Reinstating Profitable Production Rights, Part I

 Introduction

People, Ideas & Objects are reinstating a modified Profitable Production Rights Licensing method of generating the necessary revenue for the development of the Preliminary Specification and our user community. Providing Profitable Production Rights Licensees with the unique opportunity to participate simultaneously in both the North American oil & gas industry and its ERP software markets. All businesses in the 21st century will soon be software businesses. On March 15, 2022 we suspended our Production Rights initiative to pursue what we were calling our “Marshall Plan.” A means in which producers could deal directly with the issues in the industry as a result of it being elevated to the level of a political weapon in the form of the ongoing European crisis. To which producer officers and directors applied their “muddle through” strategy. The confusion and lack of coherence in the global oil & gas marketplace is evidence that all is not as it seems. 

I’ve made a number of changes to the Profitable Production Rights License and better defined the opportunities for all concerned. It is a means in which the development of the Preliminary Specification can be undertaken and for licensees to hold the rights to control who will have access to People, Ideas & Objects software and our user communities service provider services in the form of our Cloud Administration & Accounting for Oil & Gas. I’ll restate here why participation in People, Ideas & Objects et al is valuable in the 21st century. 

It’s no longer enough to just own the oil & gas asset, it’s also necessary to have access to the ERP software and services of People, Ideas & Objects et al’s Cloud Administration & Accounting for Oil & Gas that makes all oil & gas assets profitable. 

Oil & gas producer officers and directors have proven they don’t have an interest in oil & gas in their transitions to clean energy and their declaration that shale will never be commercial. A capitulation of the oil & gas business that others were responsible for building. Officers and directors have proven they don't have an understanding of, need or how to go about earning “real” profitability over these past four decades. Oil & gas producers have proven to hold a legacy and culture that is incapable of change and one that is counter to profitability and productivity. The first step in changing a culture is accepting there’s an issue. The key issue being chronic and systemic overproduction, or unprofitable production, such as natural gas is experiencing today. An issue People, Ideas & Objects et al resolves. An issue we see today in natural gas. Oil & gas producer officers and directors are not interested in being transparent in their accountability through their proven specious accounting methods and reporting, ad hoc ERP systems and dysfunctional organizations. 

At this point in time what more needs to be proven that the North American producer is a failed organization? How many more chances will they be provided with? Societal jeopardy is now in play with what I perceive is the industry's inability, over the next decade, to maintain the volumes of shale’s deliverables over the mid to long term. For example U.S. natural gas production from shale is almost 80% of its total production. With 10,000 to 25,000 man hours of mechanical labor contained within each barrel of oil equivalent, the producers officers and directors self-interest overrides all other concerns. With all that has happened between producers and their investors since 2015. With the well defined expectations of their investors. It’s difficult for me to comprehend how they can explain their desire not to invest in enhanced profitability. 

I came across this statement regarding what is defined as the Fifth Estate.

The Fifth Estate is a fundamentally different kind of power. It’s more difficult to consolidate than media, and more difficult to control than even our government divided by design. Its impact is also far more difficult to predict. This is because technology is above all things defined in terms of newness, which not only makes it disruptive of pre-existing power, but destructive of itself -- a sort of anti-power that only guarantees change. The true failsafe. Our ultimate reset. Tremendously empowering of tyranny in times of stagnation, technology is also our most powerful weapon against tyranny in times of innovation.  

         - Edmund Burke

We’ve lived through an interesting period where a transition has been taking place in the business community. One that has seen new Information Technology driven business models disintermediate the old with new, highly productive and value generating methods of conducting business. Over the past two decades the status quo has maintained control while everything in their business became distorted and value effectively destroyed. Since the 2008 financial crisis we’ve witnessed shale technologies become dominant however little to no value has been realized as a result. I see this period as the last of the “tremendously empowering of tyranny in times of stagnation.”

The oil & gas industry is not only faced with its most challenging operational, financial and political future. These three challenges demand that innovation, entrepreneurship and the principles that have brought the North American continent to dominate the global economy be put forward to resolve the industry's difficulties. The status quo is not only incapable, it has chosen not to bother, shrugged its shoulders and moved on. It is therefore a time when “technology is also our most powerful weapon against tyranny in times of innovation.” The choices we make today are how we’ll perform in 2025, 2030, 2040 and 2050. 

It is People, Ideas & Objects opinion that the status quo has failed. Since 2015 they have unsupported capital structures. Have failed to act to remediate any aspect of these issues leading to their difficulties. Have deprecated their internal Work-in-Progress capabilities. Destroyed the service industries capital structures and the motivations for their people to seek employment there, capacities are operating at 40% of prior levels. And possibly most detrimentally of all, the leadership in the industry do not concern themselves with these concerns. Instead saunter off the stage into unrelated businesses involved in “clean energy.” Taking the oil & gas revenues in unauthorized fashion, that were generated by their investors and are the only source of financial capability available to fund the rebuild of this industry.

Producers are organizationally unprepared to approach their most challenging future and have not supported any method of organizational development. Leaving People, Ideas & Objects as the only alternative in the marketplace to this failed, archaic method. The only solution that has been researched and reviewed. Constructed on the basis of performance that provides for the most profitable means of oil & gas operations, everywhere and always. To build a dynamic, innovative, accountable and profitable oil & gas producer and industry to ensure that North America attains its optimal economic prosperity through energy independence by commercializing shale. 

People, Ideas & Objects et al’s Profitable Production Rights Licensees own the keys that producers will need to access our Cloud Administration & Accounting for Oil & Gas method of profitable oil & gas organization. Or, producers could choose to remain with what usable life they have in the status quo, let that expire, and check to see what may be available then. In the meantime explain to their investors why they continue their unprofitable ways.

Profitable Production Rights License

The origins of our Profitable Production Rights Licenses were previously captured within a cryptocurrency or coin. We have deemed this to be unnecessary as the ability to lease these rights will be contractually managed within the Profitable Production Right Licensees control. The Coin was a distraction that may have tainted the prior method acceptability and with all that has happened in the crypto arena, I’ve realized that the coin was featureless for our purposes and redundant. 

In terms of implementation, what we need is the ability to write each of the Profitable Production Rights Licenses into a blockchain solely dedicated to securing the Profitable Production Rights License. We thankfully are able to do that through Oracle Cloud Infrastructure and the use of their Oracle Autonomous Database’ recent development of the Oracle Blockchain Table as described below. This will be an Oracle database within the Preliminary Specification that manages these Profitable Production Rights Licenses by controlling producers' access to the software and services of People, Ideas & Objects et al and will manage the licensees revenue and expenses on their behalf. 

Any assignments, sub-leases or transfers of the Profitable Production Right License do not override or delete the original purchaser's transaction in the database; they will write a new block on the chain, or row on the instance of the Oracle Blockchain database. Each Profitable Production Rights License is therefore aggregated through its serial number in order to determine all the associated transactions, assignments, its current ownership, and licensing of its production right to which producing Joint Operating Committee. 

Ownership and control of the encryption Key to access the Profitable Production Rights record database will be held by the licensee of the Profitable Production Right. The contract they execute with the producer for the production will be maintained in this database and form the basis of the Profitable Production Rights Licensees billing to the producer. Where the licensee holds the access rights to what we believe will become the only means to profitably organize North American oil & gas exploration, production, administration and accounting. From Oracle.

A blockchain table is an append-only table designed for centralized blockchain applications.

In Oracle Blockchain Table, peers are database users who trust the database to maintain a tamper-resistant ledger. The ledger is implemented as a blockchain table, which is defined and managed by the application. Existing applications can protect against fraud without requiring a new infrastructure or programming model. Although transaction throughput is lower than for a standard table, performance for a blockchain table is better than for a decentralized blockchain.

A blockchain table is append-only because the only permitted DML are INSERT commands. The table disallows UPDATE, DELETE, MERGE, TRUNCATE, and direct-path loads. Database transactions can span blockchain tables and standard tables. For example, a single transaction can insert rows into a standard table and two different blockchain tables.

It should be noted that Oracle Blockchain Database is not a pure implementation of blockchain technology. It does not distribute a blockchain to other servers for validation and verification of the blockchain in the event of a suspicious transaction. It is focused on higher transaction based performance than the traditional blockchain technology is able to provide. A necessary requirement for our purposes. It is managed by the Oracle Autonomous Database and will act as a gatekeeper to our Cloud Administration & Accounting for Oil & Gas. In other words the data is immutable which is the feature of all blockchains. We are using it to ensure the Profitable Production Rights Licensees security of their rights. Each of the North American oil & gas producers will need to secure adequate Profitable Production Rights Licenses in order that their organization can access our Cloud Administration & Accounting for Oil & Gas software and service to obtain the most profitable means of oil & gas operations. People, Ideas & Objects believe that once constructed there will be no other competitive options in which producers can organize themselves profitably.

Flexible Profitable Production Rights License

Oil & gas production can be variable at times. Fields can and are susceptible to decline with shale being particularly variable. There is also the market demand as we’ve seen with an overall decline of 25% worldwide consumption during COVID. Although it is doubtful to happen again it forms a baseline. Add to this the variability that the Preliminary Specification is introducing with the decentralized production models price maker strategy. And production volume variability may become more significant and difficult to predict. How would this be manageable with the Profitable Production Rights License unable to earn revenues for at least a month or more, yet be obligated to cover the associated fixed overhead costs attributable to their license(s).

Therefore we are introducing two categories of Profitable Production Rights. What has been described to this point as one category. The second category will be assigned on the basis of 33.3% of the total amount of Profitable Production Rights License and be designated as Flexible Profitable Production Rights License. These will absorb the variability in production volumes up to the 33.3% level of all production on a priority basis. Whereas each producing property will automatically be assigned 33.3% of the Flexible Profitable Production Rights License to offset any production decline. Therefore the Flexible Profitable Production Rights License indemnifies the Profitable Production Rights License owners in case of variable production volumes up to the level of 33.3% of a Joint Operating Committee total production volume. 

A Profitable Production Rights Licensee would therefore maintain their revenue streams in cases of production variability up to the extreme volumetric declines that we’ve seen in this past decade. As production is being shut-in due to the lack of profitability, this is anticipated to be a small percentage of the total output of North America. Therefore if the shut-in production is attributable to the lack of profitability and meets the following conditions. 

Where the property is being actively reworked to be put back into production. The defined purpose of the Preliminary Specification. 

Then the Flexible Profitable Production Rights License will assume those volumes as part of their overall allocation and absorb the revenue loss on any shut-in production of those properties on behalf of the Profitable Production Rights Licensee assigned to the property. Abandonment or suspension of the properties production would release all of the Profitable Production Right Licensees to seek new production elsewhere. Until such time as the production deliverability in North America dropped 33.3% below the base production volume established for the continent. Then there would be no effect on the Profitable Production Rights Licensees, only on the Flexible Profitable Production Rights License in terms of revenue loss. 

The Flexible Profitable Production Rights License is not valued below the Profitable Production Rights License in terms of its purchase price when distributed. This is a result of the Flexible Profitable Production Rights License being fully acquired by myself. I am accepting 16.65% of the overall licenses, or half of the Flexible Profitable Production Rights License in consideration for 50.0% of the compensation of my 33.3% Intellectual Property royalty portion of the Preliminary Specifications budget. The other half of the Flexible Profitable Production Rights License is in consideration for the same percentage values of the Profitability of People, Ideas & Objects. What I expect as a result of holding all of the Flexible Profitable Production Rights Licenses is to have a strong negotiating position when leasing these to the producer firms that need to secure Flexible Profitable Production Rights Licenses on one third of all their production. In the interests of transparency and accountability,  I am committing to publish the communications and negotiations that I have with producer firms regarding their securing the Flexible Profitable Production Rights they need for their production.

What do the Flexible and Profitable Production Right License earn?

Flexible and Profitable Production Rights Licensees are the exclusive customers of People, Ideas & Objects Preliminary Specification and our user communities service provider organizations. There will be no ability to access the Cloud Administration & Accounting for Oil & Gas software and services they’re building without the associated Profitable Production Right License in place to do so. What each individual Profitable Production Right enables is the means in which to process one barrel of oil equivalent / day in a profitable manner through this facility. Please note there will be an unknown period of time during development in which no revenues will be earned and no expenses incurred by either class of the Profitable Production Rights Licensees. This would not preclude the licensees from engaging the producers to ensure they have their production rights in place prior to commercial release. Profitable Production Rights Licensees revenues are earned by charging producers access fees to profitably process their boe on a monthly basis through the Cloud Administration & Accounting for Oil & Gas software and services. How those are structured will be an interesting development as we proceed.

Producers methods today have failed, have destroyed what value had existed in the industry prior to their administration and the subsequent investments made. They have not generated any value from the massive call on investors and are incapable of dealing with today’s issues and opportunities. Oil & gas producers have proven to be incapable of managing the business and are in fact failed organizations with capital structures that are unsupported. Officers and directors today are managing a capital intensive industry with reasonable cash flows that are only capable of providing for their executive compensation. There has been and will be no change from this during their tenure. It is within that statement that the value of the Profitable Production Rights can be discerned. What is the difference between a truly profitable oil & gas operation and the one that has been carried out in the industry since the initial 1986 oil price collapse? Where the North American oil & gas industry would be capable of performing against all other industries for capital. That is the value that the Profitable Production Right Licensees offer the producer firm. It is within this People, Ideas & Objects value proposition that the Profitable Production Right Licensees are leveraging their revenue stream. The exclusive right to grant the dynamic, innovative, accountable and profitable oil & gas producer the ability to organize, operate and provide for the most profitable means of oil & gas production. The methods and means of operations are described in the Preliminary Specification and cover the full scope of exploration, production, administration and accounting for the start-up to integrated producers.

Although the producers have not listened to their investors and bankers demands to accommodate their needs. It will be interesting to see the producers' argument why they’re not participating in the Profitable Production Rights Licenses for the production they have. Why are they so committed to unprofitable production or is clean energy really that attractive? 

The Issue, Part III

 The Toll This Has Taken

The issue is best expressed as chronic, industry wide, unprofitable production or overproduction. There is an understanding by the officers and directors that the commodities of oil & gas are driven by markets that will accept anything that is produced. And therefore they always produce at 100% of their capacity. Assuming that the markets will absorb unlimited levels of production without having an affect on the commodities price and therefore they believe that these commodities fall under the classification of price takers. 

Whereas the primary characteristic of oil & gas commodities needs to be understood by producers that they are price makers. Where increases in production only occur when profitable from a reasonable, financial, and accountable basis using the actual, factual costs incurred. We've learned just in the last few years the sensitivity of oil & gas pricing to overproduction and underproduction is significant. A known characteristic of a price maker. To deny that oil & gas are price makers today is to deny the facts. 

The second aspect of this issue is the financial understanding that drives the industry. There are many false assumptions that drive decisions and the culture that has grown over the past number of decades understands no difference. 

SEC profitability

Is one method of portraying the financial statements. And only one way. It is a corporate perspective that has no basis in evaluation of performance. It distorts accounting from measuring performance to evaluating asset value. 

Recycle costs

Are not factual in terms of performance. They reflect the “what if” scenario involved in the costs and economic benefits in drilling wells etc. to release further reserves in today’s field cost environment. When the potential of tomorrow's drilling costs are stated as being profitable at $25. That does not alter the performance of the other 97.5% of the producers' properties that incurred their actual historical costs recorded by accounting. Despite what the producers press release may impute when the $25 is stated. 

Accounting is focused on the corporation

The corporation under the SEC method is reputed to be profitable. As we’ve seen all producers qualify as profitable under their method. The performance of the property is unknown and unknowable throughout the North American oil & gas producers. Their ERP systems do not capture the data necessary to measure the properties performance on any reasonable or accurate basis. As a result there is no understanding where the corporation may be losing money. Unprofitable properties dilute the profitable properties and therefore diminish the corporation's earnings. An unreasonable approach for any company to pursue. 

Overhead costs and interest are capitalized

From an overall asset perspective that is what has been allowed and for those purposes it may be acceptable. However producers need to understand the actual performance of each of their properties to make the appropriate decisions. On the basis of actual factual costs incurred, not on the basis of overhead allowances and never on their mythical recycle costs. 

Over the past decades I have focused on capitalized interest costs and overhead. The follow-on consequences in terms of cash drainage from the firm. An interesting result of these arguments occurred about five years ago. Interest costs then began to be detailed in the financial statements and scaled back in terms of the amount capitalized. I’ve also alleged that creative, excessive, executive compensation has been included in the overhead that’s subsequently capitalized. Please note however, that we have seen no change in the treatment of overhead during this period.

Cash is only consumed

The culture created from the SEC’s permitted methods of accounting have permeated all thinking within the producer firm. That accounting can and should be used for many other purposes is a foreign subject. The dedication to this principle is such that they capitalize every possible cost for the long term and the short term despite these costs draining the cash of the producers each and every month. Never including a reasonable accounting of the cost in the product as they pass them to the consumer. Investors pay for the capital costs in a capital intensive industry, consumers pay the royalties and operations.

Revenues pale in comparison to the capital asset

Over four decades of this culture's development. With no critical evaluation done outside of People, Ideas & Objects throughout this period of time. Spending became what’s known as “capital discipline.” The business performance was obscured through growth fueled by massive investor funding, fueled by investor dilution. The SEC’s method of accounting ensures any individual who has the capacity to spend money can operate a profitable oil & gas producer. Therefore the overall industry performance has degraded to the point where productivity of the asset base today is barely a shadow of what a performant industry would provide. 

Consumers are therefore subsidized by investors.

The amount of this subsidy is the majority of the capital costs of a capital intensive industry that are and have never been passed on to the consumer. Investors are left with the cost, because that is the “risk” they undertook, the officers and directors allege. Such is the thinking in oil & gas. The asset value listed in property, plant and equipment is best considered as the unrecognized capital costs of past production. People, Ideas & Objects believe it’s necessary to adjust, on a pro-forma basis, these balances by way of a reduction totalling 75% of the balance to depletion. Upon doing so, property, plant and equipment, the profitability and performance of the corporation will be accurately reflected. 

Consumers are not paying for the capital costs of the energy they consume.

The actual costs of oil & gas exploration and production being subsidized by the investors for over four decades has caused consumers to heavily consume these products with little respect for their value. This is contrary to the unique nature of the products irreplaceable and irretrievable characteristics. The limited supply needs to be better managed both on the producer side by only producing profitable production everywhere and always. Passing a healthy and prosperous oil & gas industry and sub-industries on to future generations. And consumers can make the appropriate decisions on how they choose to consume the commodities based on their appropriate prices. 

What this August 2019 graph reflects clearly is the culture and understanding of the oil & gas producer officers and directors. The level of confusion and misunderstanding of basic business concepts in their decision making is evident in this graphs presentation.

It was sourced from Lev Borodovsky who publishes on Twitter @SoberLook. Looking at this from the perception of the producer officers and directors. The total costs of each barrel of oil produced in the various shale formations is in the range of $48 to $54. The operating and royalty cost of each barrel varies between $28 and $37. I would point out the $18 to $23 in capital costs are based on an allocation of all of the capital costs across the entire reserves of the property. We’ve argued that this allocation is unreasonable in a capital market where the demands for the performance of capital are far greater than what can be achieved when a producer is cycling their cash through their investments in a manner that retrieves their cash over several decades or more. As an alternative, for performance purposes, People, Ideas & Objects recommend in our Preliminary Specification that the producer retire all of their capital costs within the first 30 months of the properties life to provide for the reuse of their previously invested cash. Providing them with the means to meet the demands of their future capital costs, shareholder dividends and bank debt repayments, all at the same and all the time. And to better match the rapid decline rates experienced in shale. Instead of “putting cash in the ground” People, Ideas & Objects, our user community and their service provider organizations will put producers' cash to work.  

This can only be achieved if the producer is selling their commodities at a price that is above their “Breakeven point.” Which we assume in this instance that it considers an appropriate accounting of the costs of exploration, development, royalties, operations and overhead. A more timely recognition of their capital costs in a capital intensive industry that competes for capital in North America. Note that what this graph reflects is that “Well Breakeven” and “Shut-in” prices denote that at any point, and as long as the commodity price covered the royalty, operating, and remaining overhead costs, the property would continue to produce regardless of the impact on capital costs. If a dollar of capital costs was being returned, or one dollar above the shut-in price, that would enable the production of the property to continue. Only at the point in time where the commodity price dropped below the operating costs would the producer allegedly shut-in their production. 

This is a fundamental misinterpretation of the term break even, it is the reason the industry is in the difficulty that it’s in and why the producers have continued to lose money for the past four decades. Break even is not what is being interpreted here. What in fact the producer is assuming is that as long as there is cash flow above the operating costs then they’re making money and will continue to produce. What they’re stating is acceptable is they may not be breaking even, but they’re generating “some” cash flow. Over the course of four decades the shortfall created in systemically accepting this logic. The capital costs of exploration and development have been borne by the investors on behalf of the consumers as the majority of the capital continues to be unrecognized as the product is sold below their “Well Breakeven” price. 

What People, Ideas & Objects provide in our Preliminary Specification, if we could assume the accuracy of this graphs numbers, is the point at which the property would be shut-in is the breakeven point and below. The reason for this being the production discipline gained through knowing that producing any property unprofitably only dilutes the producers corporate profits. 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.

With the inherent value contained within each barrel of oil. With the supply possibly limited to the next half dozen generations. Why would we ever produce any oil or gas that was unprofitable? What would be the purpose of doing so? Would we not be robbing future generations of the resources they’ll need to expand their quality of life? On the one hand the costs of oil and gas exploration and production continue to escalate with each barrel of oil produced. This is due to the increased difficulty and science necessary to extract the resource. Therefore a more accurate accounting is necessary than what has been provided to the industry in the decades past. People, Ideas & Objects, our user community and their service provider organizations are designed to provide each Joint Operating Committee with a more accurate accounting of the costs of exploration and production. When only profitable production is produced it is implied that we're accurately capturing the timing and accuracy of all costs and passing them on to the consumer on a reasonable basis. Profits and innovation will be used to ensure an abundant, affordable and reliable supply is provided for the long term. Conversely, consumers paying the full cost of their energy will ensure that they’ll choose the most efficient and effective use of the resource.

What producers need to be doing is to begin informing consumers of the choices they have to make. Understand that each barrel of oil equivalent has the mechanical leverage of 10,000 to 25,000 man hours of labor. The global oil & gas daily output of 147.25 mm barrels of oil equivalent production is therefore equivalent to the daily output of 27 to 68 times the world's population of 8.0 billion people. If consumers want to rely on alternative means of energy then there will be a wholesale downward swing in industrial capacity compared to what oil and gas provides today. Without oil and gas there is probably 97.5% overpopulation and the quality of life for the 2.5% would be prehistoric.

What is clear is that the officers and directors believe that the associated risk of the business of oil & gas exploration and production needs to be borne by the investors. I see this differently. The risk of exploration and production needs to be passed to the consumer as the ultimate cost of the oil & gas they consume. That is what it cost. The risk adopted by the investors is in putting their money on the wrong horse. By knowing the difference, predominantly through the financial statements reflecting real profitability and superior performance they should be able to wisely determine who are the heroes and who are the zeros. The heroes will invest in profitable operations that recover their costs quickly and effectively. Generating the level of cash necessary to pay appropriate dividends and fund themselves. Zeros will flounder and spend investors money that generates little in terms of value or profitable production. Will soon fade into the distance as so many of the status quo producers should have done decades ago. This doesn’t happen in oil & gas because you can’t tell through the status quo financial statements that have been produced since the late 1970s, whether the producer has been effective in generating value. They’ll state they generated reserves and we see the value that they hold in today’s market when none of the producer's reserves can produce “real” profits. They’re useless. All of the producers for the past four decades have spent lavishly, recorded it as property, plant and equipment, added interest costs and overhead, and therefore whatever revenue is generated is literally profit. 

The Issue, Part II

 Why are these such issues today? The culture of the oil and gas industry is an issue due to the belief that value is generated through drilling to expose more reserves. However, this is not backed by the financial performance of these businesses. And when I say the financial performance I limit performance to just include the generation of cash. The industry became a massive call on investor funds each and every year. There never was, or is, any understanding their “business” should be self supporting. It was necessary for producers to “build the business” and this was represented by “building the balance sheet” and “putting cash in the ground” which are the unanimous callings of the producers. Spending to release more reserves is the only capability and is the sole competitive advantage of the North American oil and gas producer. The problem the producers don’t see is they’re incapable and have never produced any “real” profits from their reserves. The value invested in the industry is sitting in the ground, as invested cash, with those reserves as represented by the bloated balance sheets of property, plant and equipment. 

Reporting a sample of the overhead and only the operating and royalties as costs, which are all the costs that are left after the majority of costs are capitalized, makes producers look spectacularly profitable. The fact is everyone believed those bloated assets, profits and cash flows. Profits were not just over reported as a result of not recognizing much of the costs of oil and gas exploration and production in the current period. Producers only deplete the property, plant and equipment account on the basis of taking all of the capital costs that they’ve ever spent. Allocating these costs to the entire reserves base, and then recognizing the capital costs apportioned to the reserves produced that year. Leaving the majority of their capital costs on the balance sheet for decades at a time. People, Ideas & Objects believe that this is an uncompetitive posture in terms of the industry's ability to compete in North America’s capital markets. They need to be turning capital over repeatedly as opposed to being dependent upon outside markets. When investors and bankers have turned their back on you, they don’t forgive and forget until there are fundamental changes. Action on this basis is the more appropriate posture now and nothing will change their minds. Producers have failed and can’t compete for capital. Time to look at what investors are saying!

It’s interesting to go back and review the financial statements of the producers and find those periods in which they claimed they were highly innovative and claimed substantial cost reductions in their production. These were periods in which their total recorded depletion, year over year, was declining while their production increased. Indicating they were recognizing far less capital cost per barrel produced. Secondly the service industry was subject to steep declines in their capacity utilization and the fact that producers were only willing to pay half of what the service industry representative needed. Reducing the producers costs of their future drilling operations. Not so innovative. The service industry representatives' choice was to take the business or put their equipment into long term storage. Producers who claimed their costs were declining due to being innovative, during periods when the commodity prices declined, costs that were once $60, producers were then profitable at $40 and subsequently at $24. They were able to miraculously and retroactively reduce their costs of exploration and production by reinventing the “historical” aspect of historical accounting. Such is the innovativeness of the oil and gas producers during periods with these conditions. 

What we’ve had over these four decades was a reportedly massively innovative and profitable industry based on the chronic spending of investors' money. Spending being the only competitive advantage present in the industry. The amounts of recorded capital in property, plant and equipment are not assets, as represented in the specious financial statements of the producers, and rubber stamped by the public accountants who should have known better and done something to correct the issue. These costs are what we describe as the “unrecognized capital costs of past production.” And quantify too the amount of the discount provided to the energy consumer since none of these capital costs of exploration and production have been recognized and passed on to them. Financial statements in oil and gas “emulate the value of the firm,” I am told, they’re not what they should be, measures of performance. 

We believe any and all producers should therefore be subject to a pro-forma accounting adjustment to consider the reality of the current situation by moving at least 75% of property, plant and equipment to depletion to better reflect their performance. What we then find is that what’s left of shareholders' equity is eliminated in the industry and the majority of the bank's interests have been expended. In other words negative balance sheets. Oil and gas is a capital intensive industry implying that the majority of its production costs are capital in nature. It should therefore be predominately a capital cost that’s reflected in the consumers price of the product and that has not been the case for several decades.

The SEC defines the outer limit of what a producer's property, plant and equipment account can be, that does not mean each and every producer reaches the limit each and every year. It’s a limit, not a target. The most competitive producer would strive to profitably recognize all of their costs as quickly as they could and hold the smallest balance of property, plant and equipment. This would return the previously invested cash, assuming they charged adequate prices for their products, in order to recapture their prior investments and reflect a competitive financial performance that would differentiate them in the oil and gas, and capital markets. Can anyone today tell one producer's financial statements from another? Which one’s the hero and which one’s the zero? 

When investors are told profits are as healthy as they’re reported in the industry over these past four decades. They rush in with their money in order to capture some of those profits. More investors lead to over investment in the industry which leads to the chronic, systemic overproduction we’ve seen. This can also be described as unprofitable production. This chronic overproduction issue has existed in oil and gas since 1986 when OPEC dropped the price of oil. $10 was the price and all the North American producers had to do was to pull back production 15% in order to rectify the greater than 50% price decline. What the producers did was nothing. Except bring about the beginnings of their second cultural phenomenon. Looking under each and every rock for the responsible scapegoat and crying “oh whoa is me” in the process. In seeing this behavior, it became clear to me the configuration and structure of the producers could not reduce their production. They’re not configured for that. It would only leave large portions of overhead uncovered and profitability would suffer severely, albeit unnecessarily. I therefore set out in 1991 to build the software necessary to enable the industry to deal with chronic overproduction which was occurring as a result of the chronic over investment created by the specious accounting and financial statements of the producers. 

The Preliminary Specification provides the oil and gas producers with the most profitable means of oil and gas operations, everywhere and always. We believe this chronic overproduction situation has created 30 poorly performing years out of the last 36. With shale reservoirs it will soon be terminal to the financial, operational and political frameworks of the industry. During the most recent decades when producers were barring the door so no more investors could get in. I would ask them about their financial statements and their lack of any recognition of their costs of capital. The answer was always the same, “those are sunk costs and no one considers those.” I would then ask them the following question, so they’d gladly take more investors' money and then spit in their face by telling them last year's investment is now considered a sunk cost? I would comment as they would walk away in dismay at my questions, you do reap what you sow.

Without real profitability. Without anyone searching for value outside of the reserves being discovered. Without any critical evaluation through financial performance reporting being undertaken anywhere. The value built in the oil and gas industry in prior decades, and the investment dollars put in, have been frittered and wasted by these officers and directors. The industry is now worthless as it demands substantial capital investment in order just to operate. The cash crisis created as a result of the 2015 investor and banker withdrawal is slowly progressing towards its final demise. If we consider another consequence of People, Ideas & Objects pro forma adjustment of 75% of the property, plant and equipment account moved to depletion. The debt held by these producers is leveraged far in excess of any reasonable criteria. Producers are highly leveraged in an era when interest rates are normalizing. 

Subsequent to their investors withdrawal, the cash consumption continued, lines of credit were drawn until banks ceased their lending, more cash was consumed, properties were sold for half of their recorded value, working capital is now diminishing at a remarkable rate with nowhere left to turn. The only source of new cash was more drilling financed over 18 months by not paying the service industry bills. Decimating the capital structures of the entire service industry, destroying the trust and faith that their investors had in the oil & gas industry when they saw their investments cut up for scrap metal. Governments then began specious, woke social science experiments on a mass scale by shutting down the economy. Slashing oil prices to negative $40. Faced with capacity and capabilities in field equipment, the service industry operates at 40% of its prior capacity, unable but more importantly, unwilling and unmotivated to expand. Oil & gas commodity prices are relatively healthy but still not profitable from a performance point of view as they do not recognize the adequate capital costs of exploration and production. 

Faced with these consequences of their own making, producer officers and directors invoked their tried and tested strategy of “muddle through.” Nothing was done. The most innovative of companies, as they told us they were, sat on the couch. At some point they realized that the shale decline curve would come into play as a result of their inability to maintain their production volumes from the decline in field capacity and capabilities. This is reflected in shale natural gas plateauing and now showing indications of trending down. Shale decline curves are steep and dramatic. Therefore producer officers and directors saw the writing on the wall and declared shale would never be commercial and moved into clean energy.  

If the production profile in North American natural gas is in decline. This downward trajectory will create another issue for the oil & gas producer. Downward momentum adds another force that will be as strong as what today’s damage and destruction needs to be fought with. A doubling of our efforts will be necessary to sustain just what we have. 

This has taken three years to become a serious problem for the producers and throughout the industry without any discussion anywhere outside of People, Ideas & Objects. We see no discussion of the underlying reasons for cash being consumed by these organizations. When they never retire their capital costs. When most of the overhead and interest are capitalized. There is no short term float where the cash spent on overhead and interest are expended and then recovered in the subsequent 60 - 90 days by costing them into the price of the commodities. Therefore creating a short term cash shortfall in addition to the long term shortfalls noted above. 

These overhead and finance costs that are capitalized, in addition to the drilling, completion and equipping costs are draining the producers cash resources each and every month because they’re not adequately included in the producers commodity prices charged to consumers. Which is a reflection of how poorly these businesses are operated. Simple cash management would have shown this to be unsustainable at least 20 years ago. But they were so profitable, as we were told. People, Ideas & Objects have repeated this point for the better part of a decade and they’ve continued to do nothing. In the normal course of their operations they required outside funding to reload the spending machine annually. The cash drainage continues and no reloading has or will be undertaken. Leaving them with their limited and heavily diminished toolset of creativity and imagination. 

The Issue, Part I

 Eighteen months ago officers and directors of the producer firms were stating their unilateral shift in the direction towards clean energy. Harmonizing on the talking point that “shale will never be commercial.” Europe has taught us that listening to teenagers' apocalyptic pronouncements about the seasonal changes in the weather, and divesting of oil & gas, is dangerous. With regards to the officers and directors of the producer firms you have to ask yourself a few questions about their actions in the directions they take. What should we think now of this seasonal change in the officers and directors vision of the future? What are these people motivated by? What do they think about when they get up in the morning? Is this what passes for innovation? What direction will the wind be blowing in a few months? What characteristic other than revenue does shale provide that has attracted these officers and directors. I don’t think any of these questions have answers that involve oil & gas or that imply the officers and directors are thinking logically now.

Producer officers and directors seem fundamentally incapable of grasping basic business concepts. Cultural inertia causes them to continue to assume that whatever they produce in terms of cash be used for either dividends, capital expenditures or reducing bank debt. It is inconceivable to them that they achieve “real” profitable operations and the generation of cash to satisfy all three of these, all of the time. They have at their disposal all the authority, responsibility, resources and albeit diminished capacity and capabilities to conduct themselves in a manner that would provide them with all of the resources they could ever imagine. If only all those other people would stop picking on them.

A Polish broadcast during WWII.

“All is lost that is not saved by active effort”

Winston S. Churchill

Triumph and Tragedy, 1953

Introduction

The issue that I am finding in early 2023 is the cultural regression that appears to be occurring in oil & gas producers. Any progress that may have been achieved in terms of the investors desire to change the methods of management of the officers and directors. Quickly regresses back to the cultural norms when a hint of normalcy appears on the horizon for them. The need to change becomes less of an issue when they believe “muddle through” has been proven effective once again.

The need to shift away from this mythical, magical world that oil & gas operates in today is a necessity. The inability to look out the window to see the scope and scale of the damage and destruction authored through this disastrous management is perplexing. 

They have no field level capacities or capability to maintain the level of production they’ve obtained for the mid to long term. Drilling rig investors had to watch their new drilling rigs cut up for scrap metal to feed the staff after they were financially destroyed by the producer officers and directors. Where is their motivation to do that again? 

Producers have cannibalized their own internal processes through the attrition diet of an ongoing, almost eight year withdrawal by their investors. Nonetheless the cupboards are bare with no work in progress and no internal capacity or capability to deal with what their production profile will demand of them in order for it to be sustained. 

Their capital structures are unsupported. What could be worse than the abandonment by your investors. Absolutely nothing, and should have prompted immediate remedial management actions to rectify what the investors' concerns are. That was in 2015. 

Shale has four distinct characteristics that demand a different approach than what the current producer's culture is capable of. It is costly, prolific in terms of the reserves discovered, initial production volumes are dramatic and their steep decline curve demands costly reworks in as little as 18 months to maintain production volumes. 

In this oil & gas culture where everything is capitalized and each petroleum reserve is allocated an equal share of the capital cost no matter when it will be produced, where many of those costs will not be recognized until decades later and after many costly reworks. What will be the dynamic at play in their current method of accounting and potential production declines? It’s quite easy to see that it will be “building bigger, even more beautiful balance sheets,” “putting more cash in the ground” and specious profitability for the long term. “Muddle through.”

Over Investment Leads to Overproduction

These material consequences of overproduction started in the natural gas marketplace in 2009. Shale gas reserves were being exposed to the marketplace and the decline in natural gas prices were precipitous. Price structures were eventually damaged in a comprehensive fashion where natural gas has since traded anywhere between 9.74 to 1 and 28.04 to 1 of oil prices as opposed to its traditional heating value equivalent of 6 to 1. Closing out 2022 at 18.2 to 1. How this was allowed to happen, what efforts have been taken to rectify the situation, and why has nothing been done for 14 years? The answer was during the early days, the oil side of the business was healthy enough to carry both sides of the business. Which was true, oil prices were high enough until December 2014. During 2010, the application of shale technologies moved from natural gas to oil. Causing the same overproduction to soon begin on that side of the business. Creating difficulties on both sides of the producer firm, an issue that had never happened before.

The technical economic classifications of price makers and price takers are as follows. From Investopedia.

What Is a Price Maker​?

A price maker is an entity, such as a firm, with a monopoly that gives it the power to influence the price it charges as the goods it produces does not have perfect substitutes. A price maker within monopolistic competition produces goods that are differentiated in some way from its competitors' products. The price maker is also 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.

What substitutes are there for oil and natural gas? Can hydro power lubricate your engine or power Elon Musk's rocket to Mars? Will nuclear power provide the chemicals that oil and gas can? What size jerry-can can you use to carry electricity from wind or solar? Clearly there are no substitutes to oil and natural gas. And although in the hands of the bureaucrats oil and gas has not been a profit maximizer, that does not mean that it can’t be, or shouldn’t be. 

The Preliminary Specifications decentralized production models price maker strategy enables producers to produce only profitable production, everywhere and always, by establishing profitability as the only fair and reasonable means of production allocation. Another characteristic of price makers is that small changes in production volumes lead to large changes in price. We’ve seen this with the actions of OPEC+ and the Alberta government’s implementation of mandatory production cuts. If oil and gas commodities aren’t price makers then they would be price takers as the producers assume. So what are the characteristics of a price taker? Again from Investopedia.

What Is a Price-Taker?

A price-taker is an individual or company that must accept prevailing prices in a market, lacking the market share to influence market price on its own. All economic participants are considered to be price-takers in a market of perfect competition or one in which all companies sell an identical product, there are no barriers to entry or exit, every company has a relatively small market share, and all buyers have full information of the market. This holds true for producers and consumers of goods and services and for buyers and sellers in debt and equity markets.

The comparison to the bottled water market is appropriate here. New producers would be offered the same price as established providers despite the supply, demand and inventory in the market. And the ability to charge a premium during shortages would not be possible as consumers would switch to drink tap water, juice, soft drinks etc. 

Investors are concerned that shale reservoirs have created a shift in the dynamics of the oil and gas producers. Asking if shale will ever become commercial under the current business model used by these producers? Noting “shale reserves are a rapidly depleting asset.” Which accurately captures the entire scope of the problem. They can now see the assets and profitability of the producers have been overreported. The cash that fueled the industry was never internally generated. And without investors supporting the producers with annual cash infusions, the industry is not viable. Even though their working capital balances are at critically low and negative levels producers refuse to listen to anything from outside their organizations.

● Markets provide only one thing, information in the form of price. If you can produce a profit at that price then produce. Producers have overproduced into the commodity markets for thirty out of the past thirty six years (2022), despite prices indicating otherwise.

● Refusal to listen to their investors is consistent with the treatment People, Ideas & Objects have experienced over the past number of years since we introduced the Preliminary Specification​ as our solution to the industry's difficulties. The one exception is their feigned belief in shifting to clean energy investments. A world where accountability will be measured on how effective they’re saving the planet. They appeared to listen to their investors and went into action the following morning.

There is a litany of excuses that were used to assuage investors' concerns. Excuses such as “waiting for a cold winter,” “markets to rebalance,” “capital discipline,” “reducing costs through innovations,” “we’re profitable,” “Artificial Intelligence and the cloud,” “capital discipline” again, to its “OPEC’s or the investors fault,” “have to ensure alternatives don’t become viable,” “natural gas is a by-product,” “it’s the pipeline companies fault,” the “governments fault” these last two somewhat exclusively in Canada. Isn't it ironic that these same officers and directors were claiming to ensure that oil & gas prices didn’t rise too high to allow alternatives to get a foothold. Now they are the ones, in unauthorized fashion, to be responsible for destroying the oil & gas industry and taking its revenues towards “clean energy.” Premier quality individuals! We also find that “market rebalancing” is a particularly vile excuse as it has no basis in fact, and is only the willful destruction of the industries production profile to meet demand. 

It is People, Ideas & Objects belief that through a fundamental accounting change that occurred in the late 1970s. When the SEC regulated producers to use Full Cost accounting and its associated ceiling test. A methodology determining what the capital assets recorded in property, plant and equipment should not exceed. This enabled producers to compare the value of their balance sheets property, plant and equipment account to equal, with some adjustments, the present value of their reserves as specified in the independent reserves report times the current commodity prices as the upper limit. If their balance sheet assets value exceeded their reserves “value” then they would be subject to the ceiling test write down to correct any asset overvaluation. 

The perspective in oil & gas of the ceiling test was that it became the target to be achieved by each and every producer each year, not the limit. As represented in the “build balance sheets” and “put cash in the ground” calling of the officers and directors. To suggest as People, Ideas & Objects do that the most competitive producer would seek to reduce property, plant and equipment account (competitively reducing their overall cost of production) as quickly as possible became heresy and was refuted with their typical obstinance and attacks upon us. 

What was quickly discovered in the high interest rate environment of the 1980s was that interest was a key attribute of the assets value and therefore interest expenses were and are capitalized. Someone then asked about overhead with the resulting policies in which today we see approximately 85% of all overhead, including the excessive, creative, executive compensation, in the industry capitalized to property, plant and equipment. Slowly the culture of the industry became a spending frenzy fuelled by what came to be each producer's annual share offering. Fueled by specious profits that included revenues less royalties, operations and a sliver of the capital costs associated with the years reserves production over the total reserves. When this formula is applied to the high cost, prolific and steep decline curve of shale; the overproduction and specious reporting became evident to all. 

This culture has grown over these past four decades to know no difference in terms of what and how the industry generates or destroys value. The belief that drilling wells releases oil and gas reserves which are tremendously valuable. Until People, Ideas & Objects began arguing that “real” financial profitability was necessary, the industry did not care whatsoever about profits, it was about cash flow, not profits, and we were bellitted for our belief in profits. We believe oil and gas reserves are of little to no value if they can’t be produced profitably and profitably considering an appropriate financial accounting of all of the exploration and production costs, including capital, in a capital intensive industry. Where the costs of the product passed to the consumer in a capital intensive industry will be predominantly capital in nature and competitive in the North American capital markets. 

As of the end of 2022 we estimate that the amount of capital costs recorded on the balance sheets of North American producers will be approximately $1.5 trillion. Largely comprised of the high cost shale drilling that has dominated the past decade. U.S. shale based natural gas volumes produced from the period January 1, 2000 to November 30, 2022 total 262 TCF. The proven natural gas reserves estimate as of January 1, 2022 is 625.4 TCF. Representing a remaining 23.43 years of natural gas production at the average production rate of the past three years. Are we half way through the period of time in which shale gas will be with us? That is highly doubtful and only representative of what is known today. The question I want to ask is what will we have left to represent those shale gas reserves at the end of the next 23.43 years. It would seem that the cumulative shale gas production of 262 TCF didn’t generate anything of value outside the creative, excessive, executive compensation of the officers and directors of the producer firms. Who else has prospered?

In terms of oil reserves we also know that no proven reserves exist at negative commodity prices. As with natural gas, shale oil has been prosperous for officers and directors and they have “muddled through” handsomely. As with People, Ideas & Objects focus on value, shale will take significant efforts to make something of the remaining reserves and to rebuild a viable industry. Something that is well beyond the efforts and imagination of the current administration as evidenced by their inability to act, recognize the issue, take responsibility, lack of focus, business understanding and tendency to walk off the stage to other industries. We’ve also learned over the past decades that we should listen better to what these people are telling us. When they say they’re “building balance sheets” and “putting cash in the ground” we should accept that and not expect otherwise. They were telling us exactly what it was they were doing. Just as today they’ve stated that “shale will never be commercial.” Therefore why try when they can make clean energy all that it can be! Has there ever been a better time for change?