A Perception of Financial Status, Part V

Hedge Hogs

Producers are correct that hedging can mitigate the financial consequences of adverse commodity prices. Investors may appreciate that protection. They’re entitled to an answer to a more fundamental question: why does the underlying production lose money? A hedge settlement can offset a loss. It does not establish that the operation generating that loss is commercially competitive.

My objection to the widespread reliance on hedging has three parts. It can obscure the need to correct unprofitable production, send the wrong message through the organization, and weaken production discipline by insulating producers from the consequences of continuing to market uneconomic volumes which continue to escalate recovery costs.

Innovation Fades, Don’t Rock the Boat

The cultural consequences deserve particular attention. Engineers, geologists and accountants should be encouraged to identify problems, challenge assumptions and improve financial performance. Their contribution becomes harder to recognize when hedge proceeds are used to dismiss the significance of operating losses. The implicit instruction becomes: continue producing; the financial arrangements will cover the difference.

Hedging does not eliminate the value of an employee’s improvement. Management can, however, create a culture in which that improvement is treated as unnecessary. Why identify an avoidable cost, propose a different operating method or investigate an unprofitable well if leadership regards the outcome as already settled? Why take responsibility for a problem that management insists does not require a response?

That is how “Muddle Through” becomes institutionalized. The organization protects its existing arrangements while the people capable of improving them are encouraged to remain within their assigned roles. Competitive initiative becomes an interruption to the routine.

“Muddle Through” Continues

Are these firms oil & gas producers whose technical expertise generates competitive returns, or commodity trading organizations whose financial arrangements compensate for inadequate operating performance? The distinction matters. When management answers questions about profitability with “we are hedged,” it risks substituting the performance of a financial contract for the performance of the business it’s appointed to manage.

Excess Supplies Long Term Effect on Price

The third objection extends beyond the individual producer. Where hedge receipts support continued production that would otherwise fail the commercial test, the resulting volumes still enter the physical market. The hedge changes the producer’s financial exposure; it does not recognize or remove that production's capital costs. To the extent those volumes sustain an excess of supply, the consequences reach other producers and the wider industry when commodity prices are influenced.

Synallagi price maker strategy requires the production decision itself to carry commercial discipline. Each producer must know whether its interest in a well, property or Joint Operating Committee earns a profit at the market price. Financial protection must not become permission to disregard that information.

Negative prices make the issue unmistakable. On April 20, 2020, the May WTI futures contract settled at negative $37.63 per barrel. That was a specific contract settlement, rather than a uniform global oil price, but it remains a striking example of a commodity acquiring a disposal cost. CFTC: May 2020 WTI contract.

Our concern is the acceptance of continued negative-price production as an ordinary way of conducting business. The paper’s illustration applies an assumed negative $2.15/Mcf realization to substantial Permian gas volumes over a quarter. It exposes what happens when production consumes cash, recovers none of its allocated capital and leaves fewer remaining volumes to meet the outstanding obligation. A hedge settlement if necessary must be shown separately from the performance of the underlying Joint Operating Committees result.

Calling the gas “associated” does not resolve that commercial problem. The term describes gas produced alongside oil; it does not make the resource disposable or remove the obligation to account for its value. Oil & gas revenues and their shared costs must be evaluated together where appropriate, while retaining visibility into the contribution and consequences of each commodity.

The scale makes that visibility essential. EIA reports that Permian marketed natural gas production averaged 27.6 Bcf/day in 2025. A resource of that magnitude warrants explicit commercial management, whatever terminology is used to describe its relationship to oil production. EIA: Permian natural gas production.

Our calculation of approximately $5.4 trillion in cumulative natural gas revenue shortfalls relative to heating-value equivalence this century provides a broader measure of the pricing deterioration we are challenging. That calculation and the negative-price illustration address different aspects of the problem. Neither is answered by reporting that an individual producer received compensation under a hedge.

Restoring natural gas prices to their approximate 6:1 heating-value relationship with oil could generate substantial additional revenue. However, that relationship alone does not establish profitability. If oil is priced below the level required to recover its full costs competitively, pricing natural gas at one-sixth of that oil price may leave gas production below breakeven. 

Synallagi price maker strategy and breakeven calculations work hand in hand: the calculations establish what each well and property must recover, including actual operating costs, overhead and capital within a competitive period; the strategy uses that information to determine whether the market price supports profitable production. Heating-value equivalence provides a comparative benchmark. The decision to produce rests on profitability.

People, Ideas & Objects defines overproduction in commercial terms: production sold below the full breakeven required to recover operating costs, actual overhead and capital within a competitive period. Under this definition, excessive production begins when the volume marketed fails that commercial test. We believe this began during the July 1986 oil price crash and whose consequences were felt well into this century. 

Continuing to overproduce has consequences beyond the individual producer. Additional supply can depress the price received on a much larger volume already being marketed. Other producers then face reduced margins and greater capital-recovery deficiencies. When they continue producing below their respective breakeven levels, the process reinforces itself. Reserves are consumed, capital remains unrecovered, and subsequent production carries an increasing recovery burden. Deferring the recognition of capital costs in financial statements does not resolve that commercial deficiency.

The question is whether the industry’s organization allows market prices to impose meaningful commercial discipline. A price signal cannot protect capital or preserve reserves when producers repeatedly proceed without recovering their full costs. Sustained over decades, this behaviour can erode the financial capacity required to maintain the industry, support its service industry and replace declining production.

Our natural gas analysis measures revenue deterioration against a stated heating-value benchmark. The corresponding erosion of oil revenue requires its own explicit benchmark before it can be quantified. The commercial obligation is nevertheless the same for both commodities. Synallagi breakeven calculations establish what must be recovered, and its price maker strategy requires each producer to act on that information. Production must earn the resources necessary to sustain and renew the industry.

The production discipline begins with recognizing that producing a property below its full commercial breakeven dilutes the producer’s corporate profitability. For commodities with the price maker characteristics of oil & gas, the consequences extend beyond that property. Additional unprofitable production can depress the market price received on other production, drawing more properties below their respective breakeven levels. When producers respond by continuing to produce, the financial damage compounds: reserves are depleted, capital remains unrecovered, and the remaining production must carry a greater recovery burden. Sustained over decades, this behaviour consumes the industry’s capacity to finance its own renewal. Too often, the apparent prosperity of the “good” years depended on investors’ willingness to supply the capital that production had failed to recover.

Synallagi is designed to provide the information necessary to act. Transactions are captured in detail. Our user community’s service provider organizations perform specialized accounting and administrative processes and charge the relevant Joint Operating Committee for the services delivered in the current month if profitably produced. Each property therefore receives actual, consistently prepared cost information, including the overhead incurred in administering its activities.

Overhead allowances would no longer stand in for actual costs in this commercial evaluation. Any capitalization required for financial reporting would remain separately identifiable and would not obscure the underlying expenditure. Operating costs, actual overhead, capital recovery and the required return would establish the commercial threshold for each producer’s interest.

That detailed account information gives engineers and geologists a financial basis for improving performance. It gives accounting a direct role in the production decision. It gives officers and directors a result for which they can be held accountable.

Our objective is to eliminate reliance on hedging as a substitute for profitable production. Under Synallagi price maker strategy, profitable production proceeds, and production that fails the commercial standard requires corrective action, preservation or suspension. When Joint Operating Committee costs are all variable based on profitable production, all production would be competitively profitable. The opportunity to benefit from stronger prices remains, while the obligation to address inadequate economics is immediate.

“We are hedged” is an explanation of a financial position. It is not an answer to “why are we producing unprofitably?”

Debate # 42, Perception of Financial Status

We have another debate-style podcast produced with Google’s NotebookLM. This discussion brings the cultural issues addressed in A Perception of Financial Status into focus for listeners who may find them less apparent in a conventional presentation.

Standard and Objective Accounting

One simulated presenter advances the commercial argument behind Synallagi. The other raises objections that will sound familiar to anyone who has followed our work. The exchange is useful because it exposes a fundamental misunderstanding about what standardized, objective accounting contributes to an oil & gas business.

At one point, Synallagi is characterized as a “brilliant theory which completely falls apart as soon as it hits the dirt.” That is almost as dramatic as some of my own claims. The accompanying objection, paraphrased, is that accounting cannot standardize physics.

It cannot. What it can do is establish what applying that physics costs, what the resulting production earns, and whether the investment is being recovered.

Generally Accepted Accounting Principles illustrate the value of a common financial framework. Investors can apply a familiar structure when examining different businesses, while considering the circumstances and disclosures specific to each. Comparability reduces the work required to understand a company and evaluate its performance. The underlying businesses remain different.

Synallagi brings a similar discipline to Management Accounting. People, Ideas & Objects, our user community and service provider organizations propose standardized methods for determining the actual financial performance of wells, properties and Joint Operating Committee interests. Each property retains its geology, engineering requirements, production characteristics and costs. The methods used to evaluate their commercial consequences are consistent.

That consistency matters when an evaluation indicates that production is unprofitable. Those responsible must be able to examine the costs, assumptions and capital-recovery requirements, trace them to their sources, and understand the conclusion. They must also know that comparable evaluations elsewhere follow the same commercial standards.

Each producer then makes its own production decision. A common method gives that decision a defensible foundation while preserving the ability to identify errors, investigate anomalies and consider remedial work. The paper discusses the commercial benefits of withholding unprofitable production, with further detail in our Master Appendix.

The objection about the unique nature of the “rock” therefore misses the purpose of the proposal. Those differences belong in the evaluation. They determine the costs, production profile and practical alternatives being assessed. Geological uniqueness makes accurate financial information more valuable.

I recognize that this is an AI-generated debate, but the suggestion that the rock prevents objective accounting is one of the more imaginative justifications for “Muddle Through” that I have encountered.

A second benefit of standardization extends throughout the organization. From the mail clerk to the president, people should understand how their work fits into the business. Across the industry, participants should understand how work is authorized, performed, recorded, billed and paid.

The industry already relies on common technical specifications to make equipment and operations work together. A coherent commercial framework can bring comparable clarity to transactions and responsibilities. It should be straightforward to determine what was agreed, who completed the work, where the cost belongs, and when payment is due.

"A New Discipline"

This is part of what we describe as “A New Discipline” for working in the twenty-first century. Organizational latency—the time consumed by handoffs, unresolved responsibilities, missing information and repeated approvals—restricts what skilled people can accomplish. Reducing those delays can release more of the productive capacity of engineers, geologists and the service industry. Synallagi is designed to make the relevant responsibilities and processes explicit in the software.

My frustration with the resistance to this approach has a long history. A search of my blog returned 124 uses of “viable scapegoats” between August 8, 2019, and April 27, 2026. I developed that expression to describe objections that, in my experience, repeatedly displaced the commercial question without resolving it.

Early in this project, my emphasis on profitability was often met with the assertion that cash flow was what mattered. Yet cash received from production must be evaluated against the expenditure required to generate it and sustain the business. If capital is not being recovered, returning to investors for the annual shareholder issuance does not settle the performance question.

Engineering and geology have accomplished extraordinary things. Their achievements need a business framework capable of demonstrating that the value created exceeds the resources consumed. Otherwise, the pursuit of greater output risks becoming an unconstrained science experiment financed by others.

The long-running argument over shutting in production illustrates the problem. For years, I encountered categorical claims that production could not be suspended. Yet the industry has long used shutdowns for maintenance, turnarounds and safety. The relevant questions concern the characteristics of the particular operation, the consequences of suspension and the conditions for restarting.

Our 2019 paper on the commercialization of shale advanced the case for commercial production discipline. Less than a year later, the pandemic produced large-scale output reductions, including economic shut-ins in the United States and Canada. The IEA reported that global oil supply fell by approximately 11.8 million barrels per day in May 2020 through a combination of OPEC+ cuts and reductions elsewhere. IEA: June 2020 Oil Market Report

That experience refutes the blanket assertion that production cannot be shut in. It also reinforces the need for competent engineering assessments of individual wells and properties. Synallagi commercial evaluation gives those assessments a financial context.

Meanwhile, the replacement obligation continues. Between December 2023 and December 2024, production from existing Lower 48 oil wells declined by 4.3 million barrels per day—approximately 39% of their starting production rate. New wells replaced those losses and allowed total production to increase 270,000 boe / day. EIA: production declines from existing wells

What capital-recovery requirement should have been included in the commercial cost of that production during 2024? How much capital did the revenues actually recover, and how much remained outstanding as the existing wells’ production rates declined? Would a seven-year recovery assumption require justification against those properties’ production profiles, costs and competitive performance requirements.

The decline percentage alone cannot answer those questions. It does, however, demonstrate the scale of the recurring replacement obligation. Producers must recover their investment from the production that investment generates while preparing to finance subsequent development. If recovery falls behind, new investment adds another financial commitment before the previous one has been satisfied. Synallagi breakeven calculations are designed to make that accumulating obligation visible and establish the capital recovery required in the price of each unit produced.

This is the physical dimension of the “leaky bucket.” Much of the production added each year replenishes the decline from existing wells before contributing to growth. Growth stops when those additions merely match the losses. If additions fall below the replacement requirement, aggregate production declines. The question is how long the industry can sustain the investment, equipment, skilled personnel and productive locations necessary to meet that recurring obligation.

The financial counterpart is central to the hypothesis I have pursued since the July 1986 oil price crash and my initial 1991 corporate attempt at resolving this: production that fails to recover its full commercial costs progressively consumes the industry’s capacity to renew itself. Producers can maintain or increase output while leaving capital unrecovered, drawing down working capital and weakening the service industry on which subsequent development depends. In our assessment, the market is now revealing the accumulated consequences of that process. The financial deficiency is manifesting in the resources and capabilities available to sustain production.

We argue that additional effort within the present organizational configuration cannot resolve this underlying problem. Faster drilling, improved completions and greater production can deliver technical gains while perpetuating the commercial deficiency if the resulting revenues still fail to recover the full cost of production. The necessary change concerns how the industry evaluates performance, assigns responsibility and acts on market prices. Continuing to optimize output without establishing that discipline leaves the cause of the deterioration intact.

Shale intensified this challenge by transforming an industry organized around scarce discoveries into one capable of developing abundant resources. That abundance must be managed profitably. An extensive resource base requires the financial and operational capacity to bring it into production, recover the investment and repeat the process. Waiting until aggregate production falls leaves the underlying deterioration unaddressed until its consequences become unavoidable.

Synallagi is our proposed organizational response to that hypothesis. Its breakeven calculations establish the full commercial recovery requirement, and its price maker strategy supports each producer’s independent decision about whether production meets it. Standardized, objective accounting makes performance visible; defined responsibilities make decisions accountable. Together, these changes are intended to establish the profitability and repeated capital recovery necessary to rebuild the industry’s capacity and sustain North American energy independence.

Leadership for a Profitable Future

LNG introduces another test of that discipline. Access to international markets creates an opportunity to improve the value realized from North American natural gas. Producers must demonstrate how their contracts and production decisions convert that opportunity into sustainable profitability and capital recovery. The material costs and deductions between the destination sale and the producing property should be understandable.

For Canada, this is already an operating reality: LNG Canada shipped its first cargo in June 2025. Further development makes preparation more urgent. Producers should establish how their investments will earn competitive returns as export capacity expands. LNG Canada: first export cargo

Synallagi proposal is to calculate the financial performance of each Joint Operating Committee using actual, detailed costs and standardized methods. Its price maker strategy applies that information to the production decision. The objective is profitable production that recovers capital and finances renewal.

The debate also characterizes hedging as responsible corporate governance. Hedging can manage price exposure, but that does not answer whether the underlying production earns an adequate return. My objection is to using hedge proceeds as a substitute for addressing persistent deficiencies in the production business. The financial performance of the property must remain visible.

The prospect of another commodity supercycle raises the same question. Higher prices may improve cash receipts. Leadership must still explain what will change in its decisions, capital recovery and organizational performance. A favourable market does not, by itself, establish that the business model has been repaired.

Around the 7:30 mark, the discussion returns to a familiar proposition: geological characteristics dictate financial performance. Another version of the objection is that "accounting cannot make a basin profitable." No, but managing a business can.

Geology establishes physical opportunities and constraints. Financial information allows people to evaluate the commercial choices within them. Accounting can reveal which activities create value, which consume it, what must change and whether a proposed intervention earns its cost. Producers need both forms of knowledge to run a scientific business.

The first requirement is leadership that understands why this change is necessary. The second is an organizational and systems framework that makes commercial discipline practical through defined responsibilities, traceable transactions, consistent methods and reviewable decisions.

Integrity must be evident in how the business operates each month. That is the purpose of standardization and objectivity within Synallagi: to make performance understandable, responsibility identifiable and commercial decisions accountable. Together, they support a culture of petroleum reserves preservation, performance and profitability capable of replacing “Muddle Through.”

A Perception of Financial Status, Part IV

Part IV of People, Ideas & Objects paper "Consider This... A Perception of Financial Status: Why Oil & Gas Producers are not Profitable"

The Consequences

    The consequences to breakeven accumulate through time. Production that contributes too little toward capital recovery leaves fewer remaining volumes to recover the outstanding breakeven costs. Production that doesn’t attain the breakeven threshold increases that burden further. The required breakeven recovery price per reserve unit will rise as the resource is depleted. A positive reserve valuation, or profit, establishes that the business can finance reserves replacement, pay down bank debt, restore service industry capacity and earn a competitive return. 

These obligations extend beyond the producer’s balance sheet. Drilling contractors, completion companies and other service companies need margins sufficient to maintain equipment, retain skilled people and finance their own renewal. These are the costs represented as capital in the breakeven calculations. Producer’s cost reduction cannot automatically be celebrated as efficiency if it depends on weakening essential suppliers. The productive system must be commercially sustainable throughout its relationships. The Primary Industry operator, the producers, holds the responsibility to uphold these principles.

These warnings have been visible for years. In the Dallas Fed’s 2019 Energy Survey, respondents described restricted capital access, tighter lending conditions, weak returns and pressure on service-company margins. These were concerns expressed within the industry itself. Eleven years after the 2015 downturn, leadership must explain how its response has addressed their investors underlying requirements for profitability and accountability. Dallas Fed Energy Survey, third quarter 2019.

Investors have specifically demanded that tier 1 ERP systems be implemented within the industry. Over the course of this period none of the issues of accountability or profitability have been resolved. Indicating that none of the current market solutions have been able to address industry difficulties. As a result investors remain on the sidelines. The responsibility belongs with those authorized, responsible, accountable and have the resources available to them to act. Officers recommend operating systems and investment programs; boards approve them and oversee their consequences. The disruption and expense of implementing an Enterprise Resource Planning (ERP) system are reasons to evaluate it rigorously and govern it competently. The required outcome is an operating framework in which complete economics influences decisions and those decisions remain accountable. Where warnings and requests for action are documented, leadership must remain accountable.

Synallagi, our user community and their service provider organizations are our proposed means of restoring a culture of reserves preservation, performance and profitability. The vision enables business and technical disciplines to strengthen each other across producers of all sizes. Recognition of the Joint Operating Committee is central: Synallagi proposes to align the compliance and governance framework with the legal, financial, operational decision-making, cultural, communication, innovation and strategic frameworks of North American properties. 

People, Ideas & Objects’ business models, embodied in Synallagi, present an estimated value proposition of $25.7 to $45.7 trillion. Our calculation of $5.4 trillion in cumulative natural gas revenue shortfalls relative to heating-value equivalence this century illustrates the scale of one commercial failure Synallagi is designed to address. The capital component concerns an estimated $20 to $40 trillion of investment over the next 25 years and the difference between how the competing business models would finance it. Where production fails to recover its capital, producers must seek additional funding from investors or bankers, draw down existing resources, or reduce investment. Synallagi is designed to establish the profitability and competitive capital recovery necessary to return that capital through production and make it available for repeated reinvestment. The proposed value lies in replacing a recurring financing deficiency with an internally funded capacity for renewal.

Within the Joint Operating Committee framework, preserving the resource becomes an explicit commercial decision. Natural gas reinjection, for example, deserves evaluation where it could reduce negatively priced sales, support reservoir performance and retain gas for later recovery. Its costs and limitations must be assessed alongside the consequences of continuing the existing practice. The production decision should follow demonstrated economics and a competitive capital-recovery standard.

The responsibility extends to future generations. Oil & gas are finite resources; once consumed as fuel, they are unavailable to those who follow. Our obligation is to leave a responsibly managed resource base and an effective industry capable of supplying future needs. Depleting the resource while failing to finance the people, equipment and infrastructure required for renewal transfers consequences to people who had no part in today’s decisions. Financial weakness can ultimately become a long term supply problem, exposing society to shortages, price shocks and disruption.

This paper examines whether the industry’s perception of financial status corresponds to its capacity to meet those obligations. Synallagi must be examined against explicit commercial requirements and evidence of practical performance. Existing arrangements must meet the same scrutiny. Officers and directors who cannot demonstrate a sustainable model must address its deficiencies. Where documented failure persists alongside refusal to investigate and act, their fitness to continue in office must be challenged. North America’s energy future requires leadership that can account for what its decisions leave behind.

The question remains, what is the residual value left in the industry?

Operational Perception of Financial Status

    The commercial question is direct: does the price offered recover the costs of production, recover the investment within a competitive period and earn a profit? If it does, produce. If it does not, do not produce. This is the governing discipline of Synallagi price maker strategy.

Market price supplies the external information required for that decision. The producer must supply the detailed knowledge of its own business. Forecasting prices, measuring inventories and developing increasingly elaborate interpretations of market behaviour cannot substitute for knowing whether a well, property or Joint Operating Committee interest earns a profit. An explanation for an inadequate price does not recover the capital consumed by accepting it.

Our concern is the progressive separation of production from that commercial obligation. Technical achievement, increasing volumes and continuing cash receipts can create a perception of financial strength while earlier investment remains unrecovered. These disastrous consequences accumulate in the business and in the remaining resources.

Natural Gas Pricing and the Accumulation of Unrecovered Capital

The 2026 natural gas calculation

    For the first eight months of 2026, our updated North American natural gas calculation records a revenue gap of US$358.6 billion against heating-value equivalence, compared with US$364.8 billion for all of 2025. Eight months have accumulated 98.3% of the preceding full year’s gap. Compared with the corresponding eight months of 2025, the increase is 40.7%.

January–August 2025

Heating-value revenue gap        US$254.9 billion

Monthly average                         US$31.9 billion

January–December 2025

Heating-value revenue gap        US$364.8 billion

Monthly average                         US$30.4 billion

January–August 2026

Heating-value revenue gap        US$358.6 billion

Monthly average                         US$44.8 billion

Our calculation divides the monthly oil price by six, subtracts the selected natural gas price and multiplies the difference by U.S. and Canadian monthly production, with the necessary volume conversion. It measures the revenue difference against the six-to-one heating-value relationship used in our analysis.

Monthly heating-value revenue gap = production volume × [(oil price ÷ 6) − natural gas price].

This measures the deterioration in revenue relative to heating-value equivalence. Determining the associated failure to recover invested capital requires the producer’s actual costs and receipts. These measures address related questions, but their dollar amounts must not be added together as separate losses.

The Permian’s negative-price impact is not separately visible in this high-level calculation. The workbook applies a broad gas-price series to combined production, and each monthly gas-price input for January–August 2026 is positive. It does not separately apply negative Permian realizations to the volumes receiving them. The aggregate therefore cannot isolate that regional loss or establish its contribution to prices elsewhere.

This is precisely why detailed Management Accounting is necessary. The industry-wide calculation identifies the scale of the revenue divergence. The well, property and Joint Operating Committee accounts must establish what the producer actually received, what it spent and what remains unrecovered.

The Unrealized Capital Costs of Past Production

I describe this accumulated deficiency as the unrealized capital costs of past production: investment attributable to hydrocarbons already produced and sold that their proceeds did not recover. The resource has been consumed, but its assigned capital-recovery obligation remains unsatisfied.

This deficiency arises whenever production fails to recover its full allocated capital, even when operating costs are covered. Limiting the calculation to operating cash losses would conceal an essential part of the problem.

Recording depletion does not collect cash. Removing a cost from the accounting carrying value does not establish that investors recovered their investment. Financial reporting and commercial capital recovery answer different questions. Our calculation keeps the outstanding recovery obligation visible as subsequent production decisions are made.

The following three iterations form one continuous example. Each carries the preceding balance forward. The figures are deliberately small and illustrative; they are not estimates of actual shale costs or Permian prices. All production is assumed to be natural gas, expressed in BOE for consistency. The tables calculate a simplified capital-recovery breakeven, excluding taxes, financing costs, discounting and the required profit. Those additional requirements would form part of the complete commercial price calculation.

First Iteration: Positive Cash Flow and Deficient Capital Recovery

Assume $100 of unrecovered capital, ten remaining BOE and operating costs of $2 per BOE. Initial capital recovery is $10 per BOE, producing a $12 breakeven before the additional requirements identified above.

If the first BOE sells for $8, operating costs consume $2 and only $6 remains to recover capital. The outstanding capital balance becomes $94, spread over nine remaining BOE. The revised breakeven is $12.44. The $4 deficiency has not disappeared because the first BOE’s were produced.

If subsequent production sells for $8 per BOE, the position develops as follows:

Eight BOE have generated $64 of receipts and incurred $16 of operating costs. The resulting $48 has recovered less than half the original $100 investment, although 80% of the original resource has been produced. The remaining two BOE must each sell for $28 to recover the outstanding $52 and their operating costs.

If the ninth BOE sells for $8, only one remains, carrying $46 of unrecovered capital. Its required price becomes $48. Alternatively, selling the final two for $28 each would retire the remaining balance. The difference is whether the recovery requirement governs the sale.

The balance must avoid counting a deficiency twice. After the first sale, $94 already includes the unrecovered $4 allocation: $100 less the $10 scheduled allocation, plus the $4 deficiency. Adding another $4 would overstate the balance. Equivalently, subtract only the $6 actually recovered from the original $100.

For the next iteration, we carry forward the position after eight sales: $52 outstanding and two BOE remaining.

Second Iteration: Shale Carries the Deficiency Into Another Investment Cycle

Now assume the producer adds a shale gas well to the same property before producing those final two BOE. It spends another $100 and adds ten recoverable BOE. The combined property now carries $152 against twelve remaining BOE. The old $52 has not been recovered merely because a new investment has been made.

Assume the shale well produces six BOE in its first production period and two in the next equal-length period. Between those periods, a $20 workover is required to maintain access to the production already included in the estimate. In this example, the workover adds no reserves. Sales remain $8 per BOE and operating costs remain $2 per BOE.

(Apologies for the rough table implementation. Please see .pdf for better renders.) 

Adding reserves initially reduces the calculated average recovery price from $28 to $14.67. That apparent improvement deserves attention: the denominator has expanded, but the producer has committed another $100 and has recovered none of the previous $52 through the investment itself. More reserves have redistributed the recovery burden.

The new well then generates $64 of receipts from eight BOE. After $16 of operating costs, $48 contributes to recovery. Against that contribution, the producer has incurred $120 of new expenditure. The balance carried into this iteration therefore rises from $52 to $124, with four BOE remaining across the property.

This combines the four shale characteristics central to our argument:

Heavy capital requirements: another substantial commitment is made while earlier investment remains unrecovered.

High initial production: six BOE are sold quickly without meeting the required recovery price. High volume accelerates the deficiency when the margin is inadequate.

Steep production decline: output from the new well falls from six BOE to two over equal periods. The contribution available for recovery falls from $36 to $12 per period.

Heavy workover costs: the assumed intervention adds $20 to the recovery obligation while preserving production already counted.

High initial output and steep subsequent decline are documented characteristics of horizontal production. The particular volumes and workover expenditure above are assumptions used to show their financial interaction. EIA: Rapid declines from horizontal wells require more drilling to sustain production.

A declining production rate does not automatically remove reserves. It reduces the rate at which the producer can generate receipts. Actual production reduces the remaining volumes. Where a workover adds recoverable volumes, both its expenditure and those additional volumes must enter the calculation. Here, the maintenance-only assumption makes its effect explicit.

The table combines the wells to demonstrate the carried-forward property obligation. The underlying accounts must retain each well’s costs, receipts and remaining volumes so that new development does not conceal the performance of earlier investment.

For the third iteration, we carry forward $124 outstanding and four BOE remaining.

Third Iteration: Negative Prices Add Cash Losses to Unrecovered Capital

Now assume the selling price falls to negative $1 per BOE. Operating costs remain $2 per BOE. Every BOE sold requires a $1 payment to the purchaser and another $2 of operating expenditure. The resulting cash deficit is $3 per BOE.

There is no contribution to capital recovery. The existing obligation remains, the additional deficit increases it and production reduces the volumes available to meet it.

The first negative-price sales produce a $6 cash deficit: $2 paid to dispose of the gas and $4 of operating costs. The outstanding requirement becomes $130. With two BOE remaining, each must now contribute $65 toward recovery and cover $2 of operating cost.

One more negative-price sale adds another $3. The final BOE is left to recover $133 and cover its own $2 operating cost. Its required price is $135, before financing costs, taxes and any profit.

The original capital allocation is not added again when the negative-price sale occurs. It is already in the opening balance. Only the new cash deficit is added. This preserves the distinction between previously unrecovered investment and additional cash consumed by continuing production.

Across all three iterations, initial investment, new development and the workover total $220. Sixteen BOE sold at positive prices contribute $96 after operating costs. Three subsequent negative-price sales consume another $9. The remaining obligation is therefore $220 − $96 + $9 = $133, supported by one remaining BOE.

If that final BOE sells at negative $1, the balance reaches $136 and no production remains from which to recover it. There is then no finite recovery price for this resource. The loss remains with the invested capital or must be borne elsewhere.

What the Progression Reveals

The three iterations expose a cumulative process. Inadequate positive prices leave part of the original investment unrecovered. Further development carries that deficiency into a new expenditure cycle. High initial production can consume the new resource before the recovery obligation is met. Decline reduces subsequent receipts, workovers add expenditure, and negative prices add cash deficits while consuming the remaining volumes.

This is an escalating recovery burden on subsequent production. It does not mean the physical cost of drilling has increased. It shows how repeated under-recovery can make full investment recovery progressively less attainable. The balance measures what remains unrecovered; it does not guarantee an asset of equivalent recoverable value or a market willing to discharge the obligation.

Nor does the rising balance establish today’s replacement cost. Historical capital recovery and the cost of supplying replacement production must remain separately visible. Both matter to commercial sustainability, but they answer different questions.

Improving the execution of a process does not establish that the process is creating value.

Our broader hypothesis concerns the cumulative effect of repeating this behaviour over decades. July 1986 was the first oil price collapse. Its financial history cannot be reconstructed from a current depletion charge alone. It requires an account of expenditure, actual recovery and the production already consumed. Our example establishes the mechanism; producer records must establish its magnitude.

Giving Commercial Evaluation Authority

Where production and expenditure are treated as evidence of success, the accounting function can become an administrator of decisions already made. The implicit instruction is, metaphorically, “shut up and pay the bills.” Authority to commit capital becomes separated from accountability for recovering it.

Synallagi price maker strategy is intended to change that relationship. Each producer evaluates the profitability of its interest in every Joint Operating Committee, property and well. Market price supplies the external signal. Detailed actual accounting supplies operating costs, actual overhead, outstanding recovery obligations, expected production and the capital-recovery period and return required to compete in North American capital markets.

The simplified tables spread recovery over all remaining volumes to expose the mechanism. Synallagi commercial calculation must also test timing: the volumes expected within the chosen recovery period, the expenditure necessary to deliver them and the required return. A reserve life extending over decades does not, by itself, satisfy a competitive capital-recovery requirement.

Profitable production proceeds. Production that fails the commercial standard is withheld or shut-in under the strategy. Reinjection and other preservation options are evaluated where technically and commercially suitable, with their costs and continuing obligations explicitly recognized. Monthly financial statements for each Joint Operating Committee identify deficiencies and require subsequent decisions to account for them. Synallagi turns all of the producer's costs, including overhead, variable based on profitable production. 

Engineers and geologists have a direct interest in this discipline. Their innovations can be evaluated for the financial contribution they deliver. Specialists can apply their expertise across relevant Joint Operating Committees, strengthening opportunities to compete on demonstrated performance. Commercial accountability gives technical achievement an explicit measure of value and a basis for financing further work.

The Cost of Delay

The consequences extend to secondary industry service companies, investors, lenders, employees, royalty owners and governments. Producers, as primary industry operators, depend on an industrial system whose secondary industry participants must maintain equipment, retain expertise, finance expansion and renewal. Continuing production without adequate recovery can weaken the resources needed to sustain that system.

Delay risks postponing the solution while making its implementation more difficult. Rebuilding financial capacity, equipment and expertise takes time. Consuming the resource without recovering its investment can leave less with which to undertake that rebuilding.

The discipline is to recognize the deficiency when it occurs and give that information authority over subsequent decisions. Otherwise, each unprofitable volume can leave a greater burden for the volumes that follow. Synallagi proposed culture of reserves preservation, performance and profitability is intended to interrupt that process while both the resource and the opportunity to recover its value remain.

Calculation note: The natural gas figures reproduce the previously checked workbook totals, using the updated “2025” worksheet of Natural Gas Price Losses - 2000 - 2024.xlsx: Z303, Z303 and Z315. The three capital-recovery iterations are illustrative commercial calculations, not financial-reporting capitalization instructions. They assume constant $2/BOE operating costs, no other receipts or expenditures, and application of all positive operating cash contributions to recovery. The negative $1/BOE assumption is not the separate negative $2.15/Mcf Permian assumption discussed elsewhere. Recovery balances after the workover and negative sales include those expenditures and cash deficits, regardless of their financial-statement classification.

A Perception of Financial Status, Part III

Part III of People, Ideas & Objects paper "Consider This... A Perception of Financial Status: Why Oil & Gas Producers are not Profitable"

Overhead

The commercial purpose of recognizing overhead is to ensure that production earns the cash necessary to pay for it. Every month, producers incur accounting, administrative, technical support and other organizational costs that must be funded. When those costs are omitted or understated in the breakeven calculation, production may appear “profitable” from their point of view while failing to generate sufficient cash to sustain the organization supporting it. The resulting deficiency consumes working capital or requires funding to be sourced from elsewhere.

Synallagi is designed to incorporate the full cost of that support into the commercial evaluation of each Joint Operating Committee. Costs attributable to a particular well or property are charged by our user communities service providers directly. Shared costs are allocated through transparent, consistently applied methods that account for the resources each activity consumes. An overhead allowance is insufficient where it does not represent the actual cost incurred. Each cost must enter the calculation once, with its source and allocation available for examination.

These amounts become part of the monthly breakeven calculation and therefore the price required to produce profitably. Synallagi price maker strategy uses that calculation to determine whether the market price supports production. The revenue required from consumers must cover the complete cost of providing the commodity, including the organization necessary to administer and support its production.

The objective is to establish a recurring monthly cash provision adequate to meet the producer’s overhead obligations. As production revenue is collected, the overhead component replenishes the cash used to pay those costs. The calculation must account for the timing difference between paying expenses and collecting revenue in order that adequate working capital is maintained. 

This gives producers a practical basis for managing overhead and its recovery. They can determine what it costs to support each Joint Operating Committee, whether production is earning that amount, and whether collections are replenishing the cash required for the next month. Overhead becomes an explicit commercial requirement, with responsibility for both its cost and its funding.

As actual overhead costs are attributed to each Joint Operating Committee and allocated to the participating producers, Synallagi preserves the detail needed for both commercial evaluation and financial reporting. Producers using the SEC’s Full Cost methodology can then apply the appropriate capitalization and expense treatment to those costs, while retaining their full visibility in the breakeven calculations used for production decisions

Synallagi Methodology Towards Overhead

Oil & gas is moving into a new environment where ERP and business systems demands of the organization are far greater than at any time before. The interactions between trading partners and members of the Joint Operating Committee begin to become an issue if they’re unable to maintain the pace of today’s market speed and velocity. A producer may have spent the appropriate resources on ERP systems yet they’re forever constrained by the producers in their Joint Operating Committees and suppliers in the service industry. How does this paradox get resolved? 

Synallagi changes the cost dynamics of overhead of the oil & gas industry. Our user community and their service provider organizations are a reallocation of the administrative and accounting resources of today’s producers. Configured to hyper specialize on one process on behalf of the industry. Therefore processing the information for just that producer, Joint Operating Committee and well. Creating the data granularity necessary to infer information through appropriately configured databases and the foundation of automation and autonomous operations. Internet of Things is one of those technologies which are of value to the producers that are configured to deal with that data in that form. The value in IoT is in the receipt of the information. Then automation of the production, revenue and royalty accounting processes can be automated extensively through appropriate built systems by our user community and supported by their service provider organizations. Hyper specialization and the division of labor in both the work of the people in the industry and in the computers will expand the amount of work conducted from the same resource base.  

Sharing of this infrastructure on a global North American industry wide basis takes the costs of these developments and allocates them to each producer in the industry. Instead of each producer attempting to build their own systems to some specification that may or may not be able to work with that company's choice of systems. By sharing in the cost of these developments producers can avoid these issues and reduce their costs of development and long term support. 

The third aspect of how Synallagi assists the oil & gas producer is through the configuration of our user community and their service provider organizations. As discussed the charges for processing of their work is to the Joint Operating Committees. Therefore if a well, a property or a Joint Operating Committee is reporting unprofitable operations. Producers can shut-in that operation and gain the advantages we’ve listed here. What Synallagi has done therefore is turn all of the producers' costs variable based on profitable production. If production is shut-in it therefore generates a null operation, no loss and no profit. 

The other aspect of this method is that all of the overhead costs are being charged to the Joint Operating Committee in the current period. Therefore they’re being priced in the commodity price that’s passed to the consumer. The cash incurred to pay for the overhead is therefore returned in the subsequent month to be used again and again. 

Synallagi treatment of overhead is designed to deal with these overhead issues identified within the oil & gas industry. Turning them variable, reducing them by sharing the infrastructure costs and specializing the accounting and administration will be sizable. However, only if the members of a Joint Operating Committee participate and are involved in Synallagi.

Investors and Bankers

Accounting, investing and many other elements of business are based on trust. If the industry is reporting earnings on the basis of GAAP then technically it implies the same trust extended to oil & gas as to any other industry. If it is found that representations of what was profitable is questionable that trust is violated and investors then act accordingly. 

In oil & gas investors suspended their participation in any further stock offerings. What producers found was the doors were closed to them. They would need to find another way to raise their capital. Banks allowed producers to use the unused portions of their credit lines until such time as the banks had caught on to what the investors had learned. The investors in 2015 and the banks in 2018. 

What we will find in this Consider This… document is evidence of an erosion of competitiveness since 1986 that began culturally and to a large part had been unknown and not understood. One that drove a wedge between the operational “wing” of the company and the financial “wing.” Where neither could understand one another and no one could appreciate the points being made. This division operates as two independent silos and operations makes decisions based on corporate financial reports confirmation of earnings without the understanding of the financial issues subtly manifesting themselves on the horizon. But yes producers continued to report profitable operations and they were as specious as they were at any time before. Endorsing their “spending is profitable” understanding that supported an ever depreciating competitiveness. 

Therefore we continued with status quo operations of drilling and completions on the expectation of their investors “imminent” return. These capital expenditures were next financed by asset sales and then by not paying the service industry for drilling and completion operations for up to 18 months. The service industry is a different issue for producers and maybe their most difficult to resolve. Consolidation has been undertaken, yet the natural gas price revenue losses in the eight months of 2026 have totaled what was lost in revenues for 2025. 

Breakeven

Where’s the Beef?

Much of our discussion of Synallagi concerns performance: what an operation costs, what it earns, how quickly it recovers its investment and how its results can be improved. Financial Accounting provides the financial statements through which a producer reports its position and results. Management Accounting supplies the detailed information needed to direct the business. Synallagi places substantial emphasis on Management Accounting because commercial decisions require information at the level where expenditures are incurred, production occurs and responsibility can be exercised.

My criticism is that the industry’s accounting systems, procedures and resources have failed to provide that information with the completeness, timeliness and authority it requires. Accountants have been expected to satisfy reporting obligations without being given sufficient means to establish whether individual wells, properties and Joint Operating Committee interests are performing commercially. Producing the accounts and equipping people to manage the business are different responsibilities. Both must be fulfilled.

I suspect many of my competitors, and many people working in producer accounting departments, would recognize this criticism immediately. In my assessment, the past forty to fifty years have subjected accounting and systems budgets to persistent downward pressure while regulatory and reporting obligations have expanded. The people responsible for the information have been asked to carry more responsibility with fewer resources. Management Accounting becomes work for which there is neither sufficient time nor an adequate system.

The question extends across the industry: what enduring financial strength has been built from the trillions of dollars invested and the enormous volumes of oil and natural gas produced? Officers’ and directors’ compensation cannot serve as the measure of success. The accounting must extend to investor returns, lenders’ exposure, careers, service-company viability and the industry’s capacity to renew itself. The demands for profitability and accountability that followed the 2015 downturn cannot be answered merely by pointing to another production record.

Society has an interest in the answer. Oil & gas support transportation, food production, industry and the infrastructure of daily life. An industry entrusted with supplying those resources must maintain the financial and organizational capacity to do so. Consuming the resource while weakening that capacity transfers the consequences beyond the producer’s shareholders.

I place responsibility for the producer’s response with its officers and directors. Their desire to blame the government does not discharge that responsibility. Leadership cannot claim credit for successful development while assigning responsibility for commercial failure elsewhere. Officers and directors must generate the resources and possess the authority to approve expenditures, select systems, establish priorities and require accountability. They must ensure that the business can determine its costs, evaluate profitability and act on what the information reveals.

When engineers must turn to independent reserves reports for the cost information needed to manage current operations, Management Accounting has failed to serve them. Those reports have their own purpose. Engineers and geologists however need Synallagi detailed, current financial information that connects their decisions and innovations to the performance achieved.

Consider the traditional reporting supplied to members of a Joint Operating Committee: Statements of Expenditures for capital activity and Statements of Operations for operating activity. These summarize the operator’s charges and each participant’s share, showing current-period and accumulated expenditures. They perform an essential billing and accountability function. By themselves, however, they do not establish the complete profitability of each participant’s interest.

Overhead exposes one of the gaps. Where an overhead allowance is charged, the statement identifies an amount recoverable under the agreement. It does not necessarily identify the actual administrative and accounting resources consumed by that property. The allowances remain insufficient to answer the management question: what did administering this well actually cost? Industry accounting procedures distinguish directly charged costs from indirect costs recovered through overhead provisions. COPAS: Overhead Principles.

Across a combined view of participating producers within a Joint Operating Committee, corresponding overhead allowance charges and recoveries cancel as transfers between them. The underlying costs do not disappear. Salaries, systems, offices and administrative services have still been paid for. Allowances amounting to a net transfer of zero establishes neither zero overhead cost nor an accurate attribution of that cost to the production that must recover it.

That is the information Synallagi is intended to provide. Actual overhead must enter the commercial evaluation alongside operating costs, capital recovery and the required return. Management Accounting must make those requirements visible to the people making decisions—and give the resulting financial information authority over what happens next.

A breakeven calculation is only as complete as the costs and recovery obligations it recognizes. If those requirements are missing, the apparent margin provides an incomplete account of the business.

Break Even 101

Breakeven defines the price required to recover the costs assigned to a specified operation over a specified period. Its usefulness depends on the completeness of those costs and the consistency of the production assumptions. Covering immediate operating expenditure establishes an operating cash threshold or contribution margin; it does not establish recovery of the investment. Synallagi commercial evaluation incorporates actual operating costs, actual overhead and capital recovery, with the required investment return establishing the profitability threshold against which production is assessed.

The calculation must connect expenditures to the production expected to recover it. Dividing capital by total remaining reserves can obscure the timing of recovery, particularly where substantial volumes will not be produced for many years or even decades. Engineers must therefore bring production forecasts, decline curves, intervention requirements and expected recoverable volumes into an explicit recovery period. Workovers and additional development require both their expenditure and their incremental reserves and production to be recognized. The resulting evaluation must distinguish each well’s economics while accounting consistently for shared facilities and each producer’s Joint Operating Committee interest.

Breakeven changes as operations proceed. Production that covers operating costs but recovers insufficient capital leaves an outstanding obligation against fewer remaining volumes. Production below operating cost adds a cash deficit to that obligation. The recovery balance must therefore reflect opening unrecovered expenditure, additional expenditure and the contribution actually received from production, without counting any deficiency twice. High initial production followed by steep decline makes early under-recovery particularly consequential: the resource is consumed while the subsequent capacity to generate recovery receipts diminishes.

For engineers, this information provides a financial measure of technical performance. A proposed intervention can be evaluated by its effect on costs, production, recovery timing and profitability. An operating anomaly may become visible through its financial consequences before its physical cause is understood. Under Synallagi price maker strategy, market price and these detailed local economics govern the production decision. Profitable production proceeds; production that fails the commercial standard prompts corrective action, preservation or suspension. The objective is to give engineering decisions a comprehensive financial basis and make their contribution to the business measurable.

People, Ideas & Objects defines overproduction in commercial terms: production sold below the full breakeven required to recover operating costs, actual overhead and capital within a competitive period. Under this definition, excessive production begins when the volume marketed fails that commercial test. Our analysis takes July 1986 as the starting point for examining how unrecovered capital from past production can accumulate when those deficiencies remain unaddressed.

Continuing to overproduce has consequences beyond the individual producer. Additional supply can depress the price received on a much larger volume already being marketed. Other producers then face reduced margins and greater capital-recovery deficiencies. When they continue producing below their respective breakeven levels, the process reinforces itself. Reserves are consumed, capital remains unrecovered, and subsequent production carries an increasing recovery burden. Deferring the recognition of capital costs in financial statements does not resolve that commercial deficiency.

The question is whether the industry’s organization allows market prices to impose meaningful commercial discipline. A price signal cannot protect capital or preserve reserves when producers repeatedly proceed without recovering their full costs. Sustained over decades, this behaviour can erode the financial capacity required to maintain the industry, support its service industry and replace declining production.

Our natural gas analysis measures revenue deterioration against a stated heating-value benchmark. The corresponding erosion of oil revenue requires its own explicit benchmark before it can be quantified. The commercial obligation is nevertheless the same for both commodities. Synallagi breakeven calculations establish what must be recovered, and its price maker strategy requires each producer to act on that information. Production must earn the resources necessary to sustain and renew the industry.

A Perception of Financial Status, Part II

 Overhead Cost Reductions

Synallagi requires a reconfiguration of the industry’s accounting and administrative resources to deliver the financial detail necessary for commercial decisions. Capturing production data through the Internet of Things is the beginning. Overhead allowances must give way to the actual costs incurred in administering each property and well. What does it cost to perform production, revenue and royalty accounting for a particular well? How do those costs differ between oil and natural gas operations? Synallagi is designed to make these differences visible alongside operating costs and capital-recovery requirements. Standardized, consistently prepared, performance related accounting information would allow users to compare individual wells or aggregate their performance.

We see the potential for overhead costs under Synallagi to fall to a single-digit percentage of current expenditure. That potential rests on several methods designed to reinforce one another. Shared Cloud Computing infrastructure and specialized accounting and administrative services reduce the duplication involved when each producer builds and maintains these capabilities independently. Common infrastructure is developed once for shared use, with its development costs distributed proportionately across participating production on a BOE-per-day basis. Ongoing computing, software and service provider costs remain identifiable within the actual costs of delivering those services.

This structure expands hyper specialization and the division of labor beyond the boundaries of a single producer. A specialist’s work can serve properties across the industry, supporting a depth of expertise and volume of activity that an individual organization may be unable to sustain. Common processes provide a foundation for Artificial Intelligence to assist with repetitive work, identify exceptions and extend the capabilities of those specialists.

Adam Smith’s pin-making example illustrates the scale of improvement that reorganizing work can achieve. He described ten workers collectively producing approximately 48,000 pins per day—4,800 per worker—compared with fewer than twenty each if working independently without the relevant training. The comparison implies at least a 240-fold productivity difference. Smith connected this achievement to the division of labor, developed skills and machinery. What further possibilities emerge when specialization operates across an industry and is supported by Artificial Intelligence? Adam Smith, The Wealth of Nations, Book I, Chapter I. 

Recognition of markets, the Joint Operating Committee, innovation and Intellectual Property as Organizational Constructs provides further means of organizing work and extending improvements across participating producers. Together, these arrangements are intended to reduce overhead while increasing the precision and usefulness of the accounting. The commercial benefit is lower actual costs per BOE, a clearer profitability calculation and greater financial resources available for productive information, analysis, decision making and investment.

Comparing Our User Community to Today’s Overhead Structure

People, Ideas & Objects has raised the industry’s overhead problem many times. We have documented it extensively. At one stage, we identified capitalized interest and other costs receiving similar treatment. Notably, interest and certain related costs were later removed from this reporting method under discussion and, soon afterward, from broader industry practice. We first noted this development on our blog on November 10, 2008.

What remains materially unchanged in 2026 is the capitalization of overhead. Why has gross overhead continued to be reported in the same manner? The discussion that follows suggests this is one of the principal mechanisms through which cash continues to bleed from the industry and their accountability reporting distortions continue to persist.

The relevant question is why capitalized overhead has not been corrected. Is there a specific intent behind the desire of officers and directors to continue reporting overhead in this manner? If so, what is that intent? Why has it persisted? And why were some related costs remedied while overhead remains untreated eighteen years later?

People, Ideas & Objects maintains that, under Synallagi, our user community and their service provider organizations would operate at single-digit percentages of today’s fixed gross overhead. If there is a chronic and systemic source of overproduction in oil & gas, it lies in the fixed gross overhead carried by producers. That is where the problem begins to reveal itself. Capitalization is the mechanism that makes the issue less visible. It creates a distinct cash flow problem while distorting reported financial performance.

The argument begins with two observations.

• First, overhead costs at any point in time amounts to roughly 10 to 20 percent of revenue.
• Second, at any point in time, approximately 85 percent of gross actual overhead is capitalized.

A related issue concerns overhead charged to Joint Operating Committees. Those charges are based on estimates agreed through the Council of Petroleum Accountants Societies. In the broader industry picture, those overhead allowances are effectively zero. Any amounts charged are earned by the operator. Any net recovery merely reduces post-capitalization overhead costs. Under Synallagi those overhead allowances are replaced by the actual, factual overhead costs.

The core issue is straightforward. When overhead is capitalized, those costs are recovered over the life of the reserves. Producers allocate capital costs across all proven reserve volumes reported by their independent reservoir engineers. The cash spent on overhead in a given month is therefore returned in small increments each month over the life of the property.

That creates a structural cash problem. Each month, each producer must find new cash to fund the next month’s overhead. No cash float is created because overhead is not priced into the commodity, is not passed through to the consumer, and is therefore not returned to the producer in the current month to fund the next month’s overhead.

The materiality of overhead in oil & gas therefore creates a persistent drain on cash. This was masked when investors were subsidizing the majority of producer capital expenditures, which included capitalized overhead. Once that support disappeared, producers turned after 2015 to every available source of capital to sustain operations and overhead.

Leadership, behind the eight ball.

Today, with working capital diminished and in many cases negative, producers are financially and operationally impaired. They are barely able to fund the capital spending required to sustain production. Each year becomes more difficult as their competitive position depreciates further. Their prior conduct toward the service industry has compounded the damage, leaving trust, motivation, capacity, and capability far below what the service industry now requires.

People, Ideas & Objects therefore asks why a policy that has been in place for decades, and that is demonstrably destructive to producer cash requirements, has remained unchanged after more than a decade of industry discussion. What is it about capitalized overhead that makes it this persistent?

For all practical purposes, capitalized overhead has been a root cause of the loss of support for producer capital structures. That loss of support began in 2015, when investors withdrew because of poor performance and a fundamental lack of accountability. Nothing meaningful has been done to address either issue. How, then, does this critical cash problem remain in place in 2026?

There must be some continuing intent, motivation, or institutional desire to preserve the practice despite the absence of liquidity, the loss of support of their capital structures, and the existence of alternatives such as Synallagi.

Leadership has taken shale, one of Mother Nature's greatest endowments of wealth, delivered it to the greatest economy known to man, and for the sake of whatever remains concealed in overhead accounts, destroyed its present value.

Allocation of Capital Costs to Production

Recognition and retirement of capital costs in a timely, competitive period is one method of measuring the reality of the reported earnings. One person put it this way in terms of investing. It’s not the purchase of a stock on the basis of its price earnings ratio that’s the appropriate evaluation. Or how it performed against analysts expectations. It’s how those earnings were determined, are they “real?” Has the company put its competitiveness and performance as the priority in what is reported. Or is it just fudging the numbers? Moving capital assets to the income statement in a competitive manner is how the quality of a firm’s shareholders are determined. The quality of shareholders will subsequently dictate its market capitalization. Thinking on the basis of investing in these criteria will reveal the perception that People, Ideas & Objects sees oil & gas today. 

For decades, producers have celebrated “building balance sheets” and “putting cash in the ground.” The language treats expenditure and asset accumulation as achievements in themselves. Yet capital committed to a property remains an investment to be recovered. A larger balance sheet establishes neither the quality of that investment nor the period within which shareholders will receive a return.

Allocating capital costs across substantial reserve volumes can produce a modest depletion expense per BOE and easily support reported earnings. The commercial question remains: how much of that investment is being recovered from current production, and how long will recovery take? Where much of the production lies decades ahead, a palatable accounting charge can coexist with an uncompetitive recovery period.

Shale makes this distinction particularly consequential. Heavy initial expenditure can be spread across a large estimate of proven recoverable volumes, reducing the apparent capital cost assigned to each BOE. But high initial production, steep decline and subsequent intervention costs determine when—and whether—the investment can actually be recovered. A low allocated cost per BOE cannot, by itself, demonstrate competitive financial performance.

Synallagi therefore establishes a commercial capital-recovery discipline against which production and investment decisions can be evaluated. The recovery period, expected production, additional expenditure and required return must be explicit. Financial statements must remain connected to that commercial reality through a clear account of what has been spent, what has been recovered and what remains outstanding. Taking account of North American capital markets expectations of competitive performance.

Officers and directors are responsible for making that relationship visible. Their integrity is demonstrated by the completeness of the information they provide and the decisions they make when performance falls short. Shareholders should not have to discover, years later, that reported profitability concealed a persistent failure to recover their investment.

Full Cost Accounting

The SEC formalized its Full Cost Accounting rules in the late 1970s. Under this method, qualifying acquisition, exploration and development expenditures—including unsuccessful exploration costs—are accumulated in broad cost centres, generally on a country basis. Capitalized costs are subsequently allocated to production through depletion. The accounting therefore evaluates a broader investment program rather than treating each unsuccessful exploration expenditure as an immediate loss. SEC Full Cost rulemaking, 1978.

The depletion calculation uses proved reserves, with the amortization base incorporating applicable estimated future development and abandonment expenditures. It does not permit costs to be spread indiscriminately across every resource thought to exist in a formation. Nevertheless, the resulting expense per BOE can distribute recognition of the investment across production extending well into the future. That allocation does not establish whether the investment is being recovered within a commercially competitive period. SEC: Oil and Gas Producing Activities.

Our argument concerns the financial culture that developed around this distinction following the 1986 oil-price collapse and became more consequential as shale expanded. Expenditure, reserve additions and production growth increasingly served as evidence of achievement. Where production failed to generate sufficient cash to replenish the investment, additional investor capital could sustain the next expenditure cycle. Existing shareholders supplied more money or accepted dilution, while the underlying recovery deficiency remained.

This is the culture we describe as “spending is profitable.” An expanding asset base could support the appearance of progress while the business remained dependent on investors to supply cash that profitable production was expected to generate. The commercial question became obscured: had the previous investment actually been recovered, and had it earned a competitive return?

Shale intensified that question through five interacting characteristics.

    1. Substantial drilling and completion expenditure.

Long horizontal laterals and extensive completion programs can require substantial capital before production begins. The comparison with conventional development varies by reservoir, well design and location, but the obligation is consistent: the investment must be recovered from production within a period that justifies committing it. A technically successful well has not completed that commercial task merely by commencing production.

    2. Access to extensive hydrocarbon resources.

Shale development opened large resource opportunities and, in established areas, reduced some of the uncertainty associated with finding hydrocarbons. Commercial uncertainty remained. Where qualifying proved reserves increase relative to the associated amortization base, the allocated capital cost per BOE can decline. That result must be evaluated alongside the expenditure still required to develop those reserves and the time needed to produce them. A large reserve denominator does not itself establish timely investment recovery.

    3. High initial production volumes.

Strong early production creates an opportunity to recover capital quickly when the realized margin is adequate. The same production profile accelerates any under-recovery when the realized margin is not. A substantial portion of the well’s recoverable volume can be sold before its proceeds have discharged the corresponding investment obligation. Production records and cash receipts may look impressive while the remaining resource carries an increasing recovery burden.  

    4. Steep production decline.

Horizontal wells commonly combine high initial output with steep subsequent decline. As production falls, the volume available in each subsequent period to generate recovery receipts diminishes. Maintaining overall production can require further drilling while earlier investments remain unrecovered. Decline therefore makes the timing of profitability particularly important. It reflects reservoir and completion behaviour; it is not simply a consequence of having produced a large initial volume. EIA: Horizontal-well production and decline.

    5. Further expenditure to sustain or improve production.

Workovers, recompletions, refracturing and additional development may require substantial expenditure. Each intervention must be evaluated against the production and financial contribution it is expected to deliver. It cannot be assumed to restore the original production rate or reproduce the original decline profile. Nor is every intervention automatically capitalized: routine operating work and qualifying development expenditure have different accounting treatments. Whatever its classification, the expenditure must enter the commercial evaluation. Example of Full Cost accounting policies.

These characteristics reinforce one another when production proceeds without adequate capital recovery. Heavy expenditure establishes the obligation. Strong initial output can consume the best recovery opportunity at inadequate margins. Decline reduces subsequent cash generation, and further expenditure adds another obligation to the balance already outstanding.

The issue extends beyond producers using Full Cost Accounting. Changing the financial-reporting method does not, by itself, establish that development expenditure has been recovered competitively. The distinction between reported earnings and demonstrated commercial performance remains.

Synallagi Method

Synallagi addresses that distinction directly. The objective is to recover invested capital within a competitive period defined by North American capital markets. Recognize its cost appropriately against production and earn a sustainable profit. The profitable operation discussed in this paper, capital committed to long-term producing assets is progressively realized through sales as receivables and ultimately cash.

The strongest outcome is a property that continues producing an enhanced profitability after its original investment has been fully recovered. The producer has replenished its financial resources and retains the opportunity to earn high profits from the remaining production. That is the performance sought by a culture of reserves preservation, performance and profitability. The proceeds from oil & gas receipts will always be required to fund the current replacement cost of that boe produced. 

The cost must be recognized in determining earnings. Inadequate recognition can leave too much expenditure on the balance sheet and present an incomplete account of profitability. Integrity requires officers and directors to make the relationship between expenditure, cost recognition and cash recovery understandable. Shareholders must be able to determine whether the business is generating the resources needed for renewal or repeatedly asking them to replace what operations failed to recover.

Synallagi capital allocation operates at the product-pricing and Management Accounting level. It determines the recovery requirement per BOE, using outstanding capital, expected production within the selected recovery period, additional expenditure and the required return. Actual operating costs and actual overhead complete the commercial evaluation. The resulting information supports decisions at the well, property and individual producer’s Joint Operating Committee interest.

This commercial standard operates alongside the applicable financial-reporting requirements. Its purpose is to establish whether production meets the financial obligations of the business when the decision to produce is made.

Under Synallagi price maker strategy, profitable production proceeds. Production that fails the commercial standard is shut-in or suspended while corrective action and preservation alternatives are evaluated. Where the deficiency is confined to one well, the response can be directed to that well while profitable production elsewhere continues. The proposed benefits of this discipline are discussed here.

Objectivity is equally necessary inside the producer. If the financial evaluation indicates that a well should be shut in, the people responsible must understand the costs, production assumptions and recovery requirements behind that conclusion. They must be able to trace the result to its source and establish that the same methods have been applied consistently across relevant wells, properties and Joint Operating Committee interests. That consistency must extend across the industry through standardized methods applied to each producer’s actual circumstances. A producer can then make its own shut-in decision with confidence that its evaluation reflects a common commercial standard and that differences in reported profitability arise from underlying performance rather than inconsistent accounting methods.

“Muddle Through” leaves each new production and investment cycle to carry unresolved deficiencies from the past. Synallagi makes those deficiencies visible and gives commercial evaluation authority over the next decision. Officers and directors remain responsible for acting on the information. Continued expenditure is an investment decision whose success must be demonstrated through recovery, profitability and the financial capacity it leaves behind.