There is no consideration in these overhead charges for natural gas operations or oil operations. Anyone who knows the business will understand the complexity and difficulty involved in natural gas, from an administrative and accounting basis, is an order of magnitude more complex than oil. These overhead estimates are also the same irrespective of the volume of production from the well. What bureaucrats want you to believe in this quarterly report season is that the costs to carry the people on the payroll have been the source of their difficulties. Laying these people off will be the natural resolution to their difficulties. My argument here is all a moot point the bureaucrats will state. As the people in head office, the accountants and administrators, costs are capitalized anyway. Which is very true, so why lay them off. Could it be that you're just looking for a scapegoat?
The point of this post is to document the difficulty in determining the profitability of an oil and gas property under the present systems. Producers can determine the revenues, royalties and operating costs of the property and use that as the basis of determining what is providing some contribution to the margins. But these calculations are unable to determine the costs to administer and account for these properties and they never include the costs of capital that was incurred to explore and develop the property. Those are what are called sunk costs in the business. It is these sunk costs and the overhead that can be widely variable between properties and producers in determining a Joint Operating Committees profitability. That is, when and if they could ever be calculated properly by the producer.
To account for the administrative and accounting costs on a property basis has never been conceived of before. The necessary armies of accountants, with very sharp pencils, would be thick and deep. Therefore the need for overhead allowances has been the most practical application to deal with the way to administer oil and gas. That was the case in the 1950’s and 1960’s and has been continued throughout the last 50 to 60 years. However, we have these computers now and if we organized ourselves around the possibility of using them to do the things that they do well, and have the people do the things that people do well. We could determine with exact detail on a monthly basis each well's performance in terms of revenues, royalties, operations and exact accounting and administration costs, and just for fun I'll throw in the fact that we can determine what a reasonable person would determine the costs of capital was for the month as well.
By having our service providers replace the accounting and administrative resources of the producers. They will use their staff, who are the reallocated administrative and accounting resources from the producers, and our software to provide the administration and accounting of a specific process on behalf of the entire industry. It will be in that way that they can charge for their services to each Joint Operating Committee, or well, the exact costs of what they incurred to process that Joint Operating Committees specific administrative or accounting process. If the well wasn’t on production then none of the service providers would have done any work and none of the service providers would have issued an invoice to any of the Joint Operating Committees for any accounting or administrative work. That way if the well wasn't earning a profit the producers could shut it in and wait until such time as the commodity prices rose to the point where they could make a profit, or alternatively they could put that Joint Operating Committee in their inventory of engineering and geological workovers and try to innovate to bring it back to profitability sooner.
The way that the industry is currently structured is to accommodate the world as it exists in the 1950’s. Computers are around today but the organization and methods are still stuck in the 1950’s. The Preliminary Specification will change this by providing full income statement and balance sheet reporting for each individual Joint Operating Committee and well. We need to make these changes in the Preliminary Specification in order to provide the dynamic, innovative and profitable oil and gas producer with the most profitable means of oil and gas operations.
The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.