Trust and Credibility?

 The producer officers and directors have entangled themselves in what appears to be an unprecedented conflict of interest, evident in their shifting narratives over the past decade.

On one side, they've consistently downplayed earnings prospects to investors, blaming government policies (e.g., under the Biden administration), regulatory hurdles, and a litany of external scapegoats—while insisting that aggressive drilling ("drill baby drill") was the path to prosperity if only the president would permit it. Yet, following President Trump's election, that same "drill baby drill" mantra has quietly faded, with producers now claiming it's neither desirable nor viable.

Investors had every reason to exit in 2015, when accounting irregularities and lack of accountability became glaringly apparent. A viable alternative—the Preliminary Specification from People, Ideas & Objects—was already available by 2012, offering a framework for true profitability through decentralized, user-centric operations and proper cost allocation.

A decade later, financial statements paint pictures of wildly profitable operations, yet the industry continues to burn through enormous volumes of cash. North America's multi-trillion-dollar oil and gas sector is effectively operating on dramatic losses disguised as gains.

The recent finale of "Landman" drove this home: Producers project an image to the public of effortless wealth—raking in fortunes in weeks that dwarf ordinary paychecks—much like the hype of the late 1990s, when promoters touted "millions" in natural gas production, conveniently omitting that it meant millions of cubic feet, not dollars. Investors were sold visions of "free money" once production kicked in, only to face endless surprises and excuses. The show portrays producers as business superheroes, echoing the glamour of "Dallas's" J.R. and Bobby Ewing in the late 1970s. We all remember how that saga ended—someone shot J.R.

Reality bites hard. Savvy investors have long since protected their interests and moved on. Consumers, however, may soon face a rude awakening: either prices crash, potentially bankrupting the industry (a self-inflicted wound, as forensics would likely rule it a suicide), or they skyrocket, leaving producers stunned and unresponsive when asked for solutions.

Harold Hamm's actions at Continental Resources exemplify this shift. After taking the company private in 2022 to escape public market pressures and pursue aggressive growth, Hamm has now pivoted dramatically. In recent weeks (January 2026), Continental announced expanded investments in Argentina's Vaca Muerta shale—acquiring non-operating interests in multiple blocks from Pan American Energy, following earlier deals—and plans $100–$200 million annually to scale it into a core play. Meanwhile, Hamm has halted all drilling in North Dakota's Bakken shale for the first time in over 30 years, citing "margins basically gone" at current oil prices (around $58–$60 per barrel).

This may mark a symbolic beginning of North American producers' exodus from domestic basins. Expect a broader rush to international opportunities like Vaca Muerta, where costs and prospects appear more favorable and offer some shade from North American consumers.

Shale remains one of the greatest resource endowments ever bestowed on a nation—especially arriving at the dawn of an intellectually driven industrial revolution in North America, amplified by AI, data centers, and energy demands. Yet leaders like Hamm and other North American producers have squandered it: turning potential wealth into self-destruction through overproduction, poor accountability, and cash hemorrhage. Investors recognized the trajectory in 2015, withdrew capital, and alternatives like the Preliminary Specification existed to make shale truly dynamic, innovative, accountable, and consistently profitable.

This track record disqualifies current officers and directors from continued leadership. Their only unqualified success has been enriching their personal bank accounts.

A renewed, focused approach to shale is essential. Following reorganization of these producers, a strategy rooted in American economic dynamism could deliver abundant, affordable, secure oil and gas to North Americans within a decade—the original promise of shale. Unthinking, bloviating leadership has failed spectacularly and predictably.

Producers like Hamm might consider apologizing—to President Trump for misguided advice and to the stakeholders they've now abandoned. Consumers will soon demand reliable producers. Action is needed immediately to restore responsible leadership, or the industry risks proving there never was any accountable or responsible leadership.

Action is imperative: We must begin funding the development of the Preliminary Specification immediately. The current producer leadership has effectively stepped off the stage—abandoning North American shale basins, redirecting capital abroad, and turning their backs on the industry they once dominated—yet they continue to cling to authority, responsibility, and control over the remaining resources. Reliance on this status quo is no longer delusional; it is suicidal. When I launched this work in August 2003, the overwhelming majority who dismissed me as crazy were the very bureaucrats I had sworn to eliminate. Their isolation tactics only confirmed the necessity of the mission. I am at peace with the personal sacrifice and suffering this path has demanded. The first five years were the hardest, but one adapts—especially when the goal is to solve what the industry has long treated as unsolvable. Today, that “unsolvable” problem must be solved. The Preliminary Specification offers the only credible path to make shale truly dynamic, innovative, accountable, and consistently profitable. Delay only deepens the damage and risks leaving consumers without reliable, affordable energy. The time for excuses is over. Our funding must start now.

Until Such Time as...

 ...I can confirm I've been accepted back into the X community without conditions. Ill be cross posting my X posts back to the blog to ensure the community receives the message. 

The ongoing discussion within the oil and gas industry regarding breakeven costs remains both confusing and fundamentally flawed, a topic I explored in my recent Wednesday X post and Monday blog entry.

World Oil X Post

The central flaw in this narrative lies in the misapplication of historical costs. A recent WorldOil article, for instance, claims that the shale sector has achieved a 60-75% cost reduction, translating to savings of $30-$40 per barrel and purportedly saving consumers $3 to $4 billion per day.

This claim inaccurately conflates historical costs with prospective savings. A capital expenditure of $10 million made three years ago remains a $10 million fact today; it is a cost already incurred. The reported 60-75% reduction in drilling and fracking costs, while a valid figure for a company like Liberty, applies only to future wells, not to the wells already drilled and paid for. Therefore, past operations cannot retroactively claim these percentage-based cost savings.

Furthermore, producers must account for the full cost implications of selling below their actual breakeven point. When a property operates at a loss, those unrepaid costs are added back into the total expenditure that must ultimately be recovered. I assert that my calculated figure of $129 per barrel of oil equivalent (boe) is a more defensible breakeven value than the industry's commonly cited $30-$40 range. At today's price of $61.79, this discrepancy means an additional $67.21 ($129 - $61.79) in cost must be recovered for every barrel produced to truly reach breakeven.

Such claims of financial wonders validate the wisdom of oil and gas investors who abandoned the sector. A decade has passed since then, prompting the question: which is worse—being abandoned by investors, or continuing to promote such fables ten years later?

Breakeven Mis-belief

 The energy sector is once again engaged in the "break even" debate, intensified by declining oil and gas prices and the sustained reality of systemic overproduction. This situation compels producers to justify their operations despite having “restructured” their cost base through consolidation, creating a financially tenuous position. This analysis suggests that reported "break even" figures for Permian Basin oil and gas production may be significantly understated. People, Ideas & Objects are rightly questioning Reported Breakevens

Major consolidated producers are currently claiming WTI breakeven prices as low as $40 per barrel, with ExxonMobil stating its core "premium" Permian inventory (post-Pioneer acquisition) has a WTI breakeven in the low-$30s, and some of its best acreage approaching the high-$20s on a half-cycle basis.

Key Caveats on Producer Claims (ExxonMobil Example):

• These are development breakevens (NPV-positive at 10%), not corporate cash breakeven.
  
  

• They assume optimal conditions: full-field development, long laterals, pad drilling, and integrated infrastructure.
  
  

• Crucially, they exclude sunk acquisition costs, such as the $65 billion paid for Pioneer Natural Resources.

To illustrate the potential understatement, consider a representative $10 million well (drilling, completion, equipping, and takeaway capacity) on a 15,000-foot lateral. While initial production may be high (e.g., 1,100 boe oil and 900 boe gas), steep decline rates (60–70% in the first year, 30–40% in the second) can drop production to approximately 100 boe/d within a few years, without subsequent interventions.

Several key cost exclusions and problematic assumptions lead to an artificially low breakeven point:

1. Selective Criteria: Breakeven is often structured for payback within the first two years based on selective cost inclusion.
   
   

2. Excluded Operational Costs: Royalties, operating expenses, and corporate overhead are frequently omitted.
   
   

3. Acreage Bias: Calculations are based on premium acreage and may not represent the average shale well.
   
   

4. Associated Gas Valuation: Associated natural gas is valued at the Henry Hub benchmark, which ignores wide regional differentials. When realized prices approach zero or become negative (e.g., sold/disposed of at –$0.25/Mcf), a significant cost is created in terms of breakeven. If $5.00/Mcf is a profitable price the loss will be $4.50 + $0.25 = $4.75 requiring ($4.75/$0.50) 9.5 profitable natural gas volumes to cover the loss. Material downward adjustments in natural gas reserves are not considered in producers breakeven calculations.
   
   

5. Exclusion of Acquisition Costs: Acquisition premiums are not allocated to individual wells. For example, ExxonMobil's Pioneer acquisition premium amounted to approximately $90,210 per daily boe of production at the time. Allocating a proportionate share of this premium to a new well—factoring in its rapid production decline—would drastically increase the effective capital cost.

Recalculated Breakeven Example:

By integrating a proportionate share of the Pioneer acquisition premium ($41.5 million) into the capital cost of the model well, the total breakeven target for capital alone is estimated to be $129.21 per barrel for the total oil volumes produced (estimated ultimate recovery of 386,946 barrels), assuming the monetary value of natural gas production is a wash. This figure is substantially higher than commonly quoted prices. Peer Comparison of Claimed Breakevens (Late-2025)

Peer Comparison of Claimed Breakevens (Late-2025)

• ExxonMobil.
  
  

• Claimed Breakeven (WTI): $30–35 (Best: high-$20s)

• Narrative & Edge: "Manufacturing mode shale." Post-Pioneer scale, integrated infrastructure, lowest unit costs.

• Strategic Risk: Diminishing returns if development pace outruns geology.
  
  

• Chevron.
  
  

• Claimed Breakeven (WTI): $35–40 (Best: low-$30s)

• Narrative & Edge: Capital discipline over growth, optimizing for free cash flow. Conservative spacing, lower decline profile.

• Strategic Constraint: Smaller Tier-1 inventory relative to Exxon.
  
  

• ConocoPhillips.
  
  

• Claimed Breakeven (WTI): $35–40 (Best: low-$30s)

• Narrative & Edge: Portfolio optimizer; Permian competes internally with other basins. Strong execution consistency, disciplined reinvestment rate.

• Strategic Constraint: Permian is not a strategic centerpiece, limiting scale efficiencies.
  
  

• Diamondback Energy.
  
  

• Claimed Breakeven (WTI): $30–35 (Best: high-$20s)

• Narrative & Edge: "Pure-play efficiency leader." Best-in-class well execution, short decision cycles.

• Strategic Constraint: No downstream integration, higher volatility exposure, capital access sensitivity.

Skeptical Take: All major producers focus their quoted breakevens on "Tier-1" inventory, neglecting the higher costs and diminishing returns from "Tier-2+" acreage exhaustion. While Exxon benefits from scale, pure-play operators like Diamondback often achieve superior economics on a well-by-well basis.

Executive Summary:

• Exxon is positioned to have the lowest-cost shale manufacturing system due to scale.
  
  

• Diamondback is often considered the best operator in terms of pure execution efficiency.
  
  

• Chevron is focused on capital stewardship and lower corporate risk.
  
  

• Conoco is the best portfolio allocator, managing the Permian within a diverse portfolio.

Greater transparency and the inclusion of all relevant costs—particularly acquisition costs and realistic associated gas valuation and volumetric adjustments—are essential for a more accurate assessment of shale profitability and sustainability.

In Conclusion:

The consistent failure of producers to address their poor financial performance is striking. People, Ideas & Objects has observed producers, over decades, pivot from one excuse to another, with the only constant being the coordinated delivery of their message.

As we've documented, they have demonstrated an inability to generate profit. Significant losses stemming from a lack of genuine profitability have impacted an industry soon to be crucial in supplying the energy that fuels our progress. This responsibility has been evident, yet deliberately ignored. The officers and directors of these producer firms—the only ones with the authority, resources, and duty to act—have consistently failed to do so.

Consequently, People, Ideas & Objects offers a material value proposition, repeatedly validated by the inaction of producer officers and directors. The established history shows their decade-plus inability to effectively respond to investors. What we see as a positive sign is that the need for change is widely recognized, and the multi-decade adherence to the current status quo is proving fatal to their current administration.

2026: The Voice Revolution

As we usher in a prosperous and profitable 2026, it's essential to look back and evaluate the true impact of Artificial Intelligence in 2025. Did it live up to the hype? I believe it surpassed expectations, and 2026 holds even greater promise. For People, Ideas & Objects, AI has been a game-changer, and last year witnessed a significant acceleration in the quality of these sophisticated tools.

The next frontier for me is maximizing productivity through AI, which suggests a shift away from keyboards, especially on mobile devices, and toward microphones. This transition is proving to be challenging and feels unnatural; the immediate instinct is always to type. Interacting with voice or whisper seems to engage a different cognitive process, demanding a change in how we formulate and articulate our thoughts. Initially, the sight and sound of people talking to themselves in public will be a source of annoyance and discomfort, but by the end of the year, this will likely become a ubiquitous, everyday activity.

The consumption of voice-based content is already a norm. I find myself setting playback speeds for podcasts, YouTube, and other media sources to 230%, allowing for much faster information intake. Similarly, the time spent reading research papers can be drastically reduced by first summarizing them, identifying key sections, and then having the relevant parts read  back at an accelerated pace. To fully leverage these tools and methods, all the data and information we consume and produce must be organized and searchable. The transition to voice is straightforward for 2026 but represents a potentially invaluable shift for the future.

Happy New Year!

Two Decades and Counting

 On December 29, 2005 I wrote the following as the first post of this blog. 

Hello,

I want to invite everyone to this new blog to discuss the role of innovation in oil and gas, a topic that is complex, is being addressed globally, and might possibly be one of the most important corporate issues throughout the business world. That issue being how do we continue to fuel the global economy?

The purpose of this blog is going to be threefold, 

• discuss the methods of organization of oil and gas firms, and specifically the possibility of replacing the hierarchy or bureaucracy with the industry standard Joint Operating Committee (JOC).
• debate the attributes and elements of innovation in oil and gas.
• explore the impact of today's information technologies, and their role in making energy firms more innovative and accountable.

I would welcome any and all comments from readers and encourage a lively debate through this fascinating new medium of blogging.

Thank you

Paul Cox

People, Ideas & Objects

Time flies when you’re having fun. 

I don’t know if it’s seen as obnoxious stubbornness or consistent prescience. I would like to think the latter. 2005 was the heyday of the industry with oil & gas prices registering pre-shale dynamics of $50.04 and natural gas prices were $13.05. 

Here’s to another 20 years and getting this job done. 

Consolidated Losses?

 An article on oilprice.com offers a timely snapshot of current sentiment in the Permian. Exxon, Chevron, and ConocoPhillips are now positioning their post-consolidation performance as proof of a new operating model. The passage that drew my attention is noted in my references annotations:

Production climbed 400,000 bpd year-over-year even with WTI dipping below $60. Rig counts fell 15%, yet output still increased. The Permian isn’t following the old rules because its operators aren’t playing the old game.

The narrative is familiar: a shift “from wildcatters to industrialists,” with legacy shale developers displaced by super majors armed with scale, laboratories, and shareholder discipline. The majors highlight lighter proppants, AI-directed laterals, multi-well simultaneous fracs, and steady break evens in the $30–$40 range. Their messaging frames the Permian as a low-cost, long-lived franchise—hardly the conduct of firms preparing for decline.

I remain unconvinced.

Our long-standing critique at People, Ideas & Objects is that the industry continues to confuse technical execution with running a business. The commentary celebrates field-level efficiencies while ignoring the commercial realities that determine whether these operations create economic value. The super majors once dismissed shale as a short-cycle anomaly, then declared it fundamentally uneconomic, and then pivoted to “clean energy transition” narratives. Now they’ve returned with the latest story line as a consolidation strategy. At least for now...

The numbers don’t add up. The article acknowledges that the acquired producers carried roughly $80/boe break evens. These companies were purchased in the public markets—often at premiums of roughly 10%. That implies an entry cost closer to $88/boe. Even allowing for higher volumes, a 400,000 bpd uplift is insufficient to credibly compress break evens to $30–$40. The arithmetic does not reconcile. Yet these claims are presented as though cost structure simply resets upon consolidation.

As we noted recently, break even costs embed losses—un-recovered costs between realized revenues and break-even—back into the reserve base. Under current pricing, this dynamic pushes roughly an additional $30/bbl into the break even cost structure for every incremental barrel produced. Those costs must ultimately be recovered within the life of the reserves to avoid uneconomic outcomes and stranded investment.

Shale amplifies this problem. High initial volumes, steep decline curves, significant drilling and completion costs, and recurring redevelopment requirements compound the accumulation of capital that must be recovered later. Production front-loads the barrels but not the full cost. Remaining reserves then require new capital—new laterals, new fracs, new infrastructure—adding layers of un-recovered costs that linger until the Ceiling Test forces a reckoning. The SEC’s Ceiling Test exists precisely to ensure that booked reserve value does not exceed actual economic value. Its purpose is to strip un-commercial barrels off the balance sheet.

This is why I struggle with the celebratory tone around Permian “industrialization.” Technical gains are real, but they do not override the underlying commercial model. Until the industry manages itself as a business—not merely an engineering challenge—the structural economics will continue to be misrepresented, deferred, or pushed onto an ever-growing reserve base that ultimately cannot support them.

The majors can consolidate operators. They cannot consolidate losses.

Questions to Close the Year

 The Cloud ERP Strategy: Questions for 2026

The ongoing, rapid transition to cloud-based operations requires immediate consideration from oil and gas producers regarding the adoption of a single, industry-standard Enterprise Resource Planning (ERP) system, such as the Preliminary Specification.

This strategic imperative raises critical questions:

• Unified Approach: Is a standardized, objective and unified ERP approach essential for future operational success, and would a failure to adopt it constitute a strategically irresponsible decision?

• Vendor Integrity & Risk: Given the shift to multi-vendor, AI-driven cloud ERP systems, how can vendor integrity be effectively authorized and verified? Furthermore, does a single-vendor solution offer superior advantages by simplifying operations and mitigating business risk?

• North American Strategic Benefit: What strategic benefits will North American producers gain from establishing "People, Ideas & Objects Intellectual Property" as an Organizational Construct to define and set clear boundaries for the ERP environment?

We must resolve the industry-standard and objective question in 2026: Should the standard be an ERP system like the Preliminary Specification and Oracle, or a derivation of an existing major system (e.g., Exxon's or Chevron's)? Considering the potential for proprietary bias inherent in a system derived from a single producer like Exxon, the key remaining question is how the industry values the objectivity and non-proprietary advantage offered by the Preliminary Specification and People, Ideas & Objects.

The Holidays

 Thanksgiving marks the official start of the U.S. holiday season, a time for reflection and gratitude. I am incredibly grateful for the opportunity and the time I have to dedicate to the work of People, Ideas & Objects.

I've been holding off on a complex paper for a few months due to day-to-day interruptions, but now, with a period of more focused time ahead, I hope to make significant progress. This paper is an extension of several modules from the Preliminary Specification and is a direct consequence of the Oracle AI Conference. That's all I'm ready to announce at this time.

The arrival of Thanksgiving is something I've been looking forward to for months. As such, I won't be committing to a specific deadline for my return to regular posting. However, I will remain available, as always, if you need to contact me.

Wishing you a Happy Holidays and a Merry Christmas.

Cost Behaviors, Part II

 In our previous post, we discussed how the capital component of producers' break-even calculations has been stretched far beyond what is commercially viable. The industry's cultural acceptance of selling oil and gas at a loss, which was initially perceived as inconsequential, has been exacerbated by a prolonged failure to address chronic losses. This inaction has effectively turned many of these businesses into failed enterprises, with decades of operating at a loss pushing industry break-even costs into triple-digit territory.

Despite the period of producer consolidation, we have not seen the asset rationalization that would typically follow such a large-scale event. This may be due to "indigestion" among large producers, a lack of available capital, or a general disinterest in oil and gas and alternative investment industries. The poor reputation and track record of officers and directors—who are known to be unresponsive and unprofitable—have compounded the problem, pushing these firms past the point of easy remediation.

We begin by reviewing a graph from @SoberLook, which shows the general industry consensus on break-even costs (though six years old, the chart remains relevant). The conventional, yet flawed, assumption is that a well will break even at any price. The point at which a well would theoretically be shut in is only when operating costs are no longer covered. The critical oversight is this: selling below the actual break-even price leaves unrecovered capital costs, or property losses, that must be added back to the reserves' cost, which, in turn, recalculates and raises the true break-even price.

We must address two core issues: the overproduction process and the systemic impact of chronic overproduction on industry-wide value destruction.

• When producers over-report asset values, they equally overstate profits. This excess profitability attracts unwarranted investor interest, leading to over-investment in production capacity. As the overproduction of a commodity subject to the economics of a price maker occurs, the commodity's price inevitably decreases.

• Price Maker Characteristics:

• No suitable substitutes exist.

• Small changes in supply or demand disproportionately impact the price.

• Producers only increase production when it is profitable.

The consequences of this cycle are clear:

1. Short-term overproduction by a single producer drops the price below the break-even point.
2. Decades of industry-wide overproduction summarily consumes the comprehensive value of the entire sector.

Ignoring these issues only worsens the outlook for producers. Incorporating past losses into break-even calculations increases the required price to recoup what was invested or lost, which is not a viable business model. For example, if a producer operated for a decade at $50 when the required break-even was $55, their current break-even price could be $125. Going forward, each barrel produced has a negative contribution margin of $75, adding an incremental $75 loss to the cost of those reserves. Simultaneously increasing the cost of those reserves and reducing the number of production volumes available to retire them. This is an untenable downward spiral that explains the crisis facing "consolidated" producers.

Producers will argue they can deal with this by increasing the proven reserves by drilling a second lateral. Which is true. However, that will also put up to $10 million more for the property to recover. Here we invoke the hamster wheel analogy. Otherwise producers current strategy for managing this appears to be twofold: consistent denial of any financial difficulty and attacking the messenger. Both are tried and tested but have likely lost their effectiveness. The most prudent step is to cut the loss by disposing of the property. The question then becomes: what price is the market willing to bear?

While this may seem like an accounting issue, it is primarily an economic one. The reality is that the industry's performance is well below what a commercial operation requires. The producer will never recover the "cash they put in the ground" and is merely contributing more value to a losing cause. Activity for the sake of activity is not a valid business model, and these producers' competitive performance is only at 30%–40% of a commercially viable threshold.

The "smart money" is aware of the situation. Waiting for investors to return after observing the producers' failed strategies has proven fruitless. In fact, provoking investors to leave, and then leaving the situation unaddressed for a decade, is a serious tragedy that proved officers and directors were the root cause of the problem.

Reset the Break-Even Calculation

Traditionally, oil and gas properties are valued based on futures market commodity prices multiplied by reserves estimates at that price. Estimated operating costs are provided by an engineering firm, and the discounted present value is risked. This method, however, assumes an altruistic perspective on property valuation.

The performance-related question is what the true break-even number is for both the buyer and the seller. People, Ideas & Objects suggests this is the better way to evaluate today's oil and gas property. Would an appropriate offer to balance these differences be 30%–40% or lower of the traditional assessment? When can profitability, from a "real" financial point of view, actually be achieved? How can a purchaser compete on North American capital markets if 100% of the property's capital costs are realized in just 30 months?

The seller is financially crippled by their property. Their break-even price continues to expand, meaning they cannot and will not ever make money from it, eventually extinguishing all the value invested and generated in finding and developing the reserves and eventually leaching over to other property break even calculations. A sale stops the financial hemorrhaging; the incurred loss is relieved, which is as good as a profit in reality. It assures the seller of receiving up to 30% of the value that would otherwise be consumed by ongoing operations. The key is determining the value they are willing to accept.

Other working interest owners in the Joint Operating Committee may have the right to intervene and purchase the property, or they may face the same cost behavior and also want to sell. The outcome is uncertain. The costs to own the property can no longer be supported by any economic model at the current values held by the original owners. They often claim, as is common in oil and gas, that capital is a sunk cost. It is precisely this flawed thinking that created their current predicament.

For the purchaser, taking on the financial loss relieves the seller of their pain. The offer, which makes the seller free and clear, must also provide the purchaser with an opportunity for profitability. Oil and gas producers must establish a culture that is dynamic, innovative, accountable, and profitable. Adoption of the Preliminary Specification is assumed, and a plan for establishing those profitable operations should be in place. Working with the Joint Operating Committee may be an impediment, so approach those firms and make an offer to them as well. If the plan is not accepted, adjust the purchase price or walk away. Overpaying for assets is the most direct path to failure, and while it may take longer, those large balance sheets do eventually face tragic consequences. 

Cost Behaviours, Part I

The capital-cost dynamics embedded in producers’ cost structures offer a strategic vantage point into their true financial performance. If each month’s Joint Operating Committee financials reflected these behaviors faithfully, firms would gain unprecedented visibility into the profitability of every property. The foundational issue is a core economic principle rarely acknowledged in the sector, captured effectively in the following passage:

Stabilizing” Commodities 101 - equipment, or those working the poorest land, that are driven out. The most capable farmers on the best land do not have to restrict their production. On the contrary, if the fall in price has been symptomatic of a lower average cost of production, reflected through an increased supply, then the driving out of the marginal farmers on the marginal land enables the good farmers on the good land to expand their production. So there may be, in the long run, no reduction what ever in the output of that commodity. And the product is then produced and sold at a permanently lower price." (Henry Hazlitt, Walter Block, Economics In One Lesson)

The industry’s unresolved problem is the enormous accumulation of property, plant, and equipment. Until these are addressed only some of this discussion will apply to the status quo producers. Carrying oversized property, plant, and equipment makes the status quo the high-cost producer—regardless of the accounting method used. This reality remains unacknowledged, even as firms claim these inflated balances each quarter as evidence of financial strength.

In contrast, startups and midsize operators possess substantial flexibility. Capital-cost behaviors become quasi-variable in several ways. A primary misconception is the industry's current treatment of “breakeven.” Within oil & gas, breakeven is widely misinterpreted as the point of operating profitability. The actual definition is far more rigorous: the cost of property, plant, and equipment associated with a property divided by its proven reserves, which then establishes the per-barrel price required above operating cost to retire the capital invested in finding, developing, and producing those reserves.

Breakeven, properly understood, is the price point at which the producer should shut-in the property. At that point the asset should be transferred to the inventory of innovative work-in-progress to expand reserves, reduce operating costs, enhance productivity, or otherwise improve the economics before returning to production.

Industry behavior demonstrates disregard for this discipline. Firms routinely sell production below breakeven—and even below full operating cost—under the justification that “the market provides what it provides.” This ignores the fact that producers collectively are the dominant force shaping the market.
The question becomes: who actually cares about breakeven? At present, the answer is no one. The perceived inability to drive change has suppressed any strategic response. The Preliminary Specification provides a pathway out of this impasse.

If we assume—strictly for framing—that the cumulative revenue losses this century also approximate $4.7 trillion of natural gas sales below breakeven, the implication is severe. Those losses would be transferred forward into future breakeven calculations, elevating the price required for profitable production to levels that classify producers as the highest-cost operators in the market. Alternatively, these properties become effectively impaired—incapable of ever recovering the capital invested. Production sold below breakeven does not retire capital; it increases the capital burden that must be absorbed by the remaining reserves.

This is why both profit and loss generate cash flow in a capital-intensive industry. Cash flow, in practice, is largely the return of prior investment. In oil & gas this effect is amplified: producers manage cash for up to sixty days on behalf of all Joint Operating Committee participants, and as a primary industry they collect the revenues that ultimately fund the entire service and tertiary ecosystem. If cash is king, this business model elevates producers to another tier altogether.

Yet, for decades producers have required ongoing investor funding simply to meet annual capital-expenditure budgets. This is the long-term result of performance degradation dating back to the 1986 price collapse. The industry was gutted, and the cultural scars remain. The operational mindset became survival—taking whatever price the market delivered, deferring structural change, and continuing as long as cash flow stayed positive.

This raises the central strategic question: is the industry still operating in the same survival mode that emerged after the 1986 crash? After a decade without capital-structure support, no demonstrated capacity for structural change, and a lingering dependence on diminishing cash flow, the evidence suggests an industry unaware of what it must do to sustain itself—let alone generate competitive, market-driven returns.

The underlying issue remains unresolved: producers must recognize their cost structure for what it is, not what they hope it to be. Until then, they will continue to operate on the margins of viability, rationalizing incremental deterioration while believing they look strong—at least to themselves.

Tomorrow we’ll discuss the value of these properties in the hands of those who may be interested in purchasing them. How the acquisition and divestiture market pricing method used in the past remains the method used today. And why startup and midsized producers would be fools to play that game.