These Are Not the Earnings We're Looking For, Part LXXIII
Composition of Our Value Proposition
Intangible & Unquantifiable Attributes, Con’t
Markets
At People, Ideas & Objects, we are advocating for a new organizational approach in the oil & gas industry, one that leverages the dynamic, innovative, accountable and profitable nature of markets. Unlike the corporate hierarchies that have dominated the past century, markets have historically been the foundation of economic systems. The alternative solution currently being explored—consolidation or centralization by existing producers—seems to be falling short of expectations. This approach runs counter to the broader trend of disintermediation and decentralization driven by the Internet. We believe the choice is clear, which is why we designed the Preliminary Specification as a market-oriented, industry-wide oil & gas ERP application.
The Preliminary Specification includes three distinct markets: the Petroleum Lease, Financial, and Resource Marketplace modules. Each of these modules is designed to replicate and interface with the physical markets that currently exist, supporting the transactions and collaborative decision-making necessary for producers to leverage their unique competitive advantages—whether in land & asset bases, or earth science & engineering capabilities.
We’ve emphasized the superior quality of accounting information that People, Ideas & Objects’ Preliminary Specification will provide to producer firms, which stands in stark contrast to the opaque, disorganized, and often unused accounting systems in place today. If the current state of the industry—marked by its destruction—isn’t enough to illustrate the problem, one has to wonder why so many officers and directors still believe they are running prosperous businesses. Engineers and geologists bypass traditional accounting data, relying instead on reserve reports, which are not accurate, historical or factual.
To illustrate the critical importance of accurate accounting, consider this excerpt from David Serna of the Founders podcast, discussing a historical figure who revolutionized his industry through rigorous accounting practices:
It was a lump business. And until stock was taken and the books balanced at the end of the year, the manufacturers were in total ignorance of results. I heard of men who thought their business at the end of the year would show a loss and had found a profit and vice versa. I felt as if we were moles burring in the dark.
And to me, this was intolerable. I insisted upon such a system of weighing and accounting being introduced throughout our works as would enable us to know what our costs was for each process. And especially what each man who was working for them was doing, who saved material, who wasted it and who produced the best results. And he says he ran into human nature.
Every single manager in the mills was against his new system. And he said it took years before he was able to actually install an accurate system. But this was the end result. Eventually we began to know not only what every department was doing, but what each one of the many men working at the furnaces were doing and thus to compare one with another.
One of the chief sources of success in manufacturing is the introduction and strict maintenance of a perfect system of accounting. That's a main theme. How many times did you repeat this in the books before? So that responsibility for money and materials can be brought home to every man.
Investing in technology yields significant advantages, compounding savings and enhancing competitiveness, which can determine profitability.
Organizations often overlook the importance of precise accounting, leading to undiscovered waste and inefficiencies. Embracing modern technology, such as advanced furnaces, can substantially reduce waste and protect profit margins, even when initial investments are met with skepticism.
The Scottish-born American industrialist and philanthropist Andrew Carnegie was the leader of the American steel industry from 1873 to 1901. He donated large sums of his fortune to educational, cultural, and scientific institutions.
Born: November 25, 1835
Dunfermline, Scotland
Died: August 11, 1919
Lenox, Massachusetts
The Founders Podcast book being reviewed was Andrew Carnegie, Autobiography.
People, Ideas & Objects believe the reliance on markets will be fundamental for the producers ability to prosper. However it will not occur within the domain of the existing producer organization and their inappropriate accounting. If Andrew Carnegie was able to acquire this quality of accounting information from the computers that I can only imagine were available in the 1870s. Then why do we accept today's nonsense? The question to ask the producer officers and directors is “how do you get to Carnegie Hall?”
Relying on markets, supported by accurate accounting, is crucial for producers to thrive. However, this transformation will not occur within the current producer organizations and their outdated accounting systems. The complexities and speed of the oil & gas industry today demand a fundamentally different approach. Presently, many producers are uncertain whether shale is a viable investment or should be abandoned, whether clean energy represents their future, or if consolidation will succeed as a business meme. The past three years alone have made it abundantly clear that many in the industry remain "in total ignorance of the results."
Markets, coupled with appropriate accounting, are just the beginning of the solution to navigating the increasingly complex landscape of the oil & gas industry.
Innovation
The pursuit of clean energy by oil & gas industry officers and directors may be considered one of the most significant leadership failures in recent history. By shifting focus to renewable energy sources like wind and solar, these leaders inadvertently signaled to the service industry—traditionally the primary source of innovation—that they were no longer a priority. This message also extended to the engineers and geologists who had been steadfastly enduring the industry’s boom and bust cycles. For many, this shift was the final straw, leading them to conclude that their skills and interests might be better applied in other industries. They likely recognized that producers were either being misled or were heading for disaster, as has occurred so many times in the past.
Now, with consolidation becoming the favored strategy, a similar disillusionment is taking hold. Consolidation often results in producers reducing the number of service industry participants they work with. The surviving company typically retains relationships with their suppliers, while the acquired company ceases to engage with its previous partners. This has led to a wave of bankruptcies among smaller service firms, as they lose significant portions of their customer base. What these trends suggest is that consolidation follows clean energy in the dictionary. And we can therefore conclude that officers and directors have a long way to go before their business education is complete.
The Preliminary Specification is built on two foundational principles: establishing producer firms on a profitable and innovative footing. While there are many priorities we address, instilling these two principles go a long way toward transforming the industry. A key innovation process included in the Preliminary Specification involves a strategic approach to managing unprofitable production.
When unprofitable production is removed from the market by shutting it in, the firm's profitability increases, and a host of other significant benefits follow. One major advantage is that the property in question becomes the focus of the Joint Operating Committees innovative thinking to determine how best to return the property to profitable production. This can be achieved through various methods, and the Research & Capabilities and Knowledge & Learning modules within the Preliminary Specification offer valuable tools for conducting these types of operations.
This process of restoring unprofitable production to profitability is of immense value to the producer and should be a central focus for the firm. It addresses the company's most pressing challenges and offers significant opportunities for value generation. However, as Andrew Carnegie once noted, selling such ideas to those with vested interests can be a difficult task. Yet, this is precisely the kind of innovative approach that the Preliminary Specification advocates.
Discussion
The Preliminary Specification is undeniably a dynamic solution, one that fundamentally reshapes the oil & gas industry. I've long asserted that it will change everything, and it undoubtedly will. The initial effects will likely be disruptive—marked by dislocation, disorientation, and, in a word, chaos. However, amidst this upheaval, there is a clear vision that can help guide the industry back to a place of stability and purpose. The real question is whether this transformation will come about through deliberate action or be thrust upon us by further failures.
Through our series reviewing producer financial statements, we have meticulously documented the financial devastation within the industry. It's intriguing to note that many of the foundational principles we laid out in our Preliminary Research Report in May 2004 and the Preliminary Specification in August 2012 were initially dismissed. When we published our projections of trillions of dollars in potential value, industry leaders laughed. Yet here we are in 2024, and those predictions have materialized, quantifiable in numerous ways. What remains incalculable, however, is the human cost—lost careers and opportunities that a viable, profitable, and prosperous industry should have provided throughout this century and will desperately need in the future. Despite this, those responsible continue to act as if they understand what they are doing, with the current push for consolidation leading us toward yet another disaster.
What frustrates me most is the clear value that the Preliminary Specification offers the industry—value that remains ignored. In decades of advocating for these solutions, I have been vilified, ostracized, and rendered persona non-grata within the oil & gas sector. I have sustained this pursuit entirely on my own resources, never receiving a single cent from any oil & gas producer. Meanwhile, as I predicted more than a decade ago, trillions of dollars in oil & gas revenues and value have been lost, and the capabilities of the service industry have degraded and continue to diminish. Entrepreneurs, organizations, investors, and leaders within the service industry are disheartened, unmotivated, and have lost all trust, goodwill, and faith that producers will act beyond their officers' and directors' narrow self-interests.
The service industry clearly understands that the lack of producer profitability is the root cause of the extreme boom-and-bust cycles. They also recognize that producers seem unconcerned with addressing this issue. After 33 years of commitment from People, Ideas & Objects, with no progress in getting producer officers and directors to take action, it is evident that the real dreamers are those in producers leadership positions. Initiative is dead—they’ve killed it. No one is willing to lift a finger to help them anymore, as there is no point in trying when producers themselves refuse to work towards improving their profitability.
Conclusion
The actions of oil & gas officers and directors have led to the industry's downfall. Lacking the necessary business acumen and refusing to accept input or solutions, they have failed to understand the broader role and responsibility they hold in ensuring the industry's health and prosperity. Instead, they have focused on self-interest, leading to a collapse that has left the industry in a state incapable of meeting its financial or operational needs. Meanwhile, they have misled politicians into believing that oil & gas resources will be readily available for political leverage, an assumption that is dangerously misguided. I wouldn’t want to be the one who made those promises.
I understand that these accusations may not sit well with those I’ve criticized. They may dismiss them as mere opinions. But ask them this: What tangible value has been generated from the development of the vast shale resources? Who has truly benefited, been rewarded, or prospered, and where does that value stand today? If they point to oil & gas reserves as the answer, then ask them how they plan to access those reserves and produce them profitably. If they claim it has always been profitable, you’ll have your answer.
On the other hand, consider the tangible and intangible value that People, Ideas & Objects have built into the Preliminary Specification. Notably, our key organizational construct is the Joint Operating Committee. What additional intangible value might be realized from aligning the legal, financial, operational decision making, cultural, communication, strategic, and innovation frameworks of the Joint Operating Committee with the compliance and governance frameworks of the corporation? The potential value is enormous.
In today’s advanced societies, organizations are defined, supported, and often constrained by software. To effect change, the software itself must first be changed. People, Ideas & Objects offer the most profitable means of oil & gas operations, everywhere and always. It's no longer sufficient to simply own an oil & gas asset; one must also have access to the software that makes the oil & gas asset profitable.