Partnership Accounting

Introduction

The Partnership Accounting module is a pure “accounting” module in the traditional sense. However, I think there are many attributes and concepts in this module that make it unique and of interest to everyone in the industry.

The following is a summary of what a statutory list of required functionality and output requires. We’ll then discuss some of the novel concepts and differences of the Joint Operating Committee. This is the key organizational construct of a dynamic, innovative, accountable and profitable oil & gas producer.

This is the standard fare for oil & gas software providers. And our user community will fill this list with many more. Oracle Cloud ERP provides many of the accounting features and functionality used in these processes. And there are several processes and features that are standalone Oracle products and services that will be delivered to producers. As we will see in subsequent discussions the value proposition from the People, Ideas & Objects software application is substantial in the use of the Joint Operating Committee as the key Organizational Construct of the Preliminary Specification and is treated as the partnership that it is. It also recognizes that the costs of the property for each producer within a Joint Operating Committee are as unique as individual producers' strategies.

When we talk about the scope of operations managed under Partnership Accounting, we find that it includes everything necessary to support North American producers' accounting needs. The cut-off would be at the refinery inlet. Therefore the total scope of any upstream oil & gas operation. Let me be more specific about that from the point of view of geography and the type of operation managed by the People, Ideas & Objects application.

If we look at the North American oil & gas infrastructure we see a variety of oil & gas installations designed to serve both producers and consumers of oil & gas. Wells, gathering systems, gas plants, pipelines, storage facilities etc. At each point along these systems there may be additional deliveries of product, or sales of product or products inventoried. What seems to be an obvious and straightforward business becomes incredibly complex when it's realized that each asset may be owned by a Joint Operating Committee itself. It may also hold products on behalf of other Joint Operating Committees. This summary glosses over the incredible complexity of this business when the volume of transactions that occur in these businesses makes it a significant part of the oil & gas operation.

Critical to controlling the business is the Material Balance Report, part of the Preliminary Specification. It is the central document that so much of the subsequent process activity is based upon. If someone is to be charged for storage of butane for example, or if someone is to be charged a marketing fee for delivery of product to a customer. Or simply if a sale of a raw gas stream is deemed to have occurred at the wellhead. The Material Balance Report captures these transactions and initiates the flow of generated documents. These documents also need to be fully automated through the Material Balance Report. They are generated from the People, Ideas & Objects Preliminary Specification. To state this as simply as possible, the Partnership Accounting module includes all of these activities for all of these facilities as its purpose. Each Material Balance Report must balance. Reporting inputs and outputs balances to other Material Balance Reports. Material Balance Reports are inter-industry and continent-wide balanced.

As we explore the Partnership Accounting module further we see the reasons why we take such a broad scope of operations into consideration. It would be an understatement to state that these areas are poorly served by IT. To approach it from a global perspective that includes production operations, accounting and the other areas that depend on this information would be "ideal." However, the complexity of the business has always been in the way. Software engineering has never been available to approach the type of problem this area presents. The cost would be unreasonable and of limited value for one producer. And no software vendor could justify the work on speculation. I think it exists now in the form of mature technologies represented in Oracle products and services. Our seven Organization Constructs include the Joint Operating Committee, Professor Paul Romer’s “New Growth Theory,” specialization and the division of labor, markets, Intellectual Property, Information Technology and Innovation. People, Ideas & Objects aggregates the industry's resources. Making this process cost effective and valuable across the industry. And I think that the Partnership Accounting and Accounting Voucher modules of People, Ideas & Objects provide the vision and opportunity of how this software engineering solution solves these issues to ensure we provide the most profitable means of oil & gas operations, everywhere and always.

Pooling of Technical Resources

The first Partnership Accounting issue addressed in this module is related to earth science & engineering resources being finite. It is asserted here in People, Ideas & Objects that the “operator” classification may become a thing of the past as firms will find it difficult, and in fact no longer commercially viable, to staff the engineering and earth science capabilities necessary to meet all of their firm's needs. People, Ideas & Objects enables producers on a Joint Operating Committee to pool their earth science & engineering resources. This is to ensure they have the required engineering and geological needs. Pooling won't be a convenience or desirable addition to the Joint Operating Committee. Partners within a property will need to ensure adequate staffing of technical resources. That it will become commonplace that each partner contributes technical resources to the property.

People, Ideas & Objects use specialization and division of labor to address the mid- to long-term shortfall in these resources. Specialization and division of labor are the only tools that will enhance industry throughput from the same volume of resources. If a producer wanted to maintain “operator” classification the scale of their operation would demand such technical diversity that the burden would overwhelm any performance their team could attain. We believe that producer firms have unused and unusable surplus capacity today and that it cannot be deployed due to organizational constraints. Therefore, every producer should focus on high-level, value-added geotechnical and engineering capabilities. Each producer contributes their specialized skills to their Joint Operating Committees when and where they can. Lower level, or standard-fare engineering and geology can be conducted through service providers.

If partners are contributing human resources to the Joint Operating Committee then the systems that the partners use should be able to cost these resources, charge them to the joint account, and have their costs recovered by the Joint Operating Committee the resource was provided to. In addition, if the operator classification has disappeared, operator overhead charges should also cease to exist. If three different producers are providing engineers and geologists to the Joint Operating Committee each should be able to recover the direct or standard costs of these individuals for the time they spent working on the property.

Within the Preliminary Specification, Industrial Command & Control (ICC) provides a means in which the resources within the producer companies represented within the Joint Operating Committee, can organize a chain of command through these pooled resources to deal with property governance. In addition to this governance, producers can allocate finite earth science & engineering resources more efficiently. This assumes that during the building of the Preliminary Specification, our user community can determine a somewhat standard chain of command for all members of the industry, standard rates for the people in the industry, and detailed job descriptions for the work that each role within that chain of command is responsible for. Please also see the Research & Capabilities and Knowledge & Learning modules for the development and deployment of the firm's and Joint Operating Committee capabilities.

Today the bureaucracy builds silos of engineering and earth science capabilities that can deal with any and all contingencies their operated properties demand. This is a reasonable approach to a difficult business. With the inherent risk profile of oil & gas, safety is a priority that can be handled in this manner. The problem arises from each and every producer replicating the same capabilities within their organizations. As a result the industry has developed unused capacity that is unavailable for use at any time and at any place in the industry. At a time when engineering and earth science talent is at a premium in demand. Accessing this unused capacity, reorganizing the manner in which resources are used, and taking advantage of specialization and the division of labor are the ways that People, Ideas & Objects Preliminary Specification has solved this problem. 

To approach the mountains of earth science & engineering work that needs to be done. Demands such as the ever increasing volume of science required for each incremental barrel of oil produced. The need to obtain and sustain true energy independence etc. These require an innovative approach based on the tried and true division of labor and specialization principles. By breaking down the work into smaller more specialized components the process can be managed in a way that is faster and more efficient. The productivity of this process would be an order of magnitude more efficient than what is done today. The business management of this process would be managed through the Partnership Accounting module. Industrial Command & Control maintains the chain of command and authority from the producer firms. What took 6 engineers and geologists full time may now be done by 35 specialized engineers and geologists. These engineers and geologists may be assigned to over 100 properties or Joint Operating Committees. As shown in People, Ideas & Objects et al Cloud Administration & Accounting for Oil & Gas, management of the process falls to the software.

And there is another issue. If we use division of labor as the solution to today's limited technical resources. Without the Partnership Accounting module's pooling or specialization. The enhanced productivity from the division of labor being the objective of the exercise would require that each producer hoard even more earth science & engineering resources in order to cover the entire scope of earth science & engineering effort. Causing the market for these finite resources to skew the industry's economics. This point is critical in any solution to this problem.

If we pooled the technical resources of each producer representing the Joint Operating Committee. Then we break down individual silos and technical hoarding. One of the key advantages of using the Joint Operating Committee is that all partners are financially motivated. Consensus is easily achieved because of this, and it will continue to be so.

The perception that “our” capabilities are better than “theirs” type of comparison. The problem, however, comes down to the fact that, in a hoarding situation, no one is left to do basic engineering. This should have been done two weeks ago. Life is one percent inspiration, ninety nine percent perspiration. Engineering and geological tasks need to be handled. How this work gets done is the focus.

The solution to enhanced engineering and geological throughput comes from division of labor and specialization. But first let me reiterate that in this day and age, managing a process, or changing a process requires that the software to manage that process be built first. People, Ideas & Objects Preliminary Specification builds these processes for the industry so that these changes can be made and altered as the industry requires. 

We’ve discussed the way the division of labor and specialization could increase the throughput of the engineering and geological capabilities of the oil & gas industry. How the mountains of this type of work could be approached by pooling the technical resources of the producers represented in the Joint Operating Committee. We now want to discuss how the cost of those resources would be recognized and recovered in the Partnership Accounting module of the Preliminary Specification. This discussion is also about the multitude of equalizations each month for each producer. This is to calculate their working interest share in the property. And how the Joint Operating Committee authorizes these funding requirements.

We need to determine who charges for work done at a Joint Operating Committee and why? For that we need to revisit the Work-Order system part of the People, Ideas & Objects application modules. Work-Order charges are based on the AFE, partnership lease or overhead accounts of the producer and are therefore pre-approved, tried and tested methods of controlling costs. Without an authorized Work Order, no one can charge any work to an AFE, lease or overhead account. And with a Work Order, only work authorized through an AFE, lease or overhead account will be completed, approved and charged to the joint account.

Charges for individual engineers and geologists will be based on a factor of the Revenue Per Employee of their producer firm. Discussion regarding Revenue Per Employee can be found in the Background section of this wiki. Revenue Per Employee establishes the approximate level of capability the producer firm has taken their earth science & engineering capacities and capabilities to. It reflects their organization's value. Therefore a factor, based upon agreed upon industry standards of what percentage of Revenue Per Employee a Senior Engineer should be charged to the Joint Operating Committee at etc. Revenue Per Employee is an objective criteria calculated in the Preliminary Specification and is directly comparable among peers. 

The combination of the Work Order and Pooling of Technical Resources within the Joint Operating Committees allows industry to deal with resource constraints. Specialization and the division of labor are the only tools that can materially increase organizational productivity. It will need to be the solution. Applying this solution to the organization employed in the industry will only cause more serious consequences in terms of the economic viability of North American producers. There are many other aspects to these tools and we will discuss them here in the Partnership Accounting Module and throughout the Preliminary Specification.

The Beginning of Automation and the Material Balance Report

The Material Balance Report is an Accounting Voucher that is unique and has the following characteristics. It automates producer firms' and Joint Operating Committees' production, revenue, royalties, marketing and other processes. It is this type of specialized use of an Accounting Voucher that our user community will consider applying to other situations when contributing to the Preliminary Specifications development.

What is proposed in the People, Ideas & Objects Material Balance Report is that for an Accounting Voucher to close it must balance the financial debits and credits. However, it must also, from a volumetric perspective, be material, system and partnership balanced. Each of these three volumetric perspectives is accessed through a different “mode” within the voucher. This is to make the necessary changes to correct any volumetric imbalances or errors in that specific perspective.

The Joint Operating Committee exists due to legal agreements and in oil men and women's minds. It therefore doesn’t “own” anything or incur costs. The joint account charges must clear in the month they are incurred. It is the same with volumetric information. The Joint Operating Committee "Accounting Voucher" balances to zero in terms of costs and volumes each month by clearing charges to the partnership and royalty owners of the property. Clearings are done after the balance is determined. That does not guarantee the facility will remain balanced. Adjustments and amendments during a production month will trigger changes to the Material Balance Report. These may happen and they can be balanced and cleared to partnership accounts in the same manner as before, which is automated. The exercise ensures that the Joint Operating Committee's business is captured in the Material Balance Report. This is an integral part of the Accounting Voucher. Essentially all three are the same thing, the Joint Operating Committee, Accounting Voucher, and Material Balance Report. An integrity of reporting that is embedded within the accounting systems that are as rigid as the overall accounting requirement of debits must equal credits.

We now want to discuss the contracts associated with that Joint Operating Committee. Gas, oil, and natural gas liquid marketing contracts, as well as gathering, processing contracts. I don’t know the correct term to use, but stream seems most intuitive. If a stream of product flows through a facility, then a contract for processing or sale would be attached to it. The ability to attach the contract to a stream would enable the Material Balance Report to establish the billing of gathering or processing charges / sales for that stream. These charges (invoices) or sales (receipts) are generated by People, Ideas & Objects software automation of the process. Amendments and adjustments would generate similar documents to the initial product flows, and on an automated basis. 

The Accounting Voucher is for lack of a better term a template that is built upon as time passes. Each month as the property changes, these changes are recorded within each Accounting Voucher. The template is renewed each month with the accumulation of the property's history and any changes in variables derived from other modules. For example, the Petroleum Lease Marketplace. If an additional contract is added for production from a newly discovered well, that contract stream and the newly discovered well would be represented in next month's Material Balance Report. The Accounting Voucher template documents property changes over time.

Critical to the “definition and design” of transactions is their balance. If the debits and credits were not in balance at the end of the day, the systems automation and the accountants would not be doing their jobs. Volumetric reporting would be the same issue. If in the Material Balance Reports, they were out of balance (call this material balance), or were not balancing the inputs and outputs to other Material Balance Reports (call this system balance), or the internal accounting of those volumes to the partners, royalty holders and others were out of balance (refer to this as partnership balance) the accountants and systems would not be doing their jobs. Closing a Material Balance Report requires more than balancing debits and credits financially. They will also need to ensure that the material, system and partnership volumes reported in the Material Balance Report are balanced. Without these systems in balance, the Accounting Voucher will not close or clear.

This imposes another rather strict condition on the quality of the information accepted into the People, Ideas & Objects Accounting Voucher module. Precluding the acceptance of a voucher due to the inability to balance a volumetric requirement holds the system up for common occurrences. What if volumetric information is unavailable? What if the information is part of the normal amendment process? Traditional accounting methods are left for these issues. An accrual of the volumes necessary to achieve the balance would be processed in the current month. Most production processes are amended for up to 90 days. These accruals would then be automatically reversed in the following month. What is different from existing systems is that we force them to be volumetrically balanced. Not just inputting key variables but imposing and enforcing the facts of what actually happened at the Joint Operating Committee. In the case of a Construction, Ownership and Operation (CO&O) agreement, what is to be accounted for before the Accounting Voucher is closed.

The difference may be subtle but the implications are significant. A system that locks volumetric balancing into the Accounting Voucher itself enforces compliance with volume production and processing. Obtaining a system balance where each Joint Operating Committee activity reconciles with all other facilities and Joint Operating Committees. In this way, an unquestionable level of integrity can be achieved. Detailed processes based on data and information captured in other modules can be fully automated based on those facts. Please see the Operations Management module in the Preliminary Specification for further expansion through the Internet of Things (IoT), SpaceX's Swarm network and other technologies that automate field data capture.

There are many aspects of this system's process management that are unique and necessary. The reason they have not been undertaken is that the broad scope and scale of the development undertaking is comprehensive and beyond what the technology could have provided even a decade ago. It is from a budgetary perspective beyond the scale of what one major producer could undertake as the value gained may not necessarily be there for the individual producer to incur the entire cost, and most certainly well beyond the speculative approach of an oil & gas ERP software development solution provider. People, Ideas & Objects seeks to aggregate North American producer ERP budgets to bring these software and services to the market. Turning the cost of oil & gas administration and accounting, which includes continuous ERP systems development, into the variable cost of Cloud Administration & Accounting for Oil & Gas software and services for North American producers. Those with a comprehensive understanding of these processes will fully appreciate the points I make and the implications involved. My understanding of these processes is comprehensive and I know it can be done correctly. That this undertaking may be the single largest feature of the Preliminary Specification. Therefore, development costs are shared and shareable across the North American producer population. Driven by our user community's vision. From the perspective of dealing with contractual arrangements and governing agreements determining the production allocation method. Or if the agreement refers to an adherence to chemical composition as the basis of production allocation, both of these methods will be available in the Material Balance Report of the Accounting Voucher in an either, or and mixed environment. 

An element of the Material Balance Report is the clearing of both financial and volumetric information for the appropriate working and royalty interests. It is here where we find two critical points of interest in the differences between the Preliminary Specification and the status quo accounting methods. People, Ideas & Objects, our user community and their service providers provide standard and objective accounting information across North America. The Material Balance Report is an appropriate example of this. It will be the service providers managing the processes involved in the production, revenue and royalty aspects of the producer firms and Joint Operating Committees. We noted that in the Accounting Voucher module itself the Accounting Voucher could be generated based on either the producer firm or the Joint Operating Committee. The Material Balance Report cleared monthly is a Joint Operating Committee Accounting Voucher. Where the processes are automated and cleared based on the property's ownership and royalty interests. 

The Work Order System

In oil & gas there are two methods to capture costs. The first is the AFE for capital, and the second is the Lease for revenue and operating expenses. Incidental costs may also be incurred in departmental or Joint Operating Committee overhead accounts. These have been the standard methods used throughout the industry for decades. They have served the industry well, particularly from the point of view of distributing costs and revenues to other working interest partners. People, Ideas & Objects are introducing an additional document to augment the AFE and Lease to improve cost control in the industry. It is what People, Ideas & Objects call a Work Order. It has two distinct roles and captures costs in ways not captured today. The overall objective is to enable innovation throughout the industry, the producer firms and Joint Operating Committees. And to do so on the basis of the distinct science and technology of oil & gas exploration and production.

The Work Order is an implementation of our Accounting Voucher. A feature that we introduced as a separate module in the Preliminary Specification and a reflection of the capabilities of the Accounting Vouchers template characteristic. The Work Order is designed to capture costs in producer firms, Joint Operating Committees or other organizational structures that may or may not have a defined structure in terms of a formal agreement supporting the project or Joint Operating Committee. In the Work Order, costs and revenues could be assigned and authorized as the document that outlines the necessary details for these ad hoc organizations. These are not generally material costs, but they involve other complicating factors. This is not a license to spend funds in unauthorized areas. It is a feature of the Preliminary Specification that enables innovativeness to expand by allowing informal collaborative research and development work, or Working Groups, to be conducted throughout the industry. This is on the basis of its sciences and applied sciences. A means to benefit those participating in the research and development project. 

Today these types of costs fall outside the scope of the authority and responsibility of the producers' management. The AFE and Lease currently constrain producers to existing agreements as methods to capture costs. These Working Groups costs are therefore accountability and accounting nightmares that have proven to be more onerous for those that have attempted to benefit from conducting this type of research and development or even ventured to suggest them. Accounting for them is usually manual in nature as necessary to capture the distinct understanding of each effort and reflect it appropriately from a business perspective. 

Examples of these costs may include a geologic study of the producer shale gas characteristics of the Permian vs those in Pennsylvania's Marcellus formations. A study may examine the effectiveness of fracing in multilateral sections of shale gas wells with respect to longitudinal versus latitudinal orientation. They are necessary to advance the industries underlying science and technology, costly for one producer to undertake and of potentially limited value to the one producer that undertakes them, and therefore mitigation of risk through participation is the appropriate strategy. If costs can be mitigated through a shared model the results become more valuable, and it is this distribution of knowledge that is the basis of what we learned in our research from Professor Giovanni Dosi’s “Sources, Procedures, and Microeconomic Effects of Innovation.” That would be of benefit to any of the producers who participated in the study. Contributions from the producers could include financial or technical resources, computer simulations and other data, assets or value that a producer could contribute to the study. All participating producers would be entitled to the findings if their contributions were deemed equitable and other criteria for how long the study would take etc were defined. From this a Working Group of producers would gain a better understanding of whatever they were studying. It is helpful to remember that innovation isn’t always due to these successes but also the failures that prove what science is not. 

The other method in which the Work Order is employed is in the process necessary for a dynamic, innovative industry to broaden science and applied science resource availability. This is done through specialization and division of labor of earth science & engineering capabilities of each producer firm and the overall oil & gas industry. What People, Ideas & Objects define as one of the producers' competitive advantages. The other being their land & asset base. 

In order to unleash the unshared and unshareable aspects of these critical, competitive and soon to be constrained resources to the broader market based on their specialization. This is done through the elimination of today’s operator role in the Joint Operating Committee and implementing the Preliminary Specifications pooling concept. The “pooling concept" is in which those with the required specializations are sourced from the participating producer firms making up the properties Joint Operating Committee, or the market of earth science & engineering capabilities available from the marketplace to fill the needed role demanded of the property. The pooling concept is designed to introduce advanced specialization and division of labor to these resources. And to release what we’ve described as the hoarding of these resources in each producer firm. The need to have just-in-time capabilities available to meet the demands of the producer's operated properties requires that a surplus capacity of engineers and earth scientists be available to deal with the cyclical nature of the internal demand for these resources. This hoarding consumes large amounts of these resources in terms of the industry population of engineers and geologists. 

To make my point clear, let's break down a process that may be provided as a better service. This is in terms of the type of earth science or engineering resources that could be reorganized based on specialization. When drilling a well, well control is necessary. This can be achieved when the well is drilled on a known seismic line that reflects the targeted zones' geological features. It can then be compared with a variety of well logs from similar wells in the area. These wells are produced in the target zone. It is at this point that sea levels could be determined, and the depth at which the well should be drilled could be determined. This could be done in the future by an outside service that specializes in a variety of these different processes of analyzing the logs. This could include using seismic to choose the well location and picking the tops. These technical specialists could manage machine learning, Artificial Intelligence and have human determination in the selection of the tops. This would enable quicker turnaround, at a much lower cost without sacrificing higher quality. Releasing the vast numbers of technical resources burdened by these tasks by each producer today. The service provider's results are available for the producer to verify. Much of this is done in software today, however by the producer firm with the resources of the firm being dedicated to it in an unshared, unshareable and unspecialized manner which is costing the industry and producers due to the inefficient use of engineering and geological resources consumed within each producer. With less specialized equipment and constantly switching between tasks unnecessarily and inefficiently. These technical tasks within the producer firm are valuable in establishing well control. In turn the engineering and earth science resources of the producers would be focused on the higher level, value generating methods of dealing with the firms and Joint Operating Committee assets. While the geological service provider specializes in highly sophisticated ways to ensure service delivery is of the highest quality, lowest cost, precision and effectiveness. 

The other example of the Work Order is the one we identified in Organizational Constructs that changed the start-up and small oil & gas producers competitive advantages to Intellectual Property, earth science & engineering capabilities and land & asset base. Essentially the other side of the prior example transaction. It involves the ability to generate initial revenues using the Work Order from the services provided. This involves marketing the start-up's Intellectual Property and earth science & engineering capabilities to other producers and Joint Operating Committees. These revenues would help offset the difficulties of the start-up oil & gas process and defer much of the overhead burden today. Moving the success or failure of the start-up oil & gas firm from its ability to access capital to its technical capabilities. It won't be an industry based on who you know in the future, but on what you know, and what value you bring. These will be the determining factors of success and failure in the future oil & gas industry. 

Facilitating these changes is the Work Order, and this is our solution to the constraint of these resources in the foreseeable future. What is agreed upon by industry is the lack of replacements and the retirement of the braintrust of the industry. What we know is that the North American economy is the most powerful economy in the world and will continue to be so. For the oil & gas industry to attain and maintain profitable energy independence, it will demand much more of this existing scientific and technological resource base that may be static in terms of its population for some time. This shortage may be further aggravated as we also know that each barrel of oil produced will continue to be more difficult from an earth science & engineering point of view. We resolve this shortage by using specialization and division of labor principles to maximize throughput from the same resources. These are some of the details of our Work Order.

The Work Order system as a means of budgetary control

We discussed how the Joint Operating Committee manages who’s available to work on the property. The ability to pool earth science & engineering resources from the partnership is asserted as a necessity in the future of the oil & gas industry. It should be stated here that our Industrial Command & Control would not be limited to just earth science & engineering disciplines. Instead, it would include everyone employed by producer firms. So this would help us deal with who, now we need a mechanism to deal with what they'll do.

The next part of the Partnership Accounting module deals with the operational side of how field work within the Joint Operating Committee gets completed. Partnerships have always had AFE’s and operations budgets to manage how much is spent annually at a facility etc. Those will be handled by People, Ideas & Objects. This discussion deals with how Industrial Command & Control can deploy resources and authorize budget spending in a manner that provides for the governance of the Joint Operating Committee. Basically, we are talking about the collaborative aspect of the Work Order System in Partnership Accounting and its interaction with other modules. (Compliance & Governance, Petroleum Lease Marketplace, Resource Marketplace, Accounting Voucher modules).

Deployment of the people within the Joint Operating Committee, with the budgets agreed upon, is not enough to satisfy any interpretation of appropriate governance. Proper authorization and responsibility are needed to ensure plans and budgets are executed successfully. Without a Work Order system within the People, Ideas & Objects application, property governance would not be possible. The ways and means of successfully controlling costs and deploying resources to complete the tasks at hand are what the Work Order system is designed to accomplish.

The Work Order system will be deployed in the following manner. If someone asks you to work on a project, your first question should be “what’s your Work Order number?" Then your time will be charged to that code. It doesn’t matter if you're an employee of the producer where the request came from, a partner in a Joint Operating Committee, a vendor or supplier. If they don’t have a Work Order number you're not generating service-based revenues or working for free. If they have a number, you key the Work Order number into your device or keyboard and continue. The Work Order system aggregates and bills your time spent working on that project. The details of the Work Order, chain of command, tasks and deliverables are all delivered within the Work Order system provided when you key in the number. Your role, based on your capabilities, is populated with those parts of that Work Order.

Note that one of the benefits of this system is that no unauthorized work gets done without a Work Order. Assigning budgets to a Work Order from an AFE, Lease or from internally sourced overhead accounts will be a matter of selecting from budget accounts or from pre-approved allocations. The ability to approve a Work Order would therefore be at an appropriate level within the Joint Operating Committee chain of command. This would be pre-authorized and designated through Industrial Command & Control (involving multiple producers) or a producer firm. If a Work Order were to exceed its budget it is reasonable to assume that it’s exceeding its AFE or account budget(s if it's involving multiple producers), which could trigger action from the Compliance & Governance module of the People, Ideas & Objects application, if that is what management desired or deemed necessary and established from that module.

Let's be clear, what People, Ideas & Objects propose in the Preliminary Specifications Partnership Accounting module is nothing like any other joint venture accounting system. When we consider the Joint Operating Committee as the key organizational construct of a dynamic, innovative, accountable and profitable oil & gas producer. Aligning the producers' compliance and governance with the seven frameworks of the Joint Operating Committee, we create speed, innovation, accountability and performance over the base case. Creating a performance and innovation-based culture through our seven Organizational Constructs. Producers and industry are reorganized dynamically and innovatively. As well as being open to the possibility of enhancing their capacities and capabilities through the ubiquity of the People, Ideas & Objects Work Order. Where everyone, Joint Operating Committee, producer and service industry firm employed in the industry has an account to manage revenues, billing and time spent on projects. This is for the various producers, Joint Operating Committees and facilities.  

Some processes described in the Preliminary Specification involve multiple organizations, over multiple accounting periods. Whether that’s the development of capabilities which begins in the Research & Capabilities module. It touches on the Resource Marketplace and Financial Marketplace modules, and passes to the Knowledge & Learning module. Some of these processes carry transactions that are as complex and difficult to quantify as the process. Some will be for the joint account, some will be for the producer to incur on their own. As we learned in the Financial Marketplace module some transactions may be the result of an investment by an investment group.

Discussing the Work Order system that controls the costs associated with a project. The projects contained within a Work Order might be funded by multiple producers, AFE’s or budgeted accounts, and as a result producers will be able to control the costs of the project, monitor them and maintain governance through the Industrial Command & Control of People, Ideas & Objects system. Producers using the Work Order system will be able to charge the costs to the appropriate owners of the projects. This will be done at Work Order initialization. Since the Work Order is a multi-organizational system, members of a Joint Operating Committee or members of the field services industries can participate in a Work Order. This means they can pre-approve their participation in specific costs in the project. The accountant working within the Partnership Accounting module won't be running around trying to seek approval from partners to authorize individual expenditures on projects that weren’t planned or budgeted properly. If everyone within the industry works to chargeable Work Orders, and all Work Orders are approved by those who will be financially responsible for the charges, then the accountant's job in chasing their tail and aggravating people is over.

The point of the Work Order system is hopefully not lost on others in the industry. Some may feel that the Work Order duplicates the AFE attributes, and I would argue that they are fundamentally different. The AFE approves spending for field level and construction projects of a capital nature. The Work Order system is a means to deploy the producer's or Joint Operating Committee's capabilities in an authorized and ad-hoc manner. When we extend the Work Order system across multiple producers, Joint Operating Committees and suppliers, the ability to deploy the capabilities of multiple organizations will enable the innovation we seek in the oil & gas industry. The Work Order may take budget dollars from a number of AFE’s and assign them to a team of engineers that are asked to develop the process necessary to make their firm more capable. Two producers may contribute budget dollars to a Work Order for their Geologists. They will be able to attend a conference and conduct research on some promising developments as a result. The point being that no one works without a Work Order to charge their time for. No Work Order can collect charges without a budget pre-authorized and approved.

This will make the Partnership Accounting module workable from the point of view of controlling the costs of the multitude of different arrangements being made within the organization. If the accountants are tasked with putting together the costs and determining who is to be charged after the fact, this is how they become the annoying and bothersome people they can / have become and accountability is less onerous. By imposing the Work Order system in this fashion, within the Partnership Accounting module, the arrangements are pre-made and authorizations are required before charges can be incurred. Making accounting for capabilities deployment systematic instead of problematic, resolved before the fact and automated. This is not about accountants hounding people trying to understand why such and such was done.

The Work Order system as a tool for innovation

We are discussing the role that the Work Order system would have in clearing up the administrative minutiae of the accounting related issues of the Partnership Accounting module in the Preliminary Specification. I want to continue with that discussion and ask what it has to do with innovation? Let's look at the Work Order system from the perspective of a successful producer in the marketplace that has developed an earth science & engineering capability. The CEO is approached by one of their engineers who hears of several other producers who are conducting a study on something of interest to their firm. They are looking for other participants to join in and want the engineer that brought the news to join in the project. Assuming everyone of the producers is using the Work Order system they can pool the resources they have within the Work Order to manage the project. The firm committed to a 10% share of total costs and offset those costs with engineers' time, office space and computer resources. (Note all of these producers' costs are pre-approved and budgeted from other accounts.) With the Work Order producers could make these commitments subject to the other 90% being committed to.

We have here the means by which people working within the industry can commit to programs and projects in a manner that is natural to their business. This is the way systems should work today. What we have today is an impediment in the industry for producers who feel that participation in the study with other producers would be worthwhile. However, the accounting, approval and accountability nightmare will haunt them for the next three quarters. It will subject them to regulatory oversight that questions their moral integrity. So instead the project doesn’t get proposed, funded, participated in or done.

In Professor Dosi’s paper “The Sources, Procedures and Microeconomic Effects of Innovation” he discusses the role these administrative minutiae have on innovation.

The discussion will aim to identify (a) the main characteristics of the innovative process, (b) the factors that are conducive to or hinder the development of new processes of production and new products, and (c) the processes that determine the selection of particular innovations and their effects on industrial structures. p.1121.

There are financial resources available in our example. Motivation exists within the organization to do an outstanding job on the project. What happens is bureaucracy gets in the way and slows things down and makes it a task that requires superhuman effort to even try. And maybe one or two projects will get done each year out of sheer will. But what is needed is the ability to conduct a volume of projects far exceeding one or two, and that is beyond the scope of the organizational context as producers are organized today. Without ERP systems to define and support these innovative processes and ad hoc organizations, these processes will not spontaneously appear.

We discussed how one producer could participate in a study with other producers by setting up a Work Order to capture their involvement. Their contribution involved one engineer, office space and computer time. That they would contribute some cash is also a possibility as they signed on for 10% of the projected costs. I want to discuss the other producers' involvement and how the Work Order system, being a multi-organizational system, can capture the different ways in which each producer will participate and account for these differences within the People, Ideas & Objects Partnership Accounting module.

The emphasis remains on enhancing innovation among producers. Collaborations and interactions between producers and industry participants will lead to many innovations in the future. The impediment to doing these as a result of the bureaucracy and the current suite of accounting systems in use in the oil & gas industry is what I want to contrast in this scenario using the Work Order. It's time in this day and age that systems become as sophisticated and complex as what is described here. This is so that innovation in the earth science & engineering disciplines can occur. Professor Giovanni Dosi expands on this point further in the following quotation from “Sources, Procedures, and Microeconomic Effects of Innovation.”

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.

The producers are interested in participating in the project. Some want to contribute a variety of different resources, some have specialized capabilities that are critical to the project and others are more or less along for the ride and are willing to participate by paying cash. Some have an AFE that has been approved that directs funds to pay for their participation. Some companies incur the costs as part of their annual engineering budget. Some companies have a working interest partner that is willing to share the costs over Joint Operating Committees. The combinations and permutations of how a Work Order gets financed and funded are unlimited when we consider the number of different ways producers can participate.

To begin, we must have a Work Order system that takes into account the information from these various parties and assimilates the understanding of the deal from the five or six people who met to initiate this project. Each must codify how their participation in the costs is funded and costed in their People, Ideas & Objects Partnership Accounting modules Work Order. All of the participants use one Work Order, or in this case an Accounting Voucher, that is shared across all of the producers. This agreement's understanding must be captured within the Work Order system before approval by all producers. As with all Accounting Vouchers, the accounting details need to be coded, as well as the sources of funds. Within the Preliminary Specification we are moving away from traditional transaction recording. Automation is the focus and this can be completed through Designing Transactions accounting features. This way the system can process charges within the firm in an accurate and timely manner. For any charges that are above the threshold that a firm is willing to commit to, that implies that another firm's cash commitment would be provided to cover those costs. The Work Order should make these cash transactions or equalizations between these producers as a result of document approval. The point of the exercise is that once the Work Order is approved, the understanding of the deal, as captured by the interface, or the designed transaction, is executed.

As I indicated, an accountant's ability to follow on with the necessary accounting for these transactions requires significant recreation of the “deal” and the time of the parties who conceived of the deal in the first place. A bureaucratic waste of time. The Work Order interface should be sophisticated enough to capture the deal substance. I understand the myriad ways to do these and the difficulty in making an interface that captures them. That I don’t think is the difficult part. What I think would be the difficult part is designing an interface that provides these services intuitively. An interface that conveys the deal's substance. I, however, know it can be done. The reason it hasn’t been done is that the budget for software development like this has not been set out. It's at times like these that we should revisit our revenue model and rethink the People, Ideas & Objects approach. This is based on our projected budget.

We used the scenario in engineering, however it could just as easily be used in geology or any other area of oil & gas interest. Alternatively, it could include the supplier or vendor marketplace to form a working group. The importance of the Work Order is that the producer or participant can designate how they want to participate in the working group. As part of their approval process, they identify the source of the funds and where the costs will ultimately be allocated. This is according to their organization. Each participant or producer in the working group conducts this, all within the same interface for the same Work Order. 

One of the most obvious areas that this interface will interact with the other modules is the Security & Access Control module. Access to the Work Order will require a certain period to recruit participants. And then it will be closed to everyone but existing working group members. Only those who are within the working group, or are subsequently granted direct access can participate directly in the working group.

With the Security & Access Control module we also inherit Industrial Command & Control that allows people to impose a chain of command across the working group. This might be something they want to do if they have a difficult task or a large group of people. The opportunity to do so is available to them if they so desire as this will be part of the Security & Access Control modules core functionality.

The designation of the source of funds and where costs will be allocated is coded directly to those accounts. The Work Order incorporates Accounting Voucher elements into its operation. Each producer's accounting system will be charged, upon approval of the Work Order, according to how they coded the Work Order. As a result, it will inherit many Accounting Voucher module attributes.

I see these working groups, as we’ve called them here, as an essential element of how an innovative oil & gas industry identifies and solves its problems. 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 uncodified capabilities, or “tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.”

Therefore, how can oil & gas firms solve the technical and scientific problems of the future? How can a firm more effectively employ its capability to solve problems and encourage the discovery of other problems and the creation of their solutions? Clearly some companies are more effective at this process than others. However, this research in oil & gas asks, is there a means for an organization to increase its ability to innovate that leads to higher performance outcomes?

Having these working groups spawn at will without the bureaucratic, accountability and accounting logistical nightmare that they instill today will be a significant first step in making the industry more innovative.

The complexity of the relationships of these working groups must be captured and accounted for in the Partnership Accounting module of the Preliminary Specification. Whether we are talking about the various forms of contribution that a producer may make to the joint account, or how they may participate in a working group, the bureaucratic machinations of accounting for these transactions can’t stand in the way of producers' innovativeness.

Today, participation is hindered by the difficulty of capturing and accounting for these unique business arrangements. What is needed is the ability to develop software that captures the substance of the manner in which contributions are made. This is followed by the manner in which they are accounted for. That is the purpose of the Partnership Accounting module, to support the innovative oil & gas producer in their innovative actions. Professor Giovanni Dosi in "Sources, Procedures, and Microeconomic Effects of Innovation," points to the need for business aspects to support technical aspects of the business.

Internalization and routinization in the face of the uncertainty and complexity of the innovative process also point to the importance of particular organizational arrangements for the success or failure of individual innovative attempts. This is what was found by the SAPPHO Project (cf. Science Policy Research Unit 1972 and Rothwell et al. 1974), possibly the most extensive investigation of the sources of commercial success or failure of innovation: Institutional traits, both internal to the firm - such as the nature of the organizational arrangements between technical and commercial people, or the hierarchical authority within the innovating firm - and between a firm and its external environment - such as good communication channels with users, universities, and so on - turn out to be very important. Moreover, it has been argued (Pavitt 1986; Robert Wilson, Peter Ashton and Thomas Egan 1984) that, for given incentives and innovative opportunities, the various forms of internal corporate organization (U form versus M form centralized versus decentralized, etc.) affect innovation and commercial success positively or negatively, according to the particular nature of each technological paradigm and its stage of development. p. 1135.

Capturing the context of the deals made in both the Joint Operating Committee and working groups as described here in the Preliminary Specification can’t be done after the fact. What is needed is for the software to be sophisticated enough for the dealmakers to use while formulating the deal, to capture the substance of the deal, so that understanding will be used to allocate the costs and charge their accounting systems for these costs when they're incurred. The process we’ve defined is Designing Transactions within the Preliminary Specification. Then and only then will accountants have a chance of keeping up with the speed and innovation of the industry as it is contemplated here. Technical people will be free to pursue their science and not be hounded by those looking to recreate what was history and dealt with long ago. 

This is a necessary part of the People, Ideas & Objects software development team and most importantly, our user community. It won’t be too difficult to capture the multiple and myriad ways a deal can be formulated. The algorithm will be complex but with time and money it can be done. The real challenge in making this critical part of the Partnership Accounting module work is the user interface. Being able to intuitively use the module to capture the user's understanding. This is to document it in the People, Ideas & Objects system and account for it on that basis. That is what makes innovation possible.

We discussed previously how producers collaborated on a project to conduct research. The Work Order system of the People, Ideas & Objects Partnership Accounting module enabled the producers, who may not have been affiliated in any form or fashion until this working group’s formation, to be able to form and contribute to the project. The Work Order system captures the meeting of minds. This is because it captures the manner of each producer's contribution and method of payment at the time the project is formed. This will enable them to avoid the bureaucratic difficulties associated with participating in these types of working groups. Working groups are avoided today because accountants can make participation more difficult than they are worth. The reason we have to cut through the bureaucracy and promote working groups is that participation in these types of activities is critical to an innovative oil & gas industry. 

The accounting interface for the Work Order will have two elements. The first will account for the costs. This will list the costs of the working group and your interest based on your participation rate. The second element is where problems occur. Participation can be funded from a variety of sources and contributions. Some will have a key piece of research that is the foundation of the project. Some will contribute time and some cash. Combinations and permutations are unlimited. The one constant in these contributions is that they all have budgets. In the second element, you will identify the source of funding or contributions supporting your participation. It will need to be determined if that means cash will be transferred from your firm to others by simply clicking on a box in the interface. Once all of the producers have completed their interfaces the balancing of the Work Order will be attempted with any variances worked out to determine who will make up any shortfalls. Once all shortfalls are resolved, work can begin.

The Decentralized Production Model

Traditional oil & gas accounting systems seek to identify and record operations costs and allocate them to the rightful owners. And these are the objectives of the Partnership Accounting module of the Preliminary Specification. We are also seeking to transform producers from a “high throughput production” model to a “decentralized production” model where operations and overhead costs decline in line with revenues. And then during periods of low commodity prices, if the marginal costs of the property are not covered by revenues, production is shut-in. And when the property is shut-in, royalty, operating, administrative and accounting costs track revenues. Thus, while shut-in the property will report a null operation, with no profit or loss. This is necessary in the highly volatile pricing situations the commodity markets experience as a result of oil & gas commodities being subject to economic principles of price makers. As Professor Langlois describes the model in his book “Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy.”

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p. 58.

In the Petroleum Lease Marketplace we have the “Marginal Production Threshold Interface” which enables partners within a Joint Operating Committee to agree on a pricing point where production would be curtailed. We have also discussed in the Resource Marketplace module the use of a Production Accountant and other roles provided by service providers. Where service provider costs to the Joint Operating Committee are variable based on the property producing profitably. How these variable overhead costs would be reduced to zero during shut-in periods. What we haven’t discussed in detail is the need to charge the Joint Operating Committee directly for Production Accountants and other service provider charges. This will be a change due to the reorganization of administrative and accounting resources to the service providers and the transition to the decentralized production model. 

Many of these costs would have traditionally been incurred by the “operator” as administrative overhead; and were to be covered by the various provisions of calculating overhead allowances for the operator. These overhead allowances will be eliminated in the future due to service providers billing directly to the Joint Operating Committee. Any producer on the Joint Operating Committee may also incur administrative and accounting costs. Either directly by their staff or through a service provider. Either way, they'll be directly chargeable to the Joint Operating Committee. Joint Operating Committee costs include production, revenue, or partnership accounting. There would also be costs associated with the administrative areas of the production and exploration activities done on the property. 

During our review of Professor Richard Langlois, we learned that markets are ideal for sourcing producers' capabilities. That would be the case for administrative roles too. By hiring individuals in a dedicated manner, overhead costs are incurred during the time production is shut-in. By hiring service providers the costs associated with these administrative duties would be reduced to zero when production is shut-in. Attaining the “decentralized production” model benefits in terms of the properties operating and overhead costs. 

As we noted in the transition to a “decentralized production” model, it would enable the innovative oil & gas producer to match operational and overhead costs to any decline in revenues due to production being shut-in. By using accounting and administrative service providers the various Joint Operating Committees could control their costs if commodity prices were unfavorable. We want to discuss the configuration of those accounting and administrative service providers and how they will fulfill the needs of innovative oil & gas producers. 

As we discuss Service Providers, we emphasize their independence from any specific producer. With the elimination of the designation of "operator" from a single producer on the Joint Operating Committee no accounting, production or exploration administration is provided to the Joint Operating Committee in the manner that it is today. As a result, the way work is approached in the industry changes fundamentally. It is liberating when we consider the use of technology available today and the standardization of processes in the oil & gas industry. A Joint Operating Committee is therefore free to engage a service provider to fulfill these administrative duties. This is independent of any participating producers on a Joint Operating Committee.

From the accounting perspective we have reviewed the example of the Production Accounting role and how that could be specialized to the point where a service provider works in one geographical area for a large number of Joint Operating Committees. That is the most logical way to organize that type of work. We also discussed royalty accounting requirements. And how a service provider could specialize in that specific royalty legislation. This would enable producers that use that service provider to pay the lowest possible royalty obligations. And we have discussed an accounting service provider that specializes in SEC compliance requirements. The point being that we are seeing a further division of labor in the types of accounting service providers that specialize in a variety of different criteria for oil & gas producers. This is a necessary step in the evolution of the oil & gas industry's economic output. Further automation, division of labor and specialization are the only means for an economy to expand output. 

With the specialization of individual service providers based on unique accounting specialities. [I’m not familiar with production or exploration administrative needs and therefore can’t comment on those. These would apply as well however.] A Joint Operating Committee would engage these People, Ideas & Objects authorized service providers to provide for the services required for their property. They could choose a regional Production Accountant. A revenue and royalty accountant known for keeping royalties down. And if the price of natural gas drops to the threshold price determined by the Joint Operating Committee, to where the facility will be shut-in, these accounting service providers are not engaged during that time and incur no billings for the property. 

The alternative is for each producer to hire the necessary accounting staff as they do now. This is bureaucratic and wasteful in that it builds capacities in each firm to handle X contingencies. The problem is that each firm only needs those capabilities for a few hundred hours a year. These capabilities are recreated within each producer firm and are unshareable between producers. Locking in unused and unusable capacity within each producer firm. It's time to look at alternatives, and the time to look is when we design systems for the Joint Operating Committee. 

We will simplify and reorganize oil & gas producers' administrative and accounting processes. Closer to the practical realities of the day we find that many administrative and accounting functions are driven by standards of practice and regulations. These standards of practice are critical elements in the market supporting institutions necessary for administrative and accounting firms to operate in the manner recently described here. It is the capabilities of the administrative and accounting marketplace, the skills, knowledge, experience and ideas that the Joint Operating Committees will acquire through what Professor Richard Langlois and others call Transaction Cost Economics. A concise summary of the concept is provided in Professor Carliss Baldwin and Kim Clark’s paper “Where do Transactions Come From? A Network Design Perspective of the Theory of the Firm.”

...objects that are transacted must be standardized and counted to the mutual satisfaction of the parties involved. Also in a transaction, there must be valuation on both sides and a backward, compensatory transfer - consideration paid by the buyer to the seller. Each of these activities - standardizing, counting, valuing, compensating - adds a new set of tasks and transfers to the overall task and transfer network. Thus it is costly to convert even the simplest transfer into a transaction. p. 15.

However, within a system such as the Partnership Accounting module of the Preliminary Specification, the costs associated with standardizing, counting, valuing and compensating a new set of tasks and transferring them into a transaction are minimal due to the advanced use of Information Technologies. These costs are incurred by both the service provider and the Joint Operating Committee and are for their mutual benefit. If the accounting service provider posts a journal entry for this month's revenue for a number of Joint Operating Committees, the transaction costs are minimal once the initial engineering of the system is complete. Producers reduce their focus to the development and deployment of their distinct competitive advantages of earth science & engineering capacities and capabilities, and their land & asset base. The benefit comes to the service provider when their competitive advantages become their primary concern.

The user and Producer need to deploy knowledgeable in their own domains, but each needs only a little knowledge about the other's. 

If labor is divided between two domains and most task-relevant information is hidden in each one, then only a few, relatively simple transfers of material, energy and information need to pass between the domains. The overall network structure will have a thin crossing point at the juncture of the two sub-networks. Furthermore, because the transfers are relatively few and not complex, mundane transaction costs will be low at the thin crossing point. Thus, other things being equal, thin crossing points are good places to locate transactions. pp. 17 - 18.

And

Placing a transaction - a shared definition, a means of counting, and a means of payment - at the completed transfer point allows the decentralized magic of the price system to go to work. p. 22.

We have discussed how the People, Ideas & Objects Preliminary Specification is designed to accommodate the needs of producers, suppliers and vendors in the service industry. This is in addition to society and individuals. These administrative and accounting service providers will need special interfaces to process their work with the producer firms and Joint Operating Committees that employ them. For instance, if a Production Accounting service provider is providing services to all of the Joint Operating Committees at three major gas plants, they might want to have special interfaces that display the information in different formats to what any one of those individual Joint Operating Committees or producers might want to look at the information. These types of interfaces will support further division of labor and specialization. This is a founding principle of the service providers' organization. To expect that they will fit within the generic system configuration of what a “producer” needs would be incorrect. This is another reason why People, Ideas & Objects provides permanent ERP software development capability for the innovative oil & gas industry. 

We have also discussed in the Accounting Voucher module the design of transactions. This work of determining where the transaction point should occur is part of that process. It is more complex and detailed than it appears. If done appropriately it can have significant process efficiencies on both the producer or Joint Operating Committee, and service provider sides of the transaction. 

The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on... Frederick Hayek, “The Use of Knowledge in Society.” (1945).

Through the process of moving the industry to a “decentralized production” model as we propose in the Partnership Accounting module of the Preliminary Specification. We have matched the operational and actual overhead costs of the Joint Operating Committee to the property's production and revenues. Now we have achieved a dynamic where no production occurs on any property within the industry that has not attained profitable operations. As prices decline, unprofitable production is removed from the market. And as prices rise production would return to the market when profitable. It would be at this point that the market would achieve a certain dynamic that is not present today. And oil & gas producers could claim that their operations were capable of providing returns to their investors that were real, everywhere and always. 

Our Decentralized Production Model & Price Maker Strategy

When we consider the next aspect of this change, our decentralized production model, this assures that People, Ideas & Objects, our user community and service providers offer oil & gas producers the most profitable means of oil & gas operation, everywhere and always. What we've experienced over the past four decades in North American oil & gas is unique in all organizations and of all business history. Although we learned during the great depression the economic consequences of overproduction, and experienced its consequences in oil & gas since the 1980s, no one seems to have explained it to the North American producer. Oil & gas overproduction in North America has been systemic and chronic throughout the producer population and will continue to be without an effective means and method of production discipline being imposed. The history over this period is stark and clear. In the late 1970s the SEC imposed its Full Cost Accounting and associated Ceiling Test requirements on producers trading shares in the American market. These requirements allowed producers to record costs in property, plant and equipment as assets up to the limit of the present value of their independently evaluated petroleum reserves. This allowed an unnecessary flexibility in the financial statements that created distortions since that time. Simply, shifting the accounting from an evaluation of performance to one of value, hence the producer's foolish objective of “building balance sheets” etc came about. This is the mindset of our good friends, the producer officers and directors. What we know of business is that overreported asset valuations lead to commensurate amounts of overreported profitability. Leading investors to rush in to capture those profits and hence a process of overinvestment begins. Overinvestment in the productive capacity of the oil & gas producers leads to overproduction of commodities that are subject to the economic price maker principles and characteristics. 

It is this reason that has caused the repeated and systemic collapses of commodity prices throughout this past four decade period. The first commodity price collapse that we can document was during the summer of 1986 when $10 oil prices decimated the industry for the better part of a decade. This is counter to the cultural belief that oil & gas commodities are price takers. These definitions are from investopedia.com

Price maker

A price maker is a monopoly or a firm within monopolistic competition that has the power to influence the price it charges as the good it produces does not have perfect substitutes. A price maker that is a firm within monopolistic competition produces goods that are differentiated in some way from its competitors' products. This kind of price maker is also a profit-maximizer as it will increase output only as long as its marginal revenue is greater than its marginal cost, so in other words, as long as it's producing a profit.

Price taker

A price-taker is an individual or company that must accept prevailing prices in a market, lacking the market share to influence market price on its own. All economic participants are considered to be price-takers in a market of perfect competition, or one in which all companies sell an identical product, there are no barriers to entry or exit, every company has a relatively small market share, and all buyers have full information of the market. This holds true for producers and consumers of goods and services and for buyers and sellers in debt and equity markets.

As evidence supporting People, Ideas & Objects claim of price taker characteristics I make the following argument in our User Community Vision. Officers and directors interpret substitutes to be; if they don’t produce others will, therefore substitution is everywhere. This is not what substitution means. Does it mean that Elon Musk could make it to Mars if he replaced rocket fuel with a hydro dam? Or could we use wind energy to lubricate our crankcase? How about storing nuclear fuel rods in the convenience of a jerry can as you travel outdoors this weekend. And if you’d be able to return alive from your weekend adventure you might make it back to the office in that new solar panel, or pine bark suit you just bought. Alternatively, if bottled water ceased to be produced people would switch to soft drinks, tap water, juice or other substitutes. Any overproduction of bottled water would see inventories swell and the price remain the same, as would the price of the last bottle of water found anywhere in the world.

The connotation of the economic term price maker has caused producer officers and directors to conclude this is collusion. We argue otherwise when the Preliminary Specification and specifically this partnership accounting module, uses the Joint Operating Committee and will produce detailed, actual, factual financial statements for each property. Producer firms will definitively know the “real” profitability of each of their properties. A task that is not done today and more importantly can not be done today. And therefore producers will independently decide to shut-in their unprofitable properties to ensure they attain the highest level of corporate profitability. Invoking the necessary industry wide production discipline. Saving their petroleum reserves for a time when they can be produced profitably. Keeping their production and inventory costs lower by not incurring the costs of unnecessarily producing and storing unprofitable production. Ensure their reserves don’t have to recover the incremental costs of their prior losses as additional earned profits. And most importantly ensure that the marginal production is removed from the commodity markets allowing them to find their marginal price. 

While the property is shut-in the producer can apply their innovativeness, another Organization Construct of the Preliminary Specification, to return the property back to profitable production as soon as possible. People, Ideas & Objects and our user community are the appropriate business approach to the chronic and systemic overproduction of oil & gas and the persistent obtuseness of the producer officers and directors, not collusion as they accuse us. Profitable operations in a capitalist society do not necessarily denote collusion. Without “real” profitability there is only waste and deterioration as we’ve experienced these past decades. Without investors and bankers who were duped by these specious financial statements, there was no sustainable value generated, only destroyed.

The definition of collusion is provided by Wikipedia. 

In the study of economics and market competition, collusion takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market structure of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole. Cartels are a special case of explicit collusion. Collusion which is overt, on the other hand, is known as tacit collusion, and is legal. 

By definition then the Preliminary Specification price maker strategy may fall under the category of overt or tacit collusion. Which is legal. Each of the producer firms will be making independent business decisions of whether or not to produce at each and every one of the many properties that they own. Those decisions will be based on the actual, factual accounting that provides the information for that decision. The decision is to make a profit, if the property is shut-in due to unprofitability it will incur a null operation, no profit but also no loss. Achieved when the Preliminary Specification has made all of the producers costs variable based on profitable production. The decision to avoid a loss of corporate financial resources and assets, in the form of petroleum reserves, when producing an unprofitable property at a price that does not cover the marginal cost, in the long term perspective of marginal cost, (as per Wikipedia “analysis is segregated into short and long-run cases, so that, over the longest run, all costs become marginal,”) is a rational business decision, not collusion. This also provides, for the first time in the history of the industry, the ability for producers to indirectly control their overhead costs based on their profitable production profile.

The following graph was provided by Les Borodovsky from @SoberLook. What this graph is representing is the status quo perception of costs and how management of production is handled in oil & gas.

Please view the graph at the end of this text.

The perception of the producer officers and directors is that their total costs of each barrel of oil produced in the various shale formations is in the range of $48 to $54. The operating and royalty cost of each barrel varies between $28 and $37. I would point out the $20 to $23 in capital costs are based on an allocation of their capital costs across the entire reserves of the property. We’ve argued that this allocation is unreasonable in a capital market where the demands for the performance of capital are far greater than what can be achieved when a producer is cycling their cash through their investments in a manner that retrieves their investment over several decades or more, or even if at all. This is further aggravated when shale exposes prolific reserves, however demands substantial incremental capital to offset shales inherent steep decline curves in order to maintain deliverability. 

As an alternative, People, Ideas & Objects recommend that producers retire their capital costs within the first 30 months of the properties life to provide for the reuse of the previously invested cash. In turn providing them with the means to meet their internal demands for future capital expenditures, shareholder dividends and bank debt repayments, and better match the rapid decline rates experienced in shale in order to compete on North American capital markets. This can only be done if the producer is selling their commodities at a price that is above their break even point which considers an appropriate accounting of the actual, factual costs of exploration and production. And to reuse their cash repeatedly on this basis and not every second or third decade. 

This graph reflects the Well Break Even and Shut-in prices of the producers current policy position. At any point, and as long as the commodity price covered the operating costs, the property would continue to produce regardless of the impact on capital costs. If a dollar of capital costs was being returned, or one dollar above the shut-in price, that would enable the production of the property to continue. Only at the point in time where the commodity price dropped below the operating costs would the producer allegedly shut-in their production. This is a fundamental misinterpretation of the term break even, it is the reason the industry is in the difficulty that it’s in and why the producers have continued to lose money for the past four decades. Break even is not what is being interpreted here. What in fact the producer is assuming is that as long as there is cash flow above the operating costs then they’re making money in their opinion and will continue to produce. What they’re stating is they may not be breaking even, and as a result over the long term, stranding unrecovered and unrecoverable capital costs in abandoned properties is acceptable and commonplace.

What People, Ideas & Objects provide in our Preliminary Specification, if we could assume the accuracy of this graph numbers, is the point at which the property would be shut-in would be at the breakeven point and below. (Note that our breakeven’s point would be higher due to the competitive recognition of capital over a thirty month period.) The reason for this being the production discipline gained through knowing that producing any property unprofitably only dilutes the producers corporate profits. Producing below the breakeven point is the point where unprofitability begins. Producing below the breakeven point for one producer, in an industry who’s commodities are price makers, will have the effect where the price of the commodities will be dropped below the breakeven price everywhere for all producers. When all producers continually produce below the breakeven price for four decades it exhausts the value from the industry on an annual and wholesale basis. Which I believe occurred some time in the 1990s and since then, times were only “good” when investors were willing.

To avoid the allegation of collusion officers and directors would have us believe that they were operating the industry within the law. Losses of catastrophic proportions have been realized, displacing and disrupting the financial resources of each and every producer over the long term. Today the financial, operational and political frameworks of the industry are in tatters. This is considered normal course business operations for the officers and directors. Imposing the destruction of their firm's assets, the capacity and capabilities of the oil & gas and service industries is the price that they believed needed to be paid as a consequence of its acceptance of a “boom / bust” business by way of “muddle through.” This is unnecessary and unacceptable when the Preliminary Specification is available to operate the oil & gas business as a business.

The inverse situation is provided by the Preliminary Specifications decentralized production models price maker strategy. A contrast to the “muddle through” times we have found ourselves in during thirty one of the past thirty seven years since the July 1986 oil price crash in North America. In an environment where the Preliminary Specification will be operational, higher commodity prices would bring about production volumes that would meet the threshold of profitability and therefore previously shut-in properties would return to production. The enhanced commodity prices, everywhere and always, would allocate the necessary financial resources to search for innovative means for exploration and production. Providing the dynamic, innovative, accountable and profitable North American producer with the most profitable means of oil & gas operations. 

The organizational objective is to satisfy the consumer demand for energy on the basis of abundant, affordable, reliable and profitable energy. The value proposition of a barrel of oil equivalent is in the range of 10 to 25 thousand man hours of equivalent mechanical leverage. Going without oil & gas is not possible in the most advanced society with the most productive economy. The oil & gas producers value proposition to their consumers is therefore by far the most substantial of any other business. 

People, Ideas & Objects feel that oil & gas has a unique characteristic that needs to be recognized and adhered to. These commodities are valuable and limited in the long run. How do we ensure that we can prove to future generations that we used our share of these resources appropriately. The first way is to show that all of them were produced profitably everywhere and always. And secondly by passing along a profitable, viable, efficient and effective oil & gas and service industry. To do otherwise would be unwise and unjustified. Most of all it is unnecessary when the commodities follow the principles of price makers. Consumers are aware that the only effective way that they’re going to have secure, reliable and affordable energy independence in North America is when producers are profitable. Why this hasn’t been done is a question that needs to be answered by those that have not done this, and had the alternative in the form of the Preliminary Specification available in hand since at least 2012.

Yet, just as producers were forced to shut-in production as a result of almost negative $40 oil prices and refineries refusing to accept feedstock, they would find compelling reasons to return any property that contained shut-in production back on production in order to satisfy consumer demand and to do so profitably. Operating the primary industry of oil & gas profitably, everywhere and always, will enable them to maintain the capacities and capabilities of the greater oil & gas industrial economy. That People, Ideas & Objects were subjected to abuse and punishment for this position and other content contained within the Preliminary Specification is evidence that officers and directors knew better, that our alternative was available and it was refused as it disintermediated the officers and directors method of management and personal compensation, they’ll now need to live with their legacy of inaction.

What officers and directors were able to do was run the entire oil & gas industrial complex into the ground over these past four decades and completely destroy a large percentage of the service industries industrial capacity, eliminating that industry's capital structures and any faith, trust or goodwill between them. Go find a willing drilling rig investor or banker of a few years ago who subsequently saw the drilling rig they invested in cut up for scrap metal while producer officers and directors whistled their uncaring and inconsiderate tune of “muddle through.” It is now incumbent upon the producers to provide the financial resources to rebuild the service industry. And do so on a philanthropic basis. The rule is “producers broke it, the producers need to fix it.” Producers used and abused the service industry and now they’ll be needing to provide the money and backbone involved in the rebuilding effort, otherwise they’ll only use and abuse the service industry after they’ve rebuilt it again. Maybe when producers have had to rebuild the service industry themselves, putting some skin in the game, they’ll respect it. 

With the costs associated in exploration and production, and particularly shale reserves it's no surprise that producers have consumed the cash that is generated and any that is provided from investors and bankers. What is surprising is that producers have done nothing over this period to mitigate the overproduction that has caused the decline in pricing, subsequent financial losses, destruction of the producers reserves and greater oil & gas industrial capacity. And here we find the motivation as to why these methods continue. 

The reason for this chronic overproduction is the producers have to generate the revenues to cover the out of pocket costs of the overheads they incur in the “high throughput production” model they employ. This model has these overhead costs of the firm being incurred whether there’s production or not, and if any percentage of their properties are shut-in it makes their operation a high cost operation at any level of production. At lower production volumes, it skews their earnings and overhead costs appear out of place. Therefore this behavior of producing at capacity should be expected to continue on both the oil & gas sides of the business. Even in spite of significant financial loss or the inability to meet market demands. 

Although most producers report overhead costs of less than 2% in almost all instances this is not representative of the situation. We believe based on our experience that overhead costs range between 10% and 20% of revenues. These itemized amounts are never detailed or discussed in the financial statements of producers. If they were itemized the disproportionate and creative levels of executive compensation would be evident. Overhead costs are capitalized across the industry in the region of 85% to avoid the necessary accountability for these costs. Avoidance of accountability is the motivation for doing so, the consequences of these actions are as follows, and it should be noted People, Ideas & Objects identified this anomaly in excess of a decade ago. Yet nothing was done.

When all of the overhead is capitalized to the extent that it is in oil & gas it creates that giant sucking sound around the producers bank. Overhead in most businesses is recognized and passed to the consumers of the firm's products. In oil & gas it is capitalized. Therefore the “cash float” that all businesses have to have in order to finance these costs doesn’t function or even exist when overhead is capitalized. Producer cash is essentially stored on the balance sheet for decades and is passed on to the consumer at some point. When that will be remains a mystery. The industry phenomenon of a working capital deficiency was traditionally filled by the astute budget manager providing the amount of next year's capital expenditures in the prospectus. Without support for the capital structure, no real profitability earned and fundamentally inadequate revenues generated as a result of the decades long industry wide overproduction, we should understand the quality cash management skills being applied in the industry. When the business is a spending machine, what would you expect?

Our Preliminary Specifications decentralized production model is proposed and enables the dynamic, innovative, accountable and profitable oil & gas producer to implement our price maker strategy. This decentralized production model has been defined by Professor Richard N. Langlois in his book The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy. 

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p. 58.

Production discipline is attained through this process when the producer realizes that their maximum profitability is obtained through producing only profitable production everywhere and always. Therefore producers are incentivized to adhere to the principles of the Preliminary Specifications decentralized production models price maker strategy. Just as all businesses in the capitalist system follow these principles since the great depression of 1929. The individual decisions of each oil & gas producer, based on an actual, factual accounting of the profitability of the property, will determine if the property produces. That is how the oil & gas industry needs to deal with any low commodity price situation that it occasionally finds itself in. 

As properties begin to lose money in a period of declining prices, incremental properties are shut-in each month as they too may become unprofitable. The inverse of this is also relevant when commodity prices rise, producers will be raising production volumes when they attain profitability from higher prices and return their shut-in properties to the market. Shale based reserves will always overwhelm the oil & gas commodity markets with flush production and deliverability that are driven by shale's prolific nature. Production discipline based on profitability can only be achieved through the reorganization of the industry and producers based on the Preliminary Specifications decentralized production model. Where overhead costs are made variable and producers are using the facility we’re building in the form of our Cloud Administration & Accounting for Oil & gas software and service. Which enables our price maker strategy to provide for the producers and industries profitability and in turn ensures consumers are always provided with an abundant, affordable, reliable yet profitable source of energy. 

The effectiveness of our method is reflected in our logic. Producer profitability is maximized when losses on properties no longer dilute profitable properties profits. Reserves are held for a time when they can be produced profitably. And those reserves costs will not have to carry the incremental costs of any losses that would have occurred if the property continued to produce unprofitably. Keeping the oil & gas as reserves reduces the producers costs of production and storage of the excess, unprofitable production. Commodity markets find the marginal cost when unprofitable production is removed from the marketplace. Marginal prices for not just the unprofitable production but all production. While shut-in any unprofitable properties will form the producers work-in-progress where they can innovatively approach methods of raising production volumes, reducing costs or expanding reserves. Using profitability is the only fair and reasonable method of invoking production discipline. If it’s profitable it produces. 

It should be noted here that the Preliminary Specifications service providers will provide a standard, objective method of accounting and process management. Therefore any producer that finds a property is unprofitable, it will know that shutting it in is the most effective remedy as the assessment of unprofitability is the same standard and objective assessment that all other properties were evaluated under. The decentralized production model provides the financial resources necessary to ensure a prosperous industry controls itself as independent businesses. It is a method of determining the current replacement cost of oil & gas, as price makers only bring on new production when it is profitable. The method used today, capital discipline is a dull, blunt instrument that has proven time and again to be completely ineffective. By definition it is the willing destruction of productive capacity. Due to the decentralized production model and industry reorganization to the Cloud Administration & Accounting for Oil & Gas software and service. Overhead is only incurred when production is profitable. Overhead is variable based on profitable production and is not incurred if the property is shut-in. Therefore all overhead costs are recovered in the current period when they’re priced in commodity sales. Producers will therefore be able to indirectly control their overhead costs.

In today’s marketplace, producer management's focus on cash flow is designed to deceive those that believe they're productive. However, only officers and directors believe cash flow reflects value. It is simply a measure of how much cash the company generates. And in a capital intensive industry these numbers will always be significant. Included in that cash is an invisible amount of investment needed to maintain the assets. So although cash flow can be a big number it comes with big commitments. And sometimes those commitments exceed cash flow. Yet that never stopped management from promoting gross cash flow numbers as value. 

What is needed is for the producer and Joint Operating Committee to focus on earnings, that is the real earnings of the property. Those are based on revenues, less royalties, less a reasonable and competitive portion of capital, operating, and overhead expenses. Competitive in the sense that oil & gas needs to compete for capital on North American capital markets. When a firm focuses on those and leaves Wall Street analysts to themselves, favorable things can happen to the value of a property or a producer. Property valuation could be based on its present value earnings. Having a lot of production with no earnings provides no value for anyone. It's an exercise in activity. An activity that satisfies a small group known as officers and directors. Anyone can drill a well and produce oil or gas. Oil men and women make money. That’s the toughest part of the business, making money. Having abundant reserves is valuable if they can be produced profitably. By profitably, this implies being competitive, which is what the North American capital markets definition of competitive is.

Therefore, how can we ensure that the property always produces profitably? By reducing property operations costs. That is the next step in the ability of this “decentralized production” model to make the Joint Operating Committee the innovative framework of the oil & gas industry. With this understanding and operation, engineers and earth scientists will be able to turn to the Knowledge & Learning module of the Preliminary Specification. And determine what capabilities exist within the producer population represented in the Joint Operating Committee. To see if there is any operation that they can conduct to enhance the profitability of the property. In essence each property stands alone as its own unique cost center. Being evaluated as its own separate business based on business values and expectations. The Partnership Accounting module provides each Joint Operating Committee with detailed, actual, factual financial statements each month to determine the properties' performance. With overhead converted to variable cost, all costs are now variable and any shut-in production will incur a null operation. 

In recent discussions we saw that the accounting costs prepared for each Joint Operating Committee are the actual accounting costs for that property. This is not an overhead allowance as it is today. By reorganizing accounting and administrative functions for the service providers, we can identify the exact costs for each Joint Operating Committee. The other implication is that neither the producer firm nor the Joint Operating Committee directly employs or houses these accountants in their offices. Instead they are charged for the variable costs incurred by individual service providers. Where the service provider incurs costs on behalf of the industry and charges an individual price to the Joint Operating Committees for their services. And producers incur costs related to only those service providers they use. These are some of the advantages of the Partnership Accounting module of the Preliminary Specification, and modularity in general. 

When we’ve discussed modularity it’s been in the context of the fourteen module Preliminary Specification. However, it could easily be that we are discussing the Joint Operating Committee. Each Joint Operating Committee is isolated and exclusive to all others. As Professor Richard Langlois noted in his paper “Modularity in Technology, Organization and Society.”

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.

To have the entire accounting provided by accounting service providers who are not present in either the producer firm or the Joint Operating Committee does not seem to be too much of an issue. Dare I ask when anyone saw someone from accounting in an operations environment? Aren’t these people sequestered on their own floors or in other buildings most of the time? A revenue and royalty accounting service provider operating on behalf of several dozen Joint Operating Committees and representing fifty producers would need their own office space to organize themselves in a manner that provides them with the most efficient way to do their job. Production accounting may ideally be deployed closer to production locations.

Accounting service providers are not core to producers' or Joint Operating Committees' competitive strategy. Producers focus on their land & asset base. The engineering & earth science capabilities that make up their value proposition are where time and energy should be expended. Accountants can complete their work through meetings, emails and telephone calls no matter where they’re located. The producer's objective is to have these accounting overhead items match revenues within a Joint Operating Committee, particularly when production is shut-in. The decentralized production model will ensure that operational and overhead costs are reduced to zero during shut-in production. 

To achieve specialization and division of labor that will improve accounting efficiency. The accounting service providers will need to organize themselves in a manner that provides the highest quality service to their customers. These configurations will not represent how work is done today. In addition People, Ideas & Objects and our user community are designing systems to be as highly automated as possible. That’s not to suggest accountants' role is diminished in this environment. Their role will be more high level value added work, not transaction oriented. And they will have the support of the People, Ideas & Objects software development capabilities available to develop valuable and innovative systems and interfaces. And to do so with a permanent industry capability. By doing so, they will be able to innovate and evolve their services to producers.

In the industry wide reorganization of producer firms' administrative and accounting resources to service providers. It is our user community who are the principal owners and operators of each of them. There will be the generation of what Professor Richard Langlois in his paper “Transaction Cost Economics in Real Time” in the Journal of Industrial and Corporate Change describes as “Dynamic Transaction Costs.” 

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.

Previously, in other modules, we established an account to collect Dynamic Transaction Cost charges so that they can be identified and controlled. These costs will be incurred in the beginning stages of the transition from the firm to the market configuration. 

"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.

It will be during this time when Dynamic Transaction Costs are high. It will need to be determined within service providers' Service Level Agreements how these costs are recovered. People, Ideas & Objects see our user community and their service provider organizations as responsible for the integration and implementation of our software and their services. And as time passes and the work undertaken by the various accounting service providers that provide services to the producer becomes routine, we will know the transition to the market is complete. Professor Langlois notes.

‘Routines,' write Nelson and Winter (1982, p. 124), 'are the skills of an organization.' p. 106.

And

Such tacit knowledge is fundamentally empirical: it is gained through imitation and repetition not through conscious analysis or explicit instruction. This certainly does not mean that humans are incapable of innovation; but it does mean that there are limits to what conscious attention can accomplish. It is only because much of life is a matter of tacit knowledge and unconscious rules that conscious attention can produce as much as it does. p. 106.

And

In a metaphoric sense, at least, the capabilities or the organization are more than the sum (whatever that means) of the 'skill' of the firm's physical capital, there is also the matter of organization. How the firm is organized - how the routines of the humans and machines are linked together - is also part of a firm's capabilities. Indeed, 'skills, organization, and technology are intimately intertwined in a functioning routine, and it is difficult to say exactly where one aspect ends and another begins' (Nelson and Winter, 1982, p. 104). p. 106.

To remove ourselves from the detail of the Partnership Accounting modules decentralized production model we find that the real value is gained by the oil & gas producer. The repeated collapse of oil & gas prices since July 1986s initial oil price collapse. These events have been unforeseen and no effort has been taken to remedy what is now obviously the result of overproduction or unprofitable production. And when prices have not collapsed such as in April 2020s negative $40 oil price, there are chronically depressed prices that are the result of overproduction, or unprofitable production. The most compelling example is the loss of natural gas’ pricing standard of 6 to 1. Moving to approximately 15 or 20 to 1 during 2009 to 2022. And this past year's prices ranged between 30 and 40 to 1. This is a non-event that requires no concern or effort on the part of officers and directors of producer firms. The value expected to have been lost due to this pricing damage across North America in just the past year is over $290 billion. We assert that these are not and never have been opportunity costs. This is pure and simple mismanagement and has occurred annually on both oil & gas commodities for four decades. This is due to chronic, unconstrained, unprofitable production. Fueled by deceptive accounting practices used to raise capital to make up for shortfalls.

The same applies to oil. However, oil being a global commodity it can withstand the abuse of North American producers better than natural gas can. Natural gas is transitioning to a global pricing market however that is taking much longer than expected. 

People, Ideas & Objects are well aware of the difficulties and costs producers will incur associated with the dynamic transaction costs that will be incurred in the transition to remedy these maladies. The cost today of not doing so is abhorrent. The value we detailed where unprofitable production was shut-in, reserves were saved for when they could be produced profitably, reserves were used as the low cost alternative to storage, producers would attain the highest level of profitability when property losses did not dilute property profits and marginal prices were obtained across the continent, are well beyond anyone's material threshold. 

People, Ideas & Objects' value proposition is composed of two components. Our first point is the incremental earnings the industry will earn from our decentralized production model. Over the next 25 years we’ve priced these at a minimum of $5.7 trillion. The second component is estimated to be worth $20 to $40 trillion over the same period. This value is earned due to the fact that capital will no longer be raised from investors, consumed by producers in order to “build balance sheets” or “put cash in the ground.” Internally generated cash due to overhead costs being recognized in the current period and capital costs being recognized in a time frame that is competitive on North American capital markets. Will generate adequate levels of cash to fund the capital expenditures necessary to rebuild the industry in the vision of the Preliminary Specification, pay dividends and pay off debt.

Due to the high costs and prolific nature of shale formations, a decentralized production model is required. Oil & gas is currently run by a bureaucracy that has no idea how to produce shale. Shale presents a fundamental change in oil & gas. A change that reflected the prior dynamic of scarcity is no longer valid, and has been replaced by an era of abundance. Other than through the generation of significant losses, we have ample evidence over the past decade and a half to confirm that officers and directors don’t care about profitability. They still get paid either way. They are entrenched and will continue to fight People, Ideas & Objects Preliminary Specification with everything they have. Theirs is a comfortable and convenient life that doesn’t expect or want to be disturbed. 

As little as two years ago, officers and directors determined that shale would never be commercial. And sauntered over to the clean energy frontier to save the planet. We have no belief in their ability to understand or produce profitably, to commit to the oil & gas business or act in any way responsible. One of the inherent benefits of the decentralized production model is that it considers the ever-escalating costs of oil & gas exploration and production. Each incremental barrel of oil produced is technically more difficult and costs more than any prior barrel. This natural cost escalation is evident in oil & gas and not present in any other industry that I know of. Actual, factual and detailed accounting being prepared for each and every Joint Operating Committee in the Partnership Accounting module will account for this escalation. This will ensure these costs are immediately passed onto consumers. 

The AFE

One area we have not discussed in detail are the processes around the Authority for Expenditure or AFE. I will break the AFE discussion down into two parts. One is here in the Partnership Accounting module. The other can be found in the Research & Capabilities and Knowledge & Learning modules. What we’ll discuss are the Partnership Accounting aspects of the document. Later, we’ll examine the “capabilities deployment” elements in the other modules. 

As with any interface in the Preliminary Specification users will have the opportunity to right click on an item and pull up a contextual menu item called “Create an AFE.” The system will have intelligence and be able to generate elements of an AFE template with the information that a user right clicks upon. For this scenario, let's assume that a user clicks on an image of a well. The system will then populate the new AFE template with the information for that well type and the partners in that Joint Operating Committee. Suggestions were made that another lateral and frac job be done to increase shale gas production through the well bore. And the user populates the AFE with the appropriate account codes to account for the budgeted costs of those operations. (Note: Due to the extensive work done during development of the Preliminary Specification it should be anticipated that the industry would have access to a global chart of accounts.) Budgeted costs were worked out with a number of vendors that users were working with who have developed some enhancements to the re-entry and fracing of multi-lateral wells. Producers consider these innovations significant, and the costs make them potentially valuable additions to well profiles. 

To present the AFE to partners, users have asked them to join others in the “Marketplace Interface” at the vendor's facility to view a presentation of their enhanced tool. All confirmed attendance. At the end of the presentation users who are authorized members of the Joint Operating Committee digitally sign the AFE. This releases the document to the other partners. (All with data elements consistent with their data naming conventions. Global AFE #’s, account #’s, etc.) Cost estimates and timeframes that this can be done for the one well, the poorest performer in the facility. Users also submit engineering and geological analyses of why they think the formation will perform well for the proposed work. 

Within the AFE document itself there is a collaborative interface for partners to discuss issues and opportunities related to the document. During the month this discussion focused on how the existing lateral could be protected from damage during the drilling and fracing of the second lateral. Several partners expressed concern that the program did not do enough to ensure no damage occurred so a supplemental was raised. After the supplemental there seemed to be consensus among the Joint Operating Committee members that the risk was worth the effort. All participants digitally sign the AFE. 

As part of the collaboration, the producer firm determines who is available to participate. A team is set up to manage the engineering and geological aspects of the program. These people's time on this project can now be charged through the Work Order system with the appropriate Work Orders created. The account codes for vendors for that AFE will be able to accept charges. Cost overruns were not expected as an arrangement with the vendor for a fixed price was agreed. 

This is a scenario of how the firm will raise an AFE and have the members of a Joint Operating Committee approve / disapprove of / discuss it. Within producer firms there would be automated routing of the document to the various internal departments for approval. This could be done simultaneously as multiple people can read, process and approve one electronic document at the same time. Therefore accounting, production and exploration could each approve the AFE on the same day, eliminating the time-consuming paper shuffling that normally occurs. Even within each department the various people who need to see and sign off on the information can do so.

This document routing will be conducted at each producer participating in the Joint Operating Committee. Each partner has access to the AFE documents collaborative interface. This discussion is available to those who may have questions in the future as to why decisions were made and for what reason.

To clarify some of the similarities and differences between the AFE and Work Order in the Partnership Accounting module of the Preliminary Specification. And to point out a significant difference in the People, Ideas & Objects systems documents which differ from those ERP systems that operate in oil & gas today. 

Another aspect of how both the Work Order and AFE are unique in the People, Ideas & Objects system compared to other systems today is the manner in which documents are stored. Everyone has experienced the difficulties that multiple copies of files edited by different people create. A disappointing and troubling problem with electronic files that would be a disaster for documents. No one can have different electronic versions of a document. Therefore there can only be one copy of the document used by everyone. (Exclusions for backup etc.) However, since it's digital, multiple people can use the same document at the same time, as long as everyone is presented with the same, most current version.

The most effective example of a system that uses this exact manner of file management is Google Docs. Users have access to a list of files in which they grant access to and can edit the same file. Other users in Google Docs can be seen editing the file in real time. Any conflicts in editing those files are resolved by users while reviewing. The file remains as one complete edited file presented to each user at all times. With a history of prior versions available for review. There is no need for someone to take edits from many files and put them into one file as is the case with Microsoft Word or Excel. 

Instead of files People, Ideas & Objects will present users with documents like AFE’s and Accounting Vouchers that they have authorized access to. They and others will be able to view, edit and delete based on their authorization level and be assured that only those documents exist. No other more or less advanced copies are being worked on elsewhere. The amount of time and energy saved by knowing just one document exists is satisfying and highly productive. 

We have discussed many times that the People, Ideas & Objects application modules are moving the compliance and governance frameworks of the hierarchy into alignment with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee. By doing so we recognize and adopt the industry culture in its many forms. The change we are implementing is the removal of bureaucracy. When it comes to the AFE process there is little in the current process used by companies that is not representative of the industry culture. It is optimal that People, Ideas & Objects and our user communities capture that culture in these software developments when developing the AFE process.

One area that we will enhance the AFE process is through the elimination of the "Operator" designation. People, Ideas & Objects operates on the concept of pooling the resources of the partnership represented on the Joint Operating Committee. This is done to help mitigate technical resource shortfalls, particularly in earth science & engineering disciplines. As a result of this pooling an AFE will be available to any participant in a Joint Operating Committee to post charges. Those charges could be for their staff who are working on the project or for costs they incurred on behalf of the project. 

With each producer potentially contributing unequal shares to the joint account or AFE during a month, or over the course of an AFE’s term. They can either over- or under-commit their participation. Therefore monthly equalization will need to be a necessary part of the reconciliation of the AFE accounts. For example, if one of the partners pays for the drilling day rate, and their working interest share is only fifteen percent, they would have paid in excess of fifteen percent of the budgeted AFE. In a case such as this, the producer would be compensated to the point where their contribution does not exceed the approved total amount of their obligation.

All of this is consistent with the industry culture today. What we propose is aligning this culture within the Joint Operating Committee and its other eight frameworks. With the Joint Operating Committee being the key Organizational Construct there are six other Organizational Constructs that bring other cultural elements in as supporting institutions. We are not resisting this well ingrained highly functioning “inertia” as Professor Langlois calls it in his paper with Paul L. Robertson, Institutions, Inertia and Changing Industrial Leadership. (Please note all subsequent references in this module are to this paper.)

Inertia is the focus of this paper. As is explained in more detail below, inertia has two major functions in the cycle of punctuated equilibrium. Inertia results from, and in a sense embodies, the best feature of the stable phase of the cycle because it is based on the learning process in which producers determine which procedures are most efficient and effective. Once people are satisfied that they know how to do things well, they have very little incentive to look for or adopt new methods. In the words of Tushman and Romanelli (1985, pp. 197, 205), "those same social and structural factors which are associated with effective performance are also the foundations of organizational inertia..., success sows the seeds of extraordinary resistance to fundamental change." Inertia also provides the tension, however, that leads to the (relatively) short, sharp shock of the revolutionary period (Gould, 1983, p. 153) because the pressure required to displace a successful but inert system is considerable and takes time to accumulate. When there is little inertia, change can be assimilated in a gradual and orderly fashion, but an entrenched system may need to be vigorously displaced. p. 3.

I began with a discussion of the industry culture and how the inertia of the industries' routines and capabilities made for formidable obstacles to progress. Thankfully we are not focusing on changing cultural inertia in the oil & gas industry. We are trying to disintermediate the bureaucracies and change the systems to recognize the culture, routines, capabilities and inertia of the Joint Operating Committee. Making it a central part of all that is done in the industry. With a focus on bringing accounting and administration into the fold. This does however require the retirement of bureaucracy. 

And institutional change, we argue, can often take place through the more or less slow dying out of obsolete institutions in a population and their replacement by better-adapted institutions - rather than by the conscious adaptation of existing institutions in the face of change. p. 6.

The bureaucracy does not sustain its own inertia. It is a forced or contrived existence that serves a few within the organization. These needs can be taken care of by the Joint Operating Committee. I’m thinking of the command and control, budget and finance functions. What we have said we are doing with the Preliminary Specification is moving to the natural and cultural form of organization of the oil & gas industry, the Joint Operating Committee. Making the transition from the bureaucracy's forced means to the Joint Operating Committee's more natural way will not be a problem. Until...  

Another aspect of capabilities that has recently received a great deal of attention is organizational culture. In practice, not all organizations may be equally able to cope with change, as existing patterns of behavior involving both executives and subordinates may be resistant to change. Organizations develop collective habits or ways of thinking that can only be altered gradually. To the extent that a given culture is either flexible or consistent with a proposed change in product or process technology, the transition to the new regime will be relatively easy. If, however, the culture is incompatible with the needs posed by the change and is inflexible, the viability of the change will be threatened (Robertson, 1990; Langlois 1991; Camerer and Vepsalainen, 1988). p. 9.

And the proposition that this transition will occur has been threatened by the bureaucracy. They hold the budget and have exercised it by not providing funding towards People, Ideas & Objects. In this regard, the bureaucracy is self-serving and looks after its own interests. The abandonment of the industry's future is now evident in these actions. The responsibility for all damages and destruction falls to the officers and directors. What will the situation be like in five or ten years? Will their methods continue? What will they do now when it is clear they’ve failed? 

Teece neglects the negative side of Nelson and Winters analysis, however, and fails to note that the inflexibility, or inertia, induced by routines and the capabilities that they generate can raise to prohibitive levels the cost of adopting a new technology or entering new fields. Such inertia can develop to the extent that existing rules are both hard to discard and inconsistent with types of change that might otherwise be profitable. p. 10.

McKinsey Consulting suggests that large populations will join the middle class in 20 years. This will have a dramatic effect on the levels of energy consumption. If the oil & gas industry fails to respond to these demands due to bureaucracies' lethargic ways, will anyone note the Preliminary Specification was proposed?

Whereas major competence enhancing innovations may, in time, be assimilated, the creation of entirely new organizations may be needed to deal with innovations that undermine the capabilities or competencies of existing firms. p. 11.

Working Interest Distribution Changes

Producers have employed a variety of mechanisms to determine a point in time when the Joint Operating Committee's working interest distribution would change. This is based on the property's financial performance or activity level. These triggers have been used extensively in the past. I would suggest that with the increasing dependence on Joint Ventures in the oil & gas industry, these mechanisms will expand in their use and type. What is therefore needed is a reliable means to calculate and invoke the necessary changes to the working interest distribution. This is at the time of the change. With People, Ideas & Objects we have our user community to define the level of control producers want to build into the Preliminary Specification for these accounting cutoffs.

It doesn't matter if it's an activity level trigger such as a Before or After Casing Point election. This is where the leaseholder can join the other working interest owners. The Partnership Accounting module will not necessarily provide information to enable decision makers to make better decisions. However, it is still necessary to ensure that whatever decision is taken, the costs are accounted for before and after the decision point in the accounts. This is more of an accounting determination in current systems. By including the casing point election, our user community can automate this level of trigger. A direct benefit of user-based systems development such as People, Ideas & Objects.

In some accounting cutoff situations the point at which the change in working interest distribution is the result of a payout or penalty situation. These require the calculation and determination of when the property has achieved a prescribed financial performance. And then the distribution would reflect the revised working interest. These calculations, determinations and revised distributions are to be automated in the People, Ideas & Objects application modules.

Due to the fact that these are performance-based calculations, expanding property performance reporting is an area where I think our user community will have a significant influence on building valuable and innovative reporting. Traditional reporting of Statement of Expenditures and Statement of Operations is a standard requirement, and is included in this system's development. However I’m sure the community of users built around the development of the Preliminary Specification can expand on this reporting and provide real value for the innovative producer. It is necessary to prepare actual, factual, full financial statements for each Joint Operating Committee for the appropriate decision-making needs of the industry. The gap between Statements of Operations and Expenditures and full financial statements is about as large as possible.

Accounting Differences

In Canada at least, there is an accounting and production month to deal with production volume delays. Reporting volumetric information creates a one-month data delay. This is so that July’s production data will be processed and reported in August. And I’m sure everyone knows the amendment process for volumetric data. The adjustment process never seems to end. I wonder if we’ll ever find a solution to it.

People, Ideas & Objects seem to be a viable solution. We discussed briefly the Material Balance Report. While we noted that every report, and every input and output, must be balanced with other Material Balance Reports. And that each Material Balance Report serves as a Joint Operating Committee. We should note that there are some issues to be addressed in the Partnership Accounting module. These problems are caused by adjustments to Material Balance Reports. That is to say, these Material Balance Reports shift and amend volumes of products around as times pass and things are incorrect. When the physical world contradicts reporting, reporting must change. Hence the amendments.

I want to add to the discussion of the Material Balance Report by detailing the scope of the software engineering issue we have to solve. The first area of concern is that there are both daily and monthly volumes defining a period of time. Some of these volumes are “spec” vs. raw products and by-products, gas and liquids. Volumes are processed and gathered based on ownership and non-ownership of processing facilities. North America has two measurement units, American and Metric reporting standards. How gas is nominated (daily) and marketed (annually). Last but not least, royalty holders and surface property owners expect to earn money. And each of these processes could generate their own amendments.

The myriad combinations of possibilities within oil & gas must be captured and handled within oil & gas systems. That has not happened in any ERP system as of this date. The first aspect of solving this problem is to engineer a solution in software. Many have tried and found their budgets inadequate. Approaching this from an individual producer's perspective may seem like a reasonable investment, however, no one today declares success. If, as we have proposed in People, Ideas & Objects, we aggregate the industry's resources towards engineering the solution, this scope can be scaled, the costs to each producer will be incidental, and the results will be that each producer will realize the full scale of that software development effort.

The second aspect of the solution to this issue is to limit its scope. That is what we have done with People, Ideas & Objects. First, by using the Joint Operating Committee as the key organization construct. What we are doing is adopting the Material Balance Report as a function of the Joint Operating Committee. Which in reality it is. If however we separate it from other Joint Operating Committees from an accounting perspective then we can begin to view that Joint Operating Committee as its own autonomous legal entity, which it is. This simplifies the solution from an accounting perspective and helps to deal with business complexity. This discussion may not make sense until we get into the Accounting Voucher module. We also get into the final aspect of this solution which is where we encapsulate all of this reporting within the accounting system itself.

In a globalized oil & gas industry we have to deal with currency conversions in the modern era. And these are not your regular currency issues. The example I have used in the past is that a producer based in Texas (U.S. Dollar) with partners in Britain (British Pound) and Canada (Canadian Dollar) shares an interest in facilities and production in Turkey (Lira). Transactions through the joint account will be in Turkish Lira and recorded in the producers' native currencies based on the exchange rate at the time.

Another aspect of this problem is that currency conversions have different treatments for assets & liabilities than revenues & costs. Revenues & costs are converted at the time they occur and require no further action. While asset & liability accounts maintain a balance over a longer period of time, they may need additional consideration to ensure they are recognized and recorded correctly. If, for example, a producer’s finished inventory is in a country with a volatile currency, what amount should be assigned to the inventory? This could be answered by the ability to record finished inventory in US dollars. But operational costs may be valued in the domestic currency. And what about capital assets? These currency issues are predominantly producer related as they are cleared out of the Joint Operating Committee's accounts each month. Therefore the accounting for each producer in this scenario is and will always be unique.

I would however caution users in the community that the oil & gas industries' use of the Joint Operating Committee is unique. These currency issues may not be realized in other industries. And although I believe it is a fair assumption that Oracle Fusion Applications' currency management is state of the art. That state of the art would be for other industries like retail and other industries that would not have the scenario noted in this discussion. Because of the oil & gas industry's use of the Joint Operating Committee, currencies can be substantially improved. This is from the community's point of view. We are only scratching the surface of currency issues experienced daily in the oil & gas industry. These issues are what this community is after in terms of software engineering solutions that identify and support innovative and profitable oil & gas producers.

Costs Like Strategies Are Different

We should note that the cost structures of each producer within a Joint Operating Committee could be unique and mutually exclusive to each of the other producers on the property. When we expand the geographical view of the facilities owned in the area we see that ownership of associated infrastructure by producers can be remarkably different. This cost situation provides us with an opportunity to discuss the strategic choices that producers have within a Joint Operating Committee -- and adjoining facilities which are their own Joint Operating Committee -- and how each producer can maintain their own unique strategy.

In addition, since each Joint Operating Committee is autonomous from each other, a producer can choose unique strategies for each Joint Operating Committee they have working interests in. That is not to suggest that each Joint Operating Committee within a facility has its own strategy. They could, however that would be unproductive. What is suggested is that a producer could have each of their major properties operated under their own distinct strategies developed to optimize the assets' distinctive character. To reiterate, each producer within a Joint Operating Committee within a major area pursues their own unique strategy irrespective of each other's strategy.

Lastly, we recently noted that the Joint Operating Committee oversees the producer's strategic framework. It joins the legal, financial, operational decision making, cultural, communication and innovation frameworks within the Joint Operating Committee. This framework alignment is unrecognized in any existing ERP systems in the oil & gas industry today. People, Ideas & Objects is the only system to recognize, identify and support the Joint Operating Committee’s frameworks. In addition, People, Ideas & Objects aligns the hierarchies compliance and governance frameworks with the Joint Operating Committee seven frameworks. This alignment provides the innovative oil & gas producer with the speed, innovativeness, accountability and profitability necessary to compete in the shale-based era of oil & gas exploration and production.

Using global or generic corporate strategies is what companies did in the twentieth century. Today producers need to respond at the asset level to ensure optimal value is realized. These findings are based on extensive research conducted by People, Ideas & Objects.

People, Ideas & Objects and Oracle Corporation

Oracle Cloud ERP and Oracle Fusion Application technologies will be used in the Partnership Accounting module of the Preliminary Specification. Under the Oracle Fusion Application Financial Management Suite there are the following six modules included in the Preliminary Specification. General Ledger, Accounts Payable, Accounts Receivable, Asset Management, Payments & Collections and Cash & Expense Management. It is unknown at this time if the last three modules will provide any value to an oil & gas producer. Therefore, we will leave it to our user community to determine whether they remain and how they'll apply them. 

What we need is a solid mission critical, as they describe it, general ledger for the innovative oil & gas producer. This is for the Joint Operating Committee, the service industry and service providers. Oracle has competed in this arena since the late 1980’s with their own technologies. They have also focused their energies outside of their core database technologies on ERP systems by acquiring the top vendors in the business. When it comes to ERP software, SAP and Oracle are the two Tier 1 providers in the ERP software industry. 

When it comes to the technologies these systems are built upon, Oracle, in my opinion, wins out in a very substantial way. Their updated strategy is "hardware and software engineered together." And they have the industry leading products to do just that. With Oracle Servers, Oracle Operating Systems, Oracle Database, Java, Oracle Fusion Middleware, Oracle Fusion Applications and Oracle Cloud ERP all being industry leading proprietary technologies. SAP competes primarily on the ERP application layer, however has recently built their own database and tools. Oracle technologies are new. All Fusion products were written from scratch. Reflecting Oracle's significant commitment and investment in Java and database technologies. 

When we developed the Preliminary Specification we used modularity theory extensively. As defined in the modular definitions of the Preliminary Specification, for the producer firm, the market, and the Joint Operating Committee. Oracle also used modularity theory in Fusion product development. Enabling us to build industry specific functionality that works seamlessly with their technologies. Everything we need to build will be built on Oracle Cloud ERP. It is at the point where we'll be offering our Cloud Administration & Accounting for Oil & Gas software and service.

So when we begin to write the code for the Material Balance Report we will be standing on the shoulders of giants by using Oracle Fusion Applications and Middleware as the basis of where we start. And we will use the General Ledger, Accounts Payable and Accounts Receivable, as a minimum to provide the innovative oil & gas producer, Joint Operating Committee, service industry and service providers, no matter their size, with the mission critical capabilities of the industry leader in all of these product categories. 

Let's turn now to the comprehensive nature of the accounting done in the Partnership Accounting module of the Preliminary Specification. Whatever kind of accounting is done in the Preliminary Specification, whether it be for the producer firm, the Joint Operating Committee or the service provider, Partnership Accounting and Accounting Voucher are the two modules that capture everything an accountant will need. From the General Ledger to the Financial Statements of the producer and Joint Operating Committees everything a user needs, from management accounting to financial accounting will be here. 

To provide for this we will be using the Oracle Fusion Application Financial Management Suite of modules as the base of the Preliminary Specification. Included within that are the General Ledger, Accounts Payable and Accounts Receivable modules that will be used extensively. It will be here in the Partnership Accounting module that the People, Ideas & Objects user community will determine the need for the other Oracle Financial Management Suite modules of Payments & Collections, Asset Management and Cash & Expense Management. 

It is critical to stress our users' involvement in determining the input, process management, function and output of the Partnership Accounting module. As with all of the modules within the Preliminary Specification this is an opportunity to define what users need and want in terms of Information Technology in oil & gas firms. This should be considered a once in a lifetime opportunity. There will be very limited opportunities to join the community to have an impact once the Preliminary Specification begins commercial operation. The time to participate is now. If potential users can see value in the development of the People, Ideas & Objects systems, they should begin the process and participate as soon as possible. 

Outside of the core Oracle modules we will be doing a significant amount of development that will be key to the oil & gas industry. This will require us to drop down into the Oracle Fusion Middleware layer to access a very elaborate Java server. This will be used to provide the revenue and royalties systems that build off the Material Balance Report. Recall that the Material Balance Report is also crafted at this layer. Management of the firm and Joint Operating Committees capital and operating costs. And of course, revenues, royalties, capital and operating expenses will all be reported in gross and net values. Users may have extensive ideas about how they want their data to be displayed. They may want traditional formats like the Statement of Operations and Statement of Expenditures. This is just a small example of the Preliminary Specification feature set.

As we will see in the Compliance & Governance module there are extensive capabilities in the Oracle Fusion Applications. These capabilities enable the Balance Sheet, Income Statement and Statement of Changes in Financial Position to automate compliance. Updates to the regulations are done through Oracle and affect the Financial Statements submitted to the regulators. All in all providing the producer with an automated system from field data capture to financial statements is a wide-ranging scope, and one that should motivate everyone to participate in this worthwhile endeavor.

In addition to the Oracle Fusion Application Financial Management Suite General Ledger, Accounts Payable and Accounts Receivable modules we will use the Oracle Fusion Application Human Capital Management Global H & R Payroll module. Technically it will need to be worked out by our user community how each producer is able to charge the joint account for these costs. However, that does not present too difficult a task when we have the control being handled through the Joint Operating Committee and the Security & Access Control modules Industrial Command & Control. 

There is another assumption in the People, Ideas & Objects Preliminary Specification regarding specialization and the division of labor. And that is the division of labor between computers and humans. I suggest we cease operating in large part, from an accounting point of view, as quasi computers. Instead, I suggest we let computers handle the work that computers do best. Storage and process management are their domains and the sooner we leave these tasks to computers I think the better off we will be. The things that we are better at are the decisions, the ideas, the innovations, the change management, the planning, the creative process among many other things. These are the elements of our work that we should focus on and leave the computers to do the work that they do best.

Oracle introduced a few new concepts to its products years ago. Oracle Cloud ERP and all associated technologies are upgraded quarterly. Each upgrade contains up to 200 changes to the software and requires the attention of senior management in terms of implementation and configuration. This upgrade cycle keeps their product fresh and enables them to introduce enhanced product features faster. People, Ideas & Objects will participate in Oracle's upgrade cycle. Our service providers will support senior management in coordinating a shared and shareable understanding of the implementation and integration of Oracle and our updates. 

Secondly we are adopting the Oracle recommended method of making "additions" to the underlying software code. This is in contrast to building the modules as separate applications that reside as "customizations" on top of the Oracle product suite. Oracle’s recommendation is consistent with Java’s object model of polymorphism, inheritance and encapsulation. This will eliminate much of the conflict and difficulties Information Technology customers have experienced in the past. Where vendors debate which vendor was responsible for errors or omissions. Technically, these conflicts will have been identified and resolved prior to compile time.

Oracle CloudWorld 2022

It was during the Oracle 2022 CloudWorld conference that they introduced what I felt was an innovative direction they were taking with their products and their firm. It was the precipitating event that triggered the rewrite of the Preliminary Specification. Any blogpost preceded by OCI is a rewrite based on Oracle Cloud Infrastructure. It's interesting to note that Oracle's stock performance has increased from $67.02 to $120.68 since that conference. An 80% increase in their share price for a company with a market capitalization of $327.24 billion.

The significance of the change in Oracle’s trajectory as to what I saw at the Oracle CloudWorld 2022 conference was obviously shared broadly. To me it was the next level in ERP systems for all industries. Representative of the maturation of Oracle hardware, software and services finally delivering what Information Technology had always promised and consistently failed to deliver. Wrapped in a coherent vision of where they were taking their products next. 

This vision sees Oracle partnering with others to provide integrated services that solve many of the low level transaction oriented busy work. The kind of work that consumes bureaucrats' time and gets them out of bed in the morning. Throughout the Preliminary Specification I’ve highlighted the J.P. Morgan Chase credit card example for business expense accounts and reporting. By using J.P. Morgan Chase credit cards employees can designate the account location of the charge for their expense. At that point Oracle Cloud ERP will evaluate the charge and ensure it falls within the company's corporate policies of what is permitted. If it is not approved the employee would be charged for the cost. Individual expense reporting tasks will be reduced to the time spent so far. Their supervisors will not review these charges and waste thousands of hours chasing the few pennies usually retrieved in that process. Employees are aware of the corporate policies and will adhere to them or will be responsible for the charge and as such uphold corporate accountability. Not some nameless, faceless bureaucrat who suddenly appears out of nowhere. 

Oracle's work is critical to providing high levels of automation. Is that it’s the same type of work that People, Ideas & Objects, our user community and their service provider organizations have pursued in oil & gas. These features would be best represented in the Partnership Accounting and Accounting Voucher modules. The difference is that Oracle automations are generic and apply to all Oracle Cloud ERP customers. While People, Ideas & Objects focus on oil & gas. Producing the benefits of both worlds for oil & gas producers. Both generic automations of the expense reporting type but also the Preliminary Specifications for oil & gas specific automations. For example, those built off the Material Balance Report. These automations are targeted at the dynamic, innovative, accountable and profitable oil & gas producer.

The Service Provider's Role

Throughout the Partnership Accounting and Accounting Voucher modules there is discussion of our user community’s owned and operated service provider organizations and their role. People, Ideas & Objects see the reorganization of the administrative and accounting resources of the producer firms to the service providers as the enabling means to the decentralized production model, its price maker strategy, our value proposition, the conversion of all of the producer's costs to variable costs, gain from the benefits of hyperspecialization and the division of labor and the sharing of an industry based administrative and accounting based capability. It is only possible to have an organizational structure like this thanks to the Internet and Cloud Computing. These are the elements of Information Technologies Organizational Construct that People, Ideas & Objects use to define and support service providers. 

Each service provider is owned and operated by one or more of our user community members. Each member's contribution and area of expertise will be evident during our development. This will be used to determine the assignment of an individual process for them to manage on behalf of the industry. Our user community members will own one or more service providers that manage an individual process within their area of expertise or specialization. This will enable them to automate these processes at significant levels since it is only our user community who are licensed to make changes to the software derived from the Preliminary Specification. Automation is one of the service provider's competitive advantages. The others include leadership, issue identification, issue resolution, creativity, collaboration, research, ideas, design, planning, thinking, designing transactions, negotiating and compromising, innovation, financing, conflict and contradictions, the deployment of tacit (their services) and explicit (our software) knowledge, observation, reasoning and judgment.

Managing a single process for the entire industry seems to offer a dismal, dull future. If we were focused on processing transactions and only processing transactions that would probably be the case. Based on the competitive advantages service provider organizations will have. And the number of service providers we expect. The level of competitiveness in terms of how to innovate, automate and increase the quality of the service provided would be the beginning of the focus of those services. The means to affect change are at their disposal as the service provider's owner is a user community member. Meaning they can change their process management and software. 

Service providers will charge their service fees directly to the Joint Operating Committees. It is in that way that the Joint Operating Committee can report a null operation, no profit or loss, during times when the property is shut-in. While shut-in nothing will be transferred to the service providers through our task and transfer network to trigger them to work on that property for that month. And therefore no billing is sent to the property by any service providers. Therefore, all costs associated with producer firms become variable. And the benefits of the Preliminary Specifications decentralized production models price maker strategy are realized. 

The last point I'll make in this brief summary of service provider organizations. It should be noted here that service providers will provide a standard, objective method of accounting and process management. Therefore, any producer who finds a property is unprofitable will know that shutting it in for the month is the most effective remedy. Producers across the continent will know the assessment of unprofitability from People, Ideas & Objects is the same standard and objective assessment that all other properties were evaluated under. That we are not an Exxon or Chevron derivative ERP system commercialized for industry use. Producers should not be concerned about the validity of the standard and objective nature of profitability calculations of other producers' profitability. User community based software development generates these and other quality benefits.

The shutting-in of production is the most effective remedy for all concerned. The need for profitability, everywhere and always, is an absolute necessity in commodities such as oil & gas. Commodities that are subject to price maker characteristics and are critical to our economy, society and way of life. Shutting-in of unprofitable production is the only reasonable and fair means of production allocation that can be implemented across the industry. Government mandates, industry boards or other methods always leave bitterness and disappointment in their wake. With no capacity to stop the arbitrary decision to shut-in production. While with People, Ideas & Objects if a property is evaluated based on generally agreed standard and objective financial accounting criteria then it is in their financial interests to stop diluting their profitable properties with unprofitable production. And once done, it falls within the authority of those producers to deal with their lack of profitability at their properties. Production discipline comes into play when the producer firm needs to maximize corporate profitability by no longer diluting profits with unprofitable properties production. Competition on the capital markets will be difficult when a producer's poor performance is evident.