"Organizations Don't Change, People Do," Part III

I’m finding that people within the industry and elsewhere are concerned for the producers and also share People, Ideas & Objects sense of urgency regarding the time for action. August 31, 2020 needs to see the situation in oil and gas met with direct action by those that have the authority. I am almost 100% convinced that doesn’t include in any way the current producer bureaucrats. They’ve had plenty of time to have acted and any feigning of stupidity about this situation only reflects their guilt. For them to be giddy about today’s mid $30 price of oil is a cover story that doesn’t wash with anyone. People are now clearly understanding what the costs of oil and gas exploration and production are. There are now just slightly more than three months for action before the existing producers begin to lose control of their operations in a cascading collapse of capabilities and productive capacity. Already discussions of how the productive capacity of the U.S. oil deliverability may never attain its pre-virus levels can be found. This is unnecessary, we do not have to go there with the Preliminary Specification showing what is necessary for the industry to be built to provide a dynamic, innovative, accountable and profitable oil and gas industry and producers. And our White Paper “Profitable, North American Energy Independence - Through the Commercialization of Shale” details a three step plan of how to get there. This plan includes rebuilding the industry on the vision of the Preliminary Specification, expand the throughput capabilities of the industry through specialization and the division of labor and then build the profitable, sustainable energy independence needed for our society to prosper. The question now is, how has this critical situation come about in oil and gas?

Some of the research we conducted and included in the Preliminary Specification were the reviews of Professor Lord Anthony Giddens Theory of Structuration and Professor Wanda Orlikowski’s Model of Structuration. In essence Giddens theory has society, organization and people moving together at the same pace and interacting with each other in a harmonious way. However, if one of these three elements were to accelerate ahead or lag behind the others, there would be disruptive conflict. Professor Orlikowski’s Model of Structuration noted that Information Technologies were an element of society. Therefore IT would have a defining and supporting, but also constraining role in the change, or as Giddens puts it, transformational development of economies. 

What we have today is society and its people are accelerating their needs and understanding at a much faster pace than ever before. These are creating demands on our organizations that are best represented in the current term of disintermediation. Organizations that are incapable of making the transition to these new Information Technologies that people are using, those which are forming new societal structures and creating conflict. We see this today in the ability to Work From Home (WFH). Nonetheless oil and gas organizations have resisted the changes in society, particularly those that have affected Information Technology, and are unable to maintain the pace of change that people and society are demanding of it. This was initially represented, I believe, in the investors distaste for the industry, followed on by the banks and now the people’s disenchantment. People, Ideas & Objects therefore believe that only user based software, with a defined change enabled capability will enable the industry to accelerate with society and its people forward with the pace necessary to approach the issues and opportunities we face in the next 30 years. Yesterday’s thinking, as represented by the bureaucratic malaise, will not be the solution to tomorrow's problems. As we accelerate further and faster oil and gas organizations must keep up. 

We have documented throughout this blog and elsewhere in the Preliminary Specification that the costs recorded as property, plant & equipment on the producers balance sheet were nothing more than the unrecognized capital costs of past production. That the real cost of oil and gas exploration and production were in the region of $150 / boe. Our solution assumes there is a defined and absolute need to recapture the capital that has been invested in property, plant and equipment and have it returned to the producer in the form of cash. The means in which to capture the higher, or actual, capital costs of exploration and production are through the commodity prices charged to consumers. That is what businesses do. What I feel this shows is a trend in the current industry to defer the recognition of any cost, no matter how large or small. The focus of bureaucrats on cost control has been an exercise in spending bloat with the magic elixir of new, and yes their claim to innovative, ways by just deferring the recognition of those costs. 

It is in that sense that we see society beginning to move faster once again. This example shows that not only are the producers somewhat flatfooted in terms of the accelerating demands from society and people, they have conveniently sought to defer these newly identified and unrecognized costs which have been known over the past number of decades. The example is as follows. A regulatory ruling in Alberta on May 13, 2020 may have blown the lid off of another kettle in the industry, creating a substantial escalation in the actual capital costs of production and making it difficult for investors and bankers to find oil and gas appealing in any way they look at the industry. It may also single handedly eliminate the asset divestiture market in Canada. But before we go there, I wanted to mention too that these inflated capital assets on the balance sheet have had the benefit of impressing naive bankers in the past decades. Banks have loaned money on the basis of the reserves and not on the real profitability of the producer organizations. The organizations have been reporting specious profits and the debts that have been incurred are now substantially out of context in terms of the performance capabilities of the industry, and I mean all producers based in North America. Banks measure of risk is now disproportionately skewed throughout the industry making it difficult to see how that avenue of capital will soon become available to the producers. Now, back to May 13, 2020.

In this article it is documented how and what happened in a transaction where Shell Canada tried to sell three sour gas plants to a firm named Pieridae Energy. Pieridae is the classic, highly leveraged, risk oriented start-up that takes on gargantuan risks and suffers through to the big payday. Except there was some pushback from locals who felt that Shell was absolving themselves of the responsibility to deal with the cleanup of the three plants and its wells. Over the course of decades of production it was believed that Shell was the one responsible for the cleanup costs, estimated at $100 million and was absolving themselves of that responsibility through the sale to Pieridae. Noting that Pieridae’s future was not tenable, the Energy Regulator cancelled the purchase / sale agreement. Returning the assets to Shell.

 

What will the effect of orphan wells have on the future of the industry? The Alberta government has assessed this cost at $100 billion. This ruling received support from other Canadian producers who sought to avoid the clean up costs they would acquire if the purchaser(s) (Pieridae) are unable to continue as going concerns. Claiming they would be responsible for the cleanup if Shell was able to sell the three gas plants and Pieredae was unable to continue. Two of these producers Canadian Natural Resources, who purchased all of Shell’s heavy oil operations, and Cenovus, who purchased all of Conoco’s heavy oil operations, both of these transactions taking place in 2019. And therefore, these two Canadian producers do not have sparkling clean hands in the event that the regulator cancels Shell's purchase / sale agreement with Pieredae, which may leave Shell and Conoco on the hook for those massive heavy oil cleanup costs, absolving the current heavy oil owners in the process, the Canadian producers. Maybe, the issue of cleanup costs was not an unidentified issue in the sale and no one was seeking to avoid these? The issue is that Pieridae Energy is deemed to have a high risk of financial failure. Leaving the costs to others. Cenovus and Canadian Natural were not deemed to have been high risks at the time of acquiring the heavy oil projects from Shell and Conoco. And certainly if they were deceived regarding the cleanup costs then they’d probably best be quiet or be taken for fools again and again. 

If the need to deceive by deferring capital costs was not so strong over these past four decades we may now better understand the real costs of exploration and production. That’ll be something for this new industry to discover and ensure they capture. Is this a precedent, will it be replicated in other jurisdictions in Canada and what about the United States. I’m sure those that were motivated by the deferral of orphan well costs were expecting to dump them off to someone else. If that is no longer effective, will this new industry be able to absolve themselves of these costs and begin with a lower capital cost threshold than what currently exists?

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 American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

"Organizations Don't Change, People Do," Part II

Just when you thought it was safe to think otherwise, Shell announced it’s laying people off. 

Royal Dutch Shell will use measures including voluntary severance for staff to bolster its finances as the coronavirus pandemic batters profits, according to people with knowledge of the matter.

and

BP Plc promised its employees their jobs were safe at least until the end of June, but companies including Chevron Corp., Marathon Oil Corp. and Halliburton Corp. are laying off employees.

That is more than a whole month of extra job security if you work for BP. Such are the benefits of working in oil and gas these days. If we’re expecting a change from this behavior then who would technically be the fool? What producers have set as precedent, that it’s ok to blame the people for their difficulties, then they’ll find it difficult to make any changes from that in this “coronavirus pandemic” environment. Our sample of producers recorded 2.9% G&A costs in the first quarter of 2020. Exactly the same 2.9% for the entire 2019 year. Odd isn’t it that oil prices ranged from $53.36 to $63.47 for 2019 and only $20.10 to $51.01 in the first quarter of 2020 yet the percentage of G&A remains the same? I think what this proves more than anything is that overhead costs are much higher than what bureaucrats want us to believe. The amount I’m familiar with is 85% of overhead is capitalized, which would make the 2.9% really 19.3%. An amount that would be more consistent with my understanding. Throughout the time that I’ve been writing here I’ve found no argument or disagreement when I make that assertion. If the overhead burden for oil and gas operations was only 2.9% why lay off people? Accepting that our sample producers’ losses on revenues of $52.3 billion in the first quarter of 2020 was $33.6 billion. Would a reduction of the 2.9% in overhead, or the $1.53 billion in reported overhead costs for the first quarter of 2020 make any difference? At some point producers have to come clean with their numbers. If however overhead was 20% of revenue then cutting these costs would make a material change to the losses that were incurred. 

I’m pleased that producers have / are / will be learning how best to manage their organizations by better managing their production volumes and inventories, based on commodities prices. Proving People, Ideas & Objects hypothesis that oil and gas commodities are price makers would have been easier if they just read how the Preliminary Specifications price maker strategy operates. Tearing the place down wasn’t necessary in order to learn this, and the extent of the damage is now well beyond what can be remediated at any point. Creative destruction is a powerful force in the marketplace. Despite today’s dancing in the street by the bureaucrats who feel they’ve solved all their problems. (We noted how that’s not the case in last Thursday’s post.) Commodity pricing issues, in addition to their second quarter 2020 financial issues, should have them asking what is it that OPEC+ will be doing in the short to medium term. Or, what is OPEC’s long term strategy? With oil prices near $35, OPEC+ are in good shape, and North American producers hopefully better understanding what their role as swing producers involves. What will the expectation be in the marketplace? I think it will prompt OPEC+ to maintain production volumes at 100% of their capacity. As the low cost producers that is what the economic theory would dictate, and that would be my suggestion of what will be happening. One thing for certain is that these producer bureaucrats could blame OPEC+ for putting them out of business. A world class excuse and scapegoat.

https://knoema.com/vyronoe/cost-of-oil-production-by-country

What will be needed is a more dynamic, innovative, accountable and profitable oil and gas producer and industry throughout North America. This is the objective of People, Ideas & Objects Preliminary Specification and to do so we need to rely on nothing from the current organizations in the industry. Ours is a new industry organization that is the creative aspect of the creative destruction principle. If you believe these producers have a chance with their current financial position then you won't be interested in our offerings. I just don’t see the capabilities and capacities in senior management to make the appropriate decisions. Besides organizations don’t change, people do. The demand for change in the industry on a wholesale basis is a necessity and I’m sure we’re all grateful that we’re dealing with an abundance of energy at the moment. This new industry configuration will be dependent upon the people that make up the industry. You will never generate a dynamic, innovative, accountable and profitable industry from what exists in these organizations. But you most certainly can with the people who know intuitively what the situation is. This change begins with the People, Ideas & Objects user community. Who we see taking a leadership role in this industry transformation.

Our user community involves the understanding and knowledge that usable software is only developed with user input. Users are critical to software quality, usability, user experience and accuracy. People, Ideas & Objects will not develop software without user community involvement and has listed our user community as one of our three competitive advantages. Intellectual Property and research are the other two. With the scope and scale of an industry wide implementation and comprehensive functionality of an ERP system we believe that our user community will consist of approximately 3,000 individuals. This is in order to cover off the expected number of processes in the Preliminary Specification. Each user community member will contribute to the overall success of the software by contributing what they know and understand about the industry and how it operates. It will then be determined through an Artificial Intelligence algorithm developed by the user community themselves, which assesses the contribution of each individual user community member throughout the softwares development, and assigns an individual process within the software to be the domain of the user community members assigned service provider organization. Their service provider organizations are where they will provide their assigned processes management of the software and services to the entire population of industries producers, as their clients. The service providers bring the critical change to the industry structure that enables the Preliminary Specifications decentralized production model to turn all of the producers property costs variable. The process domain that is assigned to the service provider is the exclusive domain of that organization, supported by our Intellectual Property. There will be no competition based on price within the service providers. Competition will be based on specialization, division of labor, quality, automation, innovation, leadership and integration as their critical competitive advantages. To name just the highlights. Using our Intellectual Property that is generated in the User Community Vision as the basis of that competitive structure. 

As we’ve mentioned, service providers are a new sub-industry that will provide the accounting and administrative aspects of the oil and gas industry. These organizations will also be the change leaders that make the industry more responsive to the opportunities and issues that it faces. Due to the fact that the user community members are the only people that People, Ideas & Objects developers will look to for direction on the development of the software, it is the user community that controls the direction the industry will move towards. People, Ideas & Objects, are a permanent software development capability and capacity that will be available to the industry through the user community. Only user community members have exclusive access to our developers through our user community vision, and oil and gas producers seeking to have their wants and needs provided can have those attained through the user community. There will be no one else that will be able to solve the producers issues. As we’ve always suggested, who do you see today about making a change to the software that you use? What we’ve learned is that organizations are defined and supported, but also constrained by the software that the organization uses. Without a change enabled capability built into the new oil and gas industry, we would be cementing these organizations in a constant state. 

These user community member positions are new to anything that has existed before. They will earn a contract fee for the part-time work they do with the People, Ideas & Objects developers. And have their service provider organizations as their primary means of earning a living. When we understand the size of the administrative and accounting costs of the industry today, not the G&A that is recorded by producers, and then allocate the real overhead costs of the industry across the 3,000 service providers we see that these organizations will be substantial in terms of their size and revenue base. 

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 American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

"Organizations Don't Change, People Do" Part I

We’ve noted before how Chesapeake Energy had to pay an upfront $25 million bonus for its bureaucrats to stay motivated during this next year. The announcement for this was dropped on a late Friday night with the companies first quarter 2020 financial statements. This courageous act has not been well received by the individual investors who may have had to recall their stock was once worth $12,635.76 vs. the $12.49 at the time of this writing. Say one thing about Chesapeake, they've kept the math simple. We’ve all sat and watched in amazement these past few years while the industry circled the drain. No action, not even any discussion, has been taken by any of the producers to remedy their situation, only excuses, scapegoats and “they’d been through this before.” Negative $40.32 oil had a somewhat temporary motivating effect for the bureaucrats to start rolling off the couch and do something. Shutting in production which we’ve heard nothing but howling about for the whole time People, Ideas & Objects suggested it was necessary. Unfortunately now negative prices also appear to be the motivating factor for people involved in North American oil and gas to give up on the industry and look elsewhere. Or was it the absurd $25 million Chesapeake bonus. Either one or both, with the coronavirus also providing an opportunity for people to make their personal changes, change seems to be catching on throughout the oil and gas industrial complex. Which proves the well established rule that organizations don’t change, but people do.

There is no other industry that I can think of that treats its people in the manner that oil and gas producer bureaucrats do. They believe they’re “disposable, temporary and costly units that sometimes are needed.” What description would bureaucrats use? They love to claim they’re the most sophisticated technical industry in the world yet they treat their people the worst compared to all other industries. Producers will claim that they pay the best, however, now that these people’s education has been exclusively oriented to the industry, they have a small family and a mortgage, they can see when they take their compensation from the good years and spread those dollars out over the good and bad years, their compensation has been below minimum wage. The risk, the anxiety and the fear of another downturn looming on the horizon is not something anyone grows familiar with as their career advances. Resilience in the general population of an industry is a limited resource. The amount of that resiliency or goodwill which the oil and gas producers have consumed from its people, is beyond what is tolerable and / or acceptable. People are done. 

I thought that the producers had until August 31, 2020 to move towards a new strategy and vision. Clearly I’ve miscalculated the timing here, the actual time may have passed as early as April 20, 2020 when oil prices went negative. I’ve also miscalculated the full impact of the coronavirus’ and how that’s being seen as an opportunity for people to make some changes. If the producer bureaucrats are claiming that they’ve incurred all this damage as a result of the coronavirus why can’t others use that excuse too. This phenomenon that I’m seeing is not limited to the oil and gas industry. It affects all of the people that are involved in the oil and gas complex. Including the service industry and general economy, but also the cities in which the industry is operating in. Whether that is a head office or field areas. What is it that they have to lose if they made the career move to another region, another industry and worked there for their remaining 20 - 40 productive years?

One of the reasons that August 31, 2020 was the point in which I felt the industry had to make a determination of its future strategy and vision was their June 30, 2020 financial statements were going to be a surprise to everyone concerned. Everyone can understand that half way through the quarter we see prices have now broken through $30, that just isn’t doing anyone any good. Add to this looming disaster the financial consequences of shutting in production, or reduced production volumes and you’ll have an even more dramatic effect on the producers. People, Ideas & Objects have always been proponents of shutting in production in order to remove the marginal production from the marketplace. And that is being done through today’s industries actions. However there are many other attributes that the Preliminary Specification provides which include changing all of the producers' costs to variable, based on production. The real kicker therefore in the second quarter of 2020 is going to be the costs of the producers remaining fixed and that is going to be devastating to the producers financial performance. Bureaucrats are giddy at the moment thinking they may have solved the problem of overproduction by shutting in production, which they always claimed they could not do. This has and will have an effect on the prices of the commodities. What the Preliminary Specification also provides is profitability as the method of production allocation and most importantly a method of production discipline, profitability based on an actual accounting, and determining which properties to shut-in based on that actual accounting performance. Producing only profitable production. Today it may be that only the profitable properties are being shut-in as the producers, I can assure you with 100% confidence, currently have no idea where they earn their money. Look for the operating and net losses to hit new records, and working capital to be consumed as never before.

One of the distinguishing capabilities of the U.S. economy is that anyone can uproot themselves and move to the place where the jobs are. No other place in the world is as dynamic as the U.S. economy. Concentrations of industries are able to aggregate in specific geographical areas and leverage like minded people from throughout the U.S. People then gravitate towards those industries and towns where their jobs and interests are. Europe tries to do this with their labor mobility between countries but it just doesn’t offer the economic dynamism that is the inherent part of the creative destruction that is a feature of the U.S. economy. Also, to make the change within the megacities of Houston and Dallas most people only have to walk across the street in order to change the industry they’re involved in. The one thing that these people know and understand better than anyone is that there’ll be no bonuses for them to perform or stay this next year. But they do have high probabilities of being laid off or terminated the more experience they gain. There is no capacity within the current oil and gas bureaucracy for them to make or consider the necessary changes, therefore the people are now making their own changes. We know that organizations don’t change, people do. 

And that point in time has come where the extent of the damage that has been caused by the current producer organization, is incapable of making the necessary changes to correct what is killing the industry. What more proof do we need to determine this? It’s therefore time to replace it with a new method of organization that deals with the issues of the industry but also provides a vision and strategy for the future. The Preliminary Specification for example. That way the industry can be rebuilt stick by stick, and brick by brick while what exists today falls to the wayside. We should all be grateful that the issue we’re dealing with is an abundance of oil and gas. 

Next Tuesday in Part II of this series we’ll be discussing how People, Ideas & Objects Preliminary Specification provides the organizational change necessary for industry to deal with its issues, provide profitable production everywhere and always, but also a place for these people to grow and prosper by participating in the development of the Preliminary Specification.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

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

One of the difficult aspects of the producers current situation is that they’ve already had the bottom feeders pass through the industry hoping to make a killing. This occurred a few years ago just after the prior decline in oil prices. And of course those “investors” have now been burned too. The source of producers recovery will not be capital from outside their firms, it has to be internally generated. Something that they’ve not done for forty years. Our sample of producers have shown in the first quarter of 2020 a new criteria that proves this. The valuation of these producers which include 20 producers producing 10.42 mm boe / day has dropped to 2.8 times cash flow. Possibly the result of a beaten down sector, or, during the 2016 oil price meltdown faith remained strong and had these same producers trading at 13.3 times cash flow. The producers were managed in the past in a way that once the bureaucrats had their take, and were satisfied, then the industry was doing well and that was the extent of the ambition of the industry. We see this in today's commentary that shut-in production will be returned soon. The demand for cash is all consuming and continues to create the very low threshold of expected performance. Now faced with attaining a level of performance where “real” profitability will be demanded, and consistently, with an industry that has been decimated of all monetary value, and the supporting infrastructure has also been laid to waste, they’ve already proven, to me, that they’re incapable of rising to that challenge. They haven’t even identified that there is an issue, all of what they’re facing “is due to the coronavirus.”

Capital Discipline will be a new and quite different discipline in the industry compared to what the producer bureaucrats have been talking about these past few years. What they’ve been stating and claiming was they were very prudent with the spending of direct investment dollars. And they were prudent in this task. Nothing would ever be misplaced in terms of the money that was spent on new drilling, etc. Investors, boards of directors and their partners in the Joint Operating Committee have means and controls in which to ensure that prudence is never compromised and the integrity of the spending of investor dollars on new projects was always 100% as promised. The cash flow from prior investments distributed out of the Joint Operating Committees to the individual producers was always considered by the bureaucrats to be “discretionary.” Bureaucrats should have a good look around and understand the damage and destruction that has been realized is their fault. It’s not that they didn’t know what they were doing, they knew. I’ve been telling them since December 2005. A time in which they did everything, and I mean everything to quash the words being published here. Now that contrary piece of history is part of their legacy too.

If in the future, through the industry wide implementation of the Preliminary Specification, the commodity prices are dictating that only profitable production is produced anywhere and always in the North American market. Then capital will be returned to the producers on a much more rapid basis than what it had been in the environment where the only needs of concern were the bureaucrats pocketbook. Bureaucrats always knew then that next year's capital budget would be financed by investors. We will therefore need to implement enhanced controls over the distribution of this cash flow and ensure that it adheres to the more basic principles of good governance where it is distributed one third to dividends, one third to the reduction of debt and one third to capital expenditures. This will be the distribution of the internally generated funds necessary for the industry to a) recapitalize themselves, b) recapitalize the service industry in upfront cash payments, and rebuild the general economy so that it supports the needs of the oil and gas industry in all that needs to be done in the next thirty years. 

Back to the issue of capital discipline, the Preliminary Specification will establish a new dynamic in terms of when a producer will proceed with the exploration and production of oil and gas. The competitive advantage of spending drove the producers ability to acquire and outspend others in their pursuit of assets. This will not be the case when “real” profitability is the driving purpose behind the producers'. New criteria such as the impact on the commodity market, availability of production facilities and takeaway capacities will be more involved in the decisions being made. Acquiring decades of drilling locations will be somewhat of a theme at the local comedy houses and no longer exist in the annual reports. Viewing the business from a more global and holistic point of view will be a necessity. The division of labor of just drilling wells was the past bureaucrats thinking however it avoids the one critical point. As a primary industry it earns the revenues that are a result of the efforts of the producers, service industry and general economies contributions. Ignoring them and calling them greedy and lazy is one way of dealing with them, however it betrays the responsibility that the producer undertook when they banked their oil and gas revenues. Just one more fundamental betrayal I would suggest. What the producers will need and want in the near and mid-term future needs to be initiated, collaborated and funded by them to ensure that it’s done. Sponsoring these ideas and making them happen is the only way they’re going to materialize. These capabilities are specifically provided to the future industry participants through the Preliminary Specifications Resource Marketplace and Research & Capabilities modules. These are necessities now that the bureaucrats have so fundamentally betrayed this responsibility and destroyed most everything. As People, Ideas & Objects have recently noted here on many occasions, this will be done with producer cash upfront. It will also be time for the producer bureaucrats to toss that book of theirs “Excuses and Scapegoats for Dummies.” Whoever takes over will be operating the industry responsibly from now on.

The value proposition of the Preliminary Specification for the next 25 to 30 years is estimated to be between $25.7 and $45.7 trillion. Most producers should now appreciate the difference of how our numbers come about. If not they’re truly in the wrong business. People, Ideas & Objects first published these numbers in the Preliminary Specification in December 2013. It was this value proposition and our budget that offered no end of comedy relief for the bureaucrats who clearly didn’t understand the scope and scale of damage they were casing the industry. With the work that has been identified in the service industry and general economy on top of what has to be done by the producers themselves, the only source for that money is the commodity prices that are passed onto the consumers. Doing so by charging the consumer with the full cost of capital, royalties, operations and overhead, and yes profits of exploration and production of oil and gas. This assumes the industry begins to operate as a business and we accurately account for the actual costs of oil and gas and ensure that no production is produced unprofitably. Something that appears beyond the comprehension of what exists in the bureaucracy today, and beyond the capabilities and capacities of what is left in the ruins of oil and gas. I’ve always thought that expecting a mouse to run like a horse was a sure fire way to be quickly disappointed. I’m not expecting much in the next three and one half months. This being a time period in which People, Ideas & Objects believe action is demanded from the industry or operational control of the North American infrastructure will be lost for at least a decade. This can be mitigated by funding and beginning the development of the Preliminary Specification but it’s important that the bureaucrats understand there is an end to their line of abuse and betrayal. 

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 American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

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

Capital costs have been a long term issue between People, Ideas & Objects and the oil and gas industry. We believe that capital in a capital intensive industry such as oil and gas should be represented in the costs that are passed on to consumers. Producers believe these costs should be stored on the balance sheet and admired for their size for a number of decades. We believe that today what is recorded on the balance sheet in property, plant and equipment is nothing more than the unrecognized capital costs of past production. The producers' process of storing these costs as property, plant and equipment has overstated their assets, earnings and cash flow for the last four decades. This treatment has also created a “cash crisis” in the industry for these past forty years. For most of this time the cash crisis was backfilled with annual share issuances that reloaded the spending that has become the distinct and only competitive advantage of the industry. Once investors learned how their money was being used they withdrew their funding, and the industry collapsed at a steady pace as a result of the chronic demand for cash. Each month producers must find new cash to fund their capital expenditures. These capital costs include the majority of the producers overhead and much of the interest which was capitalized on top of what are traditionally known as capital expenditures. Therefore these capital costs were funded by the investors and the consumers paid the producers operating costs. And the “cash float” that was returned each month from the sale of the commodities did not represent anything close to the recurring monthly costs of the operation. And hence the cash necessary to cover these recurring monthly costs needed to be sourced from new investors each year. 

I argued with the producers that they were not recognizing adequate amounts of their capital. Deferring the recognition of their capital over the course of the reserves life was causing these assets to bloat even further to unreasonable levels on the balance sheet. They unanimously stated that those were costs that were incurred in prior periods and no one was concerned about them. I suggested otherwise and the point was feigned to be lost on these bureaucrats. The critical question that I have today for them is really quite simple. Where does capital come from? A perplexing question I’m sure. The source of capital is derived from the competitive nature of the industry's performance. When everything is deemed to be capital, and hence revenues appear to be mostly profits, and in the indirect ways that we’ve noted here before, mostly the capitalization of overhead and interest, also overstate the cash flow’s of the organization. Therefore, eventually the situation was bound to be discovered by those who propose building software to remedy the issues in the industry and those that had invested in the producers organizations. (Note May 2020 begins my thirtieth year in trying to make this happen.) Once it was discovered the investors felt betrayed by the reporting of the producers and realized they could have earned real performance from other industries instead of being deceived. So the answer to where capital is sourced is a complex one that includes integrity, honesty and performance in the form of “real” profitability, just to highlight the most obvious points.

Contrary to the political climate that has been ever present these past few years. Investors and capitalism are not the heartless people they’re made out to be. They’re more or less you and I who can not afford to lose what little we may have. Investors are therefore not going to expend these hard earned dollars of theirs on a bet that the producers may have now seen the light and reformed their ways. They’ll want to see concrete steps being taken to ensure that changes are being made to the way things are done, and / or, the people who are responsible for this destruction are not allowed to continue. Once given a strategy and vision of how the industry would operate, a strategy and vision that will enable the industry to compete in the market for capital by providing a competitive performance based on “real” profitability. Then, and only then, will investors even begin to look towards the oil and gas industry. There also needs to be the understanding that the investors don’t have the resources to recapitalize the producers, recapitalize the service industry and make the general economy whole again. This is the damage that the bureaucrats have created and producers themselves will have to correct once given the opportunity. They’ll first need to establish a more equitable reputation than what they currently have. This will be a particularly difficult task as the producers have created a situation where they earned the reputation of being bad credit risks and proven to be unable to pay what they already owe. Therefore it will be those that survive in the service industry and the general economy that will demand to be paid in cash upfront. Much in the way that People, Ideas & Objects are demanding our budget be funded. There is no trust, and there is no faith that the money they would have to spend on the producers behalf, to generate their service revenues, isn’t better used by just tossing it in the incinerator. The industry has become a credit risk, a business risk and an operational risk for anyone who has the misfortune of dealing with the current producers. Having cash upfront to pay for what needs to be done will be the legacy of the damage that is and has been caused in this industry. I want people to understand that I’m not painting a dire situation here. On the contrary this is the rosiest picture that the industry could ever hope to attain from here on. And will be the case for the next decade or so. However, if bureaucrats continue to sit around picking their noses for another three and one half months, this rosy picture will have disappeared permanently. 

Now that producers have miraculously learned once again that they can shut-in production, it will now be their claim they don’t need the Preliminary Specification. Nothing could be further from the truth. What we’ll find in the second quarter is that the reduction of production did little to enhance the financial performance of the producer. Shutting-in production removed some of the excess production off the market however overproduction still continues, if one listens to the price. It may well be at that point these bureaucrats will state the Preliminary Specification doesn’t work. But they’ve used that excuse many times before. Shutting-in in today’s environment helps the commodity price but the costs of the producers operation, the actual overhead incurred and the actual interest incurred etc are fixed and do not change as a result of the changes in production volume. Whereas the Preliminary Specification turns all of the properties costs into variable costs, therefore the producer remains profitable at any point along their production profile. At full production they’re profitable and they’ll be proportionately profitable at a 30% production volumes. This is one of the key differences between what happens today and the Preliminary Specification. 

One of the myths that we consistently heard during the downturn of oil prices in 2014 to 2016 was how innovative producers were. How they had reduced their cost structures from $55 / bbl to $45, then $35 and finally $25 / bbl. It was miraculous wasn’t it. We suggested that it was nothing more than the bureaucrats redefinition of historical as it applied to historical accounting. Which of course it was, and it was only another in a long line of myths that have been pushed out as we’ve documented these past few years. What they were doing was prospectively looking at what they could then drill a well for based on the cost estimates from the field. Drilling rigs were looking for work and their prices were declining creating the situation in which the future costs would be so much lower than what had been spent on the 10’s of thousands of wells they previously drilled. Those were the good days weren’t they? As we’ve noted here performance isn’t the bureaucrats forte, deception and dishonesty have been. Based on the accounting principles they were using they were nowhere near the cost structure they were quoting but they had to be competitive to what other producers had stated in their press releases. Today’s a different day. All of the producers were subject to a level of impairment of their capital assets due to the application of the ceiling test. People, Ideas & Objects understand that bureaucrats think this investor money is a sunk cost, however we feel they’re only beginning to feel the effect of that attitude. Two producers stand out in terms of their capital costs incurred per boe in the first quarter. These are Chesapeake at $211.67 / boe and Crescent Point at $299.90 / boe which sounds impressive but those are Canadian Dollars, in U.S. dollars they come in at $211.52 / boe. Having researched innovation comprehensively so that it was implemented thoroughly within the Preliminary Specification I can assure you that innovations are not transient. The producers claim to have reduced their costs to $25.00 which are in some cases now over $200 is inconsistent with the principles of innovation. It must have been something else I guess. 

I sometimes have to laugh along with the producer bureaucrats at my foolishness. Why in the world would anyone concern themselves with performance or “real profitability.” Only capitalists concern themselves with those things. We should look back and ask ourselves what the situation in oil and gas would be today if the producers would have been concerned about performance and “real” profitability instead of filling their pockets. How would we as an industry, the service industry and general economy stand if it was properly managed? If we turn to the future and see the current situation in the industry, extrapolate that out five years or even ten years, it’s just more of the straight downward decline in capacities and capabilities. Or, we could rebuild the industry based on the vision of the Preliminary Specification. Forget about these bureaucrats and their legacy of abuse and mismanagement and build this industry into what it can be. With producers that are dynamic, innovative, accountable and profitable. Crazy, eh? You don’t have to be crazy to do my job, I just find that it’s a distinct competitive advantage.

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 American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

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

We see in this desperate market situation where inventories continue to build, demand remains constrained and prices are woefully inadequate. Yet producers are moving their production back onto the market by reversing the properties that have been choked back and restarting production that was shut-in. At $25 why? There has to be some method of industry wide enforcement of production discipline. The probability of government mandates is a non-starter everywhere except for Alberta. And in Alberta they’ve only proven why they don’t work. Too much cheating with work arounds and overall dissatisfaction. OPEC proved that quotas are difficult if at all possible to impose so what is there to instill a method of production discipline in the North American producers? The only fair and reasonable method is the Preliminary Specifications decentralized production model’s price maker strategy that allocates production based on the determination of the property's profitability. If the property is producing profitably based on a standardized accounting then it produces. Otherwise it is shut-in for those accounting months in which it can be worked over to bring it back to profitable production, or commodity prices rise. 

The production reported by our sample of producers is very interesting. Canadian producers reduced production in the first quarter of 2020 by 23,295 boe / day over 12/31/2019. And reduced it by 473,852 boe / day over the first quarter of 2019. Pipeline constraints and the Alberta government production mandates being primarily responsible for the difference. Our sample of U.S. based producers increased their production in the first quarter of 2020 by 220,182 boe / day over 12/31/2019 and increased their production over the first quarter of 2019 by 895,425 / day boe. Combined the increase in the first quarter's production over the end of last year is 196,787 boe / day to a total of 10,353,426 boe / day for our sample.

Producer bureaucrats will tell you what the cost of shutting-in a well is... They know the cost of everything and the value of nothing. Yet do not seem to understand the concept of profitability and why you should not produce unprofitably for decades at a time. To take someone's money and spend it in what some people might call a business is a very simple thing to do. Some even believe that this act is what you call “business.” To earn a profit, to truly understand what a profit is differentiates those from the pretenders who only spend money as their business model. We have nothing but pretenders in oil and gas with no one knowing or understanding how or why they should be earning a profit. They have no concept to the degree of difficulty it takes to earn them and most importantly the difference. Bureaucrats can tell us the cost to shut-in a well, but fail to understand what the cost of selling oil at $25 is.

As a result of the “coronavirus” we’ve learned that you can shut a well in remotely with an iPhone, and you can turn it back on with the same iPhone! We were told by these producers any number of fairy tales about “how the formation would fold over on itself” and other garbage excuses so that they didn’t have to get up off the couch and do something. Now we find that shutting in wells doesn’t do any damage and the formation pressure builds while shut-in, causing an initial higher rate of production once it’s resumed. What is it that motivates producer bureaucrats to say these chronic, dishonest attributes of their business. We’ve seen these fairy tales pushed out over the decades which are subsequently proven untrue. Is it that they resist the logic of the Preliminary Specification and its effect on their job security. Or, is it they don’t understand what it is they’re talking about. Either way, once again, this proves that the industry would operate just fine, and in fact much better, without these people in command and control. The devastation that is oil and gas is the result of their inaction. If the reason for inaction is People, Ideas & Objects it clearly reflects the effectiveness of the threat that we pose to these bureaucrats is real and of great concern to them. That they would lie consistently to deny our commentary and the arguments we’ve made in the Preliminary Specification but to let things get this far out of hand is ridiculous. If it is not us then what has caused this? Well of course it’s the coronavirus. But let's note the effect the virus has had on the decades long depressed natural gas price. 

The accounting month is a concept that is also not understood by these producers. Shutting-in production in the middle of the month to only pick it back up in the middle of next month shows the incapacity of them to understand anything outside of their “cost control” business model. When prices go negative shut-in production, when prices turn positive, return production. The accounting month is how the industry, scratch that, is how the world turns. Everything is based on an accounting month. If you sign a contract it’s for a series of accounting months, usually. Therefore the costs that would be incurred during a three week period that a well was shut-in, that straddles two calendar months, would incur the full cost structure of those two accounting months. So much for cost control. When a well needs to be shut-in it has to be shut-in for the entire accounting month to avoid its operating costs in the current environment and the operating and overhead costs in the Preliminary Specification. And when will this cost control business model begin to consider the fact that when a property is unprofitable, that unprofitability is a real and very high cost that the producer is incurring? Not just on the shut-in property, but all their properties. At least $5 trillion since 1986.

And it’s not just the producers is it. The revenue of the producers sustains the oil and gas industry, service industry and general economy that supports the producers. As far as the producer bureaucrats are concerned these others are the leeches off of their good fortune. Yet it’ll be the reason they’ll be unable to conduct any type of business in the very near future. There never has been any understanding or consideration that the revenues that are earned by the producer are for the benefit of the entire economic system in which producers depend upon. It’s the bureaucrats' money and “go get your own” is the attitude and general operating premise. What the producers are going to find is that these people who made the industry operate have indeed gone on their search for the money you suggested that they find. It is also these bureaucrats' expectation that as soon as the investors see the wisdom of their inaction. They will return to make investments in producers that will make everything work as it did before, without any action on the bureaucrats behalf. The service industry will be recapitalized and the general economy will be restored instantly to its former glory. 

In a world where there have been decades of 0% interest rate policies producers are declaring bankruptcy. That is a testament to the spending disease in oil and gas. Where capital was always considered to have cost nothing, now that access to capital has ceased, losses have been hidden for four decades from those who should have known, to the point where the only source of cash was the commodities themselves. As a primary industry these revenues could be diverted for the bureaucrats own best interests and to hell with the rest of the economy. Overproduction, or unprofitable production, became all the rage as the revenues were considered “my money” and everyone else would be fed the crumbs to keep the facade moving forward. Now the end of the road is near when former industry stars and darlings are on the verge of bankruptcy and others are signing forbearance agreements to keep the banks from foreclosing for another month. The banks will end up with the assets very soon and they’ll certainly be better able to manage them than what’s been done. This will leave the bureaucrats with an exit strategy of slipping out the back door never to be seen in oil and gas again. Telling the people in their future industry “they tried to fix it but it was just too big of an issue.” 

A producer can have everything operating as a fine oiled machine but still have the same outcome as the other 99% who have been deliberately destroying things by overproducing. It’s necessary to have the industry reading from the same hymn sheet and adhering to it. Otherwise that one incremental, marginal barrel of oil destroys the price for everyone will always be produced. Bureaucrats need to ask themselves if this a short, mid or long term issue? And is this narrative that it's the coronavirus that’s causing them their difficulties the appropriate scapegoat to be pursuing at this point? Has the demand destruction from the virus even been quantified in the long term? I have stated that producers have until August 31, 2020 to have funded and commenced the developments of the Preliminary Specification. If they do they’ll be able to struggle for the next few years but continue. If they don’t they’ll quickly lose control of the logistical and operational control of the industry in a way that will seem to have a permanence to it. Commentary like “we can’t do that anymore because they’ve shut that facility down” or “they can’t take our production anymore because their customers aren’t paying” etc, etc will become commonplace. Which then creates the ping pong effect of having the same thing happening here and there in an uncontrolled and unstoppable series of mini-disasters. Then when it’s beyond the ability to bring it back, the oil price will rise and who will have a vested interest in wanting to get involved? No one, because no one made any money. That’s when the price hits $600 / barrel and still no one trusts the industry to do the right thing because nothing has changed. It's still the same people who ran it into the ground. They’ve never seemed to desire to grab hold of the industry and make it work. It’s always just muddling through and doing nothing. What’s happening today and how it's not really an issue. How the industry has always been able to recover from its difficulties. La de da. There is no plan to deal with the mid to long term. No strategy on how to put together a valuable industry for all concerned. It's just get what you can, while you can. You reap what you sow and the farmland that once sustained everyone looks more like an overgrown forest. 

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 American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

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

Many of our sample producers have now reported their first quarter 2020 financial statements. People, Ideas & Objects have always pursued the development of the Preliminary Specification on the basis that oil and gas was headed for an existential crisis of their own making. The coronavirus has only accelerated the end of the beginning of the crisis for them. As we indicated last Friday, the airbags from that long anticipated impact have now been deployed and the follow-on consequences will soon begin to ripple through the industry. We have suggested the industry has until August 31, 2020 to fund and commence the development of the Preliminary Specification as the remedial effort necessary to mitigate their rapid, uncontrolled and disorganized decline in industry capabilities and capacities. In reading these first quarter 2020 financial statements it is evident that the confidence of the bureaucratic management of the producers continues in its resilient, delusional fashion. I attribute this to the uncaring nature of how the industry has been managed these past four decades and the fact that bureaucrats are still able to reap some bounty, at least until August 31, 2020. For further clarification of this bounty review Chesapeake today.

Most of the producers have received distinct expressions of a lack of confidence from the market. Firms such as Ovintiv are as confident as they were when their shares were almost one hundred times what they are today. When the market thinks you're now worth 1.1% of your former self this confidence is misguided. You are the walking dead. Even the large integrated firms have exceeded the 50% loss of value threshold of their former valuations. Which to me is the critical vote of non-confidence that the management should realize that they’re in serious jeopardy. Reading these integrated firms reports reflect that some companies such as Shell and Exxon are responding in kind. When Steve Jobs returned to Apple he quickly made a deal with the devil in selling $100 million shares to Microsoft. A betrayal the Apple faithful claimed. He responded by stating publicly the firm had 90 days left to turn itself around and put together a viable choice for the marketplace. Apple is the only company that I am aware of, ever to have come back from this assessment of a lack of confidence, or of being deemed terminal by the marketplace. There was no such delusion evident in Apple’s new management and changes were made quickly to affect the firm's trajectory and solve their critical issues. I would suggest we recall that overproduction collapsed and fundamentally destroyed the natural gas pricing in North America in 2010. The same began in oil in 2014, OPEC mitigated the destruction of the oil price for over three years and have capitulated that role due to their frustration with the North American producers' chronic and deluded overconfidence and overproduction. What has been done about either of those two situations? These financial statements clearly reflect the decades of abuse producers have been subject to, and the past decade of neglect and inaction to remedy the ongoing destruction. There is no value in oil and gas and that is reflected in these first quarter 2020 financial statements. 

The analysis of these first quarter reports reveals some interesting trends that I find disconcerting and provide more evidence to support some of the claims made by People, Ideas & Objects and support the Preliminary Specifications implementation. The most critical claim was our April 20, 2020 blog post “Corruption 101.” First of course is the losses that have been reported. Mostly as a result of the forced impairments due to the application of the ceiling test. Producers have consistently desired to “build their balance sheets” a.k.a. spending like drunken sailors, and used the ceiling test as their limit as to what they could achieve. People, Ideas & Objects believe this is a misinterpretation of what a capital intensive industry is, and producers should seek to pass the costs of their capital on to the consumer as quickly as possible. The costs of oil and gas exploration and production are predominantly capital however producer bureaucrats cherish their capital costs on the balance sheet as collector items. This is not a competitive posture and is leading to the demise of this current generation of producer firms. 

The second issue is the cash flow. People, Ideas & Objects have always asserted that overstatement of assets has the immediate effect of overstating profits. More or less a given. Which led to the culture of the industry's current destruction. We have stated the current accounting overstates producers cash flow by diverting many of the operations, intangibles and overhead costs that should have been classified as overhead or operations to capital. This has the effect of increasing cash flow by not recognizing these costs in operations in the current reporting period and deferring them to depletion which is not part of the calculation of “cash flow from operations.” Overstating this value has had the effect of overstating the valuation of the firm which is indeed the standard method of valuing the industry. Six times annualized cash flow has been the basis of the market capitalization for oil and gas over the past four decades. It would never, therefore, provide any impetus or motivation to any one of these producers to want to game or boost the cash flow number in any way, would it? I believe in the first quarter of 2020 the effect of this distortion is very evident and clear for all to see. At this point with all but four producers of our sample having reported, we have a loss of $24.329 billion. (Note 2016 losses were $30.229 billion for the entire year.) Revenues have been hit but nothing like what they’ll be in the second quarter of 2020. But in almost all cases cash flow increased in the first quarter of 2020 within our sample. Two exceptions were Suncor and Cenovus who share the burden of being predominantly heavy oil producers? Yes, that is a very interesting question. An even more capital intensive operation than conventional or shale oil and gas? The other exception was Occidental which could be a result of a number of different factors and certainly no one from outside could discern what would be the cause in the next two years. Hedging has taken place and some firms did reap some rewards, however prices in general were in steep decline over January at $51.01, February at $45.26 and March at $20.01 EOM prices. How then did cash flow hold up? 

Our argument is that property, plant and equipment is more or less a slush fund that captures everything that is spent by the producer. Then it is left there for decades to accumulate as what we call the unrecognized capital costs of past production. G&A, interest and we feel a better classification of what are operations and what are intangible assets and capital would provide a better understanding of, and clarity as to how the cash flow was generated and where it was derived from. Today the number is too opaque when the capital nature of the industry and the methods used by the producer bureaucrats are as we’ve documented here. If these have been the means in which the market has determined the value of what a producer is worth, then why has there been such ambiguity? That the cash flow numbers have held up in this environment is disconcerting to me as it reminds me of the reason that Bernie Madoff was eventually discovered to be running a ponzi scheme. During the 2008 financial crisis, with everything collapsing around the world, Bernie was still able to report his historically consistent and undiminished mutual funds value and quarterly performance. But here is maybe the better question. How come we’ve heard nothing from the CFO’s in the industry over the past year? It’s almost like they're as invisible as the CEO’s! And of course all under the watchful eyes of the accounting firms who charge hundreds of dollars per hour for a recent university graduate and call them “experts.” Surely no one could ever get anything past them.

So there we have it. We have argued the specious nature of the industry's accounting throughout our writings these past decades. Would an oil and gas industry have lost its way if it had the precise accounting that measured the real performance of the producers? Why have the ERP systems vendors been so abused as we’ve documented in our White Paper? And why has no major ERP vendor provided a solution to the industry's needs? These are questions that are valid in light of the self-serving bureaucracy that has prospered at evidently everyone else's expense and the opaque nature of their activities, as they’ve reported. I guess the point of it all was to make sure the cash flow numbers were historically consistent and undiminished from the prior quarter.

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 American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

Attention Spans of Mosquitos

It was looking like we might have turned a corner, I was optimistic. Producers began to break records last Friday when they had sustained their sense of urgency for the situation that they created, and then on Wednesday May 6, 2020 it happened. In this WorldOil article entitled “Oil at $30 may be enough to revive shale activity, say drillers” where it notes that both Diamondback Energy Inc. and Parsley Energy Inc. are looking to return to full production. The record therefore stands at 16 days for producers to focus consistently on the issue of overproduction. We should congratulate them on their new 16 day record and remember not to be fooled again. On April 30, 2020 I tweeted the following reply to the CEO of Cenovus.

Alex Pourbaix, Cenovus President & Chief Executive Officer. “When global economic conditions improve, we’ll be ready” is this courageous leadership or today’s version of Monty Python’s Black Knight?

The world oil price collapsed into negative territory on April 20, 2020 and ten days later they’re passively waiting for when things get better. Six days from that producers contemplate putting their production back onto the market. Note too that May 6, 2020 is fourteen days to the expiration of the June contract which could very well see another negative pricing event. Leading to the hair on fire desperate actions we’ve seen where producers beg governments to bail them out.

In terms of producers People, Ideas & Objects have been concerned about this characteristic of theirs throughout our work. We need to have our budget funded in full or this listless wandering will look to cut the costs of our developments when the price of oil increases by $2, or would that be down $2? We’ll never successfully complete our task if we are subject to this inconsistent, passive lunacy. We would also never be able to deliver the type of software that is necessary if we have to cajole these producers every sixteen days with new incentives to keep the project operating. Nothing effective would get done, and what would get done would be useless, incomplete and a waste of financial resources. 

To suggest that producers have lost the script would be our point of view. They have not been operating in the oil and gas business for the past four decades as far as we’re concerned. What it is that they do is involve themselves in spending. The average person on the street believes they’ve created miracles by increasing production in the past decade as much as they have. It is impressive. It needs to be remembered that the average person on the street maintains no understanding or involvement in the oil and gas business. From the point of view of the business it has been a comprehensive failure and is by far the most destructive and damaged industry that’s ever existed. Those that have invested with their own money in order to build the industry have left in disgust at the performance of the producers. It is however the person on the street that the producer bureaucrat listens to in order to stroke their egos as opposed to their past shareholders and investors. That is why producer bureaucrats have no access to capital and are withering away as organizations. Let me restate that, they've destroyed all the value in the industry and have no access to capital in which to incinerate. 

This laid back “muddle through” existence is the defined strategy of the producer bureaucrats. It is inherent in the culture of the business and is incapable of dealing with any issue. “All issues will resolve themselves in time” they claim. The natural gas business experienced their comprehensive decline in prices during 2010 and have not come back in any form since. These prices have consistently fallen into negative territory and no remedial action has been taken by anyone anywhere. What was initially just a North American pricing issue has now become global as the consistent overproduction by North American producers never stopped, ever. Natural gas was always one side of the business and the other side of the business, oil, was healthy enough to carry the producer. So the bureaucrats declared. Now with the commodity prices of both oil and gas fundamentally destroyed there will need to be a plan in place in which these prices can be rehabilitated before the industry could ever recover. The only discussion of this is done here by People, Ideas & Objects, as we have discussed and proposed our solutions to these problems. Nowhere in the industry do you hear or see anything resembling concern, discussion or action to resolve these existential issues. Other than the sixteen days where “the government had to step in to save the industry,” nothing has been done. 

I refuse to believe that anyone facing the resolution of these issues would have to work under these unstable circumstances. This would be untenable and is destined to be the failure of this or any project with our scope and scale. On April 30, 2020 I wrote in this blog that the industry had until August 31, 2020 in order to prepare itself to begin the development of the Preliminary Specification. It is People, Ideas & Objects solution or failure as industry’s two and only choices. Instead what we see is the laid back, passive expectation that the future will be filled once again with wine and roses as long as the producers do absolutely nothing. The culturally ingrained hope that optimism will show the way. And any actions that were done to limit overproduction have now satisfied the market with $23.39 oil. That being a positive price, those actions are now redundant, unnecessary and therefore to be reversed. This is not a business and has not been a business for the past four decades. It is a fool's paradise where you can believe whatever future you desire. All you have to do is shut out the real world and “keep the government on speed dial, they’ll come around, trust me.” 

The crude analogy of the car hitting the brick wall began on April 20, 2020; the airbags were deployed in the manner of negative oil prices. But that was then and it’s a different day with a different future as far as these producer bureaucrats are concerned. They’re unable to see what lies ahead of them, what the follow-on consequences of their high speed impact with reality will ultimately cause them. Bureaucrats are not action heroes and they don’t play ones on TV. Theirs is a corrupt enterprise where the lining of their pockets continues and the quicker they forget about what’s going on around them, the faster everyone else will too. Explain to me how I’m wrong, or even slightly incorrect in that assertion.

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 American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.

Work From Anywhere (WFA)

The Preliminary Specification provides a distinct opportunity for oil and gas to leverage the new and valuable trend of working remotely. As with change, people always surprise me and find new and innovative ways to overcome the obstacles and bring about real lasting change, but more importantly value. The working from home or WFH trend will be a hard one for the “old” business culture to obstruct. Now that people are WFH on a wholesale basis expect to see many new and innovative applications and approaches begin to be developed around this new way of working. 

How prevalent and serious is this trend? I think it is well established in the minds of the business elite and entrepreneurs already. Shell commented in their quarterly report about this trend, stating that they think this may be a major effect to the oil and gas business in the short and mid-term. Suggesting it could materially reduce oil demand as a result of less traffic. Less traffic will be the environmental nirvana that drives some of the trend. Airlines are looking at this as the existential threat to their business, Boing et al as well. What if they were relegated to the leisure travel industry as their primary source of revenue. Warren Buffett in his virtual Annual General Meeting is quoted as saying. 

The supply and demand for office space may change significantly, 

The supply and demand for office space may change significantly,” Mr. Buffett said. “A lot of people have learned that they can work at home, or that there’s other methods of conducting their business than they might have thought from what they were doing a couple of years ago. When change happens in the world, you adjust to it.

It’s just a question of which sweatsuit I wear.

It’s not just office space either. Highly rated restaurants in New York city are seriously contemplating the closing of their eating areas permanently. Having take-out and delivery only. We’ve all known of the possibility of the trend becoming the way we worked all through our lives. That this would someday be the manner in which people worked. What I think we’re finding now is that there is nothing stopping us from doing so. 

There are two key points in the Preliminary Specification I want to point out. First is that it was built conceptually as a Work From Anywhere (WFA) oil and gas ERP system. Secondly, it strips the dynamic, innovative, accountable and profitable oil and gas producer down to its distinct competitive advantages of its land and asset base, and science and engineering capabilities. The removal of the administrative and accounting resources from the producer to service providers enables producers to reduce their office square footage down to what would be needed in order to attain and maintain those competitive capabilities. And I am unaware but there may be opportunities for having those resources operate in a WFA configuration as well. The Preliminary Specification does facilitate those interactions. 

The user community members service provider organizations will be a reallocation of the administrative and accounting resources of the producer firms. Established by the user community members they will manage one process of the People, Ideas & Objects Preliminary Specification on behalf of the entire industry. Charging each Joint Operating Committee a small fee, which may be just a few cents, for their processing during that production month. Where they will do this WFA comes with just one caveat that it is not done in the producers office space. Whether they rent their own office space downtown or elsewhere, work remotely with only meeting rooms for their staff or use WeWork to work occasionally or whatever they discern is appropriate for their needs. The source of these service providers competitive advantages are comprehensive and significant. These include specialization and the division of labor, quality, automation, innovation, leadership and integration just to name the highlights. These shared and shareable resources replace the unshared and unshareable resources that each producer has purpose built to meet the same requirements as all the other producers. The service providers will have it within the domain of their operations to achieve 100% utilization rates. Whereas the producers' current configurations may be able to reach 40% rates today due to the high levels of specialization of the industry and heavy regulatory requirements distributed over a relatively small administrative and accounting staff. This increase in resource utilization is what will be attained in the short-term. In the mid to long term the service providers will have the software development capabilities of People, Ideas & Objects and their user community member / service provider owner that can affect any change of their process as they need in order to expand on their specialization and increase the division of labor necessary to further expand the throughput of the industry with the same costs. 

I also think there could be some innovative ideas in how the capabilities and capacities of the producers' competitive advantages are configured during the development of the Preliminary Specification. The key organizational structure of the Preliminary Specification is the Joint Operating Committee. The legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the North American industry and each producer. People, Ideas & Objects believe the current organizational structure of the producers was driven by the introduction of computers in the 1960’s. When they were introduced the question was what would they be used for? Accounting was the natural first choice, then tax, royalty and other regulatory requirements. The organization then grew out of meeting the accounting and regulatory requirements of the corporate organization and the Joint Operating Committee, from an administrative and accounting point of view, has been lost and forgotten. This should not be considered the case today when we have new and better ways of working, a need for new software and a handful of issues that are addressed specifically by the Preliminary Specification. 

It was December 2013 when we published the Preliminary Specification which includes the Marketplace Interface which includes elements of a WFA capability. The Marketplace Interface was controversial when first introduced and may be redundant at this point, replaced by newer technologies that the user community can implement. What we were attempting to do with the Marketplace Interface was to have the collaborative interactions between participants supported by the capabilities of the ERP system. For example if a producer was to see a new and innovative product that was of interest to them they could begin the process of testing it from with the Marketplace Interface by way of a drop down menu and invoke the ERP system in some way, for example prepare a purchase order etc. This capability would need to be maintained in whatever the user community chose to do in this collaborative WFA area. 

WFA will be a definitive trend in oil and gas. There will be no ability to stop it by the producer bureaucrats or anyone else. Other industries will embrace the trend as a dynamic tool that is a benefit for their staff but also their bottom line. This is contrary to the absolute control that is exercised in the producer firms today. Although layoffs are the bureaucrats most competitive trend at this time, that will change and the need to source many of the people who have been betrayed by their bureaucratic and inadequate management will require extensive coaxing for those people to return. Having a competitive WFA benefit will therefore be mandatory if the producers expect to function in the western hemisphere. 

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 American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 More Excuses, Let's Get Down to Business

The state of affairs in oil and gas is... Who cares, we all agree there’s serious issues that need to be addressed. Industry has begun shutting in production which is the first lesson learned in a long list of lesson’s they’ll need to learn in a hurry. Whether the shut-in production is for one accounting month or for the next decade, the oil or gas is still going to be there. The shale reservoirs have produced a new dynamic in the industry that needs to be recognized and accommodated. Otherwise we see the direction things will be headed if we don’t make the much needed changes. 

If the past week provided us with an incremental $7 per boe increase over the prior weeks production. And the U.S. production went from 12.8 mm boe / day to 10.9 mm boe / day, a 1.9 mm boe / day decrease, how did that affect the revenues of the industry? That was an increase of $529.2 million for the week, and $27.5 billion for the year. The loss of 1.9 mm boe / day at approximately $12 / barrel dropped revenues by $159.6 million for the week and $8.3 billion for the year. For a net revenue increase of $369 million for the week and $19.2 billion for the year. This is the result of the price maker characteristics of the oil and gas commodities. Small changes to the volumetric output have significant impacts on their prices. I would quietly assert at this point that out of the $19.2 incremental gain the budget for the Preliminary Specification could be paid in full with over $10 billion remaining. The point however, is that these increases are not enough to solve the industry's problems and more is needed. People, Ideas & Objects value proposition of the Preliminary Specification is $25.7 to $45.7 trillion dollars over the next 30 years. Does anyone doubt that value proposition now?

For whatever reason this has been a difficult lesson for the bureaucrats to comprehend. The Preliminary Specifications decentralized production models price maker strategy replaces today’s methods with a proactive method of removing all the North American based unprofitable production from the market before it begins to dilute the price of commodities on all production around the world. Another key lesson is that profitable production is the only production that should ever be produced. As People, Ideas & Objects have suggested there are a variety of reasons for the accounting and the accounting systems are so poor in oil and gas. One of the reason’s is that actual overhead is capitalized to property, plant and equipment to the tune of 85%, and each property uses overhead allowances that woefully account for the costs of overhead at a property. No producer is making out like a bandit on the basis of their overhead allowances. With the Preliminary Specification we will be creating service providers that will be charging each Joint Operating Committee the fees for their administrative and accounting services on only the producing properties. These direct charges to the property will eliminate the overhead allowances in use throughout North America. That way we’ll be able to see an actual accounting of the cost of administering a property and know better what the total cost of the property is and where it’s profitability begins and ends. Overhead is in the range of $10 - $15 / boe in North America and the scope of these costs is not represented in the current accounting. Additionally the depletion of each individual property, or Joint Operating Committee, will need to be calculated instead of only on a global corporate basis which is done today. That way the cost of capital, in a capital intensive business, will finally be able to be retired in the appropriate manner based on the actual performance of the individual property. And these capital costs can then move from the producers' bloated balance sheets, where they provide absolutely no value to anyone, to the consumer so that the producer can recover their previously invested cash. 

Another lesson to be learned is the determination of what profitability is. This graph from @SoberLook provides us with an understanding of how the industry sees the determination of profitability and when a well would be shut-in. There is a misunderstanding of what break even means and under the Preliminary Specification the determination of when a well would be shut-in is at the properties break even point. A point where all costs including capital are covered by the current price. When one producer produces below the breakeven point as represented by the graph, all producers suffer from lower prices as a result of this overproduction in the marketplace. When all producers continue to produce all of their production during the past four decades below the breakeven point you have a wholesale hollowing out of all of the value of the industry. An accurate accounting of the costs of the property which will include the actual overhead incurred during production and the actual depletion that the property must recognize, until these capital costs are retired, are necessary to determine the appropriate breakeven point and ensure that the prices realized are effectively passing all of the costs on to the consumers and no longer on to the investors. Which is effectively what has been done by loading up the balance sheets with what we call the “unrecognized capital costs of past production.” 

The next lesson is the one that is going to be learned here fairly quickly. It also coincides with the new industry terminology of “curtailment.” Curtailment means to shut-in or slow down. Choking back production will certainly satisfy the need to remove production from the markets. However it will only make matters worse for the individual producers. With the Preliminary Specifications price maker strategy we turn all of the producers costs to variable costs. We do this by taking the producers fixed administrative and accounting capabilities and make them the industries variable administrative and accounting capabilities. We do this through our software and most specifically through the creation of our user communities service providers. These overhead costs will then be variable based on production, if a property is shut-in none of its costs of royalties, operations or overhead will be incurred on a property. Therefore if during the accounting month there is no production there will be no costs incurred at the property for royalties or operations and none of the service providers will have received any information through our task and transfer network that would cause them to conduct any task or to bill anything to that Joint Operating Committee. Creating a null operation, no profit but also no loss. Saving the reserves for a time in which they can be produced profitably, ensuring that the property does not have to carry the incremental costs of additional losses if it continues to produce unprofitably and removing the marginal production from the market. Unlike with the method we’ve developed in the Preliminary Specification for turning overhead costs variable based on production, the producers overhead costs today have not dropped as a result of the shut-ins that are occurring. They are fixed overheads and if they are only curtailing production the operating costs will also continue to be incurred. These holdover costs will skew the producers costs of production on a per barrel basis and reflect their performance has deteriorated. A difficult lesson that we are about to learn the hard way. 

Some might argue now that the first lesson that has been learned, the incremental $369 million for the week and $19.2 billion for the year is more than adequate to make up for any of the overhead and operations costs that remain and shall we say orphaned. The point is not to generate revenues at any cost, consideration has to be given to the overall costs to the consumer and that producers ensure they need to do everything to keep the consumer costs under control. Cost control is part of a business, it's just not all of the business. Until producers are able to make all of their costs variable, based on production as the Preliminary Specification does. They will continue to struggle with these difficulties in the oil and gas business. With overhead by our calculations totalling in the range of $10 to $15 / boe we can see that this issue should be prevalent in the minds of the producers. The question therefore needs to be asked, what will now be considered the new normal?

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 American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.