These Are Not the Leaders We're Looking For, Part XIII

Over the many decades of writing this blog, I’ve consistently captured the attention of my audience while infusing a sense of comedic relief concerning the officers and directors of the producer firms. They either had no time to listen to what they deemed foolishness or they enjoyed the humor. As People, Ideas & Objects continues to reveal and expose the operational methods of the oil & gas industry, I’m learning from those officers and directors the value of having a good laugh at others' expense, even as my audience grows and the questions directed at these executives become louder.

What About That Cost

People, Ideas & Objects hold the view that you earn value commensurate with your worth, as determined by the market. Yet, I’ve earned nothing, while officers and directors have reaped substantial rewards. Perhaps the theory is flawed. Our escalating cost to develop the Preliminary Specification has been dismissed by officers and directors, who viewed the project as a joke. However, I’ve observed money flowing out of the industry, aligning with our value proposition of $25.7 to $45.7 trillion over the next 25 years. If they dismissed the points I made, they essentially confirmed their belief that drilling is the sole source of value, and no amount of accounting or administration could enhance it. No amount of accounting and administration was going to generate any incremental value. Which is correct, just stop doing foolish things that waste so much money.

As the value propositions of People, Ideas & Objects became more substantial and the losses realized more tangible, I saw this as validation of the Preliminary Specifications Intellectual Property’s worth, which led to our increased assessments. This stance, however, led some to question my sanity. Despite this, my persistence allowed me to present my case, which was largely ignored by the industry’s decision-makers. Recently, however, the tide has turned, and these executives are now defensively justifying their non actions.

What Was Never Considered

The industry officers and directors overlooked the potential truths in People, Ideas & Objects' arguments. The prevailing attitude was to continue with established, yet flawed, practices because they had been the norm for years. Officers and directors, considered themselves most knowledgeable, dismissed alternative insights.

And they were making so much money and their companies were worth so much more than last year. The amount of cash that came through the door was more than they could ever imagine. Even though most of it wasn’t theirs it was enough to cause their brains to say “we're doing something right.” Most of the cash is not theirs as it may have been collected on behalf of their partners in the Joint Operating Committees. And as a primary industry it captures the income of the producers and all the subsidiary industries that producers depend upon. And where does it say that a producer isn’t entitled to hang on to other people’s money for up to 18 months? Oil & gas producers are not labor intensive directly, however the service industry makes them labor intensive. And that labor establishes a capability and capacity that has to be developed and maintained with the revenues and support from the primary industry revenues. There are no other sources of cash for the service industry to use. The U.S. military isn’t cut loose and left to atrophy with no resources each time they’re not called upon. They need to be developed and maintained at all times. Just as the oil & gas service industry does. The abuse they’ve been subjected to over the past many decades has eroded, and now destroyed the trust, faith and goodwill they ever had in the producers, officers and directors. It will not be the current population of officers and directors that will be given a second chance with the service industry. If producers want anything done, just send cash for the next few decades. 

What to Do With People, Ideas & Objects?

Producers will likely never financially compensate People, Ideas & Objects, as doing so would imply acknowledging their faults that we’ve highlighted. In the current climate of industry failure, shareholders seek accountability, not excuses. The existing leadership, having full control and responsibility, have failed to add value, proving their incompetence.

In the heightened environment of failure that we’ve identified where the industry is no longer in control of its financial, operational or political frameworks, shareholders are not looking for an excuse, blame to pass around or a viable scapegoat. They’re looking to take out the leadership that had the authority, accountability, responsibility and were in control of the resources necessary to build value within their producer firms and industry. Officers and directors have failed. And maybe more than failed, proven to be incapable and incompetent. In retrospect, what benefit has been the result of their time and effort?

This has always been the case for me and it would have been for anyone else if they saw what the net outcome of the industry's situation was leading to this tragic disaster. Who, other than officers and directors, can watch any situation that has detrimental consequences and only spectate. What I see today is we’ve hit the high water mark in terms of our progress. Shale provides us with untold potential. And potential will be all that we have if we’re unable to fix these financial, operational and political frameworks. They’re not worn down and diminished. They’re non-existent. 

Financial, Operational and Political Frameworks: State of the Union

Financially the industry hasn’t made money for over four to five decades. Culturally is unaware why they should or would. Is unable to figure out how. And is guided by a leadership that focuses on the effects of demand destruction from $8 natural gas prices while selling gas at negative $0.26. (See quotation from Reuters below.) A capital structure that technically exists however has no support from those who know and understand the business of the oil & gas business, their investors.

The operational framework in the service industry was briefly discussed in this post. It is symptomatic of the overall issue throughout the greater oil & gas economy. From the lowest paid in the business to the officers and directors of the producer firms. Motivation to do something, anything, to even think of something that needs to be done or to think about fixing it doesn’t exist anywhere. Why do something other than what it was that was done yesterday. Don’t rock the boat or identify yourself as a problem. Don’t get me wrong, there are many people who wish to do things. They don’t have the support necessary to do so. The risk profile within the industry is at the same level of its motivation. Both are non-existent. 

The reason for this is that oil & gas is led by misguided, self-interested officers and directors who have been involved in a scheme to overreport their asset values, which over-reports their earnings since the late 1970s that they don’t know what they’re doing and clearly do not understand. This doesn’t give them a pass from being corrupt, it makes them naive and incompetent. This was obvious when they signed on. And the reason they signed on was to get on the gravy-train. 

Politically oil & gas producers have shown great leadership in the trend towards victimhood. They are the ultimate corporate victim of everyone and everything. Including the monster under the bed. It is amazing to me that “muddle through” has become a mantra spoken as a mind numbing chant in the industry to justify the generation of new excuses, blaming and viable scapegoats. If the industry has an issue, such as the negative $0.26 natural gas prices. It’s because the pipelines and storage facilities are inadequate. The cause and effect of the business issue does not have to be correlated, it just needs to be in the same industry to earn the viable scapegoat classification. Or as this Reuters article states, 

HOUSTON, March 22 (Reuters) - Energy executives say they are looking past current ultra-cheap gas prices and betting on a coming wave of new liquefied natural gas (LNG plants to lift demand - and prices - for the fuel.

This comment was the collective wisdom of “energy executives” at this year's CERA conference. Undoubtedly the premier conference in oil & gas. Unaware of the cost of negative $0.26 requiring, as we noted in our last post, 9 times the number of units of profitable natural gas sold at $13.47. If this is of no consequence to the collective officers and directors, it reflects a flawed and failed culture that knows nothing and will not change. For the collective intelligence of the industry to be involved in resolving two issues at the same time! Is well beyond the comprehension and imagination of this soon to be unemployed and absolutely useless group.

People, Ideas & Objects raised the LNG issue beginning with our October 11, 2023 series of posts under this blog's label “Notice.” Which documents the $4 trillion in losses between then and 2023. The steep degradation in the natural gas price issue due to overproduction we suggested they should have been working on since July 2007. The one that caused the hilarity in the boardrooms when we stated these points. July 2007, the point when the heating value basis of natural gas prices began to break down.

Our Ultimate Disposition

The industry's operational performance today is as good as it will ever be in the hands of the current leadership. If left unchecked we will see a continued degradation of the deliverability of oil & gas in North America. Subject ourselves and most importantly the most powerful economy known to man to the behest of those who do not share our interests. We are late in the day in approaching the resolution of this difficulty. The officers and directors needed to laugh at People, Ideas & Objects unnecessarily for too many decades. Industry operational capacity will diminish before we’re organized to deal with these issues. 

If we leave it in the hands of the current leadership it will be far worse than what we’ll experience without them. The time has come for action and the need for either them to fall on their swords or be removed from their positions has to be completed. 

Therefore the Cost of the Preliminary Specification

Is justified. $4 trillion in natural gas revenues lost as a result of a situation that I have been discussing and providing the solution for would be a beginning. And is far more than our value proposition estimated it would generate. Possibly the greatest value proposition and best investment the industry could involve itself in. But these are not the issues that I’m looking at the industry needs to deal with. I began this adventure in May 1991 when I was 32 years of age. A life's work of significant accomplishment as far as I’m concerned. I am very satisfied with the work and if I’m the only one who appreciates it I am happy with that. Classifying it as a success or a delusion is acceptable with me. My argument is that I did my job. I took the time, energy and expense to develop the solution to the largest issue oil & gas has faced in its history. My delusion supports this opinion therefore its where my position rests. 

Conclusion

My delusion also supports the fact that officers and directors do not have a solution. If they’re serially approaching issues in the mythical world of pipelines, storage and $8 demand destruction. While destroying the assets and profitability of the firm in order to focus on the promise of LNG. Where the horses bolted, the barn gate has been closed for some time and they don’t have a seat at the adults table anyways. Then it's fair and reasonable that the Preliminary Specification is the exclusive solution to what ails the industry.

Intellectual Property has been one of the underlying strategic positions People, Ideas & Objects have secured throughout this process. Our strategy came about from some down and dirty fighting that was the result of Intellectual Property being more of the wild west in the 1990s. That is not the case today and the establishment of this now has the effect of freezing the market under my license to People, Ideas & Objects. 

Therefore if I continue to hammer away on this keyboard for a few more years as a result of my delusion, it’ll be what I feel is a significant contribution and achievement. That it may never see the light of day is fine. As I’ve advised many times before, none of it is to be used in oil & gas without a license from either myself or People, Ideas & Objects. Try it and see how Intellectual Property works in the Information Technologically driven western world of today. 

These Are Not the Leaders We're Looking For, Part XII

 Natural Gas Prices, Again

Producer officers and directors continue to fail comprehensively in managing natural gas overproduction and its consequences. Why? Operationally, it is as simple as determining which property is losing money and shutting it in. Producers can easily execute the process within a short period, thereby increasing profitability by eliminating unprofitable operations that dilute the profitable ones. Yet, for decades, the industry has wasted oil & natural gas as commodities, hollowing out value. We hear from those charged with the responsibility, authority, and accountability, endowed with the resources to remedy these issues, “Natural gas is a byproduct of oil production.” A common refrain from producers in the Permian basin, which I reject.

From the March 21, 2024 EIA Weekly Natural Gas Update, under Select Regional Spot Prices. 

In West Texas near Permian Basin production activities, the price at the Waha Hub remained negative at -$0.26/MMBtu yesterday, down 1 cent from last Wednesday. The Waha Hub price was below zero for the entire report week and traded $1.83 below the Henry Hub price yesterday, compared with last Wednesday when it traded $1.49 below the Henry Hub price. The price reached its lowest for the week at -$1.16/MMBtu on Monday, March 18. After several warnings during the report week of strained operating conditions, on March 21, El Paso Natural Gas Company (EPNG) issued a system-wide operational flow order, encouraging shippers to balance natural gas deliveries and receipts. Ongoing maintenance on the EPNG pipeline system, which delivers natural gas westbound out of the Permian Basin, is also contributing to lower prices this week.

“Who Cares About Negative Prices?”

It is problematic that oil and gas are frequently sold below their actual costs, reflecting tragic mismanagement in the industry. Producers must ensure the preservation of reserves for future generations by avoiding waste or unprofitable production, yet this is seldom considered or achieved. This situation demands that producers begin retiring their capital within what People, Ideas & Objects believe to be competitive in the capital markets, or a 30-month period. Bloated asset values in property, plant, and equipment enhance only the bragging rights in the annual competition for the CEO’s biggest balance sheet. 

The primary consequence of selling natural gas at negative prices is that it cleans out value from the producer firm faster than any of the many other methods they use. (March 21, 2024 EIA Natural Gas Weekly Report.) If the oil price is $80.82, then natural gas should be priced on a heating value basis at $13.47. Understanding shale gas characteristics—high drilling costs, significant reserves, steep decline curves, and high rework costs—the SEC accounting methodology allocates these capital costs evenly across each molecule of proven reserves. People, Ideas & Objects' Preliminary Specification proposes a more competitive approach: allocating costs to be retired within a 30-month period. Natural gas priced at $13.47 would impute a 10% net profitability, implying a cost of $12.12 per unit and a potential profit of $1.35. Current accounting practices obscure these figures, capitalizing all costs outside of operations and royalties, and spreading capital to be realized across decades. Having an equal impact on the amount of overreported profitability being reported by the producer. 

When in fact, the amount of money being lost in the course of selling natural gas at negative prices in this instance is its cost of $12.12 and the negative price of -$0.26 or $12.38. Remember when we noted that these are “just accounting charges, no one cares about those” was the response to our questions. Or if I could be more specific, the money that investors paid in to drill and complete the wells. It will take 9.23 units of natural gas sold at $13.47 generating a profit of $1.35 to offset the value lost in selling one unit at a $12.38 loss today? at the theoretical heating value price to make up for the losses on one unit of production today. This assumes that the culture that produced the natural gas at the $12.38 loss will be able to ever do anything about the chronic, systemic and ridiculous business of natural gas and oil overproduction. 

Recording of Capital Assets

People, Ideas & Objects raises critical questions about how the oil and gas industry records capital assets. Why are we so stuck on this concept and apparently the only ones harping on it? I now have compiled the financial statements of our sample of producers for the period 2016 to 2023. When I take the sample’s annual capital expenditures in aggregate for the years 2016 to 2023. We note capital expenditures of $367.090 billion. However, we also note that as of 12/31/2023 assets recorded in property, plant and equipment equals $470.993 billion. Indicating a difference of $103.903 billion.

Ok, so there is a difference, what’s it all mean? People, Ideas & Objects feel producers have the luxury of recording capital assets for almost a decade before $0.01 of 2016 to 2023s capital asset costs will be realized. Since 2016, all our sample producers' capital costs have only entered the property, plant, and equipment account.

All of the depletion of $540.368 billion that was recorded during the 2016 to 2023 period were for capital costs incurred during periods prior to 2016. The remaining balance of capital costs carried forward and unrealized in depletion prior to 2016 includes the $103.903 billion, which remains in our sample of producers property, plant and equipment account today. It would seem that recognizing capital costs of a capital intensive oil & gas industry needs to catch up to reality. The question that we ask is the recording of these sizable costs of oil & gas exploration and production being realized in a timely and accurate manner? Is it competitive with other industries' performances?

The Purpose of the Corporation

The debate over a corporation's purpose has evolved from maximizing shareholder value to encompassing broader stakeholder responsibilities. While Milton Friedman emphasized profit generation, modern perspectives advocate for value creation for all stakeholders, balancing profitability with social and environmental considerations. For the record I’m with Milton Freidman on this. Without profitability where do the financial resources come from? Profits are the excess value generated over what is consumed. The amount that can be used at the discretion of those who generated them. Compensating those who own the resources and generating value for all concerned in the endeavor. Without profitability, where does the money come from? Taxes, printing, theft or in oil & gas’ case investors.

Oil & Gas Culture

This Yahoo News article originated from Bloomberg Businessweek. EQT Corp CEO Toby Rice's comments at the CERAWeek conference reflect the prevailing attitude and culture within the oil & gas industry, emphasizing the need for more pipeline and storage capacity to mitigate dramatic price swings. However, the root issue is overproduction, not infrastructure limitations. People, Ideas & Objects identifies storage as a critical area requiring attention, advocating for production that is profitable and sustainable as the priority.

Quotes from the article will be discussed below. Consider these comments in terms of the purpose of the corporation, how is the value being generated and who is benefiting from this thinking. 

After decades of all producers ignoring the issue of pipeline capacity. Letting the pipeline companies fight it out against the regulators and environmentalists themselves. Leaving the ultimate bureaucracy in the form of the government, driven by environmental and other groups, funded by the grift paid by oil & gas producers, to the quasi bureaucratic utilities of pipeline companies. Producers are now stepping in to make it alright again? They’ll be the ones that get the storage and pipelines built? And how do I know the grift was paid by producers? Oil & gas producers are where the money is. There was never a head office of a producer picketed for any environmental purpose. Downtown Houston or Dallas would be far more impactful than in the field. Where does all the money and organization come from to conduct all the environmental activism, the lobbying and protesting. 

The chief of the largest US producer of natural gas has warned that a lack of pipelines and storage facilities will trigger dramatic price swings in the years ahead, causing them to surge as much 350%.

Although takeaway capacity may be an issue it is not the issue that plagues the producers. Overproduction is. EQT produces predominantly in the Marcellus and there are pipeline capacity issues there and in the North East where getting the gas out of the Marcellus and getting it into the markets have an impact on pricing. However, storage has only been an issue since it has put a limit on the upside of the natural gas prices throughout the year. Storage facilities have high deliverability during periods of high demand and as such sell into those markets at those prices. Limiting the upside of the producers. And buys the gas throughout the year to replenish their storage at the unseasonable prices that producers incur by producing at 100% year round. People, Ideas & Objects have identified storage as an issue that needs to be realized and resolved by producers using the Preliminary Specification and producing only profitable production, everywhere and always. 

Storage also adds to the cost of a producer's reserves through the imputed cost of storage, being the price dynamic introduced, and the operating costs of producing the reserves for storage purposes. Keeping the gas as reserves is the low cost alternative to storage. Control of the overproduction is the process that needs to be more effectively managed by the producers. Not pipelines and storage facilities, these are not their businesses. Supporting pipeline companies in the regulatory battle to have their production taken away and alleviate many of the choke points that do exist today would have been helpful in the past and will be in the future. From the Bloomberg article.

Gas demand in the US has jumped 50% since 2010, while pipeline and storage capacity have increased just 25% and 10% respectively, EQT Corp. Chief Executive Officer Toby Rice said during an interview at the CERAWeek by S&P Global energy conference in Houston. That leaves the market prone to wild price swings, ranging from today’s level of about $1.75 per million British thermal units to as high as $8, Rice said.

And

“That’s no longer an effective lid on prices,” Rice said. “So you can see prices run through that and unfortunately start seeing industrial demand destruction driving price. That’s sort of the dynamic you saw in 2022 and would leave you with prices close to $8.”

Understanding the point about the corporate purpose of profitability and building value. I am at a loss when I read most of the statements from the officers and directors of producer firms. These two paragraphs are examples of the many that are stated by these people. These statements reflect to me that producer officers and directors do not understand their primary focus should be on profitability and value generation. Ensuring their costs are under control and limited by ways such as the Preliminary Specification applies specialization, the division of labor, sharing of administrative and accounting infrastructure and automation through Information Technology can be completed. Knowing and understanding their business. To be concerned about demand destruction and high prices are of no concern. If they can compete and do so profitably is their only concern. The key question and the only question that needs to be asked of them is how will producers recapture the costs being lost in the Permian from negative prices? The $12.38 per unit loss being incurred today. These are two different worlds that are diametrically opposed to one another. One is the reality that is refused to be understood or dealt with. The current world operated by officers and directors is absolute madness.

Read More: Gas Prices Jump as Top US Driller Slashes Output to Fight Glut

EQT announced production cuts, yet the reality, as reported by the EIA, paints a different picture. Press releases used to have a more sustainable nature to them. In an Information Technology environment, facts are preeminent. 

Conclusion

The behavior of oil and gas executives often reveals a deliberate effort to obscure accountability, reflected in the underfunding of essential ERP systems. Despite these limitations, software vendors have achieved commendable results. This situation leads us to question the motives and capabilities of these leaders, who seem to be trapped by their own quest for obfuscated responsibilities. Their apparent lack of insight into their own business and operations is alarming. In the oil and gas sector, accounting is relegated to a mere financial function, rather than being integral to strategic decision-making. This CEO’s detachment from solid accounting data is evident in the unrealistic perspectives he presents.

The oil and gas industry, with its operational complacency and financial opacity, urgently needs a radical change. People, Ideas & Objects is at the forefront, pushing for a comprehensive industry overhaul through innovative management and technology. Our goal is to instill a culture of dynamic, innovative, accountable and profitable operations, everywhere and always, by implementing the Preliminary Specification. This initiative is not just about enhancing profitability; it's about reshaping the industry to be more transparent, responsive, and future-ready.

These Are Not the Leaders We're Looking For, Part XI

 Disconcerting Financial Fact of 2023:

Revenues for our sample of producers were $348,678 million, down 22.6% from 2022's revenues of $450,683 million. It is interesting that an industry can lose $335 billion (North American industry share), with our sample share of $102 billion in revenues, and yet little is said about the decline beyond the fact that production volumes are up 2.68% to 11,752,841 boe/day. Two methods can increase revenues. Increase volume or increase prices. As producer officers and directors appear to be learning today, the inverse can also be true. However, I should be fair and reasonable to note that the 2.68% increase in production would have been a $9.1 billion increase in producer revenues. 

I’m at a loss to ever understand how this could have been accepted. However, to be accepted and reflected as business as normal is certainly the case. The officers and directors, who nonchalantly shrug their shoulders, need to redefine their roles and responsibilities as the existing leaders of the producer firms. This revenue loss is consistent with 2023s contribution to the $4 trillion in losses calculated from the natural gas’ price collapse driven by overproduction. Taken into consideration with our last blog posts earnings deception of a differential of 30.4% in recognizing depletion between 2016 and 2023. Reflecting these facts were not only known, but conveniently avoided.

But Who Needs Revenues!

The revenue generated by oil & gas producers is inadequate to cover the labor costs necessary to maintain the industry. Forget about growth and don’t bring up any more discussion about the industry's future challenges. The important consideration in all of this is People, Ideas & Objects Preliminary Specification has the audacity to challenge the officers and directors administration of the industry. That is the point they’ll put across as the shiny bright object to distract attention away from the disrespect paid to the shareholders, bankers, employees, and those involved in the oil & gas subsidiary industries. The important point to remember is the officers and directors are fine and they thank you for asking. 

Throughout the past four decades, at least, the myopic focus of the producer firms has been to control costs. The ultimate drive towards efficiency is the objective of the engineering mindset which operates the industry. While fiddling with the pennies paid to the service industry for the costs they’ve incurred. We can see their part of the business of the oil & gas business was not being managed appropriately. 

When Cost Control Fails?

Accounting manipulations often come to the rescue. With the SEC having capital assets limited by the present value of the petroleum reserves. We can see the producer firm is a marginal business that, in the optimal scenario, will return that capital over the lifetime of those petroleum reserves. Such high expectations of financial performance was the target each producer set out for themselves each and every year of operation. If the ceiling test came into play, it would place those reserves into the losing column. That is losing over the life of those reserves leaving capital stranded.

One of the most hilarious topics that I was able to consistently engage with officers and directors was regarding profits. Receiving the standard excuses of “it's about cash flow!” etc. When producers were annually raising their capital budgets on the markets. I would ask them why don’t they focus on profitability? And why are they not recognizing the capital costs of their production on a more timely and accurate basis? The response was telling for many reasons however it was most reflective of the attitude and consideration that went into what a producer firm did. The response was generally along the lines of those are “just accounting charges which are to do with the past.” To which I would promptly comment. They would gladly disregard the performance of past year's activities, and at the same time, hold their hand out for more investment dollars. It seemed to silence the conversation at that point. 

Why Profits?

Companies do not operate on the financial resources of their investors. That is not a commercial enterprise. Profits will drive the firm toward growth, innovation, satisfied investors, healthy and prosperous sub-industries. None of which exists in oil & gas today. Relying on investors to fuel this activity in the past was inappropriate. To do so on the basis of deceptive, overvalued assets and earnings has a special name for it. Which would ultimately cause the industry to fail. Usually in the short term, however it has taken decades for the industry to get to that point for one particular reason. It is a capital intensive industry that throws off strong cash flow to maintain at least its skeletal remains. This has sustained the industry for the short term despite the lack of new money entering the industry since 2015 and as stated before, the officers and directors are fine. 

Culture

The primary concern of everyone now is the methods that brought us to this point did not start in 2015. That’s when the investors suspended further support. The concern is the core difficulty today is there's a culture that developed that doesn’t know its wrong and can’t change itself. It demands the changes necessary and for them to stick. Otherwise fighting the status quo would be a tiring and losing proposition. 

The Preliminary Specification considers this break a necessity. People, Ideas & Objects are establishing a new culture on the basis of preservation, performance and profitability. A complete restructuring of how people conduct the operations of oil & gas is a necessity and that is what is accomplished here. 

The People, Ideas & Objects Preliminary Specification defines 'preservation' within its culture of preservation, performance, and profitability as a commitment to maintaining the safety and reliability of the oil and gas infrastructure. This concept emphasizes the importance of sustaining the physical assets and human expertise required to ensure the ongoing productivity, energy independence and efficiency of the industry. Preservation in this sense is about safeguarding the operational integrity and continuity of the oil and gas sector, ensuring that the necessary resources, knowledge, and systems are in place and well-maintained to support the industry's long-term success and sustainability.

Performance refers to the effectiveness and efficiency with which the oil and gas industry operates. This includes the ability to adapt to changing market conditions, innovate in response to technological advancements, and profitably optimize operations to maximize output and reduce costs.

Performance in this framework is about achieving operational excellence through continuous improvement and leveraging collective knowledge and technology. It emphasizes the need for the industry to be dynamic, responsive, and proactive in addressing challenges and seizing opportunities. This involves harnessing the capabilities of people and technology to enhance productivity, dynamism, innovativeness, accountability and drive economic growth through profitability, all while maintaining high safety and quality standards.

Profitability is about ensuring the economic success and viability of the oil and gas industry. It involves generating sufficient financial returns to sustain operations, invest in new technologies and projects, and provide value to stakeholders. Profitability is seen as the outcome of effective preservation and performance, where the industry's ability to maintain its assets and operate efficiently leads to economic gains.

The focus on profitability does not include just the immediate financial gains but also long-term financial health and sustainability throughout the oil & gas energy complex. It emphasizes the need for strategic planning, investment in innovation, and market adaptation to ensure that the oil and gas industry can thrive in a competitive and evolving energy landscape. This approach integrates economic objectives with operational and political considerations, aiming to achieve a balance that supports ongoing growth and development in the sector.

These Are Not the Leaders We're Looking For, Part X

 Disconcerting Financial Fact of 2023

Another disconcerting trend is the fact that the oil & gas industry is, or at least used to be, capital-intensive. Reviewing our sample of producers as of the year-end 2016, the first year we began accumulating data, we found that the reported depletion was 46.9% of revenue, and capital expenditures were 27.5%. By December 31, 2023, these numbers had changed to 16.5% of revenue for depletion and 19.8% for capital expenditures. This shift illustrates a transition away from recognizing capital, with a growing prevalence of operating costs on the income statement. It begs the question: would not recognizing 31% (46.9% - 16.5%) of the depletion in 2016 compared to 2023 have affected earnings? This hidden 30.4% of revenues has boosted 2023 earnings and adds to the many reasons why producers consistently report profitability, even amid management challenges. For 2023, net income is reported as 18.8% of revenue for our sample of producers. However, if the 2016 standards for recording depletion were applied, it would represent an 11.6% loss. 

Introduction

People, Ideas & Objects campaign began on October 11, 2023, aiming to identify and document the $4 trillion in revenue losses in the natural gas market from July 2007 to the end of 2023. During this period, the traditional heating value price of natural gas fell from 6 to 1 to over 50 to 1 in February 2024, indicating a significant depreciation in the natural gas price. Oil & gas commodities follow the economic price maker principles. Making these losses unnecessary.

We also observed the producers' misunderstanding of the “free on board” terms for shipping LNG to end-user markets, leading to missed opportunities in capitalizing on the global price of natural gas for North American production. In late 2023, producers hastily entered LNG contracts for non-operational, uncommitted, and unapproved facilities, due to being sidelined by their many years of “muddle through” strategy.

People, Ideas & Objects noted that the LNG debacle was symptomatic of the industry's profitability challenges. Producers could bypass LNG contract restrictions by profitably producing domestically. President Biden's cessation of LNG facility approvals made the officers and directors' efforts redundant.

Recently producers announced a shutdown of 5 BCF of U.S. deliverability from a total of 105 BCF to bolster prices. However, People, Ideas & Objects recognized their inability to distinguish profitable properties due to inadequate accounting for overhead and depletion. As of Wednesday, March 13, 2024, the EIA have reported no production cuts.

What Time is it?

With mid-March passed, the focus shifts to the Annual General Meeting. The lack of engagement from producers in our campaign signals a potential alternative plan to address shareholder litigation and insurance loss, potentially at the expense of the firm's financial resources.

People, Ideas & Objects highlighted the consequences of maintaining the status quo in the oil & gas sector, characterized by financial insufficiency, lack of motivation, trust, will, and faith. The cherished balance sheets of producers are vulnerable to destruction, contrasting with our Preliminary Specification that aims for industry restructuring based on profitability and market discipline.

Damage, What Damage?

Addressing the industry's losses due to the “muddle through” approach, we question the efficacy of their remedies and the impact of their inaction despite shareholder demands. Reflecting on the $4 trillion revenue loss, we critique the justifications provided during this period, highlighting the disconnect between industry actions and the need for accountability and leadership.

Producers’ inability to manage operations and sustain the oil & gas industry, let alone the dependent sectors, showcases a systemic failure. Despite the industry's profitability claims, the reality of financial and operational struggles is evident.

Leaderless and Listing

The industry's superficial stability masks underlying damages and risks. Producers’ financial constraints and the passive approach to business reflect a broader industry culture resistant to change. The natural gas price trends embody the cumulative effects of unheeded warnings and a lack of proactive leadership.

Conclusion

Producers' rejection of the Preliminary Specification signifies a denial of responsibility for the industry's predicaments. The ongoing decline in the industry's financial, operational, and political frameworks calls for a rebuilding based on profitability. Our observations question the current leadership's capability and intent to address the industry's profound challenges. People, Ideas & Objects advocate for a disciplined, dynamic, innovative, accountable and profitable, industry transformation through our Cloud Administration for Oil & Gas service.

These Are Not the Leaders We're Looking For, Part IX

 Introduction

North American producer firms need to ask themselves how they’ll address the issues present in their business. How will they reestablish a basis of building value throughout the greater oil & gas economy. People, Ideas & Objects Preliminary Specification provides oil & gas producers with the most profitable means of oil & gas operations, everywhere and always. Last week People, Ideas & Objects detailed some of the issues producers need to undertake to deal with the natural gas price issues. Noting our Preliminary Specification will provide accounting information to determine each individual North American properties profitability. Therefore providing the ability to determine why a property is unprofitable and the justification for shutting-in of any unprofitable production. And how there may be dozens of other natural gas price related issues that need to be addressed by producer officers and directors. Issues such as excessive storage capacity and LNG’s propensity to realize substantial unclaimed value from natural gas producers exploration and production. 

We noted producers will need to invest substantial efforts in rehabilitating the natural gas marketplace due to the damage reflected there. These are but a brief listing of what is necessary to deal with just the natural gas price issue. What producer officers and directors should be concerned with would include a list of serious issues possibly in the hundreds when considering the full scope of their business. To mouth the words “muddle through” and issue a few promises in another press release, ignores and avoids the significance of the issues, the state of affairs in oil & gas and the dire scope of their consequences. 

“Muddle Through”

Nothing is being done to identify these issues in the industry. When the value of the industry is believed to be generated by drilling wells. Solely involved in the spending of money. What could go wrong and what more could there be to do? This has carried on to the point that serious damage began to be realized throughout the industry. Beginning with the July 1986 oil price collapse. If “muddle through” was not the strategy and operating procedure of the industry this should have been the first fire alarm that called everyone to immediate action. It was not. 

It’s 2024 and I can say that there does not seem to be any difference in the attitudes and behaviors of the leadership in oil & gas. As a result they have lost on a comprehensive basis throughout the industry the faith, goodwill, trust and belief they’ll be able to do anything about the situation they’ve stumbled blindly upon, being the consequences of their own inaction. It is incomprehensible that since 2015 their own investors have denied them additional capital due to the inability to understand what it is they’ve done. Officers and directors assumed, given time, their investors would see the wisdom of their ways and relent to once again forward the proceeds to continue their “muddle through” ways.

Dividends?

The one change investors have been able to achieve is to discipline producers to be paying dividends on a regular basis. I would suggest calling these dividends is a bit of a stretch for me. The performance of the industry has been so degraded through the process of “muddle through” as to be about 40% of what a competitive industry would be able to perform. I’ll address why in the next paragraph. What I want to do here is focus on why dividends are important to the health, prosperity and competitiveness in the industry. The following is a quote from Milton Friedman in his book “Capitalism and Freedom.”

Dividends to shareholders keep the firm competitive and fit. Right or wrong, good or bad decisions are made. The question is who should be the one making the bad decisions? The corporation or its owners with their own money? The answer for me is obvious, you should do what you want with your money. If producers want or need money, it should be within their domain of understanding that they can have all they ever wanted by running a competitive and profitable business. 

Capitalization Policies

Where the performance of the oil & gas industry is and why People, Ideas & Objects assess it as abysmal. Capitalization under SEC guidelines permits a producer to include costs up to the present value of the proven reserves. This is the limit of what is acceptable under the guidelines for oil & gas exploration and production. North American producers treat it as a target to be reached by the producer each year. Seemingly unaware it would be the most competitive producer who had retired their costs in their property, plant and equipment account. For every dollar that is recorded in property, plant and equipment that would be considered an overvaluation from any reasonable point of view. And therefore has an equal amount of overreported profitability. Based on this method of SEC reporting, it creates a situation where the spending of money is literally profitable. 

When profitability is reported with little effort outside of just spending money. It has a number of insidious effects on the organization. Who is going to criticize those involved, who is going to demand better and why would they ask such questions? Those who are endowed with the authority to spend money take on the aura of having the midas touch. Investors who see the profitability as what they assume it means, real profits, provide the spenders with more. The point of this is the SEC regulations came into being in the late 1970s and since then this culture of spending has driven a deterioration in competitive performance of the North American producers. 

The Consequences

Overproduction of North American oil & gas is chronic with intermittent outright collapses and even negative commodity prices. We can assume that over the past 45+ years there has been overproduction, or unprofitable production as we describe it, in the North American market throughout that period. Therefore commodity prices have been depressed everywhere and always. Secondly, any spending is less efficient than what would otherwise be the case. And I may only be thinking about the creative executive compensation when I state that. Time slips from the point of view of deadlines and what is acceptable in terms of individual contributions. These become cultural norms and are eroded further as time goes on and there is no one left to say otherwise. Claiming to be innovative while ignoring commodity price collapses for 38 years, and People, Ideas & Objects Preliminary Specification for 33 years doesn’t qualify anyone to call themselves innovative. 

Therefore, what is the level of competitive performance in North American oil & gas? Extremely poor due to the fact that capital assets are depleted over decades in almost every producer's case. When other industries provide the opportunity to process investments in one to two years and not only double but pay out their money. A ten percent dividend on a 40% performing business model with bloated assets which return the capital over a 10 to 15 year period is an uncompetitive performance in today’s capital markets. 

When investors cut funding, this too should have been an immediate call to action and focused the officers and directors attention. The significance of the investors' action and its consequences has created no discussion outside of this blog for almost a decade! When individuals start organizations, such as People, Ideas & Objects for example. To address these points and offer solutions that would remedy these issues. Warning of dire, trillion dollar consequences if not addressed. And these people are only laughed at, run out of town and dealt with violently. That is my 33 year history of attempting to provide solutions for them to fix their business. In 2023 People, Ideas & Objects documented the fact that North American producers lost $4 trillion in natural gas revenues in the past 17 years. Only recently has attention towards these issues begun. And only in the form of enhanced volumes of press releases. Four companies were moved to the point of issuing press releases claiming action will be taken. Not one call to People, Ideas & Objects however. 

What we can state unequivocally today is that there has been no commercial value gained from the production of 764 TCF of natural gas produced during this period. Attempting to shut-in production today, when producers' systems are inadequate to identify the source of any unprofitable production will prove futile. People, Ideas & Objects suspects this may be the reason behind this activity and is designed to prove the Preliminary Specification ability to shut-in production doesn’t work. (Please review the prior post.)

This culture has grown to become one of inaction and acceptance of failure. Smoothing things over with the opaque nature of their accounting and systems that were conceived of in the 1960s. Systems and accounting which have subsequently developed on the basis they were a waste of money that could be better spent in drilling and completion. And to avoid at all costs and over the course of the time since their design. Producers' lack of accountability has created incoherent accounting information that is not used or relied upon. Where their understanding of their business and business terminology is so poor as to account for errors in the trillions of dollars. We should note here, that producers are therefore the ultimate victims of their own conspicuous designs. 

Conclusion

Homogenized financial statements of producer firms makes it impossible to discern a producer's performance. All financial statements are of a cookie cutter formula based on the size of the production profile. Who’s the hero, and who’s the zero? Field operations being managed through reserve reports to ascertain the performance internally. No reliance or faith in the accounting information provided. Producers accounting and the few ERP software vendors' budgets are scaled back to such levels that they are barely functioning. Are these budgets designed to save money or are they to maintain the lack of accountability that the industry has now become so well known for. The quality of the information produced is not granular enough to know the dynamic implications of any actions within the organization. All that is known is drilling exposes more reserves. Reserves are valuable. People, Ideas & Objects have consistently asked if the reserves are not profitable. Where the industry demands outside forms of cash each year to sustain operations. The value of the industry is at best $0.00, and more likely substantially negative. With a future that is far more important to society than it has been in the past. A future that is far more innovative, complex and dynamic than in the past. An industry's speed that will accelerate at a much quicker pace now. The lethargy of three decades of inaction or more to finally issue a press release is unacceptable. The time that has passed, and the time it will take to determine what, how and why the industry will operate is at least a decade of difficult research ahead. Or, the Preliminary Specification that provides oil & gas producers with the most profitable means of oil & gas operations, everywhere and always is available now.

These Are Not the Leaders We're Looking For, Part VIII

 People, Ideas & Objects has always expressed the need to undertake a deliberate long term rehabilitation of natural gas prices. When prices are diminished from 6 to 1 to greater than 50 to 1, serious damage is reflected in that market. There are structural, organizational and cultural constraints that need to be purposely addressed and resolved in order to return it to the heating value equivalent of 6 to 1. Issues such as a means in which to ensure that both storage and LNG facilities are no longer able to extract the real value from natural gas that producer officers and directors have ignored. The $4 trillion in lost revenues as one example. These are just two of what may be dozens of serious systemic and key issues of the natural gas market that need to be dealt with. 

People, Ideas & Objects are addressing two components of the oil & gas marketplace as part of those key issues. Producers' poor accounting information and its current inability to determine which property is producing a profit and why. Through our Preliminary Specification, we convert producers' overhead to a variable cost charged directly to the Joint Operating Committee. Variable based on profitable production, enabling a more flexible and responsive financial structure. And therefore enabling their ability to shut-in that property through the Joint Operating Committee, the operational decision making framework of the industry. Revising the culture of “muddle through” into one of preservation, performance and profitability based on our seven Organizational Constructs.

Benefits of the Preliminary Specifications Decentralized Production Model.

• Creating a situation where if the property is shut-in it incurs a null operation, no profit but also no loss. 
• Producers' corporate profitability is higher due to the fact no property losses dilute profitable ones. 
• Securing their reserves for a time in which they can be produced profitably. 
• Reserve costs will no longer have to make up for any losses while producing unprofitably. 
• Maintaining reserves as low cost storage without any production or storage costs. 
• Profitable production then returns the exploration and production investment that is needed to replace the barrels produced. That is today’s cost of all production.
• Overhead infrastructure costs are shared across the industry. Not redundantly incurred within each and every producer firm. 
• All overhead and depletion costs, when cost into the current month's production, are returned to the producer in the form of cash. 
• Creating the only viable source of funding available and large enough for producers to access.
• Markets provide one thing, a price. Which contains all the information for producers and consumers to make the appropriate decisions.
• Commodity markets find the marginal cost when marginal production is removed from the market.
• While shut-in producers will move the property to their work-in-progress inventory and innovatively return the property back to profitable production. 
• People, Ideas & Objects decentralized production model is the only fair and reasonable means of production discipline available.
• If a producer wants to produce, ensure its profitable. 
• If it's not profitable they’ll be diminishing their revenues on all production and wasting corporate assets. 
• Capital markets will discipline non performers.

Building an industry around these principles, establishing a new corporate culture, and securing that within our Preliminary Specification ERP software is what People, Ideas & Objects are doing. There is little that we can do with the dozens of other issues producers will need to address. What we can state is for producers’ officers and directors to be issuing a few press releases regarding some possible future, temporary and random properties being shut-in here and there. After 38 years of the first oil price collapse. Which has nothing to do with the natural gas price other than to state it was the point when both commodities began to be influenced by systemic North American overproduction. And the time in February 2024 that producers overproduction of natural gas was ultimately realized as an issue by officers and directors. And therefore at greater than 50 to 1 pricing of natural gas, it is fairly reasonable to assume that factor is understated as the oil prices have been affected by overproduction too. (fxempire.com shows many natural gas producers have announced production cuts.)

This is only a brief passing through the issues in the natural gas market. They will take many years of concerted, deliberate effort to resolve each and every aspect of the overall issue. People, Ideas & Objects are focused on our domain which makes up a small portion of the total issue. Yet after 38 years of being faced with the issue. After 33 years of myself pounding the pavement and this keyboard. Is a handful of press releases all that are necessary to resolve the issue as far as the officers and directors are concerned?

We need to put this situation in the proper context. Officers and directors do not understand what has and is happening, how to resolve it, paint a vision for the future or even offer a counter argument to our Preliminary Specification. Profitability is the only source of an industry's health and prosperity. Assuming that spending money is profitable due to all the costs being capitalized is inappropriate. The culture that has developed around this concept is failing and is unaware of the instability of the ground they stand upon. Oil & gas is not a healthy industry and has serious issues that are not remedied through superfluous statements.

Today, we stand at a crossroads, risking the loss of our opportunity to achieve energy independence. As Ernest Hemingway wrote in his Novel, The Sun Also Rises. A discussion with two characters named Mike and Bill where Bill asked “How did you go bankrupt?” Mike responds “Two ways, gradually and then suddenly.” There is no value in the industry other than what is represented on the producers balance sheets in property, plant and equipment. These will provide little resistance to the paper shredder when the time comes. We are exposed to shale technologies that have an inherent, steep decline curve that’s never been experienced industry wide before. Shale’s drilling and completion costs are exponentially larger than conventional wells. Zero support exists for the producer's capital structures. Heavily depleted field service industry capacity and capabilities. A situation not of bankruptcy but of collapsing productive capabilities. Where is the motivation to resolve this? Not in the industry leadership. 

North America may then move on to become dependent on foreign sources of oil & gas. Whether it is two or ten million barrels / day it’s irrelevant as to the volume of oil & gas needed to be imported. In the meantime these officers and directors may want to work on the idea of what it is they’ll do when consumers ask about their energy needs. If producers fail to meet the market's demand for energy, press releases will be considered an inappropriate response. The collective will of the officers and directors of the producers has now proven itself of being incapable of understanding its business. People, Ideas & Objects Preliminary Specification is designed to rebuild the industry based on the individual efforts of those who are part of our user community and their service provider organizations. When the world is decentralizing around the Internet, the only opposing trend is the consolidation of producer firms in oil & gas. 

These Are Not the Leaders We're Looking For, Part VII

 People, Ideas & Objects believe finding the motivation to address long-term challenges is one of the most pressing issues for oil and gas producer officers and directors. This assumes they decide to stay and are given the opportunity to make significant changes in the industry. I may not be fully aware of the greater oil & gas economic state. What I do see outside of People, Ideas & Objects is not much activity other than an uninspired, lethargic leadership that does nothing outside of issuing press releases. 

Let's highlight the service industry's dynamics as detailed in the Preliminary Specification Resource Marketplace module. Some officers and directors assert the industry’s stability, convinced suppliers will always be there to accept their business. Money being the great motivator it is will maintain its predominance in terms of motivation. That does not mean they’ve been able to acquire the hearts and minds of those that are willing to go to the wall for the producers. In fact it is these necessary elements of dynamic industries that have been lost throughout the greater oil & gas economy. Producers use and abuse the service industry, kicking it like a proverbial dog whenever difficulties arise. If producers cut capital expenditures it's the service industry that will realize the consequences. And not in an insignificant way. Being fully dependent on the producers for their revenues, when activity is slashed officers and directors take the opportunity to ensure that substantial discounts are also realized. Leaving the service industry to make the choice to let the equipment idle and rust or keep it moving for a quarter of their asking price. (50% reduction in activity and 50% discounts.) 

The line up to be persecuted in this way has dwindled to nothing in the past decades. Therefore when times are good the service industry is accused of being lazy and greedy when unable to meet industries' excessive, booming demand. Producer officers and directors' favorite actions are blaming, excuses and creating viable scapegoats. When Covid hit the service industry they were forced to sell horse power to other industries and cut up their equipment to financially survive. Producers did nothing, protected by the comfort of the primary oil & gas industry revenues that are the exclusive domain of the officers and directors. 

Another critical issue is that producer officers and directors often discourage the development and utilization of Intellectual Property (IP) within the industry. Claiming any form of IP risks having it appropriated by powerful players, who may sideline your firm or use your ideas to fuel competition. They generally persecute any new entrant with the classic line: “they only work with big firms” and reflect to the rest of the community this is what happens to those who think they might start a business. If you have an idea, best just leave it on the sidewalk and let it be found by an officer or director to pick it up for themselves. Nowhere does the motivation to act for the business's benefit exist.

People, Ideas & Objects leverages IP to challenge the producers' status quo. (IP predominantly in the form of copyright and trade secrets.) We have established many precedences in the industry and we’re proud of our efforts and the changes that we’ve seen. The purpose of this post is to reflect on what I’m seeing in the broader business community. With oil & gas having none of its IP secured it is a proverbial gold rush at the moment. When we say that none of its IP is secured, producers operate on the basis where no IP is identified or claimed by anyone. Therefore a pool of IP was available to them at all times to use as they pleased, with no cost to them. We noted in our July 21, 2021 blog post that this was the case and we encouraged people to begin the process of securing their corner of the oil & gas IP. That way they could build a solid foundation on which to build their future service, product and IP pursuits.

Without legal protection and motivated leadership, the oil and gas industry's problems will persist, hindering its future prospects. Without the protection afforded by the law, no one will undertake the difficult tasks that need to be done to resolve these difficulties. In February 2024, producers finally began shutting-in production to address low natural gas prices. A mere 38 years after the 1986 oil price collapse from overproduction and a dozen since the publication of the Preliminary Specification. Yet today we’re expected to believe that this has always been the case, and shutting in production to support prices has been the common practice in the industry. If what should be common sense takes 38 years to be considered, no one will be spending any thought on the issues and opportunities around the oil & gas bored room. 

Well wouldn’t you know. Not only has this been happening, surreptitiously I might add, these people are NOT deploying that IP in their current positions. They will avoid the discussion and use of that until such time as the officers and directors are dispatched to the afterlife and they are free to establish their pursuit of resolving the oil & gas industries difficulties and build a secure and prosperous future for themselves and everyone else. The fact of the matter is that the United States is the most powerful economy in the world due to the fact that copyright protections are part of the U.S. Constitution. People can benefit from their efforts and ideas, and in turn society benefits by building a stronger and more robust economy. How far along in this process is difficult for me to ascertain. Engineering and geology are unfamiliar to me as professions. I am a “wanna be engineer” that spent their time in accounting, audit and ERP software. Places where tragic mistakes were resolved by flipping the pencil to erase the error, or using the delete key.

People, Ideas & Objects has built the Preliminary Specification around the foundation of Intellectual Property. It is one of three of our distinct competitive advantages and the means in which we secure how we provide the most profitable means of oil & gas operations, everywhere and always. It is how our user community, service providers and Profitable Production Rights holders are secured. 

People, Ideas & Objects are fully committed to the Profitable Production Rights as the means in which to raise the funds necessary for the Preliminary Specifications development. We understand and appreciate the concern from the rarified air of the officers and directors that it is comical to propose. It is the only means that we have available to us. And as seemingly the one group that’s more concerned with the profitability of the industry than those given the authority, responsibility, accountability and resources to ensure profitability. And just as People, Ideas & Objects proudly maintains the two ugliest websites on the Internet. I would hope that these producer officers and directors are adequately humiliated that others would need to go to such lengths to try to fix their problems, if only just to entertain them. 

Just when you think it's about to settle down, everything changes again. In the July 21, 2021 blog post I mentioned that I began my journey into securing IP as the premier personal asset to develop and hold. People, Ideas & Objects are the result of that. Recently Artificial Intelligence has come into the market and is interesting and valuable to some extent. For those who own IP, it’s solid rocket fuel. The combination of the two is something to behold. I’ll only repeat the three tiers of IP we see that are available in the market. Securing a variety of these are what will be necessary for the average person who will need to be employed soon, I believe. The first is the outright ownership of IP and the ability to contractually control it through licensing etc. The second tier is through a direct license from the original owner of the IP. These would be our user community. And the third is working for a firm that has acquired some form of IP and or license they apply a service with. What I see in oil & gas today is the proverbial gold rush and the early pioneers are moving. Others may need to hurry as the officers and directors will undoubtedly stop laughing, and possibly as soon as 37 years from now. 

The last point I need to make today is an important one from the software point of view. It is the division between explicit and tacit knowledge and the implications from IP. Explicit knowledge is what can be written down and captured in some form. Tacit knowledge is learned by doing and is unable to be captured in any form. Our user community defines explicit knowledge that our Preliminary Specification ERP software captures, and service providers then apply their tacit knowledge to enhance the software’s value.

Entrenched, inflexible leadership dominating the bored room presents the core issue in oil and gas. The solution which is necessary is an innovative, dynamic, accountable and profitable oil & gas industry that has the best interests of everyone involved. Oil & gas is not interested in accounting and administration as distinct competitive advantages. However that may be the headspace of the current officers and directors. The same can be stated for IP. Producers' competitive advantages exist in the coordination of earth science and engineering capabilities and capacities at their disposal, and their land and asset base. Only through highly motivated individuals willing and able to overcome the obstacles can the industry address producer issues and opportunities. To do so there has to be something in it for them other than officers and directors treating them as parasites. 

These Are Not the Leaders We're Looking For, Part VI

 Bloomberg’s Javier Blas wrote in an article on Thursday March 7, 2024, entitled “When the Fix for Lower Commodity Prices Isn't Low Prices.” He discusses how low nickel and natural gas prices are no longer affected by this principle, due to some fundamental changes in the costs' makeup in those markets. It’s an interesting read for the changes that have occurred in the nickel market. I would argue that the assumptions he’s operating under in natural gas are skewed by producers' specious financial statements, financial statements that appear accurate on the surface but are misleading or deceptive upon closer inspection, and their propensity to say whatever comes to mind in their press releases. 

Shale has brought about a new era in oil & gas. An era of abundance that is the polar opposite of the scarcity era that preceded it. Although producers had developed behaviors of overbuilding capacities and capabilities in the scarcity era, and did not make any changes to their underlying business if prices of oil & gas were too low to command a profit. Doing so by continuing to produce at 100% of their production profile. Shale gas has worsened the situation, distorting the pricing structure significantly. Years of deliberate action will be required to rehabilitate the oil & gas commodity markets. 

First, a quick 101 in commodity economics. The theory says that low prices force producers to reduce investment, curbing supply; they also incentive consumers to use more stuff, perhaps in new applications, lifting demand. Over time, both forces rebalance the market bringing prices to their so called mean reversion, aka, the average. But that stylized supply and supply-and-demand model assumes a fixed environment that doesn’t consider technological changes.

Javier Blas' argument is the one that producers have argued for decades. It is a product of “muddle through” and their belief that cutting capital expenditures will ultimately remedy low prices. People, Ideas & Objects has repeatedly put across its point of view regarding 'muddle through.' The cutting of industry capabilities and capacities does nothing but:

• Aggravate and accentuate the boom / bust cycle within the industry.
• It destroys the field service industry, forcing it to bear the consequences of producer capital cuts. 
• Willingly destroys producers reserves while years pass for the productive capacity to either recede or market demand to increase. 
• Is a dull, blunt instrument that commands no effort or work on the behalf of officers and directors outside of issuing a press release or two. 
• Officers and directors continue to be rewarded with the revenues from a primary industry.

People, Ideas & Objects Preliminary Specification enables producers to shut-in any unprofitable production within the current month. Immediately dealing with the oversupply of the commodity. These specialized financial statements, designed by People, Ideas & Objects, offer a detailed and factual account of each oil & gas property's profitability, unlike traditional ERP systems. Determining the actual profitability of the property based on actual, factual, objective and standard accounting information. The ability of a producer to determine where and how they earn their profits is unknown and unknowable in any current ERP system in the oil & gas marketplace. What they shut-in would be hit and miss as to be a losing property or one that was contributing to the bottom line. From Bloomberg.

Second, on March 4, EQT Corp., the largest US natural gas producer, said it was cutting its output by about 6% this quarter after US gas prices fell close to a 25 year low.

And please note how common place shutting in natural gas production has suddenly become.

Therefore, we are concerned that the desire of producers to finally shut-in production misses the point. They will continue to lose money on the basis their overheads are fixed, not variable as we’ve proposed in the Preliminary Specification. Although we appreciate oil & gas officers and directors' acceptance of our argument of the need to shut-in overproduction. What they're doing is inadequate without the Preliminary Specification to provide the data and information, but more importantly, to guide them to where they make their money and how. How to deal with any loss and to tune their organizations. For an industry that has a culture that has developed on the basis of “making money,” “building balance sheets” and “putting cash in the ground” by spending other people’s money. A transition to a much more sophisticated understanding of their operation must be undertaken. Merely spending money does not equate to profitability. 

In discussing the recent history regarding shale’s build out. Javier Blas emphasizes the industry talking points about the costs of natural gas production dropping from shale’s discovery and development. 

The result was a staggering increase in production, making the US the biggest exporter of liquified natural gas last year. Over time, the process has become cheaper and cheaper, lowering overall costs. Despite years of low prices, US gas output has nearly doubled since 2010.

I believe he’s implying that even with low prices, money was made to expand the throughput through shale gas development. He, like the producers investors, may have been deceived by producers' specious financial statements reflecting profitability during this period. Spending money is not profitable. 

Shale gas has four characteristics that make it unique and support the abundance era. It is substantially more costly to drill and complete, exposes prolific petroleum reserves, it achieves high deliverability and incurs early and steep decline curves. Some of these are considered in the prior quote. However, the need to spend substantial amounts of money within a few years is necessary in order to maintain the high deliverability. This can involve incremental fracing on the initial leg, drilling a second leg and fracing or other work. Higher expenses of shale compared to conventional wells generate these costs.

With the SEC’s Full Cost accounting treatment these costs are allocated equally to each molecule of proven reserves discovered. Shale is prolific for the reasonable size of its pay, however it also extends from Pennsylvania to Ohio through to New York for the Marcellus formation. The aerial extent of these reserves formations are defined by the number of states that access them. Allocating the extensive costs of drilling and completion to this level of reserves makes the capital costs appear miniscule in comparison to conventional drilling. However, the steep decline curve reflects that those reserves will not be accessible without incremental, costly and repeated reworks. These costs will be added to the initial costs on each of the remaining reserves molecules. This skews the producers capital cost per barrel of oil equivalent to the largely irrelevant stage of commercial operations. Over time what we see is that the property eventually becomes too expensive to produce as the reserves decline and the remaining capital costs are too large to produce commercially. Therefore it is abandoned and the reserves and their costs are left stranded, leaving officers and directors shrugging their shoulders. There may even be times when they realize that shale will never be commercially viable and move on to greener pastures!

Producers claiming to be 'innovative' and 'profitable' quote these capital costs. We’ve seen two phenomena regarding the cost characteristics of producer firms that we’ve never thought would happen, and have not seen in any other industry. When commodity prices were declining producer press releases were stating the firm could then produce at ten dollars less cost than previously quoted. This went through several increments from $70 / bbl to almost $30 / bbl and supported their claim of profitability first and foremost, but also their innovativeness. How does a firm whose capital costs were incurred in prior periods suddenly reduce the capital costs by such substantial margins? Are there innovations in historical accounting that I am unfamiliar with? Simply these are what are called in the industry recycle costs. Capital costs refer to the initial expenses to drill and complete wells, while recycle costs represent the hypothetical current costs to drill anew, often used by companies to suggest lower capital expenditures during periods of reduced service industry prices. When a large producer doesn’t increase their well count by much more than 5% per year, that 5% is not going to have a material impact on the historical accounting costs of the past 95%. Producers are stating that if they wanted to they can drill and complete a shale well for less than before.

I personally gripe about how an industry can claim to be innovative when it has done nothing but seek and destroy. It's the service industry that conducts the innovation in oil & gas. Those with their hands on the problem. And to argue after 33 years of doing nothing about their poor accountability and systems. I can suggest that their only innovation was of the type that Bernie Madoff was envious of. 

In most cases where companies are announcing they’re shutting-in production. I’d be concerned they would see their choice is to shut-in their conventional production and keep the shale producing. The exact opposite of what an analysis of profitable properties would be telling them to do. Conventional, it would be assumed, are older with much lower capital costs and the time passed in which to have depleted those capital costs, and therefore would have no remaining capital cost balances to deplete. Therefore being amongst the highest in terms of the profitability for the firm. The difficulty for the producer is conventional oil & gas poses less interesting scientific and engineering issues.

New entrants into the oil & gas industry will be unable to compete at anything other than the highest of costs. Figuring out new and innovative ways to bring their production on line profitably is the challenge. Therefore the fallacy of high prices cures high prices is incorrect as the assumption that low cost production will be brought on to the market is false. All the low cost production in the Preliminary Specifications price maker strategy produces 100% of the time. All the affordable reserves were produced long ago. 

From the consumer point of view, the consumption of energy may decline however that has not been proven the case. The inherent cost of oil & gas production has less and less to do with the cost of oil & gas production and much more to do with the utilities “costs” and government taxes that are conveniently attached. When the consumers value proposition from oil & gas is 10 to 25 thousand man hours of mechanical labor, consumers may begin to believe that it is their most precious resource and have some appreciation for it. When it's cheaper than bottled water, no wonder they think it's of little value. 

Officers and directors have had ample opportunity to address the pressing issues within the oil and gas industry. Yet, despite the innovative solution proposed by People, Ideas & Objects — one tailored to the industry's unique challenges and fully fleshed out conceptually — they have failed to act. They have failed to meet the most basic expectations of them. Investors have withheld further support for nearly a decade, underscoring the lack of progress. The staggering loss of $4 trillion in natural gas revenues from 2007 to the end of 2023 starkly illustrates the consequences of this inaction. Such a profound failure not only underscores the inefficacy of the current leadership but also disqualifies these officers and directors from continuing their roles. The time for change is now. These leaders have overstayed their welcome, proving that the cost of their continued tenure is too great a burden for the industry to bear. For the sake of the industry's future, it is imperative that we usher in a new era of leadership, one that is willing to embrace innovative solutions and drive meaningful progress.

These Are Not the Leaders We're Looking For, Part V

 People, Ideas & Objects have been in somewhat of the same situation we find ourselves in today. Where producer officers and directors appear as though they need to act in order to mitigate the personal risks they’ve incurred in their willful misconduct over the past many decades. This is best represented by the 2007 to current natural gas price differentials creating a documented $4 trillion revenue loss. Why do they realize they’re at risk? They understand their Officers and Directors Liability Insurance may not cover them for these purposes.

Recently we announced we were selling Profitable Production Rights at a 90% discount. Disregarding the futility of the methods People, Ideas & Objects need to use to raise the necessary funds for these developments. No producer has contacted us regarding participation in any form in the development of the Preliminary Specification. We began our campaign on October 11, 2023. We are not deceived in the actions of the producers. After 33 years their behavior is consistent and can be summarized as “they control the funds of a primary industry.” If People, Ideas & Objects speaks of risk, that is responded to by “no one cares about risk.” Just as “no one cares about profits” was previously stated by them earlier in our journey. We would also point out the fact that since no producers have jumped at this opportunity through the discount, our prices are not at issue with them. 

One day People, Ideas & Objects believe producers will begin to understand the damage and destruction they’ve inflicted upon the greater oil & gas economy by their unreasonable approach. When they do it is the Profitable Production Rights that will linger as a daily reminder of what ridiculous extremes were necessary to put their business right. People, Ideas & Objects are sticking with this method of funding no matter how foolish the officers and directors feel it is. 

Their lack of business understanding extends to the method the Preliminary Specification provides oil & gas producers with the most profitable means of oil & gas operations everywhere and always. Our price maker strategy reflects that oil & gas commodities follow the principles established by economic “price-makers.” Earlier they accused us of formalizing collusion and price fixing, that they would have nothing to do with. This was their reason for ignoring the Preliminary Specification. We were subsequently able to assert that if producers were making independent business decisions based on actual, factual accounting information, that determines the profitability of a property is collusion, then one of us had a deep misunderstanding of business.

I raise this point to highlight the consistent theme throughout their “muddle through” induced inactivity and passivity. Claiming or feigning a lack of knowledge or understanding may help them in court if they were not officers and directors. However they are held to a higher standard. If they are this obtuse and lack the business knowledge they’ve displayed throughout the past many decades, they’ll still be seen as culpable. Playing on their investors and the service industries sympathies while they destroy the industry is a deception that would be worthy of, and consistent, with their prior actions. 

Oil & gas commodities are too valuable to be wasted. Unprofitable production is waste. These are finite resources and we have an obligation to future generations to prove we managed the resource appropriately. To show we produced oil & gas profitably and that a healthy prosperous industry was passed onto future generations. Neither is the case today. People, Ideas & Objects believes that industry needs to adopt the principles of preservation, performance and profitability in order to turn this situation around. The “muddle through” culture has failed in this endeavor. 

A few months ago I mentioned the impact that natural gas storage had on the prices of that commodity. The storage facilities were built out in the early 1990s by the producer firms in one of their Keystone Cop approaches to capital investments. Everyone piled in only to find out no one figured out how to make money and therefore since it didn’t make money, storage was sold off to midstream operators. Now they have no control over the operation and it has become a depressant on the price of natural gas. Although storage enhances the deliverability of gas, it appears that the gas held in storage is not owned by the producer and therefore, just as with LNG, in the hands of others who benefit from its upside. 

When seasonal demand or production is high then the high deliverability acts as an effective buffer to the market to maintain somewhat steady prices. However, are those prices beneficial to producers? Unprofitable production is seen by People, Ideas & Objects as the exact same thing as overproduction. If all the overproduction in the industry is absorbed by storage facilities for the majority of the year, and during peak demand storage's deliverability is high enough to accommodate the extreme demands, are these normal market forces? Storage operators buy low and sell high during the seasons as their method of earning a return. 

Natural gas storage absorbs any overproduction when storage is available. And when storage is unavailable, it continues to depress the price and will accelerate any price decline into a collapse. The way to eliminate the effect of storage in the market is the same method as with LNG. Producers must only produce profitable production. By producing only profitable production through the use of Preliminary Specifications price maker strategy producers will be able to achieve all their corporate objectives. Profitability, maximized asset value and effectively eliminated any excess financial benefit to those who effectively trade off their product. 

However, based on the response times officers and directors have approached these opportunities. We should be seeing the wind down of oil & gas due to the successful development of pocket fusion reactors. Those officers and directors who should have been accountable, hold the responsibility, authority and can direct the resources necessary to deal with the consequences of their “management” haven’t risen to the occasion, and we believe never will. What I’ve found was their behavior was unacceptable and quite beneath those who were responsible for the “can do,” “wildcatting” days. These officers and directors believe they’ve co-opted and emulated that image as they strut down mainstreet with their big, beautiful, well-built balance sheets. Showing who truly is the biggest spender by putting the most “cash in the ground.” 

It's time for producers officers and directors to reveal what their vision for the industry is. What it is they plan to do. How it is they'll do what they plan to do. And why they're doing it. They've had plenty of time to come up with something. Why not share it?

These Are Not the Leaders We're Looking For, Part IV

 The question we need to ask ourselves is why do officers and directors believe People, Ideas & Objects glow radioactive? Why is there such a strong adverse reaction to the combination of 'real' and 'profits'? Shouldn't generating 'real' profitability, which would provide more cash, align with their interests? There’s no question it’s the case, why has it not happened? And if they are so offended by People, Ideas & Objects, after these 33 years, why haven’t they changed their systems to generate “real” profitability? 

After asking the many pointed questions I’ve asked in the past few weeks. To summarize, the $4 trillion in lost natural gas revenue since 2007 can be attributed to either the incompetence and indifference of officers and directors or their deliberate, self-serving actions. I suggest officers and directors need to choose one of these alternatives to ensure they don’t become accused of both. 

We have spoken before of several motivations as to why producers have not acted in their own profitable interests. These include the opaque nature of the accounting and systems allows for a freedom and creativity that accountability would otherwise expose. A second reason for the lack of action towards profitability is that the Preliminary Specification represents disintermediation, making the current business models of producer firms redundant, inefficient, and uncompetitive. The third reason that there has been no move to enhance profitability is that under their current business model it can not ever be done. 

Firstly, I have vigorously defended my Intellectual Property throughout this journey, making it accessible exclusively to People, Ideas & Objects, our user community, service providers, and Profitable Production Rights holders. Not to others. Second, today’s producers accounting information produced is inadequate to make the decisions that would be necessary to shut-in production. Accounting information is aggregated and consolidated then merged. To gain any detail or understanding of what its makeup is would be impossible to compile. The two most egregious examples are depletion and overhead.

Depletion

Depletion is a necessary element of determining what level of financial performance a Joint Operating Committees has attained. In a capital intensive industry to exclude the cost of capital from a determination of profitability is inappropriate. Many argue that the well paid-out many decades ago. And that is possibly the case. It doesn’t mean from an SEC or accounting point of view that it ever has or ever will. The need for producers to source investment capital as a means to spend has been over for almost a decade. Competition for capital has to consider a broader, North American perspective and producers need to compete with Apple, WalMart and others as much as they do the producer down the street. 

Accounting is accounting on the basis of the SEC, all accounting for all listed companies will be comparable and to a large extent is. Except when oil & gas Full Cost and the Ceiling Test are involved. These calculations, along with the depletion calculations are not completed at the Joint Operating Committee level, they are aggregated at the corporate level. Reliance on the independent reserve report to provide the detail is where a firm would get the information they need. Note: the reserve reports are factual from a reserves basis however, from an accounting basis their costs are as mythical as Harry Potter in comparison to the SEC requirements. 

The implications of Full Cost and the Ceiling Test are not allocated to Joint Operating Committees. A well may have paid out from the point of view of drilling, completion and equipping. But that’s it. Full Cost allows for any cost that was incurred in the exploration and development of the reserves to be added to the pool associated with those reserves. Therefore, the Joint Operating Committee may have significantly larger capital costs than the individual well’s drilling, completion and equipping. From an SEC accounting basis, any capital costs such as the drilling of uncommercial wells in the pool need to be included in the depletion calculation. 

Currently depletion calculations are conducted on a corporate basis. In today’s Information Technology environment depletion would need to be allocated back to the Joint Operating Committee based on the engineering reports proven reserves and monthly production in order to determine an actual monthly profitability. This work is not undertaken. 

People, Ideas & Objects advocate for a more timely recognition of depletion costs, suggesting a thirty-month period for capital cost recovery to enhance competitiveness and financial health. The SEC’s Ceiling Test defines the limit, not a target. There is ample reason for a producer to adopt a policy of zero property, plant and equipment balances. It will be the most competitive producer that maintains a zero balance of property, plant and equipment. The fact they’ve returned all their investments shows their performance has been historically exceptional. Big, beautiful balance sheets are useless to everyone other than those building consolidated paper empires. The same can be said and is said for the purposes of allocating any changes or adjustments as a result of the Ceiling Test.

There is an associated issue with the management of cash due to these policies. Officers and directors have claimed they were “putting cash in the ground” and they were telling us exactly what it was they were doing. By recognizing capital costs over a thirty month period, this cash would be released back to the producer for reuse for dividends, debt reduction and dividends. Letting cash atrophy in the ground for a decade and more is ludicrous. 

Overhead

The detail necessary for industry to identify the individual Joint Operating Committees overhead costs are significant. As a result industry operates on the basis of overhead allowances charged to the Joint Operating Committee. For every charge to a Joint Operating Committee there are 100% of those charges being recovered in some form from working interest partners. The net effect of these charges and recoveries across the industry is that all overhead allowances equal zero each month. The actual overhead is charged to the corporation and at the end of the year, aggregated and a large percentage, People, Ideas & Objects estimate an average of 85%, are capitalized. 

Ask a producer what’s the “actual” overhead cost to account and administer natural gas vs. oil. No one and I mean no one will be able to tell anyone that until such time as the Preliminary Specification is operational. Eliminating the overhead allowances and replacing them with the actual overhead costs of each process will be done when the Preliminary Specification and our user communities service providers are operational. Each service provider manages one process on behalf of the entire North American producer population. Specializing on their distinct competitive advantages that include: Quality, specialization, division of labor, automation, innovation, application of Artificial intelligence, leadership, Internet of Things, integration, domain expertise, deployment and integration of tacit (their services) and explicit (our software) knowledge, conflict and contradictions, issue identification, creativity, collaboration, research, ideas, design, planning, negotiating and compromising to highlight just a few. Processing the work and billing the individual Joint Operating Committees for their fees for managing their process. If the property is shut-in no data or information is generated for the service provider to conduct their work and as a result no billings are rendered, turning all of the producer's costs variable, based on profitable production. 

This has the added benefit of incurring these costs in a profitable operation each month. Passing these costs on to the consumer of the oil & gas. And therefore the cash incurred to pay the service providers is returned to the Joint Operating Committee within the next month. Maintaining a “cash float” for the overhead costs of the producer firm. Or if the property is shut-in, with the variable nature of overhead under the Preliminary Specification, these costs are not incurred and the property creates a null operation, no profit but also no loss. Today, with the majority of the overhead capitalized, the cash is returned when the depletion costs are recognized annually over the next 15 to 20 years. Demanding that producers find new and willing investors or some form of “new” cash each and every month to pay the overhead. When we think producers knew this from the time of the publication of the Preliminary Specifications publication in August 2012. And no changes have been made to their policies. Maybe alternative 1) above, the possibility of incompetence is the appropriate choice to make.

Moving producer costs to the customer on a timely basis is necessary for profitable and healthy producer firms and the greater oil & gas industrial complex. “Building balance sheets” and “putting cash in the ground” have failed as objectives. As any reasonable person would have anticipated. If the Preliminary Specification disintermediates the officers and directors, or their understanding of business concepts are poor there is ample material here for people to discern the scope of their failure. 

The pressing issue now is the industry's future and how it will navigate the mounting challenges it faces, exacerbated by leadership that has squandered the value entrusted to them by previous generations. A future that sees capital expenditures outstrip any era before it. An unidentified and misunderstood impact of the shale era and its consequences on the industry. A lack of support for producers' capital structures. An industry that has been gutted of any and all value that had been handed from prior generations to the current crop of officers and directors. Which summarily incinerated the capital that was raised in the past three decades. An unmotivated, distrusting and abused service industry that producers have shown they were once played for fools, and they now understand intuitively the real depths of producer depravity. They won’t get fooled again and their capacities and capabilities are inadequate for the continent's future needs. A leadership that has somehow yielded untold personal wealth at the expense of everyone else. And yet are unable to conceive of business concepts such as “real” profitability, “free on board,” “cash float” or “shut-in production.” Among many others. 

Conclusion

The absence of an accurate financial accounting assessment, particularly regarding depletion and actual overhead costs, severely hampers the ability to ascertain the true profitability or loss of any property. Therefore the diversity of outcomes of what is and what isn’t profitable are remarkable. Natural gas and its byproducts are far greater in terms of overhead costs to administer, yet there is no recognition of this in overhead allowances. Blindly shutting in production as the producers are now doing, after 38 years of destruction by not doing so. Is potentially as damaging when done on a turn this valve off and open that one basis. In producer firms today the overhead costs are fixed. Ensuring that the unknown, high overhead properties will be a drain on many other operations if they too are shut-in. 

Decisions are made on the basis of engineering reports and estimates as opposed to any actual financial information. Purely due to the lack of available financial information. Without this information the ability to analyze and understand the business does not exist. Leading to issues such as the $4 trillion natural gas revenue loss since 2007. Accounting today is the means in which to have the bills paid. The intricacies of engineering and geology encapsulate the oil & gas industry's value and complexities, often perceived as too intricate for understanding outside those professions. Thus, beyond balancing the books and undergoing audits, traditional accounting practices are seen as obstacles rather than aids to operational excellence.

The detailed, property-level data offered by People, Ideas & Objects promises to revolutionize the industry's understanding of profitability, pinpointing precisely where money is made and lost. Pursuing 100% of a producer's production profile has been demonstrably inefficient and wasteful. Profitability under the Preliminary Specification will be earned at any level of the producers production profile as all production produced is profitable. Therefore if the commodity prices dictate an 80% production profile. It can be done profitably as the Preliminary Specification, our user community and their service providers turn all of the producers costs variable based on profitable production. I understand these are advanced business concepts. We will therefore need to wait 38 more years before the officers and directors comprehend these points.