Our All Reward With No Risk Offer, Part III

 Granting the benefit of the doubt to producer bureaucrats I would say the following. Plagued by indecisiveness and dictated to by the variability of commodity prices. Bureaucrats are standing alone with little to no support in terms of what and where to turn. What has worked in the past, the standard rule book per se, has ceased to be valid and everything they’ve tried has not been able to reinstate their traditional business model of bringing a difficult, rare and limited commodity to market in adequate volumes to meet consumers demands. The disruption they’re experiencing is predominantly due to the transition to an era of abundance through shale. An era that they’re unsuited and incapable to deal with from a business basis. On a broad spectrum of possibilities this may be one scenario of an extreme. On the other is the critical alternative that I’ve been putting across here for the past number of years for the variety of reasons that I’ve documented. Producer bureaucrats seemed to me to be motivated by the self-serving ways in which they prospered financially. One lesson that we can all learn today from Afghanistan is that failure and defeat are clearly recognized by everyone. The bureaucrats' contingency plans to avoid the fallout of failure need to be clearly articulated before the point that they’re desperately needed. This has not been done as there is no expectation that their bankruptcy business model will fail. The only question to ask therefore is this by design or happenstance that the industry finds itself in this position?

We’ve heard the producers' expressions of profitability this past year. It is these same expressions they’ve made for many decades. If these producers have been so profitable for so long, why are they, as a primary industry, in the situation that they’re currently in? Why are they dealing with investors and bankers who are disenchanted? No one believes what producers are saying anymore. Having people believe you isn’t the issue however, it’s that no one trusts them anymore. People feel they’ve been betrayed. That is the point of no return, and what I think applies here. Therefore the question that needs to be asked is what is the responsible thing for them to do, how are they going to be held accountable in the future and what action can define them otherwise and allow them to walk the streets without shame.

Mine is certainly a different point of view isn’t it? What I’m suggesting is that directors take action to control the cash flow of the producers for the benefit of the shareholders and begin managing the producers in a profitable manner. End this cycle of destruction through the funding and development of the Preliminary Specification. Enabling them to establish the means to organize the industry in a manner that is in the best interest of the shareholders. Does anyone now doubt the value and need for an organization to be pursuing the objective of “real” profitability everywhere and always? The core foundations of our capitalist system. Otherwise, we all face what I suggested at the end of our earnings review to be a secure, permanent, independent and unaccountable bureaucratic state. Perpetuated through repeated bankruptcies. And failing in every aspect of their responsibilities. 

I’ve sustained the People, Ideas & Objects initiative in an attempt to ensure that things could continue without a disruption in the capabilities and capacities of the industry. I don’t think that’s possible now. The consequences of the damages realized by bureaucrats willful inaction will be that consumers will once again have a dependence on foreign sources of oil for what I believe to be an unnecessary period of time, until the industry can be reconstituted. I entered this business in 1991 with the opportunity to bring the systems into place where the data was to be captured down to the well level. What would be necessary as a precursor to the adoption of the Joint Operating Committee. Even today this ability to determine profitability at the property level has not been attained. Reporting at the well level was one of the reporting requirements of the then Alberta government's Royalty Simplification initiative. An initiative that ended in my first market failure of attempting to bring a solution to this market. The initiative was contaminated due to the obstinance and desire for producers to be unaccountable to the Alberta government. 

There will be consequences if directors decide not to adopt the business models inherent in the Preliminary Specification in the direction being offered. Just as there have been consequences as a result of the impact of shale in natural gas in 2009, oil in 2013 and 2015 when their investors began leaving. Producers can not sustain a viable, healthy existence without change to their business model. Not going forward after August 31, 2021 will have been a willful decision based on the facts as presented. Facts based on the thirty five year existence of a critical, terminal issue that has been unaddressed and destroyed producers' performance in a now failed industry. Directors' decision not to proceed with the development of the Preliminary Specification will indicate they’ve decided against profitability everywhere and always in North America. Unless they have other plans, outside of consolidation, clean energy, or the space race they’ll need to define the direction they’re headed. What logic, common sense, where are the business principles being applied and what is the plan in this, the thirty sixth year we’re entering that this issue has dominated? Or do they just need more time?

I don’t think anyone would consider that after sixteen years of my public dissertation of this issue that it would have somehow gone unnoticed. I don’t think that after thirty years of bureaucratic abuse someone continues a futile effort without knowing where there’s smoke… I am persistent and obstinate, and for that I would have qualified as a bureaucrat, I just don’t qualify for any of the negative attributes. And don’t think that there’s just me out in the distant field screaming by myself. There are many of us who are now thinking this way and I’ve always resonated with the great unwashed, as the bureaucrats like to derogatorily call us. Access to the oil and gas revenues in a somewhat similar way that bureaucrats have been able to divert them for their cause are not going to be freely capitulated by the bureaucrats. We’ve now put it to the directors. And next Wednesday we’ll know for certain that our future is or isn’t destined through that method. (Hat tip, don’t put money on it happening.) People, Ideas & Objects et al will need to begin the process of how we’ll make the changes that are so desperately needed in the industry. Completely outside of the industry. After August 31, 2021 we’ll move on with those. There’s no one else in these firms for us to deal with now. We’ve exhausted the list and I’m betting they’ll all have said no. It’s not that we didn’t give them the time. It seems to me that we’re the last ones to leave.

The only solution as it stands today, from a creative destruction and disintermediation point of view, is People, Ideas & Objects, our user community and their service provider organizations implementation of the Preliminary Specification. The natural forces of disintermediation and creative destruction are being obstructed through the diversion of industry revenues away from the development of initiatives such as the Preliminary Specification. And therefore are unnecessarily directly supporting the status quo behaviors that have been proven to be disastrous.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. Users are welcome to join me here. Together we can begin to meet the future demands for energy. We’ve 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 All Reward With No Risk Offer, Part II

 People, Ideas & Objects established the issue of overproduction of oil had been well defined in July 1986. The participation of chronic overproduction of natural gas didn’t manifest itself until 2009 with the overwhelming effect of shale. The next defining event the directors need to concern themselves with was the publication of the Preliminary Specification in December 2013. That is when I had the People, Ideas & Objects product defined as the comprehensive solution to both the oil and natural gas overproduction issue and its associated destruction we’ve all been seeing and living with. Why it's such a comprehensive solution is due to the scope of the issue. To solve the issue involves the Joint Operating Committee and by doing so everything within the producer firm and industry needs to be oriented towards the organizational culture of the industry. The industry was established to mitigate risk through the use of partnerships. The industry was also configured to deal with multiple partners due to the myriad of ways in which producers need to interact with each other. Different ownership of surface lands, spacing units, formations, partnerships, financing etc all defined the demand for the Joint Operating Committee. The culture is represented in the Joint Operating Committees legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks. The bureaucracy has been distorted to focus on the corporation through the introduction of computers in the 1960’s. First they did the accounting, then tax, royalties, compliance and governance soon followed. To where the administrative and accounting are concerned about the corporation and the business of the business is unknown by them. On the other hand, the earth science and engineering resources who are the business learned they could not understand the focus and desire of those on the administrative and accounting side. And as a result we have what we have, two disparate silos within the firm pursuing different organizational objectives. This has led to the need for the Preliminary Specification to move the compliance and governance frameworks of the bureaucracy into alignment with the seven frameworks of the Joint Operating Committee. By doing so, everything within the organization changes. The alternative is a continuation of the failure that we see today.

It’s late December 2013 and the board of directors could for the first time balance the overproduction issue in one hand, and the solution in the other. But that was eight years ago, nothing has been done, and we can assume that shareholders have not only subsidized producers directly with hundreds of billions of dollars in direct support through additional investment, but given up trillions of dollars in opportunity costs that slipped down the drain while the bureaucrats party has carried on without a hitch. And the bureaucrats are 100% correct when they say that the money being discussed here has been washed away and is unretrievable. It’s a sunk cost. People, Ideas & Objects concern is that the total amount of these sunk costs only grows larger each and every year. Responsibility, accountability and transparency (RAT) is not the bureaucrats' forte’ is it? These sunk costs are not recoverable in the sense that they can be recaptured but it is retrievable in terms of skin. What we currently have is an issue that has been well defined since July 1986. The same issue developed on the natural gas side of the business and destroyed prices there in 2009. A solution in the form of a comprehensive approach to these issues which has been available since 2013. And the wholesale shoring up of directors and officers liability insurance in 2020 when I identified these related points.

The aggravating cat amongst the pigeons is the different treatment of directors and officers in the process of bankruptcy. Shareholders as we know are sent on their way in this well defined process, what is it that should happen to their direct representatives? The directors are tossed out as well. Bureaucrats are usually maintained through bankruptcy and are established in the subsequent company in their prior roles. In other words they lose their shares but will be getting new and better ones, but nothing else really changes for them. Directors lose all connection to the firm. And in some cases the officers and directors liability insurance that was maintained on their behalf by the company needs to be either funded by themselves, or in rare cases it’s cancelled or seized by the bankruptcy judge as an asset. Making them particularly vulnerable in the event of bankruptcy being invoked. 

Which of course at $70 / boe bankruptcy would never happen? Ok, the perception that there has been no cumulative damage to these organizations and the industry is common, and absolutely false. These companies are beyond the point in which they could be rehabilitated into viable organizations. Maybe a handful could be, but the time and effort would be monumental, and with the current methods of management, with the issues they face, with so many contingencies outside of their control, or in other words commodity prices, who would be so bold to try. Until management can involve themselves in profitable operations everywhere and always throughout North America, which only the Preliminary Specification provides a viable solution to, the industry will continue it’s steep downward trajectory. The financial condition of the producers is not as represented in their financial statements and their hold on the future is at best tenuous. Big balance sheets mean nothing and do not represent any value. Property, plant and equipment represent the reserves that have been comprehensively proven unable to be produced profitably at any point in their past four decades. If anything they prove the valuation of these assets are outsized when compared to the very low percentage of revenues they generate. Neither higher prices or greater volume will be adequate to make up the difference. They mean these paper assets are being carried and offset by disproportionately high amounts of real, tangible debt incurred through two decades of low interest rates and the producers recording every cost outside of operations as an asset. Producers' futures lie in their own hands through profitable operations that are attainable through use of the software from People, Ideas & Objects Preliminary Specification. Otherwise their reputations precede them. 

The point therefore of our July 2021 RFP Response was to highlight the organizational reasons that the producers need to make this change. In order to deal with any situation demands that you organize the solution first. Running around with your hair on fire is ineffective. ERP software is how organizations in society are organized and operate today. They define, support but also constrain “what,” “how” and “why” things are done. What we can assume in 2021 is that if the bureaucrats had a solution that would have meant they identified the issue and resolved it by now. Which doesn’t seem to have happened. Therefore I don’t see profitable operations ever becoming the norm in the industry under the current bunch. 

As we slip further into the oatmeal of all things progressive in 2021. Maybe it’s best that we realize that the oil and gas bureaucrats' acceptance of their limitations is the far better choice for all concerned. Disintermediation exists for a reason. The status quo’s inability to make the necessary changes to continue in a prosperous way is certainly fact based. A good example is the bureaucratic malaise that’s facing NASA, its prior and current contractor Boeing. This article from Reuters proves one aspect of People, Ideas & Objects' claim, it’s now more than anything a software world. Three entrepreneurs, on a part-time basis, or maybe that would be better classified as hobbyists, Elon Musk, Jeff Bezos and Richard Branson have had little difficulty at times launching rockets and retrieving them safely and undamaged here, there and everywhere. The old school bureaucracy, also known as Boeing, can't get their rockets into the proper orbit. Or here’s a question, since it returned early, did it make it into orbit? It is these issues that are being faced everywhere and in every business. If oil and gas is to perform in the future, it will never be at the hands of bureaucrats. 

What Boeing's rocket failure documents is the complexity of software development, as an addition to the role that it now plays in organizations and its importance in society. Which is now assumed to be something that can be easily undertaken in the bureaucratic business model. And that’s not all. Excessive overhead costs are what we believe to be the secondary cause of a lack of producer profitability and working capital leakage. Excessive overhead costs are wholly attributable to the complexity of the environment that exists today, and the unshared and unshareable manner in which each producer approaches the development and provision of their administrative and accounting capabilities and capacities within each firm. Building bureaucratic, redundant silo’s of exact replicas of each other's administrative and accounting functions is unsustainable and unnecessary with the availability of the Preliminary Specification. People, Ideas & Objects converts the fixed cost administrative and accounting capacities and capabilities of the producer to become the variable cost, industry based administrative and accounting capacities and capabilities. Variable based on profitable and only profitable production. To continue with development of complex ERP software within each producer firm would be an extension of their failed bureaucratic business model. One that may be orchestrated by the bureaucrats as an alternative to People, Ideas & Objects to prove that software is not the answer to these issues. And therefore securing them in their roles for at least another generation. What we can discern from Boeing’s failure, in addition to many of the other failures we see today, is that bureaucracies have a ceiling in terms of their capacity and capabilities. Today’s societal demands far exceed what bureaucracies can competently deliver.

The only solution as it stands today, from a creative destruction and disintermediation point of view, is People, Ideas & Objects, our user community and their service provider organizations implementation of the Preliminary Specification. The natural forces of disintermediation and creative destruction are being obstructed through the diversion of industry revenues away from the development of initiatives such as the Preliminary Specification. And therefore are unnecessarily directly supporting the status quo behaviors that have been proven to be disastrous.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. Users are welcome to join me here. Together we can begin to meet the future demands for energy. We’ve 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 All Reward With No Risk Offer, Part I

 In regard to the Afghanistan situation. It is my opinion that OPEC countries, to continue to anticipate military support from the U.S., will need to fulfill Biden’s request for more supply. 

Short of reading the entirety of the past years' writings, many that may have joined us recently may not have an understanding of the work that’s been undertaken here at People, Ideas & Objects. I thought that it would therefore be reasonable to summarize what it is that is being offered in our August 31, 2021 deadline. The way the past year developed was unexpected and difficult for everyone. It was an interesting year for me as I literally stumbled into things that were discovered seemingly serendipitously through the summer of 2020. The first was with what I wrote on June 2, 2020 when the collapse of prices from a lack of demand were in full effect and producers were being forced to shut-in production as refiners were unable to take any feedstock. Recall bureaucrats' argument towards the Preliminary Specification was that production could not be shut-in without causing permanent damage to the formation. We’ve learned subsequently that this was not the case and that no damage, permanent or otherwise, was experienced in any of the shut-in formations. I noted in the June 2, 2020 post that insurance providers of officer and director insurance policies have at times forced exits of officers and directors of firms through the threat that if they don’t leave, as in the insurance providers opinion the firm posed too much risk for them, they’d cancel their policy. Leaving the officer or director fully exposed to any subsequent legal liabilities if they stayed. This posting hit the highest all-time views of the fifteen years that I’d been writing here. Subsequently on June 9, 2020 Reuters reported that shale producers had increased their coverage of officers and directors liability insurance by 75%.

I was doing some personal research in the July 26, 1986 Calgary Herald. My step-mother had died in a car accident on July 24, 1986 and I was subsequently able to download her obituary on July 29, 1986. The first page I landed on was page 33 of the 26th of July, or the first page of the business section, which had two articles quoting OPEC representatives regarding the price war they had commenced against North American producers. Oil had collapsed to $9.25 as a result of the abundance that was precipitated by OPEC’s price war and times in the industry had never been worse, except for now. This was the beginning of the consequences of the North American producers misinterpretation of SEC regulations that all costs are eligible to be included as assets and the follow-on consequences of over producing unprofitable production. A situation that has fundamentally destroyed the global oil and gas industry, its commodity prices, the service industry and just about everyone's lives that are committed to working in the field. But hey, the bureaucrats are fine and they thank you for asking. Reading the article from July 26, 1986 contains the same content that would be relevant and headline news in the oil and gas industry in 2021 and each and every one of the past 35 years. The article is eerie to read and shameful that this is the case. I can’t recreate or publish the document as newspapers.com is behind a paywall but is available to anyone with a membership. Here are a few quotes from the articles entitled “OPEC Minister Can See Economic Destruction” and “Return to Glory Days Unlikely.”

Qatar’s oil minister has called on both non-OPEC nations and industrialized countries to cooperate with OPEC to work out a policy aimed at restoring stability to world oil or face grave consequences. 

But in Kuwait, the United Arab Emirates’ petroleum minister said OPEC has no alternative but an oil price war until rival producers agree to reduce output. 

Whether gasoline and heating oil prices will continue to drop or rebound instead, whether the devastated economies of oil producing states and provinces like Oklahoma, Texas and Alberta will continue to crumble and whether the debt problems of countries like Mexico will get more severe.

“I’m not aware whether the price war is the best policy to follow,” Nigerian oil minister and OPEC president Rilwanu Lukman was quoted as saying, “but as we’ve already started this approach, we must continue it until the market is stabilized.” 

July 26, 1986. Nothing has been done about this. In a world where the commodities you produce are dictated by the principles of price makers, where one incremental barrel of surplus production will detrimentally affect the prices realized on all production, nothing has been done for thirty five years. It’s not that this is unknown. It’s not that this is misunderstood. In a World Oil article of January 25, 2017 BP’s Chief Economist stated.

The world has about 2.6 Tbbl of technically recoverable oil reserves, with about 1.7 Tbbl located in the Middle East, North America and the former Soviet Union, BP said in the report. Cumulative oil demand out to 2035 is expected to be around 0.7 Tbbl, significantly less than recoverable oil in the Middle East alone, Dale said.

The world has enough oil reserves that can be extracted with current technologies to be able to meet demand two times over until 2050, Dale told reporters in London. As demand growth tapers, holders of these resources could potentially decide to produce sooner rather than later, he said.

Yes I can see now that consolidation is the answer as it addresses these points head on! Here is a list of the costs of production in the various countries. Which is inconsistent with the claims made by North American producer bureaucrats that Saudi Arabia needs $85 / boe for their budget. Which is true, and conversely the demands of just Biden’s next $3.5 trillion bill will be an onerous $737 / boe cost for North American producers. Let’s not compare North American production costs to Saudi Arabia's government budget. It may have been that BP’s Chief Economist and I were the only two people that were aware of the market dynamics over the long term. However, directors in the oil and gas industry know that doesn’t matter.

As I recall, this OPEC price war started the North American producers' now well developed and refined approach of blaming, excuses and viable scapegoats of why they were having such difficulty. They assured us however that they would “muddle through” which certainly satisfies, even still. This is the point that I argued that all that was required was to shut-in some production, rehabilitate the prices and move forward from there. It was the simplest solution to the most devastating and costly problem that the industry had ever faced to that point. Except there was absolutely not one possible way in which it could be done in the business model that existed at that time. And today, short of refineries stopping the intake of feedstock the producers remain unable to solve this. The two major issues that have stood in the way through 1986 to 2021 are the determination of which property should be shut-in. And the conflict between the operator and the Joint Operating Committee as to who has control and who has authority. 

To determine which property should be shut-in should be as simple as determining which property was profitable and which wasn't’. Shutting in the appropriate ones. (The unprofitable ones, if any bureaucrats are still reading.) Oil and gas accounting was and is very imprecise, which we’ll discuss the motivation for in this post. For example, for the province of Alberta natural gas royalties, in the late 1980s and early 1990s, for the second largest producer recorded their royalties in their general ledger at the district level. Which is fine and nothing at issue there other than they had five districts for the province of Alberta. Rendering any calculation of a properties profitability moot when we consider that royalties are by far the largest operating cost. In addition there’s no allocation of depletion or actual overhead at the property level. Overhead was from “allowances'' and both of these are still the practice today. To use anything but actual, factual accounting information in determining whether a property should continue to produce, or not, can not have accruals, estimates or allowances. 

It was May 1991 and anyone today would see this as a systems issue as I did when I started this. The company was Genesys Software Corporation and I was smart / stupid enough to assume that I needed another triggering event to enable me to get into the market. And then it happened, the Alberta government passed legislation and issued the regulations for what they were calling Royalty Simplification, a comprehensive re-engineering of the method and means of how royalties were conducted in oil and gas. Demanding, in my opinion, that accounting down to the well be undertaken. All my competitors were going to need to rewrite major parts of their systems and all producers were going to need a significant upgrade to ERP based applications when the government's system went live in 1994. Royalty Simplification was introducing high levels of systems thinking to the archaic government processes that had survived from the 1960s and putting into place an advanced well thought out requirement. This would be the foundation of our new system and the approach we promoted to Oracle Corporation. Which we jointly undertook from 1992 until February 1997. 

The painful and difficult lesson that I learned leading to my first market failure. The one that I think the investors and bankers have now learned as well. Is what I learned in those formidable days in my previous company. I believed then that accurate and timely royalties would enable oil and gas producers to reduce their royalty obligations to the lowest possible level based on a sound application of these new regulations. Knowledge is not a great defence, it's an awesome offence. Producers believe that obfuscation is the best remedy in any and all regulatory, compliance and governance matters. I believe this is a facade they've been able to hide behind for too long and at great consequence to the industry. Hence my initial market failure, as no producer wanted to be transparent. It’s maybe best to ask an investor if this is why they’re now calling for better governance systems? It was in October 1997 that the Alberta government asked software developer companies to meet and discuss their plans for the future. It was there we understood that producer pressure, mostly through comprehensive non-compliance, had forced the government to make severe changes to the initiative and cancel much of the work that was done by the software developers and start on a new one. Anyone still needing an explanation as to why People, Ideas & Objects needs the funds up front before any work is done should understand the propensities and behaviours of our good friends the producer bureaucrats. Maybe one day I’ll document the activities that occured in that October 1997 meeting, the one that I refer to as my “Dead Cat Meeting.”

Heading back to the beaten path of this post. We come to the other reason that producers could not shut-in unprofitable production, and are still unable to do so today. There is a distinct conflict between the operator of the property, usually the producer with the largest working interest and capabilities, and the operational decision making framework that exists exclusively with the Joint Operating Committee. This is commonly referred to as the rights assignment issue. Here Professor Richard N. Langlois’ research provides us with an understanding of its application and resolution for oil and gas.

The question then becomes: why are capabilities sometimes organized within firms, sometimes decentralized in markets, and sometimes coordinated by a myriad contractual and ownership arrangements like joint ventures, franchisees, and networks? Explicitly echoing Hayek, Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 

The Preliminary Specification moves the compliance and governance frameworks of the bureaucracy into alignment with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee. Through the Research & Capabilities and Knowledge & Learning modules the knowledge is moved to where the operational decisions are made. It is the separation of the authority from the Joint Operating Committee that is causing many of the performance related issues today. Who’s responsible, who needs to account for this performance or failure? Well there is never anyone held accountable for anything in oil and gas. It all gets washed away in the “muddle through” song and dance. Nothing is learned that’s new, that wasn’t learned five times last year and will be learned many times again. Accountability doesn’t exist anywhere or at anytime due to the conflict between those with, and those who exercise the authority. If a property produces a loss in oil and gas, does anyone hear it? Sorry that’s a tree joke. This unaccountability framework extends all the way to the good old boys in the boardroom. Where no one is ever asked a difficult question. Is it that directors are naive and haven’t an understanding of these issues? I think it’s fair to state that my ostracised and vilified career in this arena proves the old saying that “bullies don’t fight.” They’ve turtled, assuming their traditional posture, to support their “muddle through” strategy at every and any prompting. I can not think of one occasion where they’ve ever engaged me directly. Possibly their investors are familiar with these tactics. The issue that I have is that I’ve predicted many things would be the outcome of their situation. These were always based on the historical actions of others, in other industries over the past century. As a result I’m batting about 1/1000 in terms of accuracy regarding bureaucratic behavior. What I’m apparently unable to conceive of is the dependence and reliance, but also the success that turtling provides. 

This all assumes that I had a modicum of understanding, logic and common sense when the Preliminary Specification was put together. However, all this has been done without the support of the industry and I’ve never generated a penny in revenue! I seem to be getting closer to the point where I can’t discern which is the more pertinent point! But seriously, looking back at the vision I painted in last Friday’s post, where the “normalcy” of a healthy industry that one would expect in oil and gas is not even in the conscious thought of any of those that have control of the industry, is its saddest testimony. That this is all acceptable and part of the day to day in oil and gas is just fine and it’ll all come out in the wash, when given enough time. No it’s not and should never have been accepted beyond August 1986 and this failure is 100% attributable to the directors and officers of the oil and gas producers who have done nothing about this since then. We’ll be continuing with this series to better inform the directors of their upcoming August 31, 2021 decision that we put to them in our RFP Response during the month July 2021. 

The only solution as it stands today, from a creative destruction and disintermediation point of view, is People, Ideas & Objects, our user community and their service provider organizations implementation of the Preliminary Specification. The natural forces of disintermediation and creative destruction are being obstructed through the diversion of industry revenues away from the development of initiatives such as the Preliminary Specification. And therefore are unnecessarily directly supporting the status quo behaviors that have been proven to be disastrous.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. Users are welcome to join me here. Together we can begin to meet the future demands for energy. We’ve 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. 

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

 My producer bureaucratic friends will be looking at the title of the post and saying Part LXX, same as Part I through to Part LXIX. And they would be right. The officers of the oil and gas producers do not understand my argument. My repetitiveness is attributable to their thickness and obstinacy in terms of understanding and accepting the argument. We can be sure they’ll stop reading now. The tragedy and devastation that is the North American oil and gas industry is by a substantial margin the largest, most protracted and difficult issue that it has ever faced. Trillions of dollars have been destroyed in the process of misunderstanding the point that I’ve had to repeat ad nauseum. Consider for a moment the most devastating action that can occur to a business or industry is that the investors and bankers lose faith and walk. We’ll be into our seventh year of this event occuring in North American oil and gas. Nothing has happened. The issue is not discussed, as it appears there is no issue other than covid, OPEC or the moon. A failure to accept the basic business cause and effect that has been known and understood for the many hundreds of years that accounting has been established isn’t understood. I think the best way to recruit oil and gas personnel is to hold up a pack of 3M Post-it notes and ask them if it’s an asset or a cost. If they say it’s an asset then you should hire them for the oil and gas producer immediately. You have a potential corporate officer in your midst. Yes I’m afraid this is representative of the issue that has led to the damage and destruction that has caused trillions of dollars of waste, rendered the industry valueless as it takes capital to just operate it at a loss and has no viable future beyond the absolute current horizon. Let me summarize once again therefore, the issue as it stands for our good friends the producer bureaucrats and why this has happened. Please read the second paragraph of this post carefully. Your career and personal financial health is in jeopardy. 

Overproduction throughout North America has been caused through the inappropriate recording of the majority of the producer's costs, outside of operations, as capital assets in property, plant and equipment. At the same time maintaining those costs as assets on the balance sheet for decades in an annual contest to determine who’s built the biggest balance sheet. Simply, over reported assets create the exact and equal amount of over reported profit attracting over investment, eventually leading to chronic overproduction. This overproduction is also represented in oil and gas through the breakdown of oil and gas commodity prices that fall under the economic principle of price makers. People, Ideas & Objects assert that overproduction is also defined as “real” unprofitable production. Which has consistently occurred for thirty five years that we’ve documented through the inappropriate accounting methods of recording most of the costs outside of operations as oil and gas assets. Which has been necessary due to the depressed oil and gas commodity prices. The costs that should be captured and passed on through the commodity prices to the consumers, in a capital intensive industry, should reflect that the majority of those costs are capital in nature. Instead producer bureaucrats collect assets on the balance sheet in a vain contest to see who will be this year's biggest spendaholic. And to chronicle the dollar amount on their balance sheets of the amount that investors have been forced to subsidize consumers consumption. 

This accounting game has been played throughout the industry since the time that the SEC instituted their Full Cost accounting methods for oil and gas in the late 1970’s. These regulations seek to establish the outer limit of what is acceptable in terms of asset valuation on the balance sheet. Producer bureaucrats have used them as targets to be met every year by any means possible. I’ll need to be shown any evidence of a producer that is the exception. It is times such as 2021 that we see the means in which this is done. 

As of December 31, 2020 our sample of producers had recorded property, plant and equipment of $407.235 billion. For 2020 they recognized depletion and incurred significant levels of impairments (breaches of the SEC regulations acceptable outer limit) due to the covid induced price collapse of $101.753 billion. On a straight mathematical basis this level of depletion would retire that balance of property, plant and equipment in the subsequent four years assuming no further capital expenditures were incurred. What I would assume to be a more representative amount of annual depletion in today’s capital markets, of a capital intensive business, would be a 30 - 36 month depletion schedule. 

In 2021 we have a different situation with prices of the commodities supporting a larger capitalization of the assets on a producers balance sheet based on the oil and gas reserves valuation. A bureaucratically deemed necessity to become a contestant in each year's balance sheet beauty contest. Therefore for the six months ended 2021 we have property, plant and equipment of $448.825 billion, depletion and impairments of $22.982 billion, or $45.784 billion of depletion and impairments on an annualized basis. Implying that those assets would be retired over the course of 9.8 years on the same simple mathematical basis. Buried in this number are property, plant and equipment increases of $41.867 billion in acquisitions that our sample of producers undertook during the first half of 2021. These acquisitions are immaterial to the point I’m making. The extension of the depletion rate is the other half of the method that bureaucrats use to achieve their objectives of building balance sheets and are subsequently able to continue reporting their “profits” for 2021. This method adopts the fact the U.S. has approximately 63 years of technically recoverable resources of natural gas, shale has had a similar effect on oil reserves. I’ve consistently failed to understand the business case for depleting assets over the life of these reserves. How oil and gas reserves are connected in any way to the financial performance of the producer, particularly with regard to a four decade history of the reserves inability to produce a “real” profit. Accounting is about performance, not value. What we’re being provided with today is a solution in the form of consolidation of failed bureaucracies into larger bureaucracies which will somehow overcome the four decades of established culture of bureaucratic systemic, failed behavior? 

There is a fundamental difference of opinion between the producer bureaucrats and People, Ideas & Objects way of thinking regarding the recording of property, plant and equipment, depletion and impairment. We see the producers' interpretation and the methods they use. Ours is that the most competitive producer would seek to maintain a balance of $0.00 in property, plant and equipment. Achieving the lowest cost of capital at all times. The implications of our method may not be appreciated by the producer bureaucrats so I’ll spell them out. This $0.00 balance of course would be unattainable but the objective is to reduce any balance as quickly as possible and would reflect that the producer had recognized their costs of capital in a capital intensive industry, in a competitive environment faster than other producers due to their higher profitability and better performance. Under the Preliminary Specification, Joint Operating Committees will be evaluated as to their determination of profitability to produce and if unable to be produced profitably they’ll be shut-in. A high performing producer may therefore achieve profitable production all the time at 100% of their production profile, and would be retiring their property, plant and equipment account faster than a profitable producer who was able to produce only 80% of their production profile. Let’s not forget the validity of the bureaucrats' claim that you wouldn’t recognize any capital in an environment where there were business difficulties or hardships, in the short term. We concur with this and have applied it in its proper context, in the short term. When the decision is made to produce or shut-in a property due to its profitability as proposed in the Preliminary Specification the shut-in properties will not attract any of their costs of capital during these times of hardship. This contrasts with the bureaucrats method of deferring the majority of their recognition of capital costs, or as we call them today “the unrealized capital costs and losses of past production” from their balance sheet for eternity on the basis that it’s another bust year in their capitulation to a boom / bust business cycle that every other industry has worked out of their business model. 

People, Ideas & Objects defined competitive game is the inverse of the beauty contests best built, big, beautiful, balance sheet. The benefits of our business approach include higher levels of cash flow, their favorite measure would be ballistic and enable them to pursue opportunities in the market at their discretion and on their terms. Investors would be more than satisfied, bank debt would be employed for its appropriate purpose of leveraging the organization's capital structure and not deemed as “liquidity” from unused lines of credit as they are today. Cash and working capital would be highly problematic due to their “bank” like abundance. They’ve never considered that if they weren’t carrying assets as property, plant and equipment they would be carrying assets of some form in a commensurate amount, would they not? (See Apple’s cash management difficulties and pathetic level of property, plant and equipment. Who does Apple think they are?) 

This prosperous environment would be a constant state where the costs of oil and gas, due to its ever escalating and capital intensive nature, are always being captured and passed onto the consumers in a reasonable, timely, accurate and profitable manner. Providing the producers employees with the confidence and knowledge they need to commit to a career in oil and gas without the substantial risk to their family and mortgage. The service industry would be able to count on a consistency in the demand for their service to be better able to serve their customers, the oil and gas producers. And on down the line throughout the greater oil and gas economy. This is the vision that I see of what’s possible and what I assume would be considered the normal course of the industries business operations. That this is not within the realm of consideration or the current industry's objectives is a tragedy. Our vision is a polar contrast to what exists today, the past four decade history and bureaucratic legacy. This is what I’ve always considered as the bureaucrats' ongoing damage and their cumulative destruction. What do they call it, “muddle along?” And what we get instead is a refusal to hear People, Ideas & Objects message, absolute harmony in the “building of balance sheets” and “muddle along” strategy seeking to satisfy what bureaucrats believe they hear from their investors. Investors are only interested in “real” profitability. Environmentally woke directors at Exxon, elected under a contrived voting ritual aren't representative. The message that People, Ideas & Objects offers the producer bureaucrats is creative destruction and disintermediation of their personal interests. That is the issue that is being decided at the board of directors this month. And as of today I’ve still heard nothing, so we can assume they’ll continue in their ways. 

Back to the point of the expansion of the number of years of depletion of capital assets. We saw in the second quarter of 2021 a reversal of some of the 2020 impairments having an impact as well. One of our sample producers reversed $2.5 billion of 2020s reported impairments on their $1.029 billion in the first half of 2021 oil and gas revenues. The amount recorded as depletion and impairments for 2021 was therefore negative $2.165 billion which miraculously corresponds exactly to the $2.165 billion in profit that was reported. Math is so much easier when you understand how it can work for you. 

The number of share buybacks was much lower than I was alleging in my “Managed Industry Hypothesis.” There were only $2.2 billion in share buy backs by our sample of producers. However, the producers that did participate were the few with cash balances and those that were active in the acquisition market. Was I wrong about these hypothese? Yes, I think I was unable to comprehend the potential for the success they’ve achieved. The only lingering unanswered question I have is why were the values of the acquisitions done at the inflated prices of property, plant and equipment when the asset market prices were so impaired? Even Chesapeake’s acquisition of Vine on Wednesday was at 1.97 times Vine’s market capitalization? There must be significant competition in the market for these oil and gas producers! My associated abandonment hypothesis is also out as it would seem bureaucrats have regained the confidence and control they need with the current higher commodity prices. They certainly have their swagger back. The question remains will that alleviate the pressure on the directors and allow them to pass on the decision we’ve asked of them in our July RFP Response process? In this game I call life I say no. Clearly no change in behavior is evident in the bureaucratic mischief being displayed in the second quarter reporting of 2021. We’ll get what we’ve been getting for decades if the director's action is not taken. And after the “record cash flow” period being experienced today eventually leads once again to negative oil prices, we’ll relive the horror once again. I will once again quote General Eric Shinseki, Former U.S. Army Chief of Staff. “If you don’t like change, you’re going to like irrelevance even less.” To which side of the fence this applies, the directors or the bureaucrats is to be determined. I’ll remind directors that the two highest costs an organization incurs today are time and errors, particularly uncorrected errors.

The only solution as it stands today, from a creative destruction and disintermediation point of view, is People, Ideas & Objects, our user community and their service provider organizations implementation of the Preliminary Specification. The natural forces of disintermediation and creative destruction are being obstructed through the diversion of industry revenues away from the development of initiatives such as the Preliminary Specification. And therefore are unnecessarily directly supporting the status quo behaviors that have been proven to be disastrous.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. Users are welcome to join me here. Together we can begin to meet the future demands for energy. We’ve 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. 

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

 Reflecting back on the work that I’ve done I feel People, Ideas & Objects have been able to accomplish many things that I didn't think were possible. I’m fond of the Preliminary Specification and the profitable environment it will establish for the oil and gas industry. The bureaucrats expressed satisfaction with today’s performance contrasts with the actions they took to earn the claims they’re now making. In reality they’ve done nothing, as testament to their repeated call over the past decades to “build balance sheets” based on their “muddle along strategy.” A legacy they’re satisfied with and looking forward to securing for the future. With everyone so happy and satisfied, how could there be any difficulties? Producer bureaucrats are the ones who have consistently feigned their actions are precipitated on the demands of their shareholders. Such as Exxon's Annual General Meeting “voting” climate change enthusiasts to their board. Yet, they’ve done nothing about their profitability for the time that I have been offering the Preliminary Specification as a solution, or since it was raised by their investors in 2015. I’ll be speaking to many more of these larger issues after the People, Ideas & Objects August 31, 2021 board of directors deadline has been determined. They would normally fit well within the context of this series however their deferral is the appropriate step at this time. 

My first job in oil and gas was with Shell Canada for the summer between grades 10 and 11. I was training to help out and to learn the role of mail clerk! We also stocked the office supply room. Between grade 11 and 12 I washed dirt (tailing samples) in Shell’s geological lab. If I knew then what I know now I would have stayed in that first position and worked to become the Senior, Executive Vice President and Chief Stationary and Mail Clerk Officer (CS&MCO) of a producer company today. The proliferation of vice presidents in oil and gas is incomprehensible. It’s a farce and a facsimile of their chronic mismanagement. Or is it, in our enlightened world, these bureaucrats are just looking to share the personal risks they’ve earned?

I’m on record for my distaste of the practice of hedging commodity prices on any portion of a producer's production. They’re designed to inspire mediocrity throughout the organization. When performance is predetermined what purpose is there in trying? The Preliminary Specification precludes the need for any hedges in the calculation of profitability at the Joint Operating Committee level. Maintaining the edge within producer organizations that is necessary to sharpen the pencils and to ensure their properties were always profitably produced at the objective of 100% capacity of their production profile. Therefore if a producer continued to pursue their hedging activities, then that would be their own corporate gambling activities. If all production was produced profitably at each and every Joint Operating Committee, and always, what purpose would hedging provide? Management by exception continued in the second quarter of 2021 with profit hedging taking a front seat in terms of their exceptional costs that management should have paid attention to. Losses through both recognized and unrecognized commodity hedging totalled $8.107 billion for our sample of 18 producers. Alternatively these costs of hedging across the industry would have easily provided the financial resources for the producers to have hedged their bets on their future that the Preliminary Specification may be needed and therefore provide People, Ideas & Objects and our user communities funding as a viable alternative. The value proposition of the Preliminary Specification puts it well within the region of the best investment producers could be making but it also disintermediates their bureaucracies.

Granted only a small percentage of these hedges were realized in the second quarter. Most will be realized and extend throughout 2021 and into 2022 and be incurred at that time. They were contracted as a result of chronic North American overproduction in combination with the virus demand destruction in early April 2020. All of the hedges thankfully were contracted to command positive commodity prices in the range of $20 to $40 per boe. Future oil prices may decline to the April 2020 period as a result of OPEC+ increasing production by 5 - 10 million boe / day. Or prices could play a windfall role in the producers future where these hedges would offset those larger, speciously reported profits. Either way the future is fixed and clear.

Had I mentioned that cash and working capital were issues in oil and gas? Since the withdrawal of investors which began in 2015, there have been critical shortages of cash in the industry. We’ve identified the key point of cash drainage as the overheads of the industry are not included as costs in the prices of the commodities that are passed on to consumers, instead they are capitalized. We believe producer overheads which include the excessive, and growing list of vice presidents, their excessive executive compensation are capitalized to property, plant and equipment to the tune of 85% across the industry. Therefore the cash consumed in paying these monthly recurring costs is not returned to the “cash float” in the current month and therefore new cash needs to be sourced each month these expenses are incurred. All as a result of the investors no longer willing to play along. Average prices in the quarter of $68.00 oil and $3.25 natural gas prices just weren’t enough to overcome the overhead. Paying out an annualized dividend and stock buy back rate of 18.96% for our sample of producers may appear to them to have been onerous. However, I would suggest it’s only onerous in contrast to the producer's history. For example Apple’s annualized rate of payback was 86.73% or actual cash of $77.05 billion for three quarters in 2021. One company is successful, one industry complains. I only mention this as Apple is a New York Stock Exchange listed company with a 28.61 P/E ratio. Shell’s P/E ratio is 28.96%, which in a way is competitive?

The point regarding working capital is of critical importance. Although we see the high prices being realized, “profit hedges” were on a large percentage basis unrealized and extended well beyond the next quarter, yet working capital continued to decline. Consolidation was effective for our sample which acquired four producers, one member of our sample was acquired by another sample member, for a net three new producers increasing our samples production over last year's production volumes. This moved the overall production profile from 10.056 mm boe/d on December 31, 2020 to 10.354 mm boe/d on June 30, 2021. For the 2021 calendar year this has totalled on a rounding basis to a 2.9% production increase. Yet there was a disproportionate increase in short term liabilities of over 17% which had the commensurate effect of reducing working capital. I only highlight this to point out that it’s tradition in the industry to always have someone else pay for any of the difficulties being experienced by the producers. 

What is clearly coming into focus for all those that held out hope for the resurrection of the industry due to the moderation of commodity prices. Is that at any time and given any set of variables whether they be good or bad, oil and gas producer bureaucrats will seek to make the industry take another step down on the ladder of success. What we must understand is that they are hopeless victims of society, incapable of helping themselves or doing anything about their issues. But they’ll “muddle through.” The level of excuses, blaming and viable scapegoats diminished lately and I’m therefore unable to determine who it was they allege were responsible for their current difficulties. Maybe they're getting the point of my criticism and are stopping that whining. There was and is gripping going on that is somewhat new and it seems to already be achieving a remarkable level of push back. Gripping occurs when you complain up the chain of command. In this case to the shareholders, and most specifically in this case regarding the amount of dividends and other payments being made to shareholders. And yes even Exxon was brought into the discussion and questioned why they were paying their debts instead of spending more on shareholders? Which is an interesting question from a number of points of view and particularly this pushback being at Exxon’s level of the industry. 

Looking at the Exxon pushback, the shareholders of producers are fed up to a level that is unsatisfiable, it would appear. Such is the level of betrayal orchestrated by the bureaucrats, and the final act that the board of directors will be conducting during this month of August 2021. I am suggesting here that they won’t be responding positively to our July 2021 RFP to fund the Preliminary Specification. And therefore lose the opportunity to ever gain their credibility again. That however is their objective of the exercise. Of course this is just one man's pious, obnoxious and self serving opinion. With the organizations consolidated mega-corp cash flow funding whatever their desires may be, in completely unaccountable fashion, as the objective that is attainable in the next few quarters, why destroy that opportunity? The tug of war with the banks is another interesting point. Is Exxon being kind and paying their debts off quickly? Or, as I suspect, are banks taking the money that they want? Investors have now learned the revolving oil and gas bankruptcy game / strategy. Consolidation is just another name for the bigger they are, the harder they’ll fall and the even greater the chance the bureaucrats survive the bankruptcy process. Banks own everything in the process of bankruptcy and investors get zip. If investors don’t make hay in the next few minutes before the sun completely sets they’ll be out of pocket for good. They want out and they want what they’re entitled to and were promised. Please note, it is through my audit experience that I learned that Bankruptcy Judges are more intoxicated by the thought of cash flow than bureaucrats. They seem to think that if there’s money being generated there then there’s value that needs to be managed. And as such will gladly go along with the plans that management put in front of them. What choice do they have? Shareholders and directors are not party to that circus and as such the appeal for action that we made in our July 2021 RFP Response to the directors last month.

It is these niggling little issues that I’ve been criticised for in People, Ideas & Objects. Focusing on profits, performance, time, a sense of urgency and I think a few times I even stated this should be operated as a business. These are counter to the culture of the industry that is best expressed by the bureaucrats when heard by them in absolute resonance and harmony “we’ll muddle through.” That these are parotted by all the old and new vice presidents doesn’t mean they personally believe them; however, it’s the best cover story of the century. With our July 2021 RFP Response we identified only five of the organizational constructs inherent in the Preliminary Specification. Turning the industry into a dynamic, innovative, accountable and profitable industry where everything that is produced in North America is always produced profitably. And these second quarter results are the producers' response to their legacy of greed and inaction.

People, Ideas & Objects pursuit has and is constructive which looks to solve the industries difficulties and make producers profitable everywhere and always. That has made me a pariah and the poor bureaucrats the victims. It’s a role they’ve cherished for a long time now. We see the financial situation as presented today being celebrated. They’re in the black according to their accounting and we’ll need to go through another cycle of temporary “good times” and be back to where we’ve resided for all but 5 of the last 35 dismal years of their management. The fact of the matter is they’re closer now than ever to a permanent, independent and unaccountable state.

The only solution as it stands today, from a creative destruction and disintermediation point of view, is People, Ideas & Objects, our user community and their service provider organizations implementation of the Preliminary Specification. The natural forces of disintermediation and creative destruction are being obstructed through the diversion of industry revenues away from the development of initiatives such as the Preliminary Specification. And therefore are unnecessarily directly supporting the status quo behaviors that have been proven to be disastrous.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. Users are welcome to join me here. Together we can begin to meet the future demands for energy. We’ve 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.