The End of the Year

It seems to me the only people that are confused by the situation in the oil and gas marketplace are the bureaucrats themselves. Should they stay or should they go. What we are witnessing in the commodity markets is volatility. Volatility leads to change. Some may think that change is upwards I just can’t see that with the deliverability coming out of the U.S. It is wholly unconstrained and out of control from a business perspective. Even without the support of investors and bankers regulators are having to materially revise their last months production estimates upwards based on the performance of industry. How do you stop the most costly production in the world? It would appear that governments are reluctant to step in and allocate production. How can an industry that has no concept of business take on a discipline that has never been exercised or understood?

To consider the Preliminary Specification decentralized production model’s price maker strategy is asking these producers to collude as far as they’re concerned. Nothing could be further from the truth. If making independent business decisions based on actual detailed accounting facts of profitability or unprofitability is collusion then every other industry is colluding. News a few weeks ago that congress was considering legislation that would require OPEC to produce at full production at all times. That would be the beginning of the end of the authority of congress. Not only do they not have the authority but it doesn’t make any sense. Every business manages the inventory that exists in the market to ensure that they don’t overwhelm demand and create a drop in the price. Scaling back or shutting down production to manage their inventories is a common business practice that is used and taught in universities. It is not collusion, a specious argument, it's how you maintain a profitable operation. In a competitive free market economy if the price gets too high then competitors will form to provide a check and a balance on excessive price increases. That’s how it works. And that’s why government mandated production allocation is such a bad idea. It’s a very good idea for the bureaucrats when they can sit on their never ending government mandate to line their pockets for that much longer.

The bureaucratic business model employed in oil and gas today involves these long years of austerity where producers use their dull, blunt instrument of scaling back capital expenditures. This creates shortages in the long run that eventually and dramatically affect prices then the stampede of investment and drilling begins again until it becomes “uneconomical” once again. What they mean by “uneconomical” is unknown to me as they never make any real profits at any time their business model is in play. We can see that this business model has worked well in the industry when next year we’ll be experiencing our 28th “bad” or down year out of the past 33 years. When oil and gas prices were high earlier this century the only ones making excessive profits were the bureaucrats who had participated in creating new definitions of compensation and excessive. Expectations of the return of those good days have had to be put on hold as the development of shale seems to have interrupted the holiday portion of their business model. Nonetheless, that others who have participated and maybe lost in the industry as a result of these bureaucratic actions is not pertinent to the question of how bureaucrats do their job today. Bureaucrats just wish to be supported and loved in these times of difficulty.

How and when the Preliminary Specification is picked up and by who, or if ever, is of no concern to me. There is nothing more that I can do to solve this as it stands today. With 5,000 man years ahead of us anything I do is mighty futile. There are many plans and strategies in place. We have worked to reduce the time required for development as much as we can think of at this point. People within the industry have to decide if their in, or out. Investors have to decide if their in, or out. And either support the development of the Preliminary Specification, the rebuilding of the oil and gas industry on that vision, or let things get to the point where oil and gas prices spike for the mid-term. As I said yesterday I’m satisfied with the work that I’ve done. I think I’ve saved some material amount of years for the industry. During a time where trillions are at stake each and every year, and we face our most challenging future. I’ll continue writing and pointing out the flaws in the current system. It’s what I do. However, I have to spend material amounts of money on the user community and it's not that I don’t want to, it’s that I can’t. So for the first time in our 27 years we are now at a standstill. People, Ideas & Objects is not progressing forward without our budget in place and people making the active decision to be involved. And that is where we stand today.

Some may think this is a capitulation of my responsibilities in raising our budget. I disagree. With no resources I have no capability to raise any funds. I don’t even know who would provide them. Our coin offering has always been as much as five years away. It may be even further now. If industry wants to wait that long then fine. My issues are resolved quite simply, and none of those issues have anything to do with the price of oil or gas. Those that do have issue with the price of oil and gas have a lot at stake, not me, it’s time to act in order to resolve them. I offer the Preliminary Specification as a solution. I’m sure there will be more solutions arriving soon. These people will need to make their decisions and we’ll have to live with them. I feel that we’ll not be the first choice of whomever it is. Other attempts will be made at great cost that I believe will lead to failure. You have to do the research which took me ten years. They’ll also need something other than the Joint Operating Committee as the base of their solution. That’s taken. Until whoever it is that provides the resources for this initiative there is little that I can do. And therefore I choose to do nothing further. Mine is the rational choice after 27 years of insanity. The first thing I’ll be doing is taking some time to recover. I’ll be returning January 14, 2019 and everyone have a Merry Christmas.

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.

Yeah, But at Least I'm Satisfied

It’s obvious that the volume of water that has passed under our bridge is too high for People, Ideas & Objects and the bureaucrats to overcome and work together. I suggest the bureaucrats leave. I’m confident enough in this issue to have spent the past 27 years of my life knowing that the mess we’re in today would come to pass. I therefore know that it’s not going to be rectified here in the next six months, or ever under the current administration. The issue is the bureaucrats. They can’t, won’t and will not ever change. What the industry needs is comprehensive change in order to survive. Without the changes prescribed in the Preliminary Specification we will consistently have all that we have today. How many people believe that today is the time for action? I say better late than never. The time to act was decades ago when the party really began, when oil was at $100+ and natural gas was well into the teens. That would be how you effectively manage a business, but those that were at the party chose not to adopt any changes. Everything was fine thanks.

Today the mad dash for Information Technologies golden value-add is all the rage in oil and gas. It’ll be Big Data, Machine Learning and Artificial Intelligence that drives the industry forward onto a greater more prosperous future. Looking to the technologies for the solution is the wrong direction. It’s the business that’s failing. The Internet enables new business models and methods of organization that were not available before. The way that the producer is organized today is what’s needed to be changed. The way that the industry operates is what needs to be changed. The one basic fact that we know is that specialization and the division of labor are responsible for all of the economic value that has been generated since the late 1700’s. Presenting us with a fantastic opportunity today, through the Internet, to organize ourselves in ways that are impossible otherwise. These organizational methods provide rich value for everyone involved in these disintermediated businesses. All of those except the bureaucrats and their archaic, costly and redundant ways. The time for change in oil and gas is now.

My argument has been with those that have proven resilient, in a bad way, to hang on to their self-interested and destructive ways. We can see the possibilities through the reorganization that the Preliminary Specification provides, why would I concern myself with getting along, or doing anything associated with the people who’ve brought the industry to the brink of collapse. Political niceties aside I have difficulty understanding how they deserve the benefit. Spending investors money with no accountability whatsoever. When asked about the capital costs incurred two years ago, I always received the response that those were sunk costs and irrelevant. The culture has grown so out of sync with the reality of businesses performance that no one was talking about anything rational. Investors believed what they were told when the financial statements showed profits galore and the discussion only involved the number of wells to drill next year. As long as the hamster kept running at full speed everything was ok.

In business there’s always the eventual misstep or trip up that causes problems. Overproduction overwhelmed the marketplace from 1986 to the early part of this century and then resumed in both gas and oil as a result of shale. When we enter 2019 we’ll be able to count only 5 good years in oil and gas out of the past 33. A stellar performance. If you read the media today it’s the Saudi’s and others who are overproducing and it's they who are the high cost producers. This is incorrect and anyone can see that the costs that are included in their calculations are what the Saudi Kingdom costs. North American oil and gas costs do not incur the costs of the entire Federal government so why would the Saudi’s include them in their oil costs? The high cost producer is the swing producer. A role the North American producers are unwilling to accept they’re responsible for. Swing producers alter their production volumes based on the price they recieve. If the price is profitable for them they’ll produce. If not they shut-in the unprofitable production. They therefore dictate the price of the commodities. The North American producers unwillingness to adopt the swing producer role has the global petroleum sector dealing with an unaccountable and unprofitable tyrant that is happy filling their pockets at everyone else's expense.

People, Ideas & Objects have always argued that the financial losses would lead to other difficulties. Now more than ever we see the validity of that argument. The financial, operational and political frameworks of the industry are held by others who are not participants in the industry. The only thing left to destroy are the capacities and capabilities of the industry. If we keep moving forward on this basis we’ll be unable to pick up where we’ve left off. These capacity and capability losses will be the most damaging for all concerned. They will also be the last to be remedied after we build back the financial, operational and political frameworks. You can see we have some work to do. Bureaucrats say that their systems are more sophisticated than the Preliminary Specification. And that is true, it will be a while before our user community brings ours up to full speed. What the current producer systems don’t provide however is a viable business operation. We don’t have to build just the Preliminary Specification but also the financial, operational and political frameworks, then focus on expanding the capacities and capabilities that have been lost. That is of both the producers and industry. I read the other day that the Permian was profitable at $30. I’ve also heard that President Trump has significant influence over the Saudis and hence the price of oil. Which oil and gas producer is going to tell him that they lied about what their performance was. For that matter which individual bureaucrat is going to get up and say that they’ve been lying about what they’ve been doing these past decades. Anyone?

Producers can whip out their AI, Machine Learning and Big Data solutions here in the next few quarters. I think it’s just more of the same. Bullshit baffles brains. Anyone hear anything this past year from the producers that came to be? I can’t think of anything either. How much more of this do we have to endure is exactly equal to the time that we cease to function as an industry. I don’t know why we have to go there. It seems to me that we already have a significant amount of work ahead of us. If we got started today that would be best. I will tell you that I am pleased that I disrupted my life for the past 27 years in order to do this work. That the issue is still here and unresolved seems a bit like a failure but the fact that we have the solution is not. I got it done and in my opinion I’ve been able to give the industry at least a ten year head start on solving this problem. That’s because it takes so long for this kind of work to be done and it can’t be rushed. So good luck bureaucrats. I hope your house is in order.

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.

Intellectual Property Rights

The key advantage of the work that I undertook in taking the idea of using the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. Is that through the act of publishing these 2,681 blog posts is that I’ve earned the copyright on the contents of that material. Although you can never own an “idea” what copyright provides is the monopoly right to express an idea and create derivative works from that. Therefore when it comes to the expression of the ideas contained within this blog and the primary derivative work product from that, being the Preliminary Specification, I have the monopoly rights to contractually control how those ideas are expressed. Whether through this blog, the wiki where the Preliminary Specification is held, software that is subsequently created or any other medium that is published. There have been two areas where the 21st century is fundamentally different than ever before. Intellectual Property is the only asset that holds any value in the future. In my opinion. And software will be the only business that exists anywhere and everywhere. If you’re not in the software business now, you will be soon. If software is the only business that exists then whoever owns its Intellectual Property will hold its value.

Intellectual Property can be owned outright as the first method of making a living in the 21st century. You can also make a living by having access to Intellectual Property through contractual arrangements. Think of the user community participants role here. The third method is to work for the individual or company that has Intellectual Property or has contracted for it. These I believe will be the methods that people will have in which to find employment in the near future. In terms of every business being a software business we can see that beginning to be developed here at People, Ideas & Objects. (A quick note is that People, Ideas & Objects is the organization that I have contracted to commercialize my Intellectual Property.) The oil and gas business will be a software business when people realize that it’s not enough to own the oil and gas asset. It’s also necessary to have access to the software that makes the oil and gas asset profitable. Without the software that is defined in the Preliminary Specification we have the situation that exists in the North American oil and gas industry today. A situation that is not sustainable on a stand alone basis. As it stands today, I am unaware of any other method of generating sustained and real profitability in the industry.

It is our user community that is granted specific rights to develop this Intellectual Property in the user community vision. These rights form the base of the competitive offering that the user community member and service provider have in joining these developments. Potential user community members should ask themselves what does employment in oil and gas provide you in the long run? User community members are granted a service provider offering based on the input that they contributed to the development of the Preliminary Specification. It will be their service provider organization that is the source of their long term wealth generation based on the Intellectual Property that is generated here.

These facts stand in stark contrast to the actions and behaviors of the bureaucrats in the past thirteen years of this blogs existence. They were fully aware of the implications of the Intellectual Property that we were developing when we published our initial research proposal in August 2003. I was looking for funding in order to undertake the research in order to complete some basic research questions that were subsequently answered and published in the release of the Preliminary Research Report. The two interesting aspects of this situation was we were looking for $750 thousand to conduct this research. If the industry would have funded it they would have shared in the base of the Intellectual Property that has been generated here. The second interesting aspect was a month after our publication of the Preliminary Research Report in May 2004 we found that the industry had a “large research firm” beginning to conduct the same research on their behalf. This answered a few questions that I had during the month after the Preliminary Research Report was published. Those questions were why is everyone so angry and why are they only asking who paid for our research? The simple answer was, I did and as a result it formed the base of my Intellectual Property.

What I did next set the relationship between ourselves and the oil and gas bureaucrats on a permanent irreconcilable war footing. I sent an email to all of the CEO’s that we were in contact with and as many others as I could find. The email put the CEO’s on notice that the Intellectual Property in the Preliminary Research Report would be part of the foundation of what we were proceeding with. And based on their previous attempt, that we have not licensed this in any way. We did so on the understanding that the CEO’s and their organizations are law abiding citizens and would ensure that they’re organizations did not violate my copyright. Tossing the cat amongst the pigeons as I like to say. And don’t get me wrong, like to do as well. Needless to say this is probably one of the many reasons that I’ve not received any support from the industry. Producers were not, and never have been our clients in these developments as we believed disintermediation was our role in their lives. Creative destruction is our method of implementing the Preliminary Specification. The oil and gas investors and most particularly the user community are our clients.

The implications of the Preliminary Specification in oil and gas remains the same. I have only contracted People, Ideas & Objects for its commercial development. With all of the software development that is beginning in oil and gas, and all that may begin in the near future. They would fall under the same notice that we provided back in 2004. That none of the producers are licensed in any way to prepare derivative works of any of the Intellectual Property contained in the Preliminary Specification or this blog. They can come up with their own ways and means in which to operate their firms. It’s real easy, I did it. No reason they can’t. I concluded in the Abstract of the Preliminary Research Report that “just as Albert Einstein once said, that today’s problems will not be solved by today’s thinking, producers need to consider this report in a manner that considers the changing structure and success in their industry.” These systems developments being done independently today by the producers. The ones that are being initiated now are limited in their thinking, and limited in their scope of thinking due to my Intellectual Property precluding them of what we’ve written about. How will their efforts deal with these and provide for a successful, profitable oil and gas industry?

There are penalties under the law for each instance in which my copyright is violated. These would be pursued diligently and repeatedly if the producers forgot that they are law abiding citizens. Maybe we’ll never develop any software ourselves, just live off the penalties that the courts provide us. It’s up to the producers on how this gets played. I would suggest, and there’s no reason for them to believe or listen to a word I said. That if they want to violate my copyright then they should think about the broader implications of that policy. If Intellectual Property is the only asset worth having, which is possible, who would want to have anything to do with an oil and gas producer who so flagrantly abused someone else's Intellectual Property. It’s just not the wild west in this arena anymore. In the 1990’s they could probably get away with that strategy. Today, if I see someone violating someone else’s Intellectual Property, they’ll never get their hands on anything of mine. And the producers might think that People, Ideas & Objects doesn’t really have anything, and that’s the point. They’d have a lot to lose.

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.

Nothing To See Here But Blind Rabbits

The fact of the matter is that the oil and gas industry is going to have to go through a number of false starts regarding systems development. We’re not the flavor of the day for the bureaucrats, nor are they for us, if you hadn’t noticed. War is what they wanted, war is what they’re getting. It’s just that today’s actions in terms of the producers turning to internal software developments to build the value that they now know systems can provide are a wee bit too late. If you recall throughout our discussions on this blog I’ve documented the history of the big vendors in terms of their ERP involvements in oil and gas. Towards the end of the 1990’s Oracle left as a result of the inability to secure any commitments of time and mostly money from the oil and gas producers. In frustration and realization at the small size of the market they felt there was no loss for them if they walked. Flash forward to late 2004 / 2005 IBM had invested in PriceWaterCoopers IT business as a result of the accountants divestment of software. Picking up Qbyte and PW/SQL which provided them with a market dominant position only Microsoft could replicate. Yet, they too experienced the same frustrations as Oracle did years before and as a result, they were not going to undertake the necessary developments on their own and therefore sold these applications to P2. Giant shrugs were seen across the oil and gas producers regarding the ERP landscape.

Fast forward a decade or more to late 2018 and suddenly the producers see what it was that Oracle and IBM were saying those many years ago. If only. In terms of new ERP systems development in oil and gas since 2005 People, Ideas & Objects have shared the marketspace with no one. Granted it’s been lonely, but we knew that to do this right doesn’t involve just cracking open new boxes of software. Not that anyone sells software in boxes anymore. It requires new ideas and years of research to prove those ideas are valid. Much like the idea of using the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producers. That was my thesis for my MBA which we published in August of 2003 as a research proposal to the oil and gas industry. Industry said they “weren’t interested in small research firms.” Oddly enough it’s also when the beatings with the baseball bats out back by the dumpster began. We completed the research which is represented in this blog to prove the idea regarding the use of the Joint Operating Committee was sound and then codified our research into the Preliminary Specification in December 2013. Determining “what” and “how” the industry and producer had to look like in order to operate based on these ideas. Since then we’ve let those ideas percolate and permeate in the brains of our user community in terms of their participation, and most importantly their future contributions to providing the oil and gas producers with the most profitable means of oil and gas operations.

We’ll be interested to see how the oil and gas industry changes its stripes during the development and implementation of their systems. Maybe Leopards can change their stripes! Bureaucracies have proven through this era of disintermediation that they are incapable of doing anything but striking the Deer in the headlights pose. I have no doubt that these bureaucrats will produce one of the finest Artificial Intelligence systems that scans big data in the industry that’s been analyzed with Machine Learning that pops out the conclusion. I would just argue it’s got nothing to do with the IT end of the equation. If it did, and with the vast amount that is spent each year by each of the producers in order to support the IT Manager’s empires, these issues should have been resolved by now.

So far this would be a small portion of my practical argument. I’ve learned over the years of doing this the producers are not practical. Otherwise why would I still be doing this. Knowing what I know today I’ve convinced the world that the value proposition of the Preliminary Specification at $25.7 to $45.7 trillion over the next 25 years is valid. It has become real and is the issue of the day. Therefore the legitimate threat that People, Ideas & Objects presents to the bureaucrats is more real than it ever has been. All their efforts over the past decades have not been successful in slowing us down. The one opportunity for them now is to show that any time and money invested in ERP systems is futile and wasteful. Ensuring that they are the only solution to the industries issues and therefore shutting down any threats to their franchise for the short to mid term. They may just be mouthing the words that they think people want to hear. Whether that is the case or not I don’t know. What I do know for absolute certainty is that none of the IT related efforts are going to be finished, successful or be anything but a waste of time and money. At best if they could figure out a way to work together in the industry. Yes the solution requires some industry related applications like the Preliminary Specification. Vote for a leader to provide the solution. Then do the process correctly by involving the research that is necessary and then generate and involve a user community. That will put us in the 2030’s. IBM and Oracle really new what they were doing! But so did People, Ideas & Objects by completing that work while the party was going on in the other room. The one question we do have for the bureaucrats is. Now that they know the Joint Operating Committee is safe and secure with us and can’t be used by them, what organization will they be using for their systems development?

At the same time I have to question my motivation in doing this for so long without any support. 27 years is a long time to keep harping about an issue that only becomes evident after so much time. I’m lucky that way I guess. You don’t have to be crazy to do this job but I find it sure helps. My motivation is my concern that we’re heading down a big black hole that we may not be able to reverse. If the oil and gas industry fails what happens to society and us in general? Will the Fed just quantitatively ease more barrel’s into existence? Crazy, I know. Members of our user community have seen my brand of crazy. The investors in oil and gas have also been party to my style of crazy. I can assure the producers that both of them are very satisfied with my kind of crazy. What they don’t condone is the producers, whether legitimately or not, chasing down any more blind bunny trails. That kind of crazy is unacceptable to them.

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.

To Produce, Or Not Produce, That Is the Question

On Sunday the Alberta Premier made the decision to implement a production allocation methodology for Alberta based producers. The purpose of this was to attempt to alleviate the large differentials that are being experienced in both oil and gas in the province. This is on top of the decisions made by the Federal government to purchase Kinder Morgan’s interest in the TransMountain Pipeline and the Alberta Premier's prior announcement to purchase tank cars to ship oil out of the province. Reviewing this blog you’ll find that I’ve been critical of the manner of management in oil and gas, but most particularly I have a strong disdain for the Canadian producers. They have repeatedly used governments as foils in their plans to continue to “muddle along” and do nothing as their strategy and operating procedure. As we’ve noted, investors and bankers are so impressed that they’ve withheld their participation for years at this point and there doesn’t seem to be any compelling reason for them to return. Clearly producers are trapped in a downdraft.

I appreciate Premier Notley’s consideration regarding two important concerns that I have with government mandated production allocations. The profitability of the industry, the distribution of those profits across producer sizes and her comment regarding the free market sorting this out. I want to address the distribution of profitability in the industry and the difference between the existing business model and People, Ideas & Objects Preliminary Specification. Today small producers are at a distinct disadvantage having to carry the overhead burden necessary to operate in today’s oil and gas industry. This burden is several million dollars per year and has to be maintained until enough momentum can be generated in the organization to sustain itself. An incomprehensibly difficult task. In the Preliminary Specification this has been eliminated by creating a variable, industry based administrative and accounting capability to replace the fixed, producer based administrative and accounting capabilities. Capabilities that today are generic, yet unshared and unshareable in the current business model, and replicated within each producer silo. In the Preliminary Specification with the service providers providing the administrative and accounting on a service fee basis all the costs of all the producers become variable based on production. The costs incurred to maintain the competitive advantage of the earth science and engineering capabilities are also developed with the opportunity for these to be provided as a service to a marketplace that is generated in our system. Creating a second source of consulting revenues to assist in offsetting these costs. Setting the competitive advantages of the producers earth science and engineering capabilities, and land and asset base as the foundation of the producers ability to differentiate itself in terms of exploration and production of oil and gas. A stark contrast to today’s competitive sameness that is unable to be differentiated as to who are the capable oil and gas producers and who are making it up as they go along.

The difficulty with this latest government decision is it sets in place the status quo bureaucracy and business model in concrete. There will be no change in the necessary behaviours of the producers now that they have the government to turn too to appeal to their justification as to why they should produce and others shouldn’t. I have worked for 27 years to bring the alternative solution of the Preliminary Specifications production allocation methodology to the marketplace. The most fair and reasonable production allocation methodology based on profitability. If the property is profitable it produces. I have had to fight and wage war with the bureaucrats in order just to survive. Who’s going to be the next fool Canadian to offer some new idea in oil and gas when the government is the one that is turned to and the government is the one that picks up the role of managing the issue for the “do nothing” producers. All at the expense of the entrepreneurial initiative in the marketplace. Seeing these actions I’m sure they’ll inspire the bankers and investors to jump back in as quick as they can. That and the fact that any investor will be hard to convince that their new wells being drilled will be granted production rights from the new production czar in Edmonton. This is going to be a great place to do business now. All I can say is that I thank god for the American’s.

Which is maybe the real issue for the Canadian producers. The U.S. has had Canadian oil and gas imports for decades and these exports have been a substantial part of the Canadian oil and gas industry. With shale the amount of oil and gas production in the U.S. is on the verge of self-sufficiency. The Canadian imports are down substantially from years past. One of the main reasons the differentials are high is the pipelines that have been cancelled and delayed were to take Canadian production to tidewaters. Natural gas is seeping into the Canadian market from the Marcellus formation in Pennsylvania and will eventually eliminate much of the US demand for Canadian imports but also begin to satisfy the Ontario and Quebec markets with less expensive natural gas than what Western Canada can provide. (It’s a little under $2 to ship gas from Alberta to Ontario.) In other words the Canadian producers will only expand their natural gas differentials from here. The government's involvement has only begun with this years activities being documented above. I believe, these government actions eliminate the justification for any entrepreneurial opportunity and desire.

So the scenario is as follows. The demands for Canadian oil and gas will continue to diminish as a result of continued increases in deliver ability from U.S. based shale. Leading to greater demand for more production cuts instituted by the government. Creating a hostile, bureaucratic environment where no one wants to invest. Leading to less activity in the field bringing about a lower production profile in the province. Reducing the motivation for the governments to build their pipelines to tidewater, leading to chronic and expanding differentials. Leading to greater production cuts instituted by the government, creating a hostile, bureaucratic environment where no one will invest… In what we can call an accelerated downdraft. People might want to argue with me. In which they would review the behaviours of the bureaucrats for the past decades and suggest something positive?

If anyone wonders why I’m so angry with the bureaucrats this government action defines it perfectly. Look around, all of this is their fault. The damage done in the past decade is horrendous. I’ve argued for a solution for many years and have had to fight hard with the producers for their own best interests. When the crisis begins to show a hint of what the future will look like they turtle and ask the government to fix their booboo. They are lazy, unthinking and pious bullies who think they don’t have enough support from Canadians. If the Alberta government didn’t institute production cuts it would have been the reason producers laid off 1,000s just before Christmas. With an election soon the bureaucrats know how to shift the blame. I said it would be surprising to see if these producers survived the rest of 2018. I don’t think they will. The Preliminary Specification gets rid of the organizational methodology that creates this issue and inaction. We need to build it.

I remember when producers were claiming they had a break even of $13 in the Permian. Ok, that just shows they have no understanding of the financial terminology or their business. I’ll take this situation as it will exist under the Preliminary Specification. Where the reorganization that we undertake of the producer and industry makes all costs variable. Based on our sample of 23 producers we estimate the actual gross overhead incurred, would be about $10.80 / boe across North America. Royalties would take up a large portion of the remaining calculation of what producers claim is their $13 break even. I think that what they’re imputing is that the operating costs in the Permian are $13 which may be in the ballpark. Royalties at $50 price would be $6.25 therefore our variable costs, not including capital which we’ll get to, are $30.50 and you have to understand I squeezed these numbers as much as I could. Giving the benefit of the doubt to the producers at every turn. An issue we may have to look at is the retirement of capital for the Permian and other shale formations under the Preliminary Specification may not adequately capture all of the capital costs incurred within the 2.5 years we propose as a minimum depletion schedule. The need to rework the well due to the steep decline curve may occur before the 2.5 years. If the producers are spending additional capital to re-complete the wells, then the initial drilling and completion costs, we believe, should have been recaptured by the revenues of the oil and gas produced and provided the shareholders with a real return based on real profitability. Otherwise we’re still just in the spending business. It would therefore be correct in this instance for the producers to state that their break-even was $30.50 with no contribution margin.

Our estimates of the costs from the financial statements of the 23 producers we follow would total $140. The difference between the $140 and $30.50 is known as the contribution margin. That would be $109.50 / boe in this case. Let’s assume the well cost $13 million to drill, complete and equip. Therefore to breakeven the well would have to produce 118,721 boe in order to achieve break even. Everything after that would be profit as all of the costs would have been retired. If more capital was subsequently spent to maintain the wells deliverability then these calculations would need to be revisited. The Preliminary Specification provides oil and gas producers with the most profitable means of oil and gas operations. Profits are earned and determined on a monthly basis. The breakeven analysis is used to determine if the project will payout and provide a return after all of the costs are considered. If we are looking at the property on a month to month basis and determining if the property should continue to produce based on its profitability / unprofitability then we will have to deplete its capital on a monthly basis. If the contribution margin is constant at $109.50, using the amount of capital that was required to be depleted, the $13 million cost to drill, complete and equip and reducing that into a time frame that fits within the 2.5 years, which is a competitive and reasonable amount of time for a producer to provide the investment community in terms of returning that cash. Now if the monthly production from the property is 118,721 / 30 months or 3,957 boe / month or more then the 2.5 years will be all that is required to retire all of the capital. Whereas if production is lower than 3,957 boe / month, the 2.5 years will not be enough and the property is not going to be profitable at the current price as represented in the contribution margin. Therefore it will need to be shut-in until such time as it can be enhanced in some way to reduce the costs, increase the deliverability or reserves.

Using these financial criteria we have implemented an entire new discipline into the industry. Much higher commodity prices will be needed to maintain production. The point of this exercise is to have the cash that is invested in the property by the producer returned to the producer as quickly as possible. And to have that activity attract the profits associated with the business returned to it consistently throughout the period that the property is producing. Many may think this will make it difficult to produce anything in terms of the costs of oil and gas operations. It is a different dynamic that’s for certain. If there is risk that the property will not return the money then it shouldn’t be invested. The mindless drilling of more wells in an effort to achieve “more” is not inconsistent with the vernacular of the junkie. They manage their lives about as profitably. A little more thought and and a lot more analysis will need to be done in terms of what actions should be taken by the producer. The oil and gas industry is a business and the Preliminary Specification recognizes that and begins to operate it in that manner. On the other hand, once the property has returned all of its invested capital its production will continue uninterrupted as its contribution margin will be more or less profit. This will be the other aspect of the dynamic of the business, the new production will always define what the price of the commodity needs to be. If new production is required by the market then the costs will drive those prices through this process. New production will be expensive on a boe basis because the costs of oil and gas exploration and production are expensive on a boe basis. This is called business. The reason your cellular phone bill is so high is that you’re definitely going to want to have 5G service as soon as possible.

Two items that I want to point out from a few weeks ago. There was some excellent analysis done here and here on the role that Wall Street had in fueling the spendaholics in oil and gas. Comparing the banks to casino operators. Banks didn’t care if the producers were viable or capable, they just wanted to make money on managing the deal. That was their business, much as it was in their dealings of Mortgage Backed Securities (MBS) and Credit Default Obligations (CDO’s) in 2008. Casino’s don’t care if you win or lose, the house gets paid no matter what. Not just a similar business, the same business.

The second item is Anadarko’s reorganization with their CFO taking over the CEO’s role. Here, here as the British would say. I should ask if this is the beginning of the mass exit of bureaucrats we’ve always noted would be their last act? More financial orientation in the CEO role is what we need more of, only I think it might be too late for the industry. Much of the damage is beyond any miracle worker at this point. I do not condone the focus of the new CEO on building systems, which as we’ve discussed is all the rage in oil and gas today. Producers destroyed all of the money ever given to them. Even on the basis of their specious accounting. The losses they’re now realizing are those we’ve discussed and quantified in our $25.7 to 45.7 trillion value proposition over the past number of years and as such producers now see that Information Technology is where the value is. They approach these software developments with no new ideas other than that’s where the money might be. They are not software developers. Their expectations of results in the short term are going to bite them when they’re held to account in the next couple of quarters for their costs not being that much different than our budget. What will be their vision of the industry? How will they convert all of their costs to variable costs as the Preliminary Specification does. How will they convert the spendaholic culture that exists today into the dynamic, innovative, accountable and profitable organization that we’re building in the Preliminary Specification? What organization will they use to align all of the frameworks in the industry? If they’re not interested in People, Ideas & Objects then we understand that, we only hope that they find that father time, their investors and bankers are so understanding.

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.