OCI Preamble, Part V

 The Service Industry as a Partner

People, Ideas & Objects et al’s next component of our competitive advantage of providing the oil & gas producer with the most profitable means of oil & gas operations, everywhere and always through the lower costs associated with field work done for exploration or development. This also includes the field operations on producing properties covered by a workover or AFE.

There have been many past complaints from oil & gas producers about the high costs of field operations. I have written about the accusations made by producers toward the service industry and how the situation has developed and what needs to happen in order to correct these. Everyone would agree that a more productive environment needs to be developed between the service industry and the producers. And I have put the onus on the producers to begin the process of building the capabilities for a more dynamic and innovative service industry. This was and is the position of People, Ideas & Objects at the time of the original publication of the Preliminary Specification in August 2012. Since that time we’ve seen the inverse situation develop where I suggest producer officers and directors actively sought to destroy the service industry, an industry which they’re mutually dependent upon. If it was done for any other reason I can’t imagine what that would be, as the scope and scale of this damage has been comprehensive and complete. 

There now exists an operational field capacity that is below 40% of its prior levels and nothing is being done to remedy this. The faith, trust and goodwill the service industry had with producers has evaporated and they’ll be the last to volunteer their services to oil & gas producers. Much of this issue can be traced back to the producer officers and directors attitude toward oil & gas being a primary industry. As much damage as has been done to the greater oil & gas economy, the primary industry of oil & gas’ revenues continue to some extent and that keeps the officers and directors compensated. Any decline in commodity prices, which are subject to price maker economic principles, are therefore within the domain of management of the producers to deal with. When extensive declines in commodity prices do occur, the implications of these are passed to the service industry. This has led to the consistent behavior where the service industry has been the fall guy for the consequences of the producers (in)actions. Such as the following. 

• The damage begins by scaling back field activity levels to as much as 25% of what they were. 
• Subsequently seeing the nature of service industries survival instinct they were easily exploited by producers by demanding 50% discounts. Field operators subsequently realized as little as 12.5% of prior revenues.
• When capital sources were unavailable to producers they then used the service industry to fund their field activities and paid them on an 18 month accounts payable basis. Notice of the change in payment policies occurred after the work was completed.
• While financially desperate, due to the long term consequences of these producers' activities, the service industry sold equipment such as horsepower and cut up their equipment for scrap metal in order to survive financially. Leading to the heavily damaged service industries capacity. 
• Field staff have been cast to the wind for years. Frustrated by the boom / bust mentality of the producers and have sought other more stable employment. 
• Limited capacity from limited service industry providers is not an innovative, dynamic or healthy benefit for producer firms. A serious detriment to their ability to function.

In either era a recognition that the service industry provides producers with the geographical and technical diversity necessary to operate anywhere in North America. This fact needs to be realized by producers. As of 2023 destruction of the capacities and capabilities are comprehensive and complete. Additionally, the capital structures of the service industry are unsupported as a result of the treatment they’ve received and therefore producers will need to purposely rebuild the service industry on the basis of their philanthropic contributions. They broke the industry, they’ll need to rebuild it as no one else will volunteer themselves for this style of expected sacrifice and suicidal capital investment. The belief that if producers had something invested in the service industry then they’d have some respect for it and may think twice about repeating these past, destructive actions. This process will begin by developing the Preliminary Specification and implementing the changes within it to start the overall industrial rebuilding which is a necessity. 

There are a variety of interfaces within the Resource Marketplace and Research & Capabilities modules that provide windows to the service industry. These collaborative interfaces are designed to deal with the one issue that is systemic throughout oil & gas. That issue is the manner in which the producers deal with the ideas of others who have developed them. They ignore them. And they use them without respect to who the rightful owners are. This is counter to the producers own best interests. After decades of this producer activity, what people understand is that the time and effort necessary to develop a new idea is not worth it because the oil & gas industry will only seek to share it with the innovators competitors. Therefore they’re no longer interested in sacrificing their capital but also don’t undertake the time and effort necessary to develop any new ideas. No new ideas are coming into the service industry at a critical time when the science in oil & gas is becoming paramount. 

Realization that the innovation in oil & gas is generated through the service industry. Horizontal drilling with the coiled tubing providers and fracing for shale wells with initially Packers Plus and these vendors suffered through long and difficult periods from the lack of support and respect from producers before they were finally accepted. As much as officers and directors claim that they’re innovative we need to ask them a question. Would an innovative industry earn only 6 good years out of the past 37? Or is “muddle through” as they’ve consistently claimed their true strategy?

Adding to this problem is the producers will not hire anyone for field operations that are not of a certain size and scope deemed “capable” of handling the job. So all of the money is going to the larger firms in the service industry, no new competition is being developed and no new ideas to support that new competition. Is it any wonder that the producers complain about the costs associated with field operations? Or in 2023 where the producers “deer in the headlights” look speaks volumes. The governing rule of the service industry is they broke it, they can fix it. If new investment does come back into the service industry it won’t be in the next decade. The capital structures of these firms have been damaged far worse than what the oil & gas producers have experienced. It will be incumbent upon producers to rebuild this industry, of which they are wholly dependent upon, brick by brick and stick by stick. With their own money on the basis they’re rebuilding the capabilities and capacities they so foolishly and carelessly destroyed. 

ERP system providers were subjected to the same treatment the service industry has been in for the past decades. However, we were a few decades ahead in terms of the abuse. We can pin the reason for this treatment on ERP softwares consequential increase in higher levels of financial accountability of said officers and directors actions. When ERP software defines and supports organizations, today’s oil & gas officers and directors unaccountable methods are defined and supported in the ERP software they use. Without any activity whatsoever in this ERP market since the exit of Oracle in 2000 and IBM in 2005, the coincidental financial demise of the industry and associated personal compensation benefits to said officers and directors, I do not believe are coincidental.

It is noted in early 2023 there are a number of producers that are “active” in the ERP area in terms of augmenting their systems. The ability for producers to change has been adequately defined and demonstrated these past decades while People, Ideas & Objects have been developing and promoting the Preliminary Specification. The ability for producer firms to identify there are issues, even in light of the devastating destruction is not possible. Their plans and objectives are more of the same with no understanding of why a producer needs to earn profits. What they need to do and how they do it in order to earn profits are foreign concepts as a result of the overriding culture that will dictate any and all future developments of their ERP systems. Plans of what these “new” systems will look like would be interesting to review, if they existed. Don’t even ask about a value proposition. And with each producer ultimately doing ERP systems for the “thing to be doing” the costs overall across the industry will be unnecessary.  After many decades of these producers' antics, they expect one more chance to get it right without accepting any of the responsibility for whatever it is we think they’ve done.  

In order for People, Ideas & Objects to claim that we provide the most profitable means of oil & gas operations. We need to show that the costs associated with field operations would be lower in an environment where the Preliminary Specification would exist. Having the oil & gas producers respecting the ideas of others in the service industries will be all that is required to make the changes from the current status to a dynamic and innovative service industry. Apart from funding the rebuilding costs which is a separate issue. There are a variety of interfaces and modules that are dedicated to the initiating, sponsoring and supporting of ideas throughout the Preliminary Specification. These are what are necessary for both an innovative oil & gas and service industry. When drilling a well in a shale formation can cost ten to fifteen million dollars the opportunities for innovation are strong. Today no one is motivated to do so because the producers will not respect the owner of the idea. So everyone just picks up their paycheck and carries on. It's a matter that the oil & gas industry reaps what it has sown. Professor Giovanni Dosi notes that investments in innovation are for the purpose of profits. That reasoning applies in this instance in that the innovation will reduce the time, effort and costs of field operations by finding a better way in a competitive environment. Dosi notes in “Sources, Procedures and Microeconomic Effects of Innovation.” 

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

Producers need to create this profitable environment for the service industry. Producers are the primary industry that receive 100% of the proceeds from oil & gas. They need to understand that a share of those proceeds are earned by those in the secondary industries such as the service industry who they are wholly dependent upon. Treating the service industry like leeches and cutting their funding during the bad times doesn’t instill the partnership relationship that provides producers with 100% of those revenues. Establishing a profitable oil & gas industry everywhere and always would go a long way to help smooth the revenues of the service industry but also the producers themselves. Eliminating the boom / bust mentality that should not exist in a proper 21st century industry. Enabling them to better deal with their staffing and development. Without the service industry sharing in the success of a dynamic, innovative, accountable and profitable oil & gas industry. Neither of these two industries can or will stand alone successfully in the 21st century. 

Innovation for Profits

Another element of our competitive advantage of providing the dynamic, innovative, accountable and profitable oil & gas producer with the most profitable means of oil & gas operations everywhere and always is we focus on innovation as the way in which to enhance the profitable nature of the producer. Innovation for profit, particularly from the scientific basis of the business, is the successful and necessary perspective for the 21st century oil & gas producer. From Professor Giovanni Dosi.

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

People, Ideas & Objects Preliminary Specification has been designed to capture the “what,” “how” and “why” of innovation within the ERP software that we’re developing for use by the innovative producer. Throughout the modules the principles and understanding of innovation were researched and incorporated as one of the seven Organizational Constructs in this ERP software. Our research included the works of many but most particularly Professor Giovanni Dosi and his key paper “The Sources, Procedures, and Microeconomic Effects of Innovation” (1988). There we learned many of the fundamental aspects of what is necessary for the oil & gas producer to focus on innovation. Recall in our Preliminary Research Report (2004) that we learned that innovation can be reduced to a defined and replicable process. If it's not a replicable process that is defined and supported by the organization then we need to find a reason why oil & gas producers are not innovative, and Apple consistently is. Although we define these processes within the Preliminary Specification which defines and supports the producer organization, Joint Operating Committee and service industry, that does not guarantee that all those that use the software will be innovative as a result. There will be leaders and laggards on these criteria. The ability to evaluate which producer firm has succeeded in exploiting the science and engineering involved in oil & gas most effectively, and commercially can not currently be determined in North American oil & gas. Their financial statements are homogenized facsimiles representing only the size of the producer with undifferentiated and obscure non-performance. 

To highlight a few of Professor Dosi’s key points on innovation, in this next quotation he notes the opportunities, the processes of innovative search, and incentives to investments in innovation.

Thus, I shall discuss the sources of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search, and the nature of the incentives driving private agents to commit themselves to innovation.

and

• The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:
• Capabilities and stimuli generated with each firm and within the industry of which they compete.
• Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.
• Additional issues include the conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulation, tax codes, patent and trademark laws and public procurement.)

Review of this list shows the opportunity for an innovative framework and footing in oil & gas that can and needs to be built to define and support the industry. Adoption of People, Ideas & Objects perspective of an industry that demands creative destruction be undertaken, where the rebuilding of the industry on a profitable, innovative footing is what we have in hand. It is within the DNA of the Preliminary Specification how these processes of innovation are identified and supported by our software, our user community and service providers which enhance the innovativeness and profitability of the oil & gas producer. 

To expect the status quo to be culturally capable to make these changes to realize this innovative opportunity has now been proven to be impossible in early 2023. Although producers have claimed to be innovative in the past they’ve also relied on specious arguments such as “building balance sheets” and “putting cash in the ground” as two of their premier “muddle through” strategic developments. We’ve also seen no change in any aspect of the industry since the Preliminary Specifications publication in August 2012. 

There are two high level, or major, distinct processes of innovation included in the Preliminary Specification which build off the overall innovative foundation being created. The foundation contains many others however it will be the source of many more in the future with a defined ERP software development capability, our user community that People, Ideas & Objects are creating. These two major processes work together to take control of the innovative processes within the producer organizations. To separate these processes from operations in order to isolate them, prove them, develop them and determine their successful implementation. Few innovations work on the first attempt. Once the means to implement them is complete then the opportunity to roll them out to the remainder of the relevant parts of the organization for implementation can be undertaken. This reduces the costs of everyone in the organization “innovating” and doing the same unlearned experiments over and over, then again, each year, avoiding any organizational knowledge or learning. People, Ideas & Objects et al’s approach ensures that the science and technology is applied, and if further research is necessary, it is undertaken appropriately. Control of this process is fundamental to a rapidly developing producer based on well developed concepts. Not on press releases of how innovative they may be.

The second major process of innovation involves a more ad-hoc approach that reduces the formality and constraints of the first process. What can clearly be seen as a necessity. From our second prominent research source, Professor Richard Langlois paper “Innovation Process and Industrial Districts."

While it is possible to conceive of a firm that is so hermetic in its use of knowledge that all stages of innovation, including the combination of old and new knowledge, rely exclusively on internal sources, in practice most innovations involving products or processes of even modest complexity entail combining knowledge that derives, directly or indirectly, from several sources. Knowledge generation, therefore, must be accompanied by effective mechanisms for knowledge diffusion and for "indigenizing" knowledge originally developed in other contexts and for other purposes so that it meets a new need. p. 1

It falls within the domain of the industry at large to pursue serendipity, spontaneity and creative destruction throughout oil & gas and the service industry. Working groups managed through our Work Order are part of this process. It is the second process of innovation in the Preliminary Specification where these opportunities arise, where there needs to be a defined Compliance & Governance of the process to ensure the proper authority is invoked in order to instill any promising innovations development through the first controlled process of innovative development towards successful implementation. And further direction is available within the firm to determine the conclusion that those experiments have been documented successfully and are ready for implementation for wider deployment. Or alternatively, if they’ve failed or been abandoned, documented as part of the knowledge base of the firm to ensure that the experiment's scope is not undertaken again, and to ensure that the prior failure is only built upon.

And where will the innovative oil & gas producer focus their innovative energies? It will of course be on their inventory of shut-in properties. It will be there that they have the opportunity to increase their reserves, reduce their costs or increase their deliverability and return the property back to profitable production which is their incentive to innovate for the dynamic, innovative, accountable and profitable oil & gas producer. 

OCI Preamble, Part IV

 Sharing Producers Infrastructure and Costs

Cloud Administration & Accounting for Oil & Gas 

One of the more valuable innovations that’s come out of the Information Technology industry this past decade is the drive to share costs. Cloud computing, the development of Artificial Intelligence and wholesale acceptance of object based software development. Each of these technologies seeks to mitigate their costs for the consumers of these products by sharing the resource infrastructure and associated costs across its entire customer base. This same principle has been applied throughout the Preliminary Specification in order to realize substantial value generation and savings for producers. When combined with specialization and the division of labor, sharing becomes one of the most potent business tools to effect change and develop substantial long term value. 

Professor Paul M. Romer presented the concept that can be best described as “non-rival” costs in his paper “Endogenous Technical Change” in October 1990. Professor Romer went on to win the Nobel Prize for these concepts in 2018. In a Reason Magazine article from December 2001 Professor Romer described his “New Growth Theory” as People, Ideas and Things. Adopting this concept comprehensively in the Preliminary Specification and throughout our organization we named this initiative People, Ideas & Objects as we are object based software developers. 

Today each producer is involved in the development and maintenance of their administrative and accounting infrastructure. None of these costs would ever be considered part of the producer's distinct competitive advantage; the regulatory requirements that need to be administered today are demanding ever larger infrastructures be built to accommodate them. None of these costs are unique to each producer that resides directly above or below the other producers in the same office building, across the street and only vary in minor ways to those in the next state. None of these non-rival costs are therefore shared or shareable in the current state of an oil & gas organization and industry. 

We’ve established that producers claim their overhead costs to be 1 to 2% of their revenues in their financial statements. And that is why they each claim hundreds of millions of dollars of savings as a result of any layoffs. Their arguments are specious and do not reconcile with my personal experience in the industry through my career in oil & gas. Depending on the commodity price I suggest overhead costs range in the industry from 10 to 20% of revenue. Producers that are focused exclusively on non-operated properties are able to reduce their overhead burden to lower percentages, however this is a business strategy that only works for the startup and small producers. 

The Preliminary Specification has established seven Organizational Constructs of which Professor Paul Romer’s non-rival costs are one. We will reorganize the administrative and accounting resources of the industry in a manner that exploits these principles of sharing the resource, infrastructure and Information Technology in the form of our Cloud Administration & Accounting for Oil & Gas software and service. By reorganizing the producer firm to consist of only the C class executives, engineering and geotechnical resources, legal and other staff as required. The administrative and accounting resources are reorganized into the People, Ideas & Objects user community service provider organizations. There they’ll manage one specific process on behalf of the entire industry. This division of labor will allow them to focus on their competitive advantages of quality, automation, innovation, leadership, Internet of Things, integration, issue identification and resolution, creativity, collaboration, research, ideas, design, planning, thinking, negotiating and compromising, financing, observing, reasoning and judgment. Focusing on the human characteristics that we do well and can’t be replaced by computers, which we’ll be using to conduct the storage and processing. 

It is the sharing of these resources through the Cloud Administration & Accounting for Oil & gas software and service that brings about the cost savings that producers and the industry will realize. This is also the key enabler of the price maker strategy mentioned in the decentralized production model section above. Where the producer's overhead costs are turned into variable costs, based on production. In addition, our user community members are the exclusive resource that our software developers are licensed to seek input from. Our developers have no ability to access anything outside of what our user community provides them and therefore producers will know who to see to resolve an issue. Our user community members will also be the ones on the ground operating service providers that are actively involved in servicing and delivering our software to the industry. Where they can apply their competitive advantages and continue to provide the most profitable means of oil & gas operations, everywhere and always. 

Earth Science and Engineering Resources

Our competitive advantages of providing the oil & gas producer with the most profitable means of oil & gas operations everywhere and always, has our focus on the earth science and engineering resources of the producer firm and how these are more efficiently and effectively employed in comparison to what we call the standard corporate business model that’s employed by the officers and directors today. There are many aspects of this component of our competitive advantage, however, they’re all generating their profitability for the producer firms through innovation, specialization and the division of labor and we are highlighting the use and application of Professor Paul Romer’s non-rival costs within the Preliminary Specification.

In the area of innovation, another one of the Preliminary Specifications Organizational Constructs, we look to the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification to highlight the processes that are managed there. Focused on the development, documentation and deployment of capacities and capabilities within the producer firm. It is in these modules that the markets availability, sourcing, research and development of those earth science and engineering capabilities are funneled into the Joint Operating Committees for their ultimate deployment. From an innovation standpoint there is also the Work Order that enables these innovative producers to participate and sponsor working groups to research and study various earth science and engineering based concepts with like minded producers. Designed to eliminate this otherwise bureaucratic process and the inherent difficulty in managing the accounting and administrative logistics for the ad hoc nature of these working groups. The Work Order is an interface that enables the user to allocate their overhead and AFE budgets to these studies in a manner that is consistent with the nature of the opportunities.

The specialization and division of labor of the producer firms earth science and engineering resources takes on the difficult issue of the constraint of these resources. Over the next few decades the demand for these resources will outstrip supply due to retirements and the inability to bring on an adequate increase in the numbers of new recruits. The need therefore to deal with the resource constraints is a problem that the industry must resolve. The Preliminary Specification has used specialization and the division of labor in combination with the sharing and shareable nature of these resources to do so. Enabled by the key Organizational Construct of the Joint Operating Committee that is fully recognized in the Preliminary Specification.

One of oil & gas’ key difficulties is what People, Ideas & Objects et al call the hoarding issue. Each producer is building the capabilities and capacities within their firm to deal with any and all contingencies at any time. This hoarding of earth science and engineering resources, when taken across the industry builds unused and unusable surplus capacity within each producer firm. With each producer firm attempting to provide all of the capabilities and capacities necessary for their producer firm on a just in time basis, these critical resources are therefore unnecessarily constrained. The solution that’s provided within the Preliminary Specification is what we’re calling the Pooling of these technical resources. Each member of the Joint Operating Committee commits their technical resources, based on their unique specialized capability, to the property, for a fee. Any deficiency is made up from outside technical service providers or other producers who can provide the additional earth science and engineering capabilities for a fee and organized through our Work Order system to charge, bill and pay for these costs.

Which brings up the last aspect of the division of labor and that is as it applies to the bread and butter aspects of geology and engineering. Much of this work can be turned over to newly formed technical service providers who are organized on the basis of providing a specialized service to the industry. Organized around a process or skill that is common or generic and could be specialized to a high level if the scope and scale could be brought into the picture. Leaving each producer firm able to focus on a specific high level technical specialization which forms the basis of a second revenue stream for the producer and expands their science and technology available for enhanced innovation.

It is reasonable to assume that industry will turn to specialization and the division of labor to deal with these resource restrictions. What would be the result if producers continued with their hoarding behavior and attempted to resolve their shortfall this way. Prior to Professor Paul Romer’s non-rival cost concept, it is the only tool that has proven to be effective since 1776 with Adam Smith’s publication of the Wealth of Nations. However, without our Pooling concept being a critical element of that solution. The scope and scale of the producers domain of earth science and engineering capabilities, due to the demands being generated from enhanced specialization and division of labor in the marketplace, will most certainly create chronic unprofitability due to the enlarged scope and scale of specializations necessary for producers to cover off the full scope of what their operations capabilities and capacities demand. 

In a few years having each producer conduct all the earth science and engineering necessary for all of their properties in-house will seem like a business model from the dark ages. Decentralized business models are eliminating centralization through efficiencies in every industry. What is being proposed here in the Preliminary Specification is the only reasonable solution to the real issue of the current and looming limited resource base. Future issues it will need to deal with are the demands for expanded productive capacity in order to attain energy independence and the demand for more effort for each successive barrel of oil produced. It is the earth science and engineering capabilities that form a critical part of the innovative oil & gas producers competitive advantage along with their land and asset base. The Preliminary Specification enables the firm's resources to focus on the specialized research and development of “knowledge, skills, experience” and ideas, and the deployment of those in the properties that are held by the firm. This is the appropriate posture for a profitable oil & gas firm, and another component in how People, Ideas & Objects provides the oil & gas producer with the most profitable means of oil & gas operations, everywhere and always.

Oracle Cloud ERP

Recently Oracle has taken on a new focus and direction within their firm. This is not to say they’re abandoning their technologies or the future developments. They are of the size to carry on that work and we look forward to continued innovation from them. What they are doing is setting out a different path or business model for their customers that builds value through the use of those technologies. Partnering with other service providers to deliver products in Oracle Cloud ERP that are of the same direction that People, Ideas & Objects, our user community and their service provider organizations are traveling for oil & gas. What Oracle Cloud ERP provides however is to do so on the generic business process management.

When we use Oracle Cloud ERP for the development of the Preliminary Specification we will be presented with a comprehensive system that is built specifically for the purposes of why we’ve selected them. To have the generic business functionality and process management handled in the optimum manner through their tier 1 ERP product. We then define the attributes of the system that we need to use in order to establish the features, functionality and process management necessary to provide for the unique oil & gas attributes. Presenting all of this in a seamless, highly integrated product where we provide dynamic, innovative, accountable and profitable oil & gas producers with the most profitable means of oil & gas operations. Building with the Preliminary Specifications developments will be the necessary components to provide the oil & gas industry to continue with our permanent ERP software development capacity and capability. Therefore keeping producers up to date with quarterly updates to these ERP systems.

The direction that Oracle is heading is best represented by the example that I use throughout these writings that show their efforts. Partnering with J.P. Morgan Chase, Oracle have developed a feature within Oracle Cloud ERP where use of J.P. Morgan Chase’s credit card by the firm's employees enables staff to select the specific corporate asset / project that they want charged. Oracle will then apply that firm’s policies and procedures to ensure that the charge is valid, pay J.P. Morgan Chase, charge the employee if the charge is not valid or accept the charge to the account selected. 

Much as People, Ideas & Objects propose to build value through the sharing of infrastructure and costs of the oil & gas producer and industry. Oracle is providing this service which eliminates the expense reporting for any and all businesses that use Oracle Cloud ERP. This is an incremental value added to the oil & gas producer over top of the attributes that we’ve noted in terms of the Preliminary Specifications reduction of overhead and technical resources infrastructure and costs. We feel that the attributes that Oracle will be capable of providing through these generic business developments, given time, will be as substantial in terms of cost reductions and time savings as what People, Ideas & Objects will be able to provide. This of course will be done by Oracle by way of the inconsequential cost of nothing to their customers. It’s included in the service charges for Oracle Cloud ERP and the other technologies that we’ll use. 

These are the competitive weapons that Oracle are bringing to the field of battle. Expense reports are frustrating, take time of those who have to prepare them, review, approve them and process them. All of these costs across a large producer will be offset by the incremental cost of computer processing time. Oracle’s costs of the development of these features will be captured through the installed base of Oracle Cloud ERP. An installed base that could potentially be much larger as I don’t see any of the other tier 1 ERP providers to even be able to get their databases to function efficiently. 

Oracle Cloud ERP introduced a quarterly upgrade schedule that creates the dynamic for iterative, innovative development. The Java Programming Language itself turned to a six month release schedule in September 2017. Since that time the level of innovation and new features has been blindingly quick and robust. Java has benefited immensely from the enhanced cadence of this release schedule. Yet at the same time they have been able to hold to their principles of being reverse compatibility, a process in which features are introduced over time and user community dependent input. Oracle Cloud ERP has been operating on this quarterly release schedule which divides their customer base into three. Therefore what is learned in the first month from implementing upgrades in group A can be applied to group B and then the following month on to group C in the third month of the quarter. People, Ideas & Objects have committed to following the same release schedule when the Preliminary Specification is released. 

The larger point of this last comment is the question, has Oracle eliminated the legacy ERP system? Will ERP systems of the future now evolve and cater to the needs of the business over time? Eliminating the need to have them evaluated every decade to determine what is the preferred route and the best interests of the firm? It is questions like these that are settled by Oracle's actions of iterative developments over a quarterly period and feature rich developments that focus on generating business value. Which are fully in line with what People, Ideas & Objects have sought to provide the North American based producers with the establishment of our user community as one of three People, Ideas & Objects competitive advantages and a permanent software development capability. 

OCI Preamble, Part III

 A Culture of Performance

Today’s Oil & Gas Culture

North American oil & gas producers have their balance sheets bloated with capital assets that are more or less never written down. As a result, their income statements realize only small portions of the real costs of capital incurred in the exploration and production process. Leaving investors waiting for a return of their capital from the industry. Although the officers and directors may report profits. They really are just the gross margins of the producer firm. The majority of the actual overhead and capital costs of the property are never moved to the income statement. Their repeatedly stated purpose has been to “build balance sheets” and to “put cash in the ground.” The overhead of the producer is capitalized to the balance sheet and sits there for eternity to pass. The net result of this process is the producers look spectacularly effective in their operations. Their assets continue to grow as long as they spend money from banks and investors. Their reported profits are high no matter how successful they are from an engineering or geotechnical point of view. However in terms of really producing anything of value, the investors have learned absolutely, oil & gas has been a lost cause since the late 1970s. 

Having high asset values on the balance sheet provides no one with any value. People, Ideas & Objects describe these costs as the “unrecognized capital cost of past production.” Which accurately defines the amount of the subsidy consumers have received from oil & gas investors. In a capital intensive industry, the oil & gas producer needs to deploy their capital effectively. When every producer capitalizes every dollar spent each year. How do we assess the effectiveness of their capital deployment? According to the officers and directors we need to look at the firm from the point of view of the capital assets life, or reserve life index, or in most examples ten years. I feel the horse has bolted from the barn and locking the gate after that decade has passed is useless. Investors need to have a more timely gauge in which to assess the capabilities of the management of the producer firm. I would also suggest that the assets at the ten year mark will probably sit on the balance sheet for quite a while longer, with much of those capital costs permanently stranded in abandoned properties. 

Instead of this generic, cultural method, People, Ideas & Objects suggest separating the distinct capital costs incurred to maintain their production profile from those capital costs incurred to expand their deliverability. Total current capital costs in the fiscal year has always contained the costs necessary to both maintain and grow the deliverability of the firm. What we are suggesting is that these costs which are easily identified based on their activity should either be capitalized and subject to depletion, or in the case of maintaining the production profile seen to be incurred as operations. As a result, the future producers' size of their capital assets account in the form of property, plant and equipment will be much smaller and depletion would follow the 30 month timeline to ensure the industry remained competitive on North American capital markets.

Justification for the different accounting treatment by separating the maintenance and expansion of the production profile on this basis exists in the looming debt crisis that is now threatening. Producers' erosion of their capital structures reveals that limited investment capital remains after systemic, chronic and serious losses have occurred. Bank debt is supported predominately by property, plant and equipment account balances as many producers have limited, to negative working capital. Based on their financial statements these producer firms are therefore highly leveraged going into a rising interest rate environment. However, their issue today may be an exaggerated leverage position on the basis of the overcapitalization that we’ve been discussing and the potential that the maintenance capital costs of holding the production profile constant would be better represented in the current period as operations or as we refer to, a pro forma adjustment needs to compensate for up to 75% of property, plant and equipment as the “unrealized capital costs of past production.” Leverage as reported by these producer firms would therefore be vastly understated based on their current financial statements and reflects a far more dire condition in terms of their capital structures. This reconfigured balance sheet being some of the justification for the proposed separation of maintenance and expansion production deliverability of the capital expenditures accounting treatment. 

Measurement of a firm's assets and the timing of their movement to the income statement is a key principle of accounting. Producers have interpreted the SEC’s ceiling test requirement to be the target that they’ll need to reach each and every year. When in fact what the SEC has defined is the absolute outer limit of what is acceptable. Since this was instituted in the late 1970s it has established the culture throughout the industry that is captured in the farcical claim by producers of “building balance sheets” and “putting cash in the ground.” Turning the oil & gas producers accounting from recognizing performance to one in which the objective was to recognize value. Leading the investment community to subsidize the oil & gas consumer by funding the capital expenditure programs of producers.

This will need to change if the industry is going to approach the needs of society in the next 25 years. Undertaking the $20 - $40 trillion in capital investments that is alleged to be necessary with nothing but disgruntled investors will not be successful. Investors now realize producers are well capitalized in terms of their assets on the balance sheet. But they never made any real money. And other than the paper thin balances of property, plant and equipment on the producers balance sheet there has not been any value generated and certainly no performance.

Theoretically the most competitive oil & gas producer would seek to have zero costs recorded in property, plant and equipment. Which would have large implications in terms of the value that is generated in the industry. Currently all of the costs of exploration and production are “stored” on the balance sheets of the producers. These costs have generally never been recognized on a timely basis and since this is a systemic, industry wide, multi-decade issue, this practice has created serious distortions in oil & gas. If producers were moving these costs from the balance sheet to the income statement on a timely basis they would have incurred far larger losses with the majority of the industry reporting negative capital structures. And indicated to the producers the commodity prices realized were inadequate to cover all of the costs of exploration and production. Which industry hasn’t done and have therefore in the past been desperately dependent on investor's to cover their annual cash shortfalls. Investors were actively recruited through the specious overcapitalized and over reported profits of the producers financial statements. 

Initially, without fully recognizing the costs of exploration and production, oil & gas production appears to be highly profitable. Which attracts more investment leading to more capital costs which then increases the productive capacity of the industry which “appears” to also increase its profitability. In reality none of these investment dollars are being returned to the business in the form of cash when these capital costs are not recognized in a timely manner. Therefore the investors and bankers are once again tasked to make up for the annual cash shortfall created when the commodity prices are unable to cover all of the costs of exploration and production in the business. The business is still incurring these costs, however the accounting is reporting that these costs are ballooning assets that hold some mythical value for the producer officers and directors. When in reality they should be recognized as capital costs being passed to the consumer in a capital intensive industry. 

Doing this for four decades results in the hollowing out of all measures of value from the industry. Producers have been reporting profits when in reality, if all of the costs were considered, oil & gas has been a lost cause, supported by investors for decades. Today’s residual infrastructure does not have the capital structure or financial base, or the performance capabilities, due to its chronic overproduction as a result of the chronic overinvestment systemically collapsing commodity prices. An even greater detriment is the culture in the industry is systemic, four decades in the making and knows no difference. Then, add shale!

The Performance Culture of People, Ideas & Objects

Through People, Ideas & Objects our user community and their service providers, producers accounting will change to instill a culture of performance throughout the industry when we implement the Preliminary Specification. This change will be orchestrated through the competitive nature of the producers seeking to provide the most profitable means of oil & gas operations to their shareholders. With the decentralized production model enabling the price maker strategy for all oil & gas properties. Producers will be able to shut-in those properties that are unable to produce a profit in a low commodity price environment. During times of high prices they will be able to bring the previously shut-in production back on to meet consumers demand. Or alternatively they will be able to apply their innovations to increase their deliverability or reduce their costs and return the property back to profitable production. The determination of what the costs of that property will include is the capital costs on the 30 month accelerated depletion schedule in comparison to what the officers and directors have implemented. This will bring the costs per barrel much higher and into the territory of what it actually costs for exploration and production in North America. Requiring higher commodity prices for the producers to meet the criteria of profitably producing any property and therefore fulfilling the actual, as defined “swing producer” role in the market. Providing the cash resources necessary to expand the deliverability or replace production at the current cost of exploration and production. 

Another key implication of this change is that the determination of which producer is performing and those that are not will be evident. Although producers will be reporting profitability irrespective of the percentage of their production profile. If they have 50% of their properties shut-in due to the inability to produce profits, then they’ll be reflecting they’re performance in terms of return on investment and return on capital employed is poor. Today assessing which producers are performing and which are not is next to impossible. 

Oil & gas is a mature industry. The officers and directors continue to consider that it is other people's money that they need in order to fund their operations and “build balance sheets.” This is inconsistent with reality. Oil & gas is a primary industry that should be providing the investment community with a return on the invested capital from the annual profits earned. Instead the officers and directors let the assets sit on the balance sheets for eternity and never let these costs flow to the income statement. This subsidizes the consumers of oil & gas by having the investors pay to park the capital costs on the balance sheets in some misguided business objective. Never allowing the capital costs of a capital intensive industry to pass to the consumer in the commodity price being realized. The commodity prices never adjust to the real costs of exploration and production in the industry where, uniquely in oil & gas, the costs escalate with each incremental barrel of oil equivalent produced. This being the result of the greater difficulty in producing each incremental barrel.

Understanding the significant role and value that oil & gas has in society is not being considered. It is reasonable to ask what right do we have to squander these resources from future generations? We should act responsibly and ensure that we can account for the profitable production of these commodities everywhere and always but also ensure that we pass a viable and prosperous, greater oil & gas economic system on to the next generation. Both of these issues are raised as a result of the officers and directors mismanagement. Who when asked to account for these actions will as they did in the past, lie. Recall those times when producers who were profitable at $70 were suddenly able to be profitable at $55 prices, then at $40. Miraculous I know and a feature previously unknown about historical accounting. Officers and directors have this achievement covered with “recycle costs.” Which are nothing but the cost estimates they receive from what they can beat out of the depressed service industry “if” they should happen to drill or frac a well in the depressed commodity price environment. The discount is printed right there on the drilling firm's “Estimate!”

Under the changes from People, Ideas & Objects methodology the makeup of a producer's balance sheet will change. From having a dominant position in terms of fixed assets, low and zero cash balances with negative working capital positions. To have high values of liquid investments, positive cash and working capital with much smaller amounts of property, plant and equipment. They will be financially much healthier. They will be able to dividend out large portions of their earnings back to the investment community. Pay down debt. Fund their own capital expenditure programs. And maybe best of all they’ll be more dynamic with the financial flexibility to act in the most profitable manner. All as a result of finally realizing the real cost of oil & gas exploration and production!

It will be the recognition of depletion of the capital expenditures in the 2 1/2 to 3 years that will dictate North America's oil & gas prices. Properties that carry the higher overall costs of exploration and production per barrel, due to their large balances of capital, will be depleting these balances to each barrel of oil equivalent produced. If we are realizing all of the properties capital costs in the first 2 ½ to 3 years of production from the property. Under People, Ideas & Objects price maker strategy it will be these properties that have to meet the criteria of being profitable and determined if they are produced or shut-in first in a low commodity price environment. Those properties that have exhausted their capital cost balances will be able to produce large profits no matter what the oil & gas price is in the marketplace. 

This brings about a fundamentally different capital discipline when capital is being deployed that must meet this profitability requirement immediately in order to produce. And a new appreciation as to where the value lies in the firm. Instead of where the asset balance is the largest, it will become which properties are the best performers and how to make that the case in each of the other properties of the producer. However, it will generally be the work done from a capital nature of the past three years that dictates what the actual costs of production are. And it will be that higher threshold that the oil & gas prices will have to reach to bring on the past three years production, or the one incremental barrel. In an industry that has the elasticity of supply and demand characteristics that the oil & gas commodities have, (it is a price maker commodity) it will be the higher prices that the industry will need to realize in the People, Ideas & Objects accounting methodology and decentralized production model. Or producers will continue to diminish and eliminate their corporate profitability with production from unprofitable properties.

To emphasize the point here. If a conventional property that has been operational for decades is able to attain the same commodity prices that shale properties require. Then the profits of the conventional property will be substantial. However, what is the replacement cost of the barrel of oil produced? The financing of that replacement barrel will not be at the cost structures that existed decades ago or in the drilling methods and conditions. They will be far more expensive and the financing of those will have to come from the consumer, no one else is going to be deceived into delivering the funds. Therefore the amount of cash that needs to be returned for all production no matter its source has to be able and capable of funding the replacement of that barrel in its current cost and operating environment. 

The SEC and public accounting firms detail the methods that capital assets are written down today. They define what the limit of reasonableness is in terms of what is Generally Acceptable Accounting Practices. Their position is to define the limit and ensure that the producer firm does not breach the limit of their independently evaluated reserves valuation. However, the officers and directors have taken this limit as the standard in terms of what “should be” or even as a target of what they should use as the valuation for capital assets. This, I believe, is unreasonable when producers have culturally taken the limit to the extent of the SEC’s ceiling test allowable at each and every producer firm and done so each and every fiscal year. Bloated balance sheets provide no value to anyone. We note it would be the most competitive producer who would have exhausted their property, plant and equipment account, zero being the limit that the SEC allows on the low end. 

It will be People, Ideas & Objects service providers, the sub-industry that we are creating to replace the producer firms administrative and accounting resource to offer North American producers a Cloud Administration & Accounting for Oil & Gas software and service. They will use a much more aggressive 2 ½ to 3 year method of realizing the capital assets for the purposes of pricing calculations. It is in this way oil & gas prices will reflect the real cost of the commodity. Producers will be able to “make” the necessary prices to recover their costs through our decentralized production model. And the investors can freely invest in the oil & gas producer knowing that the money they invest will be returned to them with the bonus of an annual profit. The basis of evaluation will turn towards the producers ability to explore and produce effectively and competitively from an engineering and geotechnical point of view.

Just as earnings and assets are overstated in oil & gas we believe the same is the case for cash flow. Analysis of the capital expenditures of the producer firm sees that not all of the capital expenditures are dedicated to increasing the firm's production profile. The reality of oil & gas is the ever present decline curve, particularly in shale. Should we look more critically at the capital expenditures of a producer and determine which dollars were spent in maintaining the production profile, and those dollars that were spent in expanding the production profile? 

This goes to the heart of the issue of capitalizing everything under the sun. If capital expenditures are to maintain the production profile why would they not be considered operating costs? If they were, they would reduce operating cash flows substantially in the current period and more accurately capture the activities and value that the firm is engaged in. This would immediately revalue the company's market capitalization in today’s environment if that was the only change to cash flow. These reduced cash flows would better relate to the state of the industry and producers would have to realize increases in revenues from price increases and hence profitability to better evaluate their firm on a cash flow basis. A firm based on the People, Ideas & Objects Preliminary Specification would have higher cash flow volumes than what producers have been reporting these past decades. The motivation of the dynamic, innovative, accountable and profitable producer under the Preliminary Specification would therefore be to ensure they were realizing the full value of their petroleum reserves. As opposed to the past four decades which has become a matter of increasing producer value by spending and capitalizing the costs excessively. We need to evaluate the producers on a more equitable means of cash flow and no longer on the basis of these boosted management numbers. In a capital market such as what North American producers compete in, let's see them compete equitably and fairly.

As we can see, everything in oil & gas accounting has been and is skewed to overvaluation. Assets, cash flow and earnings all are affected by the policies that are in place within the industry. This industry culture has enabled producers to believe that they are productive, contributing members of society when in fact they have been a financial disaster. It is only after four decades of this accounting treatment that the evidence of the level of destruction now being experienced is apparent to all. Essentially the value that is contained within the entire industry's infrastructure, that is the entire producing infrastructure in North America, isn’t worth anything as it is a cash flow drain with catastrophic losses. Producers are operationally consuming value. The only measure in which to turn the industry around from this point is to increase the revenues of the producers to record commodity price levels for a sustained period and maintain “real” profitable operations everywhere and always. These revenues would then be able to remediate the destruction that occurred and finance the rebuilding efforts throughout the greater oil & gas economy. Investors and bankers have invested in good faith, now own an industry that is a drain on their resources, and have indeed subsidized the consumer for their energy needs for these past four decades. The amount of this consumer's subsidy is accurately reflected by the balance in the property, plant and equipment account on the producer's balance sheets. The future capital demands of the industry are well beyond what the capital markets are willing to undertake or even capable of. The only solution is to operate the oil & gas producers as profitable businesses from the real perspective such as the Preliminary Specification, our user community and service providers provide. Officers and directors have proven they don’t understand business and are unwilling to learn but most importantly unwilling to listen. Opting out of any reasonable continuation of their administration. 

Oil & gas is a capital intensive business. The way it has been run into the ground is the capital was raised, spent and sits for generations on the firm's balance sheet for an eternity. Turning the capital over repeatedly into cash for reinvestment is never considered. It was always believed that they just raised more money each and every year. Spend that, and then add it to the pile of assets that are depleted over the decades if not centuries which those petroleum reserves remain. Producers have to begin to turn these resources over much quicker in order to compete within the North American capital markets. By doing the above, recognizing that most of their capital expenditures maintain their production profile and having those capital expenditures recorded as operations, will return that capital back into cash within the current fiscal quarter.

Now that we’ve established our accounting for capital costs methodology is different from the status quo. I want to reiterate the value proposition we have in providing the oil & gas producer with the most profitable means of oil & gas operations everywhere and always. Through the decentralized production model, and the accounting methods we’ve discussed here we’re able to generate $5.7 trillion in additional profits over what the officers and directors would provide in the next 25 years. By accounting for the capital costs of the industry in the price of the commodity we are repeatedly reusing the cash resources of the industry to fuel the capital expenditures that will be used by the industry. Providing a return on investment back to the investors. If the expectation is that the industry will be spending $20 to $40 trillion in the next 25 years. People, Ideas & Objects et al are providing, at a minimum the aggregate of $25.7 to $45.7 trillion more value than today’s base case to the greater oil & gas economy than what the current officers and directors have traditionally provided as their expectation is the investment community will fund those capital needs.

OCI Preamble, Part II

 The following graph was provided by Les Borodovsky from @SoberLook. What this graph is representing is the status quo perception of costs and how management of production is handled in oil & gas.

The perception of the producer officers and directors is that their 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 $20 to $23 in capital costs are based on an allocation of their 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 investment over several decades or more, or even if at all. This is further aggravated when shale exposes prolific reserves, however demands substantial incremental capital to offset shales inherent steep decline curves in order to maintain deliverability. 

As an alternative, People, Ideas & Objects recommend that producers retire their capital costs within the first 30 months of the properties life to provide for the reuse of the previously invested cash. In turn providing them with the means to meet their internal demands for future capital expenditures, shareholder dividends and bank debt repayments, and better match the rapid decline rates experienced in shale in order to compete on North American capital markets. This can only be done if the producer is selling their commodities at a price that is above their break even point which considers an appropriate accounting of the actual, factual costs of exploration and production. And to reuse their cash repeatedly on this basis and not every second decade. 

This graph reflects the Well Break Even and Shut-in prices of the producers current policy position. At any point, and as long as the commodity price covered the operating 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 in their opinion and will continue to produce. What they’re stating is they may not be breaking even, and as a result over the long term, stranding unrecovered and unrecoverable capital costs in abandoned properties is acceptable.

What People, Ideas & Objects provide in our Preliminary Specification, if we could assume the accuracy of this graph numbers, is the point at which the property would be shut-in would be at the breakeven point and below. (Note that our breakeven point would be higher due to the competitive recognition of capital over a thirty month period.) 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 everywhere for all producers. When all producers continually produce below the breakeven price for four decades it exhausts the value from the industry on an annual and wholesale basis. Which I believe occurred some time in the 1990s and since then, times were only “good” when investors were willing.

To avoid the allegation of collusion officers and directors would have us believe that they were operating the industry within the law. Losses of catastrophic proportions have been realized, displacing and disrupting the financial resources of each and every producer over the long term. Today the financial, operational and political frameworks of the industry are in tatters. This is considered normal course business operations for the officers and directors. Imposing the destruction of their firm's assets, the capacity and capabilities of the oil & gas and service industries is the price that they believed needed to be paid as a consequence of its acceptance of a “boom / bust” business by way of “muddle through.” This is unnecessary and unacceptable when the Preliminary Specification is available to operate the oil & gas business as a business.

The inverse situation is provided by the Preliminary Specifications decentralized production models price maker strategy during the times we have found ourselves in during thirty of the past thirty six years in North America. In an environment where the Preliminary Specification will be operational, higher commodity prices would bring about production volumes that would meet the threshold of profitability and therefore previously shut-in properties would return to production. The enhanced commodity prices would allocate the necessary financial resources to search for innovative means for exploration and production. Providing the dynamic, innovative, accountable and profitable North American producer with the most profitable means of oil & gas operations, everywhere and always. 

The organizational objective is to satisfy the consumer demand for energy on the basis of abundant, affordable, reliable and profitable energy. The value proposition of a barrel of oil equivalent is in the range of 10 to 25 thousand man hours of equivalent mechanical leverage. Going without oil & gas is not possible in the most advanced society with the most productive economy. The oil & gas producers value proposition to their consumers is therefore by far the most substantial of any other business. 

People, Ideas & Objects feel that oil & gas has a unique characteristic that needs to be recognized and adhered to. These commodities are valuable and limited in the long run. How do we ensure that we can prove to future generations that we used our share of these resources appropriately. The first way is to show that all of them were produced profitably everywhere and always. And secondly by passing along a profitable, viable, efficient and effective oil & gas and service industry. To do otherwise would be unwise and unjustified. Most of all it is unnecessary when the commodities follow the principles of price makers. Consumers are aware that the only effective way that they’re going to have secure, reliable and affordable energy independence in North America is when producers are profitable. Why this hasn’t been done is a question that needs to be answered by those that have not done this, and had the alternative in the form of the Preliminary Specification available in hand.

Yet, just as producers were forced to shut-in production as a result of almost negative $40 oil prices and refineries refusing to accept feedstock, they would find compelling reasons to return any property that contained shut-in production back on production in order to satisfy consumer demand and to do so profitably. Operating the primary industry of oil & gas profitably, everywhere and always, will enable them to maintain the capacities and capabilities of the greater oil & gas industrial economy. That People, Ideas & Objects were subjected to abuse and punishment for this position and other content contained within the Preliminary Specification is evidence that officers and directors knew better, that our alternative was available and it was refused as it disintermediated the officers and directors method of management and personal compensation, they’ll now need to live with their legacy of inaction.

What officers and directors were able to do was run the entire oil & gas industrial complex into the ground over these past four decades and completely destroy a large percentage of the service industries industrial capacity, eliminating that industry's capital structures and any faith, trust or goodwill between them. Go find a willing drilling rig investor or banker of a few years ago who subsequently saw the drilling rig they invested in cut up for scrap metal while producer officers and directors whistled their uncaring and inconsiderate tune of “muddle through.” It is now incumbent upon the producers to provide the financial resources to rebuild the service industry. And do so on a philanthropic basis. The rule is “producers broke it, the producers need to fix it.” Producers used and abused the service industry and now they’ll be needing to provide the money and backbone involved in the rebuilding effort, otherwise they’ll only use and abuse the service industry after they’ve rebuilt it again. Maybe when producers have had to rebuild the service industry themselves, putting some skin in the game, they’ll respect it. 

With the costs associated in exploration and production, and particularly shale reserves it's no surprise that producers have consumed the cash that is generated and any that is provided from investors and bankers. What is surprising is that producers have done nothing over this period to mitigate the overproduction that has caused the decline in pricing, subsequent financial losses, destruction of the producers reserves and greater oil & gas industrial capacity. And here we find the motivation as to why these methods continue. 

The reason for this chronic overproduction is the producers have to generate the revenues to cover the out of pocket costs of the overheads they incur in the “high throughput production” model they employ. This model has these overhead costs of the firm being incurred whether there’s production or not, and if any percentage of their properties are shut-in it makes their operation a high cost operation at any level of production. At lower production volumes, it skews their earnings and overhead costs appear out of place. Therefore this behavior of producing at capacity should be expected to continue on both the oil & gas sides of the business. Even in spite of significant financial loss or the inability to meet market demands. 

Although most producers report overhead costs of less than 2% in almost all instances this is not representative of the situation. We believe based on our experience that overhead costs range between 10% and 20% of revenues. These itemized amounts are never detailed or discussed in the financial statements of producers. If they were itemized the disproportionate and creative levels of executive compensation would be evident. Overhead costs are capitalized across the industry in the region of 85% to avoid the necessary accountability for these costs. Avoidance of accountability is the motivation for doing so, the consequences of these actions are as follows, and it should be noted People, Ideas & Objects identified this anomaly in excess of a decade ago. Yet nothing was done.

When all of the overhead is capitalized to the extent that it is in oil & gas it creates that giant sucking sound around the producers bank. Overhead in most businesses is recognized and passed to the consumers of the firm's products. In oil & gas it is capitalized. Therefore the “cash float” that all businesses have to have in order to finance these costs doesn’t function or even exist when overhead is capitalized. Producer cash is essentially stored on the balance sheet for decades and is passed on to the consumer at some point. When that will be remains a mystery. The industry phenomenon of a working capital deficiency was traditionally filled by the astute budget manager providing the amount of next year's capital expenditures in the prospectus. Without support for the capital structure, no profitability earned and fundamentally inadequate revenues generated as a result of the decades long industry wide overproduction, we should understand the quality cash management skills being applied in the industry. When the business is a spending machine, what would you expect?

Our Preliminary Specifications decentralized production model is proposed and enables the dynamic, innovative, accountable and profitable oil & gas producer to implement our price maker strategy. This decentralized production model has been defined by Professor Richard N. Langlois as:

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. 

Production discipline is attained through this process when the producer realizes that their maximum profitability is obtained through producing only profitable production everywhere and always. Therefore producers are incentivized to adhere to the principles of the Preliminary Specifications decentralized production models price maker strategy. Just as all businesses in the capitalist system follow these principles since the great depression of 1929. The individual decisions of each oil & gas producer, based on an actual, factual accounting of the profitability of the property, will determine if the property produces. That is how the oil & gas industry needs to deal with any low commodity price situation that it occasionally finds itself in. 

As properties begin to lose money in a period of declining prices, incremental properties are shut-in each month as they too may become unprofitable. The inverse of this is also relevant when commodity prices rise, producers will be raising production volumes when they attain profitability from higher prices and return their shut-in properties to the market. Shale based reserves will always overwhelm the oil & gas commodity markets with flush production and deliverability that are driven by shale's prolific nature. Production discipline based on profitability can only be achieved through the reorganization of the industry and producers based on the Preliminary Specifications decentralized production model as detailed in the Specialization & Division of Labor section above. Where overhead costs are made variable and producers are using the facility we’re building in the form of our Cloud Administration & Accounting for Oil & gas software and service. Which enables our price maker strategy to provide for the producers and industries profitability and in turn ensures consumers are always provided with an abundant, affordable, reliable yet profitable source of energy. 

The effectiveness of our method is reflected in our logic. Producer profitability is maximized when losses on properties no longer dilute profitable properties profits. Reserves are held for a time when they can be produced profitably. And those reserves costs will not have to carry the incremental costs of any losses that would have occurred if the property continued to produce unprofitably. Keeping the oil & gas as reserves reduces the producers costs of production and storage of the excess, unprofitable production. Commodity markets find the marginal cost when unprofitable production is removed from the marketplace. Marginal prices for not just the unprofitable production but all production. While shut-in any unprofitable properties will form the producers work-in-progress where they can innovatively approach methods of raising production volumes, reducing costs or expanding reserves. Using profitability is the only fair and reasonable method of invoking production discipline. If it’s profitable it produces. It should be noted here that the Preliminary Specifications service providers will be providing a standard, objective method of accounting process management. Therefore any producer that finds a property is unprofitable, it will know that shutting it in is the best remedy as the assessment of unprofitability is the same assessment that all other properties were evaluated under. 

OCI Preamble, Part I

 People, Ideas & Objects, our user community and their service provider organizations competitive advantage and value proposition is that we provide the dynamic, innovative, accountable and profitable oil & gas producer with the most profitable means of oil & gas operations, everywhere and always. We suggest it is no longer adequate to just own the oil & gas asset but also have access to the ERP software in the form of our Preliminary Specification which makes the oil & gas asset profitable. Setting the foundation for the industry to obtain the objective of profitable energy independence on the North American continent. People, Ideas & Objects propose to build this with Oracle, through Oracle Cloud ERP, and deliver to North American producers through our Cloud Administration & Accounting for Oil & Gas software and service.

Adoption and integration of the Joint Operating Committee as one of the seven Organizational Constructs of People, Ideas & Objects and our user communities Preliminary Specification. It is the industry's legal, financial, operational decision making, cultural, communication, innovation and strategic framework. The Preliminary Specification moves the compliance and governance frameworks into alignment with the seven frameworks of the Joint Operating Committee enabling speed, innovativeness and profitability in the North American producer firms. The six other Organizational Constructs include specialization & the division of labor, markets, Intellectual Property, Information Technology, innovation and Professor Paul Romer’s “New Growth Theory.” Each of these establish a legal, cultural or structural component of understanding and knowledge for our software developers, our user community and their service provider organizations, to the producers, those that work in the industry and the service industry to operate within and adapt. Aligning these Organizational Constructs within our Preliminary Specifications ERP software provides a resonance with the law, principles of economics and opportunities, particularly from the use of Information Technology such as we have done in extending the conceptual model of Cloud Computing to be offering North American oil & gas producers with our Cloud Administration & Accounting for Oil & Gas software and service.

In addition to the commercial focus of profitable production everywhere and always. People, Ideas & Objects et al provide an overall vision of how the North American producer will face their most difficult and challenging period towards 2050. The demand for capital will be high due to the need to establish and maintain profitable energy independence on the continent. To deal with the rebuilding, refurbishing and reclamation of the infrastructure. Ensuring our energy consumers maintain the most powerful and efficient economy through the abundant, affordable and reliable domestic oil & gas that is profitably produced. Ensuring they realize the full value proposition of the energy produced of 10 to 25 thousand man hours per barrel of oil equivalent. Setting out tomorrow, seeking to “muddle through” by “building balance sheets” and “putting cash in the ground” has turned out to be a financial catastrophe, hidden by specious accounting over the past decades. A financial failure has precipitated operational destruction throughout the secondary industries leading to a potential inability to meet the market's demands for energy. 

Industry demands for capital to fuel this future is untenable for any and all sources of capital. Producers have a reputation of unreliability with the investment community. Financial statements continue to be distorted and reflect no capital structure to speak of. Have never been capable of generating the required profitability to generate the profits to meet their capital demands and possibly the most detrimental characteristic of all, have no propensity to make the necessary changes. Profitability is the only means of capital large enough to fuel the needs of this industry's future capital demands. Only the Preliminary Specification provides the necessary structural changes to generate the industry wide profitability.

These are the areas that provide the most significant value increases for the dynamic, innovative, accountable and profitable oil & gas producers. 

Specialization and the Division of Labor

Our focus on the areas of specialization and the division of labor and how these tools will move the producer firm to higher trajectories of productivity and performance, and therefore reduce the costs of exploration and production in the industry. The need to introduce new and innovative methods, business models and efficiency will be inherent in the culture of the industry, not something that should be resisted as People, Ideas & Objects Preliminary Specification has been forcibly resisted for more than a decade. An elementary, yet highly effective example of specialization and division of labor is provided through this quotation from On Liberty by Thomas Paine.

In order to gain a clear and just idea of the design and end of government, let us suppose a small number of persons settled in some sequestered part of the earth, unconnected with the rest, they will then represent the first peopling of any country, or of the world. In this state of natural liberty, society will be their first thought. A thousand motives will excite them thereto, the strength of one man is so unequal to his wants, and his mind so unfitted for perpetual solitude, that he is soon obliged to seek assistance and relief of another, who in his turn requires the same. Four or five united would be able to raise a tolerable dwelling in the midst of a wilderness, but ONE man might labour out the common period of life without accomplishing anything; when he had felled his timber he could not remove it, nor erect it after it was removed; hunger in the meantime would urge him from his work, and every different want call him a different way. Disease, nay even misfortune would be death, for though neither might be mortal, yet either would disable him from living, and reduce him to a state in which he might rather be said to perish than to die.

What we do know is that today we stand on the shoulders of giants and benefit from a very sophisticated and complex specialization and division of labor. Today everyone in oil & gas has attained skills from education and training, and gained experience from years of working within their chosen field to conduct specialized work. To disrupt this in any fashion without a full understanding of the global aspects of how specialized this work has become would cause failure. At the same time, with the current corporate model proving to be unsustainable, the focus has been on cutting costs. Cutting too deep could have greater implications than what’s intended. The point is that today, to move to a higher level of specialization and division of labor will not be done, and can not be done, without significant and deliberate forethought. The principles of spontaneous order, serendipity and creative destruction have failed to provide any capacity increases in the past decades. We believe software is responsible, or more specifically, the lack of software development capabilities are responsible for constraining organizations. Oil & gas is at minimum a continental based economy. To organize this in a productive, profitable, specialized manner and divide the labor efficiently without the assistance of the Internet and deliberate forethought will limit our ability to progress.

Secondly we have to consider the role of software in society today. If we intend to move to a higher level of specialization and division of labor. Then the software that we use, and particularly the ERP software, is going to have to define and support those changes. Therefore we’re not only going to have to deliberately plan the next level of specialization and division of labor, we will need to build the systems that define and support it first within the software, before the implementation of any changes or benefits will be seen. This is one of the defined benefits of having the software development capability of People, Ideas & Objects, its user community and their service provider organizations. To conduct any form of organizational change demands the software be changed first in order for it to support the revised process. Otherwise the organization will quickly regress back to the process that is defined in whatever software is used. What People, Ideas & Objects considers a modern day software bug. 

Review of the Preliminary Specification shows there is a defined restructuring that takes place throughout the modules based on a higher level of specialization and division of labor of the industry. The oil & gas producer is a stripped down version of itself that has the C class executives, earth science and engineering resources, land, legal and minor support staff. And that’s it. The rest of the producer's administrative and accounting needs are provided by our user communities service provider organizations through our Cloud Administration & Accounting for Oil & Gas software and service. Moving the industry from a reliance on the producer's fixed cost, administrative and accounting capabilities to a reliance on the industries variable cost, administrative and accounting capabilities. Variable based on profitable production. And each of these service provider organizations are focused on one process, or one element of a process, that is organized and specialized to manage that process across the industry. 

For example, there may be a single royalty payment service provider organization that handles all of the industries Texas Railroad Commission royalty payments. Ensuring producers were always paying the lowest amount allowable of their royalty obligation. Where the cost of the royalties, and the incidental billing cost of the royalty service provider is billed directly to the appropriate Joint Operating Committee. Therefore eliminating the fixed nature of the operators administrative and accounting costs, and replacing them with the variable nature of the Joint Operating Committees administrative and accounting costs. As without profitable production the variable royalty payment process would not be invoked, no service would be rendered, no costs incurred and no service provider billing. This requires the termination of the use of fixed overhead allowances as the variable, actual, factual overhead cost will be known at each of the properties. Enabling an accurate accounting of the properties performance based on all of the actual variable costs of exploration and production. 

There are many advantages of moving to a system or methodology such as the Preliminary Specification. Cost and efficiency are just some of the reasons. The costs associated with the royalty payment service providers organization would be a small percentage of what is incurred by the industry today. By focusing on the most efficient way to process the industry's royalty payments, and only royalty payments, that specific service provider would become specialized and reduce their time and effort in doing so, yet increase the quality of the service of administering these tasks to a small component of what the costs are today. 

In Adam Smith’s pin factory, his research yielded a 240 fold increase in productivity from the specialization, division of labor and use of mechanical leverage that he made in the process of making pins. Having the royalty payment and other administrative and accounting processes in the industry subject to this type of analysis, complete with the software development capability and our user community of People, Ideas & Objects, similar results in productivity may be attained and continue to develop in terms of leveraging intellectual pursuits. All economic growth that has been achieved since 1776 is a result of the economic principles of specialization and the division of labor. The advancement of machinery employed in this process is how these changes continued to provide value to society. Today the application of software towards automation of our processes will yield similar benefits to what was realized in prior centuries from machinery.

When we consider the current corporate models attempts to provide the producers administrative and accounting needs for all that falls within their domain. And the understanding that is necessary to support those administrative and accounting tasks. The ability to build and maintain that capability and capacity is costing each and every oil & gas producer their profitability. What will come to be seen as an archaic business model will be the way in which the industry is operated today. It has to because it is unsustainable and a more effective and efficient business model based on higher definitions of specialization and division of labor will become the norm through the adoption of the Preliminary Specification. The industry's survival requires it. What we’re doing is moving from a reliance on each of the producers' fixed cost administrative and accounting capabilities to a reliance on the industries variable cost administrative and accounting capabilities. Eliminating the costs of each producer building, maintaining and incurring these non competitive capacities and capabilities in house. This is part of our shared and shareable model that we’re building on the conceptual model of Cloud Computing by providing what we are calling Cloud Administration & Accounting for Oil & Gas. An example of our Organizational Constructs implementation of Professor Paul Romer’s non-rival costs.

Our Decentralized Production Model & Price Maker Strategy

When we consider the next aspect of this change, our decentralized production model, this assures that we offer the most profitable means of oil & gas operation, everywhere and always. What we've experienced over the past four decades in North American oil & gas is unique in all organizations and of all business history. Although we learned during the great depression the economic consequences of overproduction, and experienced its consequences in oil & gas since the 1980s, no one seems to have explained it to the North American producer. Oil & gas overproduction in North America has been systemic and chronic throughout the producer population and will continue to be without an effective means and method of production discipline being imposed. The history over this period is stark and clear. In the late 1970s the SEC imposed its Full Cost Accounting and associated Ceiling Test requirements on producers trading shares in the American market. These requirements allowed producers to record costs in property, plant and equipment as assets up to the limit of the present value of their independently evaluated petroleum reserves. This allowed an unnecessary flexibility in the financial statements that created distortions since that time. Simply, shifting the accounting from an evaluation of performance to one of value, hence the producer's foolish objective of “building balance sheets” etc came about. This is the mindset of our good friends, the producer officers and directors. What we know of business is that overreported asset valuations lead to commensurate amounts of overreported profitability. Leading investors to rush in to capture those profits and hence a process of overinvestment begins. Overinvestment in the productive capacity of the oil & gas producers leads to overproduction of commodities that are subject to the economic price maker principles and characteristics. 

It is this reason that has caused the repeated and systemic collapses of commodity prices throughout this past four decade period. The first commodity price collapse that we can document was during the summer of 1986 when $10 oil prices decimated the industry for the better part of a decade. This is counter to the cultural belief that oil & gas commodities are price takers. These definitions are from investopedia.com

Price maker

A price maker is a monopoly or a firm within monopolistic competition that has the power to influence the price it charges as the good it produces does not have perfect substitutes. A price maker that is a firm within monopolistic competition produces goods that are differentiated in some way from its competitors' products. This kind of price maker is also a profit-maximizer as it will increase output only as long as its marginal revenue is greater than its marginal cost, so in other words, as long as it's producing a profit.

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.

As evidence supporting People, Ideas & Objects claim of price taker characteristics I make the following argument in our User Community Vision. Officers and directors interpret substitutes to be; if they don’t produce others will, therefore substitution is everywhere. This is not what substitution means. Does it mean that Elon Musk could make it to Mars if he replaced rocket fuel with a hydro dam? Or could we use wind energy to lubricate our crankcase? How about storing nuclear fuel rods in the convenience of a jerry can as you travel outdoors this weekend. And if you’d be able to return alive from your weekend adventure you might make it back to the office in that new solar panel, or pine bark suit you just bought. Alternatively, if bottled water ceased to be produced people would switch to soft drinks, tap water, juice or other substitutes. Any overproduction of bottled water would see inventories swell and the price remain the same, as would the price of the last bottle of water found anywhere in the world.

The connotation of the economic term price maker has caused producer officers and directors to conclude this is collusion. We argue otherwise when the Preliminary Specification uses the Joint Operating Committee and will produce detailed, actual, factual financial statements for each property. Producer firms will definitively know the “real” profitability of each of their properties. A task that is not done today and more importantly can not be done today. And therefore producers will independently decide to shut-in their unprofitable properties to ensure they attain the highest level of corporate profitability. Invoking the necessary industry wide production discipline. Saving their petroleum reserves for a time when they can be produced profitably. Keeping their production and inventory costs lower by not incurring the costs of unnecessarily producing and storing unprofitable production. Ensure their reserves don’t have to recover the incremental costs of their prior losses as additional earned profits. And most importantly ensure that the marginal production is removed from the commodity markets allowing them to find their marginal price. 

While the property is shut-in the producer can apply their innovativeness, another Organization Construct of the Preliminary Specification, to return the property back to profitable production as soon as possible. People, Ideas & Objects and our user community are the appropriate business approach to the chronic and systemic overproduction of oil & gas and the persistent obtuseness of the producer officers and directors, not collusion. Profitable operations in a capitalist society do not necessarily denote collusion. Without “real” profitability there is only waste and deterioration as we’ve experienced these past decades. Without investors and bankers who were duped by these specious financial statements, there was no sustainable value generated, only destroyed.

The definition of collusion is provided by Wikipedia. 

In the study of economics and market competition, collusion takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market structure of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole. Cartels are a special case of explicit collusion. Collusion which is overt, on the other hand, is known as tacit collusion, and is legal. 

By definition then the Preliminary Specification price maker strategy may fall under the category of overt or tacit collusion. Which is legal. Each of the producer firms will be making independent business decisions of whether or not to produce at each and every one of the many properties that they own. Those decisions will be made on the actual, factual accounting that provides the information for that decision. The decision is to make a profit, if the property is shut-in due to unprofitability it will incur a null operation, no profit but also no loss. Achieved when the Preliminary Specification has made all of the producers costs variable based on profitable production. The decision to avoid a loss of corporate financial resources and assets, in the form of petroleum reserves, when producing an unprofitable property at a price that does not cover the marginal cost, in the long term perspective of marginal cost, (as per Wikipedia “analysis is segregated into short and long-run cases, so that, over the longest run, all costs become marginal,”) is a rational business decision, not collusion. This also provides, for the first time in the history of the industry, the ability for producers to indirectly control their overhead costs based on their profitable production profile.