Leadership Capitulation, Part V

 What right do we have to steal oil and gas production from future generations? We have an obligation to our future selves to ensure that we use these resources responsibly. By producing them profitably, everywhere and always, and handing down a profitable, prosperous and viable industry similar to the one which was handed to us and destroyed by these bureaucrats. Why is it that a handful of bureaucrats have chosen they can ignore these needs to personally benefit instead and so willingly cause so much damage and destruction? To the point where they claim they can’t make money in oil & gas and therefore clean energy is the future. Would profitable oil and gas exploration and production everywhere and always lead to higher energy costs for the consumer? Possibly, which was the caution bureaucrats stated was their concern that renewable energy may become competitive price wise. In theory then, to avoid the chance that renewable energy became viable they financially crippled oil and gas? And now in the ultimate hypocrisy, after decades of feigning the boogeyman of renewable energy, it is they who are the ones that are diverting the oil and gas revenues to fund their clean energy investments. Is there any clearer separation that oil & gas and clean energy are two separate and distinct industries than these words of the past bureaucrats? Investors who financed the development of oil and gas are not going to have the revenues from those investments now diverted to another industry in an unauthorized and unaccountable manner. This story hasn’t been written yet, as the investors will begin with chapter 1 very soon. Diverting revenues of a primary industry is the ultimate betrayal of all those who participated in establishing them. If there will be higher commodity prices they’ll be taken into consideration by consumers to make the more effective decisions as to how they’ll use them. Oil and gas’ value proposition is at a minimum leveraged to the point of 10,000 man hours per barrel of oil equivalent. At $72.38 / bbl that means the energy cost per man hour is $0.00723 / hour. If the U.S. consumes 35 mmboe / day, oil and gas provides the labor equivalent of 43.75 billion eight hour man days, at $0.0578 per day for each one of those many billions, each and every day. If bureaucrats are unable to make money in a business with that value proposition, are we not witnessing the pinnacle of incompetence and corruption ever known? They should immediately step aside. People, Ideas & Objects, our user community and service providers know that we can, and we know how, to make money in this business.

Here’s my version of the history of how the bureaucrats have so financially damaged the industry and left it destitute. Where all the value that had been built up by prior generations, and all the incremental investment made in the past four decades has been mismanaged and destroyed by the bureaucratic methods we’ve discussed here at People, Ideas & Objects. These are just the highlights of course, there were many other missteps along the way. 

First it was their investors that “betrayed” the bureaucrats by cutting access to “their” never ending supply of cash which had become the only source of incremental value for the industry. This set the industry on a different trajectory where layoffs were necessary and changes to the way the firm managed its cash, in other words who supplied it. With the follow-on consequences of people looking to other industries for employment, clearing out the engineering and geology faculties in universities and generally giving up on the “boom / bust cycle.” Putting families and mortgages at risk was no longer considered a quality of life attribute. Therefore banks became the means in which to make up for any cash shortfall. The innovation of including the amount of remaining leverage on the lines of credit into working capital calculations made everything appear operational once again. That is until the banks began to tighten, unnecessarily bureaucrats say, with their six month reviews that eventually revealed they were in the same category as the investors. Nonetheless bureaucrats were well along in their “muddle along” strategy that involves them waiting out the investor and now their bankers inevitable return. Possibly stating “They’d be back soon, as they’ve always done.” What to do in the meantime with so much field work to be done and no capital. Other than to proceed with their “capital discipline” and pay the service industry when that investor and bank money arrives after they see the brilliance of what’s done. These actions devastated the service industry's financial core, crippling its capacities and capabilities, trust and faith in the producers. It was this past year it could be heard bureaucrats saying “That worked well for us but there’s no chance of it working now as the people in the service industry have become so difficult to deal with.” Production then became the way to go for that hard earned cash. The difficulty was and always will be to make sure the commodity prices remain in positive territory. And now with hedging contracts creating large offsets that are eating any cash like nothing bureaucrats have ever seen before. It’s time to have the working interest partners in the Joint Operating Committees give up their net profit proceeds from their shares of the properties bureaucrats operate for them. That’ll keep them afloat in terms of cash for the next few months, until the investors and bankers come begging to get back in. 

Who’s going to step up and save this industry? No one. There’s nothing to save as there’s no value left when the industry consumes cash in the process of production. The industry itself is going to have to resolve this themselves. Bureaucrats doing nothing but begging, borrowing and stealing are not attractive in terms of what the business community expects. Implement the Preliminary Specification. Rebuild the oil and gas industry on the basis of profitable North American production everywhere and always. Financially perform for a decade and maybe someone will show some interest. It is the height of laziness and sloth that the bureaucrats are still waiting for new investors and bankers to return with cash to their chronic mismanagement and lack of performance. Particularly when bureaucrats have done nothing regarding the issues these people raised as early as 2015. There’s nothing being offered and therefore no one’s interested. Especially when those involved are mostly interested in maintaining the status quo of controlling the oil and gas revenues for their own personal benefit, gave up on oil and gas as they declared they couldn’t make money, moved on to the clean energy business, feign they have no understanding what the issues are and have not performed for four decades in the two most critical commodities needed by the most powerful economy known to man. The Preliminary Specifications business model makes the industry perform financially.

I’m certainly on record by attacking with severe allegations I’ve made regarding bureaucrats, their lack of performance and inaction. There’s never been any deception on either side of our relationship with what each other is looking for from each other. The annihilation and obliteration of the other. To state People, Ideas & Objects case diplomatically, it is to disintermediate the industry. Calling them out is what I will continue to do for as long as they exist. I can’t accept the level of destruction and damage that has been realized in the North American oil and gas industry. It is the source of our substantial value proposition. It has passed well beyond the point of acceptability and the inability of the self interested parties to do anything about it is astonishing. It is only they who have the accountability, authority and responsibility to make the changes to resolve these issues and they who cease to defy the common sense and logic of the difficulties they’re creating for everyone but themselves. That I’m able to maintain the level of civility that I have is a miracle to me. That my readers have to look through my habit is appreciated and I know there is an understanding of these efforts. We’ve come a long way and the days of the bureaucrats continuing are fading quickly. Words that I’ve stated on many occasions but the scale of their difficulties is truly impressive. If we should hope to see the necessary organizational changes conducted by bureaucrats we understand their culture stands in their way. They know the end of the road is their destination and they’re just riding it out as long as they can personally benefit from it. They’ll take credit for the things of which they’ve had no involvement in and promote it as their own ideas and efforts. Such as this jewel I saw here late last week. 

As background to this jewel, it is within the Preliminary Specification that People, Ideas & Objects, our user community and their service provider organizations enable the producers and industry to obtain North American energy independence and profitable operations everywhere and always. We do this through the mechanisms that provide for “production discipline.” The two key components of this discipline is the capability gained from the comprehensive reorganization, systems development and processes to produce financial statements at the Joint Operating Committee or property level. A capability that can not be conducted anywhere in North America with the systems that exist today. A capability that converts all of the producer's costs to variable costs. Variable based on production. Therefore if a property begins losing money as defined by its specific financial statements, it can be shut-in and worked on from an innovative point of view to return it to profitable operations. Generating a null operation while shut-in with no profit but also no loss. It’s this ability to only produce profitable properties that provides the motivation, or production discipline, for the producers to ensure they no longer dilute their corporate earnings with any losses from losing properties. Maximizing their profitability under any production level of their production profile. Enabling them to perform in the capital markets. The complexity in which we’ve been able to achieve this change is complex and difficult, it is a foundation of the Preliminary Specification, our user community and their service provider organizations. And is unattainable today anywhere in the North American oil and gas industry without the People, Ideas & Objects et al.

In an article from World Oil entitled “Shale drillers’ newfound commitment to production discipline appears to be paying off as crude plunges toward a bear market.” Producers have discovered production discipline? People, Ideas & Objects would ask what is their motivation for doing so? Or is it just their poor cash management over these past decades, the lack of funds and of financial support causing them to appear that production discipline is under way? Unable to finance any field activity due to the lack of field capacity and capabilities in the service industry, the lack of staff in that industry and internally, with the fact everyone knows their game of never paying and that they have no money. That doesn’t stop them from making the claim of their “newfound commitment to production discipline” though. Recall their history of excuses, blaming and viable scapegoats. It appears to me that there must be a demand that this issue be addressed by the bureaucrats from someone they need something from? Someone like an investor maybe? In the same article they assert that production discipline is built to last and the 2022 drilling budget will be as the quote from some “investor” claims. 

“The latest market pullback comes at a fortuitous moment with respect to 2022 E&P drilling plans,” said Michael Roomberg, who helps manage $3 billion at Miller Howard Investments Inc. The slump “will likely give pause” to any explorer considering boosting production, which will keep returns robust, he said.

It's always something they’re forced to do. Spun as a feature, not a bug, with the promise of new found greatness down the road and riches for all. Promise the world, with no intent to fulfill the promise and no means to do so at some future undefined and unknown date. To claim production discipline legitimately would demand bureaucrats build the Preliminary Specification. And people wonder why it is that I’m so disrespectful when bureaucrats don’t even put the effort in to be honest. 

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering?

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. We know we can, and we know how, to make money in this business. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined gettr and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

Leadership Capitulation, Part IV

 In business nothing positive ever comes about from everyone thinking in the same direction. The harmony and passivity of today’s bureaucracy throughout that peer group is a classic example of the theory of groupthink. And the reason oil and gas has quietly sailed over the oceans edge. Without the conflict and contradiction that I indicate in the user community vision being used as analytical tools to get to the truth of the facts. We will only be replicating prior or creating new failures of possibly greater disastrous results and consequences. People, Ideas & Objects are not creating a hostile environment in the user community. On the contrary, we’re building a collaborative environment with the appropriate tension that avoids the groupthink pitfalls that are created when everyone goes along to get along. With the toolkit of conflict and contradiction there is also the need for cooperation. That someone has raised a point with a different perspective does not make what you're suggesting wrong or inappropriate. Your perspective may need defending and the need to understand the other perspective is a necessity. There may be a hybrid of the two that can be reached and seen by all as the optimal solution. Or there could be another method. Innovation and progress are not linear. The search for the optimal method based on the Preliminary Specifications vision is the journey we’re pursuing. 

When the CEO’s learn they’re profitable in everything they spend they’re like surgeons taking on the god complex. Their commands to the CFO these past decades have been to pay the bills, raise the money and file the reports. There’s no other role asserted, there’s none appreciated and there’s no other role culturally acceptable, it's bookkeeping. The evidence of this is everywhere and those that feign financial control of the industry have themselves subscribed to the talking points of “building balance sheets” and “putting cash in the ground.” It is these officers and directors that lost the script many decades ago and we need to restart and rebuild the industry without them as soon as possible. What risk is there in doing that? What damage would ensue and where would that leave us? The CFO quite simply should have been saying, “No, we’re not going to do that.” and asserted the appropriate business environment through to the producer firms officers and board of directors of the necessary decisions. If the CFO’s recommendations were consistently not accepted then as professionals with a personal risk and obligation to the shareholders themselves they would have needed to resign with the understanding they were unable to do their job. Publicly mouthing the “building of balance sheets” and “putting cash in the ground” or going along to get along should never have been the role they adopted. 

The conflict that exists between the corporation and Joint Operating Committees in oil and gas has been generated as a result of the CFO’s being unable to stand up for the appropriate financial and systems requirements. The derogatory attitude and manner of consideration that accounting just needs to pay the bills is the final manifestation of the chronic weakness in these CFO’s. The ability to spend the financial resources on the appropriate tier 1 ERP systems and enhance the quality of accounting is a direct result. Taking cash to enhance the quality of accounting only diverts money from the drilling budget. People, Ideas & Objects have detailed the nature of the industry's home grown solutions and lack of tier 1 ERP providers in the industry. How it’s accounting and systems are purposely and deliberately deceptive. The specific investor demand for the past number of years to increase the producers accountability through implementation of tier 1 ERP systems, such as People, Ideas & Objects use of Oracle ERP Cloud, has been summarily ignored. Accounting is also treated derogatorily because of this lack of respect fostered by the CFO, accounting measures performance and needs to be communicated to the operational decision makers accurately and timely to inform them of that performance. This has not been done in the past four decades as the producers' systems have been incapable of providing them with any useful and usable information. The CEO’s who understand little of accounting are told they’re profitable at the corporate level and that is all they need to know to continue with the methods of what they deem to be a successful operation. That profit can vary is foreign to them and they believe it to be a factual number not subject to interpretation. 

There is no doubt in my mind that these bureaucrats will continue with their methods of personal financial betterment and destruction of the industry for as long as they’re allowed to when they “know” they’re profitable and successful. What future do bureaucrats promise and how do they propose it comes about? Investors will not be funding the next 25 years of capital expenditures and there doesn’t seem to be any acceptance of that fact, understanding of why that’s the case and what bureaucrats need to do to resolve it. This dumbfounded posture of theirs, after six years of their investors cutting their financial support would be amusing if it wasn’t so tragic. Granting them the benefit of the doubt would see consideration that they’re unaware there’s an issue. 

Based on their actions towards People, Ideas & Objects I can assure readers there’s no reason for giving them the benefit of the doubt. If bureaucrats wanted to have ample amounts of money to spend what would be the most effective method they could take to do so. “Building balance sheets” and “putting cash in the ground” as ludicrous as that sounds, is their contrived opportunity to gain access to vast amounts of capital. Under the pretense that everything a bureaucrat spends in the form of capital, overhead and interest is a capital cost that will stay on the balance sheet in property, plant and equipment for what seems an eternity. The offset for these excessively large capital asset balances is the imputed justification for high levels of equity capital that bureaucrats could raise in the capital markets. And in turn, this capital structure would provide higher levels of leverage. The sophistication of their three card monte worked until investors realized the game was fixed. Without investors' direct support the lack of real profitability shows no value is or has been generated, losses have eroded the capital structure and the short term assets have evaporated and are disproportionate. Now, producers stand with an asset that is incapable of generating any value and demands cash in order to produce. The producer's leverage is skewed by this inappropriate behavior and the past 20 years of low interest rates. With looming higher interest rates thrown on the pile of unresolved critical issues. With no plan or strategy other than “muddle through” it’s not that anyone ever questioned the motivation behind these bureaucrats' behavior. 

The Preliminary Specification sees that a capital intensive industry would contain a large component of capital in the costs of the commodities sold to consumers. Just as a labor intensive industry product would have a large component of labor costs passed to the consumer. Moving these costs to the consumer is inconsistent with the “building of balance sheets” and “putting cash in the ground” for the reasons noted. People, Ideas & Objects, our user community and their service provider organizations believe it is the commodities ultimate consumer that will be funding the next 25 years of capital demanded by oil and gas producers by cycling the invested cash through the producer in a manner that enables producers to perform in the capital markets. This would bring about a competitiveness in the industry where the producer with the proportionally lowest level of property, plant and equipment would be the most effective and competitive. And in turn would have the lower cost of capital associated with their organization. Therefore, since the Preliminary Specification has been available since August 2012, why it has not been developed by bureaucrats is not as much of a mystery when it is ourselves, the non-bureaucrats, who have misunderstood that the oil and gas revenues are, have been and will always be for the bureaucrats to do as they please. A review of their history solves this mystery and to have them continue to lead these organizations is contrary to common sense and logic. 2021 should be the end of them.

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering?

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined GETTR and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here. 

Leadership Capitulation, Part III

 People, Ideas & Objects took preemptive action to offset the clean energy discussion that was beginning in oil and gas in our July 2019 white paper “Profitable North American Energy Independence -- Through the Commercialization of Shale.” In our paper we included a review of The Manhattan Institutes March 2019 Mark P. Mills' paper entitled “The ‘New Energy Economy:’ An Exercise in Magical Thinking.” In our White Paper's section “An Inconvenient Set of Facts'' we highlighted Mr. Mills' evidence that the physics of wind and solar were incapable of carrying the freight that oil and gas does today. With 69% of the energy provided by oil and gas and only 12% by all sources of renewable energy the 57% differential reflects a misguided ambition. For 2020 the consumption by energy source is presented in this EIA chart that breaks down the overall and renewable energy sources share. We see that combined wind and solar energy consumption are currently at 4.44% of the total energy the U.S. consumed. This is achieved after the landscape has been overtaken by these facilities, nothing but government financial support and the monotonous leadership provided by misguided teenagers. Nuclear power continues to provide 9% of U.S. capacity, yet has been stagnant in terms of investment and support over the same period of time. Oddly enough we still source almost half of the renewable energy contribution (2.16%) from the burning of wood. 

These are some of the quotes from Mr. Mills' paper that document the constraints which physics impose on the ability of clean energy to ever do the job. 

Scientists have yet to discover, and entrepreneurs have yet to invent anything as remarkable as hydrocarbons in terms of the combination of low-cost, high-energy density, stability, safety, and portability. In practical terms, this means that spending $1 million on utility-scale wind turbines, or solar panels will each, over 30 years of operation, produce about 50 million kilowatt-hours (kWh)—while an equivalent $1 million spent on a shale rig produces enough natural gas over 30 years to generate over 300 million kWh.

Solar technologies have improved greatly and will continue to become cheaper and more efficient. But the era of 10-fold gains is over. The physics boundary for silicon photovoltaic (PV) cells, the Shockley-Queisser Limit, is a maximum conversion of 34% of photons into electrons; the best commercial PV technology today exceeds 26%. Wind power technology has also improved greatly, but here, too, no 10-fold gains are left. The physics boundary for a wind turbine, the Betz Limit, is a maximum capture of 60% of kinetic energy in moving air; commercial turbines today exceed 40%.

The annual output of Tesla’s Gigafactory, the world’s largest battery factory, could store three minutes’ worth of annual U.S. electricity demand. It would require 1,000 years of production to make enough batteries for two days’ worth of U.S. electricity demand. Meanwhile, 50–100 pounds of materials are mined, moved, and processed for every pound of battery produced. P. 4

Today’s reality: hydrocarbons—oil, natural gas, and coal—supply 84% of global energy, a share that has decreased only modestly from 87% two decades ago (Figure 1). Over those two decades, total world energy use rose by 50%, an amount equal to adding two entire United States’ worth of demand.

The small percentage-point decline in the hydrocarbon share of world energy use required over $2 trillion in cumulative global spending on alternatives over that period.​ Popular visuals of fields festooned with wind-mills and rooftops laden with solar cells don’t change the fact that these two energy sources today provide less than 2% of the global energy supply and 3% of the U.S. energy supply.

To completely replace hydrocarbons over the next 20 years, global renewable energy production would have to increase by at least 90-fold. ​For context: it took a half-century for global oil and gas production to expand by 10-fold.  ​It is a fantasy to think, costs aside, that any new form of energy infrastructure could now expand nine times more than that in under half the time. P. 6

If the initial goals were more modest—say, to replace hydrocarbons only in the U.S. and only those used in electricity generation—the project would require an industrial effort greater than a World War II–level of mobilization.​ ​A transition to 100% non-hydrocarbon electricity by 2050 would require a U.S. grid construction program 14-fold bigger than the grid build-out rate that has taken place over the past half-century. Then, to finish the transformation, this Promethean effort would need to be more than doubled to tackle nonelectric sectors, where 70% of U.S. hydrocarbons are consumed. And all that would affect a mere 16% of world energy use, America’s share. P. 7

Availability is the single most critical feature of any energy infrastructure, followed by price, followed by the eternal search for decreasing costs without affecting availability.

It costs less than $1 a barrel to store oil or natural gas (in oil-energy equivalent terms) for a couple of months. Storing coal is even cheaper. Thus, unsurprisingly, the U.S., on average, has about one to two months’ worth of national demand in storage for each kind of hydrocarbon at any given time.

Meanwhile, with batteries, it costs roughly $200 to store the energy equivalent of one barrel of oil. Thus, instead of months, barely two hours of national electricity demand can be stored in the combined total of all the utility-scale batteries on the grid plus all the batteries in the 1 million electric cars that exist today in America.

For wind/solar, the features that dominate cost of availability are inverted, compared with hydrocarbons. While solar arrays and wind turbines do wear out and require maintenance as well, the physics and thus additional costs of that wear-and-tear are less challenging than with combustion turbines. But the complex and comparatively unstable electrochemistry of batteries makes for an inherently more expensive and less efficient way to store energy and ensure its availability.

Since hydrocarbons are so easily stored, idle conventional power plants can be dispatched—ramped up and down—to follow cyclical demand for electricity. Wind turbines and solar arrays cannot be dispatched when there’s no wind or sun. As a matter of geophysics, both wind-powered and sunlight-energized machines produce energy, averaged over a year, about 25%–30% of the time, often less. Conventional power plants, however, have very high “availability,” in the 80%–95% range, and often higher.

A wind/solar grid would need to be sized to meet both peak demand and to have enough extra capacity beyond peak needs in order to produce and store additional electricity when sun and wind are available. This means, on average, that a pure wind/solar system would necessarily have to be about threefold the capacity of a hydrocarbon grid: i.e., one needs to build 3 kW of wind/solar equipment for every 1 kW of combustion equipment eliminated. That directly translates into a threefold cost disadvantage, even if the per-kWH costs were all the same. p. 8

Such a ban is not easy to imagine. Optimists forecast that the number of EVs in the world will rise from today’s nearly 4 million to 400 million in two decades. A world with 400 million EVs by 2040 would decrease global oil demand by barely 6%. This sounds counterintuitive, but the numbers are straightforward. There are about 1 billion automobiles today, and they use about 30% of the world’s oil. (Heavy trucks,aviation, petrochemicals, heat, etc. use the rest.) By 2040, there would be an estimated 2 billion cars in the world. Four hundred million EVs would amount to 20% of all the cars on the road—which would thus replace about 6% of petroleum demand. P. 13

An ant-size engine—which has been built—produces roughly 100,000 times less power than a Prius. An ant-size solar PV array (also feasible) produces a thousand- fold less energy than an ant’s biological muscles. The energy equivalent of the aviation fuel actually used by an aircraft flying to Asia would take $60 million worth of Tesla-type batteries weighing five times more than that aircraft. p. 13

Finally, when it comes to limits, it is relevant to note that the technologies that unlocked shale oil and gas are still in the early days of engineering development, unlike the older technologies of wind, solar, and batteries. Tenfold gains are still possible in terms of how much energy can be extracted by a rig from shale rock before approaching physics limits.​ That fact helps explain why shale oil and gas have added 2,000% more to U.S. energy production over the past decade than have wind and solar combined. p. 16

The inexorable march of technological progress for things that use energy creates the seductive idea that something radically new is also inevitable in ways to produce energy. But sometimes, the old or established technology is the optimal solution and nearly immune to disruption. We still use stone, bricks, and concrete, all of which date to antiquity. We do so because they're optimal, not “old.” So are the wheel, water pipes, electric wires ... the list is long. Hydrocarbons are, so far, optimal ways to power most of what society needs and wants.

More than a decade ago, Google focused its vaunted engineering talent on a project called “RE<C,” seeking to develop renewable energy cheaper than coal. After the project was canceled in 2014, Google’s lead engineers wrote: “Incremental improvements to existing [energy] technologies aren’t enough; we need some-thing truly disruptive. ... We don’t have the answers.”​ Those engineers rediscovered the kinds of physics and scale realities highlighted in this paper.

Hydrocarbons—oil, natural gas, and coal—are the world’s principal energy resource today and will continue to be so in the foreseeable future. Wind turbines, solar arrays, and batteries, meanwhile, constitute a small source of energy, and physics dictates that they will remain so. Meanwhile, there is simply no possibility that the world is undergoing—or can undergo—a near-term transition to a “new energy economy.” P. 18

Certainly not as catchy as will all be dead in 12 years, but physics was never a popular subject. What’s clearly needed in the clean energy business is an army of bureaucrats who have the competitive advantage of spending. A 20 fold increase in production from shale in comparison to what clean energy achieved in the same period is the factor that sticks out the most for me. Even in the hands of the bureaucrats, shale was far more productive in terms of delivering the needed energy. However, they couldn’t make any money at it and they’ll certainly never be doing so in clean energy with these constraints. 

This must be why bureaucrats make the big bucks. Making tough decisions in difficult times. Figuring out how to do things that others think are impossible. Or, what is it that they’re doing? What is it that they’re thinking? Is this why they need to have the oil and gas revenues to support these activities? How are clean energy investments performing?

With the declaration that producers are unable to make money in any aspect of oil or gas exploration or production. What promise is there that these same people will be able to make money in clean energy? When 69% of the most powerful economy that man has ever known is supported by oil and gas. And those involved in that business can’t make it a viable business there has to be a significant issue involved. There’s a disconnect between the demand in the marketplace and those that are providing the product from a business point of view. That disconnect is with the leadership of the industry and their lack of understanding of business, full stop. The question therefore is what is it that should be done. They declared oil and gas was not viable and moved on to what they perceive to be greener pastures. Taking the proceeds of oil and gas inappropriately and in unauthorized fashion to fund their adventures. Do we now let them return and give them another shot at it and maybe they’ll get it right this time? A new opportunity to do what they should have known better throughout these past four decades. A time in which their own shareholders were withholding financial support because they were dissatisfied with the performance? Or are they so committed to their green agenda that nothing will pry them away from their task at hand? I naturally feel we’re better off without them and it's about time we cleaned the place up. 

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering?

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined GETTR and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here. 

Leadership Capitulation, Part II

 Today we have a specific example of the bureaucratic interpretation of innovation, action and the general direction of where I think we may be headed. The company is BP and the example is highlighted in this McKinsey article. For whatever reason the management of BP felt the need to address the performance of their organization and introduced some changes in an attempt to enhance their performance. This is my critique of these changes, why they’re unable to satisfy their needs, why the performance criteria are not appropriate and why the result is not acceptable. But then you’d expect nothing less of me would you. 

There is a poor analogy that can be made that has relevance here. An architect is designing a large building that is dramatic and pushes the envelope in terms of its new initiatives. Hence the costs have become something of an issue in having it built. Let’s assume for purposes of this analogy that building regulations are not as strict as they are and the architect therefore specifies substantially lower grade building materials in order to compensate for any cost overruns in the design. These lead to nothing but difficulties in the day to day issues that are being experienced by those that are involved in the building and implementation of the design of the architecture. And subsequently with the maintenance costs that are far greater than what they should be due to the poor materials used. These issues are raised with the building's managers throughout the life of the building, are cost based and therefore are focused on demanding better performance and effort be made by all concerned or they’d be terminated. What are the people who are involved in the day to day to do to resolve the issues that were created in the conceptual model? These are the permanent problems that can’t be resolved and to have the consequences of these poor decisions pushed down on to the people who are doing the day to day, who are powerless, as is anyone, to remediate the problem now, is patently unreasonable and misguided. It’s this analogy that I want to highlight in this discussion and will come too towards the end of the post. 

There is in the software development world a new and innovative form of organizational method that has come to take the world by storm. By that I mean it’s now become a catch phrase that’s used to sell an idea of a progressive and dynamic means in which people can work together. This is called the agile methodology and in its basic conceptual form it’s a good model. There are now two versions of agile as I see it. The management version and the version that is used by the people working in the agile groups, neither contain any similarities to the conceptual model. Managements are selling it as a means to recruit, to be with it and appear to be up to speed on the latest talking points and buzzwords. And as always will “talk the talk” with little forethought or understanding. The people who work in the agile method understand that it means self-organizing teams. What I see is unaccountability running amok in the organizations that have adopted agile as the next great thing. Conceptually dispatching legions of staff to attack a problem in whatever way the team may feel is appropriate will never solve anything. Don’t get me wrong, I am not a proponent of the waterfall software development approach, I would prefer agile any day in a properly constructed environment. First you have to have a vision of what it is they’re going to be building. A reference point that is standard across the entire organization. And most importantly the influence of a user community to guide the software development to develop what it is that they want and need. Groups of developers in self-organizing teams set upon a task to build the undefined x is anarchy. And that is what agile has come to mean by those that appeal to it the most. To be using agile as a one size fits all organizational solution to resolve any and all problems in any business at any time is exactly what it sounds like. A distortion of the concept.

These are the key points that I’ve taken from the McKinsey article entitled “An Agility Pioneer in the Energy Industry.” 

bp has recognized the need for bold action. At the start of 2020, new CEO Bernard Looney announced an updated purpose for the company: to reimagine energy for people and the planet and to be a net-zero company by 2050 or sooner (see sidebar, “bp’s new purpose”). To achieve these goals, bp would have to shift from a traditional business model to a much more focused and integrated organization. Bernard described this radical shift as “reinventing bp.”

Well no actually. BP was rebranded as “Beyond Petroleum” in 1997 by then CEO Lord John Browne onwards. From Wikipedia.

From 1997, Browne sought to re-brand BP.[4] The company linked itself in its corporate communications with green issues by the overt link of its BP initials with the phrase "Beyond Petroleum". Browne stated that the right to self-determination was crucial for people everywhere, and that he saw his company's mission as to find ways to meet current needs without excessive harm to the environment, while developing future, more sustainable sources of energy. He promised that BP would reduce its own CO2 emissions by 10% by 2010, a target which was achieved nine years ahead of schedule.

What we see here is the public relations expectations that memories are generational. Or doing the same thing over and over again is a sign of something or other. Nonetheless has BP, or is it bp, found an issue or challenge they’re concerned about? We’ll deal with the manner in which their concern is being addressed at the end of this post. 

Energy companies are facing major challenges. The COVID-19 pandemic has significantly shifted energy-demand curves, cost management needs to be resilient to commodity price cycles, and technological advancements are reshaping the industry. In addition, a finite global carbon budget and an impending energy transition present the biggest challenges yet for the industry. Energy companies need to respond quickly; survival will require a transformation, not incremental change.

One of my criticisms of the bureaucracy is that they incorporate the cost control business model. It continues in this definition of the issue with the statement that “cost management needs to be resilient to commodity price cycles.” No, this is not what needs to be done. The management needs to begin to look at the business holistically. It is not just costs but a business with revenues, customers, partners, suppliers and believe it or not profits. A greater oil and gas economy is what is defined and supported through the production of oil and gas. If nothing but costs are ever looked at, this is the perspective that the building manager is taking in trying to take the day to day costs out of the high maintenance cost building. It is the same thing here with trying to take the costs out of the greater oil and gas economy without addressing the larger issues that are being imposed. And just out of curiosity if Lord Browne undertook this same initiative in 1997, what have the results of that been and why do it again?

The company already had a head start: bp started the transformation journey in its upstream business in 2016, founded on agile ways of working and accompanied by investments in digital technology and by ways of working that could spur ongoing growth and innovation. The “Reinvent bp” program in 2020 amplified this experience to redesign Production & Operations (P&O) around an agile operating model with mission-driven, cross-disciplinary teams. These teams—or squads—are laser-focused on value, pursuing high-priority initiatives to optimize current assets and harness future opportunities.

 Well there we have it. The “transformation journey,” “founded on agile ways of working,” “investments in digital technology,” “ongoing growth and innovation,” “mission-driven, cross-disciplinary teams” and “focused on value, pursuing high priority initiatives to optimize and harness.” There we have the majority of the buzzwords that make the management of BP, or is it bp, the best that it can be. How could anyone criticize this? Well I’ll chime in here and say they’ve forgotten to allow the staff to bring their pets to work. 

Bp is stating they already have over 700 units of independent agile groups working. And these units may have over 14,000 people assigned to them by the end of this year. It is these unstructured, unconstrained yet fully responsible and accountable for their actions “squads” that should be the most frightening. What we know is that activity for the sake of activity is not action. Critically this is not how innovation works or how to implement it within organizations. These points are generally well understood in senior management and are on the list of things not to do, ever. You need to have all of the innovation being conducted separately from operations as it’s proposed to be done in the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. The impact of changes made here or there can have consequences. These need to be understood before they’re implemented. The business is holistic and not just a cost centre. The question that should be answered first and foremost is, will it be profitable and build value. Secondly the ability for producers to innovate demands the involvement of the service industry. Which is a costly proposition if bp is going to be doing the same innovative discovery 700 individual times which is what this structure creates. It will also provide them with that same innovative discovery each and every other year from then on. Learning and relearning over and over again whether they were ever successful or not. This last point sets this entire article into the fake news category. When innovations come about on their first try or first iteration we see that they’re either not innovations, bp’s story is bunk, and quickly realize that the six people interviewed in the McKinsey article are all from bp's senior management. 

My point is that innovative ideas are usually right upon the first iteration about 1% of the time. A very large number of them fail outright. Without the time and effort necessary to prove the concept and its implementation they’re not worth anything. These therefore have to be organizationally constrained and controlled as is done in the Preliminary Specification. Having unconstrained, unstructured and disorganized people running around innovating, because they can, is a recipe for organizational disaster and runaway, unconstrained costs. Which may be the point that bp is attempting to prove. After all, I’m not speaking Martian here. This entire article is ripe with things that you would not do in an organization. Agile has been effective in some software developments but is being interpreted as a revisit of kindergarten in many implementations. It will never be a one size fits all organizational method. As this series denotes, I am chronicling the capitulation of leadership in the industry. Bp at the beginning of the article admits of upstream performance related issues. Instead of addressing those and architecting the appropriate solution at the appropriate levels it appears to me they are passing the issue down to those on the ground. Giving them the unfettered authority and responsibility to tweak the valves and potentially but unknowingly gumming up the works. And when all hell breaks loose, which the bureaucrats are fully well aware of, authored, are solely responsible and accountable for. The wholesale destruction that is already baked in and will be occuring in the very near future. They’ll have their “agile methodology” and their staff as the excuse to blame as their viable scapegoat for the failure they’ve orchestrated these past four decades in oil and gas. 

They’ll also have their absolute proof they’ll need to prove that the Preliminary Specification would never work. This being the parting shot for the bureaucrats to make their exit as life for them has become incomprehensibly untenable and they knew all along that People, Ideas & Objects, our user community and service providers would be a failure. And they were therefore right not to choose it. What we’re reading in this article has zero similarity to the Preliminary Specification, our user community and service providers. Ours is constructive, focused on profitability, theirs is clearly destructive. Lastly if our suspicions are correct regarding the bloating of accounts payable and to a lesser extent accounts receivable being symptomatic of the producers cannibalizing their partners net cash proceeds from their properties. In order to pay the massive losses on their profit hedging, as we call them. They are actively breaking down the legal framework of the industry and trust between the producers themselves. So yes its their staff’s incompetence that caused the destruction to bp and the Preliminary Specification would never have resolved that. For bureaucrats to be getting out now is maybe their best opportunity and don’t be surprised if we see this. It’s my opinion that producer bureaucrats contriving situations such as what McKinsey has documented in this article is shameful. We’ve established their pedigree of bureaucratic excuses, blaming and viable scapegoats being generated over the last decade. Never had they been designed so sinisterly and tragically against the people who have little choice or say in the matter. The destruction of the financial, operational and political frameworks was complete long ago. They’re actively looking to break down the legal framework of the partnerships that are a foundational concept of the industry and how it manages risk. Eroding the trust between parties and driving the final possibly fatal blow into any remaining trust they may have had with the people who continued to believe in them. 

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering?

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined GETTR and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here. 

Leadership Capitulation, Part I

 We’re now past Thanksgiving and into the holiday season. That is for the bureaucrats, those we’ve identified as the officers and directors of the producer firms. This is the time when nothing to the power of two is undertaken. Unlike the time where nothing is ever done while they're in attendance. Returning in mid-January to what will be a litany of creative excuses and new viable scapegoats they’ll put forward. I thought I’d ask some questions for bureaucrats to contemplate and consider while they're off the office couch and on the recliner at their villa. Questions that are focused on the business of the oil and gas industry. Giving them time to research and understand the subtleties of these questions. Other than that, on behalf of all those that have experienced some form of financial, career or business destruction at the hands of these fools, we wish them a miserable Holiday Season for what they’ve showered across the oil and gas economy. 

Comfortable isn’t the word for how these people have lived. Spending money as the sole, distinct competitive advantage is taxing, almost as taxing as preparing specious financial statements or putting investors cash in the bank. Operating a profitable business from the “real” perspective” is a different level of effort and understanding than what these bureaucrats are capable of. They’ve had the Preliminary Specification in front of them since August 2012 and I’ve never received a call from them to discuss the finer details of it or to express an interest in it. Don’t get me wrong, I get lots of calls from bureaucrats. And they’re very active with respect to making sure People, Ideas & Objects, our user community and service providers never succeed. Maybe that’s where all their time is consumed and therefore they have no time for the oil and gas business? What does the future hold for the bureaucratic world of oil and gas?

Let's start out with some questions regarding the global oil markets. How come OPEC+ are not concerned with a potential rise of North American producers' production profile? They’re fully aware of North America’s historical and chronic overproduction, or unprofitable production as we call it. How come OPEC+ is not concerned with the threat that the U.S. might withhold military support if they don’t act in their best interests by raising production as requested? Do they now hold an equally valid threat that any lack of U.S. military support would just precipitate their move to Russian or Chinese military support? Therefore who’s more dependent on whom? The point that OPEC+ understands is that North American producers have never been profitable in the real sense. Don’t know how to be profitable. Don’t have a culture that understands or supports profitability. And do not have the financial resources, framework or capital structure to do anything about their business as it stands today. These bureaucrats have sailed off to clean energy and consistently resisted the calls to act by their investors for the past six years. They’re persistent and obstinate about doing nothing to deal with their lack of performance in comparison to what the competitive capital markets provide. What they've done is allowed People, Ideas & Objects to define why it’s necessary for producers to achieve real profitability everywhere and always. Everyone in oil and gas, the service and tertiary industries are fully aware of what the need for real producer profitability is and why it’s a necessary ingredient for a prosperous North America oil and gas economy. 

Without profits eventually everything just grinds to nothing. Careers are destroyed with the inability to advance in the industry other than through the bureaucratic arts. The excitement of doing things and being part of the team that did that is gone as each year you're faced with doing more with less budget and the ever increasing reality of being downsized. Businesses throughout this economy look to scavenge money and deal with angry investors who are displeased with the performance being displayed. Nothing is happening and nothing can happen because the money that is needed is not being earned to make it happen. Everything just slowly dies off, or in the very good years at best levels off. And this is the case with the greater oil and gas economy in North America. Not because oil and gas has lost its value to society but because industry leadership has lost its way as to its focus and objectives. “Building balance sheets” and “putting cash in the ground” is still not accepted as good corporate governance or objectives that are worthy for any organization to be involved in. If you were in business and your competition started mouthing these objectives you’d just snicker and forget about that wasted space. Which is where oil and gas is today. 

Leadership capitulation is a twisted opportunity being sought by our good friends the bureaucrats. I’ve mentioned many times that historically when leadership finds themselves in times of untenable situations they’ll just exit enmass and move on to other industries. The first time this happened was during the great depression. Oil and gas bureaucrats have now done this with the special twist that they think they’re taking the producer firms oil and gas revenues with them. They stated unequivocally that they could not make money in shale. Just as they couldn’t make any money in any of the other types of oil and gas businesses that they had previously rushed into and overinvested in. Conventional, heavy oil, offshore etc were all summarily written off to pursue shale as the shiny bright object that would make everyone so much money. Except there was no plan or understanding of how the business would work beyond the “building of balance sheets” and “putting cash in the ground.” Oil and gas was never able to make any money under their administration as even they admitted this past year. Therefore it was on to clean energy without any plans or strategies, any cash, competitive advantages, history, capacities or capabilities. But trust them that’s where the money is. The fact that no one outside of massive government subsidies has been able to generate any sustainable economic activity is not lost on them. The one thing they do think they have is the oil and gas revenues that investors had invested in good faith in the oil and gas business. Bureaucrats believe the fruits of those investments will be redirected to “support” these new clean businesses is not, trust me, ever going to happen. 

It is my opinion that in this process of moving to clean energy they’ve tendered their resignations in the oil and gas upstream. They no longer have their hearts and minds in the oil and gas business and therefore they’re on to their clean energy frontiers. And the oil and gas revenues will be staying with the producer firm that they’re no longer part of. If they believe in clean energy then they’ll be better off solving the difficult technical challenges of making it a commercial enterprise. If they’re feeling the sting of an empty stomach, angry spouses and bankers and a bank account that drains exponentially faster than it ever grew. These are the things that focus the minds of the entrepreneur that allow them to undertake the miracles they have to create every hour of every day. Our good friends, the bureaucrats will never even create one miracle if they have oil and gas revenues that permit their lifestyle to continue in the comfort they used to know.

The lunacy of the bureaucrats is best described in this action of moving on to the next bright shiny object. Something they’ve done for the past four decades. These movements were all precipitated by the need for “more” of whatever was selling on the street. In the direct question category we have the following. Why did bureaucrats always walk away from their non-performing assets, move on to the “new frontier” and never seek to rehabilitate the financial performance of those assets that were not performing? How would a conventional oil and gas property be performing today? With much lower capital costs, expended decades ago there would be few capital costs left to deplete. The production doesn’t decline as quickly as shale and although lower in terms of production, may continue for many decades. The cost to maintain it is miniscule. Is it these properties that are taxing producer cash accounts? Is it these properties that are heavily leveraged? Is it these properties that are unprofitable in the “real” sense of profitability? Why is it that bureaucrats never undertake to do the hard work of figuring out how to make money? Instead, it’s on to clean energy and the oil and gas business, including shale, is finished, they said. Even though the commodity sold presents a life and death struggle if consumers were forced to go without! What business are they in? The most valuable commodity to the North American economy and they have not made any money at it, admit they can’t make any money at it and have decided to saunter off the stage! These are the people who have proven track records? These are the people we want to run the producers? Would anyone find this culture of failure acceptable? In April of 2020 when oil prices fell to negative $40 levels there was no clearer indication of the need for remedial action to fix the chronic overproduction that has been evident each and every year from at least July 1986. It’s important to note that the Preliminary Specification has been available to resolve these cultural and overproduction issues since August 2012 and I can assure you they were all well aware of it. Why was and has nothing been done? If leadership capitulation and the taking of oil and gas revenues to move to a business with a history of zero performance is their idea of how to operate the North American based oil and gas economy, is that considered a good idea? 

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering?

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined GETTR and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here. 

Cannibals Do What Cannibals Do

 People, Ideas & Objects have been harping about cash and working capital throughout our time discussing the oil and gas producer bureaucrats mismanagement. Their solution has always been to have investors arrive annually with new funds for their capital budgets. Turning spending into their most prized competitive advantage. This was carried on for decades and became a cultural expectation and “what we do around here.” As a result the dependence on reliable outside capital sources eliminated the need to a) run a profitable operation and b) manage cash. Eventually what has happened is the principle of “building balance sheets” and “putting cash in the ground” demanded that accounting assume four fallacies that conspired to make producers wholly dependent on these outside sources of annual capital infusions for their existence. What would and should have been obviously a circuitous and unsustainable method of non-commercial production and operation remained unnoticed. Until the outside capital sources were removed. Even today bureaucrats feign obliviousness to the reason why their cash vaporizes. Or are they justifying this disappearance on their objective to just “put cash in the ground?” Culture is the reason that People, Ideas & Objects are rebuilding the industry brick by brick, and stick by stick. To eliminate this destructive culture in any other way is next to impossible. 

The four fallacies consist of the price taker assumption, capitalization policies, extended depletion schedules based on petroleum reserves and the objective of never reporting a bad quarter. Taking these one at a time, the price taker assumption is that markets are magically mythical beings that are able to take all of the production that is provided, no matter what. The consequences of doing so are irrelevant in terms of the producer's specific production profile, and the head in the sand opinion that there are no consequences. In our White Paper we noted the following effect of this attitude and assumption.

Producing below the breakeven point is the point where unprofitability begins. Producing below the breakeven point for one producer, in an industry who’s commodities are price makers, will have the effect where the price of the commodities will be dropped below the breakeven price for all producers. When all producers continue to produce below the breakeven price for four decades you have an exhaustion of the value from the industry on an annual and wholesale basis. Times were only “good” when investors were willing.

These four fallacies led to the myth making machine coming up with an accounting concept of pure wizardry. Producer bureaucrats were always able to maintain production, profitably, in an environment of declining commodity prices. Who remembers when oil was dropping from >$90 in 2013 to $36 in 2016. That each decline was matched by the declaration of the producer bureaucrats that the threshold of profitability was then miraculously $10 lower than their last declaration of profitability. The accounting innovation that enabled this is unknown to me and I’m still looking for it. What I’m seemingly unable to comprehend is how they’re able to revise historical cost accounting that saw producers' costs of $80 suddenly become $20 in three years time. 

What we’ve discovered so far is that these are not costs as we normally understand accounting costs to be. They’re “recycle costs,” the term used in the industry. They are a result of polling the service industry representatives as to what the cost to drill and frac would be if they slashed their prices to the bare minimum in a depressed $36 oil price market. The fact that the cost of 100% of their production was historical was not relevant to this conversation. You’ll recall none of the financial statements contain these specious profit quotations, these recycle cost quotes were only uttered to the press by the producers CEO’s. To be forgotten or denied when asked about them later. The Preliminary Specification was published in August 2012 and contains the decentralized production models Price Maker Strategy. These concepts were known throughout this period. Maybe the Internet didn’t have the ability to reach the rarified air of the bureaucracy at that time? Or, why do anything when you can just have investors inject the capital each year to keep the party going? 

The second aspect of the vanishing cash is the fact that as many costs as possible are capitalized to property, plant and equipment or “building balance sheets.” Interest and overhead have become extreme in terms of their total costs that are attached to these capital assets. This appears to be an inert action that has no consequences to bureaucrats who have no understanding of the follow on repercussions of their actions. The immediate impact is that producers claim overreported profitability when most of the costs are deferred to subsequent periods that extend beyond decades. And as we’ve noted, overreported profits lead to overinvestment by investors seeking to gain access to those profits which eventually leads to overinvestment that brings about the overproduction. When the commodity prices are price makers then chronic overproduction leads to collapsed commodity prices and the destruction of value. This didn’t need to be documented in the Preliminary Specification as it's a basic business principle that extends back at least one century. 

The third and fourth point in documenting our accounting based cash crash of the North American producers. Works hand in hand with the second item of overcapitalization and fourth of never recognizing a bad quarter. This is the extended depletion schedules based on reserve life indexes. A principle of accounting is to match the costs to their revenues. To do so on an accurate and timely basis. These have been tossed in the bin in oil and gas. For example our sample of producers in 2020 depleted their capital assets over a simple arithmetic basis of exactly 4.0 years. The factor they’re using for 2021 is 9.75 years as of the third quarter. What you do is forget about consistency and just plug in a number for depletion which will ensure that profitability is reported. People, Ideas & Objects believe that it would be the most competitive producer that had depleted the greatest amount of their capital assets. Contrary to the build bigger, better, beautiful, balance sheets principle. A producer should look to compete in the North American market for capital. Returning capital over a ten year period is inconsistent with the types of returns that other industries are providing investors with. Lastly it is our assumption that a capital intensive industry would have large components of capital being passed to the consumer in the prices being charged. 

The fourth fallacy is that accounting is a fixed determination of profitability is the myth that bureaucrats will hold dear to their last dying days. That the variance of how profits are reported can be distorted is not something they’ll accept as an argument or news to them. This is the engineering and geological science based understanding of profits. Profits are profits. If the company has been reporting profits they are profitable from the accounting basis and the audit has verified those profits. That profitability is subjective and a perspective that can be flexible is not understood. When they demand the CFO to magically never report a bad, bad is defined as a loss, quarter. They’re assuming their CFO is in financial control of the firm to ensure that profitability will come about. The CFO understands the demand to be flexible. Besides, in the bureaucrats' minds the only thing of value are petroleum reserves because they produce them profitably. If you interfere with that you're considered a fool and will be ostracised. Trust me on this point. 

Cash drainage is systemic, chronic and unavoidable in the bureaucratic oil and gas producers. These four methods conspire to destroy the bank balance every day the producers exist. Simple cash management would have identified the situation was untenable long ago. Why this was not the case is the question I have, especially in light of the points being discussed here throughout this blog and the existence of the Preliminary Specification as the solution. This is therefore how the cash disappears. 

• Producer costs are incurred in the form of capital, royalties, operations and overhead which include interest. 
• Other than royalties and operations all other categories are capitalized. 
• Large percentages of overhead.
• Tangible and intangible assets are recorded in an effort to emulate the value of the producer's petroleum reserves as determined by the independent reserve estimate. Reserves are worth nothing if they can’t produce “real” profitability.
• Oil and gas commodities are price makers. Over reported profits have led to overinvestment which enabled over production to collapse prices below the breakeven price. This began as a result of the late 1970s SEC implementation of full cost accounting and manifested itself initially in the 1986 oil price collapse.
• The cash returned to the producer was diminished in the past four decades due to overproduction dropping the commodity price below the breakeven level for all producers and everywhere. By how much is unknown. Cash shortfalls were made up by annual investor infusions.
• Producers are recording minimal percentages of overhead and interest in the current month. These therefore are the only costs, outside of depletion, being returned to producers in the form of cash from the sales of the commodities. Depletion emulates reserves life in what is hoped and understood to be a growing variable. And therefore the reserves life basis does not compete for capital in the North American capital markets.
• Cash goes in, sits for a decade or two in property, plant and equipment, where it is soon joined with the next year's investors' cash and these will grow old together before they’re ever passed on to the consumer and recognized in the price of the commodity. Finally converted to the cash they were when they were once invested, or as we’ve been told all these years of “putting cash in the ground.” Turning over the cash invested on a multi-decade basis in 2021, or at any time is ludicrous and yes, insane. 
• If accounting seeks to match costs with revenues. Oil and gas is the reason this principle was discovered and realized in terms of its value. 
• Oil and gas bureaucrats seek to match revenues with profits. Match their capital assets with the amount of their petroleum reserves. It didn’t matter if the price of the commodities were too low to produce real profits, they could report profitability by deferring more costs by “putting more cash in the ground” to “build the balance sheet” and increase their profitability. Therefore we should have been listening to them. 

Bureaucrats took this situation to extremes in the more recent two quarters of 2021. We noted they were, what we believed to be, harvesting their cash in order to pay the commitments on their hedging contracts. However at the same time their working capital fell to critically low levels in the third quarter, a trend that began in 2015 with the exit of their investors and accelerated in the second quarter of 2021 when the realized losses from hedging became an issue. We’ve published that our suspicion is these hedging losses are now being attempted to be financed by holding on to the shares of their working interest partners production proceeds. We don’t know if that is the case however accounts payable and receivable in the industry are ballooning to untold heights. There is not enough field activity to support this level of accounts payable debt being incurred and it is systemic throughout our producer sample. We noted that Conoco does not have any hedging activity and yet their accounts were ballooning too. And I questioned if Conoco were the only producer that was paying their debts what would that provide them? The fact of the matter is that there’s no other source of cash available to them. Hedging is incurring substantial losses and very rapidly. Just under $17 billion for our sample of producers that’s been incurred for just the second and third quarters. 

Bureaucrats have lost control of the operational, financial and political frameworks as we noted in last Friday's post. Today in the process of cannibalizing one anothers production proceeds they’re actively breaking down the legal framework of the industry. When investors, banks and the service industry have all been betrayed, that leaves just the other producers doesn’t it. Will investors be stepping up to provide the financial resources to bail out the bureaucrats? How about the banks?

While bureaucrats show their persistence and diligence in awaiting the inevitable return of their investors and bankers. It’s important to note the efforts they’ve taken in these past six years since their investors began their exit. Please note they left as a result of dissatisfaction with the performance and expected action would be taken to correct it. What’s happened in those six years is absolutely nothing, the same as the past four decades that established such a strong non-performant culture. Although not part of our sample of producer firms. A company that is the largest natural gas producer in the U.S., EQT has the enviable position of proving most of what I’ve claimed in these last two blog posts. For three quarters of the 2021 fiscal year they have negative revenue of $775 million. That’s correct negative revenue and losses of $2.9 billion. Working capital was negative $3.89 billion up or down, I don’t know, from 12/2020 of negative $547 million. Non-GAAP reporting was $1.115 billion in earnings! This is unfortunate and a tragedy but we know the score, muddle along.

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering?

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined GETTR and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here. 

Our Price Maker Strategy, the Brandon Version

 “Damned if you do, damned if you don’t.”

Bureaucrats consolidation strategy has attracted the Brandon regime's allegation of “mounting evidence of anti-consumer behavior by oil-and-gas companies” which caused high gasoline prices. Who would have thought that oil and gas producers would’ve been used as the football in any and all situations where politics were involved? The accusation that People, Ideas & Objects Preliminary Specifications decentralized production models Price Maker Strategy was collusion was something that bureaucrats have accused us of, and we've had to listen to since the first time it was mentioned here on November 11, 2008. The first thing we should do today is pull down the economic definition of “price maker” from Investopedia. 

The price maker is a profit-maximizer because it will increase output only as long as its marginal revenue is greater than its marginal cost. In other words, as long as it is producing a profit.

The point of this argument is of particular interest in today’s oil and gas industry. Shale has transformed the industry from one of scarcity of the commodity to one of abundance in both reserves and deliverability. The ability to over produce, or to produce unprofitably as we’ve described it, by any producer is well established and fully represented in the financial disaster that is oil and gas. In the hands of these producer bureaucrats, shale is a nuclear weapon with a hair trigger. Bureaucrats have no understanding of markets other than they are magical and mythical. Markets will absorb any and all production that producers provide until refiners ultimately say no more. That is what amounts to their production discipline. There is only the race for “more” as the objective that mimics the consumption of drug addicts. 

Production discipline is gained in the Preliminary Specification through the fact producers need to compete for capital in North American capital markets. This demands they produce “real” profits and return those to their shareholders in a competitive manner to all other industries. Profitable operations also assume a healthy and prosperous oil & gas, service and tertiary industries everywhere and always. This demands the deliberate elimination of the boom / bust cycle that producer bureaucrats hide behind and have so willingly accepted as fact. Why have they accepted this destruction, asking for a friend? Through our user community and their service providers, all of the costs of the producer become variable, based on production. Minor exceptions aside such as surface rights rentals. Therefore when a property is reported as unprofitable it can be shut-in and the producer firm will maximize profits by no longer diluting their profitable properties with production from unprofitable properties. Only the Preliminary Specification will provide the necessary standard, objective, actual and factual financial statements at the property level. 

Bureaucrats would rather run the industry into tatters and destroy everything in their wake to ensure that they’re never accused of collusion. Only to have the Biden regime set the Federal Trade Commission to investigate industry “anti-consumer behavior” to alleviate his administration's responsibility in rising gasoline prices. The only thing I can suggest the producer bureaucrats should do is enjoy the hypocrisy of the situation. The same hypocrisy they’ve been selling regarding their management of the industry. According to them it’s always been someone else’s fault. Coming up with excuses that tested the depths of people’s intelligence. And used all of their creativity in generating the viable scapegoat of the day as to why the situation was something they couldn’t do anything about. Let’s also recall the fancy systems they devised in order to better understand the “market” by knowing what the world wide inventory of oil was on any given day. By analyzing the floating roofs of storage tanks the world over, through satellite imagery, knowing the time of day and the size of the shadow cast on the tank they could accurately predict the amount of oil in the tank. Aggregating the storage globally they’d come up with a storage number. Recall the futility of their information when they were no doubt pouring over this data while the oil price “suddenly” and “unexpectedly” headed to negative $40 in April 2020 and the shock they must have realized at that point! 

Markets use prices to pass all the necessary information on to producers and consumers that they need to know to make intelligent decisions. If producers are able to produce a profit at that price they’ll produce, otherwise they’ll shut-in production. The benefits of doing so are logical, common sense and consequential. The producers optimize profitability by no longer diluting it with losses from other properties. Reserves will be saved for the day when they can be produced profitably. Those reserves will not have to carry the additional costs of prior production losses that would therefore need to be recovered in the future by the remaining reserves. Commodity markets would find their marginal prices that were needed for profitable production everywhere and always. By keeping their commodities as reserves, it is a form of zero cost storage by avoiding production and storage costs. And on what planet would making independent business decisions, at the property level, based on detailed actual, factual, standard and objective accounting to determine profitability or loss be collusion? These points have been ignored in the industry since November 2008 in order to achieve… 

It is the daily headlines that drive producer bureaucrats. Whether it's the climate or the prevailing political winds they’ll go with the flow. Leadership is their forte’. When it comes to the business of the oil and gas business however it’s “muddle through.” I would like to ask a simple question. What the hell are we doing? I’m reminded of a particular quote that I found relevant to today’s situation. British Prime Minister Neville Chamberlain was most famous for his “Peace for our time” quote and flaunting his “agreement” containing Hitler's signature. Subsequently when his management of the situation became World War II he found the hostile attacks coming from within his own party. From Winston S. Churchill, The Gathering Storm (The Second World War, Book 1)

From the benches behind the Government Mr. Amery quoted, amid ringing cheers, Cromwell's imperious words to the Long Parliament: “You have sat too long here for any good you have been doing. Depart, I say, and let us have done with you. In the name of God, go!" These were terrible words, coming from a friend and colleague of many years, a fellow Birmingham Member, and a Privy Counsellor of distinction and experience. p. 593

How much longer do we have to suffer this destruction under such incompetence? They have outlived their uselessness. Who is it that these bureaucrats will listen to? In the name of God, just go! A culture of bureaucratic economic denial is not what is needed at any time and it is no longer acceptable. High cost North American overproduction, or unprofitable production as we describe it, became a global issue that demanded remedial action by these producers in July 1986. That’s when we’ve been able to document the issue was raised globally. Over thirty five years ago and the reason I began working on this issue in 1991. Shale has fundamentally changed the business and nothing has been done to make the business capable of dealing with this new dynamic. Natural gas prices collapsed in 2009. Oil prices collapsed in 2014. Investors began their exit in 2015. Banks began theirs in 2019. The industry collectively has lost control of the operational, financial and political frameworks. This is something People, Ideas & Objects have argued here for many years. Otherwise, producers will just muddle through.

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering?

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined GETTR and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.