Profits? What Profits.

Many producers today are stating that they are profitable at today’s prices. It has been our argument at People, Ideas & Objects that this determination of profitability excludes two significant costs from the equation. Capital costs of the property and the overhead of the producer are not included in the determination of what producers are claiming they are profitable on. If we include these costs, and apply them retroactively through the past years we believe we would find that the producers have never been profitable. Even when oil prices were over $100.00 and natural gas was over $15.00. This seems to be a significant difference of opinion between what is being claimed today and what People, Ideas & Objects are asserting. How could things be so disparate?

First of all the producers are not doing anything technically wrong. They are following the SEC regulation and the financial statements are being audited each year. It is interesting to note that other industries that conduct research and development must have their costs expensed to the Income Statement in the current year. For software companies none of the costs of development are capitalized. Why is oil and gas exactly the opposite? Our argument is therefore with the eligibility or methodology of capitalization of the capital assets that the SEC prescribes. Since approximately 1977 it has been either Full Cost Accounting or Successful Efforts. Either method enables the producer to capitalize all of the costs involved in the drilling, completion, equipping, gathering and plants developments. In a capital intensive industry these are the costs that drive the business. Essentially any cost involved in the development of a property is capitalized to the Property, Plant & Equipment account on the Balance Sheet. These costs will then be depleted based on the amount of the production volumes produced that year, over the reserves that the property has booked and verified by the independent engineers. And as I mentioned these are all audited by the public accounting firms, therefore they are reasonable in terms of their accuracy and in compliance with the SEC.

The difficulty that this provides the oil and gas producer is in the effective deployment of their capital resources over the lifetime of the properties. As work is continually done to the property the reserves continue to increase and these increases are recognized by the independent engineers. Therefore reducing the amount of capital recognized in each year's calculation of costs. Oil and gas being principly a scientifically based business where the principals who operate the producers need to be from the earth science and engineering disciplines. Feel that having a large balance sheet with high balances of Property, Plant & Equipment reflect a healthy producer. Which of course it reflects nothing of the sort. It only shows that the producer spent x amount on its capital assets. Ideally, these asset categories should be turned over as quickly as possible so that the capital that was used in developing the property can be recognized in the Income Statement, evaluate the performance of the management, and in turn, return the cash resources used in developing those assets back to the producer by way of cash and profits earned. That is the theory, the flaw comes by way of the oil and gas commodity prices are inadequate to earn profits.

There is an attitude that the oil and gas industry does not operate on the basis of earning profits. It is operated on the basis of cash flow. It is this accounting methodology and this belief in cash flow that have jointly conspired to operate the industry on the basis where the investors have been subsidizing the consumers of their energy products. This is done by keeping the assets on the Balance Sheet for long periods of time and never recognizing these costs as part of the business. Hence the investors are consistently asked for additional money, the prices received are inadequate to capture and recognize all of the costs profitably, and the producers never have the money they invested in the capital assets returned to them to reinvest in the business.

Most producers operate on the basis of two accounting reports for operations. The Statement of Expenditures reports the amounts of capital that has been deployed over the life of the project. These at no time show the amount of depletion that has been recorded. The other report is the Statement of Operations. This reflects the actual revenues, less royalties and operating costs. Note the Statement of Expenditures is rarely matched with the Statement of Operations. Included in the operating costs of the Statement of Operations are the overhead allowances that are permitted through the various Petroleum Accounting Societies. These seek to allow an amount for overhead to be recognized. These are in the thousands of dollars and are woefully inadequate to provide the operator with an offset to the real cost of the overhead of their operation. So when they say the property is profitable it is on the basis of the Statement of Operations that it is. The actual costs incurred in terms of overhead by the producers as reported on the financial statement is an immaterial amount of 5 - 10% of revenues in the General & Administrative category. However these are the net costs after 75 - 80% of the overhead has been capitalized to the Property, Plant & Equipment accounts. And the percentages that I am using here are generalizations of when the commodity prices were much higher, at these lower commodity prices the G&A will be a far greater percentage of the revenue of the producer.

We have seen many producers being forced to take significant write downs of their capital assets in the 2015 financial reports. Eliminating essentially all of the profits that were reported over the past few decades. Supporting my thesis that based on an appropriate accounting, oil and gas has not been profitable at any time this current century. This is why there is a constant demand for capital. The money goes in, and never comes back because the prices charged are inadequate to cover the costs to find and produce oil and gas. What is needed is the price maker strategy of the decentralized production model in the Preliminary Specification. It uses a pricing calculation that includes the actual costs of the overhead of the producer. This in our system will be the service providers administrative and accounting billings that are incurred if there was production. There will also be consideration of the capital necessary to produce the property included in the pricing calculation. One that amortize the capital costs of the property within a reasonable period of time. I think it should be three years. Setting up an interesting dynamic in terms of what is profitable and should be produced and what is not profitable and should remain shut-in.

Oil and gas is a capital intensive, mature business. Profits are the measure of the management's performance. What I am suggesting here is we begin operating and evaluating the industry on that basis. Continuing to invest irretrievable volumes of capital each year is not doing anyone any good. I’m surprised it has gone on for this long. It needs to stop and that can only be done through the development of the Preliminary Specification.

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. 

Really Smart People

With the investment community that supports the oil and gas industry taking a pass on People, Ideas & Objects. Stating that we haven’t done enough to solve their trillion dollar problems. I recently heard PJT Partners Tim Coleman say that the oil and gas producers have many very smart people. However, those very smart people have driven the industry into the ground, and they are certainly not immune to the technologically driven disintermediation that is happening in all industries. We’ll see how much longer these investors think the bureaucrats are very smart when the banks begin to withhold all their further loan advances and the producers look for that additional capital shortfall from the investors. Having a junky needing yours and other people’s support is probably a fun place to be. Even if they are the smartest people you’ve ever met.

This week marks the end of the first quarter of 2016. We’ll soon see in the producer's published quarterly reports who’s been swimming naked as Warren Buffett always says. Cash is at a premium in the industry. There have been a few equity and bond issues that have enabled some of the senior intermediates to raise the funds necessary to weather the storm for a year or so. Most of the companies however are unable to feed at the equity and bond markets as they used to. For these companies the next six months are going to be the absolute worst imaginable. Many will be forced to sell their crown jewels for one month's payroll. We saw this in PennWest last week where they sold some of their shale assets so they can refocus on the Cardium formation. Banking that the Cardium is your future is the surest sign that it's over as a viable going concern. Expect to see this type of activity on a daily basis. Unfortunately the amount that oil and gas is being sold for these days barely covers the payroll. Therefore the need to cut the payroll, I think, is going to be the bureaucrats priority for the next six months. Which will lead to a period that we will come to know as the darkest days in oil and gas.

It's difficult to see clearly when you're in the middle of a crisis. I’ll concede that to the bureaucrats. However there has to be some discussion of the issues and how to resolve them. The stark nature of the commentary coming from the producers that the sky is blue and the future is bright is diminished by the reality that it’s really dire in the industry today. The cash drain created by simply producing oil and natural gas will bankrupt everyone in time. The ability to curb the deliverability of the industry doesn’t exist in the shale or any era. The producers that are desperate for some cash will always figure out a way to increase production. This is happening every day, and will forever, this overproduction will not stop. The producer used to have to look hard, and work hard, to find and then produce oil and natural gas. Now it just happens as a result of people looking to generate some cash. And this pursuit can only get worse. The capital that is being provided today will only accelerate the decline in commodities prices. Think about that.

In the McKinsey video of John Chambers yesterday it was noted that the initiative to change the organization could not come from within. If the change initiative was to be accountable to those that are within the current organization, they will run it into the ground. People, Ideas & Objects are about as distant from the industry as could possibly be. By bureaucratic design. If there is any sense left in the powers that be then they should initiate this change, and let us get to work. The bureaucrats have proven they can’t, won’t and will not ever change. And change is what is so desperately needed. We need to think of the consequences of continuing on without addressing the difficulties in the industry. With the oil price up $10 it's maybe a bad time to be asking for this but the problem is not going to go away.

All a producer can do in the current environment is keep producing in order to make their payroll. If they stop producing their payroll still needs to be paid. They are trapped in a spiral where they can’t get out. It’s an organizational and industry based phenomenon that can’t be solved within the current organizational structure. It must change to something that can accommodate the needs of an industry based on the abundance provided by shale.

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. 

John Chambers on Where We're At

We have highlighted John Chambers, the Chairman of Cisco on this blog before. He is articulate and well versed in both the business and Information Technology domains. McKinsey have a 4 minute video of him summarizing his opinions of where we stand in terms of the disintermediation of industries.

If you’re a leader in today’s world, whether you’re a government leader or a business leader, you have to focus on the fact that this is the biggest technology transition ever. This digital era will dwarf what’s occurred in the information era and the value of the Internet today. As leaders, if you don’t transform and use this technology differently—if you don’t reinvent yourself, change your organization structure; if you don’t talk about speed of innovation—you’re going to get disrupted.

I think he is stating these points in the context of a business that is doing well in a traditional sense. That those healthy businesses are under threat from technology. In oil and gas, I prefer to think in terms of the next 25 years. Are these bureaucratically congested producers the ones that are going to carry us through the next generation? The industry has been decimated by low prices. Investors have lost most of their investments. Banks have written off much of their oil and gas loan portfolio’s. Nothing has been done to address the issues around the systemic overproduction. Is this the environment and foundation that we can look towards the next generation with? Or, has the bureaucracy failed?

Using the Joint Operating Committee is a fundamental shift in the dynamic of the oil and gas industry. It changes everything and aligns it within the organization that has been developed to deal with the specific property that it was created for. A producer simply consists of many interests in many Joint Operating Committees. In our Preliminary Specification it is the Joint Operating Committee that drives the organization. Not the corporate model of today, which is driven by accounting, tax, SEC and compliance requirements. Those frameworks, the compliance and governance, are brought into alignment with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee by People, Ideas & Objects Preliminary Specification.

When many people think about this, you want to think about the intelligence of an architecture, where you can get access to any data, any point and time you want. It’s simple to describe, but it really means you’re dealing with intelligent networks—a next generation of the Internet, if you will. But connecting 500 billion devices doesn’t get the job done. It’s the process change behind it. So you’ve got technologies like cloud or mobility and cybersecurity and the Internet of Things that are very important. That’s actually the easy part.

The hard part is how do you change your organization structure? How do you change your culture to be able to think in terms of outcomes for your customers? It’s all about speed of innovation and changing the way you do business. The majority of companies will be digital within five years, yet the majority of their digital efforts will fail, which speaks to what a CEO has to do differently.

It is this alignment to the Joint Operating Committee that provides the dynamic, innovative, accountable and profitable oil and gas producer with the speed, innovativeness, accountability and profitability. The Preliminary Specification was developed specifically with innovation as its foundation. Using the research of Professor Giovanni Dosi and others as our foundation. We applied their work to our understanding of the oil and gas industry. Innovation is the core of the Preliminary Specification. And this is where the value in the oil and gas industry will be generated in the next 25 years.

She or he has to think much more outside the box. They have to reinvent themselves. They have to reinvent their company. Not stay doing the right thing too long, if you will. That’s what got companies in trouble in the past. But the rate of change then was much slower. Today, you’re talking about digitization being an integral part of the fabric of a company’s business strategy or the way it interfaces its supply chain with its customers. Not enabled by technology—technology will become the company.

I have stated the similar effects of Information Technology many times before on this blog. It’s not enough to own the oil and gas asset anymore. You must also have access to the software that makes the oil and gas asset profitable. Without the Preliminary Specification operational in the industry the systemic overproduction will continue. In natural gas six years of overproduction continues and it doesn’t stop. Bureaucrats don’t change. Prices are in the $1.80’s and there is no positive outlook for prices. The natural gas producers went through a period, like today in oil, where they believed things would get better, they just needed to “rebalance the market.” Eventually things became so oversupplied that the market and its price collapsed and continues to do so. This is where the oil market and its prices are headed. To an oversupply driven collapse. Until the industry has a method in which to deal with shale, the industry will systemically overproduce. Only the Preliminary Specifications decentralized production models price maker strategy enables a method in which to allocate production fairly and equitably, on the basis of profitability determined on a detailed and accurate accounting.

The first step is merely making it an independent group, because if you do it inside your organization, your existing culture will kill it. So why do these transitions fail or succeed? Companies fail to understand the implications of how quickly this technology will transform their business. And they underestimate what it really means to their economic growth or that of their competitors.

Secondly, they stay doing the right thing too long. And that’s what gets so many of us trouble, because we’re trained to get a 3 to 5 percent increase in productivity. To just crank it: do a little bit better each year; cut expenses a little bit; grow the top line. This is about exponential change.

There are exponential and trillion dollar value propositions to be realized in this new manner of economic reorganization. For those that participate. There is a rapid demise for those that don’t. Oil and gas bureaucrats have been successful in asserting that theirs is the only way. These next six months are going to provide a different vision. A war of ideas. In the meantime we have work to do, the user community is developing, and we need more people to join.

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. 

Record Natural Gas Production

Some interesting facts came out of last Thursday’s Wall Street Journal. “U.S. natural-gas production hit its highest level ever over the winter even in the face of low prices, a conundrum at the heart of one of the year’s worst-suffering markets.” And in the U.S. Energy Information Administration’s March 24, 2016 weekly update they stated that the “EIA forecasts natural gas will overtake coal as the primary source of generation in 2016.” In the same report they state that “Working gas stocks are at record high levels for this time of year.” And lastly the EIA estimate of “unproved technically recoverable” shale gas reserves is at 622.5 tcf for the U.S. and 572.9 tcf for Canada.” U.S. production of natural gas is approximately 25 tcf / year providing almost 25 years of natural gas and 130 years for Canada based on their production profile.

Its as if the oil and gas industry's current business model exposes all of these reserves to the commodity markets at once. These are overwhelming numbers and prove that the basis of the industry has fundamentally changed. Instead of an industry based on the scarcity of the commodities it’s an industry that needs to understand that there is an abundance of their product available to the market. The business changed when the shale volumes produced became material to the overall deliverability of the industry. We can’t go back, we wouldn’t want to go back, and we are now wholly dependent on the high cost shale production. Without shale the conventional sources would be inadequate for our needs. With this change in the oil and gas business it demands that we change the business model of the industry to accurately deal with the situation on the ground.

In a scarce environment it is appropriate for the producer to produce everything that they can. A market for the energy that is produced will always be found. The producer accepts the price that is offered and continues with the business of finding and producing more oil and gas. In today’s abundant shale based reality this old business model over supplies the market with the energy resources that it needs. Simple supply and demand principles dictate that the price must therefore decline to reflect the over supplied nature of the market. Over time producers are eventually unable to earn enough from their production to cover their payroll. There is however significant discussion in the market that today’s production is profitable for the oil and gas producers. I have argued here that the true costs of the operations, which includes the overhead of the producer and the capital that has been expended, are not being taken into consideration when those comments are made. We’ll be discussing this point tomorrow.

The method currently used by the producers to deal with the market's oversupply is called market rebalancing. Effectively reducing capital expenditures until production volumes fall in line with demand. This is a blunt and ineffective instrument. This was used during the last downturn in oil. Beginning in 1986 and lasting for the better part of 15 years. Rebalancing is inappropriate for today’s shale based oil and gas industry, particularly with respect to the work that the industry has to undertake in the next 25 years. We have waited six years for the natural gas market to rebalance and as we see we are at record production. It's two years in oil and there is no hope in the foreseeable future for rebalancing there either.

Unlike the natural gas markets the oil markets were precipitated by a change in strategy by Saudi Arabia. What the Saudi’s did in changing their production strategy is logical to me. Moving from their traditional swing producer role to dedicating themselves to their specific customers, and not letting anyone take those customers away from them by competing through lower prices. They see shale production in the U.S. as the high cost production and therefore feel that the U.S. should occupy the swing producer role. If the Saudi’s were to maintain the swing producer role and leave the shale producers to produce as much as they wanted to. They would eventually have both low oil prices and no customers. They are defending their business against what they believe are the high cost producers, the U.S. shale producers.

The decentralized production model of the Preliminary Specification solves this conundrum by enabling the dynamic, innovative, accountable and profitable oil and gas producer to shut-in any unprofitable properties, and to only produce profitable properties, occupying the swing role producer in both the oil and gas markets. Shutting-in any unprofitable production leaves the property with a null operation, no loss and no profit. This is as a result of the reorganization that is done through the Preliminary Specification of the producer and of the industry itself. Enabling People, Ideas & Objects to provide for the most profitable means of oil and gas operations.

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

Good Friday

No posting today.

The Speed of Change

People, Ideas & Objects is all about change. Using the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer introduces change everywhere and to everyone. Nothing within the oil and gas producer and the oil and gas industry is untouched by making this fundamental change. What we are doing is moving the corporate model’s focus on the compliance and governance frameworks, and aligning those frameworks with the Joint Operating Committees legal, financial, operational decision making, cultural, communication, strategic and innovation frameworks. With the alignment of these nine frameworks we achieve a speed, accountability and profitability in our producer organizations, and a platform in which to operate for at least the next 25 years.

The establishment of People, Ideas & Objects has with it our user community which consists of the people who supply the tacit knowledge of how the industry operates. They provide our developers with the understanding of what and how they need the People, Ideas & Objects software to operate to do their jobs, based on the alignment of the nine frameworks to the Joint Operating Committee. The user community members are also the people who have a financial and operating interest in the service providers who provide our software and their services to the oil and gas producers. It is this reorganization of the accounting, administrative, land administration, production administration and exploration administration that enable the producers to achieve these positive outcomes. Bureaucrats would have you believe that their accounting proficiency is their competitive advantage.

The structure of the producer is changed fundamentally from the configuration today to a stripped down version in the Preliminary Specification that includes the C class executives, the earth science and engineering resources, some land, legal and support staff. The service providers process the accounting and administrative processes on behalf of the industry. Replacing the need for each producer to build the redundant and unshareable accounting and administrative capabilities within each producer firm. Focusing on the industry as their client base, the service providers use specialization, the division of labor and automation of the individual process that they manage for industry to achieve the greatest administrative efficiencies. Having control of the software as a user community member they are able to change the process they manage by changing the People, Ideas & Objects software through the user community, and if necessary, with changes to the people in the service provider itself.

The advantage of our Preliminary Specifications decentralized production model’s price maker strategy is that it turns all of the producers costs into variable costs. If the producer finds a property is no longer profitable based on the price in the commodity markets. They can shut-in the property and none of the service providers will receive any data in our task and transfer network to process anything, and no subsequent service provider billing will occur. Creating a null operation on that property as opposed to that property incurring a loss as it does in today’s environment. Therefore increasing the producers overall profitability by only producing profitable properties, reducing their future capital costs by not having the costs of the losses added to their reserves capital base which needs to be recovered in the future, reducing the volume of the commodity in the marketplace allowing the commodities price to seek the marginal costs, and increasing the profitability of the producers other properties by having higher prices received for their production.

I haven’t calculated our value proposition for at least a year. The last time I ran the calculation it was in the range of $25.7 to $45.7 trillion. The $20 to $40 trillion is the amount of capital that is projected to be expended in the industry in the next 25 years. Our value proposition calculations include all of these capital costs being depleted over the course of at least three years. This returns the capital to its owners and is a critical part of our value proposition. The current bureaucracy like to let capital rot on their massively bloated balance sheets. Leaving no way in which to return the capital to its owners. In addition to the $20 to $40 trillion we have included in that number the amount that exists on producers balance sheets today. These capital costs will be included in our pricing calculations and is in essence the money that was invested in the industry in the past and will finally be returned. The $5.7 trillion is the amount of money that the oil and gas prices were able to provide in a profitable industry vs. what they are receiving at the time of the calculation. Oil was priced at $60 then and gas was much higher than today’s $1.90, therefore this element of our value proposition is at least double. But I don’t want to make the bureaucrats look too bad now do I.

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. 

Canada Eh!

We’ve noted these next six months will be difficult in the oil and gas industry. Then again maybe Opec will solve all the overproduction issues by cutting their production and shale producers can then produce as much as they want and continue drilling for more! Bureaucrats should notice that proposed cuts in production do have an upward increase in prices which supports our Preliminary Specifications price maker strategy. Has anyone noticed these stories out of Opec seem to be serially produced fairy tales, or are bureaucrats really buying what they’re selling. Maybe I’m wrong, and something will come out of the meeting. Before we would know we’d need to see the formal seating plan for the members at the meeting. If that issue is ever is settled then I might begin to believe. Here in Canada things will be very desperate for the next six months and will dive into the deepest of ditches after that. The desire to fix the overproduction doesn’t exist in Canada either, and we are about to begin significant overproduction of natural gas.

I read the other day that the Marcellus regions producers are focusing their marketing efforts on the Ontario and Quebec marketplace for their natural gas. This market has traditionally been serviced by the Western Canadian based producers in the form of a multi-billion dollar pipeline from Alberta to those markets. With this distance you can be sure the tariffs are significant which makes the Marcellus gas attractive at one sixth the overall distance. Canada used to produce 16 bcf / day and now produces only 12 bcf / day. This is mostly due to the lack of export demand into markets in the U.S. that are now serviced by the American shale producers. If U.S. shale begins to provide Canada’s two largest populated provinces with their natural gas, there will be little demand for that current 12 bcf / day of Canadian production.

Our current federal government is about to bring about its first budget which I think in traditional Trudeau fashion is going to shaft the province of Alberta by cancelling any pipelines under review, in the name of global warming. Therefore I think it’s going to be a hard time in Canada for the next few decades to find work in the oil and gas industry. Bankruptcy trustees aside. There is a notion in the snowboard instructor, bar bouncer of a Prime Minister that we have that we should be more focused on the manufacturing areas of the economy. The oil and gas, and coal are dirty and really beneath Canadians. We Canadians like to just tag along when the going is good. My recommendation is don’t buy real estate in Alberta.

Somebody else will always fix the issues in the oil and gas marketplace. That’s the position of the bureaucrats who reside within the investors and producers. No matter what, they don’t have to do anything. Someone else will fix their trillion dollar issues for them at no cost to them. I really should have accepted this logic when I began this initiative so many years ago. I could have started coding the Preliminary Specification at the start and we would therefore be only 4,975 man years from completion. Which is what I think is missing from the equation in being assessed as not doing enough, I can’t produce an iPhone app that organizes the industry in the manner of the Preliminary Specification. With the user community, and service providers where the producers only produce if it’s profitable based on a detailed accounting. This of course would sell for $1.99 and be available in an Android version as well.

Well I know what I need to do now, that $1.99 will come in mighty handy I can tell you. But then that just shows you the value of technology today, solve a multi-trillion dollar industry wide issue with a $1.99 app. Who would have thought.

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. 

Our Low Interest Environment

The Federal Reserve is in the news once again. Changing their position on interest rate increases for the remainder of 2016. Having such low rates in the marketplace has been the wrong policy for about four or five years. It’s time to return to normal and stop the chronic bad decisions that are being made in business and in individuals personal lives from such low rates. Here in Calgary people are buying their first homes with $400,000 mortgages which is about as bad a decision you could make in your life. You could never pay that amount of money off, and at some point regular interest rates will resume and you will have valued your debt at that ridiculous level. With housing values based on the carrying costs of the home, in an era of rising interest rates, your home could be worth half of your mortgage in just a few years. Then what do you do. Its these kind of bad decisions that need to be avoided by increasing the interest rates to normal now.

The same can be said for the business community. All investment decisions are based on the anticipated return and its performance in the marketplace. When secure investments provide no return, pretty much any kind of investment appears to make sense. This leads to the overproduction that is systemic in a disinflation and deflationary environment. One that low interest rates are attempting to avoid.

I want to make it clear that I don’t think low interest rates are what have lead to the systemic overproduction of the oil and gas commodities. Opec is certainly a constant that appears in the oil markets of today and of course back in 1986 through to this century. They had upwards of 10 million barrels of surplus capacity that was believed to be part of the reason for the low prices in 1986. I think however you have to look at the business model of the oil and gas industry, on an international basis, in order to find the real reason behind the systemic overproduction. And that business model is the high throughput production model. It takes significant infrastructure in order to be an oil and gas producer. These infrastructure costs are what drive the need for more production. In addition, the never ending demand for higher production volumes from the investment community is further application of the high throughput production model. The element of shale, on top of the inherent overproduction arising from the high throughput production model is the toxic destructive environment that demands a solution in both commodities.

Whether we agree on the aggravating causes of the price declines over the past history of the industry is probably unnecessary. We could all agree that shale is an aggravating factor that will not be handled without some intervention in the market in the short to mid term. Shale has changed the oil and gas business fundamentally. Moving it from commodities that are scarce to abundance in a material way. As a result what the Preliminary Specification seeks to do is to move the industry to our decentralized production model and away from the high throughput production. Turning the producer from a reliance on their administrative and accounting infrastructure, to a reliance on the industry based administrative and accounting infrastructure of the People, Ideas & Objects Preliminary Specification, our user community and our service providers. And therefore turning their infrastructure costs from fixed to variable in nature.

Making the change to the existing oil and gas producers is not something that is contemplated as being a possibility. Organizations don’t change, but people do. The bureaucracies that exist today are the same that began in the 1920’s, only accelerated by today’s computer technologies. The hierarchies useful life has ceased to exist in many of the industries that have been disintermediated. They are replaced by networks of people who are capable of dealing with the opportunities and issues in the specific industry. Changing a hierarchy into a network would require the energy equivalent of what we have in all of the shale based reservoirs today. You won’t see me volunteering for such a frustrating and difficult job as that. We are relying on the forces of creative destruction to make the change from the hierarchy to our networked world quickly and effectively through implementation of the Preliminary Specification. We should thank the producers for following our script so diligently to this point, failure has a distinct feeling, now if they would just step aside.

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. 

Low Water Mark

You want to establish a high water mark in terms of your performance during your career. The proven track record that you can succeed at a high level consistently. In oil and gas the bureaucrats have now established the low water mark in terms of how bad they run the industry. In these days where the oil price reaches $40 we get the sense that the worst is over and the good days are around the corner. To establish the pressing need for change in the bureaucrats now would be a hard sell, don’t you think? They were able to muddle through the worst period the industry has seen and they were never challenged in terms of their franchise being questioned or challenged. That is other than by a blogger. There were no calls to make the necessary changes to the business model, just to wait out the time necessary for “market rebalancing.”

I have argued that the next six months will be by far the worst period that the industry has ever seen. These temporary price increases will not last much longer. It appears to me that people are covering their shorts in both the stock and commodity markets. This attitude of the bureaucrats is telling. They did nothing then, and they’re feeling bolstered by the prospect of the good times. Time to start working on fixing up the cabin for the upcoming season. My visits to downtown Calgary reflect that the planning and execution of the summer time activities is well on the way. There is no discussion of business that you overhear. It's all personal business that is the topic of discussion. The pace in which people walk from point to point has a sense of entitlement and leisure that I have never seen before. There is no sense of urgency anywhere. There is no concern as to the future of the industry or their business.

We sort of new the store wasn’t being minded by the bureaucrats all along. They don’t care. The oil and gas industry is ripe for disintermediation and the destruction that it has set itself on. If the bureaucrats don’t see it now, and are not concerned in the least, then they won’t be part of the battle of ideas that will be raged in this next six months. They have nothing in this field. Other than rebalancing the market which has been the operating strategy in natural gas for six years. Nothing is being offered as a strategy or idea by the bureaucrats. Six years is an economic cycle. Is the oil and gas investor expected to sit out many economic cycles in order to treasure an oil and gas investment? Other than the Preliminary Specification, there is nothing, just a quiet, passive death of a way of life known as the old oil and gas industry.

This is the standard of expectation of an oil and gas investor! How the bureaucrats were able to get away with this is unknown. Our own campaign in the past three years has generated no interest from these investors. They must feel that our value proposition does not build the trillions of dollars of value that these bureaucrats are losing for them. Whichever. The point of the exercise is that disintermediation is occurring in all industries. Information Technology is defining new ways to organize and build value where the old can’t. This is the larger trend that People, Ideas & Objects needs to tack towards. Holding out the trillions in our value proposition in terms of the prize that is available to those that are willing to do a little hard work here. What we see in oil and gas today is an industry that will do nothing to defend itself or offer up any challenge or resistance. The investors who have been taken to the cleaners apparently couldn’t care less either. An industry that is well past ripe for the taking.

What we have also learned through this process is that it is not enough just to own the oil and gas assets. Now, in this Information Technology driven world it is necessary to have access to the software that makes the oil and gas asset profitable. The existing bureaucracy have proven themselves to be a complete failure and incapable of being resurrected as a viable going concern. Now we just have to position ourselves in the manner to disintermediate the 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. 

Some Operational Concerns

Only a fool would continue operations as we are at People, Ideas & Objects without a penny from the bureaucrats in these past 25 years. Especially after having been assessed by the investment community of not doing enough to solve their trillion dollar problems. Yet here we are. Well I take offense to being called a fool, and would state that you don’t have to be crazy to do this job, but it sure helps.

We’ve had a lot of fun this past week highlighting the conflict and contradictions that we find ourselves in. Bureaucrats are bureaucrats whether they exist within the producer firm or in the firms that invest in the oil and gas producer. And those investors continue to invest in the oil and gas producers. My argument about investors subsidizing consumers for their costs of energy doesn’t seem to have been made. Maybe the oil and gas investors should just buy the commodities instead of the producers. They’ll get the same performance but with no risk of the firm defaulting. Which brings into question what is it that the bureaucrats are doing if they’re just mirroring the commodities moves. I thought I read somewhere at sometime that the point of management was to eliminate the downside risk of investing in the commodity.

One area that the bureaucrats criticize me for is the broad scope and scale of the Preliminary Specification. Applying this across the industry would be difficult and doesn’t seem, to them, to be a viable solution to the issues facing the industry. I agree with the scope and scale point of view. It is very broad and includes the accounting, administration and operations of an oil and gas producer. Which raises the question how is it that the bureaucrat is able to cobble this solution together within their own shop, but feels it would be impossible on a broader scale? I will have a much more efficient budget where the costs of operations will be covered on a greater percentage basis than they can achieve. For example, the costs of managing an email server takes 30% of one individual's time within the producer. Whereas it may take ten fully committed specialized team members at People, Ideas & Objects. Yet these ten team members costs when allocated over the production profile of the industry will be mere pennies on the dollar compared to the individual producer's costs. We also have the advantage of specialization and the division of labor to expand the industries capacities and throughput when and where it is necessary. These traditional economic tools are not available to the bureaucrats small internal technical teams with their limited capabilities when applied against this broad scope and scale. We also have the budget in terms of our ability to research and develop new initiatives and capabilities that will provide value to the producers in the future. Something that the producers don’t appear to have today.

If we were to commence developments without the full budget secured. Then we would be at risk of having the bureaucrats cancel our project each time the price of oil went up by more than $2.00. Their attention spans do not breach the next quarterly report. Therefore we need to have these resources secured to ensure that the outcome of the project is viable, but there is a far more important issue here. The bureaucrats are vindictive and will take the baseball bats to those that are involved in this project. If those people find that their opportunities in this initiative are suddenly cut off, then they’ll only have the angry, vindictive bureaucrats to deal with to save their careers. No one should have to commit career suicide in order to save the industry from these most lovely people.

I want to point out why Exxon, BP, Shell and Chevron can’t go it alone in terms of their own systems development and why we need them in the user community. The big guys like to do things their own way and we can all understand their reasoning for that. But we need them. It is their production profile that will be responsible for offsetting much of our costs. Or in other words they’ll be paying most of the freight. They’ll be doing that anyways with their own systems development, and once their system is built there will be no one else that’ll touch it. Is Devon going to want to use a system that was developed by Exxon? People, Ideas & Objects independence from any individual producer, working on behalf of the best interests of the producers, providing producers with the most profitable means of oil and gas operations, is the objective way in which all producers, large and small can willingly use a system that was designed and developed by a user community.

I’d also like to point out the recent discussion we had regarding IBM and Oracle’s participation in the oil and gas ERP marketspace. After many years of trying to secure support from the producers they were wholly unsuccessful and left the market. All of the producers stood united together expecting that the Information Technology vendors would be the ones that “invested” in the producers ERP applications. IBM and Oracle could see the devastation that had been created in the oil and gas ERP space over the years. For more on that read our Revenue Model. Now, outside of the existing SAP and P2 installs which have no further development plans, there is only People, Ideas & Objects who have a value proposition in the trillions of dollars, which coincidentally has been determined to be not a good enough effort by the producers and their investors. The fact of the matter is they wouldn’t do anything then, and they don’t do anything now. The only difference today is that I have provided them with a comprehensive vision of how and what the producer and industry would need to operate in order to earn our multi trillion dollar value proposition. Creative destruction is about the old being washed away by the new. We obviously don’t know who will be the ones who step up to earn those trillions of dollars. What we do know is it's not the existing bureaucrats.

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. 

Options for Investors

What the oil and gas investment community should be thinking about these days is their options for dealing with the difficulties they are experiencing in oil and gas. I have to assume that at some point the story that the market will rebalance itself is going to begin to look a little tired. Someone is bound to notice that it’s the same story that’s been told for almost two years in oil, and for six years in natural gas. And its not working. We should ask the bureaucrats, what exactly it is they’re doing? Is there anything being done? How have things changed as a result of the discovery of shale based reserves, and how will these changes fix the issues we are experiencing. These I would expect would be the questions that are being asked in the marketplace.

I sat in amazement in the 1980’s and 1990’s when all of the producers, and I mean all of the producers, continued to overproduce oil into the marketplace. It was clear to me that if each producer was to shut-in some of their production, and only a very small percentage of it, then they would experience significant increases in price, revenues and finally earn some profits. This never happened and the producers only complained about how bad it was and waited for the market to “rebalance” itself. After what I think was at least 15 very bad years the market rebalanced itself and things resumed somewhat with prices that at least covered costs. Why did they continue to overproduce? Because that is the way they are structured. They can do nothing but produce at full capacity at all times. What would enable the producers to change to a more appropriate method of organization? What was that method of organization? And could it continue to meet the needs of the marketplace and to also earn a profit?

Then in May 1991 the vision of the Preliminary Specification came to me. Now not in a coherent, expressible way that made sense. I knew however that given time I would be able to solve this problem. I also knew that software was the means in which to implement the solution. I then started out with these ingredients, built a team, promoted Oracle on this vision and raised some money. We then began developments on a solution to solve this vision that I had. The history of the next six years is well documented in this blog. Unable to continue with the software developments, I was still able to work on solving what eventually became to be known as the “business model.”


In 2000 I started my MBA with the specific purpose of fully vetting my ideas through the process of that education. It was in the process of writing the proposal for my thesis that I finally determined that the Joint Operating Committee was the key organization construct of the dynamic, innovative, accountable and profitable oil and gas producer. I then ran around town announcing that it was the Joint Operating Committee that was the answer to the problem and most people looked at me and asked what exactly was the question. Many of the very senior people in the industry fully understood the implications of using the Joint Operating Committee. I also knew that although I solved the problem, the implementation needed to be determined. That is, what would the industry and the producer look like and operate as if we adopted the Joint Operating Committee as the key organizational construct.

The Preliminary Specification which represents the codified research that determines what the industry and producer would need to look like and operate as if we adopted the Joint Operating Committee as the key organization construct was completed on December 20, 2013. It total’s 175,000 words and is based on the 1.5 million words of my research that have been published on this blog. That was a little over two years ago, based on a vision that I had almost 25 years ago, about an issue that I saw in the industry around that time. Some may think I haven’t done enough, but then I’m the only one who did anything.

The point of this history lesson is that the bureaucrats have rejected the Preliminary Specification in its entirety. It eliminates the bureaucracy through the technology that disintermediates the industry. A phenomenon that is happening in every industry, and one that is being battled between the old and new ways of doing things. If there is to be a third way that is generated to operate the industry. That is if you think the bureaucracy is as much of a dead end as I do. To generate a new implementable business model could be available as soon as 2041. I wonder what things’ll be like then?

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. 

Stealth Mode

We have to focus on what we can do to solve the issues that are present in the oil and gas marketplace today. Our primary time constraint is the development of the user community. If we had our budget in hand it would be the development of the user community that would dictate the pace in which we developed the Preliminary Specification and our delivery date. Since we published the Preliminary Specification, development of the user community has been our primary focus. With the Internet we have the means in which to communicate with people of similar mindsets and prepare them for this work. Giving us the opportunity to state that we are working as quickly as we possibly can to solve the issues in the marketplace today. That those people who are out the trillions of dollars don’t see this, is one of those unique contradictions that we all know and love in the business world. Maybe they’ll realize the bureaucrats are feeding them a line and understand who is really working for their best interests. In time they may see that our efforts are to provide them with solutions to the bureaucrats failings, and that by providing them with options gives them the choice to move in the appropriate direction to solve their problems.

Our user community is the critical element of People, Ideas & Objects products quality. And they are much more than that. They are the means in which the oil and gas industry will affect the administration, accounting and operational strategies and changes in the industry. Software defines and supports the organization. As the bureaucracies have shown it turns them into unchangeable cemented fixtures. Without a dynamic user community with the power and control over the software that defines and supports the organization then there will be no dynamism in the oil and gas industry. We will simply re-cement the industry with the Preliminary Specification and live with the consequences of that. Not an acceptable outcome. We look to our user community to also provide the service provider organizations that will deliver our software and their services to the oil and gas producers.

The capability of the user community to enable this dynamism in oil and gas is provided through the user community vision. This grants them the effective control over all aspects of the software and ensures that they are the ones that are seen as the people who are able to make the necessary changes. People, Ideas & Objects software developers are blind, deaf and dumb to anyone and everyone other than the user community. We will have no Service Level Agreements with the producers. It will be the user community that is the exclusive organization in which to deal with the softwares form and function. The user community is designed to include approximately 3,000 part-time members and each will have an interest in one or more service providers that are providing a processes management to the entire oil and gas industry as their client base. Through licensing it is the user community that has full access, control and development of the Intellectual Property that makes up the Preliminary Specification and its derivative works. It is this power that will make them the effective go-to group to have the industry's problems solved. Which bureaucrat do you go to today to have your issues resolved? And if you find one, will they have the power to do anything?

We have set up a process where people can apply to become members of the user community. No one better than I understands the vindictive and insidious way in which the bureaucrats operate. This application process remains completely confidential until such time as the full resources of our budget are secure. There is no reason that anyone needs to risk their career as a result of being seen to be involved in this initiative. You can think of us as being in stealth mode until such time as it is safe from the likes of our good friends the bureaucrats.

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. 

My Pricing Analysis

The level of hope and anticipation that the oil price will finally begin its inevitable climb back to $100 is so strong this past week. Any news that was positive was heralded as a clear indication that things would be better soon. When you don’t have a plan. When all you do is sit around and watch the price of oil and natural gas, these can occupy a bureaucrats day. Therefore they are imputing anything and everything that is positive into any news. We also see the overall depression that sets in those days when the performance of these commodity prices aren’t on an upward trajectory each and every day. What we have also witnessed is many more people being shown the door. Those that have worked in the industry for decades, with mortgages and kids, who thought they had attained some job security are faced with the reality that they have little more than the starting laborer on a construction job. I find this element of the performance of the bureaucrats to be particularly vile as it was unnecessary. If they had only moved to the Preliminary Specification.

If you look at the recent price history for natural gas it began to decline during the financial crisis. In the first year it fell from approximately $13.50 to $2.75. Shale gas production grew from 5 - 8 bcf / day during this period. Bureaucrats who were thinking that this was attributable to the financial crisis, watched the market then move upward to a little over $6.00. In subsequent years the market fundamentally broke down from chronic oversupply. This as a result of shale gas reservoirs producing approximately 42 bcf / day today. The only time since then that the natural gas prices were on an upward trend was during the very cold winter of 2014, for the rest of this eight year period it has been more or less on a continual downward slope. Expect to see these same characteristics over the next six years in the oil price.

Rebalancing of that marketplace is therefore due to occur in 2105 by my estimates. Take for example the most recent news out of the Marcellus shale region. Production volumes had been in decline for the past year or so. As we know the Marcellus producers have been very fortunate to receive a price for their natural gas that began with a $1 in front of it. Pipeline capacity restrictions keep the prices severely depressed, yet the bureaucrats continue to produce. In the last couple of weeks additional pipeline capacity came on stream and the Marcellus region is now reporting an increase of 2 bcf of additional production.

What we have is a “machine” that produces. When oil breached $30 from its lows some investors were on Bloomberg saying they were investing in oil and gas again. Citing the opportunity of a lifetime. These bottom feeders were rushing in to buy the stock issuances of the producers at firesale prices. From the investor to the mail clerk this is a “machine” that does nothing but produce as much as it can get its hands on. Every nook and cranny of pipeline capacity must be filled at all times. No matter what the costs. Well, hell, who cares about the cost. Nothing must stay below the surface to be produced profitably later.

The other thing that was notable last week was the “strength of the producers balance sheets.” I must of heard this term being used for every class and every quality of producer in the marketplace. That they were going to “defend their strong balance sheet.” This has to be in response to my arguments about bloated balance sheets. If you want to see a strong balance sheet look at Apple’s. $76 billion in short term assets, $177 billion in long term marketable securities, $22 billion in property plant and equipment, and notably $5.2 billion in goodwill. Approximately the same amount of goodwill that both Encana and Devon have. The difference is that Encana and Devon have approximately the same amount of shareholders equity as they have in goodwill. Note too, that all three have approximately the same amounts of property plant and equipment.

These aren’t healthy balance sheets. These are testaments to the spending orgy that the bureaucrats undertook with shareholder and banker money. The subsequent elimination of most of the shareholders equity shows that the decades these bureaucrats have been in power have seen them destroy that money. Recall too that they have now written their assets down to the amount of their reserves times the prices at year end. These assets therefore represent the sum total of all future revenues of the producer. That’s not an asset! They have also destroyed the oil and gas marketplace by systemically over producing oil and gas. They did this in the 1980’s and 1990’s and they are doing it again. And if you think they will stop, you should read about the characteristics of shale reservoirs. This “machine” that they have developed, which can not be changed because it is the same “machine” that existed in the 1980’s, and shale based reserves, when combined are a toxic, destructive force. This “machine” must therefore be eliminated and replaced by the Preliminary Specification or we will have no industry left. People, Ideas & Objects is the only solution in which we can rebuild the industry to take on the challenges we face in the next 25 years.

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. 

Status of This Project

Why do producers continue to produce at full capacity when these prices do not generate profits? They need the cash. And so we have an industry, with such spectacular overcapacity, that will continue to produce for the little amount of cash that they can generate. Oil prices in the mid $30 range brought about a sense that the worst was over. And I keep pointing to the natural gas side of the business. I can announce at this time there will be no change in the operating strategy of the industry on a go forward basis. These losses and the continuation of the layoffs will not stop for the foreseeable future. We are about to enter a period of time in the oil and gas industry that I can only assume will be looked upon as its darkest ever. But the bureaucrats are safe. They’ve made it through the publication of their 2015 financial statements. They can now, once again, take the rest of the year off.

The situation in the marketplace is ripe for change, destruction is everywhere. Everyone can see this as clear as day. Overproduction in the commodities is killing the industry. There are trillions of dollars being destroyed. Our strategy was to appeal to the oil and gas investor community and to have them support People, Ideas & Objects. After all it is they who have suffered the most in terms of financial losses. Over $700 billion in lost market capitalization alone. I don’t use the label feature of this blog anymore, people can use the search feature much more effectively, but I had used the label “Investor” on 388 individual posts. This represents the number of times over the past three years that we made our appeal to the investor community. This was in addition to the many phone calls, emails and representations to those people in the financial industry. I was also aggressively pushing our message out to the international press attempting to accelerate our exposure in every area.

I am announcing today that the results of these efforts over the past three years are a complete failure. I can tell you today that the investors will not participate in the rebuilding of the industry in the fashion that was put forward to them by People, Ideas & Objects. What I think the issue is, is that the investment capital is separated from its owner and is managed by its own bureaucracy. They may see the issue as we do here, however they also see People, Ideas & Objects as regular business. There is also an expectation that a 5,000 man year software development project will be completed on a volunteer community basis that solves their trillion dollar issue, by tomorrow. They don’t necessarily see it as I do in the context of creative destruction and the need to actively make the radical changes to the industry that the Preliminary Specification dictates. Which of course is their choice and their decision to make. They have a relationship with the bureaucracy in the producer firm and will seek to work within the organizations that they’ve established. Hence they should schedule more losses in the future. It is clear to me that they need to feel more pain and misery. This will also come to be known as the time when you can find us passively waiting by the phone for someone to call.

My issue is the same issue that I have had since I first determined the Joint Operating Committee is the key organizational construct of the dynamic, innovative, accountable and profitable producer. That issue is that I glow radioactive. The bureaucrats know that I am toxic and eliminate their future in the industry. The press knows the bureaucracy will not support the initiative and therefore don’t get involved. Users, and many more of them these days, see their future in the Preliminary Specification more clearly than they do in the status quo. And we will continue to develop our user community. But we can now see that the investors in the oil and gas industry have not yet suffered enough.

Which leaves us with the question of where do we get funding. Our Revenue Model still stands and it is the producers who need to pay for the development of the Preliminary Specification. The oil and gas producers, as detailed in our Revenue Model, have a checkered reputation for not paying for the costs of ERP software developments. As a result they have to pay upfront, otherwise they’ll just abuse another vendor and I’ve played that game. It was always assumed they would pay these costs under the direction of the investors. I’ve said it a million times. Software defines and supports the organization. If the oil and gas bureaucrats never support any ERP software, then their franchise is never challenged because no “market” will be created without any financial resources. Ensuring the bureaucrats future.

How we source our funding is unknown at this time. I have never had the support of anyone in this initiative. It looks like it will be a lonely pursuit for a while longer. There is no doubt in my mind that the need for energy in the next 25 years is at risk with the current structure. That it will be more difficult to do this job is no big surprise to me. I went into it with my eyes wide open and titled our Preliminary Research Report “Plurality Should Not Be Assumed Without Necessity.” Explaining this as “It's not what you know that you do not know that hurts you. It’s what you do not know, that you do not know that will. It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to bring about a new order of things.” That was certainly the case at the beginning of this initiative and it certainly is the case today. Just because my job is difficult doesn't mean it doesn't have to be done. It does mean that we should brace ourselves for serious difficulties ahead. All hell is about to break loose.

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. 

Dead Cat Bounce

In an industry that is as capital intensive as the oil and gas industry is. Where all of the costs are in the capital costs of drilling, completion and equipping of a well. Where the monthly costs to operate outside of the royalties are minimal. Isn’t it odd that the bureaucrats choose to preclude the capital costs from the accounting of their performance. “Those are the sunk costs, we don’t consider those in calculating our costs to produce.” When senior intermediates like Devon Energy are depleting their sky high capital costs over the course of 13 years. You see the extent of the game that is being played in the industry. It is elementary accounting that you let your costs flow to the income statement. It’s how you recover the capital that you incurred when you spent the money. Are there no accountants employed within those vast layers of bureaucrats?

Oil prices rebound on speculation that some countries would freeze their production levels at the current output. I think this has led to the speculators covering their shorts. But we’ll see in the next few weeks what the market has in store. Mark me down as expecting to see further erosion in the price of oil. Why so pessimistic? Have you seen the price of natural gas. Into the $1.60’s this week, the sixth year of systemic overproduction. We went through a period of time in the 1980’s and 1990’s when there was chronic overproduction. All that was needed was for each producer to reduce some of their production in order to increase the price. It never happened and they all kept producing at full capacity year after year. Now we see the same phenomenon happening, if only they cut global supply by 2% they would realize an $70 increase in price, cover their costs and provide their shareholders with a return. Which as we calculated, is what is necessary to earn a profit. Now we have the overproduction phenomenon again, but with the added excitement of shale based reservoirs.

What is needed is for the industry to come clean on its accounting. What has gone on in the past has destroyed too much. And it is here that I blame the bureaucrats 100%. So much is being destroyed and we are seeing the irrational decisions of people such as Aubrey McClendon. I have to ask what would have happened if he had the Preliminary Specification operational during his tenure at Chesapeake? That is what I think we should look forward to in the next 25 years when people like him are able to do the building of the industry. And do so in a manner that is properly managed. Not one that is summarily destroyed by an uncaring, self interested bureaucracy.

I don’t hold out any change in the status of the industry. The bureaucrats are fine as they are. There’s no need to make any changes or to disrupt their lives in the downturn that we’re in. This downturn is being experienced by the shareholders, the bankers and the people who do the work. Cutting to the core of the organization leaves the bureaucrats in place and able to continue their lives as long as they maintain control. Who is going to make that change? A blogger? Which is what they have effectively reduced this initiative too.

I will be taking this next week off and will return on March 14, 2016.

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. 

Corrupt Accounting Practices Part III

We are left with an accounting of the costs of production and royalties in determining what the actual costs of production are for the oil and gas industry. These costs should be relatively straightforward and present no difficulty in determining the final number. We will then summarize the total costs of production on a boe basis. Beginning with the production costs, we’ll keep with the information that we used in the overhead and capital calculations, Devon Energy’s 2015 report.

For 2015 we have the Lease Operating Expenses and Production and Property Taxes that total $2.492 billion. These cost do not present any issues as they are all expensed in the current period and therefore reporting would not change under the Preliminary Specification. The calculation would therefore be to allocate these across the throughput of the company for the fiscal year. Devon produced 571,000 barrel / day and therefore these costs are $11.96 / barrel of oil equivalent.

Royalties are a bit of a difficult calculation to undertake. Most, if not all producers report their production as their share only. Royalties are the compensation paid in order to earn the title to the products produced. They are therefore in theory never the producers products and to report them as their products is to overstate their revenues. Therefore, in order to determine what the cost per barrel is we’ll have to calculate the royalties that were paid. There are two ways of doing this. I am going to take it from our cost point of view because we are in essence determining what the producer needs in terms of price in order to cover their costs. Therefore the costs to produce today consist of the overhead of $11.10, the capital $49.71, and the operating costs of $11.96. These total $72.77.

To impute a fair and reasonable royalty I’ll use what I think is an average industry value that is reasonable for both oil and gas. That is 18% royalties on all of the production. Therefore the prices needed to generate a 10% profit would be $101.05. If Devon were using the Preliminary Specifications price maker strategy they would immediately shut-in all of their production. As would every other North American producer. Which would lead to the solution to the problem. Then as the prices rose to around $80.00 they could start to bring their lower cost production back on stream. This is an extreme example that I am suggesting here. I only suggest such an extreme example to counter the extreme example that the producers chose to do when they mindlessly produce oil at $30.00 / barrel.

If your tactics are to produce to cover your cash costs then you will continue to produce no matter how much it costs you, and you will continue to do so for as long as you remain in control. There are other motivations that are in place that are leading the bureaucrats to continue to produce at these prices. And I think we have covered that topic. “Recycle costs” is the name of the game and it is played by determining what the price of oil is. Asking what cost would be necessary to be profitable at that price, and then stating that that is your cost of production. The significance behind the recycle costs is that the use of accountants, historical accounting figures and logic are not the necessary ingredients. You can make up the number that you need no matter what the price of oil or natural gas is. When someone asks you how you reduced your costs in such a dramatic way, in a capital intensive industry, that is based on historical accounting, tell them that you have been innovative in the field! There is a reason that this series has been entitled corrupt accounting practices. People generally go to jail for these kinds of comments and slights of hand. Just one mans opinion.

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. 

Corrupt Accounting Practices Part II

In the second part of this series we want to determine what the capital expenditures would be for a producer. Yesterday we determined that the payroll costs of a producer totalled $11.10 / bbl. It will be through this series that we’ll determine what the actual costs are to produce a barrel of oil in the current exploration and development environment. If we look at Devon, we need to determine a reasonable capital cost per barrel of oil produced for the 2015 fiscal year. We are not going to apply any ceiling test or incur any impairment of the assets. We’ll leave the balance of the assets as they were. However, we’ll look critically at the two components of the capital costs. The first being the capital expenditures in the current year. And secondly the amount of depletion recorded in the normal environment. We’ll assess these values, based on the asset balances, on a more reasonable basis to determine what I would, and I think most investors would determine to be a reasonable method of depletion.

When you capitalize everything under the sun, you significantly reduce the capital cost per barrel of oil. My thesis has been that the annual stock offering of each producer has subsidized the consumers of energy through this mechanism. The investor believing that the producer is growing their balance sheet by building value and reporting profits based on little to no costs being recognized, has distorted the actual costs of the industry. Only now after chronic, significant and unrelenting overproduction brought about by over investment do we see the extent of the performance of the oil and gas producer. The accounting, only now, seeks to remedy, in a single charge to the income statement, that which it should have done more appropriately each fiscal year before. Recognizing the actual cost of oil and gas exploration and production.

If the producers did recognize the actual capital costs of each barrel of oil in the appropriate manner these costs would have flowed off of the balance sheet onto the income statement. It would have been at this point that the producer would have been able to report a profit or loss and the investor could assess the capabilities of the producer's talents. Instead nothing was recognized, and any revenue was also essentially reflected as a profit. This distortion worked against the producer’s best interests. If they were recognizing their capital costs and reporting profits they would be realizing the return of their capital in the form of tax free cash from the prices they were charging the consumer. Generating the money needed to invest further in their business. Ceasing to issue stock annually to raise the capital expenditure program would also cease the chronic dilution of the investor base. This never happened, and with the overproduction, the prices were never high enough to truly make the industry profitable other than through convoluted accounting.

If we look at Devon Energy we see that they recorded capital expenditures of $6.324 billion and depletion of $3.129 billion. We need to reduce the capital expenditures by $1.2 billion for the recognition that it was G&A in yesterday's calculation of the $11.10 / bbl making it $5.124 billion. Before we make any calculations I want to question the substance of the depletion number and determine if it adequately captures the true costs of the production that year. The net capital recorded on the balance sheet sits at $36.296 billion as of December 31, 2014. Adding the 2015 capital expenditures the total becomes $41.420 billion This represents approximately 7.7 times the 2015 revenues. A high number. However, Devon is only depleting their capital costs by $3.129 billion or over 13.24 years. An even higher number. Again the question is why are we harbouring these costs for this period of time. Let them flow to the income statement so the cash that has been incurred to develop them can be retrieved. Are these precious works of art that must be kept for ever?

Let’s therefore reduce the amortization of the capital costs from 13.24 years down to 4 then the depletion for 2015 would therefore be $10.355 billion. Now we need to determine what the throughput of the organization was for the year and determine what the capital costs were for each barrel that Devon produced. That was 571,000 boe / day. Therefore the capital costs per barrel is $49.71. Now those that might find this calculation to be unreasonable may want to recall that Devon reported a net loss of $14.4 billion in 2015. Which is a net loss of $69.09 per barrel of oil produced. The key difference is my method would produce the same results for at least the next four years. Probably for all of the future years based on the level of capital expenditures in the current year. Whereas the actual 2015 loss is once in a generational accounting. And with the price maker strategy of the Preliminary Specification, prices of the produced products would exceed their costs and these capital costs per barrel would be returning to the producer in the form of cash. So we should really state that the company would have a cash balance at the end of 2015 of $10.355 billion in incremental cash. What do you know, a business! Wait, $49.71 plus $11.10 plus more costs to come, $30.00 oil price, maybe not so much of a business after all.

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.