Recruiting for our Leadership Teams Part II

Our user community has a very large leadership team made up of the many different talents necessary to make an oil and gas ERP system successful. The user community needs a full board of directors, a complete C suite of its own and what I think may be 20 or more of what are called product owners. Recruiting of these individuals will begin September 26, 2017, hopefully with the full support of the oil and gas industry and their resources. If we don’t have that support then we’ll be travelling our own road to provide the future oil and gas producers with the most profitable means of oil and gas operations. The earnings that are being reported in the second quarter should be evidence that oil and gas is far from healed, or on the road to recovery. It truly is a desperate situation and if the producers are unable to do anything for themselves at this point, then there won’t be a point in the future in which they’ll turn to us.

I foresee these losses continuing. OPEC this past week boosted the oil price in the short term. The question is for how long. I foresee a precipitous decline in the price of oil sometime this summer. One that will retrace the precipitous decline that occurred in the price of natural gas once the overproduction and oversupply issue was deemed hopeless and chronic by that marketplace. These producer losses and further commodity price declines will lead to the exit of the bureaucracy whose only response has been “market rebalancing.” They will exit the scene because they have no answer and the situation in the industry has become untenable. I think this nightmare scenario is what is probable for the industry prior to our September 25, 2017 software development start date. What we need to commence our software developments is our first year's budget of $100 million to be forwarded by the producers. Whether we receive those funds or not is not at issue with respect to the recruitment of the leadership teams for both the user community and People, Ideas & Objects.

The user communities board of directors will undertake the interesting task of determining how the user community should evolve over time. This will be an interesting development as the industry must be comprised of oil and gas producers that are dynamic, innovative, accountable and profitable. These being the underlying means in which it will be successful in the long run. The user community process needs to enable this. User communities could also be the future bureaucracy that achieves the further destruction of the industry. This will need to be managed by the members of the board of directors and ensure that the appropriate steps are taken to avoid the bureaucratic nightmare that user communities have and can become. There will be other responsibilities to be sure, this is the one that I am most concerned about.

The roles and responsibilities within the C suite are very well defined. Essentially don’t fail. Whether we take the path with the industry support or not is not our decision. It is our responsibility however to ensure that the option we have with the Preliminary Specification is delivered to the marketplace in a timely fashion. The industry has no other option than to adopt the Preliminary Specification. Society will need shale reservoirs and therefore shale needs to become commercial. The only way in which to make shale commercial is through the Preliminary Specification decentralized production model’s price maker strategy. Currently there is our solution and the ongoing destruction of the marketplace in which to choose from. Therefore we need to act accordingly and ensure that we do everything that we possibly can to deliver our product as quickly as possible to the industry. We have given the bureaucrats every opportunity possible. We can’t be blaming them for our own failure to deliver what we are now responsible for.

I’m including the product owners in our leadership team as their primary responsibility is the product that they’re assigned to. We will have at least 20 product owners, one for each of the modules of the Preliminary Specification, the user interface, the data model, mobile, test data, etc. These people will be part of the software development team in the agile software development methodology. They are responsible for representing and ensuring that the user communities needs are met and the overall quality are what’s required. A unique and critical role in the software development world and one which is enabling user community developments to be successful.

If any of these roles appeal to you please contact me. We are moving forward with the development of the organization September 26, 2017 with or without the existing producers and therefore, these positions are open now. I’m not expecting anyone to quit their job tomorrow and join these team’s. There will be a transition period where the work will be of a part-time nature with a full commitment necessary upon our funding being secured. There is no need for anyone to incur any career risk. And it is in that sense that all information will be held in confidence.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Recruiting for our Leadership Team's, Part I

In addition to the work that the user community and our developers will be undertaking in the first year of our developments. We will also be securing the full complement of individuals to fill out the needs of our leadership teams. There are two teams that need to be developed, one for People, Ideas & Objects and the other for the user community. The user community being a separate and distinct organization that is exclusively dedicated to the ERP needs of the oil and gas producers. The recruitment of these teams will begin September 26, 2017 whether or not the producers, as they stand today, join us. Our September 25, 2017 deadline is an opportunity for the oil and gas producers to deal with the overproduction and oversupply issues. With the companies being in the financial condition that they’re in. With their financial community taking a wait and see attitude. If the producers don’t come up with a plan on how to deal with the abundance of shale and the profitability of the industry. Then I believe, after September 25, 2017, if the producers haven’t proceeded with the developments of the Preliminary Specification, other producer organizations will be developed to replace the current producers.

Producers may believe that “market rebalancing” is right around the corner, and for all that anyone knows they could be right. They will have however lost the faith of the marketplace which will be looking to others if this current bunch can’t move off the tired and destructive process their on. Every opportunity has been given to these producers. September 25, 2017 which is the deadline I’ve set for the producers to participate in developing the Preliminary Specification. If they let this deadline pass then it will be for all intents and purposes, their last chance. Therefore, until the 26th of September we will assume that they’ll come to their senses and deal with their issues and propose a plan to the financial community of how they’ll move forward in a dynamic, innovative, accountable and profitable manner. And turn shale into a commercial operation by adopting the Preliminary Specification. When the financial community loses faith, rapid action is the only solution.

Effective September 26, 2017, should we not receive the support of the industry we will be dropping our offer of funding only the first years developments, and once again, expect that our full development budget be secured before we start any development work. Our value proposition is real, anyone can see the amount of value that is being destroyed as a result of chronic, sustained overproduction and oversupply. Trillions of dollars have been wasted already and many more before we’re finished. Our budget is not the issue in an environment where bureaucrats can be so wasteful and foolhardy. Our offer is therefore rescinded September 26, 2017, and we will expect the full proceeds of our budget to be provided before any work will be done.

Therefore our Leadership teams will be developed under one of the two possible scenarios that People, Ideas & Objects continues under. One being that the producers participatie under our current offer of providing the first years development budget by our deadline. Or we begin with the development of the leadership teams in anticipation of the full force of creative destruction dealing with the remnants of the oil and gas industry. People who are interested in these leadership positions should contact me and we can begin the process.

Within People, Ideas & Objects we will be recruiting as our first priority a CFO that is capable of managing a firm with our scope and scale. Although we will always be a private firm we have many responsibilities to the user community and the producers to ensure that our product is delivered successfully in the manner that the user community and producers expect. The strength of the CFO to undertake this task will require a senior individual with extensive experience in the role. The financial strength of People, Ideas & Objects will be one of the underlying foundations of our success and the CFO will be a critical element in ensuring that success comes about.

Our COO will be the one who heads up the software development team. This will be based in Houston and that individual will need to organize and build the Preliminary Specification under the direction of the user community. The COO will be responsible for the budget in terms of the People, Ideas & Objects development team requirements and deployment of Oracle’s portion of our budget. On Monday we will discuss the user communities leadership team and what roles are available there.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Oil and Gas Capitalization Policies

I’m certainly one to criticize the producers for the manner in which they capitalize everything that they touch and then never recognize any of those costs. It has become the only game being played by the producers and has led to the many distortions that we see in the marketplace. It is so misguided, in my opinion. The ability for a firm to turn over its capital in a rapid and repeated fashion would be considered a competitive advantage. In oil and gas you raise the money and retire it for the remainder of life on earth. It will just sit on the balance sheet for decades and never provide any subsequent value to the producer. Instead of passing these costs on to the income statement, where if they were receiving enough of a price to cover the cost of operations, overhead and capital, then they would have that capital being returned to them in a timely fashion for reuse in the payment of debt, issuance of dividends or future capital expenditures. The producers balance sheet would not have accumulated bloated balances of property, plant and equipment but instead, have a handful of accounts that balance off those assets in the current asset category. Cash, short term investments and other liquid assets would replace those otherwise stale and decaying, wasted property, plant and equipment balances.

So what would we do. People, Ideas & Objects think moving the majority of the costs to the income statement in a timely manner is the appropriate thing for the producer to be doing. In the high cost shale era, with its steep decline curves, deferral of the recognition of those high costs to the next decade is ludicrous. There are a number of changes that we would make to the way producers recognize the capital costs of oil and gas exploration and production. The first would be to reduce the period in which these costs are realized down to two or three years. That will provide a return of the capital that has been deployed within a reasonable time frame. The current excessive balances of the producers should be treated in this manner. That will also determine the costs of production of each property, which will be very high, and therefore under the Preliminary Specification shut-in much of the production in both oil and gas. Rehabilitating the oil and gas commodity markets as quickly as possible, I would suggest during the three year period that I mentioned. Then with the bloated balances of property, plant and equipment finally extinguished, normal operations will dictate somewhat lower prices that can be accommodated by a lower capital structure.

Secondly we stop capitalizing everything. All overhead in the Preliminary Specification is allocated directly to the property. This is through the service providers billing the specific property in which their accounting or administrative service was rendered. Recognizing the actual costs to administer a property is not capital its overhead and the recording of this as such will better represent the performance of the producer and the property. In the future only controllable material will be capitalized. The cement used to cement the casing and the casing itself are not retrievable. They are appropriately called intangibles. I propose we expense intangibles in the current period. These would include the costs of day work and fracing. How can so much of the costs of a well be recovered when they are intangible? I would even go further than this. Asking, if the producer increased their production profile then their capital was deployed effectively. If it was deployed to only maintain the production profile, why are we calling this capital?

Bloated balance sheets don’t explain or prove what the producer is worth. Accounting is not about determining the value of the company. The value of an oil and gas company is clearly presented in the reserves that it owns and the prices that it realizes. The historical cost is irrelevant, accounting is about performance. How much money are you making on the basis of a fair and equitable evaluation. Are you fooling yourselves by hiding all your costs in the future or are you retiring your costs effectively in the current term and therefore effectively deploying your capital? These are the points that should be discussed in the boardrooms of the producers. Not how “big” we can make the company by issuing more stock and spending money like drunken sailors. It’s all become so surreal that it has no basis in value any more and it's a farce. The investors don’t buy it, the banks don’t buy it and the industry should be wiser to it.

If we retroactively applied these policies to today’s producers on a pro-forma basis we would have a fundamentally different industry. Today’s producers wouldn’t be around. Removing 75% of their property, plant and equipment and processing that through 2016’s income statement would have eliminated retained earnings in all cases of the producers. It would also have eliminated the share equity. There would not have been the associated gain in cash as the prices the commodities were sold for was inadequate to truly generate a profit. Therefore these companies have been run into the ground by adopting a ridiculous capitalization policy. They have no money, they generate no earnings and the cumulative asset base of the industry isn’t worth anything worthwhile as it would require a trillion dollars each year to fund the cash shortfall.

By proactively putting this policy in place we would then be able to tell which producers are being run by the guy in the size 2 hat. The people who know what they’re doing from an engineering and geological point of view are going to have financial statements that stick out like sore thumbs compared to those with the size 2 hat. Today I couldn’t tell you which company is run by who. They all look the same and their performance is abysmal.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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 Thoughts on Integrations

The other day I read an article from PwC about ERP integrations. It was on Oracle’s website if you want to search for it there, I wouldn’t bother though. In it the author suggests that most ERP integrations failed. That as a result of these failures the overall scope of the integrations have reduced the financial commitment to within the range of $10 to $100 million. That many of the reasons for these failures was the lack of business focus of the implementation, many being driven by IT. It seems that not a lot has changed since the mid 1990’s in the world of ERP integration. I have a lot to account for in light of these facts. The Preliminary Specification is outsized and is breaking the mold of the traditional ERP integration. I think that’s a good thing. The one key advantage that I assert the Preliminary Specification has going for it is that most ERP integrations don’t have the gun to the head of their client. The producers have little choice in the world, it's build the Preliminary Specification or die, in my biased opinion. There are no alternatives that provide a solution to the overproduction and oversupply issues. And failure is not an option.

Lets address the elephant and the gorilla first. Our budget of $6 billion is different. Outside of the People, Ideas & Objects profit and my royalties our costs are $2 billion. A much larger number than what PwC is saying is the norm. The key difference is that we need to be looked at from the industry point of view. We are providing an ERP integration for all of our service providers who will be undertaking the accounting and administrative processes for the producers, the North American producers themselves and finally deeply integrating their interactions with the service industry. Not one individual producer. Therefore our costs are going to be much higher. If you take the $2 billion and divide it by the number of producers you’ll get a number that, on average, falls well within the lower range of the PwC numbers. However, we are covering off a much larger scope and scale of ERP application than under the current failed methodology. Each producer is currently attempting to integrate their ERP with those much smaller budgets. Therefore each producer is having to suddenly become “expert” at ERP integrations which is part of the reason for high failure rates. And as we have stated on many occasions the costs of overhead in the oil and gas industry, costs that are unshareable between producers, is one of the reasons for the lack of “real” profitability.

User community participation is another reason why we’re different than the standard integration. One third of our budget is allocated to the costs of building and maintaining this user community. As soon as the final edited version of the Preliminary Specification was published in December 2013 we began our user communities development. Our vision and the policies that support how our user community was established, what will make them a success were defined, and the recruitment of participants all began. We have been at this now for over three and a half years. Nothing will be done by People, Ideas & Objects developers that isn’t directed by our user community. They are the holders of the Intellectual Property of the Preliminary Specification, the research that went into that and the derivative work that they will generate. Lastly it is the user community participant that the dynamic, innovative, accountable and profitable oil and gas producer will be in exclusive contact with to have their needs, in terms of what the software needs to do, or how the integration is working in their operation. These four elements are the keys to how our user community is different than any other ERP integration and how we have planned on making the Preliminary Specification a success.

Our key constraint at this time is the speed in which our user community can think. Some may think it’s the speed in which the producers can act. I disagree. I used to think that, and before that I used to think that the underlying technologies were not robust enough to undertake an application of our scope and scale. The technology can now handle the type of application that we’re building. The user communities speed is at an infantile pace where it is unable to crawl at this time. Which is to be expected. However, in comparison to where it needs to be in terms of addressing and resolving the issues and opportunities of the oil and gas producers that is inadequate. The primary issue is money. Producers can’t expect, which has been their modus operandi, that someone will do this much work for them for free and expect to get paid when they deliver it. Read our Revenue Model for how we’ve addressed this. We’ve played the producers game before and think we’ll sit the “next time” out. So for the user community to develop at the speed that is necessary to approach this issue we are going to need to see some of that industry cash. It’s not the user communities problems, it's the producers.

I’m sure many bureaucrats will undertake integrations in the next year to try and deal with the issues and opportunities that they face. It might provide them with an excuse to appear to be doing something to fix what ails their company. In their “cost control is everything” mindset they will pay the $10 million and get what they paid for. Who knows they could even get lucky!

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Two Months To Go

It would be reasonable to assume that oil and gas producers have had two issues to deal with this past decade. The chronic overproduction and oversupply of both natural gas, initially, and subsequently oil. The second issue has been me on the sidelines barking and criticizing their every move. I have to say that I prefer this side of the fence. It’s been more enjoyable. Though the bureaucrats would love to have me removed from the scene that would do nothing to rid them of the overproduction and oversupply issue. It would have been easy for me to have walked away from this life consuming idea that I could fix the overproduction and oversupply issue. In what is our twenty-sixth year, the issue is ever present and the damage done to the industry is far in excess of what I ever thought it could be. I feel a compelling responsibility to continue. This hasn’t been beneficial to me in anyway. I have not received the support from the industry at any point during these past twenty six years. I put that down as the nature of software having all of the costs up front. If we get to the point where revenues are generated then I will benefit because of the material impact that we have in the oil and gas industry. My suggestion is that time is short and the need for the oil and gas producers to think clearly is necessary. I am not their biggest issue, life without me, may be.

Today is the 25th of July which means there are two months to go before the start of our developments. If you’re interested in joining our user community you should be actively preparing your application for submission anytime before then. We are looking for the first 100 of about 3,000 individuals that will participate in our user community. These are part-time positions that will define more of the Preliminary Specification in terms of the necessary detail. If you want user community based ERP systems in oil and gas then you know what you’ll have to do. There is nothing that will happen at People, Ideas & Objects without the explicit direction of the user community. People, Ideas & Objects are user community based, which is reflected in our overall vision. That is the only way in which to make systems usable and functional for you the end user and producers that need them. Everything else in my opinion would be a waste.

I am unaware of any response to our call to the producers to fund our first years developments. The level of deception that they’ve convinced themselves of is very evident in the Encana financial statements. Everyone in the world is looking to the North American producers for a response to the overproduction and oversupply of oil in the marketplace. The Preliminary Specification is the solution to that issue. It is not my solution, it is the solution. It is the result of ten years of research into what would be necessary if the industry used the Joint Operating Committee as the key organizational construct. And, there is nothing else available. Any other idea can not tread on my Intellectual Property and would take at least ten years of research to complete. Therefore the producers have backed themselves into the corner where they have no options. Lastly I would point out the Preliminary Specification is robust at 175,000 words and approximately 1.4 million words of research. The solution works and is a viable choice for the industry to solve the problems that it’s faced with today.

Blaming OPEC may hit a fever pitch again today. They begin their meeting regarding their production sharing agreement and what to do about the chronic overproduction of the shale producers. I don’t see a lot of pressure on them to do anything. The fault of the issue is now clearly on the North American producers. They can accept that or reject it and govern themselves accordingly. And OPEC can do whatever they like. Saudi Arabia’s cost of production is $3 / barrel, they can continue to produce profitably for a while longer. Whereas the North American producers break even point is at today’s prices. Which means they’re covering their production costs. The North American producers need to understand that with twice the volume of oil available for the market until 2050 a means of production allocation based on profit is a necessary element of their business. That is the Preliminary Specification. Otherwise OPEC will just produce what the world needs at whatever price that is offered. Putting the North American producers out of business. Which at this point, with these financial statements is about 15 minutes of miserable life left.

North American producers face an existential crisis. Act to develop the Preliminary Specification on September 25, 2017 or be eliminated from the marketplace through overproduction by OPEC and other lower cost producers. We see that OPEC are doing everything that they can and blaming no one for the difficulties. It might be suggested that Saudi Arabia’s costs are much higher, and that would be an academic argument based on the costs of their government. I would therefore suggest that the North American producers undertake to include the Federal debt and fiscal budgets of both the U.S. and Canada for comparison purposes.

I have argued here for an appropriate policy to deal with the issues as I see them in the industry. I have offered a solution to those issues in the Preliminary Specification and user community. My argument may have been acute at times, however that is only as a result of the bureaucrats behavior towards me and the continuation of the foolhardy way the industry has been run into the ground. I am not the enemy. I am the one trying to solve the industry's problems yet the bureaucrats are too thick to even acknowledge the issues. They point to OPEC, or the warm winters as the reasons that their performance and operations are so poor. Or they outright deceive themselves as Encana did last Friday with their comical financial statements. Their opportunity to deal with this is coming quickly. September 25, 2017 will arrive and there needs to be a solution underway by the producers otherwise we will be building it without them. It’s that stark and real at this time.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Encana, Perhaps the Most Profitable Company on the Planet!

Last Friday was the beginning of the second quarter reporting season. Encana and Husky started off the season with their reports. These being Canadian companies, it would be difficult to discern anything from their reporting. As bad as the recording of every transaction as an asset in property, plant and equipment is in oil and gas. The Canadian producers have made the preparation of financial statements a complete farce. They are far too extreme in their capitalizing of everything and recognizing nothing in terms of the costs of production. They make the rest of the industry look almost normal. As I’ve said many times it’s the regulations that allow the producers to book assets in this manner. The issue that I take is that it’s at obscene levels after four decades of practice in the industry, where every producer goes to the limit every fiscal year. The one positive is that revenues are up 50% which helps. That is however much lower than the 300% that we recommend the producers need in order to recover from the crisis and prosper.

Husky has $15.8 billion in property, plant and equipment, or as I call them, unrecognized costs of past production. These “assets” are generating $2.2 billion in revenues for the six months of 2017. Certainly oil and gas is a capital intensive industry. People, Ideas & Objects proposed policy would be to therefore realize the costs of that capital as quickly as possible. That imputes that the prices you would sell your products for would be adequate to generate profits. If the assets were unable to generate a profit then you would shut-in the property until such time as they could be produced profitably. Accelerating the depletion of their capital would therefore enable the producer to turn over their capital in rapid fashion. Enabling them to pay down their debts, declare dividends and fund their own capital expenditures. In the past four decades producers have raised capital from investors each and every year to pay down debts and fund their capital expenditures. Causing the industry to slump into a situation where it was consuming capital to discount the price of the commodity on behalf of the energy consumer.

The only recommendation that I can make after reading Encana’s financial statements is for everyone to sell their Apple stock and buy Encana instead. Encana have taken the ridiculous to the level of the surreal and then made a mockery of financial statements. Everyone should look at these as testament to the level of stupidity that this industry has become. Suddenly, Encana has 32% after tax profit margins! Their capital expenditures are 214% of what their depletion is. Yet, their production profile is constant in the first six months of 2017. Implying those capital expenditures did nothing to expand the production profile and, in my opinion, should therefore be considered operating costs. At the current rate of depletion they will take 11.25 years to eliminate the current property, plant and equipment balance of $8.5 billion. In addition, Encana has the audacity after carrying retained earnings of $12 million at the end of 2016, of increasing their goodwill by $23 million to $2.8 billion. The other feature of Encana’s cost control is their reduction in G&A from $140 million in 2016 to just $82 million in 2017. Anyone want to guess where that 42% reduction in G&A went to? Property, plant and equipment. This is how they’re able to generate these profit margins. By deferring the recognition of any cost in the current period to property, plant and equipment. And then stretch the recognition of those costs out well over the next decade and then some. And then finally, as if that’s not enough, allowing that account to balloon ever higher each year by spending twice as much money as they recognize in depletion.

One would assume that earning 32% profit margins would have provided the organization with difficulty in finding places to stuff all that money. Well except for Encana, or for any of the producers in the past four decades. The reason money was raised each and every year from investors and banks was to keep the energy consumer subsidized. Producers for the past four decades have consumed more cash than can be stacked in a pile to the next galaxy. In the case of Encana during the first six months of 2017, their $762 million profit consumed $439 million in cash to produce those earnings. Wow?

Where’s the integrity. Where’s the understanding that you're running a business and attempting to reflect the policies of the administration through the accounting that’s being reported. Every producer is hustling all their costs to future recognition so that their current quarter is as good as it could ever conceivably be. Meanwhile their contribution to the systemic industry wide overinvestment is overproduction that causes prices to be about one third of what are necessary. This Encana report is the most obscene one I think I’ve ever seen. They have so distorted the reporting of their operations that the business is a failure and they report it as perhaps the most profitable company on the planet. The deception is complete and thorough. The only problem is that the ones who produce the reports are the ones that’ve been deceived.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Third Friday Off

Individual Actions

If you compare the effort that went into the research that was prepared for the Preliminary Specification, the Preliminary Specification itself, and the work that we’ll need to do to implement it, to the theory of “market rebalancing,” and all that it entails, we can see the attraction of it for our good friends the bureaucrats. The financial condition of the producers is beyond anything that can be rehabilitated. To put the producer firms in the proper perspective you must take 75% of the property, plant and equipment account and move it to depletion in the current period to reflect a true measure of the situation at any of the producers. Then you’ll know the futility of the activities these bureaucrats have been involved in. Storing unrecognized costs of past production as property, plant and equipment has become obscene and is reflected clearly when you adjust their financial statements. These producers will argue that it’s just accounting, and I say exactly. Accounting is about performance and I certainly would not want to be responsible for this either.

Without the wholesale changes brought about by implementation of the Preliminary Specification this culture of destruction will continue. “Where is the outrage” at this performance in the industry? It only exists at People, Ideas & Objects and our user community. The bureaucrats have bought into their self serving ways and have it so good that they would never make the change. We all know that these types of situations can never continue for ever. And the end is arriving later this summer. A time when we’ll see these bureaucrats exit the scene and the chronic unprofitable overproduction finally breaks down the oil price as it did the natural gas price almost a decade ago. So how does this get fixed. If we listen to what is said today, it's business as usual. There is not a concern on the horizon and everything is going to work itself out over time as it always has. There is, and always has been, a decided lack of leadership in oil and gas. Right now the business is about drilling wells, issuing stock and spending money. What more could be involved? Outside of this there’s been no leadership whatsoever.

So where does the leadership come from in the future under the Preliminary Specification. Instead of looking to the bureaucrats to act we will have the individual actions of those within the industry with the capacity and capabilities to act. Those individuals being the user community participants and the service providers in which they own and operate. Through the user community vision they have the means in which to act to make the changes to the process in which they manage in their service provider organization. They have the ability to change the Intellectual Property that makes up the ways and means of how the industry operates. And they will have access to the People, Ideas & Objects software developers to have their changes made in the software. Therefore no one will be sitting around wondering who to contact to make the changes that are needed in a certain process. It will be the user community participant at that service provider who operates that process. And they will be willing and capable to act.

Once we’ve implemented the Preliminary Specification we will have achieved the big changes that are needed to be made in the industry. The subsequent iterative changes will be able to keep the industry in the position where it will address its opportunities and issues proactively and constructively. Providing the oil and gas producers with the most profitable means of oil and gas operations. We’re now seeing how destructive the industry can be when the producers lose sight of what it is they’re doing. Without profits there is no money. Without money there are no jobs, no taxes to balance the government's budgets, no royalties and the rest of the difficulties that we are currently faced with.

The bureaucrats have been nothing but self serving for the past number of decades. This has been at the expense of the health and welfare of the oil and gas business. That is not to say that the user community participant and service provider will be living in acute poverty to serve the oil and gas industries needs for profit. Not in the least. I see these as very lucrative opportunities for those people. User community participants and service providers will be very profitable businesses. When the oil and gas industry is profitable, and profitable in the real sense, not the sense that has been contrived for the past four decades, then those that are able to provide real value for the producers will also be profitable.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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.

Failure By Any Measure

I can suggest that I occupy an obscure corner of the Internet with my rantings and ravings about the bureaucrats. Which I do, there just are not a lot of people outside of oil and gas that come back to a website dedicated to oil and gas ERP systems. And the bureaucrats are frequent visitors who are well aware of what we’re doing and offering. They’ve known from the beginning, they must have because that’s when the beatings began. It’s also the time when other groups began publishing similar work to what we had published back in August of 2003, during our research and the Preliminary Specification. It appears that until then bureaucrats were unaware of copyright provisions and laws. However I’ve now informed and educated them. The point I’m making is that I may occupy an obscure area of the Internet but I am not unknown by the bureaucrats in the industry. It’s not that they didn’t have the opportunity, or didn’t want what People, Ideas & Objects and the user community have for themselves. Its that they don’t want to be challenged in their franchise and they don’t want to work as hard as the changes in the Preliminary Specification would dictate. They’ve had it pretty good before the Internet came along. They just wanted to keep it that way.

People, Ideas & Objects and our user community have a plan that builds the Preliminary Specification as a replacement to the current bureaucracy. Brick by brick and stick by stick. All as a result of the lack of action on the bureaucrats behalf and the destruction that they’ve caused in the oil and gas industry. There was plenty of time in which our remedy could have been implemented. Instead the only thing we’ve heard is the “market rebalancing” story that has no basis in fact or reality. It’s the lazy man’s excuse not to do any work and it has been very effective in oil and gas. Throughout the time that they have been singing in harmony about market rebalancing they’ve been fully aware of the Preliminary Specification and the fact that oil and gas commodities are subject to the characteristics of price makers. There’s has been a self serving and irresponsible mismanagement that has brought us to this point that we are in this summer.

Who knows, maybe oil and gas prices will rally in a new commodity super cycle. I’m not seeing oil and gas participating even if that were the case. Shale is a new variable in the market that requires new thinking and new actions to be taken by producers. Producing everything, always when the world has twice what it needs for the next 33 years doesn’t seem to be a viable business to me. Production discipline based on profitability is the only reasonable methodology to allocate production in a marketplace such as the North American producers. If the property is profitable, considering all of its costs, then it will produce. Otherwise it remains shut-in until some innovation can be developed by the producer to reduce the costs, increase the throughput or expand the reserves. Then it can be placed back on production profitably. But only then. This attitude of producing as long as the property breaks even is ludicrous. It maybe a tactic to be employed in the extreme short term in temporary crisis situations. It’s not a long term strategy for an industry to employ for decades. And that’s what has happened in North American oil and gas. Don’t believe me, just pull up an oil and gas producers financial statements. Look for the obscenely bloated property, plant and equipment and realize that these numbers represent the unrecognized costs of past production.

I am unaware of an industry's failure on the scope and scale of what I see the North American oil and gas producers facing in the next few months. Maybe it's just that the Internet has compressed our timelines and things happen much faster than they would pre-Internet. Faster and with more fallout. What you could maybe muddle through twenty years ago can’t be done anymore. There’s too much risk. The resiliency of the producers, the desire of the investors and bankers to step in and help the producers through the tough times will get the industry through about 15 minutes of the difficulties that we’re about to face. After that, what? What will the genius bureaucrats do when the oil price collapses and even they don’t get paid? All I can say is it’s going to be interesting. Our plan is to start developments on September 25, 2017. You should consider what you’ll be doing then?

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Participation Ribbons, All Around

The bureaucrats have found a new tool in their management toolbox. Breakeven analysis. I’ve seen the term mentioned many times over the past few days. It must be the new talking point for the upcoming second quarter reports. I would suggest that they fully explore what breakeven analysis means and the implications of what they’re saying. Breakeven takes the variable costs and deducts them from the sales price to determine the contribution margin. The contribution margin being the amount of money that the firm will use to offset the fixed and capital costs, this would also define the profit margin. So what the bureaucrats are saying is that their “breakeven is at $45” which means they're only covering their variable costs. Excellent work! Participation ribbons all around. The other problem that I have with this, which is what’s being implied by these statements, is that you can’t run an industry by just covering your variable costs for four decades at a time. At some point you will be required to earn enough money to achieve the level of what are called commercial operations.

I’m also hearing producers saying that they’re more cost competitive than the producers in OPEC. That therefore this competitiveness justifies their continued production as they consider themselves the low cost producer. However if you look at the marginal cost per barrel of oil production Saudi Arabia’s come in at around $3, UAE’s are at $7 and the U.S. shale producers are at $73. What North American producers want to show is the $104 in costs of Saudi Arabia’s society that is supported by their oil revenues, which is a specious argument. What OPEC do with their net proceeds from oil is their business. For producers to fail to identify they need to base their operations in the North American financial markets. Which are markets that are driven on profits based on standardized accounting. It is therefore within these financial markets where their focus should be on generating real profits. Comparisons to others using phoney numbers is typical of this bunch.

The last few days I’ve detailed a number of scenarios where a Chernobyl like event was going to occur this summer as a result of the inaction of the oil gas producers bureaucrats. Where oil prices would decline precipitously and the bureaucrats would seek greener pastures. Now let's assume for a moment the bureaucrats point of view that all is well and that none of the scenario’s that I’ve detailed here are of concern. Acceptance therefore of the status of the industry is the approved and general consensus by those who run the industry. How could this be? Have we lost the will to be accountable and perform. And choose instead to hide within a bureaucracy so that we are unknown, unidentifiable and most importantly unaccountable. When was this level of performance, year after year ever acceptable. And to continue on without a single initiative other than the status quo. We are leaderless and unacceptably so. We were originally told that the market would rebalance in 2016, now it's 2020, and that’s the story now for at least until 2019. Natural gas isn’t discussed anymore since it never rebalanced in 2009 or since. How would this ever be acceptable anywhere else?

Oil and gas bondholders are coming under stress again. Who cares, the bureaucrats received that money years ago. There was no shortage of Stampede spirit from the bureaucrats this year. It’s time for them to turn their attention to vacation now. Fiddling while Rome burns. With a willing media bought into the rebalancing story there is no way this gravy train could ever derail. That is the sense that I am picking up from the industry. Outside of the People, Ideas & Objects user community there is a frightful lack of concern regarding the health and welfare of the oil and gas industry. President Donald Trump gave a speech in Poland recently. In which he questions our resolve to defend our way of life. Asking specifically if western civilization can build from here? Now I see the President quite a bit different than most. I see a 70 year old man with a 757 and loads of money who can do anything he wants. And he gave that up because he was concerned. Not only concerned but did something about it. And he stands there day after day fighting for what he believes we should be doing. Setting the example, that’s leadership.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Self Preservation as Motivation

Can you sense my frustration, it's not fun adopting the chicken little stance of the sky is falling. On the Internet there are many of us who are preaching doom and gloom. It’s hard to break away from the numbers so I’ve made myself as comfortable as I can. That hasn’t stopped me from doing what I think needed to be done. Development of the Preliminary Specification and the user community are parts of that. I read late last week that OPEC’s compliance to the production sharing agreement had dipped to the lowest level in June. Reaching 78% compliance from 95% in the month of May. OPEC had been diligent in terms of their compliance to the agreement. I guess they’re giving up on making the difference. The industry executives and the IEA are also beginning to sound highly pessimistic regarding the lower for longer situation. Suggesting it will now be 2020 when rebalancing occurs.

I have to say it’s starting to get pretty crowded in the oil and gas sector of our corner of the Internet. I wanted the industry to avoid this Chernobyl situation that I’ve predicted, the one that the Preliminary Specification addresses specifically. Overproduction and oversupply are features, not a bug of the bureaucratic business model of the oil and gas producers. I think people are beginning to see how chronic and unending it really is. It never stopped in the 1980’s and 1990’s. And nothing will stop it today, other than the Preliminary Specification being implemented across the North American sector of the industry. Bold statements are my forte. It’s either we learn to live with total Chernobyl level destruction or build the Preliminary Specification. And when it comes to destruction, what do you think will be happening now as we see the optimism slipping away from the leadership of industry?

I learned late in life that things like People, Ideas & Objects didn’t get built in the normal course of business. Winston Churchill in a May 2, 1935 speech in the House of Commons stated one of his famous quotes regarding the buildup to World War II.

There is nothing new in the story. It is as old as the Sibylline Books. It falls into that long, dismal catalogue of the fruitlessness of experience and the confirmed unteachability of mankind. Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong -these are the features which constitute the endless repetition of history.

Self-preservation is going to be the motivation that builds the Preliminary Specification. The jarring gong will be heard this summer as a result of the Chernobyl like events that I’ve suggested were in our future. Those being the exit of the leadership of the industry, and the collapse of oil prices. But it would seem that history tells us the jarring gong is necessary and that unfortunately is where I think we’re headed this summer.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

The Deluded North American Producer

First of all I would never accuse a client of being deluded. That may be a hint as to what I think the North American producers should be doing. Some may think it unwise for me to call them deluded. I don’t, the bureaucrats will be skedaddling here very soon so we’ll be hearing a lot worse from everyone else about them soon enough. At some point producers need to recognize that their inaction is no longer working. If nothing is done by them the two scenarios I put forward yesterday have very high probabilities of happening. And if those scenarios do play out, then what? Is that the clear indication that we’re looking for that “market rebalancing” is a failure? To continue from this point without a plan of action is very foolish. If this comes about, to blame and accuse others for the difficulties in the industry will have more than this posts title calling them deluded.

If producers are so profitable where’s the cash? The industry has been run off the annual shareholder fleecing for over the past several decades. It didn’t necessarily matter that you were a good geologist or engineer. If you were a lawyer or someone with a rolodex of people in New York you too could run an oil and gas company. The only way to run a company was to ensure that you raised money each and every year of your existence. That way “spending like a drunken sailor” could be replaced by the “spendthrift oil and gas industry.” I was told who needs profits a thousand, million times when we adopted our claim that we provide oil and gas producers with the most profitable means of oil and gas operations. People told me I was many things far worse than deluded, it gives me great pleasure to pass on some of the same sentiments now. The only thing is that I propose we generate trillions of dollars in value as opposed to their destruction of trillions of dollars in value. I also carry the welts and scars of repeated sessions with the baseball bats out back by the dumpster.

The fact of the matter is that the situation is out of hand and requires immediate remedial action by the leadership of the industry. However that leadership seems consumed in pointing the finger at OPEC’s misdeeds in not reducing enough production. This is the precursor, in my opinion, to the mass exodus that we'll be witnessing once the summer is over. To adopt the Preliminary Specification as that remedial action would be too much for the bureaucrats to do, as it eliminates them from the scene. We disintermediate them like bureaucrats are being disintermediated in so many other industries today. Therefore they’ll just leave.

Speaking of facts, the configuration of the oil and gas marketplace is one in which the North American producer has every right to criticize others for. As has been noted in many places the fact is that we have adequate supplies of oil to meet the projected global demand twice over until the year 2050. So by all means the high cost producer should go about unprofitably overproducing in order to collapse the commodity markets. North American producers produce about 10 million barrels which is equal to an amount of Russian exports and 30 million in OPEC exports. Why doesn’t Russia and OPEC who are 80% of the market just produce whatever they can until they’re 100% of the market? Who’s going to rush in to save the North American producers? The investors have had enough, besides, by then the management will have hightailed it into other industries. Seems like Russia and OPEC will be close to earning that 100% market share and they didn’t have to do a thing! In fact they look like the intelligent and reasonable people trying to remediate the market by reducing production in an oversupplied market.

The one fly in the ointment of my little scenario here is that the producers do have those glowing and well defended balance sheets. Like super hero’s they’ll be able to wield those balance sheets like shields and protect everyone from harm. Well that’s what the producers think. Bloated balance sheets are useless. They’re a ruse that has the spendaholics in the industry thinking that they build value by spending money. The bloated balance sheets are tributes to the scope and scale of the spendaholics. Nothing more, and that will become very clear when once again this quarter we hear the CEO’s stating they’ll defend their balance sheets.

I’ve been trying to put the situation in North American oil and gas into context of what it is in terms of a crisis. It’s not 2008 as the limited nature of North American oil and gas is not as significant as global banking is. I think that the perfect analogy in terms of a disaster is the Chernobyl meltdown. Completely avoidable but for the bureaucrats, and certainly not a place where anyone will be visiting soon.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Clouds on the Horizon

The Preliminary Specification changes the way the oil and gas industry operates. Moving it from the position of a price taker to one that is a price maker. The industry today is operated on the assumption that no matter how much oil or gas is produced the market will take that production and there will be no impact on prices. We should be very thankful and frankly grateful for the bureaucrats who have provided us with such good data in this area. Both during this past decade and during the late 1980’s and 1990’s. People, Ideas & Objects provide this price maker strategy by providing the oil and gas producer with the most profitable means of oil and gas operations. Producers foolishly believe that producing only profitable production is collusion and will incinerate themselves to prove it. They need to get their heads around the concept of price maker and the implementation of our strategy before too much longer.

I have documented the technical differences between price maker and price taker in the Preamble of the Preliminary Specification. Please review it for further details of how the oil and gas commodities hold the characteristics of price makers. If we want to have the oil and gas commodity markets change their behavior then we’re going to have to change the behavior of the North American producers. These producer changes are going to have to be made before there will ever be any changes in the commodity markets. This will require the implementation of the Preliminary Specification. Just think of the number of years that we’ve been in this economic decline as a result of low natural gas prices. And how many years have oil prices been depressed. I can assure you, based on the history and behavior that I saw in the late 1980’s and 1990’s that there will be no changes in either the commodity markets or of the producers if we just give it more time. The level of destruction has been too severe as it stands now. If the situation is as I suspect this summer, we are about to experience a crisis of leadership and financial liquidation.

The producers have employed what could be considered strategic patience in letting the industry muddle along through this destructive phase. Now everyone sees that the North American producer has to act to deal with the situation. Everyone sees that the producers have nothing in terms of an answer for the market. Investors and bankers may form the conclusion that shale is non-commercial. There is nothing for investors in the North American sector of the industry. Except for losing their investment, joining with the bureaucrats in admiration of the producers bloated balance sheets or participating further with suicidal producer firms that require you to invest more cash, or they’ll go under. If an investor raises these points what will a producer argue? We just need more time! Enough time has been wasted watching everything go to waste. At what point will action occur?

You could argue with me about the timing of the collapse of oil prices this summer. And I agree that it may not happen this summer, but does anyone doubt that it’s in our future? Can the industry afford to lose another year due to inaction? If the investors, after employing their own strategic patience with the bureaucrats, expecting them to have done something about the situation by now, are on the verge of determining that oil and gas is uneconomic, why would it be necessary to prove it? Another year will only make it more difficult to convince the investors that you’ve subsequently obtained that old time religion of profits. Another year will also invoke that scenario of BP’s Chief Economist where the low cost producers decide to get some value for their product and just produce at whatever price. OPEC has seen what happens when they cut production. North American producers rush in to fill the void. If you wait another year, OPEC will certainly outproduce you and your investors will have lost their strategic patience. How can producers proceed forward from September 2017 without a plan in place to deal with these two highly probable scenarios?

Who will save these prices from falling further for a decade or more and who will save the industry? What can the North American producers do to prove to their investors that they have the situation in hand and will remediate it, and what actions will give OPEC the assurance that they would be premature in giving up on the undisciplined North American producer. That they indeed had become producers of profitable production and would be responsible participants in the market! To be candid I’m putting my money on Santa as being the one that saves us, because he arrives much sooner than the Easter Bunny and they call me an optimist.

We have a plan called the Preliminary Specification that the North American producers can adopt and begin developments on September 25, 2017. If they hustled they could look like they were men of action. Women too. We need our first years financing of $100 million of which, as I’ve stated many times before, I’m doing nothing about. I expect the producers to organize themselves and raise this cash. If they’re relying on me and the resources that I have, then they’ll be letting their investors and the other participants in the oil and gas marketplace down in a big way.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

And One More Thing

Yesterday I suggested that we should develop the Preliminary Specification. A little self serving and all that, however the one recommendation that People, Ideas & Objects has made for the producers to resolve these chronic and unending difficulties. Is the tripling of oil and gas revenues by tripling the price of the commodities. This is the only way in which to move forward as an industry. These higher prices will begin to reduce the capital costs of past production carried on producers balance sheets as property, plant and equipment and account for current depletion. The total of which People, Ideas & Objects have calculated at approximately $76 / barrel. These higher oil and gas revenues will help to remediate the current desperate financial position of the producers and enable them to recapitalize their organizations and develop more appropriate financial positions. Without the support of investors and bankers there is little else that will work to heal the destruction that has occurred in the marketplace and the ongoing damage of low commodity prices. Then we can approach the difficult future we have in terms of providing the energy consumer with affordable energy. This will require substantial investments in all areas of the energy infrastructure and deliverability over the next 25 years. Is it the expectation of the bureaucrats that the investment community will continue to subsidize the energy consumer for these costs over these next 25 years? It would seem so.

To suggest that we triple commodity prices and maintain affordable energy for the consumer seems to be a bit of a contradiction. I’m not so certain. Most of the cost of energy is consumed in taxes, infrastructure and delivery. The commodity itself is not a large component of the energy consumers price. A tripling of the commodity prices may see, I’m not certain of the amount, only 50% increase in the price of gasoline etc. Investors have been burned. The industry is in shambles. And the demands for capital in the next 25 years is historically high. The industry has shown no capacity to identify or deal with the pressing issues that threaten the industry. The bureaucrats are oblivious it would seem to the situation. They point the finger that it’s OPEC’s fault and responsibility, that “market rebalancing” will arrive despite their chronic overproduction and their prayers for cold winters has just not resolved the situation. I’ve seen the bureaucrats playbook, it consists of two pages, one says muddle along the other says do nothing.

The Preliminary Specification enables the producers to achieve the tripling of commodity prices by beginning the appropriate accounting of each property. Where the capital costs are recognized on a timely basis, the operations and actual detailed overhead are accounted for properly. No overhead allowances, actual overhead at each property. Then with the Preliminary Specifications reconfiguration of the producer firm to include only the C class executives, the earth science and engineering resources, some land and legal, and support staff. With the accounting and administrative resources reallocated to service providers who are focused on one specific process and have the entire industry as their client base. Using specialization and the division of labor as their key competitive advantages. Then if a property is reporting that it is profitable it continues to produce. If in the next month it is not producing a profit it is shut-in and enters the producer's inventory of shut-in properties to enable it to innovate by reducing its costs, increasing its deliverability or expanding its reserves and returning it to profitable production. No collusion, just independent business decisions being made at the property level on the basis of actual, detailed accounting information. Bureaucrats will call it collusion only to confuse the situation and avoid the work of building the software.

By using the Preliminary Specification the producer increases their profitability by only producing profitable properties. No unprofitable properties dilute the earnings of profitable properties. The commodity markets have the marginal production removed from the marketplace increasing the commodities prices. The reserves are saved for a day when they can be produced profitably and the reserves costs don’t have to carry the additional costs of successive losses on the property. These attributes are enabled through the Preliminary Specifications task and transfer network where the information that drives the work of the service providers will not have any information for those properties that are shut-in. Therefore no work will be done from an administrative or accounting perspective and as a result no billings from the service providers will be generated on those shut-in properties for that month. Creating a null operation at that property. No profit, but also no loss. Enabling the producer to scale up and down their deliverability based on the prices provided in the commodity markets. One month they may be profitable at full production of 100,000 barrel / day and another month they will be profitable at 25,000 barrels / day. The Preliminary Specification creates dynamic, innovative, accountable and profitable oil and gas producers.

How much production needs to be scaled back and which properties are profitable are unknown at this time. In order to achieve the market equilibrium it will be dynamic and changing at all times. At this point in time none of the producers can tell which property is profitable and which one isn’t due to the overhead being lumped into corporate and then most of that being capitalized to property, plant and equipment. Today properties only have allowances for overhead that are woefully inadequate to capture the real costs of accounting and administration. I understand the bureaucrats argument that these changes will take effort and a lot of hard work. However the only ones who have ever benefited from the industry are those bureaucrats. A tripling of commodity prices will keep these products as the greatest deal ever offered to consumers. And the change to the Preliminary Specification is the only way that this industry is going to move forward. That only way starts September 25, 2017.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

A Contrast in Value

The implication of stuffing the balance sheet full of every conceivable cost, including royalties, has the effect of reducing the amount of cost recognized on the income statement and therefore increasing the profits of the producers. It would therefore be assumed that the producer firms were wildly profitable as a result of not recognizing the capital costs of past production. That isn’t the case. In our sample of 22 producers who produce 7.688 million barrels of oil equivalent per day. Their net property, plant and equipment at the end of the first quarter stood at $459 billion. The amount of their cumulative profits as reported in their retained earnings over the life of these firms stands at $61.9 billion. Looking at this critically from the perspective that the majority of the costs in property, plant and equipment should have been recognized in previous accounting periods. That these balances are disproportionately outsized and obscene as a result of recording everything as a capital asset and depleting those assets over the life of the reserves, in which many cases may be a 25 year lifetime. And limiting our focus to just these points, it will take 7.4 more lifetimes before these companies earn enough to retire these property, plant and equipment balances.

I did not take in consideration dividends and other matters as I find those points to be irrelevant to the argument that I am trying to make here. These producer firms are not performing and have never performed. They have diverted the recognition of their capital costs, which include the costs of the Post-It Notes and telephone service of the receptionist, to make them appear to perform better than they are. As we noted last Friday the SEC has charged Obsidian and three of its accounting people with civil accounting fraud for the extension of this logic to include royalties as property, plant and equipment. That being the final step in the process of including everything in property, plant and equipment. What I guess the SEC sees in the Obsidian case is that the royalties are much more material than Post-It Notes. I am asserting here the materiality of the $459 billion in capital assets that our sample producers continue to hold in contrast to their lifetime earnings of only $61.9 billion. That is a lot of Post-It Notes.

Those in the industry will say that this is all just accounting and numbers, who cares other than the accountants? If we employed a reasonable test to the property, plant and equipment of these producers I would suggest they would probably be in the range of $100 billion as more representative of what “normal” would look like. That would mean that $359 billion would have flowed to the income statement and these 22 producers would have collectively been responsible for $297 billion in cumulative losses. Which is what I feel is a better representation of the bureaucrats performance in this industry. A dismal performance that would have been remediated well before now. Instead what you have is an industry of spendthrift, unaccountable bureaucrats who overproduce in unhinged fashion and think they rule the world.

The destruction of $300 billion by 22 producers is an achievement. Well the world is coming to see that maybe it's not. First there was me, I knew it wasn’t working. Then the investors and bankers caught on. We also have what I can proudly say is the beginnings of a very large user community being generated here at People, Ideas & Objects. Maybe the SEC has caught on as I suggested last Friday. This loss of $300 billion is just accounting when you consider the damage that has been done to the commodity markets. How much pain and suffering, and unnecessarily so, has been incurred by the people who work, and used to work, in the oil and gas, and service industries. Add it all up and these bureaucrats really should recieve my respect and more civil tone.

The sad part of this assessment is that this is the destruction that we can account for today. As the bureaucrats strike up the band to motivate the machinery to kick into gear again. There is an emptiness in these actions. Everyone knows all is not well and saying and doing otherwise is not going to fix the problems that are pretty much obvious to everyone. As bad as it is today I think everyone can see things spinning out of control pretty soon. That is certainly what I’m seeing. The oil price can’t hold up with continued overproduction and oversupply. It took a few years for the natural gas price to precipitously fall and break down but once it did, well we know the story. Then the “cash flow” that this capital intensive industry generates, and the bureaucrats currently count on to compensate themselves, will diminish into thin air. Then the bureaucrats who have a long history of cutting and running in other industries will do as much here. What we’re left with is an industry that has experienced this level of destruction, turning steeply downwards, where management has left, and the only thing I can recommend is that we build the Preliminary Specification starting September 25, 2017.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

To The Bureaucrats, We Say So Long

I’ve read many articles this past week stating that the ball is in the court of the North American producers. Expectations that OPEC and Russia will extend or expand their production cuts doesn’t exist. The focus is clearly on the North American producers to act. With oil prices about to fall precipitously as a result of the oil commodity market fundamentally breaking down from overproduction and oversupply. All the finger pointing that the North American producers have done over these past few years has encouraged others to act. And they have acted in a fashion that is above and beyond what the market expected of them, and then some. That North American producers want to now change the talking points from “market rebalancing” to the “demand side of the equation.” Which is effective in showing the world their ability to all sing in the same key and in perfect harmony to avoid any and all action. What the world really want’s to see is a response, or what is it that they’ll do, when faced with such destruction.

Natural gas prices fundamentally broke down in 2008. Partially I would suggest due to the financial crisis, but also the chronic overproduction and oversupply destroyed the commodities pricing for the short, mid and long terms. It will require extensive rehabilitation of the marketplace to have the natural gas prices return to levels that will earn producers profits. This began nine years ago! Nothing has been done, other than to initially state that the market would rebalance, and to continue operations as if nothing had happened. Bureaucrats have for almost a decade made out like bandits. Just as they are today. No one talks about natural gas markets anymore, primarily because there is no one to blame. There is no question that the decline in the natural gas market is solely as a result of North American producers overproduction. Is this a trend?

The Preliminary Specification wasn’t complete in final edited form until December 2013. There were however many elements of it that were published before then. The Preliminary Specification is 175,000 words and in 2008 I had published the Draft Specification which is for all intents and purposes the same thing. It contained 25,000 words. There was at least the opportunity throughout this period of time of depressed natural gas prices for these bureaucrats to do something about the natural gas business with the Draft Specification. Instead I was subjected to the repeated sessions with the baseball bats outback by the dumpster. I can assure you that there is nothing else in the marketplace today that deals with the issue of producer overproduction and oversupply that contains anywhere close to even 25,000 words. Bureaucrats claim to be innovative, they only punish innovators, they don’t solve problems, they only muddle along and do nothing.

Bureaucrats haven’t figured out that investors and bankers had figured them out a few years ago. They’ve been withholding new investment funds from the industry due to the issues that they see that remain unaddressed. The lack of cash for these past two years did not motivate the bureaucrats to do anything. They seemed to understand intuitively what I only came to understand recently. That a capital intensive industries cash flow will always support the industries overhead costs. Of which includes their compensation. All they had to do was to hang on, keep the paper flowing until the issues became unmanageable and then duck out en masse in a crowd of otherwise unidentifiable bureaucrats.

That is the status of the industry in the summer of 2017. No one likes to hear this type of talk especially when it's vacation time and the Stampede is in full swing. But before they go I thought that it might be worthwhile for us to take the time to thank these bureaucrats while they still occupy known space. Tell them that their efforts are not appreciated and don’t let the door hit them on the way out. These next couple of months may be the only opportunity in which to do so.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Oil and Gas Accounting Fraud

An interesting thought came to mind last week as I read the news about former PennWest, now Obsidian as they’re called, and three of its accounting employees, including the former CFO Todd Takeyasu, being charged with civil accounting fraud by the Securities and Exchange Commission. There was something that was said by the SEC that reflected to me a different point of view about oil and gas accounting than the one that is operational in the industry. A point of view that is more consistent with the point of view that is expressed here by People, Ideas & Objects and our concern that the industry has over reported their property, plant and equipment and profits by substantial amounts. The quotation is as follows:

The U.S. Securities and Exchange Commission alleged that Penn West Petroleum, which changed its name earlier this week to Obsidian Energy, had moved hundreds of millions of dollars from operating expenses to capital expenditure accounts. That maneuver, the SEC said, artificially reduced the company’s costs by as much as 20 percent at times, and improved metrics of oil extraction efficiency. 

The response by Obsidian to these charges is hilarious.

The law suit is based on certain historic Penn West accounting practices, discovered by the Company and reported to the SEC in July 2014. As a result of the Company’s discovery, investigation, and correction of those practices, Penn West restated its historic financial statements and results on September 18, 2014.

I read this response as saying “accounting is a joke, we overreported by a few hundred million and then fixed it, move on.” Which is typical of the attitude in oil and gas towards the accounting profession. That royalties were capitalized to property, plant and equipment is only a further extension of the “game” that has been played in oil and gas for the past four decades. The culture of capitalizing every possible cost to property, plant and equipment only went to the obscene level of including royalties with PennWest, that we know of. However it is indicative of the level that the “game” is played. The fact that this was done over several reporting periods and was several hundred million dollars worth shows that it was a known practice within the organization. It wasn’t an innocent mistake.

The Post it Notes that the receptionist uses, are they capital or overhead. The phone service that she uses to take the calls, is that capital or overhead. In oil and gas I can say with great certainty that the majority of the companies in the industry would have capitalized 80% of these costs to property, plant and equipment. And hence the “game.” This is done through an entry to take the 80% or whatever percentage of overhead amount from the overhead total and move it to property, plant and equipment on the financial statements working papers. Fifteen seconds and it's done. The history of this is the SEC’s requirement that Full Cost and subsequently Successful Efforts being the only two acceptable methods of accounting for public oil and gas companies. Obsidian being a public company, which they should probably better understand. In the 1980’s interest began to be capitalized and then the inclusion of overhead began when the oil price dropped in the late 1980’s. Since then it has been a competition, more like a race, to capitalize the most overhead and report the most profits as a result. Does anyone think you can operate an oil and gas company on 1.48% of revenues being the total overhead incurred?

To the point regarding the thought that I had earlier. Is the SEC thick and obtuse regarding the methods of oil and gas accounting? Are they unaware of the outsized and obscene balances of property, plant and equipment within the industry? Can they not see the associated value that has eroded through the process of over reporting capital assets and profits? That the inevitable methodology that the industry has employed has distorted the accounting of the industry? That the industry is claiming to “only following the rules” of the SEC and FASB.

If we look at the point of the Obsidian lawsuit the SEC is stating that “That maneuver, the SEC said, artificially reduced the company’s costs by as much as 20 percent at times, and improved metrics of oil extraction efficiency.” It’s clear the SEC do get it. To me this also say’s something that I don’t think has been heard before. That operations are operations and not capital, just as overhead would be overhead and not capital. This capitalization “game” has gone on for a long time and has become obscene by any stretch of the imagination. In answer to my questions regarding the thought processes of the SEC, I think the days are numbered when the producers will be able to continue to get away with this hokus pokus. You can’t fool all the people all the time.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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.