Our 12th Module, Part I

People, Ideas & Objects Preliminary Specification is almost four and one half years old. During the time that we’ve discussed the specification, the user community and service providers and all the other elements that are needed for the dynamic, innovative, accountable and profitable oil and gas producers. There were no changes to the specification, establishing it as a baseline in which the user community would begin their work. Today we begin the definition of what will be our 12th module of the Preliminary Specification. After researching the topic and grasping an understanding of the Information Technology that underlies the blockchain, today we can begin the integration of that technology into all aspects of the other eleven modules of the Preliminary Specification.

If there was one weakness in the Preliminary Specification it may have been in its ambitiousness. The ability to implement some of the technologies in the manner as described would have been difficult. Areas such as the Material Balance Report where the industry wide reconciliation process is conducted from the field data capture through to the financial statements was going to be difficult. The area of concern was in ensuring the integrity of the data and its reporting when dealing with Joint Operating Committees, amendments and the complexity of the system as described in the Material Balance Reports specification. By adopting blockchain technologies, which I find best described as distributed ledgers, the Preliminary Specification doesn’t seem all that ambitious anymore. What I knew was doable and could be implemented with the technologies that existed in 2013 when the Preliminary Specification was published, are now far easier and in many ways the only way in which the industry should proceed in terms of their ERP systems development.

The best video I found describing what the blockchain provides is from its biggest proponent, Don Tapscott author of the book “Blockchain Revolution.” This video has a number of interesting catch phrases that I think help people understand the technology.

The first quote that I would point out from Mr. Tapscott is “so what that means is the nature of a corporation and the nature of competitiveness is going to change. This is a time of great transformation. First of all, every industry will go through huge convulsions not just financial services. Resources, … Secondly, it means that every business function will change.”

The phrase that I found resonated the most with the Preliminary Specification was at around 3:35 of the video. Mr. Tapscott said “everyone has a “shared network state” where they can “look real time at everything that’s happening.” Once we’ve moved to the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producers. We take on what could be described as “a shared network state” within the industry. The Joint Operating Committees are / could be standalone investments or would be held together as a network of assets within an oil and gas producer as a firm or corporation. Joint Operating Committees are in many ways independent as a result of this “shared network state” and the manner in which they are managed in the Preliminary Specification. The concept of operator is gone and each working interest owner is an active participant at all times.

Recall we are moving the compliance and governance frameworks of the hierarchy to the Joint Operating Committees legal, financial, operational decision making, cultural, communications, innovation and strategic frameworks. Transactions between the owners of the Joint Operating Committee either in terms of the land that they lease, both mineral and surface, the capital assets deployed, the production and sales of commodities, the service industry representatives they engage, the producers earth science and engineering capabilities, our user community and service providers or coin holders will be able to operate within this “shared network state” we understand to be the oil and gas industry and service industry.

The integrity of the transactions that are undertaken in oil and gas are always the subject of heavy documentation and verification. As we move to a software driven world, yes even oil and gas, this integrity, documentation and verification can’t be ignored. With blockchain we are gaining highly secure systems by implementing the blockchain as our 12th module in the Preliminary Specification. Where it will engage with each of the other modules and provide the transaction security that is necessary. There may be one blockchain within the Preliminary Specification or there maybe many. It’s too early to determine the best implementation of the technology at this point. What is known is it will be used in at least 50 different ways that I can think of off the top of my head to provide that integrity and security that is necessary in today’s systems. Anywhere that there are interactions or transactions between producers and Joint Operating Committees there will be the blockchain securing the transaction.

We’ll be discussing the 12th module and some of the technologies around the blockchain in the next few weeks. We will be taking a short break some time after May 9th to review the first quarter’s financial performance of the producers. It’s important to understand the difference at this point between the blockchain as our 12th module of the Preliminary Specification is fundamentally different to our implementation of the blockchain for our Initial Coin Offering. They are for all intents and purposes two mutually exclusive events. One is the technology integration into the Preliminary Specification, the other is the means we are using to raise the financial resources to build the Preliminary Specification. Our coin offering will be based on the rights that are distributed through the coin to its holder that provides them with the exclusive access to the software that will be built from the Preliminary Specification.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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

Financial, Operational, Political, Part IV

Maybe the producers have everything under control. “The large volume of unrecognized capital costs of past production that the industry carries is only an accounting issue for the accountants to worry about. These “assets” do not have any effect on the bank balance at the end of the day. They represent only the money that was spent in the past and that is where they should stay, in the past.” More or less this is the justification for the “muddle along” strategy and “do nothing” procedure. When the producer doubled their reserves and revenues continue to grow “who cares about what happened in the past!” More or less this has been the attitude regarding the business of the oil and gas business. The money being made was in the reserves being discovered and produced. If these reserves are so valuable, why can't they be produced profitably? Profitably based on a reasonable accounting. These reserves have had nothing to do with the accounting from the accountants. What the producers have failed to see is that the money that has been invested in the industry isn’t performing. For all intents and purposes it sits forever as an asset on the balance sheet as property, plant and equipment. To perform the producer needs to take into context what was spent and how that investment has performed under their management. On that basis the performance has been the poorest possible. This new process of evaluation is how oil and gas producers are assessed and bureaucrats are not happy that they now have to account for their past behaviors.

“That people within the industry and the service industry are having difficulty seeing where the value lies in the oil and gas industry. That they don’t want to be part of a thriving, growing operation is not the producers concern.” The industry doesn’t have a problem it's the people who no longer want to work in the industry that do. “The investors and bankers that don’t participate anymore, the service industry reps that can’t fill producers needs, and others that just don’t understand how difficult and hard the oil and gas business is.” Back in the early 1990’s when oil prices were low due to overproduction it was this kind of dialog that was heard throughout the industry. Usually in the annual reports and at the annual general meetings. “Oh whoa is me, another bad year, oh whoa is me.” I think we’ll begin to see this same dialog begin to be pushed across to us from the producers in the first quarter reports and at the annual meetings. I think this year it’s not going to fly, and here’s why.

Many investors are talking. Some are proposing changes to the boards. Producers are resisting and we’ll see who wins the proxy battles. Proxy battles are futile in my opinion. A lot of screaming and yelling and then nothing happens. The chances of instituting any change is very low, no matter how bad things are. And even if things are desperate bureaucrats have their ways of ensuring their franchise is safe. The only way that there’ll be changes from a management point of view is when the bureaucrats know intuitively that the gig is up. That their opportunities are best sought elsewhere in greener pastures in other industries far away. The timing of this jump is critical to the success of their next industries perspective of them. If they wait to long then they begin to look like they may have been responsible for the oil and gas difficulties. Best to leave before the knowledge that bad management was the cause of oil and gas’ downfall and becomes common knowledge across the business community.

When, as we have documented here, the financial difficulties are as bad as they are in oil and gas. The investment and banking communities have hightailed it out many years ago. When the operational difficulties are becoming more of a logistical difficulty and causing the bureaucrats to work evenings and weekends, then you know we’re close to the time for them to bail. The one sure measure of this however is the political. When the politicians believe the lies that the business was represented as by the producers for the past few decades. Then you do not want to be around when the truth begins to be known by those outside of the industry. This could really damage the employment prospects of the bureaucrats in the industry they choose to work for in the future.

When creative destruction hits its peak in oil and gas then that’s the day People, Ideas & Objects, our user community and service providers get the call to put it all back together again. This day has always been a light at the end of the tunnel. For the past number of years my future’s been brighter. Now this light is so bright and so close that I think we could measure it in minutes. There is always the possibility that the producers extend their hold on the situation for another 25 years and keep the show on the road. I just don’t see that, and am certainly not banking on it.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.

Financial, Operational, Political, Part III

We’ve all heard that producers are profitable at $12 / barrel in the Permian. So it would seem President Trump has also heard those claims. He feels that oil prices are substantially too high and have taken OPEC to the woodshed for doubling the price of oil. And he feels that can’t continue. In a Tweet last Friday he said “Looks like OPEC is at it again. With record amounts of Oil all over the place, including fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!” But let's bring in another point about Kinder Morgan’s difficulties with Canada’s Trans Mountain pipeline. The Canadian and Alberta governments are battling it out with the British Columbia government. Where are the producers in either of these political battles? Kinder Morgan is quite alone in their battle and other than the commitments of the producers for the pipelines capacity it would seem all they get are crickets. That the CEO calls the situation untenable can be fully understood and appreciated.

The point of this blog post is we’ve now hit a point in the industry where events and developments are working against the oil and gas industry. If you don’t pay attention to the business beyond the development of reserves and spending your revenues on bureaucratic niceties, then things will degrade. We’ve seen the financials degrade, the support of the investment and banking communities withdrawn, now the operational capacities and capabilities are diminishing at a remarkable rate. The problem is that all the people who were dispatched from the oil and gas, and service industries couldn’t give a damn. What’s the next shoe to fall? Oh wait it's the political winds will begin to blow against you. When you lie about how much you can produce the Permian for, powerful people are listening. Square the circle of your first quarter financial statements to your investors with the fact that the political environments expectations accepted your claims of $12 costs, that pipeline companies can’t be bothered fighting the governments exclusively on your behalf anymore and as I noted yesterday, no one’s going into the water business. Brilliant, absolutely brilliant, every bureaucrat give yourself a big bonus!

Consider for a moment that President Trump who just sold vast quantities of military equipment to Saudi Arabia. And I’m certain that there is at least an implied guarantee to them of military protection from both Iran and the Soviet Union Russia. All on the basis of understanding that oil production costs are $12 / barrel. The President then begins to apply diplomatic pressure for the Saudi’s to move the price back down for the consumers benefit. I guess it doesn’t really matter, you were never really profitable anyways. You’ll muddle through when the Saudi’s have no choice but to abide by the needs of the President of the United States. Remember he’s the one with lots of Nukes that provide the protection that Saudi Arabia needs.

Telling the uninformed that you’re profitable and your costs are $12 when the reality is a bit different doesn’t help you in the political arena. The fact is oil and gas is as political as it can get. Not to worry though you still have all the reserves and revenues. The muddle along fairy will fix this. We are moving from a financial disaster to a financial, operational and political disaster and the producers are eager to do nothing, their operating strategy. I might be wrong here, and I’ve said I might be wrong on many occasions, yet the Preliminary Specification addresses today’s issues and opportunities of the industry in wholesale fashion.

The only way in which to get the financial market back on the producers side, the only way in which the producers can begin to produce real profits, the only way to stem the operational concerns down the road and the only way to begin to deal with the political fallout that’s beginning is to implement the Preliminary Specification. Which does show my bias. The alternative is to muddle along and do nothing which will precipitate People, Ideas & Objects long term funding source, our Initial Coin Offering. My best projections at this time is this is in excess of 2 years from reality. The important thing for producers to recall is that the ICO essentially puts a claim on those reserves and revenues where ⅓ of the net after royalties and taxes are diverted to the coin holders, those that funded the development of the Preliminary Specification. How is this possible you may ask? It's important to understand that in the future, it's not important to own just the oil and gas asset. It will be necessary to own the oil and gas asset and have access to the software that makes the oil and gas asset profitable. You’ll need to speak with the coin holders about that. The other question producers should ask themselves is if they have 2 more years in which to just sit and watch the industry disintegrate in front of their eyes?

Destruction is not boring, but it's not the place you want to be. That’s the image oil and gas has. So good luck trying to reverse the political winds to support the industry. How you’d do that and maintain these dishonest practices will be a surprise to me. Maybe I’ll learn the really value and understanding of “muddle along” and “do nothing,” anything’s possible.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.

Financial, Operational, Political, Part II

With all of these inflated profit numbers being reported things should have been hoping mad in the oil and gas industry! It’s just that no one has been taking care of the business for a long time. The role of the oil and gas producer is (actually was) to raise money and spend it drilling lots of wells. Now it’s just to drill wells. “Cause that’s where the money is.” People rob banks because that’s where the money is. I think there’s a direct analogy there. Drilling for oil and gas both increases the value of the producer firm with reserves and establishes revenues as a primary industry. Anything outside of this, such as pipeline capacity, the health of the business, or the health of the service industry or any other concern has never been part of the deal. Producers drill wells! The rest of the oil and gas business, which doesn’t generate any value to the producer, or for that matter anyone else, will take care of itself when the producer ignores it. This is also known as the “muddle along strategy” and “do nothing” operating procedure.  When producers take all of the oil and gas reserves and divert the cash from their revenues in a primary industry for themselves, what’s in it for anyone else? The expectation is that investors will provide for the service industry and pipeline providers. Volunteer their capital into secondary industries so that producers can then call them greedy and lazy when they submit an invoice for the work that they’ve done. Only to pray that they receive payment from the producer within the next 18 months.

Organizational methods do begin to fail. Creative destruction is one of the key enablers to our advanced way of life. As the old organizational methodologies cease to build value, new business models have rushed in to replace them. Hierarchies have had a very substantial run. From the 1920’s, or even earlier, they were able to organize and conduct large operations of substantial scope and scale. Today for a variety of reasons these no longer function to provide the value that is necessary to support our way of life. What has happened in oil and gas is we’ve travelled a long distance beyond the point in time in which we’ve collectively built value. Through accounting shenanigans bureaucrats have been able to hold on to their perch without too much difficulty. While other industries have been disintermediated by the Internet and Information Technologies, oil and gas has appeared to be immune. In reality what has happened is that the financial foundation of the industry has eroded to the point where none of the value that was built up before has been maintained. Through chronic unreported losses producers financial foundations have become incapable of carrying themselves in the future. The collective value of the industry is worthless as it generates nothing of value and requires substantial financial support just to operate. This support now comes from the fact that the industry is a capital intensive industry. The investors money that was invested over the past decades is being returned by the business in the form of cash flow. These cash flows are being diverted to keep the bureaucrats happy and the doors open. The time for change was decades ago.

As a result of the financial deterioration the next element of creative destruction has come into play. The operational capabilities and capacities are clearly disintegrating as we speak. Certainly the production profile of North America is increasing in both oil and gas production. That can be attributed more to the power of shale than to the effectiveness of the industries operations. Take the 50 bcf / day of today’s U.S. shale production away from the 80 bcf / day of today’s U.S. natural gas production and ask yourself where would we be without shale? Abuse of the service industry, pipeline companies, and all those other businesses that are part of the secondary industries that survive based on the work they do for the producers is epic.

The services that the producers have depended on for all these decades is in decline. The collective wisdom of the service industry, the people who work in that industry and those that used to work in the industry is, “who cares.” Why break your brain or back in the hope that oil and gas will possibly have one of the good years as they’ve had 5 of the last 32. There are other industries of interest with real opportunities. The boom / bust cycle is something that should have been worked out of oil and gas many decades ago. Yet, bureaucrats hold it out as a feature of their business model. People don’t invest in their education and careers to find at forty years of age they have the seniority of a construction laborer with a high school diploma. They’ve seen that scenario play out too many times in their family and friends to concern themselves with anything but getting out of the industry. “If the industry can’t manage itself then I’m outta here.”

The long term consequences of the producers “muddle along” strategy and “do nothing” operating procedure have brought us to this point. Producers load themselves up with all the value of oil and gas reserves and oil and gas revenues. These fuels the bureaucrats existence in a way they just can’t believe they’re so intelligent. As long as they build value in the reserves and build revenues that is all that they need to concern themselves with. Well we see the end result of this thinking. Financially the industry is a disaster. Operationally it isn’t that bad at the moment. The Permian is having difficulties as are other areas. These are limiting the upside of the production profile. Soon they’ll begin to affect more and more of the industry. As we mentioned yesterday the Permian is having difficulties sourcing water, sand, trucks, truck drivers etc. “What I really want to do is go into the water business in the Permian. Invest a bunch of money from some naive investors and wait until 2020 to get paid for the hard work of the water hauling I did today. So that producers can sit on their big fat reserves of oil or gas and their big fat oil and gas revenues. I can always buy balony for $1.50 a lbs and sleep in the truck until I get paid. Such is the good life today in the oil and gas service industry.”

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.

Financial, Operational, Political, Part I

It was during mid-February that we shifted our discussions to our user community and the 2017 earnings of our sample of 23 producers. We’ll return to a review of the first quarters earnings of 2018 some time after May 8, 2018, which is the day in which our last producer reports. And we will always return to our number one priority, our user community. You will recall that the 2017 earnings for our sample of 23 producers were $15.6 billion. A number that we reclassified to exclude the extraordinary items of the Trump tax cuts, a consistent level of depletion with 2016, Cenovus’ ludicrous reclassification of their assets based on the purchase price of the Conoco assets and the elimination of Conoco’s earnings on the sale of their heavy oil assets. The justification for these reclassifications is debatable, however, we reclassified these “earnings” to a loss of $31 billion for all of 2017 for our 23 producers. The debatable nature of these “earnings” would also have noted that these producers would have lost $173 billion if they’d adopt our recommended 2.5 year depletion schedule for their property, plant and equipment. Which I’ve noted would be ridiculous, but honest, just as keeping property, plant and equipment on the balance sheet for 27 years is ridiculous, but dishonest. If you never recognize your capital cost in a capital intensive business, then it's really not a business that your representing is it? Is your property, plant and equipment an asset or a cost? And why do producers never want to account for the money they spent?

Within the Resource Marketplace, Research & Capabilities, and Knowledge & Learning modules of the Preliminary Specification. We institute a major change in the manner in which the industry is operated. Oil and gas is a primary industry which means that it is involved in the extraction and collection of natural resources for direct sale. These generate direct revenues to the producer of the oil and gas. The service industry and other businesses such as pipelines are in the business of supporting the oil and gas industry and are dependent on the oil and gas producers paying them for their services. As secondary industries they are providing these services in the expectation of earning a profit. In the good times the secondary industries are called “lazy and greedy” and the in bad times they are the first to be laid off and as the “leeches” that they are, have their payments extended to eighteen months by the oil and gas producers. The change that is made in the Preliminary Specification is the recognition that without the service industry and companies such as the pipelines the producers would be unable to conduct any of their operations. People, Ideas & Objects create a more cooperative, collaborative and innovative environment to enhance the innovations that are generated from the service industry for the benefit of the oil and gas producers.

The CEO of Kinder Morgan says that their $7.1 billion “approved” Trans Mountain pipeline is untenable. We’ve discussed the associated gas issues in the Permian where pipeline takeaway capacity is an issue there too. Now we hear that producers are having difficulty sourcing what is needed from the service industry and staffing is difficult. Just google it and see the number of articles documenting the difficulties in sourcing water, sand, trucks, truck drivers etc. When I read stories like these I’m reminded of the stories that came out of the former Soviet Union during its collapse. How everyone, literally, was waiting in line at the bakery for bread. Methods of organization reach a point where they cease to generate value. Then they begin to destroy the value that was built before. Oil and gas is well past the point of generating value and we’ve passed into a destructive phase many decades ago. Accounting shenanigans hid the costs of the destruction from everyone while investors were hoodwinked by suspect accounting into pouring their money into the oil and gas industry each year to keep it afloat. Now the operational side is beginning to fall apart, which after the financial disasters is always the next thing to go. You can read more about this in the Preliminary Specification, which was designed to stop this crap.

Oil prices are up since OPEC’s production sharing agreement went into place. Anyone notice that oil and gas may follow the characteristics of price makers? Remove 2% of the production and receive 100% price gains! Right now the Saudi’s are talking about their goal of $80 oil which would be a good price for their production. Theirs being conventional production doesn’t cost much, and even at $60 they’re making plenty of money. I can almost guarantee that North American producers shareholders will be disenchanted with the first quarter of 2018’s performance, just as they’ve been disappointed these past number of years. $66 oil is half of what People, Ideas & Objects have determined that the North American producers cost is. Primarily due to the high levels of unrecognized capital costs of past production stored on the balance sheet as property, plant and equipment. Which I guess is better than selling oil at $29 / barrel.

Producing oil for $12 / barrel is claimed to be what it costs to produce in the Permian. That is their “breakeven” number. If the producers are making $54 / barrel they should use some of those resources to solve the logistical difficulties in the Permian and pipeline issues too. That would be a good place for that money to go because no one else is volunteering their “free” capital to burn to those oil and gas service businesses anymore, either. What I know for certain is that $12 / barrel cost is as dishonest as the day is long. It either takes the total capital cost and applies it to every molecule of reserves discovered. Which in shale is a substantial volume of reserves making the cost / barrel quite small. Or, are we to assume that royalties in the Permian are below 18% which is $12 / $66. The $12 / barrel being quoted is usually the operating costs of the producers alleged “breakeven price.” Therefore if we assume that all of the non-capital costs are included in the $12, that is not the breakeven price. That is the cost that is used to determine the contribution margin. In this case the contribution margin would be $54 / barrel which when you divide by the capital costs would give you the volume of barrels needed to be produced to achieve breakeven. Therefore the industries use of “breakeven,” as with so many other of the producers fancy financial footwork, is another sleight of hand.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.

User Community Developments, Part XIII

As we noted yesterday the new oil and gas producer, the one that is enabled through the implementation of the Preliminary Specification, has acquired the business model that enables them to control all of their overhead. Their administration and accounting are handled by the service providers and charged directly to the Joint Operating Committee. Any overhead that they incur will be as a result of profitable operations and hence paid for. Any shut-in inventory of unprofitable properties will not attract any of the administrative or accounting overhead. What the shut-in inventory of unprofitable properties will attract is the hourly charges from the earth science and engineering resources time in which they’re working on these properties in an effort to return them to profitable production. These earth science and engineering resources charges would be considered capital costs in my opinion. While those geological and engineering resources are working to return these unprofitable properties they will be generating service revenues from billing the Joint Operating Committees AFE or lease for the work that they’re doing. Capturing the producers service revenues necessary to cover off the cost of maintaining the earth science and engineering capabilities of their producers competitive advantage.

Whether the new oil and gas producer is a startup or an intermediate they will be able to maintain profitability of their oil and gas production at all times. The startup producer can begin operations by reselling their earth science and engineering capabilities they’re developing prior to owning any oil and gas properties and remain profitable. The shareholders can begin their involvement as soon as the management have shown commercial use of their capabilities. In addition, participation in a few small properties is the beginning of an oil and gas producers production profile. In today’s environment this requires the staffing of administrative and accounting resources necessary to manage the firm's interest in those properties. With the Preliminary Specification and service providers in place shareholders won’t see millions of dollars being consumed in the maintenance of overhead during the startup phase of the organization. Only the fees for the service providers will be charged on the few properties that are owned by the producer. Attaining a 100% effectiveness of the administrative and accounting resources being charged on those properties vs. the extremely low percentage utilization the full time administrative and accounting resources the startup producer has to take on in today’s market. Unlike today, this will have proven to the shareholders that the management of the new oil and gas producer have an understanding of business and profitability, and will not indulge in development of a spendthrift organization such as today’s oil and gas producers.

This is not to say there will be no overhead that is not incurred at all times. The CEO, COO and CFO salary and benefits are not included in either of the two categories we mentioned. When the differences are analyzed between the overhead that is incurred by today’s producers and that which is incurred by a producer in the Preliminary Specification. They will not be carrying any of the costs to maintain and build their competitive advantages in the earth science and engineering capabilities. These would be self-supporting activities as they are a separate business model in the Preliminary Specification from oil and gas production. Direct overhead of the Joint Operating Committee will be incurred for any production that is profitable. This will involve the producers share and be offset by the revenues of oil and gas sales. Lastly there will be some overhead that the producer will be incurring above and beyond these areas in the management areas of the organization. These are not incidental costs and how the producer chooses to report them, as capital or costs, would be to their discretion.

Bureaucrats have been fooling themselves about how much they spend and where it should be classified. “Large explorers outspent their cash flow by 117% over the past seven years,” according to Barclays. “The top 15 oil companies have paid executives $2.8 billion over the past decade while delivering a smaller return to shareholders versus other industries.” That averages $18.6 million per year / producer. I can state unquestionably these are not the statistics that drive the day to day or any conversations anywhere in the industry. It is the pursuit of the engineering and earth sciences technical difficulties that occupy the minds of the oil men these days. Increasing their production profile in the face of such technical obstacles is the only thing that excites and challenges the people who work in the business. The financials will do what the financial will do.

Today the U.S. production sits at 10.5 million boe / day. This number is expected to be 10.65 million by the end of May 2018. That is 2 million boe / day higher than when OPEC implemented their production sharing agreement in November 2016. In shale the US natural gas production over past 50 years equalled.

1968: 51 bcf/d
1978: 52 bcf/d
1988: 47 bcf/d
1998: 52 bcf/d
2008: 55 bcf/d
2018: 81 bcf/d  (forecasted)

Shale, in the past ten years, is responsible for a 47% increase in the deliverability of natural gas in the U.S. Is it any wonder why the prices are so low? If industry increased deliverability by 8% in the prior 40 years, is this considered out of control? The fundamental collapse of the natural gas marketplace would seem to indicate that it is.

Conversely I don’t think producers have thought through the implications of implementing the Preliminary Specification. What happens when the $1.6 trillion in capital that currently resides in property, plant and equipment is retired through the decentralized production model? Clearly their legacy costs of oil and gas exploration and production / boe are going to go down. But only after the investors who have supported the industry are compensated and the assurance is given that they will not be directly subsidizing the consumers again. Destruction of the natural gas business was quickly followed by the destruction of the oil business. Today the financial health of the producers, when you consider the bloated nature of property, plant and equipment on the balance sheet, is astonishing. It is worthless and demands capital to maintain an operating deficiency. Even though the investors are not returning there is no discussion or understanding in the industry of what is happening or what to do about it. Returning money to shareholders who provided it in the past certainly doesn’t stir any discussion outside of this blog. There must be wells that need to be drilled.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.

User Community Developments, Part XII

Administration and accounting are driven by deadlines. The need to report in a timely and accurate manner within the prescribed period. These leave little opportunity for the accounting and administrative resources to apply the technologies that are just at their fingertips, technologies that could make their lives that much more efficient. The time to do this type of work is never, and the cost to apply these technologies is beyond everyone’s budget. The difficulties faced in one producer are replicated within each and every other producer. The inability to organize and implement a solution across the industry is the primary reason for the failure to advance beyond primitive systems. This is where the user community and the service providers step in and take the opportunity that is present here and realize it on behalf of the oil and gas industry. The cost of the Preliminary Specification across the industry may be high. The value to each producer is substantial in resolving these issues. People, Ideas & Objects, the user community and service providers value proposition would be realized by all.

Many in the software vendor community may take offense to my comment regarding primitive systems. Particularly since the Preliminary Specification is vaporware on steroids. The thing about vaporware in oil and gas is you get what you pay for. Producers have refused to pay for any systems development for decades now. Oracle left the industry late last century for this reason, and IBM sold out around 2005. If the producers are unhappy about the state of the Preliminary Specifications vaporware then they should do something about it. The maturation of Information Technologies since the time the big IT companies left the industry has been dramatic. People, Ideas & Objects are not a technologically focused solution provider, we rely on Oracle for that. We are focused on the business, but when it comes time to implement the technologies we are certainly able to punch above our weight. We look forward to the opportunity to display these capabilities when the time comes.

As we discussed yesterday the specialization and division of labor that the user community and service providers will be able to implement will be far greater than one producer can, or could ever do. The same is the case for the innovations that can be made on the processes that are under management by the People, Ideas & Objects software that will be managed by the individual service providers. This will also apply to their ability to implement their technical excellence into the process that they’ll manage. It would seem contrary to think of technical excellence as a competitive advantage when your processing large data sets. However, it will be in these large data sets where I think the value and the quality of information that the service providers will generate for their clients, the oil and gas producers. We are clearly defining a division of labor between computers and people with computers doing the processing and storage, and people conducting the leadership, problem solving, decision making, creative, collaboration, research, ideas, design, planning, thinking, negotiating, compromising, innovating and financing. Tasks best suited for our user community and their service provider organizations, not computers.

When we consider the differences, productivity, and overall benefits of organizing the administrative and accounting resources in the fashion of the user community and service providers. We see a distinct difference to the current method that is employed by each and every producer working hard to get these administrative and accounting tasks done. People, Ideas & Objects are proposing a better way, one in which the performance of the user community and service providers will be driven and capable of providing incremental value for the industry and each individual producer. Our value proposition is wholly dependent on the configuration of the service providers as described within the Preliminary Specification. Without that configuration the overhead costs will not become the industry based variable overhead costs that provide so much flexibility to each of the producers operation. The competitive advantages of the user community and service providers bring a level of competition and quality to the fields of administration and accounting in oil and gas. These attributes replacing the focus on cost control and efficiency that each of the producers struggle with today. Without the user community and service providers as described within the Preliminary Specification the industry and producer will be unable to deal with the profitability issue that plagues them today. And they won’t be able to address the future issues and opportunities without them either.

People, Ideas & Objects have proposed a viable and valuable idea in the Preliminary Specification, its user community and service providers. Compared to today’s situation it is a clear decision as to which method should be chosen. The question that I have is what alternatives do the producers have? If there’s a better way in which to configure the overhead costs of the oil and gas industry, what would that be? If there were any alternatives I’d be surprised. The development of the Preliminary Specification took me a while to figure out and I don’t see anyone working on it anywhere else. Which begs the question, what’s the hold up in moving forward?

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.

User Community Developments, Part XI

We began discussing the reasons for establishing the user community and their service provider organizations in the oil and gas industry. We’re doing this to show that there are fundamental and necessary reasons for building the Preliminary Specification, the user community and service providers. And not just for the sheer joy of the exercise. What we do know is that in contrast to what we are doing, the bureaucrats are doing nothing about the issues in the industry for the luxury of doing nothing. One of the points that we discussed in the first post in this series was specialization and the division of labor of the user communities and service providers competitive advantage. Today I want to expand on that and look at that competitive advantage from the point of view of the oil and gas industry. What do these elements provide the industry and producers in terms of value above and beyond what has been detailed in this blog series and our value proposition.

What we said in the first post of this series was “Looking at the individual components of the user communities competitive advantage we’ll review the first item on the list and the part about flipping our working relationship with computers. Specialization and the division of labor is the only means in which economic development has ever been achieved. The difference between the economies size in the year 1800 and today is 100% attributable to the application of specialization and the division of labor. Therefore in order that the oil and gas industry can develop further, expand its output, grow efficiently and profitably is through the application of specialization and the division of labor. It’s here too that we can bring in the work of computers and have them do the storage and processing which is their specialty. Essentially a revised division of labor between people and computers. And therefore people can focus on their capabilities which include leadership, problem solving, determining what’s relevant, creativity, collaboration, research, idea generation, design, planning, thinking, negotiating, compromising, innovating, financing to name just a few. These are the areas we need to be focused on and stop moving data from one system to another and other redundant computer related tasks. With each user community member and service provider focusing on one process, they are specializing at a much higher level than what is available now or is ever going to be possible within any producer firm today. Therefore the amount of work they’ll be able to do will be substantially more efficient than what it is today and will continue to provide an enhanced and developing value proposition for the oil and gas industry.”

Today with each producer pursuing the development of their own administrative and accounting capabilities they are seeking to limit the costs incurred by their organizations. This is the only reasonable approach to the issue of high overhead costs in oil and gas. Building state of the art capabilities would be redundant in a generic and regulated function that is not a competitive advantage of the firm. Therefore using the tools that are available to boost the productivity of the administrative and accounting resources are limited to the quality of the firms resources in terms of education and experience in the industry. Getting things done is essentially the only thing that matters.

From an industry wide perspective this is highly inefficient. Within each producer these costs are being duplicated by each and every other producer. None of these administrative or accounting capabilities, as we’ve discussed are shared or shareable. In addition each producer only incurs a volume of transactions that provide for what I would call a “clerical nightmare.” There is no scale in which to provide the efficiencies for the producer to spend the time or money on automation or use specialization and the division of labor to increase the throughput of the resources they have. Therefore each producer struggles with these “clerical nightmares” of processing just enough transactions to make it not worthwhile to invest in their efficiency. It would be considered a waste of resources if each producer undertook the investment in automation, specialization and the division of labor on their own transaction volumes.

If it is accepted that overhead, which is unshared and unshareable, is contributing to each and every producers unprofitability. That overhead is driving the producer to higher levels of production in the high throughput production model, to offset as much of that overhead as possible. Then overhead is an issue in oil and gas. More efficient means of administering and accounting for oil and gas are necessary. The only way in which to increase the efficiency of these administrative and accounting resources is to expand their throughput through application of specialization and the division of labor. It is here that the producer is more or less stuck in terms of discovering any possible means to do so within the four corners of their operation. The need therefore for a reorganization that would facilitate specialization and the division of labor is the only method in which the industry is going to avoid chasing its tail with respect to attempting to cover off all of their overhead by overproducing.

Therefore we come down to the unshared and unshareable nature of today’s overhead. If we took the resources of each producer and organized them in a way in which they could compete based on specialization and the division of labor. They would need to form into groups, focus on one process and deal with the entire industries data set in order to be able to apply automation, specialization and the division of labor. With the Information Technologies that are available today this is reasonable and more than possible. The issue with doing this type of change would be the design of each process and its subsequent iterative changes being implemented. Those that manage a process would need to have the means in which to control the processes makeup and implementation. Particularly in an environment where the oil and gas industry was expecting to achieve higher throughput with the same resource, or in other words, lower overall overhead costs, in addition to turning the producers fixed overhead costs into the industries variable overhead costs.

What People, Ideas & Objects knows from our research is that as soon as we implement our software we will be setting in metaphorical cement that configuration into the industry. Nothing will be able to change unless the software changes first. That is why our Revenue Model is dependent on change, the user community members are the owners of the service providers. And the user community member is endowed with the necessary tools to implement changes that are necessary at anytime in the software. Otherwise we will just freeze the industry and producer in the definition of the Preliminary Specification as it stands today and be unable to deal with the issues and opportunities as they arise in the future.

These points are considered value that is generated outside of our value proposition. More efficient costs in terms of overhead is a benefit to the industry and producer. Industry based variable overhead costs are a benefit to the industry and producer. Specialization, the division of labor and automation can also create cost reductions, increase the throughput of the industry and provide better quality information than what is available today. These are only available as a result of the changes being made to initiate and support the People, Ideas & Objects user community and their service provider organizations. To me this is a worthwhile exercise that brings value for all concerned. The understanding and implementation of the necessary tools for the user community to succeed in this transition are contained within the user community vision.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.

User Community Developments, Part X

It would seem that we are conducting radical surgery on a patient that doesn’t need it when we reorganize the administrative and accounting resources of the oil and gas industry and producers. I can certainly understand this point of view and appreciate the concern with all of the changes that we’re implementing. There are however many reasons that the Preliminary Specification disrupts the industry in this manner. Reasons that we’ll now discuss in order to build the support that is needed for the user community and their service provider organizations.

The key concept is the transition from the high throughput production model that is in use today. To the decentralized production model that is used by the Preliminary Specification. In the high throughput production model producers seek to produce as much oil or gas as possible in order to offset the overheads that are incurred. With the decentralized production model the objective is; from Professor Richard Langlois.

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p.58

The nature and abundance of shale eliminates the concern for the scarcity of the commodities. In the past any production that was brought on was welcomed by the marketplace with immediate demand. In today’s market inventories swell and prices collapse quickly as a result of the ability to bring on high deliverability shale based reservoirs. These shale basins are well known and are able to be explored with little to no geological effort in comparison to the past. Everyone knows where the shale is and not much effort is being made to determine what new basins are available. Shale is also expensive. Although producers in the Permian state they can produce for as little as $12 / barrel this is after an allocation of the drilling and completion costs across the massive shale reserves they’ve exposed. Costs to drill and complete are orders of magnitude higher than conventional drilling and completion costs. These new shale based realities need to be dealt with. Investors can’t be waiting for decades to have their investments perform and commodity markets are quickly overwhelmed by the smallest volumes of overproduction. These issues demand a different business model than what has been used in the era of energy scarcity also known as the high throughput production model.

The Preliminary Specification is the result of what and how the industry and producers need to operate when we adopt the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. It is our belief that in the 1960’s when computers were introduced to the oil and gas industry. The first question is what could be done with them. In accounting and administration the uses became obvious with the development of software for corporate accounting, tax, royalty and compliance needs. Over the past decades this has led to what I believe to be a cultural perspective of the oil and gas producers corporate model that exists today. Some systems in use today are unaware of the Joint Operating Committees existence and role within the operations of the producer firm and the partnership it represents. By adopting the Joint Operating Committee we are moving to the culture of the industry and accommodating that unique need.

Therefore each partnership or Joint Operating Committee will replace the reporting emphasis from the corporate to the Joint Operating Committee. Each property will have actual, detailed and full financial statements provided with the corporation being a consolidation of those operations interests. The Information Technologies used will bring the partners in the Joint Operating Committee much closer together and enable faster decisions and management processes through the Preliminary Specification. These render the use of the concept of “operator” to be redundant. With each producer having an interest in 100’s of Joint Operating Committees for a small producer to tens of thousands for an intermediate this becomes logistically difficult if not for the People, Ideas & Objects Information Technologies.

Accounting and administration in oil and gas is generic, regulated to a large extent and hopefully not a key competitive advantage for any producer. Each producer is challenged with their constant need to develop administrative and accounting capabilities that are unshareable with other producers. These generic processes as structured today are unshared and unshareable with each producer building the same capabilities within their own organizations as their partners, neighbours and the rest of the industry. Unshareable overhead processes are costing each producer their profitability. The Preliminary Specification seeks to change the dynamic of overhead in the producer firm from this static fixed overhead cost to a variable industry cost, through implementation of the user communities service provider organizations providing the unique process management on behalf of their clients, the oil and gas producers. Enabling these producers to determine the profitability of a property with the detailed overhead that is charged by each of the service providers for their process management to each individual Joint Operating Committee. Then if a property becomes unprofitable they can shut-in that property and generate a null operation, no profit, but also no loss. No overhead costs of the service providers would be incurred on the shut-in property through the Preliminary Specification. The producer could then invest their time, energy and money to return the property to profitable production through their earth science and engineering capabilities and innovations.

It is through these changes the producer is able to produce only profitable production at any level of their production profile. Unprofitable properties will no longer dilute profitable properties. Maximizing the producers profitability. The excess unprofitable production will be removed from the commodity markets ensuring that these find their marginal cost. The reserves will be saved for a time when they can be produced profitably and those reserves will not have to carry the incremental cost of additional yearly losses to be recovered with the capital costs. These benefits are facilitated by the user community and their service provider organizations. We are not executing change for the sake of change but to deal with the issues of today, the opportunities that shale reservoirs bring and the business and culture of the oil and gas business. These can only be achieved through the implementation of the service providers.

Although it is radical surgery to implement the Preliminary Specification, the user community and service providers. It is needed for these reasons. Oil and gas is facing an existential threat to its financial health. Oil prices may be higher today, but not high enough to cover the costs. Overproduction as a result of shale is the reality that needs to be dealt with. Natural gas prices are woefully inadequate and no one even talks about that side of the business anymore. The producers have fundamentally destroyed the natural gas business. Oil is different in that it has not been destroyed, yet. Given time however it will certainly follow the natural gas business. It is through these business changes, the difficulties the industry and producers face and the opportunities that are presented to them that the user community and service providers are enabled.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.

User Community Developments, Part IX

People, Ideas & Objects now return to focus on our customers, the user community, and continue the discussion we had prior to our review of the producers 2017 earnings season. In a series of eight parts in February and March 2018 we were able to review the user community and service providers competitive advantages, corporate structure, role within the industry and their role in the development of the Intellectual Property that makes up the Preliminary Specification. As we discussed, the overall objective of the user community is that they’ll become the state-of-the-art providers of leadership and capabilities in terms of oil and gas administration and accounting in North America.

The topic that I want to discuss today is leadership and it’s development within the user community. I recently stumbled upon what I think is a game changing analysis of leadership from PriceWaterhouseCoopers and Harvard Business Review. Entitled “Strategy That Works: Five Acts to Transform Your Future.” The pertinence of these ideas to the work that will be done in the user community and the service providers is directly relatable. I highly recommend reviewing the following short video to capture the differences that this thinking represents in comparison to traditional ideas. The video is a summary of the book they’ve published “Strategy That Works.” More information on these and the entire thrust of their initiative can be sourced from here.

PWC and HBR state that business strategy is broken, and state there are five unconventional acts that companies can use to win. The first of these acts is “Stop chasing the market.” People, Ideas & Objects offer a substantial business opportunity for those in the oil and gas administrative and accounting fields. Working over the mid to long term we believe those members of our user community will be able to establish themselves as leaders with the competitive offerings and advantages we’ve discussed in this series. These opportunities are not available to generate revenues tomorrow, but chasing the market doesn’t build value, in my opinion, and appears to be consistent with the ideas of the authors of this book and video. What members of the user community will be able to do is position themselves to generate the revenues in the mid to long term.

The second act is “Translate the Strategy into the everyday.” Which is exactly what we will be doing in People, Ideas & Objects Preliminary Specification, the user community and their service provider organizations. “Start blueprinting and building unique cross functional capabilities.” Taking the existing oil and gas and service industries, and the vision of the Preliminary Specification and determining, with the direction of the producers, what, how and why things need to be done in the industry. Build the software that will identify and support that structure and implement it across North America. From both a software and capabilities point of view determine the organizations necessary to support the user communities customers, the profitable oil and gas producers.

Act three is “Put your culture to work.” Everything that is done in the Preliminary Specification, the reorganization of the industry and the producer is done to align with the culture of oil and gas. The development of the user community and service provider is to accommodate the unique culture of the oil and gas industry. Using the Joint Operating Committee as the basis of the dynamic, innovative, accountable and profitable oil and gas producer is the source of all of the changes that are made in the design of the Preliminary Specification. What we are doing is we are moving the compliance and governance framework of the hierarchy into alignment with the Joint Operating Committees legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks. The alignment of these seven frameworks is what provide us with the speed, accountability and profitability that we desire in our oil and gas producers.

I am very critical of the cost cutting that is done in the oil and gas industry. Reading my past posts in our “These Are Not the Earnings We’re Looking For” series will show the areas of our concern. The fourth act in the video is “Cut costs to focus on strategy.” And I could not subscribe to their recommendation more than I am now. The authors suggest that cutting aimlessly is, I’ll put words in their mouth, useless. Instead focus your cost cutting on areas that are redundant to your strategic needs and into areas that will “supercharge” growth. One area that I believe the North American oil and gas producer can participate in this type of investment is by sponsoring the Preliminary Specification, our user community and service providers.

“Shape your future.” Is act Five. It is here that we come into alignment with the author's thinking once again. The user community is being looked too to provide the leadership and capabilities to the oil and gas industry for the mid to long term. We have endowed the user community with the tools necessary for them to orchestrate the changes that the oil and gas producers will need to maintain their profitable operations. These tools include our software developers only look to the user community for their input. And the user community is in control of the Intellectual Property making up this initiative.

The point here is that People, Ideas & Objects and these authors are in complete alignment in terms of what the future needs of organizations and industries are. I am elated with this work, and very pleased to be offering the user communities participation to those who are the future leaders in the oil and gas administrative and accounting fields.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.

These Are Not the Earnings We're Looking For, Part XII

One thing that the Preliminary Specification provides is a performance basis of evaluation of the producer firm. Since only profitable production will be enabled through our decentralized production models price maker strategy. Producers will seek to maximize profitability at all times by ensuring that their unprofitable properties are shut-in and aggressively worked over so they can be returned to profitable production. Our basis of profitability is based on a competitive investment environment that exists in the 21st century. Allowing assets to bloat on the balance sheet for decades provides no value for anyone other than for the CEO to brag amongst their friends. This accounting sleight of hand has been enabled for the past four decades by the SEC’s very odd accounting for oil and gas. Producers have over these decades taken the capitalization of every cost they incur to ridiculous levels to ensure that they report the highest “accounting” profits they possibly can. Accounting in oil and gas is about deceiving everyone that your profitable, integral and a good corporate citizen. Performance never enters into the mindset of anyone. If there was a performance mindset they would want to recognize the capital costs stored in property, plant and equipment to the income statement as quickly as possible.

I am not seeing any changes in the numbers or the attitudes of the producers regarding the time frame in which their depleting their capital assets. If they did change their time frame and adopted our recommendation that all of the property, plant and equipment currently on the balance sheet should be depleted within the next 2.5 years. Then the scam would be exposed for what it is. Producers have been selling oil and gas for decades at discounted prices to the consumer. This would become evident in an appropriate performance based accounting. Losses would be chronic, systemic and spectacular. These losses have been mitigated in the past decades by not recognizing the cost of capital in a capital intensive business. And having the shareholders fleeced annually for additional capital to make up for the cash shortfall the organizations incurred due to the low commodity prices they’re charging. To me this has been industry “common sense” since the time the SEC implemented their policies in the late 1970’s. It has become the culture of the industry to distort their performance in this way.

The attribute that keeps the doors open and the pumpjacks pumping is the fact that the industry is a capital intensive industry. The amount of capital that was taken from shareholders in the last number of decades. Annually and seemingly by every producer, is substantial. These investments now provide the cash flow that fuel the standard of living that our friends the bureaucrats enjoy. Whatever they spend and how they spend it in this area is never really known or understood. Overhead for our sample producers ranges from 1.5% to almost 20%. I would suggest the producer that is incurring the 20% is accurately reporting their overhead. The average for our sample of 23 producers is 6.21% which I think shows the extent of the capitalization of what others would call overhead costs. The game of who can capitalize the most costs came to somewhat of end a few years ago when individuals were charged by the SEC for capitalizing royalties. That as we know was PennWest, who now call themselves Obsidian so that people will forget that they tried that. The point is that this is evidence that these people can be embarrassed, and the fear of embarrassment will affect their behavior.

As good as that news is about the cash flow continuing and the bureaucrats keeping the show on the road. The overcapitalization of the industry is the dead weight, the albatross that they can never get out from under. What took decades to build up will not be resolved with accounting trickery in the next 15 minutes. As easy as it was to defer the recognition of your capital costs as a young, upstart producer with shiney profits. That deferral comes back to haunt you at some point. On an industry wide basis these balances have been bloating for the past four decades. Bureaucrats have been so enamoured with them that they use the property, plant and equipment account as evidence in the valuation of acquisitions and divestitures. Paying billions of dollars for big numbered assets is a fools game. Sure you can substantiate the validity of the value with the present value of the reserves. However if you critically evaluate the performance of the producer the assets have been sucking their shareholders down a big black hole. That big black hole, I’m suggesting, is only going to be getting bigger and its gravitational pull will be getting stronger.

In light of all of this. The one question that I have is why are we leaving this cash flow that is being used to support the bureaucracy in their hands? That is the only question I have based on my analysis of the sample of 23 producers that I reviewed. The only purpose to the existence of these organizations, other than drilling more wells that do nothing for the business, is unknown to me. Just drill more until the market collapses again. And maybe there is a performance and productivity here that I am unaware of. Nonetheless, why are we leaving the cash flow in the hands of these bureaucrats?

We’re going to shift back to our discussion of the user community and other topics next Monday. Today is the beginning of reporting season and annual general meetings. We’ll return to these topics and why they’re not the earnings we’re looking for after our sample of 23 companies have published their first quarter reports.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.

These Are Not the Earnings We're Looking For, Part XI

Big numbers continue to be produced when it comes to anything associated with the Permian basin. The volume of associated gas production is stratospheric at approximately 10 bcf / day. The expectation is that this may exceed 16 bcf / day when all the screaming and hollering is done. That is more natural gas production than all of Canada. As it stands today Permian gas competes directly with Marcellus gas for the least expensive gas in the U.S. This being a result of the lack of take away capacity in the region. Almost 8 bcf in pipeline capacity will soon be coming on line to move the Permians associated gas to LNG facilities. Producers are sitting around waiting for these pipeline companies to build this new takeaway capacity at which time they will be able to release that trapped gas into the larger U.S. market. As I’ve stated before I think that’s what they’ll be doing, moving their trapped gas from low priced, depressed areas like the Permian and Marcellus to flood the market and depress the natural gas prices across the country. Unleashing the constrained gas in the Marcellus and Permian may have the unintended consequence of overwhelming the rest of the continent’s natural gas market with suppressed deliverability about to come online.

Recently Concho Resources announced a merger with RSP Permian Inc that is subject to both firms shareholders approval and is scheduled to be closed in the third quarter of 2018. Concho’s acquisition of Permian is valued at $8 billion. Concho has about $13 billion in total assets generating $2.5 billion in revenue per year. To give you an example of how far gone these oil and gas companies are, and how far I think they’ll need to travel in order to right themselves. It would be my opinion that Concho should have $2.5 billion in property, plant and equipment generating $13 billion in annual revenues. Since the merger deal includes the value of the debt, it would seem the premium paid for Permian is about $2 billion. Concho or the merged entity will have $21 billion in assets and approximately $3.5 billion in revenues. The only game in oil and gas is to have the biggest balance sheet, which will enable the CEO to strut like few before him.

Neither of these firms has ever truly been profitable. They collectively have reported almost $1 billion of those oil and gas type of earnings between them over the lives of their firms. Even over the long term considering an inflation induced business model. Under People, Ideas & Objects Preliminary Specifications decentralized production model the most effective use of a producer's time, energy and money would be to return their inventory of shut-in, unprofitable properties to profitable production. This would be done through the hard work and innovations of the producers earth science and engineering capabilities. Only when they have no inventory of shut-in properties would it be reasonable or justified for them to turn to the marketplace for more land, production or acquisitions. This rushing of everyone into the asset that grabs most of the press headlines has been part of their inflation induced business model and has been going on for 40 years. It’s almost like gaming the stock price is the objective. Today it’s the Permian, recently the Marcellus, prior to that any shale formation, heavy oil had its day and before that it was SAGD. On and on the spendaholics rush around with sirens ablaze that they’re in a panic to acquire the only thing of value. Chesapeake was the prior darling of the day. Acquisition of reserves at any price to boost the balance sheet is the name of the only game that is ever played in oil and gas. Reserves are useless if they can’t be produced profitably. What the acquisition of Permian by Concho shows is that this fact has not been learned and the status quo that has brought these very difficult times in this industry remain well entrenched.

What I think this merger looks like is two swimmers who are in jeopardy of drowning, then decide they have a better chance of survival by holding on to each other. Maybe these mergers will become the strategic flavor of the day! My suggestion would be for the industry to look northward to the pleasant business environment in Canada. I haven’t held out much hope for Canada these past few years. The business model here has been the same as in the U.S. Although the U.S. is much larger, they may be able to learn that continuation down this same old, same old road will present similar difficulties to the ones now being faced in Canada. More or less it’s get out of Canada as quick as you can. Shareholders are fleeing, Pipelines under development are being stopped and maybe the smart producers are moving to the states. There is nothing much for anyone here in Canada except for the bottom feeders. It is far easier to bail on the Canadians then it ever would be to bail on the American producers. Which doesn’t mean it can’t and won’t happen. I’ve been saying oil and gas is in serious jeopardy for a few years. It just doesn’t have to be this way.

What will the Canadian producers do to fix this? They like the rest of the industry have certainly done nothing so far. The problem still exists even after a decade of natural gas overproduction. Market rebalancing, discipline and every other excuse has been put forward and nothing has been done. Now it’s expected that we’ll just leave them alone and they’ll do their thing? What if these are the good times? What if the next 5 years present more difficulties than the past 5 years? Oil prices peaked at $145.29 and natural gas at $13.58 on July 3, 2008. Both collapsed as a result of the financial crisis to well below $45 for oil and $4 for gas. Neither has truly recovered since, but oil did have 2011 to 2014 in which the price averaged almost $100. We’re all aware of the sharp decline in prices since then and the efforts of OPEC to “rebalance” the market. If producers future is dependent on their stock price matching the changes in commodity prices. Is it reasonable to think the future is theirs? If just drilling more wells is their future, what could go wrong?

Natural gas as a business has been fundamentally destroyed by overproduction. Nothing is being done about that, or even discussed. Oil prices are up therefore drilling for oil is the “thing” to do. Around 1,000 rigs are operating now. Up from the days when oil collapsed. What is important to understand is that there’ve been innovations in the service industries. The speed and overall time to drill and complete a shale well has collapsed. Therefore on an annual basis those 1,000 rigs will drill and complete more wells. Oil prices are high today. Certainly not high enough to make the reserves profitable. But no one in the industry will be concerned about that until the commodity prices collapse again.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.