Monday, February 29, 2016

Choices to Make

The alternatives could not be more stark. Stick with the bureaucrats and live in a mushy, blah day to day existence based on the producer's cash balance, for the rest of eternity it would seem. Or begin the developments of the People, Ideas & Objects Preliminary Specification, user community and service providers which will set the industry on a prosperous and dynamic course for the next 25 years. We have laid out the vision of how this will happen in the Preliminary Specification. The business models, organizational structure and strategies that will be used are included. The implementation through the user community to fully define what it is that is needed for them, as service providers, to ensure that their producer clients are provided with the most profitable means of oil and gas operations is clearly defined there. Our budget defines how we will build our systems and the services needed to operate the industry on this revised methodology. It’s all right there in People, Ideas & Objects.

So what’s with the name? People, Ideas & Objects is derivative of Professor Paul Romer’s new growth theory. It used to be that if you wanted the economy to grow you needed to invest in expanding the base of the economy in three areas. In transportation, finance or communications. New growth theory suggests that this has changed and is now based on People, Ideas and Things. Since we are object based developers we simply changed things to objects. How do we expand the economic output of the oil and gas industry? Not with the bureaucrats I can assure you. What it is they’re doing I am not sure of, but it doesn’t seem to me to be anything that is positive. It seems to me to be self-interest that is driving them and in turn destroying the industry at a rapid rate. The need for change today is significant, the industry can not withstand too much more of this destruction. It needs to begin addressing its long term needs and building for that. Therefore it needs to reorganize and start that process fresh.

When I first published our budget in August of 2014 the bureaucrats laughed. It was well before the decline in oil prices and they only saw the difficulties in the natural gas side of the business. They also assumed that those would subside once the “market rebalanced” itself. The scope and scale of our budget is the most significant software development that has been undertaken in the oil and gas industry, and that is why it’s so costly. When I proposed it I knew it was controversial for those reasons, however, solving the issues in the industry can’t be undertaken with a shoestring budget. I think my approach, as represented in my budget accurately captures the scope and scale of the issue that we all face today. I’m sure the bureaucrats would have been happier with a $6 million budget, that would be more in line with their level of thinking.

Managing expectations and setting timelines that are well into the future are the only things that the bureaucrats are able to do at this time. To discuss the issue and any resolution to them would have to consider their elephant in the room, People, Ideas & Objects. And they can’t do that. It’s suicide for them. It’s as if they’re taxi dispatchers in the world of Uber. They’re redundant. So they will hang on saying and doing nothing for as long as they can before someone comes along and kicks them out of their chairs. Until then they still get paid and can talk about “market rebalancing,” thinking that people are buying the story.

We’re at a critical time in our evolution as a solution to the industry. I can look back at the work that I have done and know that I wasn’t wasting my time. We have a bright future ahead of us in the oil and gas industry. The probability of success of the People, Ideas & Objects initiative, our user community and service providers is on the verge of being 100%. We have some very difficult work ahead of us. Each of us has the opportunity to contribute to solving this issue for the industry. And in the process establishing for yourselves a valuable position as a member of the user community with ownership in a service provider that will become a significant part of the new oil and gas industries infrastructure. An opportunity in a lifetime really, and I think some of the best work that we’ve ever had the opportunity to get our hands on.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Friday, February 26, 2016

The Timing of Our Revolution Has Been Set

The International Energy Agency. That’s the IEA, not the EIA which is the U.S. Energy Information Administration. States were all good. That is the rebalancing will be completed in 2017 and a “price spike” will occur in 2021. They assume that between 2017 and 2021 the excess inventories that have been built up until 2017 will have been worked off by then. What can I say, the bureaucrats are correct. Sitting around doing nothing is the correct operating procedure after all. I’ll make sure that I delete this blog and the Preliminary Specification this weekend. Can you imagine the monumental mistake that would have been if we had secured our budget and completed the development and reorganization of the industry by 2021? It would have been a wasted effort! Oil leaped 8.1% on this IEA news!

What did I say yesterday about short attention spans? We are dealing with the reactions of an entire industry that is watching the price of oil at each and every minute of the day. Obtaining relief that all will be well when the slightest uptick occurs. And the massive depression that sets in when the price inevitably goes down further than it had before. It's good that we have the IEA to be able to know what the future has in store for us. I was also pleased to see Deloitte & Touche came out with a paper that summarised the strategies that a producer can employ in these difficult times. They actually had five different scenarios in which to follow, all of them being just a rehash of the status quo.

But wait a minute. Doesn’t the IEA’s projections assume that the industry has the financial resources necessary to get them to 2021? Even the Deloitte & Touche paper states that the producers are operating on negative cash flow, and in some cases, negative equity. “These are just details that will not cause any real difficulties in the long run,” we hear the bureaucrats say. The cash crisis will be a critical issue that will start in the next one to five months, I’ve stated here many times. Remember that PennWest announced it was living “week to week” based on its available cash. We’re going to see many companies unable to make payroll, I can assure you. Making it to 2017 will be a miracle, 2021? where can I invest today!

If we look at the heart of the issue. The overproduction brought about by shale, has been unaffected by any of these newsworthy items. If the IEA were 100% correct we would see the rush to drill and complete the frac log to bring on new production to overwhelm the “profitable” prices in 2021. And so it will go. Without the mechanism to fairly and equitably allocate production in the industry that the Preliminary Specification provides. Based on the real profitability of the property, based on an actual accounting which includes capital, operations, royalties, administration and accounting costs at the Joint Operating Committee. Not until then will the industry normalize. For evidence of this look at the natural gas industry. Gas is in its sixth year of overproduction. If only those Saudi’s would stop producing natural gas, too.

If one looks at the situation in natural gas we see rainbows and unicorns there as well. The EIA this time, not the IEA, is projecting that natural gas storage will be around 2.2 tcf at the end of the winter season on March 31, 2016. Getting a $1.80 for your natural gas is something that, as a producer, you might want to hedge your future production on. These are going to seem like good prices come April 15, 2016. But this is uniquely a natural gas situation. It shares no known characteristic with oil! That is other than the overproduction from shale is chronic, systemic and unforgiving, with no remedy from our good friends the bureaucrats. Remember the shale revolution began in the natural gas business before it was used in oil. Oil is just catching up to natural gas in terms of the market dynamic that shale brings to its markets.

Unless and until the producers have a means to allocate production, overproduction will continue, and I would say more likely until 2031. Bureaucrats don’t want to do anything for a variety of reasons. It takes their eye away from the screen where the oil price is displayed. They would have to work very hard on building the Preliminary Specification. And they’re eliminated from the oil and gas scene in the Preliminary Specification. Self preservation being the driving force behind the antics we see displayed in the industry. If you believe the facts you might want to have a look at what we’re doing here at People, Ideas & Objects. If you believe in fairy tales look at what the IEA, Deloitte & Touche and the bureaucrats are selling. Nonetheless they have set in place the expectations of when the timing of the return of “normal” oil prices will be. I should thank them for setting it five years from now. All that they are trying to do is to buy time and manage people’s expectations. Unfortunately for them, I know, that’s unacceptable to a certain group of people.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Thursday, February 25, 2016

That Elephant Sitting Next to You

We need to talk about the elephant that has been occupying space in our living room these past few years. This elephant is none other than our initial development budget which sits at $6 billion U.S. What is particularly difficult for the bureaucrats to accept is the allocation of our margins between earnings and Intellectual Property royalties. Our margins are consistent with any other software provider. That we detail how they are being allocated in our budget is to provide clarity and transparency in how the money will be spent. What the bureaucrats should be pleased with, is that we don’t include my Intellectual Property royalties as part of People, Ideas & Objects costs. Bureaucrats who take issue with the distribution of our margins, or with the size of our budget need to focus more on our value proposition. Did I ever mention that in the next 25 years we provide $25.7 to $45.7 trillion in incremental value to the oil and gas industry. If any bureaucrat raises the issue of our budget or margin allocation with the current state that the oil and gas industry is in. I would suggest that they’re not interested in solving the underlying issues of the industry. And as I indicated in yesterday’s post, we do not cater to, or expect any support from the bureaucrats regarding our initiative.

Identifying oneself as a member of the People, Ideas & Objects user community, the critical element of the quality of our offering, will give the bureaucrats a newly identified target to destroy. This has been the case with myself since the publication of the Preliminary Research Report in May 2004. When we proceed with the developments we need 3,000 people to join our user community and to take high profile positions within the industry. They will be active with many of the producers and investors. Having bureaucrats attack them is something we will learn to deal with as time progresses. We however can not have our people involve themselves in any career risk as a result of being involved in the user community of People, Ideas & Objects. The same can be said for our developers. Bureaucrats have long memories and are particularly vindictive. Our users and developers will be able to handle the abuse, however, there is no reason for them to risk their careers in the oil and gas industry as a result of the bureaucrats cutting our funding and leaving these people to twist in the wind.

Therefore People, Ideas & Objects needs to be funded in its entirety before any development work can begin. The protection the users and developers need to receive will be in the fact that they can finish the work that we set out to do. That we will be able to establish the alternative methods of organization and operate the industry in the manner proposed in the Preliminary Specification. If we do this on the basis of a pay-as-you-go type of development we will be subject to the manipulations of the bureaucrats and their flighty attention spans. These latter two issues also raise the overall business risks that People, Ideas & Objects would otherwise have to overcome.

As I documented yesterday, the history of the industry with respect to the development of any real software systems consists of serial failures. Bureaucrats have shown no initiative and no desire to challenge themselves to do more work and effort than what is required. Secondly, they have never invested the kinds of resources that are necessary to make the changes that are needed. Otherwise the oil and gas industry would not be in the situation that it’s in. For us to proceed without the producers having some skin in the game. Something that will keep their attention beyond the 9% spike in oil prices next Tuesday. It will be necessary for them to be financially involved. Whom is the benefactor of the Preliminary Specification becoming operational?

If I undertake the developments of the Preliminary Specification without the money secured then I am setting myself up for failure. The bureaucrats will ensure that my failure happens. The efforts that I put in from the point where the money is secured will have little to do with the success or failure of this initiative. It will be down to the user community. Establishing their independence is critical for them to succeed. And their motivation is to build themselves the types of organizations that will be the user / service provider that are critical elements of the future industry infrastructure. To get there they will need to have the risks of their businesses mitigated during our initial development. It is the producers, again, who will benefit as a result of this reorganization.

To take into context the $6 billion U.S. that is our budget. Both Chesapeake and Devon each incurred three times our budget during 2015 just in terms of their asset impairments! Also if we take the value of the price declines that are attributable to the overproduction issue. We come to roughly $70 per barrel. $6 billion divided by $70 comes to 85.7 million barrels of oil. That is 9.38 days of U.S. oil production in terms of the opportunity costs that the producers are incurring to develop the Preliminary Specification. And that is just on the oil side. So when the bureaucrats bark about our budget, ask what is it that they are really saying.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Wednesday, February 24, 2016

History 101

I’m noting the recent acquisition by IBM in the health software market space. Buying a company for a little over $2 billion creates over $6 billion in increased market capitalization for IBM, just on the announced acquisition. This seems to be the area that IBM is finding resonance with its shareholders and future operations. As are many other technology based companies. It used to be that IBM had some proprietary software in the oil and gas sector too. The acquisition of this technology came about from the PriceWaterhouse Coopers technology practice they purchased. Qbyte, as it was called, was the industry leading ERP system in North America. It was married to the PW/SQL financial back end that Price Waterhouse had developed in house in the mid 1990’s.

A bit of a history lesson, when Oracle announced in February 1997 Oracle Energy. And I found ourselves orphaned of the financial backbone of our ERP application in oil and gas, that which we called Genesys. We looked for a replacement with a variety of other vendors in the marketplace. And I recall there were at least ten at that time. It was in June of 1997 that I executed an agreement with John Haslett of Price Waterhouse to put Genesys together with PW/SQL. We were back in business with the added benefit of having acquired the 40 or so clients of Price Waterhouse. Then in September of 1997 Coopers & Lybrand and Price Waterhouse announced that they were merging. Coopers & Lybrand owned and operated Qbyte and it was decided that we were orphaned once again. Anyway, John Haslett was subsequently running the oil and gas practice for IBM out of Calgary. Centered around Qbyte and deployed throughout North America.

Time flew by and Oracle announced that they were disheartened with the oil and gas industries market size and decided to leave the oil and gas ERP space. This was on or around 2000. John Haslett had worked for years at IBM attempting to herd cats, getting the producers to sponsor some new development work on a new generation of applications within IBM. Around 2005 IBM determined that they were unable to solicit any support from the oil and gas producers regarding a prospective plan in terms of an ERP application. They therefore left the ERP business as well and sold Qbyte, the then market leading ERP application, to P2 which still operates the 1980’s to 1990’s technological wonder in the marketplace.

The point of this history lesson is that the big guys came, saw and left. Or is it? The real lesson here is the bureaucrats didn’t do anything in their past. Leading to the exit of the technological giants, mostly out of frustration. Our experience, as chronicled in this blog is that they can’t, won’t and will not do anything to mitigate their difficulties in the marketplace today. Based on this trajectory, it is fair and reasonable to conclude that they will do nothing in the future as well. In the publication of the May 2004 Preliminary Research Report I noted that software defines and supports the organization. That in order to change the organization you must first change the software that supports the organization. In learning this these bureaucrats have twisted this logic to suggest that their franchise will be unopposed as long as they leave the software they have in place. Which is what they have and will continue to do. And therefore we can expect the overproduction in natural gas and oil to continue from these organizations.

I think that people would be mistaken if they held the belief that the bureaucrats were operating in any other manner than for themselves. It is their self interest that is driving the industry to destruction. I have seen little if anything coming from them that would reflect that they are concerned about anything other than their personal concerns. Knowing that there is a solution to the situation of overproduction, the Preliminary Specification, why has it not been implemented? I can assure you that they are aware of it, and have taken every measure to eliminate it, steal it or suppress it in the press. Are these the actions of a group of productive, constructive, interested in the common good type of people that we would have thought?

Yesterday’s and today’s blog posts have been relatively sharp criticisms of our friends the bureaucrats. You would think that I would do better if I was a little easier on them. I’m not of the belief that that would provide any value. They are determined to do what they do and that won’t involve anything that we do here. For them that would be suicide. Our’s is a toxic relationship. Some might argue the wisdom of having a toxic relationship with your customers. But that’s the difference, I don’t see myself ever working for the bureaucrats. I work for the investors who are as dissatisfied as we are with the situation today. We will be the ones, along with you the reader, that rebuild the industry from the destruction that the bureaucrats are causing today. I understand that this is something that I have been stating for many years now, the difference today is, it doesn’t sound as crazy as it did so many years ago.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Tuesday, February 23, 2016

Comparing Capitalization Policies

One issue with the producers 2015 financial reports that I find interesting is the impairment charges that are being realized. In some cases these impairments are as large as the capital structure of the producer. Even Devon Energy, a senior intermediate, has an impairment charge of $20.8 billion that takes out much of the firm's total shareholder equity that stood at $26.3 billion as of December 31, 2014. We also saw Chesapeake’s third quarter 2015 report incur a $15.4 billion impairment. This severely damaging the $18.2 billion in total shareholders equity that they had in December 31, 2014. Isn’t it odd that these are not the numbers that the bureaucrats and the press talk about. They prefer to talk about the gross margin of the firm, so that they can state that the firm’s production remains profitable. What these numbers state, unequivocally, is that the investors and the people in these companies flushed their investors money, time and effort down the toilet for the past number of decades. It's been an exercise of taking people’s money, spending it foolishly on unproductive activities and having nothing of value to show for it. Note that it’s these things that Bernie Madoff is in prison for.

But of course we don’t talk about the impairments. No one cares about these in the industry. They are the sunk costs of the operation and have no effect on the cash position of the producer. All very true. And apparently you can fool all of the people all of the time. Devon was in the market recently, increasing their stock offering to $1.3 billion due to the demand for their shares. This after a drop of 48% of their stock price in 2015, and another 42% drop in 2016. The way that I look at this, is that these capital costs should be considered in determining the performance of the management of the producer firm. Of course they don’t want to be assessed on the same basis as Bernie Madoff but what better example is there? The investors have put their money in, and the stock of the company is, in Chesapeake’s case, worthless, and the activities that they spent their money and time “investing in” are not a self supporting business!

The Preliminary Specification takes particular concern regarding the capital assets of the Joint Operating Committee. (And recall our price maker strategy used in our model.) The SEC requirement is that the producer shall not breach the reserves value times the price of the commodity at the end of the fiscal year. Therefore any reasonable method of capitalization would suffice. The Preliminary Specification wants to achieve a much faster write down of the assets of the firm. Within at least a three year window. Capitalizing only the controllable equipment. Expensing the non-controllable and intangible capital costs will force the management's evaluation of their performance. In a capital intensive industry, the commodities prices necessary to produce profitably will then consider these costs of capital and therefore, while these capital costs are being expensed and written down, the cash from the higher commodity prices, which offsets these expended capital costs is returned to the producer in the form of tax free cash. That is how a business operates. It cycles its costs through the income statement. Storing capital costs on the balance sheet for eternity only leaves the producer with high asset balances, supported by high debt levels and never any cash being generated from the business itself.

Our methodology imputes that the oil and gas industry is an actual business. A viable going concern that is able to support itself without the assistance of constant debt and equity issuances. The bureaucrats never want to account for their performance. Each year they let the capital that they spent build up on the balance sheet as opposed to report their actual performance. When they can no longer hide the fact that they’ve been fooling everyone, and are forced to write these assets down through an impairment, they say these costs are of no concern and are the sunk costs of the organization. These capital costs represent the capital that has been taken from the investors and the banks. Again, oil and gas is a capital intensive business! The bureaucrats desire to ignore the capital that they spent is representative of the fraud that they undertake.

The need for the change to the Preliminary Specification is necessary to rectify this situation. The decentralized production model, our price maker strategy and other aspects of our business model will ensure that a proper accounting is done. This is important to establish the credibility of the industry and begin to address society's needs for the real energy they will need this century, from oil and gas. The focus on profitability is also necessary from the point of view of the future of the industry. It’s not becoming any cheaper to find or produce oil and gas. Each year we can expect to see increases in the costs per barrel of capital, operations, administration and accounting. Clearly accounting for these and having them recovered by the prices that the commodities sell for is what a business will do. And that is what we propose, is to put this monkey business out of business and run it like a business. The bureaucrats should be ashamed of themselves for not accounting for their pathetic performance.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Monday, February 22, 2016

This Dismal Performance is Now Permanent

I feel somewhat liberated today by having the opportunity to mention our good friends the bureaucrats. Doing nothing by these people will be the operating procedure for the oil and gas industry for the foreseeable future. Is anyone else amazed at the persistence that these bureaucrats have. They want to ensure that there are no jobs or people left in the industry anywhere. That is the only logical conclusion any reasonable person could come to when they see the current situation. How bad is it? This is certainly the worst that it has ever been in the time that I’ve worked in the industry. I don’t think there was a time before that was as difficult. We should also note that we didn’t experience any bouncing paychecks in the mid February time frame. The last paycheck of the month will be covered by the end of the month production receipts. That leaves mid March as the most probable first time that paychecks from the producers will start bouncing.

When we see senior intermediate producers slashing their dividends and cutting their capital budgets in the manner that they are in these past few weeks. We can impute that cash is King. Producing at these prices is a fool's game. Yet everyone continues to produce at 100% of capacity despite the prices. This is the same behaviour that was displayed for almost 15 years in the oil market from 1986 onward. Oil prices dropped to $10.00 at times and they did nothing. Expect to see the same outcome from the same behavior continue until such time as the Preliminary Specification is adopted by the industry. Has anyone noticed or questioned why there is no discussion about our alternative in the marketplace? Odd isn’t it. Over ten years I’ve been at this blog and it still remains a secret! The fact of the matter is the dozens of people in the press that I have contacted over the years are aware of this alternative. They speak to the producers who advise them otherwise, although I don’t know precisely what they say. And the bureaucrats sit back and say that there is no solution. This is also in direct contradiction to the four times that they’ve hired other research firms to attempt to take the Intellectual Property of the Preliminary Specification away from me. Odd isn’t it that those initiatives never continued?

The cash crises that we are currently experiencing is particularly acute. The industry never ran on real tangible profits. The profits they did report were based on never recognizing any of the capital costs of the properties. And capitalizing everything under the sun. Cash flow was the measure of the producer. Little did they seem to understand that their cash flow numbers always included the annual stock offering and the incremental increase in the bank's line of credit. The sales of oil and gas were never high enough to support the business on its own. What they have been doing is taking banker and investor money and subsidizing consumers for the costs of their energy. Look at the working capital of any producer over the past decade and if you find one with a positive number, I would be very surprised. Bureaucrats always ran the producers on negative working capital. Forcing the service industry vendors to wait six months as a minimum to get paid. The effect of all of this. Particularly when the annual stock offering ceased its annual ritual in 2008. And the bank started short sheeting the bed. Is that producers have been hollowed out of any residual value or surplus resources to turn too when times get tough. Well times have been tough in gas for six years. And times have been tough in oil for almost two years now, and there is absolutely not one thing left in the cupboards anywhere to live off of.

You can rob Peter to pay Paul for a period of time. And these are desperate times indeed. The logistics can become messy in a rather complex business. The imposition on others begins to take its toll as well. The service industry begins to atrophy and the people you’ve laid off can’t help anymore. You're certain the prices of the commodities will turn around if you can only make it through this day. And so it will continue as it has for the past six years in natural gas. For those who think this downturn is a temporary situation I would point to the post 1986 period where there were subsequently 15 years of poor prices. This current situation in terms of oil and natural gas prices are a permanent fixture in the industry today. I don’t see any change coming about in the next five to ten year time frame. Shale is a permanent change to the dynamic of the industry. The industry therefore must change in order to accommodate shale and that requires them to only produce profitable production which demands the Preliminary Specification be used.

The problem with our solution is the bureaucrats are eliminated from the industry in the Preliminary Specification. That’s why they say there are no solutions. They want to make sure that they keep their paychecks as long as they can, they don’t care about the rest of the stuff. Have you seen a bureaucrat hurting anywhere?

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Friday, February 19, 2016

Thursday, February 18, 2016

A Business Based Solution

During this post I promise not to say the B word. You know the one that I am always blaming the downfall of the industry on. Doesn’t leave me with a lot of material left to deal with, but here’s a shot. People, Ideas & Objects, our user community and the service providers that those users will generate are all focused on the issues and opportunities that are present in the oil and gas industry. We are an Information Technology based company. However that is not the method that we use to solve the issues and present the opportunities in the industry. At least not exclusively. It is from the business side that we approach the industry.

There have been many technological solutions presented to the oil and gas industry in the past decades. Yet we still have the problems that are ever present in the marketplace. Technology is not the issue, it is a tool that can be used to help solve our difficulties, however it is not the tool that can solve anything on its own. When used in partnership with organizational change and a fundamental business understanding is when it becomes its most powerful. The Preliminary Specification relies on a high level of technological infrastructure. When we proceed with the development and deployment of the Preliminary Specification we will be putting these technologies to the test.

By selecting Oracle as our technological provider we are selecting the best technology in the marketplace. This is not even in question. Larry Ellison the founder of Oracle has the understanding of databases that clearly no one else does. He also has the power and control of Oracle to make their products superior in every way. Oracle is decades ahead of IBM, who I rate as second best. And the remainder of the marketplace is scattered with a variety of also rans. It will take the full power of the Oracle database to deal with the way we manage the oil and gas industry. I don’t know if the other vendors products would be able to handle the load that we are going to be placing on Oracle.

Our budget has set aside a significant portion, approximately one third of our costs, to Oracle. These are for the various licenses and cloud computing infrastructure that we will need in the development and early deployment of our applications. The bulk of the money that we are setting aside for Oracle is going to be for their developers. These are for a variety of purposes. First is to ensure that our team is up to speed on the latest Oracle technologies. Secondly is to ensure that there is a high level of technological transfer from Oracle to People, Ideas & Objects. Our team needs to be as good as Oracle’s in terms of their technological capabilities. And then we will need to be better than they are. Not a simple objective, or a reasonable one from an unreasonable man such as myself.

We have determined that we will be using Oracle Fusion Middleware and Oracle Fusion Applications as the base of the People, Ideas & Objects offering. These applications were developed from the ground up and were written in Java within the past decade. The first and only one to do so. Essentially the only modern applications to use the Java technologies as their base. Products such as SAP are legacy applications from the late 20th century and will need to be replaced, in my opinion, in the next decade. Replaced with new products based on object oriented programming languages.

We have a history with Oracle. Some of it not that pleasant from our point of view. Nonetheless I have rectified the manner in which we are approaching this development and we will not have the difficulties that we had with previous Oracle developments. That I can assure you. What we will have is a system that each and every oil and gas producer will have their administrative, accounting and operations managed successfully on. That’s a bold statement and a necessary one. Using the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable producer demands this high levels of integration and usage. Each and every element of the industry and producer is affected by the change to using the Joint Operating Committee. We can’t just do half of the industry, half a producer or half of the scope and scale of our applications. Its our job to rebuild the industry in the manner that is necessary, and the Preliminary Specification and this technology deems that necessary. All that and no B words.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Wednesday, February 17, 2016

Choices the Bureaucrats Make

It is generally agreed that we have 1.7 million barrels of oil per day of overproduction. Causing a 70% decline in the price of oil. So, as a bureaucrat, of course you will sit and do nothing. Is it better to give up 2% of global production, or experience price declines that lead to losses of 70% of your revenue. Well we know the answer don’t we. The U.S. production is by far the most expensive production in the world. Yet we hear that some producers will still be profitable in some of the shale areas at $23.00 / barrel. Its times like these that people should learn to read financial statements. Understand what it means to be profitable, learn what break even and marginal mean. This terminology is not interchangeable and is well defined as to what it does mean. Right now no producer anywhere is making money. That I can assure you. Their financial statements may state that they are, but when you capitalize everything, any revenue turns profitable. That is the game that is being played in the industry today. Justifying their inaction because it continues to be profitable is how they continue on. Just don’t count the cash.

And so it will continue. If you thought that the end would soon appear you have to look at the situation in the marketplace and ask yourself, how will it change? If everyone is profitable at whatever the price is, remember our discussion on “recycle costs,” there will never be any behavioral change. And even if there was a behavioral change these organizations could not change to become the dynamic, innovative, accountable and profitable producer that they would be under the Preliminary Specification. Organizations don’t change, but people do. And that is why we will be successful in our initiative to change the oil and gas industry. We are focused on developing the user community that will be the key lever to make the changes to the new organizational model in the Preliminary Specification, the Joint Operating Committee.

What the oil and gas producer will be configured as in this new environment will be fundamentally different than the manner in which they operate and are organized today. They will still be driven to grow their overall production numbers as they have before. The key difference will be that they must increase their profitable production numbers. Increasing your production is the easy part. Just look everyone is doing it. Increasing profitable production is hard, as we can see that no one is doing that. And what will stop the producer from producing unprofitable production in our new organizations? They simply will not be able to afford it. It drains the organization of the profits that were earned on other profitable properties. It also increases the costs of the reserves of the unprofitable property by the amount of the losses that need to be recovered from the future. Making it even more difficult to produce the property profitably. Investors who see producers who cheat and produce properties unprofitably will be dealt with by a general lack of confidence in their management and in their assets. Not something the producer wants to test.

Carrying unprofitable properties that have been shut-in will be less costly for the producer than what it is today. The configuration of the producer in the Preliminary Specification is stripped down to the C class executives, the earth science and engineering resources, some land and legal, and support staff. The administrative and accounting resources have been reorganized across the industry into service providers who are providing their services directly to the Joint Operating Committees. If there is no activity in the property, then there is nothing for the service providers to do and hence no billing from any of their service providers is sent to that Joint Operating Committee. As a result a null operation will be recorded in the months that the Joint Operating Committee is shut-in. These null operations will have the effect of neutralizing the downside risk of owning unprofitable properties. They can therefore be kept in a portfolio of shut-in properties where the focus of the producers innovations can seek to return them to profitable production.

These changes can not be made by the current bureaucracies. The accounting is not precise enough to know what is profitable and what is not! The overhead and administration costs in the industry are estimated by me to be approximately $18 / boe and most of these costs are capitalized by the producers. Today the Joint Operating Committees sees nothing of these actual costs. They are only charged for allowances which are woefully inadequate to capture the scope and scale of the true administrative and overhead burden. What we are talking about here is a complete new dynamic in terms of how the administrative and accounting of the industry is handled. Enabling the price maker strategy to be employed by all of the producers. This strategy is as simple as if the property is profitable it produces, otherwise it’s shut-in. In today’s environment there would be no profitable production, prices would therefore adjust quickly.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Tuesday, February 16, 2016

How We'll Rebuild the Service Industry

In a world where I can send you, in all likelihood a stranger to me, any amount of money in as little as two hours. Why does it take an oil and gas producer six months to pay someone in the service industry? Someone who they’ve done business with many times before, and someone who has always done a stellar job! Because that’s how long it takes for next year's financing to close! That’s a statement of fact, not a joke. The six months that it took for producers to pay the service industry in the good times was the punishment that the bureaucrats felt that they deserved. So it therefore became the norm to use six months as the general rule in how vendors were paid. That was in the good times. Now there is no money to pay them and the service industry is going to have to wait for the good times to return before they see any of the cash that they are owed today.

You may recall the days when the bureaucrats called the service industry representatives lazy and greedy because of the fees they were charging for their services. Those high fees are as a result of times like these. How many companies in the service industry will be able to withstand their customers not paying them for the work they’ve done. Not many. And those that do will be financially scarred for decades and unable to invest in their businesses as if it were a normal going concern. And what about the people who worked in the service industry? These people are also being forced to look for work in other areas and in other industries to feed their families.

So the next time that the producer wants to drill a well and there is not enough drillers in the marketplace. They better not ask why. And when they do find one, they best keep their mouths shut about the amount that the driller might charge for their day rate. It's the 21st century, yet we’re still subjected to the idiotic thinking of the bureaucrats that operate the oil and gas producers. The ones who piously looked down on the service industry and called them lazy and greedy not two years ago. It is a surreal world of the oil and gas bureaucrat. One snap of the finger and you can have anything that your heart desires, and at no cost apparently.

The Preliminary Specification is designed to eliminate this boom bust cycle in the oil and gas, and service industries. First by implementing the price maker strategy the producers will be able to bank on secure earnings. And it will be because of those earnings that they can turn to innovation in the field service industries. Where they can develop the resources and capabilities that are necessary to support the oil and gas industry. Through the Resource Marketplace and Research & Capabilities modules the capabilities and development of the service industry is front and centre in the mindset of the innovative producer. This is what we should have been doing two years ago when the bureaucrats were calling people names, investing in the service industry to expand its capabilities. We’ll have a lot more difficulty in attempting to resurrect the capabilities that we’re going to need from the service industry in the future as a result of the bureaucrats actions today.

Its really frustrating to watch the industry being destroyed in the manner that it is. I also find it surprising the amount of sympathy that the press gives these bureaucrats in terms of the dilemma that they’re in. They’re the ones that have caused this disaster and they’re getting the sympathy! It won’t be too long before the press starts to realize the rebalancing story that is being told is the same as the story that was told last year and the year before that. And that it doesn’t work. Then they might begin to ask questions as to why they would continue to produce when it costs their cash and destroys the business. What fool would do such a thing?

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Monday, February 15, 2016

No Posting Today

In recognition of Presidents Day and Alberta's Family Day holidays.

Friday, February 12, 2016

Don't Shoot the Messenger

As each week passes the destruction of the industry becomes more significant. This week was particularly dire for a number of the senior intermediates. I would have thought that they had greater staying power than what they are displaying this past week. Could it be that I have underestimated the difficulties? Give them a few more months and they will be empty shells of their former selves. The scope and scale of the devastation that is occurring at this time can not be underestimated. Producers believed their own convoluted financial statements that showed their legacy of overspending provided them with “strong balance sheets.” The problem is that no one let these capital costs flow to the income statement where they could evaluate the performance of the bureaucrats, and as such, they also believed they were making money because no capital costs were ever recognized. The fact of the matter is that even in the good times the producers were not making any money because they have never accurately accounted for their capital costs. These spend fests went to die on the balance sheet where they still reside, and today, as they did in years past, provide no value to the producer. If they would have let the capital costs flow to the income statement, these capital costs would have returned abundant cash to a healthy profitable producer. Cash that they could have used today. What we have now is an industry with sky high assets on the balance sheets, supported by debt, and no liquid resources, anywhere.

This shortage of cash is not a minor issue. It is the only issue for the foreseeable future. As it is stated by, and what I am hearing from the bureaucrats, the oil and gas production is covering the cash costs of operations. It is however not covering the costs of administration and overhead, or the payments for the money they took from investors and banks. The overhead and administration costs are not relevant to this calculation, I hear the bureaucrats state. It is too when the paychecks have to be written for all the staff. These paychecks, and the rest of the overhead, like lights and rent, have been calculated by me to approximate $18 / barrel. That’s why no one is going to be paying any dividends. Therefore your production is currently costing you approximately $15 / barrel in cold hard cash to produce! Sorry investors you just don’t count.

This is the logic that has overcome the industry since 1977 when the SEC instituted either Full Cost or Successful Efforts accounting as the methods to be followed. Everyone has been raised by the “capitalize everything” and never “recognize any depletion” attitude in the industry. I’ve been told a billion times, its cash flow stupid. And I have always responded that earnings are more important. And the bureaucrats have laughed at me for that as well. They felt as long as they could sell a property for multiples of what it cost, who needs profits? This game continued on and more competitors entered into the market seeking the “opportunities” to make “spectacular” money. Eventually with all the fools rushing in, the industry was overbuilt and the over investment lead to overproduction. Why don’t they sell a property today if they need cash! The problem is they can’t, there is no market. You could buy PennWest for $330 million. That’s 60,000 barrels per day, or $5,500.00 per barrel. Such a deal! But there is that debt, and you’d have to support that cash drain, maybe not such a good deal. And certainly not the market that PennWest thought would exist to sell assets into.

If you listen carefully the bureaucrats state there is a need for the market to rebalance only 1.7 million barrels. Imputing that the total oversupply is just the 1.7 million barrels. But it's not, that’s the overproduction per day. The amount in inventory is closer to a billion barrels of excess storage. To draw that down so that prices can recover means that we have to lose 3.4 million barrels of oil production per day for approximately 2 years. Then the prices will rebalance. We are a long way from that. Sorry investors it will be a while before you see any money.

Take for example the natural gas prices which have been depressed for the same reasons for the past six years. The Marcellus area is lucky to receive a natural gas price of $1.25 at any time in that region, the most prolific shale area. Recently the EIA reported that production in the Marcellus region was up! Rebalancing is a myth in the shale era.

When you have a destructive mechanism such as this, built within the DNA of the producer organizations and the industry itself, you will always have these difficulties. The shortage of cash is horrendous at this time. The balance sheets of the producers never had any working capital even in the good days. They always ran on high levels of negative working capital and now they’re producing significant negative gross margins. Meaning you can’t expect the service industry to extend you much more credit. And that means if there is any cash in the industry it is being tossed on the fire. What does an industry do with no cash? We are going to find out in as little as two, but no more than five months.

Expect to see a slew of bad news after the close of markets today. Everyone will want to get the bad news out before the weekend and have everyone forget about it by Monday morning. Chapter 6.2.1 of the bureaucrats 2016 handbook.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Thursday, February 11, 2016

Creative Destruction and our User Community

Anyone expecting the bureaucrats to make the necessary changes within their organizations. To deal with the overproduction issues of today will be waiting a long time. The Preliminary Specification is such a fundamental change to the producer firm. Moving it from a price taker to a price maker. In order to do this we will be making changes to every element in the industry. The point here is that organizations don’t change, however, people do. The way that we are making this change is that we are using the forces of creative destruction to break down the bureaucracies. And building the user community as the replacement.

We should send a thank you note to the bureaucrats for following our script so closely. The forces of creative destruction are evident throughout the history of our western based economies. When things become too inefficient and incapable, new solutions rise to replace them. Overproduction will continue until such time as the Preliminary Specification is operational in the oil and gas industry. It is what has been done in natural gas for six years now and in oil for two years. Do we see any response to this overproduction? It was recently stated that there were globally 100,000 barrels per day of oil shut-in during 2015. That is the level of response our friends the bureaucrats can achieve to the overproduction dilemma.

Muddling along is the operating strategy of all producers in any situation involving a crisis. That is the only thing that can be done. The producer firm is a deliberate building of organizational capabilities designed to operate oil and gas facilities based in some geographical region. That is their sole purpose. These organizational capabilities are unique to the formations that they produce and explore. The accounting and administrative capabilities are developed to support an organization in the regulatory, tax and compliance environment that the corporate organization exists within. And that is their domain. To determine if a Joint Operating Committee is profitable, in absolute 100% accurate accounting terms is impossible. Most of the administrative and accounting costs are capitalized and the Joint Operating Committee is charged with overhead allowances based on industry accepted principles. All that bureaucrats know is if the property is generating cash. They only find out that they're not profitable when they publish corporate level financial statements.

And so they continue because they do not have the appropriate information and cannot make the appropriate decisions as to which property is and isn’t profitable. The decision itself, the operational decision making authority resides with the Joint Operating Committee, and even if the operator decided to shut-in an unprofitable property it would have to be put to a vote at the Joint Operating Committee. This conflict doesn’t occur because the systems and procedures within the oil and gas producer do not recognize the Joint Operating Committee or its legal, financial, operational decision making, cultural, communication, strategic or innovation frameworks. It only recognizes the corporate frameworks of compliance and governance of the tax, regulatory and the SEC requirements. Recall what we are doing in the Preliminary Specification is we are taking the compliance and governance of the hierarchy and aligning it with the seven frameworks of the Joint Operating Committee. This alignment provides us with the speed, innovativeness, accountability and profitability that we seek in our in our oil and gas producers.

How we get to the point where People, Ideas & Objects is funded and the user community begins the development of the software defined as the Preliminary Specification is unknown at this time. What we do know is the producers that exist today are not going to be around for much longer. Slowly each and everyone of them will continue to lose so much money that they can no longer continue as viable going concerns. Cash is becoming a significant issue in the marketplace today. This is accelerating the demise of many producers and will make the transition to our user community that much quicker. How we get there is going to be an interesting journey. There’s plenty of room for everyone to join in our user community at this time. It's not that organizations won’t change, it's that they can’t. The people who join our user community will be the ones who are making the change in the oil and gas industry.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Wednesday, February 10, 2016

Task List for the User Community

As a group, the user community has some specific tasks that need to be completed in the first iteration of our development. These apply only to our initial development and will change once the software is operational in the marketplace. If we look at these tasks from a global perspective we are taking the Oracle Fusion Applications, applying the vision of the Preliminary Specification, developing and integrating that across the industry. In terms of technical risk, I assess the project as moderate, we are using proven technologies on a very large scope and scale. The vision within the Preliminary Specification is comprehensive and has the benefit of unifying the user community in the appropriate direction for successful implementation.

The first step in this initial development phase is therefore to implement the model that is the Preliminary Specification. This vision provides the broad outline of what and how the applications need in order to operate. The details of how each individual's work needs to be handled is the work of the user community to fill in, define and ensure that our developers provide you with the systems that you want and need. For example, if you are working in an area where the Material Balance Report is part of the domain of your work. You will collaborate with others to determine what is required, ensure that it is correct and iteratively develop the functions and processes that will be managed by the software and the service providers. In many ways we are capturing the manner in which the industry operates today from an operational, administrative and accounting manner and redefining it around the Joint Operating Committee and the vision of the Preliminary Specification.

What we don’t need in this first iteration is to have any innovation completed by the user community on the business models contained within the Preliminary Specification. What exists today in the vision works in terms of its global perspective. It may appear that in some small area it might be better to change an element of the model to accommodate some other condition. What we will not know is if this change will upset the global perspective and put the overall vision out of sync in terms of its operational capabilities. The first iteration is not a time in which to innovate on the business models of the Preliminary Specification.

What we can do, and what brings about the greatest value from the model is exploring and implementing the interactions and implications of our model. When we move to the Joint Operating Committee as the key organizational construct of the producer. We are changing every aspect of the oil and gas producer, the industry and service industry. Not much is unchanged in terms of the effects of implementing the Preliminary Specification. The interactions and implications are where the dramatic value is generated for the various stakeholders in our targeted market. It is here that I expect to see the value of the model to be in the forefront of the user communities search for delivering on that value in the first iteration of the development.

Once we have the software fully operational in the marketplace then we will be able to innovate on the model, and determine further interactions and implications within the various domains of our operation. We are focused on providing the oil and gas industry with a dynamic, innovative, accountable and profitable oil and gas producer. This requires that constant change be part of the user community and service providers. People, Ideas & Objects Revenue Model is structured to generate revenues based on changes within the industry. That is the dynamic that keeps this community moving forward. Software has the effect of becoming concrete to an organization. Turning it into an unchangeable beast. If an organization needs to change, it is the software that needs to change first. And in order for the software to change, the user community has to be the ones that make the changes through the mechanisms they have to affect that change. And in People, Ideas & Objects that is our user community vision.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Tuesday, February 09, 2016

What If the Bureaucrats Win?

You may have been distracted the previous time that I noted our value proposition. People, Ideas & Objects, our user community and service providers provide the oil and gas industry with $45.7 trillion in incremental value over the next 25 years. We also have the added feature of putting the industry back on a profitable footing. Enabling it to reclaim much of the greater than $1 trillion in lost market capitalization over this past year. But today I think we can add to these small industry incentives to act to implement the Preliminary Specification. By adding the losses that the producers are incurring during the 2015 fiscal year to the list of things that would not otherwise happen if the Preliminary Specification existed. Some may think that this is a simple double counting of the value proposition, I as you can imagine, beg to differ.

These losses represent the incineration of the capital that the bureaucrats were entrusted with. They could have used the Preliminary Specification to ensure that they are providing their shareholders with the most profitable means of oil and gas operations. However, they are not doing that and have instead chosen to destroy the industry. I see these as two separate and distinct acts. Both as a result of the deliberate carelessness that our friends the bureaucrats are becoming known for, but the losses are different than the value proposition. They are, dare I say, like the loss in market capitalization, more real.

If we calculate the losses of the producers that have been reported as of last Friday we find that the total comes to $8.043 billion for the fourth quarter of 2015. Not bad for three months work. And that is just eight producers. Anyone notice that the amount that these eight producers have lost is higher than our budget? I guess no one will be giving us any grief about our budget anymore. After all if you're willing to lose this kind of money in a quarter, you surely would not mind spending it in productive ways.

I have a great deal of difficulty understanding why any of this is acceptable. There is no bureaucrat that seems too concerned about the situation. Is it that the bureaucrats are frozen in fear, or is it that they don’t care? They’re all singing from the same hymn sheet and stating that the market will rebalance. Let's give them the benefit of the doubt and assume that happens. They’ll then need to work off the huge balances of oil in storage that has built up in the world. Rebalance that! But nothing effective is done other than to get the press off their backs! Sure they changed the oil export restrictions, but how has that worked out? I think they just stare out the window dreaming these dumb ideas up. This is the muddle along strategy in its finest hour. Shrug your shoulders and assume that nothing can be done and go on doing the paper shuffling thing that they do. Hoping that nothing bad happens to you. Absolutely brilliant!

The Preliminary Specification is designed to make the industry dynamic, innovative, accountable and profitable. None of which it currently is and never has been while I’ve worked in it. The current business model was developed in the 1920’s and has had no changes to it since. In the dynamic, fast changing world we live in, we end up with a bureaucracy that is so out of tune with the times that it can’t even defend itself. Are we to expect that we’ll keep this in place for the foreseeable future. Will this be the way that the industry is managed in 2025, 2040?

Why would anyone give more money to these bureaucrats to lose. The industry has had no response to natural gas for six years. No response to oil for two. Is anyone else seeing a trend? What do we think will happen tomorrow or ten years with this bunch? That is exactly what the bureaucrats want. To ride this through with no expectations of performance and then to resume normal operations where investors line up for the next round of fleecing. Then the bureaucrats will be so established and permanent that we’ll never be able to get rid of them. I say if we don’t toss them out in this current environment, and soon, we’ll end up paying for it for a long time.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Monday, February 08, 2016

No News Here

We should be building the oil and gas industry to address the needs of society in the next 25 years. Instead we’re hunkering down hoping that our most recent paycheck wasn’t our last. Here we are with all the intelligence and technology in the world to deal with our difficulties. And we can’t overcome the inertia of the organizational methods that were established in the 1920’s. I’ve provided so much comedic relief to the bureaucrats over this past decade. It's good to know they’ll at least have the thought that they knew better. It’s pretty obvious now, as it was in the 1980’s and 1990’s, that the lack of production discipline is with us as long as the bureaucrats exist. The news is here we sit, no change in the status of this initiative, other than the bureaucrats don’t laugh anymore. They can’t, won’t and will not ever change. We apparently have to completely destroy the industry before they're convinced they're wrong.

As far as I’m concerned the damage to the industry has and will be extreme. We have only begun to see the pain that we will need to endure. Sitting around hoping for higher prices and stating that the market will rebalance itself is sticking our heads in the sand. It appears to me that every producer is hurting except for Exxon. I think half of the industry will end up in bankruptcy. And the people who make this industry work will have had enough. What we’re talking about here is a generational time frame in order to rectify the damages being done now. I haven’t seen the rush to the door by the bureaucrats yet, but trust me that is coming, and they’ll take that aspect of the industries capabilities with them as well. Leaving us with that hole to fill on top of everything else.

We have, and will have, work to do. I have budgeted 5,000 man years of effort necessary to put out the first iteration of the Preliminary Specification. This is going to be very hard work to do and will demand a lot from the people who are involved. I guess the point is why do this hard work, disrupt the entire industry in the process, if it's not necessary. Just let the market rebalance itself as it always has. And that is the decision that is made. Muddle along and do nothing, let the forces of stupidity take hold and the good times will resume.

I don’t see that happening this time. First of all you need cash to buy the time to get there. We’re in February and there is less and less cash each day that passes. Getting there also assumes that the prolific nature of shale is somehow eliminated. That overproduction, which is systemic, unforgiving and destructive will be solved in the long term. Which it won’t and we’ll be back here at $30 for oil and $2 for gas in no time, assuming rebalancing does raise prices. Hope does spring eternal.

I can see the tombstones of some of the walking dead already. These are the firms that are no longer going to be with us. Give it a year and no one will remember them. Chesapeake, Encana, PennWest, Pengrowth and Bonavista. A lot of Canadian names in that bunch but all of them are trading at less than 10% of their all time highs. Which reflects a complete capitulation and lack of any faith in the managements or assets capabilities to be able to return to a viable company. Zombies.

It didn’t have to be this way. Disintermediation is a trend that is shaping industries across the business landscape. Technology with organizational changes are building substantial value propositions, as do we, and are the reasons that companies are moving in that direction. Why didn’t the oil and gas industry? What is the unique characteristic that caused them to oppose this initiative from the start and refuse to consider it? I don’t think we’ll ever know. But one thing is for sure, the opportunity in oil and gas is on this side of the fence. This post may seem dire, but I think I’m telling it like it is, it really is pretty sunny over here on this side.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Friday, February 05, 2016

Securitization

Securitization invokes the 2008 financial crisis with thoughts of mortgages being purchased from banks, parsed based on their credit rating, and repackaged as investments on Wall Street. Add in some sloppy accounting and poor legal work, some innovative ideas like synthetic credit derivative obligations, then you can see how a good idea can become the source of a banking crisis. Securitization, I think, has a role in the revised oil and gas industry. It could be a source of capital that is necessary to develop the industry in the future. If working interest ownership positions within various Joint Operating Committees were repackaged as securitized investments and bought and sold on exchanges. Then some of the capital necessary to fund the next leg of the industry might be available.

My concern is that the industry thinks that they’ll wait to rebalance the market. Like they’ve done so many times before. That low commodity prices are a natural part of the cycle that has to be worked through. You take the good with the bad and after all the screaming you make some money. I ask who is going to loan or invest money to anyone who has this attitude in the 21st century. If you feel that this is a good place to put your money go down and invest in an oil and gas company today. The bureaucrats in these companies are deluded to think that their vision is going to attract anything but flies. And we should make sure that these industry bureaucrats are shown the curb for thinking that this would be acceptable.

We went through the latter part of the 1980’s and the better part of the 1990’s listening to the oil and gas bureaucrat say “oh whoa is me, commodity prices will recover soon.” We’re hearing it again, and if we don’t do something about these dead beats we’ll be hearing about it in ten years from now. Just when did this become acceptable. That is all that we will ever hear if we accept this behavior today. “The market will rebalance and all will be well.” Investors are being destroyed. People’s careers are being destroyed along with their lives. The service industry, where the entrepreneurial and innovative talent in the industry exists is being destroyed. And the best that can be suggested is “the market will rebalance itself.” I think we should call an end to the muddle along strategy right here and right now.

The damage that is being done in this business is not something that’ll be fixed in the short term. The investors will not be lining up to give the people who are running this ship aground another turn at the wheel. They’re spitting mad. And they want scalps. Once they get those scalps they’ll lick their wounds for some time before they’ll venture into oil and gas again. Same with the people who are being laid off. “It was good while it lasted, but maybe we’d be better off shifting into something else” they’re thinking. The capabilities of what and how the industry does was it does can only take a big step downward in a scenario such as this. Thank your bureaucrat for all of this fun and excitement.

To the point about securitization of oil and gas properties. The Financial Marketplace module discusses this point as one of the elements of how the industry is funded in the future. This is enabled in the Preliminary Specification through the service providers detailing their work at the Joint Operating Committee level for the administrative and accounting costs. Each Joint Operating Committee will have the actual overhead costs to administer the property each month. Add these detailed overhead costs to the detailed royalty and operating costs and you have all of the Joint Operating Committees actual costs in their entirety being recognized. Actual detailed accounting each month! With the capital costs of the well known, the property can then prepare audit-able financial statements for any Joint Operating Committee for any month of the year.

Therefore the net profits of the Joint Operating Committee are something that can be calculated and determined accurately every month for every property. With the reserves data, working interests in these properties could be securitized and the producer able to generate additional capital through the process. One other aspect of the way in which the Financial Marketplace module of the Preliminary Specification is different is that due to the way the accounting is done in Preliminary Specification, the operator and the working interest owners overhead costs will be the same on a working interest basis. The operator will no longer be carrying the significant administrative and accounting resources and costs necessary to operate the properties on behalf of the Joint Operating Committees. And they will not be forced to capitalize these costs in order to hide them. The actual costs incurred by the service providers will be distributed based on the working interest distribution to all the working interest owners on an equal share basis. And this is why the producers will use the service providers for their administrative and accounting needs. Otherwise they’ll be footing the bill for their administrators and accountants to the full extent, as they do now.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Thursday, February 04, 2016

Rats and Sinking Ships

My apologies, I forgot to edit the title, it should read bureaucrats and sinking ships. I meant no disrespect. It gives me no pleasure in being the scorekeeper in this disintegration of the oil and gas industry. There were many opportunities for producers to act to mitigate these problems. The natural gas business has been displaying elements of overproduction since 2008 and that has been more than enough time for us to have had the Preliminary Specification developed and in the marketplace. The giggling of the bureaucrats had to carry on for the many years since then so that they could achieve the satisfaction of expressing their opinion about the Preliminary Specification. The fact of the matter is today we have an industry with no cash resources and a brick wall that will be hit in the next two to three months. The time is now in which we’ll see super human action and resolve from the bureaucrats in their abilities and capabilities to resolve the issues underlying the oil and gas industry. Maybe not.

It's time to jump ship, man what lifeboats there are and save yourself before there are two many people looking for the same thing, the bureaucratic thinking will go. The first to get out has the best chance of surviving to live another day. Everyone for themselves will be the mantra of the stellar bureaucrat! I think this is our future. And I think it will begin to happen very soon. In Canada the production month’s receipts are distributed on the 25th of each month. That means we can keep the lights on for a few more weeks, and as we all know now, make the February 1, 2016 payroll. After that it's up in the air. The other consideration is that if you wait until the next month's production distribution, the 25th of February, that gets awfully close to late April and early May when the fan ceases to operate at all. Waiting until the end of February might cause people to remember your face and name.

Whatever the bureaucrats thinking. They need to make sure that they are at least in the crowd of defections that will be announced in a hurricane of activity. Hiding out in the crowd is a good strategy but remember that it's important to be in the lifeboats early. You don’t want to get stuck with the women and children in a sinking ship. If you look closely at the behavior of the bureaucrats, they are clearing their offices of personal items, shredding the evidence, deleting the data and milling about the exits. These people are smart, they can read a cash balance. The trick will be to avoid the stampede of bureaucrats when it does occur. They are ruthless in a pack.

It will be after this that “what now” becomes the question. Will the environmentalists who fundamentally believe that powering vehicles with coal, or sorry electricity, is our future, finally be proven correct? Will solar and wind rise to save the day from dirty oil and gas. I think these, I'll call them myths, will be found to be the misguided adventures that they are. Oil and gas is the source of our societies advanced capabilities. I think we will be learning this lesson, once again, the hard way.

There has been a strong turn towards government and regulation since the Obama administration began. The bureaucrat has had their day in all aspects of societies dimensions. This was due to the 2008 financial crisis which has been blamed on Wall Street greed. The fact of the matter is that Fannie and Freddie, two government agencies, supported by regulations and legislation regarding mortgages are the reason for the financial crisis. The bureaucrat’s day has never been so entrenched and secure as it has been this past decade. Where they can go is of no one's concern at this time. We just need to ensure that we note their absolute failure and keep them off the ships that we build in the future.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here

Wednesday, February 03, 2016

The Producers Dichotomy

Up until producers were able to develop shale based reserves their job was well defined and easily understood. Build value by finding oil and gas reserves. The ability to increase the reserves of the producer, verified by an independent engineering firm, created value for the shareholders of the producer firm. In the past this effort was conducted in an industry whose resources were scarce and the capabilities of the producer were reflected in the growth of their reserve base. Those that understood engineering and geology could win by simply applying their trade. And that is how the producer operated and built value for their shareholders.

Shale came along and turned the industry from one of scarcity to abundance in terms of the oil and gas resources. Today there are many producers that didn’t exist a decade ago that have 1, 3, or even 5 tcf of gas booked as their reserves. This is as a result of what I refer to as the prolific nature of the shale reservoirs. These producers, prior to the price collapse, were as a result, presented with handsome market capitalizations. A tcf of gas would have normally been the domain of a senior independent, now we have startups with that volume of gas available to them. What to do?

The producer can’t sit on these reserves and do nothing. They involved the deployment of significant capital resources and the costs of those resources demand interest and dividend payments. Therefore the producer must put these reserves on production. On an industry wide basis this amounts to throwing the full 2,500 tcf of natural gas in the United States on to the commodity markets. And as expected this has had the effect of pushing the commodity prices down. The producers dichotomy is the flooding of the market with shale gas has the effect of diminishing the value of their natural gas reserves and rendering their operations severely unprofitable. This all seems to be obvious and rather elementary in terms of determining what the issue is in the industry today. The real issue is that there is no restriction on the producer to restrict the volume of production in any way. It is to produce everything they have. And that is the theory behind the high throughput production model that the industry operates under. Production needs to be as high as possible in order to cover the significant overheads that exist at any production volume.

Production disciple is not something that has ever been considered in the oil and gas industry before. Producers claim to have capital discipline, however, in a zero interest rate policy environment that is a moot point. Production discipline is what is necessary to ensure that the industry doesn’t continue to throw 100% of the reserve base of the industry onto the commodity markets at once. If you hadn’t noticed, it's not working. Some might suggest that production discipline is collusion, and I fundamentally disagree. Others might suggest that the government should get involved and determine the threshold production volumes or allocate supply as they do in agriculture. This would also be a bad decision.

The means in which to attain production discipline is to appeal to the dichotomy that the producer has put themselves in. Have them operate in their best interests at all times. Their best interests could be defined as a high market capitalization for their stockholders based on the market value of their reserves. Imputing that those reserves were priced based on a commercially viable price. And that all of their production was indeed profitable. These should be the guiding principles of what a producer should be motivated by. Their best interests.

To do this. To attain production discipline requires the Preliminary Specifications decentralized production model which uses the price maker strategy. This will enable a clear and precise accounting of the Joint Operating Committees performance. It will be this performance that is the determination of whether that Joint Operating Committee is profitable. And if it is profitable it will continue to produce. If it is producing a loss then it will be put in the producers shut-in inventory to determine how it can be returned to profitable production. It is this method, used across the industry, that will ensure that the producer is provided with the most profitable means of oil and gas operations. The reserves of the producer will be saved for the time that they can be produced profitably. And the commodity markets will find and reflect the marginal costs based on a clear and concise accounting at each Joint Operating Committee.

There is no way in which to determine if a Joint Operating Committee is profitable using the current systems that are in use by the producers. Their methods of accounting use overhead allowances that badly estimate what the actual overhead for a property would be. They assume the costs to administer natural gas is the same as the cost to administer oil. And they are woefully inadequate in terms of what the real costs of overhead are. Overhead is a big shell game in the industry. Most of it is shuffled off to the capital assets on the balance sheet to be amortized over an infinite lifetime. The cost of a production accountant for example, is not recognized at the Joint Operating Committee, it is capitalized on the producers balance sheet. These overhead costs, which are substantial, must be brought into the determination of whether the Joint Operating Committee was profitable.

The capital costs are also needing to be brought into the equation. Leaving these to wrought on the balance sheet for eternity leaves the producer with bloated balance sheets that prove they are nothing but spendaholics. The capital costs never flow through to the income statement to evaluate the performance of the management, and generate the cash resources necessary for the business. This is why the oil and gas industry will be running out of cash in the next three months. They have useless bloated balance sheets. Already PennWest has announced that they are living from weak to weak based on their cash balance. They and a lot of other producers are finished. There are very few producers that will be left in a few months that can participate in the building of the Preliminary Specification, those that will be I would suggest act quickly.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here