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

To allow thoughts and ideas from other disciplines such as finance and accounting to permeate the scientific community that sits atop the producer firms in oil and gas is never going to happen. That is as far as they’re concerned. It is their domain and the principles of these sciences are too far beyond the scope of what normal humans can comprehend. “The industry is fine and we’ll be moving forward soon,” our bureaucratic friends would say. “What has accounting got to do with profitability?” They would ask. An extension of what I see as the continued degradation of common sense by those who are the elites in society. I personally have had enough of experts as we see the systemic damage that has been caused through their advice which has brought about such comprehensive destruction equalling what we’ve experienced in oil and gas. The first instance I would suggest is the environmental movement and their 50 year fire alarm of chronic, imminent, environmental armageddon. And now from 14 year olds. According to them we should have been liquidated by the toxic nature of our atmosphere by now. The second instance is the financial crisis that began in 2008. What was common knowledge to most people who were reliant on common sense passed beyond the rarified air of the economists except for the one standout, Nouriel Roubini. Most recently we have seen NY Times columnist Paul Krugman. An individual that has belittled any and all individuals that suggested any possible counter argument to his international trade theories. His characterization of Trump’s nationalistic trade policies were the highlight of his belittling and his career. That is other than winning the Nobel Prize in Economics in 2008 for his work in international trade. It’s ironic that he received the award during the time the economy was melting down in the financial crisis. Krugman’s apology in October 2019 for this 30 year litany of abuse is highlighted when all that he says was that he was wrong. Or today we see in the “science” based approach to the corona virus and the changing landscape that our “scientists” are painting for this mild flu. As with all of these situations, in oil and gas the engineering and earth scientists state that the science is unimpeachable and it is they who have the confidence in the “science” and the rest of us need to sit down and STFU. It’s time to put these elite experts back in their cages and remove them from the halls of power. They do not know what it is they’re doing. 

The Attorney General of the United States Bill Barr commented about the situation with Corporate America and their dealings with the Chinese government and military. Calling out specific company names that he called “collaborators” and implementing the policy to have all agents of foreign governments register under the Foreign Agents Registration Act. Any lobbying by these agents who are or are not registered from these corporations will have a new and different approach to how they’re treated by U.S. officials. I raise this point as it’s implied in other comments by the AG that the ethical approach of U.S. corporations in the past decades has been counter to the best interests of the U.S. I would and have argued this same point regarding the activities over these past four decades in oil and gas. No one other than the bureaucrats have gained any financial benefit from the oil and gas industry during that time. Bureaucrats have been defined by People, Ideas & Objects as the Directors and Officers of the producers. The future does not include these unaccountable bureaucrats. That’s the message that I’m getting from all that is happening in the world these days. 

This blog post’s opening is provided as background to what I see happening in corporate America as a result of the continuation of the Trump administration. Granted the Democrats have their policies of how they’ll rewrite history however I don’t think anyone is really buying them, other than the misguided youth our education system proudly produces. Nonetheless change is in the air for corporate North America and it is comprehensive and significant. The new trade agreement between the U.S., Mexico and Canada will provide a system where North America can maintain its economic dominance, I believe for the remainder of this century. People, Ideas & Objects vision and strategy is that North America will always be the largest consumer of oil and gas due to it being the most powerful economy. Oil and gas will always be a major component of the energy mix for at least the remainder of this century. It is therefore incumbent on North American producers to fulfill this possibility going forward by adopting the objective of profitably fueling our economies needs for the remainder of this century. The beginning of this would be to read and adopt the plans and strategies that are contained within our July 4, 2019 White Paper “Profitable, Energy Independence in North America -- Through the Commercialization of Shale.”

Profitability is the critical ingredient needed to fulfill this oil and gas industry objective. People, Ideas & Objects do not believe that we have the right to produce any oil or gas unprofitably. Producing unprofitably only steals from the future the energy they’re entitled to. We therefore owe it to them to prove that we’ve produced all of it profitably and can provide them with a viable, financially healthy industry that is capable of supporting itself. The only way in which we can do that is to ensure that all costs associated with exploration and production are passed onto the consumers in an appropriate and timely manner. I have detailed what and how our methods of profitability are in the Preliminary Specification and throughout the past 15 years of existence of this blog. We offer the oil and gas producers with the most profitable means of oil and gas operations, everywhere and always. How our determination of profitability is fundamentally different from the reporting of the current producers, and how theirs has exaggerated assets, earnings and cash flow materially for the past four decades. These differences are also detailed in the White Paper I’ve mentioned above and in this graph. 

What we’ve learned recently is there is an initiative in play in the industry. We know this is not the Preliminary Specification due to the fact that my phone has not been ringing. Reporting the disastrous second quarter reports of these producers will be a shock to everyone. As bad as people assume them to be, they will be much worse. To continue without any discussion on how to deal with what People, Ideas & Objects believe, is an existential threat to the industry without a plan and strategy is suicide for the bureaucracy. We think the bureaucrats agree with this scenario and have devised a strategy and plan that is coded as a “reorganization” around the “assets” of the producer. Their focus is on assets as they are the purpose, collectable and proof that theirs is bigger than all others in the pursuit of “building balance sheets.” We would ask what is the objective of their “asset reorganization” being undertaken by producers? No producer has filed their second quarter report as of this date and time, giving them all at least a few days to come up with an objective, similar to what People, Ideas & Objects have described above and throughout our publications. But it’s not just a viable future they’ll need to identify, the viable methods and means in which to get there will be mandatory as the bureaucrats reputation for issuing press releases with no follow up is well known. We wish these producers godspeed and good luck in this endeavour. Just as with the producers' Artificial Intelligence initiatives of a few years ago no one will know or understand what they're doing or have done. Will it enhance their profitability in the material way that the Preliminary Specification can, or is it just to buy more time in which the bureaucrats can profit personally and devise other viable scapegoats in their never ending list of already used, viable scapegoats that have fueled their chronic inaction? What we do know is that they’ll demand more time to prove their case, after all it’s only been a steep trajectory of destruction for this past decade.

The motivation for the bureaucrats to come up with this initiative is none other than a series of blog posts we presented in early June 2020. These referenced the officers and directors insurance coverage they carry should they be sued for what are subsequently judged to be acts they are culpable and guilty of. Our initial post pointed out that these insurance companies may force resignations as the cost to cover the individuals was becoming too great on a go forward basis. When insurance companies pull their coverage they force the individual to resign to ensure they’re able to maintain the insurance coverage over the time they were at the organization. On learning of our allegation in early June that they did not uphold their fiduciary duty when the Preliminary Specification was available since December 2013 to deal with these specific issues. They would therefore be found guilty in any litigation. What happened was producer bureaucrats promptly, and on a wholesale basis, increased their coverage as a result of our commentary. Earlier this month we made the commentary that the focus of the bureaucrats was to cover their buts, not undertake any step towards fulfilling their fiduciary duty and remain blinded to the consequences of their (in)actions towards others across the industry. That stung and as a result they need to be seen as doing something, that something is now what they are generally calling “asset reorganization.” This post today is designed to challenge the depth and breadth of that initiative and to question the motivation, the methods and means in which this is being undertaken. Asking specifically if this is just another “viable scapegoat” along with the “waiting for a cold winter,” “Artificial Intelligence and the cloud,” “waiting for markets to rebalance,” “capital discipline,” “reducing costs through innovations” and “it’s OPEC’s fault.” To name just a few. I’ll be adding “asset reorganization” to this long list for the future.

Compare and contrast the producers use of “asset” and its value vs. the Preliminary Specifications use of the Joint Operating Committees legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks as its organizational construct. Dare I ask what the value of the “asset” is in terms of an organizational construct? I think what the producers are trying to say is the “asset” is their name for, or ultimately the direction they’re heading is to the Joint Operating Committee. Knowing full well that is territory that is proprietary to People, Ideas & Objects. They also know if they stick to their failed strategies and plans of doing nothing eventually everything will be ok, they hope. Which proves they will always be incapable of realizing the differences in the industry as a result of shale based formations. Which include:

• A change from scarcity to abundance
• Substantially higher drilling and completion costs
• High initial production rates
• Steep production decline curves 
• High recompletion and workover costs
• Leading to massive amounts of orphaned capital (unrecognized capital costs of past production) to accumulate on the balance sheet, (hence build balance sheets)

Shale is a fundamental change to the underlying oil and gas industry. Moving forward with cosmetic changes designed to satisfy the need to be seen as “doing something” in this disastrous second quarter is consistent with the large volume of excuses, blaming and scapegoats that have been used by bureaucrats throughout the past decades. “Asset reorganization” will form a new strategy that is nothing more than their current, viable scapegoat. “Asset reorganizations” do nothing to solve the situation at hand and the most critical issue that needs to be addressed and dealt with is the cash and working capital crisis that continues. Fortunate producers were able to access their lines of credit in the second quarter which will begin to bring into context how leveraged the industry really is. These increases in debt will contrast the asset write downs and show the industry is in desperate financial shape. And in particular, understanding that those assets that remain listed as property, plant and equipment are not so much assets as they are the unrecognized capital costs of past production, being what People, Ideas & Objects have identified them to be and categorized them as. More or less when the industry as a whole consumes the kind of cash oil and gas has this past decade, the producers and industry are worthless as they demand cash to operate.

This cash and working capital crisis is into its fourth decade. The structure and culture of the industry has, as a result, been developed into a cash incinerating machine that these producer bureaucrats feign not to be able to comprehend. If it's not investors or governments that need to bail them out on an annual basis its banks. Luckily some producers received the sympathy vote from their banks this quarter. This however does not help them with the problem they’ve created and can only be solved by adopting the Preliminary Specification. When producers capitalize most if not all of their interest and overhead, all of their capital expenditures including the intangible assets. Then leave these assets on the balance sheet for decades at a time you create the cultural and specious industry calling of “you have to put cash in the ground.” That’s because all of the cash that has ever been given the producers, less what the bureaucrats were able to divert for themselves, is currently sitting in the ground. The real issue is that the commodity prices charged to consumers for oil and gas do not recognize anywhere near the appropriate amounts of capital incurred. The full costs of exploration and production are not passed on to the consumer as the investors have paid for the capital costs of these commodities, in order that producer bureaucrats could “put that cash in the ground.” One look, but not too detailed of a look, at the check book would show that without the annual cash infusion from investors these producers never generated any cash from operations above and beyond the operating and overhead costs they were incurring. They reported they did, however if you consider the high overheads necessary to fill those buildings with people in those downtown cores, the overhead in oil and gas is high. Possibly as high as 50% based on today’s commodity prices. No one knows! These costs are capitalized and the cash incurred is not recovered for decades. Leaving a gaping hole in the cash balances each month when products sold are underpriced due to the fact that there is inadequate capital costs recognized in the price of oil and gas. The purpose was to “build balance sheets” not pass costs on to the consumers. These cash balance deficiencies have traditionally needed to be filled by investors, bankers or governments. Because “you have to put cash in the ground.”

Operations never provided enough cash to pay these overhead costs, which are also high due to the creative and innovative ways in which bureaucrats have expanded the concept of executive compensation. Besides the reporting is so skewed through these capitalization policies bureaucrats can always “build balance sheets,” report profits and cash flow. The fact of the matter is that the industry has been consuming cash at voracious rates for the past four decades. Investors became wise to this in 2015 and left. Banks are taking longer to figure this out. Governments seemed to understand it intuitively. Anyway, enough about the good times. This is about 2020 and the new normal as they’re now calling it. I expect the producers that were able to access their lines of credit will have consumed all of that cash by the end of June. It is reported that the average prices that had been received during the quarter were slightly over $22 for oil and just over $1 for natural gas. OPEC+ are having no difficulties making profits and generating cash at the current prices and I expect that $40 oil will be what can best be hoped for for the next few years. As of August 2020 OPEC will have 7.7 mm boe / day of surplus production. $40 is much better than $22, the only difference is the time in which North American producers hit that brick wall. Neither price is adequate to even begin to deal with the cash drainage that we’re talking about. Even if it could, the current cash and working capital balances would take years to recover. Recall prices were anywhere between $45 and $70 these past three years and were incapable of providing the producers with the cash to cover operations and capital.

So when these oil and gas bureaucrats talk about the future of the oil and gas industry they’ll be able to discuss their new fangled “asset reorganization” or, the finer points of their strategy regarding Chapter 11 vs. bankruptcy. And how they’ll be able to implement strategies to ensure the executive compensation for their efforts and bonuses will be granted just moments before that momentous occasion. Then they might realize their accountability to the shareholders would finally end! These are the limited choices bureaucrats can use in their second quarter reports.

The third issue that we need to discuss is the tragedy of shut-in production that will be caused in the second quarter under the current industry methodology. I need to clarify this as I and the Preliminary Specifications decentralized production models price maker strategy doesn’t come across as being hypocritical. One of the reasons that producer profitability is so poor is that the administrative and accounting capabilities are replicated within each oil and gas producer. These capabilities are not part of the producers competitive advantages and are not shared or shareable in the current industry configuration. Utilization rates of these resources may be as low as 40% due to the high levels of specialization necessary. The first objective of the Preliminary Specification is to organize the industry in order to move the producers' fixed costs of administrative and accounting capabilities to the industries variable costs of administrative and accounting capabilities. Once all the producers' costs are variable in nature, shut-in production will incur what we call a null operation, no profit but also no loss. In the current system the fixed costs of overhead are in essence a producer capacity and capability. A better way to describe it would be to call it a fixed industrial capacity. I describe it this way to explain that one of the highest costs an organization or an industry can incur is surplus / idled capacity. It is an insidious cost that is unpredictable in its nature. It is also one of the most costly and can lead to either producers or an industry's demise. If we are correct that fixed overhead is at 50% of revenues in the second quarter the costs of surplus capacity will be horrendous. Earnings and cash flow will evaporate unpredictably under all methods of accounting, and yes even the specious ones. And this same characteristic of surplus capacity costs will be no different than the costs that will be incurred by implementing the Preliminary Specification. Therefore the industry's surplus capacity will need to be worked out of the organization and industry, which our system does through a more dynamic capital allocation based on a new capital discipline that considers only profitable production is ever produced anywhere. The difference between these two methods of dealing with surplus capacity is that People, Ideas & Objects turns these administrative and accounting costs variable, based on production. And the remainder of the production is only produced on a profitable basis. In today’s systems the overhead remains fixed and there is little that can be done about that in the short term. While the commodity prices remain depressed due to the chronic overproduction, or as we’re calling it here surplus capacity.

The issue producer bureaucrats have with our decentralized production models price maker strategy is that they claim it’s collusion. Contrary to the accusations that the Preliminary Specification is collusion, what we in essence saw in the second quarter of 2020 was collusion, by the producers definition, from those who chose to shut-in production. I have argued this point for well over a decade now and what the Preliminary Specifications price maker strategy and what the industry participated in during the second quarter was anything but collusion. It was listening to markets telling producers not to produce unprofitably. Which is in the economic definition of price makers. These two issues, the declines in commodity prices and shut-in production volumes, thrown onto the financial skeletons these producers began the second quarter as will become apparent to all. They will need to have an answer. Muddling through and doing nothing will not be acceptable and therefore they have come up with their “asset reorganization” as their current viable scapegoat. I spent over a decade researching the Preliminary Specification as a holistic business model to deal specifically with these issues. Producers may have spent a month on coming up with theirs. If they’ve not done this work, producers have a few days in which to do this much work to prove that they’re not fielding further, viable scapegoats and instead have chosen to pursue real tangible solutions in their “asset reorganization.” I’m certainly here to answer questions about our model. Let’s hope they’ll have answers for theirs.

One last point is the service industry that supports and provides the wherewithal for the producers in the field. We are seeing many bankruptcies in those companies such as BJ Services announcement on Monday. As a pioneer in coiled tubing and fracing techniques, they’re going to be missed. And I can say that with the assurance that their bankruptcy plan sees them exiting Canada. This will no doubt garner at most two shrugs from the Canadian producer bureaucrats. Additional changes include reducing their remaining operational footprint and selling off businesses. How will BJ Services capabilities be recovered in the future. It is really quite simple, producers will have to pay in advance for all of these service industry related services in the future. And will have to pay to have the capabilities purposely rebuilt and expanded with all service industry representatives. There will be no investors or bankers stepping in after they’ve seen the antics of the producers over the past decades. What would be in it for them? These capabilities will have to be (re)built and paid for in advance by the producers in order to have them available. These payments will be nothing more than advances. There will be no equity or rights attached to these payments. The payments will be a means in which to source the capability and live with the past that producer bureaucrats created. No one in the service industry is going to get up off the couch in order to lift a finger without free money from the producers first. Welcome to the new normal! 

The question that keeps coming back to my mind is, how do we evolve economically from our current situation? We know that today is not working, and in the past we were able to move towards enhanced solutions that arose from the concepts of creative destruction and spontaneous order. I see the destruction and a static situation that has developed for the following reason. Today bureaucrats understand that locking their organizations in structures that are defined and supported by ERP software disable any changes until the software is changed first. There have been no changes in the ERP systems in oil and gas for the past 30 years, at a minimum. These systems had evolved in order to fuel the bureaucrats personal needs and therefore won’t be changed while they’re in control. We therefore remain locked in to what I call a 21st century software bug. The producer bureaucrats understand what the problem is, they devised it. What they don’t understand is how complex the solution will be and what will be involved. Where does the motivation to move forward come from? And how is it implemented? With vested interests aligned against progress and unmotivated by their own personal greed, destruction on this scale is the only result. And just as I knew that this industry fallout would happen at least a decade ago, and the Preliminary Specification is configured to address these specific issues. I can say today that we haven’t seen anything yet. 

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North 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 XV

Unlike ANTIFA People, Ideas & Objects are not interested in tearing things down. ANTIFA’s objectives in tearing things down is wholly consistent with the oil and gas bureaucrats who have and are doing a very fine job in their specialized discipline. And just like ANTIFA, they are of the staunch anti-profit and anti-capitalist mindset. People, Ideas & Objects are rebuilding the industry brick by brick, and stick by stick due to the fact that the damage and destruction is so comprehensive. People are seeing the decline in the industry is rapidly getting worse and there are no attempts to even admit there’s a problem. Trying to save what is left and reconstituting what is already destroyed would be a more ambitious objective at this point than just starting over. We have a lot of work ahead of us at People, Ideas & Objects and the sooner we get our budget funded the sooner it’ll be completed. Our objective is to save the industry from the bureaucratic destruction, we are not the ones that are attempting in any way to destroy it. Our solution provides a viable business model that identifies and deals with the business issues that are present in the marketplace today. And also provides a foundation for the industry to resolve future issues and build a foundation for a dynamic, innovative, accountable and profitable producer and hence the entire oil and gas industrial complex associated with the producers.

Absolute control of people’s workday has been the domain of the bureaucrats and their minions in oil and gas. Little is done without a comprehensive command and control environment where the features and productivities of the administration, accounting and governance of the organization replicates a computerized 1950’s scenario. This is the domain that provides the bureaucrats the protection from outsiders such as People, Ideas & Objects and our radical ways. It is how the bureaucrats ensure that any value which is generated is siphoned off and delivered to them personally. Meanwhile in the rest of the world, the 1960’s, 70’s, 80’s… to today have evolved differently. People are expected to do their jobs in a time and place where the expectation is the job is completed in a timely manner. The assumption is made that people have the capacity to think and do what is necessary without the direct supervision of those that provide no real value anymore. As bureaucrats are threatened more and more these days they have the reins tightened and ensure that the organizational discipline and control is broken down to 30 second intervals. This is where we stand today, with organizations that would be competitive in the 1950’s, which just as the former Soviet Union proved their system no longer built value, the bureaucrats system no longer does either. We can either ride the downward spiral with those that have destroyed most of what was ever provided to the industry, or we can replace them and rebuild in the vision of the Preliminary Specification. 

When will the producers begin to act responsibly and begin to deal with their issues? Deferring the discussion to people and groups that have none of the responsibility for this downfall is well beyond tiring for most people. We heard last week it was the employees fault. No, it’s no one's fault other than the producer bureaucrats themselves. Instead of working to build the business it became a culture of digging into the gravy train for one's own benefit. Producers are responsible for the greater oil and gas industrial complex that they rely upon. It is the source of their capabilities and capacities, which they gladly take credit for, and the groups that are abused financially so that they’re able to access more. These two behaviors are inconsistent with the needs of the service industry and tertiary industries. They are at the behest and are beholden to the producers and do not function for anyone else outside of the industry. They are the reasons producers generate revenues from oil and gas sales. Oil and gas is a primary industry and the producers need to begin operating in a manner that recognizes the fact that they need to support and develop all of the resources they rely on for those revenues. Expecting investors or banks to fund the producers themselves and to finance the innovations and organizations in the service industry has been used and abused to the point where it won’t be available on that basis again. Producers will need to work effectively with all member organizations of the industrial complex and begin to move it forward as they require it. In other words the bureaucrats have blown it. And there will be no second or third chances. 

But I repeat myself. And I ask what it is that can be done to move this forward with such an obstinate group of do-nothings. There is no instinct of self preservation or inclination towards action. Bureaucrats are seeing the looming bonus that will be available once they declare their organization bankrupt and that only prompts them to expand their personal shopping lists. Ten years ago natural gas declined and is showing every sign of a looming global collapse. It has been five years since the investors left without a whisper of concern or anything beyond a shrug. And just as they’ve destroyed natural gas they went on to prove they could do it again in the oil market six years ago. Oil takes more time and effort to destroy due to it being a global market but it looks like 2020 is the year they can begin congratulating themselves on a job no one wanted done. At least they have the coronavirus to blame.

Second quarter financial statements are about to be published in the month of August. What will these read and how will they be presented? I think it’s reasonable to assume that they will show the end of the line as any reasonable person would define it. I know that for a lot of people who work within that greater oil and gas industrial complex the exit doors are getting very crowded and it’s only motivating more people to do the same. Issues regarding the retention of people contrasts the layoffs bureaucrats are executing. People are wanting out and they’ve had enough. They see where this is headed and know instinctively that they don’t want to be there when the roof caves in. Call it survival mode. 

Many such as those that are interested in our user community are not giving up on the industry. They just don’t want to be part of the decline and destruction anymore and want to be part of how things get turned around. They know and intuitively understand that society in general is wholly dependent on oil and gas just as people are dependent on oxygen. Without them it’s terminal. North America stands as the premier economy in the world. For that to continue it will need to remain the largest consumer of energy. Oil and gas will always be a large portion of the makeup of our energy source, at least for the remainder of this century. Energy independence and security are worthwhile, attainable and liberating for our position in the world economy. These are spelt out in our White Paper “Profitable, Energy Independence -- Through the Commercialization of Shale.” Something that frightens and scares the bureaucrats because they know they wouldn’t be involved in that, and therefore the gravy train they’re used to would also subside. 

We will always have choices in how we fuel our economy. The issue is the efficiency that is derived from oil and gas is undervalued today. That undervaluation will cease and be overcompensated if the producer bureaucrats continue in the selfish manner that they are. Purchasing our energy from offshore can always be undertaken until the infrastructure is rebuilt from the destruction that we’re witnessing today. The issue would be how much would it cost and how long would it take to turn this ship around. When each boe has the mechanical leverage of 23,200 man hours it can be easily defined as the deal of the century at today’s prices. I prefer to call it the crime of the century when producers are unable to recognize the business is not a business in any way, shape or form. Nonetheless the choice we’ll have is to compete in the world economy with one arm tied behind our back by paying others $600 / barrel while the North American oil and gas industry is reconstituted. If we began this now by adopting People, Ideas & Objects Preliminary Specification, funding its budget and moving it forward then there would be less time and risk of this happening for a protracted period. 

I’m sure that what is going to happen with our good friends the bureaucrats is that they’re going to frame this with their classic spin. If I could be so bold as to suggest for them what they should call it. “Living the Dream.” In their case I’m of course taking the critical point of view that they have their heads in the sand. Although it could also be suggested that this is what they intended all along with the associated destruction being the vision or dream they were always pursuing. I could associate a few other points to the phrase but they would be redundant too. However if the bureaucrats aren’t catching the sarcasm, they are certainly free to use the phrase. 

I will be taking the next four weeks off returning August 10, 2020. 

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 XIV

Just a quick note to follow up on Monday’s post. We originally raised the point about Directors and Officers insurance coverage in our June 2, 2020 post. We subsequently learned producers increased the officers and directors coverage. But since that time nothing has been done. Monday’s post noted that the solution to what ails the industry is for the Officers and Directors to cover off their personal risks, in what I allege to be a reasonably clear insurance fraud. This is not acceptable and should be dealt with. They are the ones that are responsible, accountable and the only ones with the capabilities to act. Yet they’ll just sit and watch what they’ve done in the industry play out without a shrug, care or concern for anything. They’ve got insurance coverage and they couldn’t be happier or more content. Whatever happens in the industry will be beyond their control and they can say they upheld their strategy of muddling through and doing nothing. What is not being considered is the time that we’re in and the state of affairs of the industry are demanding remedial action. Oil and gas prices at these levels do little other than to keep said bureaucrats comfortable. There is no future and the prospects for the future fade each passing day. Whether that is LNG facilities which can no longer find markets, pipelines that can’t be built, the service industry capabilities further eroded or producers preparing people for more losses, more lay-offs, more bankruptcies and more write downs. The second quarter will be the worst quarter in oil and gas, ever. What we’ve learned is that the alleged leadership wanted to skate on through this without any risk by increasing their insurance coverage. And that is all. 

Quiet is the only word to describe the atmosphere in oil and gas. There are the layoff announcements that have the bureaucrats competitive juices flowing once again. “I’ll see your 500 souls and raise you another 200!” Such zeal. All of this is done with no consideration of the future of the industry and how it will function beyond the third quarter of 2020. But then again they’ve been bereft of any planning or strategy for four decades, what good would a plan provide today? With $40+ oil prices bureaucrats are back in the money due to the fact that their royalty and operating costs are below this price. That makes them “profitable” and “cash flow positive” and somewhat assured that the good times are just around the corner, or at least next week. The capital and overhead costs are all being capitalized so these costs will linger in that big vat of unrecognized capital costs of past production. Why would that change? The fact is their innovation in terms of their compensation can resume and start providing bureaucrats with the fruits of their strenuous labors once again. 

In Canada I can say the bureaucrats have been operating these past few years on the basis that all employees are at their desks, figuratively speaking, throughout the day. Activity levels on the street and in the +15 system have been minimal to none while the working hours have been enforced. I always thought that this was so that bureaucrats could ensure that control was maintained at all times. The coronavirus has broken this hold on the staff’s time and location during working hours. It really doesn’t matter where you are does it? The quality of life for most has been increased due to the capacity to work from home. Once the virus is done, I would think that this would be difficult if not impossible to make the change back to the bureaucrats rigid control regime. Other industries are seeing the ability to work from anywhere as a real quality of life issue and a benefit for their staff. It also seems to be a boost in productivity. With the reputations that are being so rightly earned in the industry today, producers would be the odd man out if they tried to continue with their prior version of controlled lockdown. Could oil and gas compete for talent without the ability to work from home?

The converse of this is that the work from anywhere opens new opportunities to the people who were once committed to the industry and may see things differently since their forced exit. Other industries may be as accessible from their current locations just as easily. The loyalty and commitment in terms of being the scapegoat for all that is wrong in the industry is just the latest example of why the bureaucrats will never get this back under their control. Admission or self-reflection as to how we arrived at this point are in short supply. 

People can see now that the shale basins are not going to be turning around, whatever that means, anytime soon. Optimism has waned and the facts are as stark as ever that the industry has issues to face. More and more I’m hearing that the service industry will be the impediment to any quick turnaround. As bad as the oil and gas industry is, the service industry and those that make up the rest of the industrial complex have had it. These people and their companies are being betrayed and are exiting the continent leaving literally nothing in their place. The people who had worked, and the tacit knowledge of how things were done, are walking away and these capabilities will need to be rebuilt from the ground up. Offering big wads of money doesn’t motivate anyone when the trust and belief in the industry is at the levels the bureaucrats have now chosen to operate at. The only question the people have is will there be a second paycheck on the basis of that handsome offer?

OPEC+ the scoundrels the bureaucrats always alleged they were, who allegedly are playing dirty tricks somehow, ended up with all aces. Is this because of their actions or the self-inflicted gunshot wounds of the North American producers? At $40 OPEC+ are profitable in the real sense of the meaning of profits. Sure they’re countries budgets may not be fully funded but when was the last time that Canada’s or the United States federal budgets were? And when did it become the sole responsibility of the oil and gas industry to solve all the financial commitments of the government? Operating costs for Saudi Arabia are $3 / bbl. Ghawar has been producing since 1948 and I doubt has much capital left to retire. OPEC+ have 9.7 million boe / day of surplus capacity until the end of July 2020. This will hang over the market like a dead weight, satisfying any increase in demand for the foreseeable future. $40 oil is going to be as good as it gets for a number of years. In terms of natural gas pricing I think it’s really bad news there as well. The producer bureaucrats haven’t been profitable in natural gas since they first collapsed the price in 2009. Here is a graph of these prices in North America, Europe and Asia. It would appear that the world is now awash in shale gas too. 

Once natural gas prices collapsed in 2009 the race began to reverse the existing facilities for LNG imports and expand the LNG export capacity. The global markets were unaffected by the shale gas overproduction and oversupply in North America. Therefore the global prices were much higher making the LNG business viable. Now with LNG export capacities of the U.S., Australia and Qatar flooding the global market, natural gas prices are emulating the shale based decline of 2009. 

Understanding this only took ten or eleven years for North American producers to orchestrate. And with oil starting in 2014, that means we have four or five more bad years before things turn around, or collapse further. I’ve never stated how long I think it will take for producers to turn this ship around. Eleven years and they still don’t know or understand the issues. It will be at least a decade before the industry pulls itself up to a moderate operating level. That is with the implementation of the Preliminary Specification. The extent of the damage is reflected in this Deloitte & Touche report that shows somewhat accurately the state of affairs. 

HOUSTON (Bloomberg) --Almost a third of U.S. shale producers are technically insolvent with crude at $35 a barrel, according to Deloitte LLP, highlighting the industry’s acute financial strain even as oil prices rebound from a record low earlier this year.

West Texas Intermediate edged up to $40.06 a barrel at 11:38 a.m. in New York, a substantially higher level compared with most of the last few months, especially April, when prices briefly went negative. But the rebound will do little to prevent 15 years of debt-fueled production growth catching up with many shale producers, Deloitte said in a study. Technical insolvency is an accounting way of saying a company will face problems meeting debt repayments.

“New and unforeseen headwinds continue to jolt the industry’s progress,” authors Duane Dickson, Kate Hardin and Anshu Mittal said in the report. “Although the sub-zero price was a temporary dislocation, this intense volatility highlights the fragile state of the industry.”

I would suggest that this report understates the situation in oil and gas as I understand it. It is appreciated that others are beginning to see the industry's problems and difficulties. I would also suggest that Deloitte & Touche are party to the disaster that is oil and gas as they are the ones who are charged with ensuring that accounting is accurate and timely. Now they’re finding that not only are they the ones that should have been standing in the way of the bureaucrats. They should have been the first to raise the issue. We can look at the roots of the problem and see that it is first and foremost an accounting issue of over reported profits, overreported assets, overreported cash flow, overproduction and oversupply. All at the expense of the investors who had been assured their audits were meaningful. That’s right, I forgot, oil and gas is where everyone in authority does nothing about everything. And none of these comments mitigates the CFO’s as culprits in any way.

Maybe a good exercise for those at KPMG, PriceWaterhouseCoopers, Deloitte & Touche and others would be to account for the comprehensive losses that have and will be incurred as a result of this disaster. Start with the investors and bankers, then those that have been laid off. Then it might be easiest if they just took the entire service industry's value and trashed it, after all that’s what the producer bureaucrats have done. Maybe these accountants can add an estimate of what their oil and gas industry billings will be once this decline has reached bottom. I now see why the engineers and geologists thought that the only purpose of accounting was to “pay the bills.” This is pathetic and sadly I’ve spelled out a role for these accounting firms in the development of the Preliminary Specification. I’m curious to know now if it's beyond their capabilities and their capacity to understand that role. 

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 XIII

Bureaucrats have made out like bandits over the past decades. Unaccountable for their inactions is the only way to describe it. As we’ve stated the Preliminary Specification eliminates the bureaucrats in oil and gas, just as all industries are being disintermediated. The Internet and software have that effect on organizations in the 21st century. We see the bureaucrats' motivation for enhanced personal financial compensation is in stark contrast to the destruction their inactions have caused. Inaction motivated to save and protect their personal financial empires from threats such as People, Ideas & Objects Preliminary Specification. These bureaucratic acts of inaction and enhanced personal financial compensation were done for the same reason we were subject to the ostracization and attempted thefts of our Intellectual Property. The only issue the producers face now is will they act in time to save the industry from falling off the cliff. No one would argue that our trajectory is downward and steeply so. The question in the market would be, is it going to get better by continuing to do nothing? The time frame in which to evaluate this is best understood to be what we commonly refer to as July. It seems awfully quiet these days. The only apparent news is coming out of Exxon who commented on their looming second quarter report. Softening people up for the wicked left uppercut they’re about to throw later this month. 

After Shell announced they would be recognizing an additional $22 billion in asset write downs. Exxon announced that it would not be recognizing any write downs in the second quarter of 2020. Adding language that included “may not account for all adjustments and charges required to fully reflect the changes in industry conditions.” However, Exxon announced it was having a difficult time these days. They did say they’ll be reporting a second consecutive loss in the second quarter of 2020. The consequences of this chronic malaise have nothing to do with the people in power. They’re passengers just as we are, they’d claim. This stupefying passivity of the producers, being passed off as “normal operations” is another aspect of the producer bureaucrats that has become very tiring. Here’s a suggestion, fund their share of the Preliminary Specification.

A key point to keep in mind for the remainder of this post is the purpose of accounting is to record the performance of the organization. It is not for the purpose of valuation. Markets determine the value, accounting records the performance and producers build balance sheets. This behaviour is consistent with the culture of the industry. The objective everywhere is to build balance sheets, big bold beautiful balance sheets. I still don’t know what that means. There have been charges made by a former Exxon employee Mr. Franklin Bennet and others that parallel the charges and allegations that People, Ideas & Objects have made regarding the industries accounting practices and culture. Accounting practices that have been instituted and systemically practiced throughout the industry since the late 1978 change by the SEC to accept only Full Cost Accounting in terms of recording exploration and production assets for oil and gas companies. The WSJ notes,

An Exxon spokesman said the company is in compliance with accounting rules and SEC regulation about disclosures to investors. 

Which is exactly the point and the source of the issue at hand. Producers have failed to recognize the SEC has defined the outer limit of what is acceptable accounting practice. Not the goal that every producer must achieve each and every year. This misinterpretation of the rules has led to the demise of the industry. When you overstate your capital assets, which this convenient misinterpretation does, profits are overstated as well. Specious profits raise excess amounts of capital from the markets, excessive investment brings about overproduction. Overproduction as we’ve defined it here is unprofitable production. These “fake profits'' generate what People, Ideas & Objects call the unrecognized capital costs of past production sitting on the bloated balance sheets as property, plant and equipment of each and every producer. A producer seeking to be the most competitive in the marketplace would have retired as much of their capital costs as quickly as possible, especially in a capital intensive industry. This would have seen their previously invested cash recycled quickly from the capital assets account of property, plant and equipment, be recognized as part of the capital costs passed on to the consumer in the process of producing profitable production on the income statement and returned to the balance sheet in the form of cash to be used in paying dividends, paying off debt or funding further capital expenditure requirements. This assumes they’re receiving profitable commodity prices such as the Preliminary Specifications price maker strategy provides. But why run it as a business when you’ve convinced investors that you’re profitable with specious accounting and they’re lined up around the block trying to get in. Eventually the accounting scams become more concerned with the methods and means in which to “get more” for the guilty parties, and less about the business at hand. What’s most surprising is the fact that nothing is being done when the entire industrial complex is collapsing, amazing. 

Producers now want to be evaluated based on their revenues less operating and royalty costs during times of trouble, which is an acceptable thing to do. Recognizing capital during difficult times can be suspended to ensure the organization survives. Producers may want to claim this in the second quarter of 2020. However, People, Ideas & Objects assert the point is moot when the facts clearly state that they’ve been doing so consistently for the past four decades. This graph provided from @SoberLook shows that the common industry interpretation of break even and the time in which properties would be shut-in are different. They shouldn't be. It also shows the interpretation of breakeven by the industry is inconsistent with the term. 

Maintaining production in the short term while prices are poor may be necessary until such time as the issue affecting prices is resolved in the market. This is common sense and everyone can agree that it's the appropriate methodology for the very extreme short term period of a month or two, at the absolute most. However, what’s happened is that the culture of the producers, driven by their misinterpretation of the SEC regulations, have seen them continue to produce well below the “Well Breakeven” price for the past forty years. Doing so for one producer, when the commodity is subject to the characteristics of price makers, causes the price of all of their production to drop below the marginal price. When this industry produces all of its production for decades below its breakeven price you have an erosion of the global oil and gas commodity markets pricing systems where no one will make any money, ever. This began with the oil market price collapse in 1986. For the period extending beyond the extreme short term the “Well Breakeven” has to be recognized as the Shut-in Price or there will never be any money made in the oil and gas industry. Producers only ever reported profits by deferring the recognition of their capital assets, in a capital intensive industry, for decades at a time. Doing so made them appear profitable which created the investment scam which enabled them to produce such innovations in Executive Compensation.

Cash and time have all but run out for the industry. When you’ve run out of cash, the simple request to investors and bankers for more, along with financial statements that show you have none, and don’t produce any cash are all that’s needed to watch them sprint the other way. These are the most certain signals that the organization is unable to deal with whatever ails it. The time to deal with this issue is upon the bureaucrats this month. They can fund People, Ideas & Objects budget before they publish their financial statements, or they can stand and be dealt with by the market after producing their second quarter reports with their classic blank stare regarding the lack of strategies and plans they have to move forward. That is the choice that chronic deferring and denying these past decades provides you. 

We’ve noted before the producers Boards of Directors and Officers as individuals have upgraded their personal insurance coverage that indemnifies them from any risk of the personal costs of litigation arising from their term at the organization. So we can assume they think they have the personal strategies and plans in hand to be able to weather the storm. Therefore why have a corporate strategy and plan? If there is fall-out it will be in the form of investor lawsuits against the Directors and Officers alleging they didn’t fulfill their fiduciary duties. If that should be the case the question comes down to whether their insurance companies will find a clause in their contracts that eliminates the Officers and Directors coverage due to clause “abc” or “xyz?” We’ve all known and experienced how insurance companies like to control their costs. With what can only be trillions of dollars being lost in the greater oil and gas industrial complex. And flying by the seat of the bureaucrats pants is how the oil and gas industry has chosen to be run. Will the insurance companies, upon seeing that there were fraudulent scams by these bureaucrats, those that have been identified, documented and alleged by People, Ideas & Objects and those identified in this WSJ article. The people responsible, accountable and capable of remedying the issue, have done nothing to stop the destruction of these trillions of dollars in investor and others losses, and with the full knowledge of the Preliminary Specifications existence and availability since December 2013. Will that preclude the insurance companies from having to meet their global industry wide commitments? Asking for a friend, who has a follow up question too. When the Directors and Officers upped their insurance coverage last month, does that imply culpability and guilt? Would that also be seen by the insurance companies as dishonest behavior or misrepresentation regarding their obligations and insurability? Say an insurance fraud? Instead of addressing and fixing the problem, upholding their fiduciary duty, just upgrade your insurance! Brilliant, kind of fits in with the muddle along and do nothing strategy. With all the devastation and destruction in the greater industrial complex of the oil and gas industry, I think we can satisfy ourselves that we've definitively found the source of all the destruction. I told my friend he should talk to his broker or agent to get the answers he’s looking for. In the meantime I’ll be upgrading the insurance on everything I own, moving it inside and setting the house on fire to enhance my insurance claim. I should have thought of this before!

With the landscape of ruined careers and financial catastrophes by those that chose to believe oil and gas to be a “good” place to establish a career or business. Are satisfied to know that those that are responsible for this, that were never held to account and were the only ones capable of doing something about it for the past decades. Will be more than adequately covered in terms of their risks by the insurance they’ve now purchased, and in most instances, form part of the innovative personal executive compensation we’ve seen them create. It’s these kinds of actions by the leadership that make oil and gas so special. The problem is these people are otherwise unidentifiable as they walk down the street. Which kind of makes the situation more difficult to accept. But we always knew they were nameless and faceless bureaucrats. 

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North 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.