Bureaucrats Set a Fine Example

What People, Ideas & Objects had traditionally done at this time of year was to pressure the producers in the lead up to their Annual General Meeting. Understanding that soon after the annual report and AGM they would be able to escape any accountability for the rest of the year. What we saw last year was shareholder activists in both Crescent Point and Obsidian. Neither company were materially changed in the process and as a result have languished throughout 2018. As a result on December 31, 2018, Crescent Points market cap had achieved 22.4% of its book value and Obsidian’s market cap was 25.4% of its book value. These being reflective of the levels of investor faith in the management of those firms. For comparison purposes our sample of 23 producers market cap is 2.5 times its book value. And that includes both Crescent Point and Obsidians values. I might argue that book value is a poor judge in determining the value of a firm, which it is, but when values are as low as Crescent Point and Obsidians they reflect that something’s not right. Therefore if shareholders are unable to exact any change in the behavior of the management of those that are in the most need of change, then for People, Ideas & Objects to be doing the same thing and expecting different results from this AGM; is not a place I’m willing to admit that I’m at, yet.

Those with the dollars are more than able to exact the pain necessary for changes in the typical organization outside of oil and gas. What both People, Ideas & Objects and the oil and gas investors are clearly facing is an entrenched and self centered bureaucracy that has it far too good to make the types of changes that will ultimately upset their franchise. The more that action is required the more entrenched they become. They are able to sit back and do nothing but belittle others for their losses, divert cash flow to support their demands and continue unobstructed in doing so. All with a declared strategy of muddling along and doing nothing. With the cash flows generated in oil and gas, there will always be enough cash for them to survive handsomely. What ever could the issue be? One part of me wants to continue trying to pressure the producers through their AGM. Chronicling the further deterioration of my personal situation. The other part of me knows that this is a dead end that will not get the job done. Something has to be done in order to have the Preliminary Specification funded and developed.

Time is up, whether it’s obliviousness to the situation or a deliberate act the fact that the cash flow generated can buy the interests of others to align with the bureaucrats. That leaves us well outside of the industry as we have been for well over a decade. The source of capital necessary to make this change has to come from somewhere that can be motivated by that cash flow as well. If the bureaucrats are able to use the cash flow that they have under their control to line their pockets and to buy others allegiance then two can play at that game. The problem for the bureaucrats is that I have a value proposition valued in the trillions of dollars that represents the extrinsic value of the industry. Adding the extrinsic value with the intrinsic value they currently manage makes my capabilities more powerful than theirs.

I’ve now dealt with the part of me that wanted to continue pressuring the bureaucrats through the AGM. We are now putting our Initial Coin Offering forward as the means in which to proceed with the funding and development of the Preliminary Specification. It is through this coin offering that we are granting the exclusive right to the coin holder to use the software that is generated from the Preliminary Specification. We believe this will provide all concerned with the necessary changes and funding mechanisms to correct the issues in the oil and gas industry and move it forward through the next 25 years. A time which will be the most difficult in its history. The rights that the coin holder will be granted will be the exclusive access to the software that is derivative of the Preliminary Specification. Software that the holder of the oil and gas property needs in order to ensure that it achieves the most profitable means of oil and gas operations. Through our price maker strategy the extrinsic value of the industry will be realized as a result of the price maker strategy. The coin holder will earn one third of those values over and above today’s base case in consideration for access to the software. The two thirds extrinsic value will be earned by the owner of the oil and gas property. The oil and gas property owners extrinsic value earned in this process is what People, Ideas & Objects call our free money strategy, free in the sense that the coin holder did the heavy lifting to fund and develop the Preliminary Specification. The accountability for that individual property will have ownership interests that will demand to know why the management of that property, whomever they may be, are not realizing the free money strategy. Compelling them to participate in the use of the Preliminary Specification software that is controlled through the rights of the coin holder.

I am not one to suggest what the coin holder would do in terms of the value they generate. I am only suggesting the one third value as a placeholder for discussions here. They would of course be free to designate whatever percentage of the intrinsic and extrinsic value of the property that they desired. The only method that we are going to be able to cut off the abuse of the cash flow by the bureaucrats is to establish a profitable means in which to produce oil and gas. Profitable in the sense of all of the costs of oil and gas exploration and production which would include the coin holders compensation. The time for us to act on this strategy has arrived and we will now be actively pursuing this source of funding and development. I am currently the beneficial owner of all of the coins that will be distributed to fund the Preliminary Specification. As the owner of the Intellectual Property that is developed in the Preliminary Specification, I will control the coin offering through contractual means. We rewrote our Revenue Model in October 2017 to make this change. We subsequently noted that it would take approximately five years to complete. We now believe with the work that we’ve done that we are down to three and one half years and will be pursuing this aggressively to push our timelines 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.

Beyond the Imagination and Capabilities

Do these oil and gas producer organizations survive? Business history would show that they should have expired some time ago. A capital intensive industry has large flows of cash from prior investments to keep its vested interests, the bureaucrats in this case, alive. We believe this chronic overproduction issue is now terminal for the existing producers. As we’ve documented this is the 28th “bad year” out of the past 33. The contrast between what is seen on the street and our message is stark and unambiguous. Producers continue to misdiagnose their difficulties and cloud the issue. Theirs is an unserious approach. Stratification of the industry has always included the start-up, junior, intermediates, integrated and national oil companies. The start-up oil and gas producer can now be seen at the local museums of the town’s with heavy oil and gas influence. The juniors, just as the startups are heavily dependent on frequent capital infusions, their financial statements are miracles of modern science. Juniors have not been part of our sample of 23 producers that we review, but we know from the juniors financial statements that we’ve reviewed that time is precious. The various levels of intermediate producers have now lined up in terms of their financial health. Some such as Crescent Point and Obsidian, the former PennWest, companies that experienced active shareholder challenges at last years AGM and are having difficulties that will be near impossible to overcome. Overproduction is an issue that will take out the smallest, then the weakest but no matter who the producer is, there’s no escaping the inevitable consumption of the entire industry.

I was thinking the other day why doesn’t someone make the appropriate decision to move forward with the development of the Preliminary Specification. Then I realized, who exactly? Over the past 33 years there has been a flattening of producer organizations and many rounds of layoffs to the point where the organizations became optimized well drilling machines. This depression we’re in has decimated the ranks even further and few are remaining. Who’s going to be the mole that pops their head up and gets whacked?

Throughout the past decades, particularly in Canada, nothing has been done to invest in the business, why when drilling wells was the business. As a result everything else was left to atrophy. With everything now in a dismal state, the producer is faced with a scope and scale of issues that are beyond just drilling wells, and well beyond their capabilities. These issues have led to commodity price collapses in every decade since the 1980’s. Now as the global saturation of the commodity market continues unabated, regional differentials in North America are enhancing the overproduction effect to reduce producers revenues further. Overproduction is an issue that we believe will never end in the hands of the bureaucrats. The producers revenue losses are valued in the hundreds of billions of dollars per year across the industry. Many trillions over the past decade. Regulated pipeline companies revenues and profits are and always will be fine as they are always profitable at any level of operation due to the nature of their business model. Yet producers feel pipeline companies have a vested interest in ensuring that their product is shipped to market in a timely manner. There has, and had, been no leadership or concern expressed by producers during the pipeline review process. Passing the full responsibility for this logistical, political and environmental nightmare onto a regulated company to manage. Expecting the utility to safeguard the future upside of the producers operations and to maximize and realize those trillion dollar revenues. Now the Canadian producers conveniently blame the Canadian government of mismanaging the process. Who’s revenues were in jeopardy if the pipelines weren’t completed? The utility, the government or the producers?

Service industry representatives take the brunt of the hit when oil and gas producers accuse them of being greedy and lazy, sorry that was during the few brief minutes of good times we had about a decade ago. The service industry have had their business volume slashed to a quarter of their capacity of a few years ago, and their pricing pressures are now as high as 50%. It would be interesting to see how a producer would deal with a reduction in their revenues of 87.5%. Maybe we’ll see that soon, or that could be the situation today! The leadership in oil and gas hasn’t been missing. It would have had to have been there at some point in order for it to have been missed. Instead of working with those that make the industry happen, producers sit on the revenues of a primary industry and belittle those in the secondary and tertiary industries. Belittle and blame them for not maximizing the producers value. When faced with an existential threat the producers always blame others. As it is today. I don’t understand why someone who is out several trillion dollars in revenue would point fingers at others stating it was their fault and whining that they get no support as the Canadian producers recently argued. If oil and gas producers don’t care about their revenue losses why would others? Certainly their investors and bankers have expressed their lack of faith.

With the Preliminary Specification all oil and gas production becomes profitable through the decentralized production models price maker strategy. When each producer is able to make independent business decisions, based on the profitability of the property, determined by the actual accounting of that property, to shut-in any unprofitable properties, then those shut-in properties reserves can be saved for a time when they can be produced profitably, keeps the cost of those reserves down when the losses on the property are not incremental to the cost of the reserves, the producers profitability is maximized when unprofitable properties stop diluting their profitable properties and commodity markets will find the marginal price when unprofitable production is removed from the market. Producers are then able to focus their attention and innovations on those properties that are not producing and determine how to enhance them and return them to profitable production. Or, alternatively producers can just drill wells, turn everything on and leave them on at all times. Which system sounds best?

We should not be producing any oil or gas unprofitably from this point forward. And profitably based on a reasonable accounting, not the myth that is spun in the current producers financial statements. Subsequent generations will ask what justification was there to use a limited resource in such irresponsible ways? We also need to begin to realize as a society that the most powerful economy will be the one that consumes the most energy. North America can be energy independent, however it will have to be profitable in a competitive way in order to do so. Investors have ceased to subsidize the consumers for their energy consumption. What we have is an unworkable situation that is destined to fail in a manner that is beyond the imagination and capabilities of the leadership within the industry today.

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.

Odd's and End's

When I think about what we could be doing in 2019. It’s frustrating that we’re unable to do anything, and forced to sit back to admire the efforts of the oil and gas bureaucrats. We have no remaining resources to continue with the developments of the user community. This will not be detrimental in the long term to the development of the community. We will not be, or ever will be, taking any volunteer contributions from anyone and most particularly user community members. Producers will be paying for their systems, one day, and they will not be receiving any of their systems on the backs of volunteers or free contributions. As much as that is the way the oil and gas industry has been operated to date. It’s also a failing industry. The value that has been destroyed in the industry is catastrophic and complete. It continues today and we see no remedial efforts or recognition that anything is at issue with the producers. For the past fifteen years of working on the development of the Preliminary Specification, and subsequently the user community. I’ve always been satisfied that we were at least moving forward and therefore reducing the amount of time that the industry would be incurring the unnecessary and very costly losses they seem to enjoy. This is no longer the case as we are now at a standstill with no resources to move the development of the user community into its next phase. Therefore producers are now actively losing time in which People, Ideas & Objects solution will be provided.

Our last post regarding the user community generated some discussion regarding the AI algorithm that we would be developing and using to determine the user community members allocation of service providers licenses. Although I’m hesitant to define anything more than what was stated earlier, I expect the user community will conduct these discussions themselves and manage them for their interests. Starting from day one of our developments user community members should be able to resolve their issues over the term of the developments towards commercial release and come to an agreement as to how the algorithm will calculate and generate these service provider allocations. People, Ideas & Objects will therefore provide all of the technical resources necessary to coordinate the developments of the algorithm, data and its capture.

I’ve also been reading some articles on recent ERP systems integration failures in a variety of industry marketplaces. Many of these are around the SAP Hana product, just google “Sap Hana failure” and you’ll be presented with a number of details. Producers may be concerned about what People, Ideas & Objects is doing to mitigate the failure of the Preliminary Specifications integration. We first of all state that the situation in the industry as it stands today. With its downward and accelerating trajectory, the industry has no opportunity to contemplate failure. I’ve done everything that I could have done to this point. And it won’t be down to one person to make this a success. The placement of this development in the hands of the user community with their vision provides the highest level of quality possible. The chance for failure still exists if the producers sit back and expect someone else to deliver them from their current situation without their direct, painful, dedicated and committed efforts and assurance that it will be a success. This is today’s modus operandi of the producers. Which is to shift the responsibility to the vendor for their success and conceal that within a contract. As we’ve mentioned there will be no industry / producer Service Level Agreements with People, Ideas & Objects. And if the producers think that an SLA can capture what is necessary to make this a success then they’ll be wasting their time and money. We demand a distinct change in attitude and method of operations for the success of this initiative. Otherwise producers may be best to go with the likes of SAP Hana which seems to have achieved a 50/50 probability of success through their SLA methodology. I wonder what their plans for oil and gas are?

Bureaucrats would love to have someone to hang for the failure of this initiative. Their actions and behaviors have proven this to me time and again throughout these past fourteen years. When I published the Preliminary Research Report in May 2004, which states that software defines and supports the organization, therefore to change the organization you must change the software first, they interpreted that as long as they never changed the software they would remain unchallenged in their management of the industry. Which has been the case hasn’t it? Therefore for them to establish the conditions in which we were to fail is an obvious precondition of dealing with them in the future. They would like nothing more than to prove that they are the only alternative to the management of the oil and gas industry. All other initiatives had failed. Therefore, using this same corrupt logic of the bureaucrats, we can state unequivocally that the industry would not survive the failure of the People, Ideas & Objects Preliminary Specification, user community and service provider initiative. And the responsibility for the success of this initiative is squarely on the shoulders of the bureaucrats. We have the evidence that they would choose to have this fail through their non-actions in these past fourteen years, we have seen it’s failure through its lack of funding. Therefore who is going to be ultimately responsible? If they choose me then that’s fine, I’ll have one payday down and will miss out on the second payday, but I’ll survive quite prosperously. It’s the user community members that I worry about. It should be to no one’s surprise that I see this as life or death for the oil and gas industry. The question is when will the bureaucrats see it as life or death.

It’s important to point out the role of the user community within the industry on a go forward basis once we’ve released and are operational on the software. We expect the user community will provide the leadership in the administrative and accounting areas of the oil and gas industry. Their role in subsequent developments will continue in order to cater to the changes and needs of the industry and producers. They are also enabled through the user community vision to be the ones that are able to ensure that the industry is able to address the issues and opportunities in the administrative and accounting areas. If there is a new business model that would better fit the industry, then the user community will have it developed and implement it. This overall development of the administrative and accounting capability and leadership within the industry are the direct threat to the current bureaucracy and their motivation to fight as they have.

It is difficult for me to define what People, Ideas & Objects are doing. Are we custom software or integration? We are built on the Oracle stack of technologies that include Oracle Fusion Middleware and Oracle Fusion Applications which are now offered in the Oracle ERP Cloud product. We are standing on the shoulders of many giants here. We determined in 2018 that we could save many, many years of development time if we switched to use Oracle Consulting for our development of the Preliminary Specification. The user community will be defining the necessary details to fill out the requirements of the Preliminary Specification. They are also the ones that will be conducting the administrative and accounting functions for the industry in the future. It is only natural that the service providers therefore undertake the installation and integration of the software and services necessary to be operational in the producer firm and industry. Therefore to answer the question if we are a custom software development or integration is appropriately answered by stating that we are a hybrid. Developments and integrations will begin to some extent on the first day of our projects beginning and continue throughout.

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

High Quality, User Community Based Developments

The source of our quality in terms of the applications that People, Ideas & Objects, our user community and their service provider organizations will be able to provide to the dynamic, innovative, accountable and profitable North American based producer will be our user community. User community based software developments, particularly in the ERP arena, are those that are considered the highest of quality. To fully comprehend all aspects of the Preliminary Specifications modules requires the understanding and tacit knowledge of those that are involved in oil and gas. We have therefore established that, with the input from others outside of the user community, we believe our user community will be capable of capturing this understanding and applying it to the developments of our software when our user communities population is approximately 3,000 individuals. That is more input than any other ERP system in oil and gas, and what the demands of our 12 modules dictate.

The revenue stream that these user community members will have are two fold. First there will be the part-time revenues that are generated as a result of the work that is done directly with our developers. This will involve the details of what the software needs to do with an understanding of how best to present and interact with the software in order to meet the needs of the producers. These are part-time revenues due to the expectation that at any point in time our developers would be having interactions with up to 600 user community members at any one time. The user community member will be paid for this time by People, Ideas & Objects on the basis of our budgeted hourly rate of $190 U.S. / hour. This is also in consideration and compensation for the Intellectual Property that they contribute to these developments, we’ll discuss the IP more later in this post. The second or primary source of the user community members revenues is through the service provider organization that they’ll develop in order to deliver the People, Ideas & Objects software and their services to the oil and gas industry. These revenues will be generated by providing the producers with the People, Ideas & Objects software and services of their service provider organization. Each service provider will be granted an exclusive license to manage a process within the Preliminary Specification. This license is also in consideration for their efforts during the development phase. We anticipate that specialization during the developments will be a commonplace occurrence and these users will generally find their niche area in which to operate in. The assignment of service provider licenses to the appropriate user community member would be a herculean task that would cause some difficulties. It is in this domain that upon the receipt of our budget we will begin the development of the Artificial Intelligence algorithms and data sets necessary to make these recommendations when they’ll be required. It is also understood that the assignment of service providers to the user community members may not exclusively be on a one to one basis. There maybe many user community members with ownership in many service providers, etc. The point is that the sum total of these interests would equal the sole ownership of a single service provider.

People, Ideas & Objects have been involved in the development of our user community since the first quarter of 2014. Since this time we have developed our user community vision which is unique in that it transfers the power and control of the software developments to the user community at large. The two key aspects of this transfer is the Intellectual Property that makes up the Preliminary Specification, and the software developers are deaf, dumb and blind to anyone and everyone other than the user community. Anyone in industry or anywhere else for that matter will know if they have a concern, an issue or an opportunity to expand the software or services to go to the user community. It will be generally well known which user community member will have the authority and responsibility to manage which individual process and they will have the capabilities to make the changes to the software and or the services. Whom do you go to today? This is the dynamic nature of the user community and their service providers organizations, the ability to make the changes. We have developed these communities with the expectation, that with our software developers they will become a permanent capability to the oil and gas industry. Precluding the need to see the industry fall into such disarray due to some organizational or other issue.

The centralization of the Preliminary Specifications Intellectual Property in my hands personally has enabled this to happen. I will license People, Ideas & Objects with all of the rights that I currently hold in the underlying Intellectual Property. The company will then in turn grant the licenses for the exclusive rights to the individual service providers. These are exclusive in order that a service provider will not find some “me-too” competitor spring up and undercut their prices. The competitive advantages of the service providers are their quality, specialization, division of labor, automation, innovation, leadership, integration and many many more. Price is what our competition have provided the producers and as a result the issues have become epidemic in oil and gas. Our user community vision provides the control of this Intellectual Property to the user community. There it is free to be managed in the manner in which is in the best interest of the producers. The user community member, through their service provider organization will know and understand the industry and what the issues and possibilities are. There will be no one that they have to seek approval from in order to make those changes. Other than of course to do the best job that they can for their oil and gas producer clients. It is their revenues that will be affected if they mishandle the responsibilities put forward here.

Therefore what we are building is a permanent capability that is exclusive to the North American oil and gas producers. Designed to have the change enabled iterations take place at the point in which they are needed. The understanding and forte of the user community members is derived from their administrative and accounting capabilities and the Information Technology aptitudes that they’ve developed. They are well aware of the technologies in play and can employ them in the manner that builds real value for the industry. Working hand in hand with our developers this capability will ensure that the industry is provided with the most profitable means of oil and gas operations.

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.

Trillions and Trillions, By Me

The scope and scale of the tragedy that is the oil and gas industry can’t be quantified. Let’s satisfy ourselves, and at the same time somewhat pacify ourselves into believing it would only be a few trillion dollars to rectify. The investors used to pay for this freight but soon found three critical aspects of their investment. Their investments were made on the basis of financial statements that don’t represent the truth. As a result they determined that they were the ones who were the “mark.” And profitability is inherently unknown and uncared for in the industry. The search for a replacement to the investors cash, and to a lesser extent the banks, continues. No one seems willing to raise their hand for the purpose of backfilling the bureaucratic bloat. This multi-trillion dollar deficit needs to be made up and the producers bureaucrats I’m sure will find someone to step in to incinerate their hard earned money to the cause. After all in exchange the oil and gas producers have so much to offer to whomever steps up for the cause. Just exactly what that is, beyond spectacular financial statements is unknown. So goes the future of the oil and gas industry. If you use your watch or your computer’s clock you can see that its future can be played out in its entirety in less than one minute. Then just repeat. Will no one come to the aid of the oil and gas bureaucrat?

The Preliminary Specification provides for the most profitable means of oil and gas operations. Real profits, ones that have actual cash attached to them that can build a business. We realized the difficulty that the producers are facing today would eventually come about. You can’t fool investors forever. Therefore they would need a replacement source of funds in order to be operational. But where? We determined that since the investors were used to pay for the capital costs of the consumers consumption of oil and gas, why not instead, get the consumer to pay for the full freight of their energy consumption. Seemed logical to us and as a result we developed the Preliminary Specification with its decentralized production models price maker strategy. To suggest that this was welcome relief in oil and gas would be a bit of a stretch of the truth. Almost as far as the producers profitability. We’ve never received any support, but like most people who move the industry forward, are vilified, ostracised and abused for decades by the producers who don’t want to be called out for their malfeasance. I don’t like using these words but after the hours I spend in my thesaurus I have to resign myself to the clarity and accuracy that these words provide. And then again what do I have to lose?

Reviewing the producers fourth quarter reports, those that have been published at this point, it’s refreshing to see the profitability that is rampant in the industry. Just too bad about the cash. The cash crisis continues to rage and the obstacles to its resolution only become more acute. Natural gas prices were as high as the mid $4.50’s a few months ago, now they languish again in the mid $2.50’s. And it’s not that anyone received those anyways. Differentials are all the rage these days too. New production is the only source of cash that is incremental to last months so the race to bring on new production continues at a handsome rate. Which should remind anyone with a pet hamster that they need to be fed.

I sure wish there was a blog or somewhere that I could go to tell me what I need to do to fix my business. The persistence of the bureaucracy is the most fascinating thing to me. Ten years of destruction and nothing, not even the slightest recognition that they have an issue. How is it that they do this, and then get away with it? If they hide the big hole they’ve dug, the hole that will have to be filled with someone’s money in order for the industry to have a future, the many trillions of dollars in terms of the size of the whole only scares people away. Therefore if they don’t say anything, nothing will be wrong. They think no one has noticed I guess.

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.

Page 545 of the Bureaucrats Handbook

I think we’ve summarized the state of affairs in the natural gas side of the business in these last number of posts. They are historical in that they look at the past ten years and document what chronic and systemic overproduction has done to the price of natural gas, the impact on the financial condition of the industry and now its devastated landscape. To look forward in this business today we only need to look to the prolific nature of shale and the endowment that these resources have provided. Oil and gas producers love to take the credit for everything. Innovation that is derived from the service industry. Reaching energy independence in North America. These were only attained through the development of shale based technologies that the service industry developed, were vilified for, then starved to death before the producers would even try them. Maybe I’m too harsh on the producers but when shale’s endowment of natural gas is as grand as it is, and we’ve seen that 145.8 tcf has already been produced unprofitably and at great expense to everyone associated with oil and gas, except for the bureaucrats. It’s difficult for me to get up out of my chair. What’s worse is that today there is no plan, no strategy or any identification that there’s an issue. All the producers are profitable don’t you know. Which they are, and in a significantly distorted manner. As for the future of the natural gas business, what exactly is the issue?

Oil is following the same master script that resides on page 545 of the bureaucrats handbook. Entitled how to ensure you’re seen as the master of the universe. Bureaucrats only started applying this to oil after natural gas was well advanced down the road to ruin. It is also a global market and therefore will take much more effort to effectively cause the damage that has been seen in the natural gas side of the business. But trust me we are well on our way and we will get there. I for one am pleased that we have advanced beyond the ridiculous excuse phase. The “pray for a cold winter,” “market rebalancing,” or any of the other unjustifiable bs that was pushed out from our very good friends the bureaucrats. They don’t say much of anything anymore. Which implies a capitulation of responsibility to try and resolve this and a heavy hand in terms of the guilt of why it was caused. It does not imply any motivation however. Which over the last number of decades has led to the generational cultural that feins they know nothing. But that’s just my opinion. If you are not as furious with this situation as I am then maybe count yourself as part of the problem.

Without the efforts of OPEC+ where would we be? I believe their purpose in removing production from the market was to teach the American based producers that oil and gas commodities are subject to the principles of price makers. A principle that is set out in the Economics faculties and is a well established principle. One in which we’ve adopted in the Preliminary Specifications decentralized production models price maker strategy. Any discussion that has ever taken place between People, Ideas & Objects regarding this element of our specification with a decision maker in oil and gas has devolved into the rapid and rash conclusion on their behalf that its collusion. No more discussion. The effective business principle “price maker” is used in every business that qualifies and no one continues to overproduce their product at the expense of their pricing power in the market. Except for oil and gas producers. OPEC+ has shown that oil prices respond well to small decreases in supply. The point is to stop producing unprofitably. And if producers that make independent business decisions based on actual, factual accounting data, that determines profitability / unprofitability and hence production or not, is collusion then we’re well down the road to socialism.

Based on the behaviours in the natural gas business we can assume that without OPEC+ efforts oil prices would be in the mid $20. And all the North American producers would still be profitable and break even at $10. Such is their manipulation of reality. There is no application of rational thinking conducted in the industry. The declared strategy and operating procedure, the culture of the producers is to “muddle along,” and “do nothing.” Because it's been so successful? Bureaucrats will only see good news in what I’ve written today, when they can point to the fact that if OPEC+ didn’t remove the production “things could have been worse.” And there you have it, the logic, the planning, strategy and tactics that ensured things didn’t get worse then they are. All brought to you by the unseen hand of the brilliant oil and gas bureaucrats.

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.

President's Day / Alberta Family Day

Creative Destruction, Defined

Imagine for a moment if every industry was operated as oil and gas is. There are only two operating modes in which to exist. Throttle on full, throttle off completely. Nothing in between and no concept of what could be achieved if the industry hummed along at a steady speed. Not having to rebuild itself after each and every misadventure from those throttle junkies that overdid it, one way or the other. By analogy imagine that cars only had the same two operating modes. How would anyone get to work? How many unnecessary tragedies would occur each and every day due to the fact that no one thought of modulating their speed? If someone were to propose that we produce only profitable production everywhere and always they would be vilified for the idea of a state of calm and normalcy. That is where we’re at today and I’m the idiot who thought that a steady pace, one in which we achieved a constant and a legitimate profitability would be a good idea to pursue in 21st century. However, the bureaucrats remain with their heads firmly lodged in the fifth century, and as the monarchy chose to do then, they will choose to make their world as comfortable as could be while the remainder of the serf’s suffer for their amusement. Much as a demolition derby in the morning rush hour would provide them with comic relief.

The point of the exercise is to drill wells and put production on the market. It will then “rebalance,” whatever that means, and they’ll just continue drilling wells because the investors have more money. This is the logic of the industry. Except it’s illogical and anyone can see that it doesn’t make sense. But based on some specious accounting that allows everyone in the morning to open their eyes and start capitalizing everything they see and do until they close their eyes that evening. Therefore, any kind of activity makes profitable sense doesn’t it? Even buying Post-it-Notes. And if one day the investors figured out this charade then they’d stop participating. But that doesn’t instill any change and so the drilling and production continues despite the cash drain on the organization. Until the day when everyone runs out of all of the cash, we’ll just have to wait and be patient because no one knows if there truly is an issue or if there is the will to fix it? Until we know for sure it’s best just to continue drilling more wells.

Besides people’s expectations are completely out of left field. They’ve been spoiled by stories from other industries that certainly have their recessions when the economy drops a bit here and there. There’s no sense of adventure in these people when they’re tossed out of a job they’ve been doing for 15 years because there’s no cash and they can’t be paid anymore. Where they foolishly thought to depend on that paycheck for as long as they were contributing good value to their producer firm. It was also foolish of them to purchase that house ten years ago and to start that family, what exactly were they thinking! From what I here of the bureaucrats they’ve had to give up their annual bonus, their stock options, an extra week of their vacations and the company car. So who’s really suffering? They now only make hundreds of thousands when they used to make millions!

This is more or less the state of the oil and gas industry. If you’d be so out of touch with reality that you’d proceed for decades without really earning any money. Just turn to investors, and at the same time dilute them again, when cash balances began to get a bit skinny. Why wouldn’t you see the world of the serf’s as the monarchy did in the fifth century?

Clearly it's never a specific producers fault for the overproduction. It’s always the other producers responsibility. How do we instill that production discipline in the “other producers” responsibility? By implementing the Preliminary Specification. But the ruling class have no idea of the concerns of anyone. Why, because they’re still profitable. No need to address anything if nothing’s wrong, but please just send cash. If the natural gas business is as bad as the EIA and the IEA have suggested. And as we calculated yesterday the need for not profitable operations, but just covering the costs of exploration and production is such a great distance away from where we are. What do we do?

What we have is a persistent bureaucracy that is uncaring, unaware, self-satisfied, indifferent and unaccountable. The issue is therefore them. So what do we do with “them?” The Preliminary Specification has always considered the only solution is creative destruction. After ten years in natural gas the chance of anyone making a change internally is very unlikely. Nonetheless after ten years, it forms part of the proof that it has to be done. What is it that we’re waiting for? The Preliminary Specifications budget is for 5,000 man years of effort. That won’t be completed tomorrow. Therefore we need to act quickly.

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.

Billions and Billions, By Carl Sagan

What is surprising in all of this, is that I’m not the only one who is seeing this from my perspective. Both the EIA and more particular the IEA are expressing some serious concerns about the natural gas business. A somewhat contrasting point of view to what comes out of the media and the producers themselves. It just doesn’t make any sense why the producers continue to produce everything from everywhere, unprofitably. No one has bought the claims published in the financial statements. The majority of which, we suggest, is ⅔’s of those “assets” in property, plant and equipment are the unrecognized capital costs of past production. Performance from a financial point of view is not in existence anywhere in the industry. Competition to perform better than your peers doesn’t exist anywhere in the industry. It’s an industry that is based on activity that is claimed to be profitable no matter how smart and prudent you are, or reckless that you are and that you wear a size 2 hat. “Just drill wells, because that’s where the money’s at.” Except it isn’t and it hasn’t been for many, many decades. The dependence on fresh capital from investors each and every year fueled a generational culture that knows no difference.

The graphs from the EIA that we published the other day also come with the ability to download the data that underlie them. I took the 2010 to current data for the shale gas production volumes and the average prices for each year. If we make the assumption that natural gas cost $6 for exploration and production, then we can determine the amount that was lost on shale production in the United States during these past nine years. I believe $6 is a reasonable price when we consider that none of the differentials are included in these annual average prices. This amount would also have been the amount of our value proposition if they had implemented the Preliminary Specification. Although it was not published in final form until December 2013 the majority of its elements existed well before 2010. Shale gas production volumes for this period totalled 124.98 tcf of gas. These shale volumes in the U.S., based on these assumptions, since 2010 have generated revenues of approximately $405.5 billion U.S. and at $6 People, Ideas & Objects value proposition would have been $344.4 billion which is the amount that is also lost by those producers.

Those are big numbers to be throwing around so let's look at them a little closer. In January 2010 shale gas production was 13.79 bcf / day and rose to a phenomenal 64.79 bcf / day in December 2018. If we made the assumption that the Preliminary Specification was in place then producers would have shut-in their highest cost production. Therefore we assume 10% of these volumes were shut-in in order for the market to achieve the $6 price that covers all of the costs of the other 90% of production. The volumes would then be 12.4 bcf / day in January 2010, and 58.3 bcf / day in December 2018. Historical average yearly prices were in the range of $2.52 and $4.37, or underwater at all times. Adjusted total production during this period was 112.48 tcf. The question that arises as a result of this calculation is, if the adjusted for shut-in properties value proposition is $269.4 billion as a result of the implementation of the Preliminary Specification, what would this money have been used for? First let's note that we have only reduced production to the point where the prices covered the costs of natural gas exploration and production. None of the incremental $269.4 billion in revenue is going to earn any of the natural gas producers any profits.

There would have been the traditional royalties that would have been paid on those incremental revenues. Whether that was governments such as the Alberta government here in Canada or elsewhere. The Alberta government have lost control of their budget in the past five years and are running sizable deficits in the range of $10 billion / year. These are mostly attributable to the loss of revenues from oil and gas royalties. In the same sense governments where the oil and gas industry operates in North America have all experienced declines in their tax revenues due to the drop in activity and the losses that are being experienced in areas such as the service industry. In addition the costs of unemployment insurance to compensate those that have been laid-off in the industry has increased these governments costs, as opposed to those people paying taxes. Who cares about the governments, well everyone has to pay their share and when governments are not collecting what they budgeted for, and received before then they’ll make those dollars up somewhere else. If oil and gas isn’t smart enough to manage itself appropriately then governments will just have to tax other jurisdictions to make up the difference.

The cannibalization of the service industry is what usually happens when the industry hits a downturn in activity. Laying down rigs is expensive and costly for the owners of those rigs. Losing the people who were operationally efficient on those rigs will be a task to attempt to get back and redeploy if the industry ever turns around again. Until then the service industry is suffering the worst of everyone as a result of the slashing of activity and then the slashing of their day-rates by the producers who use the fact that there are so many idle rigs to pressure the rig operator to drop their day-rates. Producers applying the principle of supply and demand if you can imagine. This and the decline in depletion per barrel have made up most of the producers claimed cost innovations. Maintaining the capabilities of the service industry are key to the innovative stance that will be necessary for the future. Nothing new will be coming out of a cannibalized sub-industry until they either adjust to the new reality or revenues are restored. This loss of capabilities will be at significant costs to the producers and they would of been able to avoid this unfortunate situation with the implementation of the Preliminary Specification.

Those that are employed in the oil and gas industry directly are taking their cue from the field hands. They’ve decided to leave the industry and never return. There are better places to earn a living. And so it is with those that are and have been laid off by the producers. They can find work elsewhere, raise a family and take on a mortgage without concern of whether or not the bureaucrats will run the industry into the ground or completely destroy it this time. We heard the complaints from the bureaucrats in those few good days before 2008 that the demand for more engineering and geological people was going to be increased to replace the people that would be retiring in the near term. I guess that’s not an issue of concern at the moment as there seems to be a surplus and the question remains how many do you lay off now. They’ll deal with the shortfall when and if it occurs. And just as the field hands, producers will be able to pay handsomely when they get a plan, and that plan is put in place. The thought of a plan will come about some day I’m certain.

The most important point of all of this is to recognize that the bureaucrats are fine. They are the first and the last to be paid in this cash crisis they’ve created. Just as they are the first to be paid at any time it would seem. There’s is the perfect balance between separation from the shareholders and accountability. Just as long as no one screws with the software they use, that ERP stuff, then there should be no change in the status quo. Just as the media continues to report, all is good, which indicates to me one thing, is that the media is the next in line after the bureaucrats to get paid. I guess it beats working.

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.

Wasting Away

It would seem that all is not lining up in the manner that it was expected to, just a month ago news of an OPEC+ agreement similar to the one that led to $70+ oil prices, and natural gas prices in the mid $4 region, who wouldn’t anticipate the good times. Well there’s always me isn’t there. We’ve seen this scenario play out repeatedly in which we go from manic periods where the world is our oyster to “oh whoa is me.” Things are changing though. The only people that are believing the story that is coming out of the producers are the ones that are writing the stories at the producer firms themselves. It seems like the investors have completely checked out except for the time when they show up for their dividend checks. It is as Hess CEO John Hess said the other day, oil and gas now is only 5% of the S&P Index vs the 16.5% they occupied ten years ago. It must be great fun to attend those board meetings as the CEO or CFO of the company. We have a new article to review, this time from the IEA which has published an article entitled “Commentary: Signposts for the Gas Outlook.” Like the EIA they don’t have many positive things to say about natural gas in the coming decades. Their review looked at the market from the global point of view and started with…

Global gas markets, business models and pricing arrangements are all in a state of flux. There is great dynamism, both on demand and supply, but still plenty of questions on what the future might hold and what a new international gas market order might look like. The World Energy Outlook doesn’t have a forecast for what gas markets will look like in 2030 or 2040, but the scenarios and analysis provide some insight into the factors that will shape where things go from here.

The IEA report has an extensive focus on LNG demand in China and Europe as the two major growth areas. Although the demand in Europe of 380 BCM is currently being met by Russia this could easily be displaced by LNG deliveries from the U.S. and other NATO countries such as Canada. Both China and Europe are each expected to demand one third or 380 BCM of the LNG market by the year 2040. They see Japan and Korea being constant at around 175 BCM, or today’s level of demand, and the rest of asia beginning to pick up demand in early 2020 and be in the range of 250 BCM by 2040. As we indicated yesterday, the future is shale and there is little question of its capabilities. The demand increases from domestic use and LNG will provide for a robust natural gas business, if and only if, there is some form of production discipline instilled in the market to manage the escalating costs of exploration and production, and the cyclical demand.

What we currently have is a gradual meltdown being orchestrated by our good friends the bureaucrats in oil and gas. It has been ten years in which they’ve watched the natural gas business melt away in their hands. Ten years is a significant amount of time in which to produce up to 80 bcf / day on a massively and chronically, unprofitable basis. This is the question that both I and the IEA are asking “the World Energy Outlook doesn’t have a forecast for what gas markets will look like in 2030 or 2040” because it is not a managed business. It is a money generator for the bureaucrats to build their pocketbooks ever larger. Outside of themselves no one has made any money in the past generation of “activity” in the North American oil and gas industry. It has become the most disgusting display of selfish, pious and deliberate mismanagement in the history of business.

The ability to get control of the oil and gas business resides in the Preliminary Specification. One of the key attributes of our Preliminary Specification is that it disintermediates the bureaucracy from their position in the industry. That is also why they’ve so fiercely fought the ideas contained within it. The natural gas business has been destroyed for the better part of a decade as a result of the issues identified here by People, Ideas & Objects. The oil business hasn’t been completely destroyed at this time however. It is a global commodity and has been able to resist the bureaucrats with the scope and scale of that market for a longer period of time. Natural gas being a continental commodity had little hope of resisting the foolishness for long. This has been the situation, and as soon as the natural gas business was ruined, it was only then that the focus went from shale gas to shale oil.

There are many vested interests aligned against People, Ideas & Objects initiatives. The producers are the ones with the money and therefore most sane people go where the money is. Making this a protracted and difficult battle in which little to no support has been provided to us from any corner. Clearly the time has come for the industry to do something about the dire situation it has put itself in. Nothing is going to fix the problem other than to do it themselves by funding the Preliminary Specification. No one has the money necessary to solve the industries problem other than for the consumers to begin to pay the full fare of their energy consumption, and no one is going to come up with an idea that can compete with the Preliminary Specification at this point. It would take a decade for someone to figure out how to do it and the industry hasn’t the time. What happens next and where we go from here can be very positive with the development of the Preliminary Specification. It could also be more of the same of what we’ve experienced over this past decade. Or it could be that it continues to deteriorate, however at an accelerating pace that no one can deal with the consequences of. That is if we’re not there yet.

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.

Life in 2050

The EIA have published projections for the natural gas market in their Natural Gas Weekly Update. The report of January 31, 2019 was particularly interesting for its projections regarding the markets to the year 2050. They’ve projected what the production, consumption, imports and exports will be throughout that time and an estimate of the low and high resource and technologies impact on prices. The following is a summary of their conclusions.

This growth in production, consumption, and exports comes as U.S. natural gas prices are expected to remain relatively low and stable through 2050. The annual average Henry Hub spot price is expected to remain lower than $4.00 per million British thermal units (MMBtu) in real 2018 dollars through 2034 in the Reference case, and not to exceed $5.00/MMBtu by 2050. The range of Henry Hub natural gas spot prices in the AEO2019 is defined by the resource and technology side cases, indicating that assumptions about technically recoverable resources and costs drive the projections. The High Oil and Gas Resource and Technology side case projects lower prices that remain lower than $4.00/MMBtu through the projection period. The Low Oil and Gas Resource and Technology case projects steeper growth, with prices reaching $4.00/MMBtu by 2023 and exceeding $8.00/MMBtu by 2050.

U.S. natural gas pipeline exports to Mexico and Canada are also expected to increase through 2050. Exports to Mexico will grow from 5 Bcf/d in 2017 to 8 Bcf/d in 2050. Net imports from Canada will decrease as the United States exports more natural gas to Canada while importing less, particularly from western Canada. The net flow of natural gas between the United States and Canada is expected to change to net exports toward the end of the projection period as U.S. export volumes exceed import volumes from Canada.

And before we go any further I want to present a chart that the EIA updates each week in there report. The volume of natural gas that is produced from shale formations in the United States is one of the more fascinating charts. Shale is the future and there is no question about that. However there is the issue of overproduction which today has destroyed all of the value that existed in the natural gas business. Even without an economic case to continue operations, and scaling back on capital expenditures, the value of shale in terms of its endowment as a natural resource is impressive and reflected in these production volumes.

Since 2010 the natural gas business has been in a massive depression. Yet U.S. production of shale has increased from approximately 12.5 bcf / day to 65 bcf / day. There was widespread speculation that shale fields had reached their limit when in 2015 production moved sideways for about two years. Even at that the chart shows that shale averaged around 45 bcf / day during that time. Then, suddenly, in the past couple of years its trajectory exploded. At 65 bcf / day shale is now almost 75% of all natural gas production in the United States. The EIA expects production will reach 120 bcf / day by 2050, based on the assumption that the consumption of natural gas and LNG exports will be what drive the demand. Shales production capacity appears capable of delivering that supply during these next 31 years, and based on the past ten year history, certain to chronically and systemically exceed that demand.

Looking at the landscape of the oil and gas producers that are in the North American market today. One in which the natural gas business has been a disaster for over a decade. Where nothing has been done to mitigate the effects of the chronic and systemic overproduction. Without the recognition that overproduction is even occurring. These projections outward for the next 31 years will seal the deal for everyone who was on the fence as to what their future holds in the industry. Investors will continue to take as much capital out of these companies as they possibly can. Careers become something you pursue outside of the industry. You certainly would not study to participate in an industry with these kind of dismal prospects. And as a service industry representative, you’ll wait to be paid for the amounts outstanding in accounts receivable before you volunteer your time and money on behalf of any producer firm. This in no way represents a business, it’s the dead zone. Where not only money, but now everything goes to die.

No production discipline is being applied anywhere in the business today. Why would there, what’s the issue? Where will this desperately needed production discipline come from in 2030, 2040, or 2050? The issue is ever present today, no one is recognizing it or addressing it, now the projections appear to be for more of the same until 2050! The EIA’s low and high price projections assume a continuation of the accounting wizardry we’ve known in the industry. Make sure the investor pays for the capital costs and the consumer only pays for the operational costs. Yet I see outside of the Preliminary Specification no consideration of any change or the understanding that there are other opportunities for everyone concerned in oil and gas in other industries of the economy. Producers believe that eventually the production profile of the industry will drop below the level of demand and prices will bring about the “good times” once again. That worked for 5 of the last 33 years of the pre-shale era. Will this model still function in the shale era? I guess we’ll know in 2050.

Who knows what will happen in the future. We can only look to the past to determine the behaviours that occurred before. None of these behaviours have changed and the issues producers face today are spectacular. The only means of attaining a viable form of production discipline is through the adoption of the Preliminary Specifications decentralized production models price maker strategy. Alberta has shown the way that government mandates come with too much baggage. I’ve been saying these things for a while now and there doesn’t seem to be any concern being expressed by the oil and gas bureaucrats. We don’t know what their plans are and they aren’t sharing.

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.

No One Seem's Immune

Shell is not one of the companies that we include in our sample of 23 producers. They recently published their fourth quarter report and I have a few comments to make regarding their performance. The one thing that is evident, which is the result of their reporting the past five years in comparison to the current year, is the effect that the decline in oil prices have had in the industry. The effect that we’ve documented in our sample of 23 producers has not been limited to the juniors and intermediates, and what appears to be the demise of the start-up, but has had tremendous impact on the integrated companies as well. Nonetheless, the culture that has caused the overproduction in our sample of 23 producers is evident in Shell as well. It is a systemic culture throughout the industry as a result of distortions that the SEC’s accounting requirements have created. Those being the current culture of building balance sheets by expanding property, plant and equipment as the objective, and not recognizing an appropriate amount of these assets as the capital cost of exploration and production, therefore distorting the profits of the producers, these high profits attracting overinvestment, leading to chronic and systemic overproduction.

With that in mind let's take a look at Shells property, plant and equipment account dynamics. They have property, plant and equipment of $223 billion at the end of 2018, depletion of $22.1 billion and capital expenditures of $23.0 billion. In terms of building balance sheets they score an A+ as the amount of cash locked up in property, plant and equipment, due to the increase of $0.9 billion in 2018, will last to eternity. There is no sense anywhere in the industry to free these resources and reuse or redeploy them, dividend the subsequent resources to investors or pay off debt. The question we continually ask is, are these assets or are they the unrecognized capital costs of past production? As with all producers there is a desire to build the balance sheet in the property, plant and equipment account. Which is admirable that they seek to build the asset side of the balance sheet. There are those that seek to build the liabilities. There are however a myriad of different asset accounts other than property, plant and equipment. Some are even classified as current assets like cash and other short term assets used in the calculation of working capital. Why not realize the capital costs of exploration and production, pass those costs on to the end user of the product and in turn boost the balance of those current asset accounts that contribute to increases in working capital? The only thing that big balances of property, plant and equipment provides is the ability for the CEO to strut around town in a vain attempt to prove they have the biggest and best balance sheet, when in reality these balances only reflect the amount that the investors have had to subsidize the consumers for their consumption of oil and gas, and how much Shell has invested in excess of the cash flow that has been generated.

In order to generate value, real tangible value producers will need to stop swapping investors cash around and begin generating value from the activities they perform. No one is buying what these financial statements are selling throughout the industry anymore. Investors stopped participating in the annual petroleum beggars banquet many years ago. Creating the producers cash shortage that exists throughout the industry. Providing further proof that there was never any value being generated from producers activities. Investors had the opportunity to have invested into the oil and gas companies, which they did, or Apple, FaceBook, Google or many others. Companies that have generated value for their investors. As a result they are now demanding the producers begin the process of paying back a more than reasonable return in order to compensate for the oil and gas investments they made, the dilution that occurred and the value that should have been gained. If the investors weren’t able to earn it in the past then they’ll take it out of the producers today and tomorrow. Dividends, buybacks and payments to the banks have been substantially increased throughout oil and gas in 2018. Even Shell has not been immune to these demands. In 2018 they paid out $15.5 billion in debt reductions and $20.2 billion to shareholders for a total of $35.7 billion. These payments were made on operational cash flow of $53.0 billion or 67% of that cash flow. In contrast, during 2013 Shell had cash flow of $40.4 billion, debt increases of $5.4 billion and $12.45 billion in payments to shareholders in one form or another, for a total of $7.0 billion or 17.3% of cash flow. No one is immune from these demands of shareholders and banks in the oil and gas industry. The trend isn’t going to stop either. Investors will continue to demand the value that will far exceed what producers feel they should have earned. With that in mind, Shell’s 2018 shareholder equity was $202.5 billion generating a 17.6% return vs. 2013’s shareholders equity of $181.1 billion providing a 3.87% return. A 454% differential between these two eras and proof as to who’s upset with who’s performance. Shell is one of the best managed companies. If they are being forced into this situation then I can’t imagine what kind of pressure is being put on bureaucrats throughout the industry.

In comparison the investors alternative investment would have created a disastrous tax liability due to the capital gains earned by the shareholders who invested in Apple Inc. Nonetheless, during 2015 - 2018 Shell issued dividends of $46.9 billion on $202.5 billion in shareholders equity or 23%. Whereas apple has paid $50.2 billion in dividends for 2015 - 2018 on shareholders equity of $117.8 billion or 43%. The point of this exercise is to prove that the average investor is not that enamoured with oil and gas performance. Shell’s most recent dividend performance is being boosted as a result of strong investor influences and therefore appear much better than they otherwise would be. It is necessary to consider that there are other, better performing industries in which to put one’s money. It's time for oil and gas to compete beyond the mindset of they’re better than a bank.

Oil and gas producers performances are not better than a bank which is what the bureaucrats believe they are. Invest your money and we’ll return a handsome 4% coupon each and every year, the oil and gas bureaucrat will state. Banks don’t invest their money to make a return. They take deposits. If I deposit $1,000 in Canada the bank will provide me with $20 each year that I do so, and the U.S. is no different, the bank can then take that money as part of their reserves and loan out $10,000 at 6% for a revenue stream of $600. This is on the back of zero investor dollars. If the oil and gas producers want to compete with the performance of a bank then understand that under the banks charter they are authorized to create money. I’d like to see producers earn a net $580 / year on investments of nothing. Time to start dealing with the oil and gas business as a business that competes against all other industries, including banks, and not some fairytale of what other industries are providing their shareholders.

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.

Differentiating Cash Flow

It used to be that cash flow was everything in oil and gas. Profitability was irrelevant. This was some of the thinking that led to the difficulties the producers face today. Profitability is required and a firm or industry that is not concerned about its earnings is bound to be in financial jeopardy in a short period of time. Oil and gas investors have shifted the attention of the producers to profitability and cash flow has waned as a measure of performance. After all what is cash flow when the oil and gas producers have touted the numbers their firms produced. Oil and gas has never been about building value, it has never been about profitability, it has been about spending investor money on an annual basis. Spend, raise, spend, raise. The only reasonable assumption that can be made is that oil and gas is involved in the activity of drilling wells. That’s where the money is, for the bureaucrats at least. No one else seems to have prospered from the industry.

The measurement of cash flow as a means to determine the value of the firm and its performance is a specious argument in oil and gas. That has been my opinion for many decades now. If you spend a thousand dollars, which then generates a thousand dollars in cash flow what is it that you’re doing? It appears to me to be the act of swapping money from one pocket to the other. Investor money goes in, cash flow comes out. The issue is that there has been sizeably larger volumes of money going in then has come out. This is recorded accurately on the big, beautiful and well built balance sheets of the producers. In property, plant and equipment we can assume the value that is represented there is the amount that the investors have subsidized the consumers, check, but also the amount of excess investment over the cash flow that’s been realized, check. The cash flow numbers are nothing but a return of the capital that had been previously invested in the business in prior years by the firm. There is no incremental value being represented in those numbers above and beyond the capital being returned. If there was incremental value being represented in the cash flow numbers it would be shown in the profitability of the producer. However, until recently it didn’t matter that the firm didn’t produce any profits. Unprofitability was considered the nature of the business.

In terms of spending the investors money there has never been any question regarding the accuracy and integrity of the spending of those dollars. Oil and gas has a premier reputation in terms of how it spends the money from its investors. Bureaucrats know not to divert any of those funds to anything but the drilling of wells and bringing them online. It's the cash flow from that spending which is discretionary as far as bureaucrats are concerned. As long as it is justifiable as business of some form then they’ll spend it. The many forms of bureaucratic compensation flow from these considerations.

I have argued that the profits that had been reported by the producers were of the lowest possible quality imaginable. Taking everything the producer does as a capital expenditure adds up to a significant amount of capital expenditures after a decade or so. It also has the effect of making the income statement look not as bad as it really is. Recognizing a small percentage of capital costs has been enabled through the SEC’s unreasonable method of recognizing a negligible amount of capital costs in a capital intensive business. Allocating all of the costs to the reserves discovered, and then recognizing the small number for each volume of production that year is a poor measure of performance. Properties in oil and gas have been known to produce for 50 years. This does not enable the producer to compete in the current capital markets. Waiting decades for the cash resources to be returned from prior investments is uncompetitive when other industries are turning over capital at much higher rates. We recommend for accounting purposes that producers adopt the 30 month requirement of a straight amortization of the capital costs. This will more accurately match the flush production, which subsequently requires extensive capital to rework the well, it will return the cash in a timely manner in which the producer will be able to redeploy it as incremental capital costs, assuming they are charging the consumers appropriately and producing only profitable production, and will better reflect the risks involved in a highly technical business. Oil and gas is not banking and is not intended to take deposits which are paid out over 10 to 20 year periods.

These changes will separate the leaders from the laggards. Today it is difficult if not impossible to differentiate the producers based on the financial statements that are provided. They’re always profitable! In a very convoluted way. Under the Preliminary Specification the competitive differentiation is based on the earth science and engineering capabilities and their land and asset base. The financial statements of the leaders will be evident in comparison to the laggards. The laggards financial statements would look quite consistent with today’s presentations. Whereas the leaders would be profitable on very high revenues. Have substantial cash and working capital, a smallish capital structure with moderate to high leverage employed in a low interest rate environment. In the stand out producers they would have extinguished their property, plant and equipment consistently and show little to no values in that account. The only requirement that the SEC dictates is that the value of property, plant and equipment doesn’t exceed essentially the market value of the reserves. Otherwise the dreaded ceiling test, which we’ve seen far too often, is invoked. A high performing producer would have consumed their property, plant and equipment due to their competitiveness and performance above the others.

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.