our user community will undertake in the Preliminary Specification. This is to determine if data will reside within the Joint Operating Committee or the producer. This is an effective example of where the issue resides. If the agreements, leases and AFE’s are the same for all the producers why not store them within one location in the Joint Operating Committee and have access by the authorized producers? Everyone works from the same documents. Here’s where Industrial Command & Control will need to be sophisticated enough to enable the appropriate users from different producer firms to access these documents. Another consideration for our user community's research project.
Then there is private information that the producer generates that serves strategic and tactical concerns. This will be for producers only. The discussions could be related to one of the agreements that shouldn't be included in the "partnership" category. How does a firm maintain access to this critical information and ensure it doesn't leak to someone it shouldn't? Please review the “Two Types of Data" section of the Security & Access Control module.
The Preliminary Specification also provides many valuable opportunities regarding aggregated data publication. In the context of producers' capital budgets. If producers maintained their expected capital budgets in reserve report format within the Petroleum Lease Marketplace, would they be interested in publishing that data in aggregate through the Resource Marketplace module? This data would be scrubbed of all pertinent proprietary information and only represent dollars, general geographical area and account classification. This information would provide the Resource Marketplace with information as to what the marketplace would look like in the near future in terms of producer demand. This would enable service industry participants to plan to meet that demand. And would provide the service industry with a better understanding of their customers.
Proponents of "big data" and other technologically focused solutions to business issues claim they yield value for their clients. I am unaware of any tangible results. Producers' inability to organize their data is one of the impediments to moving forward from failed status quo operations. Much of the data, and particularly the financial data at the Joint Operating Committee does not exist which is accurate or reliable in terms of determining profitability. It is issues such as these that People, Ideas & Objects need to contend with in addition to the Preliminary Specifications feature set.
One of the complaints I have regarding oil & gas management is the myopic focus on cost control. It arises from an engineering discipline where the most efficient and low cost method is used to solve the issue. Oil & gas needs to be managed as a business and this has been lost in today's industry. To bring back a more rounded view of the overall oil & gas business other elements of what the business involves and where management should focus must be considered. Revenue Per Employee provides a perspective on the producer firm and Joint Operating Committee revenues. How these are enhanced, where their innovations are sourced, where they should be applied and how they compete with other producers. There also need to be objective criteria to evaluate a potential or existing partner's value. A need to value the deployment of their resources to the Joint Operating Committees based on what that producer's capacities and capabilities are. These are necessary as a successful oil & gas producer in the near future will need to know and understand exactly where that success originated and why.
In terms of evaluating a potential partner firm's performance in a Joint Operating Committee. Determining a property's performance over time. Or to determine the hourly charge out rate of a producer's technical resources. People, Ideas & Objects have developed “Revenue Per Employee” as the metric that provides an understanding of the state of capabilities and innovativeness of a partner firm or Joint Operating Committee. If you calculate revenue per employee you will find rather dramatic differences in terms of the different factors for producers. Special consideration must be given for integrated firms to ensure that you exclude the downstream operations and the smaller producers as the factor unfairly reflects their capabilities. Given the disparity in Revenue Per Employee for producer firms this factor is a valuable tool in determining the appropriate partner to select for a property. It is also an effective tool for motivating teams towards higher capabilities, innovativeness and performance. However, it is most effective in assessing the technical capabilities and capabilities of producers.
Professor Giovanni Dosi’s paper “The Sources, Procedures and Microeconomic Effects of Innovation'' 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. These disciplines are key to the capability and success of oil & gas companies in their search for and production of hydrocarbons. The investment in science and technologies is 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 that of the competition. Ensuring that producers partners in the Joint Operating Committee are of the same mindset and capability is critical to their future innovation strategies. 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.
A meeting of minds regarding innovation has to be established in the Petroleum Lease Marketplace module. This meeting needs to be captured in the agreements and associated modules. We will discuss the revenue per employee factor in the Analytics & Statistics and Performance Evaluation modules in the Preliminary Specification. Maybe what we need to do in the Petroleum Lease Marketplace module is find a place to compare the various producers' revenue per employee factors. This will enable people to determine if they are an appropriate or suitable partner in terms of being an innovative partner. A simple listing of the revenue per employee of partners and potential partners on its own interface within the Petroleum Lease Marketplace module.
First we should ask ourselves: does the calculation of revenue per employee provide a reasonable comparison of the innovativeness of a producer? Or would this calculation reflect the quality of assets, the size of the firm or its actual innovativeness? That is the question hopefully answered here.
Clearly the factor of revenue per employee would reflect many factors other than the firm's innovativeness. However, would the comparison of revenue per employee over multiple periods determine innovativeness? The increase / decrease in the factor would be due to an increase or decrease in price and volume. The volume being particularly affected by the changes and innovations that occurred over the period in the firm. Another critical determining factor is the number of employees the firm employs. Unreported changes in employee numbers would skew the results significantly.
If the Revenue Per Employee interface in the Petroleum Lease Marketplace module calculated revenue per employee for the participants in the Joint Operating Committees of the producer. And calculate the factor for prospective producers there could be value in determining who would be a suitable prospective match as a partnership in the future. The report could also determine the trajectories on the basis of volume, price and employee variances during the periods under comparison by the user.
So what have we got? We have run some elaborate calculations that “might'' prove that one producer is innovative. What does that prove? That depends on what is expected of you as an innovator. Professor Dosi states “In very general terms, technological innovation involves or is the solution to problems.” Dosi defines this as “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” as Professor Dosi describes “on the part of the inventors who discover the creative solution.”
Running this factor against the general population of producers within the industry provides value for the user. The ability to highlight who is solving problems in the industry innovatively and partner with them is positive for all concerned. However the real value in the Revenue Per Employee calculation would be the ability to run the report on the basis of the individual Joint Operating Committees the producer is a participant in to determine where performance could be improved. Set the charge out rate of producers' earth science and engineering capabilities to Joint Operating Committees.
This is a more difficult task due to the calculation to determine the number of employees on each property. However, with People, Ideas & Objects Preliminary Specifications Industrial Command & Control and Work Order system, it is possible to determine who has worked and how many hours were worked. These systems will record the hours of the people from all of the various producers who are authorized to work on the Joint Operating Committee. Therefore the calculations that were run on the basis of the producers, can then also be run against any and all of the Joint Operating Committees that the producer has an interest in. This would also include the calculation of volume, price and employee variances, and their trajectories over the periods being compared. This being the first step in the process, determining which Joint Operating Committees were the most innovative. Why and how was that the case? And do those innovations apply elsewhere? The next step, and the most significant one, would be to understand where and who the innovations may be coming from.
Our discussion of the producer's capabilities has documented a number of processes through the Research & Capabilities, Knowledge & Learning and Resource Marketplace modules. These are comprehensive processes that enable the producer to develop and maintain unique and valuable competitive advantages in earth science and engineering capabilities. These capabilities should be actively marketed to other producers as a potential partner in terms of the value added to a potential Joint Operating Committee.
We are in a period where the “easy energy era” has passed and it is generally agreed that the complex energy era has begun. The demand for earth scientists and engineers is substantial. This challenges producers to build the capabilities they need to operate all of their properties. Therefore the need to pool their capabilities with their partners in the Joint Operating Committee is not an option to have but a necessity. This pooling can take the form of an ad-hoc disorganized mashing of two or more producers or can be a deliberate construct as a result of the meeting of minds at the beginning of a joint venture. Enabling each producer in the pooled partnership of the Joint Operating Committee to specialize in their earth science and engineering capabilities. People, Ideas & Objects Petroleum Lease Marketplace assumes the latter is the preferred choice and provides the tools to develop these specializations and joint capabilities.
In Professor Giovanni Dosi’s paper he notes the following three factors involved in innovation development.
The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:
Capabilities and stimuli generated with each firm and within the industry of which they complete.
Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.
Additional issues include the conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulation, tax codes, patent and trademark laws and public procurement.) p. 1121.
We assume for the purposes of these writings that the key stimuli are commodity prices which allocate financial resources to fuel innovation. Throughout the Preliminary Specification we focus on the producer's capabilities. What the producer must now learn to do is specialize in their own earth science and engineering capabilities. In addition, they must leverage their partners' specialized capabilities in their Joint Operating Committees.
Within the Petroleum Lease Marketplace there needs to be an interface that lists the areas where other producers' capabilities are being leveraged. These listings need to be based on the agreed to and documented exchanges of capabilities that are part of the CO&O or other agreements that make up the Joint Operating Committee. This same report could detail the commitments that the producer firm has made in terms of its capabilities to the partners in future years. This "Capabilities & Commitments" interface would be organized based on the Joint Operating Committee.
Within the Petroleum Lease Marketplace of the Preliminary Specification we have established two redesigned interfaces. The first is what we have called the "Revenue Per Employee" listing that details the various calculations of revenue per employee by producers within the industry. These calculations are broken down to provide variances based on commodity prices, volumes and number of employees. Further calculations are conducted on each Joint Operating Committee the producer firm participates in. These calculations are broken down by the variances noted above and are confidential to the producers who participate in the Joint Operating Committee. In this case, we look for the trajectory change in the three variables over a period of time.
The second interface in the Petroleum Lease Marketplace is what we call the "Capabilities and Commitments Report." It details the capabilities provided by agreement in the various joint venture agreements the producer participates in. This report also details the commitments that the producer has undertaken to provide in terms of its capabilities under those same agreements. This report enables the producer to fully leverage their partners' capabilities and focus on developing their capabilities. It also meets contractually their requirements.
These reports add value to the producer and the Joint Operating Committees that use the information contained within them. They are unique and provide information that can be used innovatively. Of note I think that a service provider could be established to complete the task of regularly verifying the producer data for Revenue Per Employee on an industry wide basis. That way one service provider would need to verify industry wide producer related information. However, there is more to these reports when used in combination. And what we could provide is a hybrid report that sorts the information based on the Joint Operating Committee, having both the Revenue Per Employee calculation and the determination of the Capabilities & Commitments Report output together. Learning “who” and “where” the innovations were developed.
In our review of Professor Dosi’s paper, he summarizes that businesses commit to innovation stemming from...
“exogenous scientific factors and endogenously accumulated capabilities developed by their respective firms.” Dosi's general point is that “observed sectoral patterns of technical change are the result of the interplay between various sorts of market-inducements, on the one hand, and opportunity and appropriability combinations, on the other.” pp. 1140 -1141.
Recall that “appropriability” for the producer includes lead times and learning curves as more effective ways of protecting process innovations. Therefore appropriability and opportunity are clearly reflected in the Revenue Per Employee report. What the Capabilities and Commitments Report reflects are the “market-inducements.” The result of the “interplay” between these reports would be “patterns of technical change.” That might be a bit of a leap for some to make on an industry wide level, and I would agree, however, the devil would be in the details. On a Joint Operating Committee basis, which we would have the data for, both the capabilities from the partners, the producer and revenue per employee, this information would be valuable.
Any “pattern of technical change” would be triggered by Revenue Per Employee trajectory changes. Most probably by any volume variance trajectory change. Therefore, what was the reason for the change and was it as a result of any change in producer capabilities due to any “patterns of technical change” or “market-inducements?” Maybe I am being too analytical and attempting to extend the value of innovation within the enterprise.
Highlighting what is effective within your organization, from an innovation standpoint, will be a difficult and challenging task. These reports will highlight any success or failure in the current month. I think that provides ample time for the producer to determine the viability of their or their partners' innovative capabilities. These reports are critical for innovative oil & gas producers. In the future, it will be necessary not only to succeed, but also to point to where it originated from.
Previously we documented how the division of labor might affect the lease rental payment process. It was there that we discussed the specialization of 20 individuals who processed lease rentals for all of the Joint Operating Committees who use People, Ideas & Objects. How these people would actively improve the process by identifying “gaps'' and being supported by our software development team to amend the software to accommodate the changes they made to their processes.
The Petroleum Lease Marketplace is rich with processes like lease rental payments. All of these processes as well as those in other modules would be subject to similar changes as those noted for lease rental payments. The Petroleum Lease Marketplace module deals with the administrative details of both the producer firm and the Joint Operating Committee. Both of which will undergo significant changes due to innovation in other areas of the business. What has been a rather constant area in terms of activity and change, the lease rental payment and other processes, may take on a more dynamic feel for the business. When the producer and Joint Operating Committee actively innovate, Professor Giovanni Dosi notes that two distinct phenomena are observed.
First, new technological paradigms have continuously brought forward new opportunities for product development and productivity increases. p. 1138.
A rather uniform characteristic of the observed technological trajectories is their wide scope for mechanization, specialization and division of labor within and among plants and industries. p. 1138.
The dynamic of the Research & Capabilities process, documented elsewhere, relies on the Petroleum Lease Marketplace for information and resources. The need for it to be responsive to Research & Capabilities changing needs is a necessary requirement of Research & Capabilities' innovative-ness. Looking to model the management of these change processes across all producers within all geographical regions would seem difficult. To capture this change process within People,Ideas & Objects software, is an even more difficult task. However, Professor Dosi notes that there are other serious concerns to consider.
The appearance of new paradigms is unevenly distributed across sectors and so are (a) the degrees of technical difficulties in advancing production efficiency and product performance, and (b) the technological competence to innovate, embodied in people and firms. pp. 1138 - 1139.
Simply not everyone will be working off the same page when it comes to the types of innovation, the scale of their application and degree of complexity. In this next quotation it becomes clear that the processes under management by the software are the means in which to deal with these underlying paradigms and trajectories. Therefore, in order for the producers to begin the path of innovation requires that we resolve these process design issues, and build the software before they are implementable within the various disparate organizations.
These distributions of opportunities and competence, in turn are not random, but depend on (a) the nature of the sectoral production activities, (b) their technological distance from the “revolutionary core” where new paradigms are originated, and (c) the knowledge base that underpins innovation in any one sector. p. 1139.
As the Preliminary Research Reports research question asked, can innovation be reduced to a quantifiable and replicable process? The answer was an unqualified yes. This last quotation is one of the reasons why. Our software captures the requirements of the "revolutionary core" and "knowledge base that underpins innovation". That does not mean that every producer will fully appreciate or understand the full scope or scale of what the system provides. Only those at the "revolutionary core" will be able to fully exploit its resources. That however, does not preclude the use of systems by everyone within the industry. For example not everyone is at the "revolutionary core" of Microsoft Excel and that does not preclude them from gaining value from its use.
People, Ideas & Objects believes that if we engineer a software application to deal with these issues, we can accelerate the producer's performance and the industry. From a systems engineering point of view this has been beyond the scope of one software development team working with limited budget resources. For any producer to undertake the required analysis, let alone the development of the systems, is beyond the scope of what is possible or desirable. It is well beyond the scope of any software developer to undertake on their own, in a speculative manner. Therefore, it is beyond the industry's imaginations and possibilities. I would also argue that, in the past, automation of this business process would have generated limited value. Today we can, as with People, Ideas & Objects, define a more specific division of labor and specialization. This will, therefore, provide a more profitable oil & gas operation.
To state this point differently, we can focus the industry's resources on the comprehensive engineering of these processes. Allocating these costs over the entire energy producing base presents opportunities to undertake detailed software development that has not been attempted before. This is the approach necessary to deal with the issues associated with producers meeting market demands. Management of these processes is the key to enabling organizational performance, technological paradigms and trajectories that Professor Dosi notes in this paper.
What People, Ideas & Objects is undertaking in developing the Preliminary Specification is the simple process of moving the compliance and governance frameworks of the innovative oil & gas producer into alignment with the Joint Operating Committees legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks. This discussion will deal with the strategic framework and how the Petroleum Lease Marketplaces “Strategy Interface” works to communicate the unique strategic direction of each of the Joint Operating Committees the producer has an interest in. In addition, the business model provided to an innovative and profitable oil & gas producer using the Preliminary Specification will be discussed.
In each property, earth sciences and engineering are required. Producers' ability to apply generic corporate strategies to all of their properties is quickly expiring. A unique strategy for each property must be developed to address each property's unique characteristics. Each property's unique strategy will be the result of collaborations among the Joint Operating Committee participants and will be subject to change from time to time. A key determinant, or business model, is optimizing reserve value profitably consistently over the project's life. The model must be transparent, and flexible enough to adapt to changing commodity prices. It must also be tailored to the financial goals of the project, with an emphasis on maximizing efficiency and minimizing risk. Finally, it must be designed to be a long-term, sustainable strategy that will ensure the profitability of the project.
Placing the Strategy Interface in the Petroleum Lease Marketplace is the logical location for this information. Along with the agreements, leases, AFE’s, and other partner related information that shares several things in common with the “Strategy Interface.” Those common threads are the collaborative nature of the development of the documents, and the access privileges that will be used to access the information. Each producer has read / write access to each property that they have an interest in. Where they can collaborate within the partnership on the overall strategy and tactical direction of the property. Where individuals who are authorized to work within the Joint Operating Committee through the Security & Access Control module, and who are authorized with read access to the Strategy Interface are able to determine whether their actions are in line with the strategic intent of the property. Additionally, the Strategy Interface provides a platform for the producer to communicate and collaborate with other partners in the property. Allowing each partner to share their thoughts and ideas in order to reach a consensus and move forward with the overall strategy. The Security & Access Control module ensures that only authorized personnel have access to the Strategy Interface.
From the producers perspective they have a database of strategic documents unique to each property. They can determine quickly what the strategy is for any property and engage the specific people responsible for further information. Although each property follows its own proprietary strategy, the producer firm is not without its input. It can quickly determine the key strategic direction of the property.
We have now documented the “Strategy Interface” of the Petroleum Lease Marketplace module of the Preliminary Specification. This being a simple collaborative interface that documents the unique strategy of each and every Joint Operating Committee the producer has an interest in. This further discussion will deal with the positive attributes of the Strategy Interface, the application of the business model and the difficulties it will impose on bureaucracies unwilling to consider individual property strategies.
Natural gas is experiencing an exceptional situation with the prolific nature of shale gas discoveries. And oil continues to experience high global demand and prices with nominal supply growth. Providing energy for today's markets requires more complex earth science and engineering than in the past. The land and asset base of an innovative and profitable oil & gas producer is the basis for competition. For producers, now is the time to adopt a profitable and performance-driven business model. People, Ideas & Objects Preliminary Specification provides that updated business model for the industry. One that is based on the decentralized production model that sees the producer firm reduced to C class executives, earth science and engineering resources, some legal and support staff. The remaining administrative, accounting and overhead resources are reorganized into service providers focused on the industry-wide process. Processes like lease rental payments, production, revenue and royalty accounting, etc. Our business model enables the producer firm to focus on its core business of exploration and production. And converts overhead costs into variable characteristics, based on profitable production. It is therefore most profitable when only profitable production is produced to ensure oil & gas replacement value is earned.
In this manner, when the service providers provide production accounting services, they can bill the Joint Operating Committee for production accounting services. Note: They bill the Joint Operating Committee and not the producer. The property may be shut in if it fails to meet its marginal cost and moved to the producer's work-in-progress inventory. This allows innovative work to be undertaken to return it to profitable production as soon as possible. While shut-in all of the administrative, accounting and overhead costs that are typically incurred by the service providers will not be incurred and therefore will not be charged. Causing the property to report a null operation and saving the reserves for a time when they can be produced profitably. This will achieve our business model objective of removing surplus commodities from the marketplace and putting a floor under the commodity prices. Shutting in the property is a short-term solution to balancing supply and demand. In the long-term, there needs to be a plan to increase the property's innovativeness, so it can remain profitable and competitive in the marketplace. And ensure consumers have affordable, abundant and independently sourced oil & gas.
The combination of the Strategy Interface with the People, Ideas & Objects Preliminary Specifications business model for innovative and profitable producers. Gives the producer the tools to optimize the value they can achieve from their reserves. This is the way producers can compete in the complex energy era.
Exploration and exploitation of oil & gas reserves have been and always will be a function of technology based on science. This is undeniable, and is also likely to contribute to the short-term life cycle that many believe will continue. This reserve size and deliverability is paralleled in Professor Giovanni Dosi’s discussion of how innovations in industrial companies have been diluted by demand prediction and lower production volumes. Generic corporate strategies impede the value realization of petroleum and natural gas reserves. An innovative approach will also bring about different strategies in terms of investment timing. Professor Dosi notes;
Finally, empirical studies often show the coexistence, within the same industry and for identical environmental incentives, of widely different strategies related to innovation, pricing, R & D, investment and so on. Specifically with regard to innovation one notices a range of strategies concerning whether or not to undertake R & D; being an inventor or an early imitator, or “wait and see”; the amount of investment in R & D; the choice between “incremental; and risky projects, and so on (see Charles Carter and Bruce Williams 1957; Freeman 1982 and the bibliography cited therein). Call these differences behavioral diversity. p. 1157.
Changing the innovative behavior of one producer carries a scope of change that is as broad and as diverse as is contemplated in the business world. Change at this scale often cannot be managed within an organization. Instead, it needs to be managed through creative destruction in the general economy. A time of dynamic change driven by organizational changes focused around the innovative Joint Operating Committee. How can a firm that has been developed in an era of cost control transform themselves into an innovative, dynamic, earth science and engineering focused producer? In many cases the will to do so might exist. However, with the speed and unforgiving nature of the business cycle, not much time will be provided to those attempting the transformation. Since the financial crisis of 2008, we've seen many interesting phenomena in the capital markets. To suggest any trend or definitive result from these would be premature. It's just a different world for oil & gas CEOs than it was before 2008. However I am sure we can all agree that continued production of shale gas reserves at a loss would be the continuation of the destruction component of creative destruction. CEOs need to be aware of the risks associated with overproduction and be prepared to adjust their strategies accordingly. It's worthwhile to remember that creative destruction is not just about destruction; it also involves creating something better in its place. Such a transformation will require an innovative approach such as the Preliminary Specification which capitalizes on shale gas reserves opportunities.
Within the Preliminary Specification the producer can scale back their production in the face of poor commodity prices. This is part of the business model that allows the innovative and profitable oil & gas producers to optimize their reserves. In the Resource Marketplace module we discussed the implications shutting-in production has on production and overhead costs. That is by moving to the “decentralized production model” from the “high throughput production” model it turns the producers' fixed costs of overhead, administration and accounting, into the variable costs of overhead, administration and accounting of the Joint Operating Committee. Therefore all Joint Operating Committee costs decline in line with revenues. With no production there are no revenues, however there are no other costs other than capital costs. Leaving the property, or Joint Operating Committee with no loss, or a null operation during periods of shut-in production. It is in the Petroleum Lease Marketplace module that the capability to reduce production is acquired through the Marginal Production Threshold Interface. This is the subject of this discussion.
The operational decision making authority lies with the Joint Operating Committee. And we have discussed throughout the Preliminary Specification how the decision may be made to shut-in production to mitigate the losses on the property and to help return the commodity markets to profitable prices across the industry. Ultimately removing the bust from the oil & gas boom / bust economy. With the Preliminary Specifications move to the “decentralized production model,” where all costs are variable and recorded in the Joint Operating Committee. Therefore costs are suspended with the decision to shut-in production when triggered through the Marginal Production Threshold Interface.
The Marginal Production Threshold Interface would provide the collaborative means by which the Joint Operating Committee would agree to the criteria for suspension of production. We see today with natural gas prices in North America, a situation where no one makes money. When prices meet the criteria the partnership has agreed to, i.e. the marginal costs, the decision to curtail production can be carried out. Whether that is manually issuing the order to shut-in production, or if the systems are automated, the system is triggered at the beginning of the month when the criteria is met.
The Joint Operating Committee has the ability to collaborate and agree among the partnership. Having all of the Joint Operating Committees that producers have an interest in located within the Marginal Production Threshold Interface in the Petroleum Lease Marketplace. This will provide producers with an understanding of their production profile at various price scenarios. Recall within the Partnership Accounting module detailed, actual, factual accounting financial statements are prepared each month to determine the performance and profitability of each Joint Operating Committee. This can be subsequently analyzed through a “what if” scenario page within the interface.
Every marginal property within the industry would be shut-in and therefore have a null operation if each producer managed its production this way. Reserves would be saved for a time when production was profitable. Production and storage costs would be reduced to zero when reserves remained unproduced. Those reserves would not have to retrieve incremental profits to cover unprofitable production periods. Commodity prices would have fewer and less impactful downside swings due to less overproduction. Or unprofitable production as we've described it. As a result, these prices would apply across the producer's production profile, providing the much-needed replacement value. The current method of managing prices by limiting capital spending, or “capital discipline,” is a very blunt instrument that leads to over and under production at the extremes. Creating a boom-bust economy. People, Ideas & Objects Preliminary Specifications business model, with our user communities service provider organizations, enables producers to stop producing marginal production. This enables producers to employ the only fair and reasonable method of production discipline across North America. Producers, the service industry and all those associated with oil & gas will participate in a dynamic, innovative and robust economy. Providing producers with a wide range of markets for goods and services. And consumers will be assured of a sustainable industry providing affordable, abundant and independently sourced energy. A bit of faith in the markets is all that is required.
Discussion begins on the boundary of the firm and markets in the Petroleum Lease Marketplace in the Preliminary Specification. In this section we focus on capabilities. And the question should be what capabilities are we seeking from the Petroleum Lease Marketplace? And why is there a need to transition to this organization model, a marketplace? We begin with a quote from Professor Richard Langlois’ paper “Capabilities and Governance: The Rebirth of Production in the Theory of Economic Organization.”
The organizational question is whether new capabilities are best acquired through the market, through internal learning, or through some hybrid organizational form. And the answer will depend on (A) the already existing structure of capabilities and (B) the nature of the economic change involved. p. 20.
What we currently have are a number of departments; Land, Legal, Land Administration, Production and Exploration Administration and Accounting, which will become elements of the Petroleum Lease Marketplace. These departments will transition to various roles, some in newly formed service provider firms, where they will be part of a marketplace environment. It will be within the marketplace that they will provide their capabilities to those producers and Joint Operating Committees that need their services.
If a profit opportunity requires a configuration of capabilities different from what already exists in the economy, the Schumpeterian process of creative destruction may be set in motion. p.20.
It's a marketplace, not a department within a bureaucracy. A marketplace within the dynamic, entrepreneurial and innovative oil & gas industry. A place where buying and selling leases or interests in properties, making deals or building producers can and will be done.
Seldom if ever have economists of organization considered that knowledge may be imperfect in the realm of production, and that institutional forms may play the role not (only) of constraining unproductive rent seeking behavior but (also) of creating the possibilities for productive rent-seeking behavior in the first place. To put it another way, economists have neglected the benefit side of alternative organizational structures; for reasons of history and technique, they have allocated most of their resources to the cost side. p. 3.
It is interesting that one of the roles of the firm, in this revised boundary of the firm and market, is the enhanced role that coordination undertakes. This next quote states explicitly the need to improve coordination through routines and capabilities.
All recognize that knowledge is imperfect and that most economically interesting contracts are, as a consequence, incomplete. But most of the literature considers seriously as coordinating devices only contracts and the incentives they embody. It thus neglects the role - the potentially far more important role - of routines and capabilities as coordinating devices. Moreover, the assumption that production costs are distinct from transaction costs and that production costs can and should always be held constant obscures the way productive knowledge is generated and transmitted in the economy. p. 11.
Since contracts are one of the key end products of the Petroleum Lease Marketplace module activities. It is these incomplete contracts that will continue to demand the services of those employed in the marketplace and the firm. "Routines and capabilities as coordinating devices." Making the "marketplace" a key interface of the Petroleum Lease Marketplace module.
We have noted that the ability to build a company was one of the things done while working within the Petroleum Lease Marketplace. Implying that the marketplace was an area where the active state of affairs was to create something instead of filling file cabinets with agreements. This is the key reason why the Petroleum Lease Marketplace must be a marketplace. It must reflect the personality of the people who build their firm. From Professor Langlois’ Competition through Institutional Form: the Case of Cluster Tool Standards.
Industrial economists tend to think of competition as occurring between atomic units called "firms." Theorists of organization tend to think about the choice among various kinds of organization structures - what Langlois and Robertson (1995) call "business institutions.” But few have thought about the choice of business institution as a competitive weapon. p. 1.
The “Marketplace Interface” of the Petroleum Lease Marketplace module of the People, Ideas & Objects system provides innovative oil & gas producers with the competitive weapon they need to build their firm.
On the other side of the ledger, an open modular system can more effectively direct capabilities toward improving the modules themselves (Langlois and Robertson 1992). Such a system harnesses the division of labor and the division of knowledge, allowing organizational units to focus narrowly and thus deeply; at the same time, it magnifies the number of potential module innovators, and thus can often take advantage of capabilities well beyond those even a large unitary organization could marshal. p. 29.
The modular nature of the Preliminary Specification provides this ability to focus on the critical attributes within the module. The Petroleum Lease and Resource Marketplaces are different just as the Financial Marketplace, Research & Capabilities and Accounting Voucher modules are unique. Each has a unique set of individuals and activities. All of these factors work together in support of the oil & gas company's innovative approach. From Professor Richard Langlois’ Organizing the Electronic Century.
A complex systems product is underlain by an architecture: a set of parts and a way of fitting those parts together. An integral architecture is one in which the parts depend on one another in complex and often unpredictable ways: the system is a tangle of spaghetti. By contrast, a modular architecture is one that regularizes the dependencies among the parts, forcing them to interact only in relatively formalized and predictable ways (Langlois 2002b) p. 6.
The point that I am struggling to get across is the interface in which users will access this marketplace in the Petroleum Lease Marketplace. It is the "Marketplace Interface" that I am highlighting in this discussion as an oil & gas concern's value proposition. It is through the reorganization of the industry based on implementing People, Ideas & Objects et al's Cloud Administration & Accounting for Oil & Gas. And through this software representation of the marketplace, much value will be gained.
To develop an innovative system for the oil & gas industry is an opportunity that I think is a once in a lifetime, maybe a once in a century opportunity. To think that we will use these systems in the same way as today underestimates the possibilities. The user interface is the area where most innovation will occur in terms of how people interact with large volumes of data. Google “Oracle Redwood” to see their groundbreaking work in Oracle Cloud ERP. These and other types of issues should be considered in the Preliminary Specification. I offer the “Marketplace Interface” and this discussion to expand the scope of what is possible in terms of the Preliminary Specification.
The Petroleum Lease Marketplace module is the second of three “marketplace” modules in the Preliminary Specification. Like the Resource Marketplace module, which deals with resources used in oil & gas development, the Petroleum Lease Marketplace emulates the marketplaces for Petroleum & Natural Gas Leases, concessions, etc. And the associated activities involved around those “things.” What is helpful in understanding the capabilities attained by developing “marketplaces” in the Preliminary Specification is this quote from Frederick von Hayek in “The Use of Knowledge in Society.”
The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. ...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 passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement. (Hayek 1945, pp. 526 - 527).
Prices for bonus paid on acreage. The price asked by a producer for a working interest share in a property. These are activities that occur in the marketplace every day. What we are doing in the Petroleum Lease Marketplace is emulating the real marketplace to make it thicker and more robust. With market opportunities being dislocated sometimes thousands of miles from interested parties, market participants cannot even on the Internet find someone. However, with a module like the Petroleum Lease Marketplace, producers have a focused forum to deal with interested parties. At the same time they’ll have the means to transact and manage the business, develop agreements, pay lease rentals etc. The Petroleum Lease Marketplace is an ERP software environment that emulates marketplaces.
Critical to the success of this marketplace is the further division of labor and specialization. We discussed earlier in the specification how Lease Rental Administration could be handled industry wide by a service provider. There may be other roles in the Petroleum Lease Marketplace that are handled similarly. With the development of these software modules, market supporting institutions would enhance the effectiveness of the marketplace. Providing assurances such as when the P&NG Lease was acquired it was known that it would automatically have its lease rentals processed by the service provider.
There are many advantages to emulating the Petroleum Lease Marketplace in the Preliminary Specification. Just as there are advantages in the Resource and Financial Marketplace modules. Attempts at exchanges and other technical solutions have been tried before but they don’t have the “business” aspects that a “marketplace” has. What we replicate is a business unit, not some technological solution. A significant difference for the users and producers of the physical marketplace today. They will take advantage of the Petroleum Lease Marketplace module if it provides further value in their use of the actual marketplace. And with that I want to introduce the “Marketplace Interface” which uses Open Wonderland technology. Here it is shown as an example of what we describe as the ultimate collaborative interface.
(Please review the series of videos below.)
See also this May 29, 2020 Wall Street Journal article.
We have detailed some of the interfaces that would be used by suppliers and vendors in providing specific products and services to oil & gas producers and Joint Operating Committees through the “Marketplace Interface” of the Petroleum Lease Marketplace. We note that the service provider organizations or Industrial Districts as Professor Langlois refers to the concept, is structurally different than in the Resource Marketplace. The "Marketplace Interface" focuses on administrative work. Although the disruption in moving the majority of the work from the firm to the marketplace will involve innovative and creative processes, once the marketplace settles into a rhythm, the administrative level of change will slow. Much of the actual work in the “Marketplace Interface” will be to support the transactions conducted by the producers in the marketplace environment.
The “Marketplace Interface” is not a source of innovation for the oil & gas producer. It is an area where the producer can focus on their core competitive advantage of their land and asset base. Administrative efficiencies and effectiveness are certainly part of that competitive advantage. In this regard, I wish to highlight the fact that the market will be dynamic when it comes to purchase, sale, bidding, acquisition, dealing, surrendering, leases and properties.
As a possible scenario, in the Marketplace Interface, we have a producer who is interested in determining what the market value for their interest in a small gas plant will generate. The average production is 100 barrels of oil equivalent per day from 50 wells, compression and dehydration. Through the “Marketplace Interface” the producer puts their 17.5% working interest in the property on the market for sale and is open to offers. The property is then highlighted in the property section of the “Marketplace Interface” where users can see that the property was just posted for sale. It is also listed by zone and product category in international market databases. Soon offers are made and the property attracts a reasonable price. The seller deems the asset to be sold, none of the partners can match the most competitive offer, and the property is sold. With the closing executed, the administrative tasks of recognizing the leases, agreements and partners are completed. Additionally historical data may be available to be copied to the purchaser's Cloud Administration & Accounting for Oil & Gas for reference.
Or something along those lines. The point in this scenario is to briefly show how many of the attributes we have been discussing will work together in the “Marketplace Interface.” The efficiencies of the marketplace in terms of having a ready market to buy and sell properties, leases and interests. And to have those transactions supported by transaction processing that is as complex as necessary to close the most complex of purchase or sale agreements. This is how innovative oil & gas producers will need to operate in the 21st century.
We have focused on the deliberate nature of developing the “Marketplace Interface” of the Petroleum Lease Marketplace in the Preliminary Specification. During the 1960's systems capabilities were limited and applications were quite crude. Organizational developments were therefore constrained by Information Technologies limitations. Systems development focused on the firm itself, and that focus was driven primarily by firms' compliance and governance requirements (Accounting, Tax, Royalty, SEC etc). During this time, in oil & gas, the Joint Operating Committee was secondary to the demands of the firm's compliance and governance frameworks. This system's thinking grew over a period of time that included several generations of people. Through this process the administration, oil & gas became more oriented to the compliance and governance frameworks of the firm. In contrast, they became more withdrawn from the Joint Operating Committee's seven frameworks.
It is my opinion that the Preliminary Specification is not revolutionary in its move to the Joint Operating Committee, but evolutionary. Particularly from the point of view that we are moving towards the common-sense industry organization. Leaving this 1960’s “systems thinking" behind. This is what is necessary for the innovative producer to achieve the speed of operations to compete in the 21st century oil & gas industry.
We also must contend with the concepts that originated in the minds of the software developers of SAP. These concepts were different from what have been stated in the Preliminary Specification. I believe that whatever their vision may have been, for oil & gas it is misguided as it does not recognize the unique nature of the business, the Joint Operating Committee. The unique nature of the industry has led to new solutions and new methods of operation. Those solutions consist of the Joint Operating Committee and market dependence. I can't think of an industry that matches the energy business culture.
Today the technologies involved in the Internet provide the industry with the opportunity to realize that the manner in which it operates is unique. It can deal with those anomalies in the best Interests of the industry. A dedicated software developer to build the systems that mirror the industry operations, the Joint Operating Committee and marketplaces, will enable greater innovation by relying on the marketplace. This will allow innovation to flow from wherever and whomever. This will not happen by chance. It is a deliberate act. And today that demands software development capability and vision like that offered by People, Ideas & Objects and the Preliminary Specification. From Professor Richard Langlois. 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.
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.
Therefore, the development of the “Marketplace Interface" is not an option to have but necessary for the innovative oil & gas industry. And the first technology I want to discuss is Oracle Cloud ERP. It is in fact the “Marketplace Interface" made available through the open source Open Wonderland organization. Recall that there is only one “Marketplace Interface” that serves the three marketplace modules, the Resource, Petroleum Lease and Financial Marketplace modules.
The origins of the Open Wonderland organization are of interest and pertinent to the discussion. Originally a Sun Microsystem research project, Project Wonderland development was open sourced and made available to the larger community. When Oracle purchased Sun Microsystems it was deemed that the technology was of no commercial value to it or its customers. It set the community to find a new home. Needless to say, Open Wonderland has struggled since. Without a major sponsor the technology has not advanced and the marketing of the technology is limited and difficult. There seems to be a lack of understanding of the marketplace metaphor within Project Wonderland. That is what I think they need to make it the killer app in the commercial market space.
Open Wonderland is written in Java and therefore is compatible with the Oracle Cloud ERP. Having this operate as a module in itself would not technically be an issue. The business risk of using weak organization technology is mitigated by the fact that they have open-sourced the code for the applications. If something happens to Open Wonderland as an organization there is still an avenue to pursue with the code itself. It would be incumbent upon People, Ideas & Objects, when our revenue streams begin, to support initiatives such as Open Wonderland since we directly benefit from their technologies and their organization.
(Please review the series of videos below.)
The “Marketplace Interface” is a place where anyone in the oil & gas or service industry can establish a market presence or create an avatar to collaborate with others within the industry. People, Ideas & Objects will enable these avatars to conduct business through the ERP service of the People, Ideas & Objects application modules and Oracle Cloud ERP. Interactions such as buying and selling oil & gas assets, purchasing field services, establishing an AFE, and making decisions within a Joint Operating Committee. Many of the things that can be done physically, will be accomplished virtually through the use of the avatars created and enabled in the “Marketplace Interface.”
Here’s why I think the “Marketplace Interface” is so critical to innovative oil & gas producers. Phone calls can’t do it. That is to say they are usually, or preferably, with only two people. They can’t be documented and any business that arises from them must be entered into other systems. They have the benefit of spontaneity and are available anywhere. Meeting scheduling is difficult, spontaneity is impossible, and virtualization of this kind is possible. However they are easily documented and the business that arises from them needs to be input into other systems. Meetings can be with any number of people, however the law of diminishing returns comes into play. There must be a compromise between these two forms of collaboration. Keep the phone calls and the meetings and add virtual collaborations from the “Marketplace Interface.”
The “Marketplace Interface” will provide the spontaneity of a phone call and the ability of people from far distances to meet up in no time. Documentation of the business can be comprehensive and include video of the simulation and copies of the documents. Any business generated during meetings can be dealt with through the “Marketplace Interface” by selecting the appropriate ERP related option-command submenu. Productivity would follow. Attendance at these virtual meetings could increase and overall travel time would be substantially reduced. Follow-up business associated with meetings would be initiated during the meeting and things would get done. A real productivity-enhancing tool, not just Information Technology for its own sake.
(Please review the series of videos below.)
What follows is a general discussion of the Marketplace Interface in the Petroleum Lease Marketplace module. It is intended to provide some understanding of the Marketplace Interface's ability to enable a user to engage with other elements of the market. This will build the producer firms land and asset base.
It was during the Preliminary Research Report that we first applied Professors Anthony Giddens "The Constitution of Society" and Wanda Orlikowski's Structuration Model's research to the Joint Operating Committee. Professor Giddens Structuration Theory states that people, organizations and society must move together or fail. Professor Orlikowski’s Model of Structuration states that technology is a part of society and both defines and constrains action. Therefore when we look at the two possible organizational types of architecture for Petroleum Leases we see the Marketplace and the file cabinet. But seriously, the choice is that stark and the contrast is that dramatic. To match the organization, the people and societal definitions and constraints, the marketplace is the ideal architecture. To therefore designate a module within the Preliminary Specification as the Petroleum Lease Marketplace, it builds on this simple architecture. From Professor Richard Langlois' “Modularity in Technology, Organization and Society.”
Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces - which can then communicate with one another only through standardized interfaces within a standardized architecture - one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections. p. 1.
This next quote is critical. It's a chicken and egg problem however. I don’t know if we are taking elements of the technology and mapping them to the organization, or taking the marketplace and mapping it to the technology. Both are undergoing significant changes in the Petroleum Lease Marketplace.
What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to modularity in the design of the organizations that produce such products. p. 1.
Lastly, users need a window to see the marketplace. In the Petroleum Lease Marketplace, is our “Marketplace Interface," consider a user examining a Unit that they are a member of the Joint Operating Committee within the Marketplace Interface. During viewing, contextual tiles with agreements, leases, and other information appear. If the user wants to click on those and query the information it is there as well as historical accounting data. If users from another firm view the property, they can be seen and engaged in a collaboration. Immediately contextual tiles of information about the individual are available, and any previous correspondence and outstanding matters appear. Meanwhile clicking on the newly drilled well that was performing beyond expectations to get an update of its actual production. The adjoining lands have just been posted for bid by a producer firm who is not a member of the Joint Operating Committee. Calling on the other producers in the Unit and sharing a recorded video meeting within the Petroleum Lease Marketplace. This will initiate a plan to deal with it.
Professor Richard Langlois in his 1992 paper “Modularity in Technology” defines what capabilities are in a corporate setting.
This is the basic modularization of the market economy. It accords well with the modularization G. B. Richardson (1972) suggested in offering the concept of economic capabilities. By capabilities Richardson means "knowledge, experience, and skills" (1972, p. 888), a notion related to what Jensen and Meckling (1992) call "specific knowledge and to what Hayek (1945) called "knowledge of the particular circumstances of time and place." For the most part, Richardson argues, firms will tend to specialize in activities requiring similar capabilities, that is, "in activities for which their capabilities offer some comparative advantage" (Richardson 1972, p. 888). p. 27.
Recently we discussed the Petroleum Lease Marketplace "Marketplace Interface." We hopefully saw with the brief description of how the system could provide a window on the Petroleum Lease Marketplace and how that contrasts with the current rows and rows of file cabinets. Application of the firm's capabilities within that “Marketplace Interface” will be how the producer and Joint Operating Committee will build its firm and earn its profits. Or as Hayek says about capabilities, how much “knowledge of the particular circumstances of time and place” is not being acted upon in the firm today?
There will be significant changes in the transition from file cabinets to People, Ideas & Objects Preliminary Specification. These changes imply that there will be a cost and part of these costs will be software development. Professor Langlois calls these “Dynamic Transaction Costs” From Professor Richard Langlois “Transaction Cost Economics in Real Time.”
Over time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost - the cost of transferring the firm's capabilities to the market or vice-versa. These "dynamic" governance costs are the costs of persuading, negotiating and coordinating with, and teaching others. They arise in the face of change, notably technological and organizational innovation. In effect, they are the costs of not having the capabilities you need when you need them. p. 99.
Who said it's not the destination, but the path? That is what software development is about, the path. We have a rough idea of where we are heading and what it might look like. However, without the involvement of the user in the development of these systems it would all be pointless. User involvement is critical to People, Ideas & Objects success and quality. The Preliminary Specification is only a starting point. Our user community can take it and build upon it as they and the industry desire and need. Over time as the organization and markets change, so will the software. And the capabilities of the marketplace and the firms will develop as a result.
"F.A. Hayek (1945, p. 523) once wrote that 'economic problems arise always and only in consequence of change.' My argument is the flip-side: as change diminishes, economic problems recede. Specifically, as learning takes place within a stable environment, transaction costs diminish. As Carl Dahlman (1979) points out, all transaction costs are at base information costs. And, with time and learning, contracting parties gain information about one another's behavior. More importantly, the transacting parties will with time develop or hit upon institutional arrangements that mitigate the sources of transaction costs." p. 104.
There is a distinct market capability available in the Petroleum Lease Marketplace of the Preliminary Specification. A capability that is not reflected in the Research & Capabilities module, a capability that resides in the “Marketplace Interface.” A capability that provides the innovative oil & gas producer with the ability to participate in the dynamic marketplace of oil & gas leases, lands and properties. If the Research & Capabilities module handles the earth science and engineering aspect of the producers competitive advantage, it is the Petroleum Lease Marketplace that handles the Land and Asset Base attributes of the producers competitive advantage.
As we have discussed here many times, the amount of engineering and earth science effort for each barrel of oil or gas produced will continue to expand as time passes. Naturally therefore the volume of activity associated with oil & gas will increase as well. This implies that the number of P&NG leases and agreements will increase as will the number of Joint Operating Committees producers participate in. The Petroleum Lease Marketplace is the means to participate, make sense of and build your land and asset base from. It is reasonable to assume that this may require a multiple of legal, administrative and negotiating resources on the producer's behalf to achieve these outcomes. The "Marketplace Interface" becomes the first place to source the skills, knowledge and experience needed.
Although one can find versions of the idea in Smith, Marshall, and elsewhere, the modern discussion of the capabilities of organization probably begins with Edith Penrose (1959), who suggested viewing the firm as a 'pool of resources'. Among the writers who have used and developed this idea are G.B. Richardson (1972), Richard Nelson and Sidney Winter (1982), and David Teece (1980, 1982). To all these authors, the firm is a pool not of tangible but of intangible resources. Capabilities, in the end, are a matter of knowledge. Because of the nature of specialization and the limits to cognition, organizations as well as individuals are limited in what they know how to do effectively. Put the other way, organizations possess a pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities. pp. 105 - 106.
It will be through the “pool” of knowledgeable providers supporting the innovative oil & gas producers. The “Marketplace Interface” will enable these providers to engage with producers and build their firm. These will be the Land people, the administrators and those that support the negotiations and transactions involved in land deals. Traditionally these people have been employed by individual producers. However, with the “Marketplace Interface” there will be a need for these services provided by the marketplace. That will be one of the changes during the Preliminary Specification development.
But often - and especially when innovation is involved - the links among firms are of a more complex sort, involving everything from informal swaps of information (von Hippel, 1989) to joint ventures and other formal collaborative arrangements (Mowery, 1989). All firms must rely on the capabilities owned by others, especially to the extent those capabilities are dissimilar to those the firm possesses. p. 108.
Now that there is a marketplace established for the knowledge, skills and experience of the resources used in the Petroleum Lease Marketplace, we can begin to approach that marketplace from the point of view of its specialization and division of labor. Most of the work that is done within a producer firm for Land administration etc. is done for timeliness and accuracy. Due to the scope and scale of the individual producers' volume of lease and land activity. Efficiencies from the analysis of the division of labor and specialization may not have been available. With the development of the “Marketplace Interface” of the Petroleum Lease Marketplace the opportunity to conduct that analysis during the Preliminary Specification is provided.
It was autonomous innovation that Adam Smith had in mind when he argued that the division of labor enhanced innovation: each operative, by seeking ways to make his or her lot easier, would discover improved methods of performing the particular operation (Smith, 1976, I.i8, p. 20). The improvement he had in mind were such that they improved the efficiency of a particular stage without any implication for the operation of other stages. Autonomous innovation of this sort may even further the division of labor to the extent that it involves the cutting up of a task into two or more separate operation. Instead of being differentiating in this way, however, an innovation may be integrating, in the sense that the new way of doing things - a new machine, say - performs in one step what had previously needed two or more steps (Robertson and Alston, 1992). More generally, a systemic innovation may require small modifications of the way work is performed at each of a number of stages, and would thus require coordination among those stages. pp. 116 - 117.
In today’s market we have powerful tools that alleviate repetitive nature of lower level work. Two of those tools are computers and globalization. Our analysis of the marketplace should use these tools to the fullest extent to focus our attention on innovation. If we look at the Petroleum Lease Marketplace “Marketplace Interface” from this perspective there is much work to be done, and a significant opportunity to provide real value for all producers. Having a Petroleum Lease Marketplace that provides the producer and Joint Operating Committee with the ability to focus their capability on building their land and asset base would be a worthwhile objective for this module. It is one half of an innovative oil & gas producer's competitive advantage.
Designing and implementing a marketplace that organized these capabilities efficiently and effectively would not be difficult. Ensuring that our user community was supported through their learning and development of enhanced and innovative capabilities would.
A market form of organization is capable of learning and creating new capabilities, often in a self reinforcing and synergistic way. Marshall describes just such a system when he talks about the benefits of localized industry. p. 120.
To review what we have with the Petroleum Lease Marketplace "Marketplace Interface". Using the People, Ideas & Objects Marketplace Interface, the user can access an environment that's accessible to producers and Joint Operating Committees. There they will find a rich market environment where they can resource the skills, knowledge and experience they need to secure and manage their Petroleum and Natural Gas lease and land base. Given that marketplaces have time to develop and grow, with its own market supporting institutions, it will take on its own characteristics and efficiencies. Enabling the innovative oil & gas producer to leverage the marketplaces capabilities and focus on their core competitive advantages.
Making this transition to where the producers and Joint Operating Committees capabilities are sourced from the marketplace will take time, incur unique costs and involve many iterations. These “Dynamic Transaction Costs” as Professor Richard Langlois calls them are necessary as the transfer of capabilities from the firm to the market occurs. One should be aware of the reasons for this transition. And the reasoning is that we are moving the industry from the “High Throughput Production Model” to the “Decentralized Production Model.” This provides the producer with the capability to shut-in production, and then have the associated costs of production and overhead not incurred.
One might think that, as governance costs diminish in the long run, the boundaries of the firm would be determined solely by capabilities. But capabilities also change over time as firms - and markets - learn. The classical presumption was that the firm's capabilities would diffuse completely to the market in the long run, leading to complete vertical disintegration. This reinforces the point that capabilities are more than a matter of production costs in the neoclassical sense and, more importantly, suggest that the notion of a firm's capabilities implies a kind of information or knowledge cost - the cost of transferring the firm's capability to the market (other firms) or vice versa. These costs are a neglected kind of governance cost, which I call 'dynamic' governance costs. These are the costs of transferring capabilities: the costs of persuading, negotiating and coordinating with, and teaching others. These costs arise in the face of change, notably technological and organizational innovation. They are in effect the costs of not having the capabilities you need when you need them. pp. 123 - 124.
As one can imagine, this marketplace would be dynamic. The need for a dedicated software developer to identify and support not only the innovative oil & gas producers and Joint Operating Committee, but also those changes occurring in the marketplace vendors and suppliers, would be critical. That is the role of People, Ideas & Objects. From Professor Richard Langlois “Vanishing Hand, the Changing Dynamics of Industrial Capitalism.”
"The basic argument - the vanishing hand hypothesis - is as follows. Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets, much as Allyn Young (1928) claimed long ago. But the components of that process - technology, organization, and institutions - change at different rates." p. 3.
Let's assume you are a vendor involved in the Petroleum Lease Marketplace. And want to participate in the People, Ideas & Objects Preliminary Specification to expand the business. To include your firm in the “Marketplace Interface” would require you to use some of the interfaces we developed in the Resource Marketplace module. This discussion is about how the vendor would interact within the “Marketplace Interface” and engage with the producers and Joint Operating Committees that were looking for your products and services.
First we should mention who will make the changes we expect to see in the “Marketplace Interface” of the Petroleum Lease Marketplace. Resistance to People, Ideas & Objects by current bureaucracies is strong. They have a comfortable system that keeps them firmly in control and do not foresee the need for change. So how do these marketplace changes come about? And how does a marketplace like this come about? The answer is simple and reflected in this next quote from Professor Richard Langlois paper "The Vanishing Hand: Industrial Capitalism's Changing Dynamics."
"Ruttan Hayami (1984) have proposed a theory of institutional change that is relevant to my story of organizational and institutional change. As they see it, changes in relative scarcities, typically driven by changes in technology, create a demand for institutional change by dangling new sources of economic rent before the eyes of potential institutional innovators. Whether change occurs will depend on whether those in a position to generate it - or to block it - can be suitably persuaded. Since persuasion typically involves the direct or indirect sharing of the available rents, the probability of change increases as the rents increase. And the more an institutional or organization system becomes misaligned with economic realities, the more the rents of realignment increase." pp. 36 - 37.
Is the profit opportunity of being an innovative oil & gas producer more appealing than today's methods? And will those that operate in the “Marketplace Interface” find increased profits by providing services that innovative producers want and need? If either of those situations are the case then the profits will motivate the changes within the marketplaces described within the Preliminary Specification. (Please review the Preamble to the Preliminary Specification.)
In terms of the interfaces that will help vendors who provide lease and land services to innovative oil & gas producers the first would be the “Vendor / Supplier Contact Database.” This provides the basic information needed for the oil & gas producer or Joint Operating Committee to have on the vendor. Think of it as a rich contact database maintained by the vendor. There is a second aspect of this database that provides a secondary or tertiary level of data to the producer. This is when the producer engages the firm. This includes access to the vendors' staffing profiles, calendars and scheduling information and enables the producer and vendor to establish further elements of their working relationship. (Query the “Vendor / Supplier Bidding / Commitment Manager” in the Resource Marketplace module for further information on the extent of these interactions.)
The second interface that would help the vendor in operating within the “Marketplace Interface” of the Petroleum Lease Marketplace would be the “Gap Filling Interface.” Recall this is the interface that is used by producers and vendors to communicate the need to have a “Gap Filled.” The gap being a situation where the division of labor could be expanded by providing a further service that is not currently offered. The expansion of the division of labor is done through filling gaps. And if producers and vendors identify and communicate needs and services that are in need of filling, or demand for updated services, the opportunity for the service to meet the demand will occur quickly. The reason for this is that we live in a time and a place where the service and the need may be located thousands of miles away from each other, or even just next door, and may never know that either exists. The “Gap Filling Interface” eliminates time and distance of these needs.
The third interface that provides value to the vendors in the “Marketplace Interface” of the Petroleum Lease Marketplace is the “Actionable Information Interface.” Although somewhat similar to the “Gap Filling Interface” it fills a different role. If a vendor has undertaken a strategic and competitive investment over the next five years that would fundamentally change their service offering. They would publish this information in the “Actionable Information Interface.” This would inform the producers and Joint Operating Committees of the prospective changes in the marketplace and allow them to engage the vendors on what they need. This being a collaborative interface, vendors could engage the market to help define their market offering in the mid term. Most of this information is available to the prudent Google-enabled researcher today. Nevertheless, the aggregate value of the information would be a unique window on the marketplace offerings and market direction in the "Actionable Information Interface." One might question why you would publish such sensitive information? I would remind readers that publication is how you earn copyright.
Our Petroleum Lease Marketplace's "Marketplace Interface" section was recently updated. In order to build upon the value provided, I'll add two updates to the discussion.
“Serendipity means finding interesting or valuable things by chance. It's what happens when we make unexpected connections and create possibilities that never existed before.” Innovative products and services are not created behind desks or in a boardroom full of executives.
What an organization does is defined and supported by ERP software. The organization is also constrained by the ERP's configuration. In today’s software driven environment, where the Internet provides “a wealth of information,” Professor Herbert Simon said it best, “creates a poverty of attention.” A number of the constraints placed on an organization's ERP software prevent any excessive information pollution from getting in. Globalization brings about advanced levels of specialization and division of labor based on global comparative advantages. Competition, vendors, suppliers and resources are dispersed in long distances and in every direction. The overall effect of this environment is to prevent serendipity from being able to “find interesting or valuable things by chance.” And I would suggest that it has all but eliminated spontaneous order which is defined as:
Spontaneous order theory proposed that orderly societies could emerge from the self-interested actions of decentralized individuals who had no direct concern with the common good.
Anyone arguing for centralized organization in oil & gas may have a hard time providing relevant examples of successful implementations. The People, Ideas & Objects Marketplace Interface represents the three marketplace modules of the Preliminary Specification. Is designed to provide an oil & gas focused forum of discussion and understanding of its communities to overcome the challenges presented by the issues and opportunities we identified. The industry has been hamstrung by issues that hinder progress, growth, and profitability.
Apple announced a headset device yesterday for video conferencing, virtual meetings, whiteboards, and avatars consistent with the concept of the "Marketplace Interface" of People, Ideas, & Objects. As the "Marketplace Interface" is designed, headsets are not required. Apple's positioning, however, is clearly not competitive with Meta or Microsoft consumer products. Apple is considering and implementing this on a broader, more work-related platform. Consistent with WFH and of high quality for long-term use. From Bloomberg.
The device will have advanced video conferencing and virtual meeting rooms with realistic avatars, ideally making users feel like they’re interacting in the same place, and new collaboration tools via the Freeform app that let users work on virtual whiteboards and go over material together. There are also features to tie into existing Apple devices, such as using the headset as an external monitor.
People, Ideas & Objects offers these features which are deemed essential to establishing serendipity and spontaneous order once again in an ERP system such as the Preliminary Specification.
See the Apple Vision Pro promotional video at the bottom of this wiki page. Although focused on the consumer market, one's imagination is all that's needed to see the value in an ERP environment specifically designed for oil and gas companies.
As a result of developing the Petroleum Lease Marketplace from the Preliminary Specification. A key deliverable would be the removal of management control from the current bureaucracy. And rebuild it with the marketplace's "vanishing hand". The marketplace would be represented through the “Marketplace Interface” that we’ve discussed here. In this quotation, taken from Professor Richard Langlois’ book “The Dynamics of Industrial Capitalism” he reflects on this point.
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. The unavoidable flip-side of seeing firms as possessed of capabilities, and therefore as accretions of habits and routines, is that such firms are quite as susceptible to institutional inertia as is a system of decentralized economic capabilities. Economic change has in many circumstances come from small innovative firms relying on their own capabilities and those available in the market rather than from existing firms with ill-adapted internal capabilities. Chapter 5 will reconstruct the New Economy of the late 20th and early 21st centuries along exactly these lines, once again adding nuance and historical texture. If the antebellum period reflected the Invisible Hand of market coordination, and if the late 19th and early 20th centuries saw the rise of the Visible Hand of managerial coordination, then the New Economy is the era of the Vanishing Hand. p . 14.
One could certainly accuse me of being anti-management. I’ve had quite a battle with them since we determined the Joint Operating Committee was the key to being a dynamic, innovative, accountable, and profitable oil & gas producer. Our other determination was that software defines and supports the organization, and therefore changing the organization requires changing the software first. Management has distorted this knowledge by realizing that if they never changed the software, their management domain would never be challenged. Using this knowledge to secure their future in unaccountable and unchallengeable ways. But we know many things from our review of Langlois, Coase and Chandler in particular.
Management has no stake in the firm.
If a crisis strikes a firm, management resumes elsewhere, or declares bankruptcy.
It is the investors and debt holders who will shoulder the costs.
Management currently hold the reins, and are mindful of their options.
Ownership, in the same way as the Merchants need to start over.
Starting over begins with supporting People, Ideas & Objects, our user community and their service provider organizations.
It was noted by Chandler that management has failed in the past.
During the great depression.
A time when the government had to increase its economic involvement.
Management may not see the bigger picture, and fail again.
Management's knowledge in not changing the software is an extension of their monopoly on tacit knowledge. A market or bureaucracy can hold tacit knowledge. The producer has ensured no market can claim their tacit knowledge and gain a foothold to challenge their dominance. In this way, the whole People, Ideas & Objects Preliminary Specification is futile, or a call to action for oil & gas ownership. From Professor Langlois paper “Capabilities and the Theory of the Firm.”
Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. p. 17.
The bureaucracy's assertion that the oil & gas service industry vendors and suppliers are greedy and lazy is self-serving. And designed to ensure that markets don’t develop and compete with management. What is needed is the market supporting efforts of an innovative oil & gas industry. This depends on a dynamic and effective “Marketplace Interface” in the Petroleum Lease, Resource and Financial Marketplace.
I think that what we have learned about capabilities is valuable and applies to the “Marketplace Interface” that we have detailed here. That “knowledge, skills and experience” are the basic ingredients of capabilities and these fit well within the Petroleum Lease Marketplace module. If we at People, Ideas & Objects could be so bold as to assert that we include “ideas” with knowledge, skills and experience then we are beginning to build on these concepts.
The other aspect of what we have discussed is the role the oil & gas industry has in providing the infrastructure that supports the market. This includes standards and, as we have discussed, software like People, Ideas & Objects to support markets and marketplaces. The choice between the marketplace and management as to who will control the industry in the future has already been made. The Internet demands that decentralized markets will rule the day. Just don’t tell the current management as they fight to hang on to their last few moments of control. From Professor Richard Langlois' Book, “The Dynamics of Industrial Capitalism.”
When a modular product is imbedded in a decentralized production network, benefits also appear on the supply side (Langlois and Robertson 1992). For one thing, a modular system opens the technology up to a much wider set of capabilities. Rather than being limited to the internal capabilities of even the most capable Chandlerian corporation, a modular system can benefit from the external capabilities of the entire economy. External capabilities are an important aspect of the “extent of the market,” which encompasses not only the number of possible traders but also the cumulative skill, experience, and technology available to participants in the market. Moreover, because it can generate economies of substitution (Garud and Kumaraswamy 1995) or external economies of scope (Langlois and Robertson 1995), a modular system is not limited by the weakest link in the chain of corporate capabilities but can avail itself of the best modules the wider market has to offer. Moreover, an open modular system can spur innovation, since, in allowing many more entry points for new ideas, it can create what Nelson and Winter (1977) call rapid trial-and-error learning. From the perspective of the present argument, however, the crucial supply side benefit of a modular production network is that it provides an additional mechanism of buffering. p. 70.
Data models define a database's architecture. A data model is an application-level structure that provides structured data storage and retrieval for Oracle databases. Normalization ensures that the database adheres to the rules and requirements of the data. People, Ideas & Objects Cloud Administration & Accounting for Oil & Gas provides this value through Oracle Autonomous Databases. There will be three data models used in the Preliminary Specification to provide the data attributes that are needed by this system. The combination of Oracle Cloud ERP applications, PPDM Association field operations data model, and People, Ideas & Objects' proprietary oil & gas ERP data model make up the three.
The Oracle Cloud ERP data model is comprehensive and manages not only Oracle Cloud ERP attributes but also system-related data model requirements. This data model's size is staggering, and People, Ideas & Objects, our user community, and their service providers will need to be familiar with the tables that their processes access and write to. I'm sure not much of what is contained in Oracle’s Intellectual Property can or will be known by any one individual. We are in the domain of automation, specialization and the division of labor. It might be understood by as little as one thousand people but I would doubt it.
The PPDM Association defines and creates standards for oil & gas exploration and production data management. This data model includes the following information; general well header, digital well log, seismic location, seismic data, land parcel, reservoir field and pool, faults and formations, geographical, and surface grids. Although many of these data elements may seem outside of the ERP scope only seismic location information, seismic data, and faults and formations may be outside. As part of our industry-wide collaborative application, the land information will be of significant value.
The PPDM data model is quite large. In one of the last upgrades PPDM suggested that just the upgrade was an addition of 500 tables. People, Ideas & Objects are not members of the association and are therefore not able to download the model and can’t tell what level of normalization the data model conforms to. Looking in the wiki however I see a number of tables with similar first names that have different second names. The first name should be the table, and the second name should be an attribute within that table. Instead of 10 or 15 tables, they would only need one. Despite this, data models are difficult to understand without a comprehensive look at them.
Applications based on the PPDM data model are already used by many oil & gas producers. As a result, we are building on the existing infrastructure of technologies used by the producers for earth science and engineering applications. By implementing ERP, we are increasing the applications that producers' technical staff are able to access and use. Engineers benefit from having access to well header information that also references accounting data. This is also necessary when we get to some of the more complex items in the Material Balance Report of the Accounting Voucher. Particularly valuable will be the integration of IoT and SpaceX that will be undertaken in the Operations Management module.
Oracle Cloud ERP, Oracle Autonomous Database, and PPDM Association data models don't adequately represent the fourteen modules, three marketplaces, or seven organizational constructs of the Preliminary Specification. In order to deal exclusively with oil & gas-specific attributes, we must develop our own Cloud Administration & Accounting for Oil & Gas data model. Consequently, People, Ideas & Objects data model will form part of the underlying Intellectual Property developed with our users. Our user community vision describes the methods we are using to accomplish this development.
The Petroleum Lease Marketplace of the Preliminary Specification requires transaction support for many things. These include lease rentals, surface rentals, and bonus payments. The purpose of this discussion is to determine which services are available to assist in the transaction processing of Oracle Cloud ERP Applications Financial Management.
In terms of the expanded division of labor and specialization enabled by the Preliminary Specification, we should once again look to our user communities service provider organizations. Innovative oil & gas producers and their Joint Operating Committees focus on their land and asset base, as well as their earth science and engineering capabilities as their unique competitive advantages. The Research & Capabilities and Knowledge & Learning modules focus on the development and deployment of capabilities and the Petroleum Lease Marketplace module is focused on the land and asset base of the producer. Therefore to focus on those assets would require that the administrative minutiae of land, production and exploration administration and the accounting associated with land and assets be outsourced to specialized service providers. By doing so, the producer is able to concentrate exclusively on securing and managing their company's competitive and strategic land and asset base. A task that will ultimately build value for the producer, and a task that is unlimited in terms of the amount of time and energy they spend on it.
As an example, we have a scenario where a producer has chosen People, Ideas & Objects for their ERP system. Which includes the Oracle Financials and implies that high levels of specialization and division of labor are incorporated through our user communities service providers. Thus, these accounting applications are typically used by individuals who reside outside of the producer firm. Although information derived from them will be used by members of the producer firm, most of the data and processing will reside with the service providers. Thankfully we are using a cloud computing model of delivery of the systems by these service providers.
Consider that there are service providers for lease payments who guarantee the surface and lease rentals will be paid on time, lawyers for contract maintenance, and one for Crown and Federal lands. They each represent many producers and hold a substantial share of the industry's market. Each has highly organized and efficient processes that require specialized software systems to meet their specific processes needs. On behalf of the producers represented in our subscription model, People, Ideas & Objects would provide access to the producers' data and develop these highly automated systems. Service providers have access to one or possibly a dozen data elements of each producer's Joint Operating Committee for the process management they are responsible for.
The processes of one producer would be fairly straightforward. It is unlikely that an organization seeking high levels of automation could justify its high costs of software development independently. In a scenario where the industry is being represented by specialized service providers the need for automated systems is necessary. And these systems have to be an integral part of the producers in terms of their integration with our Security & Access Control module. For instance the lease rental service provider would be able to access only the tables relating to the lease rental data. And the service provider would be unable to complete their task without this level of access.
Oracle Cloud ERP Applications will include the full suite of Financial Management modules. Among these are General Ledger, Accounts Payable, Accounts Receivable, Asset Management, Payments & Collections, and Cash & Expense Management. Our Resource Marketplace module already adopted these, so we only need to access the specific services within those modules. Modularity offers such advantages.
Consider the innovative oil & gas producer using the People, Ideas & Objects Preliminary Specification. Across the Petroleum Lease Marketplace, we noticed that the producer's main focus was acquiring land and assets while accounting, land administration, and other service providers handled the firm's administrative and accounting needs. For these highly specialized service providers to have access to the producer's data, the People, Ideas & Objects application needs to be specifically developed to meet their needs. Now we'll discuss the billing process and how service providers earn their fees from producers.
Producers and service providers must be able to agree on prices for the service as part of the specialization and division of labor process. As the service provider can process higher volumes of lease rentals with a fixed number of resources, they can pass these savings on to the producers. Through automation, higher levels of specialization and division of labor, high utilization rates of service provider resources, and sharing of infrastructure costs across industries, savings can be derived. Due to the lower cost and higher quality of the service provided by the service providers, using them becomes more economically feasible for the producer.
Service providers, however, do not want to generate thousands of invoices each month by manually compiling reams of data. In addition, the producer does not want to reward the service provider if the lease rentals are not paid. The billing for the service will be automated based on the producer's successful payment of any and all lease rentals. Through People, Ideas & Objects, the service provider will automatically send a bill for the service after processing a lease rental payment. The systems in which both the producer and the service provider use for these purposes. Consequently, a producer's payable and a service provider's receivable are created.
With highly automated systems, and billing based on successful lease rental payments, we can be certain that costs are minimized. The efficiencies are gained by the producers, the service provider and society itself as all of these people are involved in a more productive use of their time, such as the producer building their land and asset base, the service provider gaining distinct competitive advantages. Advantages such as quality, hyperspecialization, division of labor, automation, innovation, leadership, integration, problem solving, identifying problems, collaboration, research, ideas, design, planning, thinking, negotiating, financing, tacit knowledge, reasoning, and judgment.
Oracle Cloud ERP Applications, in particular Oracle Financial Management Suite, are designed to be used in a cloud computing environment. Whether the service provider also has their own accounting system is not relevant to this discussion, what matters is that the billing process for the producer is as efficient as possible and that implies that the service providers have Oracle Cloud ERP and Oracle Financial Management suites available to them.
Last but not least, it is important to emphasize the standardization and objective nature of accounting provided by service providers to producers. It is important to realize that the decision to shut-in production is based on the financial criteria of profitability determined by the accounting and administration of the service providers. It has also been proven that in oil & gas, a producer's losses are at times reported as their windfall profits. In order to implement the appropriate production discipline on the industry, unprofitable properties must be shut-in in order to achieve maximum profitability. These shut-in properties incur no profit or loss when using Cloud Administration & Accounting for Oil & Gas. All costs, including overhead, become variable based on profitable production. This prevents them from diluting earnings from profitable properties, and with only profitable properties producing, corporate profitability is maximized as well as many other benefits. To determine whether a property is unprofitable, producers need to know that they’re using the same standard and objective accounting criteria as all other North American producers. Therefore standard and objective accounting is the basis of all service provider output to assure producers of the confidence they need in making the appropriate decisions to optimize earnings.
The Petroleum Lease Marketplace contains some of the data elements and characteristics that define the unique culture of the oil & gas industry. Many things, such as the AFE and working interest distribution, are a result of the Joint Operating Committee culture, and are collected and stored in the Petroleum Lease Marketplace. As these attributes are unique, standard accounting classifications for application modules cannot account for them. It is necessary for modules like the Petroleum Lease Marketplace to be built and for that we need to drop down from the Oracle Cloud ERP Applications to the Oracle Fusion Middleware layer.
In order to demonstrate how People, Ideas & Objects differs from other ERP systems, we should start at the beginning, starting with the acquisition of a petroleum lease, the establishment of partners and the signing of an agreement, to the raising of an AFE to drill a well.
Markets are still feeling the effects of the 2008 financial crisis and investors and bankers disappointment in oil & gas performance. Many producers are willing to farmout large blocks of land in their shale positions. In order to participate in a promising area where the farmor has shot extensive seismic, the producer negotiates a 32,000 acre 20 well deal. The producer selects drilling locations and is 100% involved. Upon completion of the drilling of the 20 wells, the producer will earn an undivided 50% working interest. Despite having limited shale capabilities, the producer has promoted another producer with extensive capabilities to join the program. A 12.5% working interest will be earned by participating at 20% and providing these capabilities.
Considering this scenario from the perspective of the producers who will theoretically all be using the People, Ideas & Objects modules. Due to the agreement, the leases with the farmor can now be listed with the companies that are party to the deal, the farmees. The agreement would have registered an encumbrance against the leases, and let's assume that happens coincidentally with the agreement. Farmees are responsible for the lease rental costs under the agreement. As part of the lease administration process, the service provider that we discussed uploads the lease data to the farmee's system and begins managing those leases. Once lease rentals are due, those leases will be paid, and the lease administration service provider will be charged for the annual services it provides. Joint venture billing will be used to bill the other farmee at 20% of the total.
Within the Oracle Fusion Middleware suite of tools there are a variety of frameworks that will be used to make this happen. The frameworks that we would use as a minimum for what is discussed above would include, Business Intelligence, Business Process Management, Collaboration, Content Management, Cloud Application Foundation, Data Integration, Oracle Fusion Middleware for Applications, Service Oriented Architecture, SOA Governance, and Transaction Processing.
Even when we step out of Oracle Cloud ERP Applications, we are still able to inherit substantial capabilities from Oracle Fusion Middleware. The promise of Java is that it builds on previous efforts in software development. Oracle Fusion Middleware is the result of considerable effort. Oracle Cloud ERP Applications are all derivatives of it.
The discussion continues regarding the scenario in which the producers were farming in on a 32,000 acre parcel of land and committed to drill 20 wells. In order to provide the services to the partners of this agreement, we will use the Oracle Fusion Middleware layer to provide the People, Ideas & Objects Preliminary Specifications Petroleum Lease Marketplace module.
It is a traditional farmin agreement with accounting and operating procedures between the farmor, the farmee and a partner with expertise in shale formations. Within the Petroleum Lease Marketplace module, all variables defined in the agreement and these procedures need to be populated. It is interesting to note that operating decisions require 60% approval for passage, which leaves producers in control of operations prior to earning. This threshold will be difficult to cross once earning is achieved since it will require almost full consensus among all partners.
Using the Knowledge & Learning modules "Planning & Deployment Interface", operational decisions are made collaboratively. When a decision is required from the Joint Operating Committee participants, we will be able to create the necessary collaborative environment using Oracle Fusion Middleware to initiate, document, discuss and record the voting process of these decisions using the Collaboration Framework.
A new area will be documenting the capabilities of the partner who has been brought on to provide the shale area experience. They are listed in the "Capabilities & Commitments Interface" of the Petroleum Lease Marketplace. Before the agreement was signed, the producer had the opportunity to review with their team their Research & Capabilities “Dynamic Capabilities Interface” for the shale capabilities they had, and were satisfied that when those capabilities were available to the producer through the Joint Operating Committee in the Knowledge & Learning module; they would be more than adequate for farm-in purposes. The agreement stated that these capabilities would be included in the consideration paid to the producer and that they were being made available. Some of that consideration is paid in the form of a higher working interest through earning, and established day rates for their engineering and geological staff members. As the producer providing the capabilities, it will be their responsibility to describe in their "Capabilities & Commitments Interface'' the resources they are providing to the farmin and the consideration they are receiving. As a result, both producers will be able to balance the costs and revenues of developing their capabilities and ensure that they are not overcommitting their resources in the future.
It is important to note that the agreement itself is not static. Perhaps the "Marketplace Interface" was extensively used during the agreement's development. Changes to the agreement could be made in that forum again. Adding equipment to deal with production from the lands or expanding the scope of the lands. These are all elements of how the agreement could evolve over time. The variables that are stored within the system would change, of course, and provide raw data to most of the modules that operate in the Preliminary Specification. As the agreements are the place of origin of most of the critical data that is used within the oil & gas industry. This is where working interest distribution scenarios, accounting methods, land requirements, and procedural requirements are discussed.
In this section, we will discuss the AFE process and how the Petroleum Lease Marketplace of the Preliminary Specification handles the elements of that document. Our discussion will also include the Oracle Fusion Middleware frameworks that would be used to implement our processes, functionality, and features.
The producer has the resources to complete the 20 well program within the next drilling season, which is consistent with the capabilities of the partner. The "Dynamic Capabilities Interface'' can be found in the Knowledge & Learning module, a Joint Operating Committee module. Which also involves the “Planning & Deployment Interface” which has as part of that interface the AFE. The variables that are used to populate the AFE are derived from the agreement and include the working interest distribution, the participants, the location and the contacts for execution. Other variables such as the budget, also prepared within the “Planning & Deployment Interface,” and are derived from the Partnership Accounting module. Preparation of an AFE therefore is the least problematic in terms of creating the document. The ability to select from pull down menus and options that automatically populate the form are necessary to make the user interface as intuitive as possible. Items such as selecting the well id should automatically populate the partners and the working interest distribution variables.
As soon as the AFE form is completed, the document needs to be routed internally for approval. Prior to sending the AFE for external approval, all expenditures must be approved internally by the various departments. Documents are routed through the Oracle Middleware Business Process Management framework. For digital approval, it is sent to the CEO, CFO, COO, Land and Legal departments. After all approvals have been received, the document will be rerouted for external distribution. As we have brought on a partner for their capabilities, it is only necessary to gain their approval since they are paying 20% of the costs. We are also routing the document to the farmor, as the AFE will be used to document the 20 well commitment we have under the earning provision. The Joint Operating Committee's other members also use the People, Ideas & Objects system, as we indicated. Thus, this routing is similar to the internal routing and approval process. Once approved, verified AFEs are circulated to the partners to inform them that the AFE has now become a valid cost center and will begin the drilling process.
Both the producer and the partner bringing in shale capabilities are actively involved in drilling these 20 wells. Costs will be incurred by both producers for the joint account. People, Ideas & Objects was designed around the concept of pooling. In order to make up for any potential resource shortfalls, all producers would have to participate in some form or fashion in order to fulfill the operator role. The producers will therefore participate and incur costs in unequal proportions to their working interests. During the Joint Venture Billing process, the People, Ideas & Objects system will equalize the participants' interests and participation rates each month. In this case, both producers must post their costs to the AFE for the month in which they incurred them, but it could involve as many producers as a Joint Operating Committee has. During the month end process, the equalization will be calculated based on their participation and the total costs incurred by both partners that month, and either compensate or bill them based on the difference. This is done on an AFE-by-AFE basis.
Part of the pooling concept involves billing a producer's engineering and geological resources to the joint account. When service providers charge actual overhead costs directly to Joint Operating Committees, overhead allowances are eliminated. The same process is used in having a revenue stream for producers' technical resources. Which is essential for a producer to maintain their earth science and engineering capacities and capabilities when the resource is in high demand. This is the ability to charge these resources to the joint account for services provided.
I thought that we would spend some time discussing the management of royalties in the Preliminary Specification. Royalties are calculated, paid, and processed in the Petroleum Lease Marketplace, as well as in the Accounting Voucher and Partnership Accounting modules. The geographical scope of the application will be an important determinant of the Preliminary Specification. The People, Ideas & Objects application modules will calculate, pay and process royalties in those jurisdictions based on that information. Participating in the community is the most effective way for a remote producer to ensure that all of their areas are covered by the application. For example, they should assert that Alaska should be included if they have production or leases in Alaska. Don't assume someone else will take care of this for you in our user community.
Royalties are calculated and processed in a number of different ways. Over time, many have adopted what can be called generally accepted royalty principles, but there are still differences to consider. In addition to these differences, there are differences in the systems used to calculate royalties. I have to admit, Excel does a pretty good job at multiplication. However, many of these royalty frameworks were not designed to work that way. Excel is a labor-intensive program. As far as Gas Cost Allowance (GCA) goes, none of the industry's systems have implemented an ERP process. One of the largest cost items for producers is royalties. Making sure that the minimum correct royalties are calculated and paid can have a significant impact on profitability with high commodity prices.
It is within the Petroleum Lease Marketplace module that the Lease document and royalty information are stored. Every jurisdiction will have its own methods and procedures for calculating royalties on its lands, be it Crown, Federal, Freehold, Private, or State. It is common for these to be comprehensive and to require substantial use of information technology. In some cases, they use realized prices, in others they use their own pricing models. Royalties can be applied to units of production in a variety of ways. However, there is nothing that cannot be handled by a software development capability like People, Ideas & Objects. Let's also examine how that compliance is achieved.
Within each royalty jurisdiction, we will have a royalty accounting service provider, or several providers, who specialize in the management of royalties, in this case, for the state of Texas. The only thing these people deal with is Texas production and the Texas Railroad Commission for state royalties. These companies pay Texas State royalties on behalf of hundreds of oil & gas producers in Texas. People, Ideas & Objects develops software specifically for the service provider to calculate royalties and ensure that producers pay their minimum amount. On behalf of their clients, the service provider also keeps up with the changes in the Texas royalty administration and ensures that these changes are reflected in their software at the appropriate time. There would be royalty specialist service providers located in each jurisdiction for each royalty that falls within the scope of the Preliminary and subsequent Specifications of the People, Ideas & Objects application modules.
As a result of specialization and division of labor, everything from the administrative side has been handed off to these service providers, increasing service quality and reducing administrative costs. Only this method is proven to increase the industry's economic performance. The alternative is that we continue to build redundant individual silos of fully capable oil & gas producers non-competitive attributes. A scenario in which only the managers will be happy.
Paying royalties is the responsibility of the individual producer. In most jurisdictions, I believe this is true. Accordingly, royalties are calculated on the producer's share rather than the Joint Operating Committee's production. Production is derived from the Joint Operating Committee, which involves the Material Balance Report. This discussion will deal with the production aspects of the royalty calculation and the tie in to the Accounting Voucher and Partnership Accounting modules Material Balance Report.
First let's revisit the manner in which production accounting is handled in the Preliminary Specification. It is through specialization and the division of labor that we have looked to service providers to provide these production accounting services to the Joint Operating Committees. Specialized in a region, the production accounting service provider may be located within that region to have hands-on experience with the operation. Working for the many Joint Operating Committees that may be located in the region the service provider may as a result work indirectly on behalf of many producers to conduct their production accounting.
Looking at this situation from the perspective of a fairly large producer. Depending on the number of jurisdictions or unique royalty administrations, they may have upwards of a few hundred geographically based production accounting service providers. It isn't the complexity of dealing with these many providers that is the issue, but rather the size of the producer. Here, it should be stressed that the billing of these services should be based on positive action. For the production accounting service provider, it would be based on the original production. Similarly, if there was no production for that month, no charges would be incurred. In the case of royalty accounting, the same situation should apply; however, producers do not want it to be dependent on royalty payments.
The Material Balance Report is located within the Accounting Voucher and Partnership Accounting modules. This report provides material balancing for oil & gas facilities. Our discussion of the volumetric information within the Preliminary Specification is covered in those modules. Review the Material Balance Report in the Partnership Accounting and Accounting Voucher modules to review the discussion to date. Material Balance Reports will be used to produce information on royalties, one of the areas that will be using the data. Each producer's production is allocated in the report as part of the process. As a result, this information is incorporated into the royalty calculations for the various jurisdictions. For royalty purposes, this volume should be the final production volume after taking into account any swaps or inventory. The endless process of amendments will no doubt last for at least 30 - 60 days before everything settles down. The royalty calculation being a nature of revenue less costs times royalty rate equals royalty, these production volume changes do not require any human interaction until such time as the point the royalties are due at the end of the month. Royalties will be paid on the appropriate volume of production based on the Material Balance Report.
The prices that the royalties will be based on is what we will be discussing. Royalties must be paid by producers on the net price at the wellhead of all the commodities produced. We will discuss how these prices are calculated in the People, Ideas & Objects application.
There are some jurisdictions that use their own pricing scenarios. To calculate royalties, provinces in Canada calculate the average price of gas and NGLs for each producer. Gas processing costs are also based on standard costs. For most jurisdictions, the royalty is calculated based on the net realized price. To describe the scenario that we are using, let's take a look at a gas contract. We will assume there are no liquids for simplicity's sake. Using the Material Balance Report, we can see that the gas that is sold under the contract is all of the gas that is produced by company A in the region served by gas plant B. In some cases, this gas is collected over a considerable distance from over 50 wells. Producers pay custom processing and gathering fees for services that are not owned by them. The gas contract is with an industrial consumer located across the state, and the point of sale is the delivery to their facility.
Therefore, the producer must pay for the transportation and processing of this gas to the point of sale. Netted back to the wellhead, the royalty price will be what the consumer pays less the processing and transportation costs. In the Material Balance Report, each production stream must have a sales contract and a transportation contract from the point of origin to the point of sale. This is a requirement of the system. Contracts support the production stream within the Material Balance Report; without a contract, the Material Balance Report will not balance. Therefore, all the information necessary to determine the royalty price can be found in the various Material Balance Reports.
From a well by well perspective, the prices that will be received at each wellhead might differ slightly since some wells may collect from a distance that is materially different, and therefore would pay more. The royalties are going to take the calculations from the point of view of the wellhead and begin the royalty calculations on that basis. These prices are derived from the Material Balance Report based on the contracts that are necessary to make that document operate and balance. As prices and volumes change, the Material Balance Report will be amended. The Material Balance Report is part of the Accounting Voucher module in People, Ideas & Objects. Any changes in the material balance must also correspond to the changes within the Accounting Voucher, and an Accounting Voucher can be for a producer or a Joint Operating Committee. So a volumetric change will recalculate the total custom processing and revenue receipts and a change in custom processing fees will affect total custom processing and net pricing to all the producers in that system. Making a change in one of the systems has an effect in the other. To change the price the producer received in the month can’t be done in the general ledger, it can only be done through the gas sales, custom processing or gathering contracts. This is a result of the high level of automation implemented in production, revenue and royalty processes of the Preliminary Specification.
We’ve used a simple example of how the costs were netted back to determine the price used for royalties. Let's look at how the Preliminary Specification handles Gas Cost Allowance (GCA) and the costs of operations. The producer has a financial interest in the gathering or processing facilities that are used to carry their gas. Based on the annual throughput of these facilities, GCA allows the costs of capital and operations to be charged.
Each of these assets, whether it is a gas plant or a gathering system, will have its own Joint Operating Committee. It is first important to determine what types of capital items qualify for GCA. Not all capital may be deducted for GCA purposes. A producer should be able to tag an AFE with the designation that these costs are eligible for GCA within their accounts. Either that or select the eligible accounts through the chart of accounts. From there the costs of capital, both a return on investment and depreciation, can be calculated for the year.
In addition, the operating costs associated with those assets will have been aggregated under their Joint Operating Committee accounts. These costs are eligible for deduction as part of the facility's total costs. Each facility must be accounted for separately. For a gathering system alone, a cost/unit factor will be calculated. Each functional unit within a gas plant should be accounted for as a separate calculation for GCA purposes. Throughput calculations need to be based on gas or liquid equivalents. In a gas plant with a C2 facility, the output will be gas and liquids and a gathering system will be based on the gas volume. For products processed or gathered through that facility in a month, the results of these calculations provide an amount of GCA to deduct from the sales price to determine the royalty price.
It is the purpose of the Petroleum Lease Marketplace module to automate these calculations. Royalties are calculated based on estimates of GCA using last year's factors. That does not mean they are not labor-intensive. People, Ideas & Objects already store all the factors needed to conduct a calculation. It is the Material Balance Report that provides information about production volumes and throughput at each functional unit. What is needed is the “Gas Cost Allowance Worksheet Interface” that aggregates these variables for the Revenue and Royalty Accountant for them to prepare their calculations for actual GCA, equalizations and estimates.
Each functional unit can be viewed separately by the accountant using the "Gas Cost Allowance Worksheet Interface". The interface will pull in the the producers variables of the AFE’s and cost centers that are pertinent to that facility and the throughput information from the Material Balance Report. These AFE and cost centers information are dynamic. Then the accountant can organize the information in the manner that the calculation is automatically populated with the current information from the system. The accuracy and timeliness of this information, and the format of the data would be such that the production of GCA values for each month of the year would be possible. The outcome of the “Gas Cost Allowance Worksheet Interface'' would be the value that is used to deduct for royalty purposes.
Producers may have different interests in the various gathering and processing facilities than they do in the producing property. Due to this, these calculations aren't done on a Joint Operating Committee basis, but at the utilization level of each producer. Royalty accounting service providers will continue to spend time in this area. Having people who specialize in the administration of royalties will help to ensure that the producer continues to pay the minimum correct royalties.
Within the Petroleum Lease Marketplace, Oracle Fusion Applications Financial Management has been used in unique ways. It provides for the accounting and billing services to the producers, Joint Operating Committees and service providers that are involved in the Petroleum Lease Marketplace module. The Oracle Database is fully employed as well as there are many attributes, or data elements, that are stored within the Petroleum Lease Marketplace module. It includes the unique strategy of the Joint Operating Committee, the Lease, the agreements, and the royalty information. We need to understand how the unique attributes of an oil & gas royalty infrastructure will be implemented.
In Oracle Fusion Middleware there is Oracle’s Business Process Management Suite (BPM) which is a collection of tools and previously defined processes that developers use to configure for specific processes. Royalties are an ideal candidate for the use of these tools. Based on Oracle Database, Java and XML, Oracle BPM provides a graphical user interface that users can relate to when it comes to mapping processes. By combining data models from People, Ideas & Objects, PPDM, and Oracle Fusion Application Suites, data storage and integrity can be maximized.
Oracle Fusion BPM tools are reliant on the user. Since People, Ideas & Objects are user-based, we need tools that allow us to interface directly with our users. Learning Java, XML, and SQL won't work. Reviewing a process from the business logic point of view, ensuring it is consistent with their needs and seeing a step by step basis of that logic assures them of the accuracy and the possibilities of what more they could have. This would seem to result in a bloated, slow product. The technologies used are the same as if the process were handcrafted, so that is not the case. People, Ideas & Objects intends to use Oracle Fusion BPM's output in our Cloud Administration & Accounting for Oil & Gas software and service, and Oracle Fusion BPM's output is fully scalable.
The People, Ideas & Objects application development objectives include calculating royalties for multiple jurisdictions, each with its own nuance of how royalties are calculated. One of the important determinations in this is what jurisdictions are we developing for. This question is answered in our scope, and is one of the reasons producers should subscribe to this software development. To make sure we are covering all royalty jurisdictions. It will be our responsibility to maintain the current requirements of each royalty regime on an ongoing basis. Nevertheless, I would like to emphasize that our value proposition is that we would do this on behalf of all producers. The one time cost allocated over our entire subscribing producers will make these changes incidental to the innovative oil & gas producer. Specialization and the division of labor works in terms of our software development team as well as the service providers.
The People, Ideas & Objects Petroleum Lease Marketplace module is one of three "Marketplace" modules included in the Preliminary Specification. In addition to the Resource and Financial Marketplace modules, this module uses the Marketplace Interface for collaboration.
The innovative oil & gas producer relies on their competitive advantages of their land & asset base, & their earth science and engineering capabilities. The Petroleum Lease Marketplace is the module that provides the producer and Joint Operating Committee with the tools to build their land & asset base. The Petroleum Lease Marketplace provides producers with the competitive advantages they need to succeed in the 21st century.
The division of labor and specialization plays a large role in this module. As in the Resource Marketplace module, service providers are relied upon to provide for the management of processes like lease rental payments and other areas of land administration. These aid in the conversion of the producer firms fixed overhead costs to the Joint Operating Committees variable overhead costs. This conversion is a critical part of People, Ideas & Objects value proposition in providing the oil & gas producer with the most profitable means of oil & gas operations, everywhere and always.