"That Jarring Gong," Part XVI

 The Urgent Need for Change

People, Ideas & Objects have reflected on what we believe to be a crisis in the boardrooms of oil and gas producers. There is no longer the support or goodwill necessary for the officers and directors to continue as viable going concerns. Bold assertions, but we’ll make our point clear. Despite having stretched the period for decisive action well beyond normal expectations, the inaction of these leaders is best represented by the investors' suspension of capital support in 2015. For nearly a decade, producers have engaged in desperate and foolish activities, attempting to prove they didn’t need their investors' money. Believing investors would eventually return when they recognize the brilliance of their plans.

These actions avoided seizing available opportunities and employed failed strategies and tactics, many of which were at least unethical and probably illegal. This has created devastation in every corner of the greater oil and gas economy. The only beneficiaries over the past decades have been the officers and directors themselves. Every other group, including career professionals, service industry businesses, investors, and bankers, has been played for fools by these leaders.

What remains of the producer organizations is not worth keeping. No one trusts or has any faith in the current cohort of officers and directors. The value developed in the industry before the 1980s has been eroded, and the value granted by the investment community has been squandered. The industry is now worthless for several reasons:

• Unprofitable Reserves: The oil and gas reserves cannot be produced profitably.
• Inability to Manage: Producers cannot determine how, where, when, or what is necessary to produce oil and gas profitably.
• Lack of Business Understanding: The industry holds a rudimentary understanding of business principles, unable to determine the appropriate direction.
• Herd Mentality: The collective will of the crowd, akin to the Keystone Cops or buffalo herds running off a cliff, prevails.
• Shale Abandonment: Producers divested shale, admitting they couldn't make money, then took oil and gas revenues to invest in clean energy, only to return to shale and claim consolidation as the answer. What will be next?
• Missed Opportunities: Producers lost out on hundreds of billions of dollars in LNG exports to unknown operators due to their lack of business understanding and incompetence.
• Deceptive Accounting: Producers cannot identify why a property is losing or making money due to massive overcapitalization and deceptive corporate accounting.
• Overcapitalization: Balance sheets primarily consist of property, plant, and equipment (PP&E), with working capital at 2.08% to 3.32% of PP&E over the past 12 months. Overcapitalization creates overstated profitability.

All these points are known and understood. Officers and directors have acted on nothing, and nothing has changed since 2015 or even earlier. They are waiting for a time when former investors realize the brilliance of their unpublished plans. 

Today, they are isolated and responsible for the industry’s performance and current status. They had the resources and responsibility to address opportunities and issues but have destroyed the entire North American oil and gas economy. A fundamental rebuild is necessary to commence functioning again. Officers and directors have proven they can't, won't, and will not change, rendering any expectations of improvement foolhardy.

The current state of affairs has probable and almost certain shale decline curves affecting the natural gas deliverable volume in the United States, reflecting the destruction authored by officers and directors. The infrastructure of capacities and capabilities needed for a turnaround is no longer available and needs rebuilding. The resources to do so are no longer accessible to the current officers and directors, and there is no goodwill left in these producers. The only viable path forward is through profitability in a primary industry, a task at which the current officers and directors have proven woefully, if not purposely, incompetent.

Officers and Directors Issues at Hand

The political situation created by the myths propagated by producers will soon be exposed if these natural gas decline curves come to light. Public expectations are that this issue should be resolved without negative consequences to the economy or political stability. Given the claims of record profitability and cash reserves, the public will not understand why the problem was not addressed. Tolerance for high prices or shortages will be zero, and the public will not accept any excuses, blaming, or scapegoats. The era of “muddle through” will finally meet its end.

The critical question remains: who will the officers and directors turn to for solutions? They have had the authority and responsibility, yet they’ve dodged accountability and misused industry resources. They have stayed well past their prime, chosen to underperform, and displayed no leadership. Oil and gas is a primary industry, so leadership accountability is essential. However, the industry has become an ossified bureaucracy, unwilling to act outside the status quo and clinging to a “muddle through” mentality. This inability to take risks has led to comprehensive and complete failure, delivered as a feature by its leadership.

Given the chance to resolve the issue themselves, officers and directors did nothing. Investors provided clear evidence of necessary actions in 2015, yet the leadership ignored it. The Preliminary Specification, designed specifically to address these issues, was published in August 2012, but no action was taken. Instead, they left the industry, declaring shale’s performance non-commercial, and sought unrelated ventures with no competitive advantage. They indirectly communicated to their staff and the service industry that they were no longer part of the leadership's direction, taking oil and gas revenues to invest in clean energy without proper authority—essentially committing fraud by diverting investor funds.

Officers and directors have no vision for the future. They argue that the Preliminary Specification is too big to be viable, but its size reflects the scope of the problem. The accounting and administrative system needed to organize the producer and industry for profitability may represent only 5% of the global issue they now face. In reality, they need to start from a position far worse than from scratch—perhaps negative 90%. The reasons for this are:

• Lack of Trust and Goodwill: No one trusts or has faith in the current leadership.
• Perpetual “Muddle Through” Mentality: This has been the modus operandi for decades.
• Operational Ignorance: The industry is unaware of how and where to earn profits, maintaining an uncommercial level of competitiveness due to an accounting method that equates spending with profitability.
• Arrogant Culture: A belief that their business sophistication precludes external advice.
• Risk Aversion: A culture that avoids rocking the boat and taking risks, assuming profits will make up for any downturns.
• Complete Failure: The industry is unprofitable, unprepared, unaware, uncaring, unaccountable, and irresponsible in its actions.

Consequences and Implications

Officers and directors have consistently followed one another off the cliff, like buffalo, never choosing to lead since the 1970s. Their reaction to the collapse of commodity prices, often caused by their own confusion, has been to retreat rather than to lead. Now, they must get out of the way. Nothing will change while these untrustworthy leaders continue to drive producer organizations into the ground. If there is any hope for the future, it lies with new leadership that understands the issues and opportunities, has a track record of performance, and possesses unimpeachable integrity.

Before they step aside, they must initiate the rebuilding process. This includes funding the Preliminary Specification to halt the waste of time and resources. While some may accuse me of opportunistic self-promotion, I have spent many decades dedicated to solving this exact problem, without deviation since August 2003.

Actions will speak louder than words. We've heard enough from the producers over the past decades to know their promises were insincere and misguided. Future leadership will be judged on their performance, not on press releases or their dedication to DEI or climate initiatives. A recent article in the Wall Street Journal highlights the political difficulty producers have created for themselves. All the expected political maneuvering must be handled by oil and gas leadership. As a primary industry, oil and gas will have to fund the follow-on industries to build out capacities and capabilities.

Conclusion

Producer officers and directors have sold a bill of goods they cannot deliver. Over the past two decades, the facade of profitability has unraveled with their investors. This is an issue they still do not acknowledge and perhaps do not understand. The service industry met every demand placed upon them, even exceeding expectations. The innovation and development of shale is solely credited to the service industry. Producer officers and directors, who claimed to be the innovators, were merely the benefactors, sharing the benefits only among themselves. They produced misleading financial statements to mask the destruction of what should have been the greatest wealth generation the industry had ever known. Now, two decades into the shale “revolution,” the results are catastrophic.

But this is not just a matter of opinion. The public and politicians have yet to see the purported wonders brought about by the producers' so-called innovativeness, management, and wealth generation. The challenge now is for officers and directors to deliver on these promises. And do so alone, constrained by their “muddle through” culture, without the ability to innovate, the inability to profit and no financial resources or support of their capital structures. We all have front-row seats and look forward to seeing if these heroes escape again in their unfolding drama.

"That Jarring Gong," Part XV

 A Reasonable Hypothesis

One of People, Ideas & Objects’ basic hypotheses is that the oil and gas industry has not built value since the late 1970s. Instead, it has been incinerating capital on an unimaginable scale. Without annual share issuances through the ongoing support of the investment community, the capital built in the industry prior to the 1980s was exhausted. This forced producers to source fresh capital to maintain their organizations as going concerns. Our hypothesis is derived from the 1986 oil price crash, which made the situation more difficult and seemed to culturally separate commodity pricing from decision-making. Capital was sourced and spent on whatever was the most attractive catchphrase to Wall Street at the time. Our hypothesis was confirmed through repeated oil and gas commodity price collapses that were highly destructive and largely ignored by the current crop of producer officers and directors. Even without the repeated price collapses due to chronic overproduction, or unprofitable production as we describe it, overproduction continues to erode oil and gas prices. Officers and directors fundamentally believe they are price takers, where commercial operations are obtained by making it up on volume.

We argue that the industry has become a spending machine, learning through specious accounting methods that spending money is profitable. Performance, therefore, is measured by the capacity and capability to spend money, as all money spent is considered profitable according to audited financial statements. Capitalizing almost every cost incurred by the producer creates overcapitalization, which is only equaled by the volume of overreported profitability. Despite what the results or performance of the property may be. This circular relationship is designed to, as officers and directors claim, “build balance sheets” and “put cash in the ground.”

Our hypothesis also suggested that once the accounting magic was discovered for what it was, investors would become wise to the producers’ eventual fate. Producers would and have become hollowed out, poorly performing, and capital dependent. Today, producer firms are leaderless and lost. They lack a basic understanding of business and are unable to function as businesses. Declaring shale uncommercial, they exited the industry, taking oil and gas revenues to fund clean energy investments with them. Meanwhile, they allowed others to maximize profits by developing the significant global LNG marketplace, leaving the domestic market to producers.

Locked out of the global LNG market, producers are now relegated to domestic prices subject to frequent price collapses. They failed to realize they couldn't take oil and gas revenues with them to fund clean energy investments, proving their lack of commitment to oil and gas. Abandoning shale as uncommercial shows they admit failure, and lack the understanding necessary to implement the appropriate remedial efforts. Their complacency allows significant oil & gas business opportunities to be easily missed in a preoccupation with unrelated clean energy technologies and unrelated industries of which they hold no competitive advantage.

Producer financial statements’ reliability and the officers and directors’ business capabilities became issues for investors in 2015, leading to their suspension of further support for producers' capital structures. This situation should have concentrated producers' efforts on remediating investor concerns. A decade later, nothing has been done, leading to chronic cash and working capital shortfalls, an embarrassment to all of them. Media and politicians claim producers are earning record profits and hoarding cash, yet critical analysis shows minimal working capital is unable to support a capital-intensive industry. Producers' capital expenditures budgets are only considered funded by including 100% of their lines of credit. 

After decades of believing that spending was profitable, there was no performance or competitive criteria to eliminate weak players. The homogenization of producers’ performance has dropped to about 25% of what commercial enterprises need to attain.

When working capital is an issue in a primary industry whose commodities are price makers, a phenomenon unique to the business world. The damage caused to the trust, faith, and goodwill by the oil and gas producers towards the service industry is significant. Producers conducted operations with accounts payable being paid in 18 months, slashed activity levels, and demanded huge discounts, cutting service industry revenues by 75%. COVID-19 exacerbated these difficulties, forcing the service industry to cut up equipment for scrap and sell horsepower to other industries. Now operating at 30% of prior capacity, the service industry is declining rapidly due to equipment retirements and fleet cannibalization. Producers will need to rebuild capacities and capabilities on a direct, philanthropic basis to regain the service industry's trust and respect.

Winston Churchill

When the situation was manageable it was neglected, and now that it is thoroughly out of hand we apply too late the remedies which then might have effected a cure. There is nothing new in the story. It is as old as the sibylline books. It falls into that long, dismal catalogue of the fruitlessness of experience and the confirmed unteachability of mankind. Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong—these are the features which constitute the endless repetition of history." (Martin  Gilbert, Winston S. : The Prophet of Truth, 1922-1939 (Volume V) (Winston S. Churchill))

The last point of our hypothesis aligns perfectly with Churchill's sentiment and is the "Jarring Gong" everyone must wake up to. This is evident in the EIA’s "Monthly U.S. Dry Shale Natural Gas Production by Formation" graph. Notice anything significant?

For the past year, I have speculated about the turning of the natural gas basins, and there is now undeniable evidence that they have indeed turned. How will this be remedied? Clean energy, consolidation, or perhaps a board meeting? Let's not confuse ourselves with the obvious facts that support this.

• Shale is the greatest endowment of riches known to man. We are fortunate to have them and therefore secure, reliable, profitable and affordable energy for all of North America is attainable, at a minimum, for at least the remainder of this century. Of which we’ll need. 
• The level of incompetence required to destroy an industry while producing these resources is staggering. Officers and directors are 100% responsible, should have been accountable, and had the resources to address the issues and opportunities they face. However, they did nothing but “muddle through.”
• A solution in the form of the People, Ideas & Objects Preliminary Specification has been available since August 2012 to tackle these specific issues.
• Chronic and systemic overproduction of natural gas continues and will continue.
• Natural gas prices are producing unprofitable production, therefore it is overproduction. 
• Shutting in of any natural gas production announced by producers in March 2024 was effective however temporary. Prices have resumed their declines.
• Of the 12 shale basins, 6 have turned.
• Marcellus on 12/2021, Down 5.7% as of 5/2024
• Utica on 12/2019, Down 53% as of 5/2024
• Barnett on 11/2011, Down 66% as of 5/2024
• Fayetteville 11/2012, Down 84% as of 5/2024
• Mississippi 10/2022, Down 16% as of 5/2024
• Rest of U.S. 10/2012, Down 57% as of 5/2024
• Reversing this trend to previous growth levels will not be achieved by merely returning to 100% field-level capacities and capabilities. It may require over 200% of the prior capacity to grow production deliverability and overcome these basin's decline.
• Where will these resources be sourced for these capacities?
• Who will be motivated to sacrifice their capital in the manner expected by current officers and directors past actions. 
• How will those field hands who’ve now moved on to other careers in other industries be motivated to return. It may require more than one big paycheck. 

The Producers Logistics

I estimate it takes a minimum of seven years to transform a concept to a producing oil and gas property. Investopedia quotes a study indicating that the period from discovery to production is 5.5 years, which aligns closely with my estimate. Since investors stopped supporting producers in 2015, capital, working capital, and cash have significantly diminished. Alternative sources were found to meet their needs, but these have now dwindled. Despite my attempts to convince producers that the Preliminary Specification would generate substantial profits and provide all the cash they need, they resist due to concerns about their personal career security. Nonetheless, in times like these, focusing on internal cost-cutting is the obvious strategy.

The oil and gas industry, being capital-intensive and reliant on external capital for all its costs, has been performing at just 25% of a commercial operation threshold. Having lost investor support they’ve now exhausted their seven years of work in progress, producers now lack the field capacities and capabilities to drill more than 30% of prior growth levels. It's as if old Mother Hubbard went to the cupboard to feed her children and found that the kitchen had been taken in last night's tornado.

Given the seven-year timeline for this process and their limited understanding of business, cutting costs in the initial stages would be prudent. Starting in the first year of difficulties, it would be most effective to cut costs incurred in the first year, hoping to reclaim resources once business returns to normal. If this proves insufficient, cut costs in the second year, and so on. This approach allows the process to continue for another seven years from the onset of difficulties, with the expectation that normal business operations will eventually resume, preventing permanent loss.

Prior growth level capabilities may be woefully inadequate. The shale characteristic of steep decline curves becomes critical when a basin cannot maintain the necessary level of activity to sustain and grow deliverability. Shale offers immense wealth, but with conditions, and the steep decline curve has always been known. Officers and directors may not have understood the business principles behind managing a diminishing resource. If they did, they would not have ignored their investors' concerns for nearly a decade. It's as they say, math is hard. During this period, officers and directors were proudly parading their "biggest, most beautiful, and well-built balance sheets" down main street.

Conclusion

The actions and behaviors of the past few decades suggest that officers and directors will only make a sustained effort to turn the industry around once they fully understand the consequences of their actions. While some may cynically believe their commitment would last mere days, I would wager it might extend to a few weeks. Their best opportunities will lie in finding new sources of cash from areas unfamiliar with their past antics. The media and governments, which the latter have significant financial resources, could be prime targets.

Producers have signaled to their investors that profits are not a priority. Their inaction implies a lack of concern for both the oil and gas business and investor interests. Allowing the industry to be destroyed to prove their point. This attitude suggests that they are uninterested in the future, which holds unlimited potential for everyone except the officers and directors. Their lack of motivation I would suggest is due to the fact they control the oil and gas revenues. It will become increasingly difficult for them to explain to their investors why this limitless future is of no interest to them.

Blaming the declining productivity issue on the government might be a strategic move, especially with the media support producers currently enjoy. However, this strategy could backfire if the truth about these outcomes from producers' past actions becomes public knowledge. A more hostile environment could emerge if it is revealed that producers have been misleading the American people. I would not want to be around when the public turns against these officers and directors.

What we’ve heard before is a long litany of excuses, blaming, and viable scapegoats as to why producers could not do this or that. Most of these excuses did not pass for basic common sense, such as “waiting for a cold winter,” or were outright mistruths, like “shutting in production will damage the formation.” The creativity in generating these excuses has been impressive, and there seems to be no diminished capacity in this regard. The expectation might now be to "drill baby drill," which contradicts the arguments that have stymied them in the past. Who will they blame then? The service industry, investors, or anyone else they desperately need to depend upon?

As a former auditor, I have a propensity to want to kick dead horses to see if they are, in fact, dead. Therefore, let’s review: Producer officers and directors will need to undertake a significant effort with no capital or support, no ability to earn money and no money on hand, no internal capabilities to conduct operations, and a reputation in the recruiting industry where no one is generally interested in them when exciting opportunities abound elsewhere. They lack field-level capabilities to conduct any operations from operators that would trust, believe, have faith, or goodwill even if the check was certified. Lastly, they have no organizational capability to do things in a way that doesn’t just cause more damage and destruction. Yea, this horse is dead.

"That Jarring Gong," Part XIV

 Compliance

During our time off, the United States Supreme Court ruled that the Chevron doctrine is no longer law. This is welcome news for those who believe the administrative state had become unconstrained in creating and applying administrative law, seemingly for its own benefit. A review of any producer's quarterly and annual reports reveals the extent to which corporate America is burdened by compliance with regulations that offer little tangible benefit. Although Sarbanes-Oxley weathered the financial crisis due to its legislative support, many climate and diversity, equity, and inclusion (DEI) initiatives seem driven more by controlling narratives rather than practical outcomes. 

In my opinion, if climate change becomes a trillion-dollar issue, dynamic and innovative solutions will emerge. Until then, it's just more unaccountable taxes claimed to resolve the issue, yet perpetually demanding higher taxes as the job is never done. DEI initiatives have constrained organizations in unimaginable ways and opened them to criticism for noncompliance. More time, energy, and money are spent here than on profitability, which doesn't even make the top ten priorities.

The future of these regulatory burdens will hinge on the outcome of the U.S. election. One side may eliminate them, while the other may support them by passing enabling legislation. The reality is that producers have not focused on profitability for many years, lacking the time and money to do so. The compliance and governance burdens have fostered a "compliance first" culture that understandably seeks to avoid noncompliance pitfalls. If many of these regulations lack a legal basis, an alternative might be to ignore their requirements and let the courts determine their validity. The chosen route will soon be evident, but North American business is too regulated and not dynamic enough to meet future demands.

In our view at People, Ideas & Objects, the consumption of time, energy, and money on compliance is unacceptable. We believe compliance and governance should be the natural consequence of the actions taken by the producer firm. Within the Preliminary Specifications Compliance & Governance module, we align these "corporate" frameworks with the Joint Operating Committees' legal, financial, operational, cultural, communication, innovation, and strategic frameworks. This alignment brings increased speed, accountability, and profitability to the Joint Operating Committees. 

Whatever the future holds for compliance requirements, the Preliminary Specification offers producers an opportunity to have our user community prepare for their Compliance & Governance needs. This approach identifies specific compliance and governance costs at the property level and ensures those costs are covered by its performance.

A Bridge Too Far?

The question we need to answer is: how do you build a bridge? How do you create anything of material value and substance that doesn’t generate revenue until it’s completed? This is the issue we face with the Preliminary Specification. The scope and scale of the issues in the oil and gas industry are so vast that tinkering at the edges with one or two producers will only be wasteful. Approaching the existing culture with a wholesale change will not succeed unless we can summarily ignore that culture and commence a comprehensive restructuring based on a new vision. We believe we’re at that point, as the industry has been ground down to a valueless non-entity. If we don’t rebuild it with the vision of the Preliminary Specification, then which vision would you prefer?

This debate doesn't address whether we're crossing the Atlantic or Pacific Ocean with our bridge. Given where we are today and where we need to be to address the next 25 years, the distance is as vast as the Pacific Ocean. I cannot convince the industry leadership that they have a problem and that a reorganization is necessary. To solve any problem, the first step is to organize yourself to approach its resolution. People, Ideas & Objects have a clear vision of what the industry needs to do and how to organize it. However, the industry’s leadership clearly doesn’t want to fulfill their role in what needs to be done. They believe that absolving themselves of the compliance risk from their new regulatory masters supersedes all other aspects of leadership. This mindset reveals their redundancy and underscores the urgent need to resolve this leadership vacuum.

Culture is Direction

What we’ve learned over these number of decades is that as much as producers claim to be responding to their environment and instituting changes. Actual change is quickly overruled by their culture. Today we see the industry is regressing back into its cultural influences. Companies such as Ovintiv are now focusing on the balance sheet once again. EQT were highlighting the performance of their hedges. Although it would have appeared that overproduction of natural gas was understood and actions were being taken by a number of producers to deal with the excess production in March of 2024. Being rewarded with a doubling of natural gas prices as a result. Those days have now passed and the lessons learned appear to be forgotten. Natural gas prices have fallen 35% since June 10, 2024. 

The persistent cultural influence of “muddle through” is accepted as fact, with nothing being done about it. The responsibility, authority, and resources to address the issue are often avoided to save resources for another day.

I often find myself impressed with the technologies claimed to be used in oil and gas and their applications. Whenever the question arises whether producers are doing enough to implement advanced technologies, we are bombarded with buzzwords like Artificial Intelligence, Machine Learning, Internet of Things, and more. These technologies are always touted as “promising” and “game-changing” when applied to oil and gas, leading one to believe that what is represented as a factual case study is more of a vendor's technological dream.

These claims contrast sharply with the legacy difficulties that People, Ideas & Objects face in getting the Preliminary Specification accepted. Organizing data and optimizing the organization for performance and profit seem to hold no interest. It's not just us that are concerned about the economic viability of the industry; shareholders have been withholding their support for almost a decade and are now capitulating due to producers' inability to act or perform. On one hand, there are issues that manifest into existential threats and business solutions that are ignored, alongside shareholders' concerns and an industry taken to the brink of having no value. All this while supposedly using the most advanced Information Technologies available? The contradictions are too glaring. These fairy tales belong on the heap of other mistruths that have been spoken. Perhaps in the second quarter 2024 reports, producers' officers and directors will adopt a policy that honesty is the best policy. See, even People, Ideas & Objects can float such fairy tales.

Conclusion

Although the leadership of oil and gas may be tinkering with Artificial Intelligence, Machine Learning, and the Internet of Things, these technologies will likely only serve to enhance their resumes for future career moves. They are chasing after new, shiny objects, knowing full well that their failure is inevitable. The industry is on a trajectory with the momentum of a 30” log rolling down a hill, unstoppable and destructive. The opportunity to intervene and change course was long ago, and they did nothing. Now, there’s nothing anyone can do to stop it, and it will annihilate everything in its path.

Reinstating their vision through consolidation is not the solution it may have seemed in the 1950s. This outdated strategy is causing more people to realize its negative consequences. Besides, consolidation is nearing the end of its 18-month cycle in terms of the industry's attention span. Soon, they might shift focus to offshore drilling or another distraction, attempting to dupe everyone once again.

Reflecting on their performance over the past few years reveals a series of missteps and failures. They abandoned shale, declaring it uncommercial, and diverted oil and gas revenues into clean energy. Realizing their mistake, they returned to shale, only to find the industry in shambles. The damage done to the service industry by these officers and directors is particularly severe. Faced with the uncommercial nature of shale once again, they decided consolidation was the solution.

The legacy of failure these officers and directors have left behind is damning. They have consistently shifted from one area to another, much like the buffalo did in the 1800s, moving from SAGD, heavy oil, natural gas storage facilities, offshore drilling, unconventional natural gas, and unconventional oil, to clean energy, then back out of clean energy, and now to consolidation. One wonders if they are finally discovering the cliff that the buffalo always seemed to gravitate towards.

Capital destruction through facility overbuilding has been their modus operandi, executed with expert skill and a complete abandonment of rational thought. Their only strategy is to run with the herd, overbuild, realize the damage, then move on to the next big thing without ever considering using the market to guide their capital investments. They have never considered remediating poorly performing assets into profitable operations. Instead, they perpetuate propaganda about the next big thing and how they’ll succeed if given a few more billion dollars.

This leadership has repeatedly proven its incompetence, leaving a legacy of broad consequences that will be felt across North America. Their propaganda has convinced politicians that they can do anything. But the truth is different. Officers and directors should prepare for accountability being demanded from another group. Will the politicians stand behind the investors, bankers, service industry participants, and others who’ve been harmed by these leaders? Or will they jump the queue and demand answers immediately?

"That Jarring Gong," Part XIII

 The Opportunity

People, Ideas & Objects offers the Preliminary Specification for North American producers, providing them with the most profitable means of oil and gas operations, everywhere and always. A primary industry that previously relied on outside capital must now transition to become profitable enough to fuel its capital expenditures, investor dividends, and bank debt repayments. This industry transition is challenging at any time and place, demanding a cultural shift from “muddle through” complacency to a dynamic, innovative, accountable, and profitable model. Changing the culture to focus on preservation, performance, and profitability requires wholesale changes to rebuild the industry with that vision. Orchestrating such change internally would be futile and counterproductive. Change of this magnitude can only be successfully achieved through creative destruction, eliminating what no longer functions and replacing it with what will.

Thankfully, producer officers and directors have proven their culture is incapable of functioning any further and demands replacement. Objectively, the industry is beset by long-standing difficulties that have resulted in a protracted waste of inherent value. Producer officers and directors have failed to address the challenges they’ve placed on the greater oil and gas economy. The information contained within this graph from @Soberlook on X confirms what we suspected and supports our belief in the necessity of moving forward.

Who could blame the investors? For over four decades, officers and directors have used the industry to fuel what may become the greatest destruction of wealth and value known to mankind. Energy in the form of oil and gas is critical to our quality of life, economy, and survival. The documented destruction in this WorldOil article is just the beginning of the difficulties the industry will face. 

• The Permian basin is expected to join all other basins in experiencing production declines. 
• 2023 saw 123 rigs dropped from the fleet and now stands at 654 rigs.
• (As of July 2, 2024 there are 585 rigs.)
• Drilling and Uncompleted Wells, or DUC’s have declined. As the WorldOil article states “the lower the count becomes, the longer it will take for shale supply to return.”

How is this happening? People, Ideas & Objects have clearly identified that it is the officers and directors, their “muddle through” mentality, well-built balance sheets, and other nonsense that have brought us to this point. Why has this happened? Not a penny of profit has been made by a single producer in the industry since the late 1970s. Nothing but the expenditure of investor money gained from specious accounting claiming oil and gas reserves were valuable. If they’re so valuable, why were they not produced profitably? What has been proven is that with willing investors, the useless spending machine of officers and directors will destroy any and all value.

Officers and directors used to proudly preach to me, "Who cares about profits? It's about cash flow.” They hardly understood why profits were necessary or that their talk about cash flow was ridiculous. Cash flow is nothing more than the return of capital invested. They never recognized that they were not profitable. With their always looming “ceiling test write-downs” proving they don’t even return all of the capital invested. They never understood what was needed to earn real profitability in a competitive market. What they have proven is they have no understanding, concern, or need to operate a profitable business. Since 2015, investors have given them ample time to figure out how to earn real profits. And what did they do? They declared shale unable to be commercial and moved on to clean energy, using oil and gas revenues to support their spending. If they want to pursue another industry, they should quit their jobs and pursue clean energy as a startup. What they did was at a minimum unethical.

In 2015, the Investors Acted

Outside of the media, merely claiming profitability does not make it true. Producer financial statements have been distorted to the point where they no longer represent performance through the accurate and timely recognition of costs. Instead, the objective has been to bloat balance sheets to approximate the value of the reserves. Given this context, a reevaluation of the industry is necessary to assess the "real" performance of producers. Overreported asset values have never sustained successful business models, achieving their success in ponzi schemes or fraudulent businesses, over the long term.

For the past nine years, no new investment money has flowed into oil and gas. Now, with a decade of inaction from producers to address profitability issues and the disaster documented in the WorldOil article, investors appear to be selling their positions and moving on. We see this as confirmation of People, Ideas & Objects' Preliminary Specification. Investors have lost patience with officers and directors and are leaving. The current outflow of funds is significant, and we expect this trend to continue for some time. This indicates the distaste that producer officers and directors are causing investors. Therefore, we believe now is an opportune time for the Preliminary Specification to move forward in our fundraising and software development activities.

These signals from oil and gas investors provide us with a clear understanding of the future. Our concern was that starting our software development without a clear signal from producer investors about their future actions could result in a terminally failed project. Such a failure would jeopardize our goal of rebuilding the North American oil and gas industry as proposed. We have represented our position to the investor community: if investors suddenly resumed financial support for producers, funding their capital expenditures with new funds, it would have been terminal for People, Ideas & Objects. We, along with our user community and their service provider organization, would have failed spectacularly due to a distinct lack of credibility and support in the short term. We would have seen such an action as a betrayal by investors toward the future of the oil and gas industry and all those who expect and depend on a turnaround. If the industry's spendthrift leadership in the form of officers and directors regained their investors' trust, faith, and goodwill, People, Ideas & Objects would be set back significantly in terms of our product horizons.

Therefore, to keep the overall opportunity open, we had to be patient until we saw what investors would do. We kept our powder dry and our candles lit until we knew where we were headed. Now, we have that clarity. We would not risk our user community's careers, nor waste their time or money, by associating them with us and potentially subjecting them to the producers' vilification. We have a viable business model, a plan, and a vision to address the industry's current issues. We indirectly have the support of oil and gas investors who have not supported producer officers and directors since 2015. These investors have tried to deal with dysfunctional leadership and are now abandoning them due to their inaction. I see investors' actions as terminal to producer firms' leadership. There is no stronger message that theirs is a flawed and failed corporation than having their investors give up on them.

Commissions

I am pleased to announce that People, Ideas & Objects are instituting a Sales Commission Program for our Preliminary Specification, targeting North American-based producer firms. This program is open to individuals within or outside the oil and gas industry who believe they can close the sale of an ERP software development, as defined in the Preliminary Specification, to North American producers. This includes direct sales to producer firms, investor groups seeking attractive licensing opportunities in oil and gas production and technology, or others interested in participating in our Profitable Production Rights.

Now is the time to offer this opportunity. Our perspective on the industry is well-documented in our writings. Our vision, plans, and Preliminary Specification resonate with those within the industry. What officers and directors dismissed as “opportunity costs'' over the past decades has materialized into a substantial value proposition, irretrievably lost due to their inaction. Our concern for the industry's future if these issues remain unaddressed is severe, with significant detrimental effects on the oil and gas economy. This turning point calls for changes, such as those defined in our Cloud Administration & Accounting for Oil & Gas software and services. This service, funded by Profitable Production Rights proceeds, will control producer access. Chronic inaction and destruction by producer officers and directors necessitate others taking steps to resolve these industry difficulties. The first step is to organize ourselves to tackle these issues effectively. In the 21st century, a software system that defines, supports, but also constrains an organization needs to be built. Organizing North American producers toward a dynamic, innovative, accountable, and profitable outcome will not occur otherwise.

We are at a point where sales must begin, and our budget needs funding. Our pricing is based on our value proposition. We assert that implementing the Preliminary Specification will generate $25.7 to $45.7 trillion in incremental revenue and profitability for the greater oil and gas economy over the next 25 years. Our Intellectual Property provides substantial and proven value, as evidenced in the North American natural gas market over the past year, and is exclusive to the Preliminary Specification business model. Decades of evidence show that producer officers and directors are unable to resolve these issues. Producer firms have chosen to do nothing, and others will now take it from here.

The commission for closing a sale is 15% of the sales price to the producer. Producer costs are based on the North American sourced production assessment per barrel, plus commission. The per barrel assessment is $1,000/boe, including commission is $1,150/boe. People, Ideas & Objects pricing is based on the value proposition we bring to the market. Without the Preliminary Specification, the industry is engaged in wasteful pursuits and lacks plans or vision for the future. Sales commissions are paid upon closing.

The sales process may be long and complicated, incurring costs that are the responsibility of the individuals participating in this commission program. People, Ideas & Objects will support the process to the extent of our ability. Unlike our Whistleblower Program, there is no exclusivity granted to any individual. However, for a fee of $5,000 USD, individuals can buy a two-year exclusive license to sell to a specific producer. License renewals are granted but will lose the exclusivity of the initial license.

For startups and small oil and gas producers, two classifications dedicated to People, Ideas & Objects et al Cloud Administration & Accounting for Oil & Gas software and services, we do not expect initial sales interest. It is likely they will join on their own or towards the end. The Preliminary Specification provides enhanced and distinct benefits over other producer firm classifications. Their participation will not be material to this Sales Commission Program unless an individual expresses otherwise, possibly as an allocation for startups or small producer firms with an aggregate production profile of X boe/day representing a number of producers.

Driven by a strong sense of urgency, I have seen exponential growth in the market's sense of urgency. Therefore, I am announcing our "First to Close Bonus" on these Sales Commissions. A "First to Close Bonus" of 2x commission will be paid to whomever secures the first sale. This bonus will be paid from People, Ideas & Objects sales proceeds.

Conclusion

User community-defined ERP software developments, such as People, Ideas & Objects' Preliminary Specification, are the only effective methods to generate quality ERP systems. Asking developers, trained in their specific disciplines, to write software for oil and gas accounting and administration on the broad scope and scale of the Preliminary Specification is impossible without direct user involvement. However, user involvement significantly escalates the budget for ERP development and implementation, often making it the first budget item to be cut. Given the scope, scale, and necessity of resolving issues in the oil and gas market, we cannot afford to make such cuts. Our proven value proposition, understood by all in the industry, renders discussions about our budget moot. The industry wastes the value of our budget every month.

There are substantial conflicts and contradictions in seeking funds from existing producers to rebuild the industry. One perspective is that we are indirectly assessing a royalty or fee on oil and gas production through the Profitable Production Right license. Each barrel of oil equivalent (boe) per day will need to secure this license to be processed through our Cloud Administration & Accounting for Oil & Gas software and service. This indirect cost on profitable production is appropriate for fostering a dynamic, innovative, accountable, and profitable industry.

I see an obligation on behalf of those officers and directors who have willingly destroyed the industry to support this initiative. Doing the right thing would mitigate their personal risk in terms of maintaining their Officers and Directors Liability Insurance, a risk they do not share with us. They seem uninterested in addressing the fact that their investors have acted in ways demanding action. Alternatives in the market have identified and resolved the issues, but these officers and directors falsely refuted those alternatives, flipped in and out of the oil and gas and shale industries, and remain indifferent to the tragic losses and damages they’ve caused.

The reality we face is that, after decades of dealing with this difficulty, the details of how these communities are financially supported remain unclear to me otherwise. Profitable Production Rights licenses assess a fee on oil and gas production for the use of our Cloud Administration & Accounting for Oil & Gas software and service. This will be the only method through which North American oil and gas producers can produce profitably. Otherwise, they must explain to any interested parties why they are not.

"That Jarring Gong," Part XII

 Introduction 

We return refreshed and ready to continue our campaign to raise the financial resources People, Ideas & Objects needs for the first year's budget. This is an opportunity to take decisive action before time further erodes industries issues and opportunities. Our initial budget is relatively modest, with a goal of $10 million USD to commence the Preliminary Specifications development while securing additional funds for subsequent years.

In this post, I will attempt to capture and represent the current state of affairs in the North American oil and gas industry. The systemic issue producers face is the chronic overproduction of oil and gas. Commodities that follow the characteristics of economic price makers, leading to significant price erosion from overproduction. We believe the root cause of this issue lies with the leadership of the oil and gas industry, specifically the producer officers and directors, who are directly responsible for trillions of dollars in damages that could and should have been avoided. This was their opportunity and obligation. As it remains for the future.

People, Ideas & Objects use a representative example from 2022 and 2023 in the North American oil and gas marketplace as it relates to this century's shale production. This example illustrates the magnitude of monetary and reserve damages and losses. We believe the issue of chronic overproduction began in the late 1970s and first manifested itself with the 1986 oil price decline. What 2022 and 2023 capture is an acceleration in the destructive cycle driven by producer officers and directors seeking a purpose in their lives and in their roles. In doing so, they have proven to be irrelevant and damaging to the financial and operational health of the industry, demonstrating a clear lack of understanding of their responsibilities.

The Issue

To understand the scope and scale of incompetence, corruption, and negligence of the officers and directors in the oil and gas industry, we only need to consider their actions in recent years. The unanimous declaration that shale will never be commercial and the announcement of clean energy as the new frontier illustrate their misguided approach. They claimed they needed to remain competitive with clean energy and justified keeping oil and gas prices below the alleged costs of alternatives. They made this switch by trying to use oil & gas revenues, without shareholder support, understanding, or competitive advantage, treating these factors as mere technicalities. 

Declaring shale uncommercial has only led to further degradation of natural gas prices due to chronic overproduction. The heating value ratio of 6 to 1 for oil deteriorated to over 50 to 1 in early 2024. Export markets began to form with sizable capacity for shipping LNG to foreign markets, allowing producers to experience global natural gas prices. However, officers and directors were preoccupied with inspecting solar panels and laying off reservoir engineers. While North American natural gas prices averaged $4.50 in 2022 and 2023, Japan and the Netherlands experienced prices exceeding $50 at times. The cost to refrigerate and ship was approximately $8.00. Today's average North American natural gas price is in the low $2.30 range.

In late 2023, People, Ideas & Objects determined that North American producers did not realize these foreign prices. They sold their natural gas at the Henry Hub to unknown purchasers who then refrigerated and shipped the LNG to Japan and the Netherlands, realizing the price differential. None of the producer firms did this themselves. Evidence of this was the rash of producers rushing to secure LNG contracts for "free on board" shipments to foreign markets, signing for contracts on unapproved and uncommitted facilities beginning as early as 2028. Locked out of existing LNG facilities by those who exploited the producer officers and directors naivety.

The fact that producers' officers and directors did not understand the principle of "net back pricing" or "free on board" highlights their lack of general business knowledge. This ignorance is evident in their decades-long declarations of "building balance sheets" and "putting cash in the ground." This nonsensical approach includes their current posture of waiting for investors to return from their 2015 hiatus. They do not understand that losing the support of their capital structures should have been their primary focus, as foreign a concept to them as realizing natural gas prices in Japan.

Consider this: while others established contracts to refrigerate and ship LNG to foreign markets, capturing hundreds of billions of dollars per year, oil and gas producer officers and directors declared in perfect harmony that shale would never be commercial. They then diverted corporate resources to unauthorized clean energy businesses, eagerly awaited the return of their investors, subsequently found clean energy not to be “commercial,” returned to shale and focused on consolidating larger positions in the Permian shale—the least profitable due to high costs and steep decline curves.

Companies like Conoco actively participated in the LNG business with substantial investments in facilities on the Gulf Coast, Australia, and Qatar. This continued focus on bright, shiny, highly engineered facilities over the business realities of oil and gas raises the question: why would a producer invest in LNG capacity when its value is realized through a sales contract? Or is this news to them?

The Opportunity

I have had the opportunity to put forward an alternative to the status quo method of oil & gas organization and operation in the past number of decades. The Preliminary Specification disintermediates the greater North American oil & gas economy. It sets in place user community defined ERP software developments to deal with the issues and opportunities that are ever present in oil & gas today. It is comprehensive in its vision and designed to replace the failed culture with one that is structured to provide producers with one of preservation, performance and profitability. Making all North American oil & gas production profitable everywhere and always. As economic price makers, oil & gas will follow the characteristic that new production will only be brought on stream that is profitable. Ensuring our claim is valid. 

Oil and gas exploration and production have demonstrated that the easiest and lowest-cost production is extracted first. Consequently, all oil and gas E&P is subject to increased costs due to the greater effort required to retrieve incremental barrels of oil. People, Ideas & Objects believe the replacement cost of produced oil, reflecting exploration and production costs in a rising cost environment, must be recognized by consumers at the time of consumption. This financial recognition will provide the resources necessary to replace what is produced today. A dynamic, innovative industry will be required to expand deliverability beyond current capabilities and to control costs. Enabling this capability in North America is a core function of the Preliminary Specification.

We achieve this by implementing the only reasonable and fair means of production discipline across the industry. If a property produces profitably, it will continue; otherwise, it will be shut in and added to the firm's Innovation Work-in-Progress Inventory until it can return to profitable production. Production discipline is realized through capital market discipline. Producers need to compete for capital in North American markets against all other industries. If they continue to perform as they have, they will continue to have no access to capital. Shutting in unprofitable production ensures that no losing properties dilute the earnings from profitable ones, maximizing overall profitability. This approach also safeguards assets, as reserves are held until they can be produced profitably, minimizing storage and production costs and avoiding incremental losses that must be recovered in the future.

Profitability will replace the “muddle through” complacency of today’s industry. The current industry's performance is abysmal, and returning it to the commercial, profitable status of the 1960s and 1970s is beyond the mindset of today’s officers and directors. They are unable to understand these perspectives because they cannot identify the issues and opportunities they face, which stem from their indecision about which industry they want to invest their time and others' money in.

Conclusion

This melodrama has flip-flopped repeatedly over the past two years and on many fronts, revealing a consistent, failed business model throughout the industry. Our interactions with producers highlight this issue. When I began People, Ideas & Objects, my focus on profitability was met with ridicule. "No one cares about profit," they said, showcasing a clear lack of common sense that is evident in all of their thoughts and actions.

On July 4, 2019, I published our white paper, “Profitable, North American Energy Independence -- Through the Commercialization of Shale” which they refuted by claims that shutting in production would damage the formations. Ten months later, faced with negative $37 oil prices, 25% of global production was cut. Our method of commercializing shale, initially alleged to be flawed, was subsequently proven necessary and effective. This led to the producers' capitulation on the commercial viability of shale, indirectly admitting that the uncommercial nature of their business was a significant issue. Choosing to ply their trade in the “clean energy” industry of which they have no competitive advantage or understanding.

Since then, they have focused on radical changes to resume shale, to consolidate, and when those efforts inevitably fail, then what? This is disqualifying. Too many opportunities have been granted to these officers and directors, who have proven at every turn that they are incapable of effectively managing the industry. If the damage and destruction caused by their inaction and incompetence ended there, I might agree with those who suggest leaving them alone to wallow in their filth. However, that is not the case.

• Producer officer and directors were dishonest about the viability of the Preliminary Specifications shutting-in of production.
• When forced to shut-in 25% of global production, they subsequently stated no formations were damaged.
• “Others” continued to secure deliverability capacity of LNG out of the Gulf of Mexico “free-on-board.”
• Producer officers and directors declare "shale will never be commercial" and saunter off to clean energy with oil & gas revenues in hand. 

Oil and gas play an outsized role in North American society and are crucial for maintaining our economic standard of living and political influence. Without energy, particularly oil and gas, we cannot compete with those who have it. Those who do have it may soon understand this and compromise our economic and political influence to provide us with the energy they believe we need. Is that the point when we ask the officers and directors for their plan? Or are we already crossing the point of no return regarding our capabilities and capacities on the continent? The faith, trust, and goodwill in these officers and directors vanished long ago. It must be the cash they keep putting in their pockets that keeps them showing up so persistently. 

An Update to the Partnership Accounting Module

 This is an update to the Partnership Accounting modules AFE section. It deals with the generation of AFE numbers, and other numbers such as Vouchers, Leases, Work Orders etc are developed through use of the Java Programming Language developments designated as Data Oriented Programming or DOP. 

The AFE

One area we have not discussed in detail are the processes around the Authority for Expenditure or AFE. I will break the AFE discussion down into two parts. One is here in the Partnership Accounting module. The other can be found in the Research & Capabilities and Knowledge & Learning modules. What we’ll discuss are the Partnership Accounting aspects of the document. Later, we’ll examine the “capabilities deployment” elements in the other modules. 

As with any interface in the Preliminary Specification users will have the opportunity to right click on an item and pull up a contextual menu item called “Create an AFE.” The system will have intelligence and be able to generate elements of an AFE template with the information that a user right clicks upon. For this scenario, let's assume that a user clicks on an image of a well. The system will then populate the new AFE template with the information for that well type and the partners in that Joint Operating Committee. Suggestions were made that another lateral and frac job be done to increase shale gas production through the well bore. And the user populates the AFE with the appropriate account codes to account for the budgeted costs of those operations. (Note: Due to the extensive work done during development of the Preliminary Specification it should be anticipated that the industry would have access to a global chart of accounts.) Budgeted costs were worked out with a number of vendors that users were working with who have developed some enhancements to the re-entry and fracing of multi-lateral wells. Producers consider these innovations significant, and the costs make them potentially valuable additions to well profiles. 

To present the AFE to partners, users have asked them to join others in the “Marketplace Interface” at the vendor's facility to view a presentation of their enhanced tool. All confirmed attendance. At the end of the presentation users who are authorized members of the Joint Operating Committee digitally sign the AFE. This releases the document to the other partners. (All with data elements consistent with their data naming conventions. Global AFE #’s, account #’s, etc.) Cost estimates and timeframes that this can be done for the one well, the poorest performer in the facility. Users also submit engineering and geological analyses of why they think the formation will perform well for the proposed work. 

Within the AFE document itself there is a collaborative interface for partners to discuss issues and opportunities related to the document. During the month this discussion focused on how the existing lateral could be protected from damage during the drilling and fracing of the second lateral. Several partners expressed concern that the program did not do enough to ensure no damage occurred so a supplemental was raised. After the supplemental there seemed to be consensus among the Joint Operating Committee members that the risk was worth the effort. All participants digitally sign the AFE. 

As part of the collaboration, the producer firm determines who is available to participate. A team is set up to manage the engineering and geological aspects of the program. These people's time on this project can now be charged through the Work Order system with the appropriate Work Orders created. The account codes for vendors for that AFE will be able to accept charges. Cost overruns were not expected as an arrangement with the vendor for a fixed price was agreed. 

This is a scenario of how the firm will raise an AFE and have the members of a Joint Operating Committee approve / disapprove of / discuss it. Within producer firms there would be automated routing of the document to the various internal departments for approval. This could be done simultaneously as multiple people can read, process and approve one electronic document at the same time. Therefore accounting, production and exploration could each approve the AFE on the same day, eliminating the time-consuming paper shuffling that normally occurs. Even within each department the various people who need to see and sign off on the information can do so.

This document routing will be conducted at each producer participating in the Joint Operating Committee. Each partner has access to the AFE documents collaborative interface. This discussion is available to those who may have questions in the future as to why decisions were made and for what reason.

To clarify some of the similarities and differences between the AFE and Work Order in the Partnership Accounting module of the Preliminary Specification. And to point out a significant difference in the People, Ideas & Objects systems documents which differ from those ERP systems that operate in oil & gas today. 

Another aspect of how both the Work Order and AFE are unique in the People, Ideas & Objects system compared to other systems today is the manner in which documents are stored. Everyone has experienced the difficulties that multiple copies of files edited by different people create. A disappointing and troubling problem with electronic files that would be a disaster for documents. No one can have different electronic versions of a document. Therefore there can only be one copy of the document used by everyone. (Exclusions for backup etc.) However, since it's digital, multiple people can use the same document at the same time, as long as everyone is presented with the same, most current version.

The most effective example of a system that uses this exact manner of file management is Google Docs. Users have access to a list of files in which they grant access to and can edit the same file. Other users in Google Docs can be seen editing the file in real time. Any conflicts in editing those files are resolved by users while reviewing. The file remains as one complete edited file presented to each user at all times. With a history of prior versions available for review. There is no need for someone to take edits from many files and put them into one file as is the case with Microsoft Word or Excel. 

Instead of files People, Ideas & Objects will present users with documents like AFE’s and Accounting Vouchers that they have authorized access to. They and others will be able to view, edit and delete based on their authorization level and be assured that only those documents exist. No other more or less advanced copies are being worked on elsewhere. The amount of time and energy saved by knowing just one document exists is satisfying and highly productive. 

We have discussed many times that the People, Ideas & Objects application modules are moving the compliance and governance frameworks of the hierarchy into alignment with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee. By doing so we recognize and adopt the industry culture in its many forms. The change we are implementing is the removal of bureaucracy. When it comes to the AFE process there is little in the current process used by companies that is not representative of the industry culture. It is optimal that People, Ideas & Objects and our user communities capture that culture in these software developments when developing the AFE process.

One area that we will enhance the AFE process is through the elimination of the "Operator" designation. People, Ideas & Objects operates on the concept of pooling the resources of the partnership represented on the Joint Operating Committee. This is done to help mitigate technical resource shortfalls, particularly in earth science & engineering disciplines. As a result of this pooling an AFE will be available to any participant in a Joint Operating Committee to post charges. Those charges could be for their staff who are working on the project or for costs they incurred on behalf of the project. 

With each producer potentially contributing unequal shares to the joint account or AFE during a month, or over the course of an AFE’s term. They can either over- or under-commit their participation. Therefore monthly equalization will need to be a necessary part of the reconciliation of the AFE accounts. For example, if one of the partners pays for the drilling day rate, and their working interest share is only fifteen percent, they would have paid in excess of fifteen percent of the budgeted AFE. In a case such as this, the producer would be compensated to the point where their contribution does not exceed the approved total amount of their obligation.

All of this is consistent with the industry culture today. What we propose is aligning this culture within the Joint Operating Committee and its other eight frameworks. With the Joint Operating Committee being the key Organizational Construct there are six other Organizational Constructs that bring other cultural elements in as supporting institutions. We are not resisting this well ingrained highly functioning “inertia” as Professor Langlois calls it in his paper with Paul L. Robertson, Institutions, Inertia and Changing Industrial Leadership. (Please note all subsequent references in this module are to this paper.)

Inertia is the focus of this paper. As is explained in more detail below, inertia has two major functions in the cycle of punctuated equilibrium. Inertia results from, and in a sense embodies, the best feature of the stable phase of the cycle because it is based on the learning process in which producers determine which procedures are most efficient and effective. Once people are satisfied that they know how to do things well, they have very little incentive to look for or adopt new methods. In the words of Tushman and Romanelli (1985, pp. 197, 205), "those same social and structural factors which are associated with effective performance are also the foundations of organizational inertia..., success sows the seeds of extraordinary resistance to fundamental change." Inertia also provides the tension, however, that leads to the (relatively) short, sharp shock of the revolutionary period (Gould, 1983, p. 153) because the pressure required to displace a successful but inert system is considerable and takes time to accumulate. When there is little inertia, change can be assimilated in a gradual and orderly fashion, but an entrenched system may need to be vigorously displaced. p. 3.

I began with a discussion of the industry culture and how the inertia of the industries' routines and capabilities made for formidable obstacles to progress. Thankfully we are not focusing on changing cultural inertia in the oil & gas industry. We are trying to disintermediate the bureaucracies and change the systems to recognize the culture, routines, capabilities and inertia of the Joint Operating Committee. Making it a central part of all that is done in the industry. With a focus on bringing accounting and administration into the fold. This does however require the retirement of bureaucracy. 

And institutional change, we argue, can often take place through the more or less slow dying out of obsolete institutions in a population and their replacement by better-adapted institutions - rather than by the conscious adaptation of existing institutions in the face of change. p. 6.

The bureaucracy does not sustain its own inertia. It is a forced or contrived existence that serves a few within the organization. These needs can be taken care of by the Joint Operating Committee. I’m thinking of the command and control, budget and finance functions. What we have said we are doing with the Preliminary Specification is moving to the natural and cultural form of organization of the oil & gas industry, the Joint Operating Committee. Making the transition from the bureaucracy's forced means to the Joint Operating Committee's more natural way will not be a problem. Until...  

Another aspect of capabilities that has recently received a great deal of attention is organizational culture. In practice, not all organizations may be equally able to cope with change, as existing patterns of behavior involving both executives and subordinates may be resistant to change. Organizations develop collective habits or ways of thinking that can only be altered gradually. To the extent that a given culture is either flexible or consistent with a proposed change in product or process technology, the transition to the new regime will be relatively easy. If, however, the culture is incompatible with the needs posed by the change and is inflexible, the viability of the change will be threatened (Robertson, 1990; Langlois 1991; Camerer and Vepsalainen, 1988). p. 9.

And the proposition that this transition will occur has been threatened by the bureaucracy. They hold the budget and have exercised it by not providing funding towards People, Ideas & Objects. In this regard, the bureaucracy is self-serving and looks after its own interests. The abandonment of the industry's future is now evident in these actions. The responsibility for all damages and destruction falls to the officers and directors. What will the situation be like in five or ten years? Will their methods continue? What will they do now when it is clear they’ve failed? 

Teece neglects the negative side of Nelson and Winters analysis, however, and fails to note that the inflexibility, or inertia, induced by routines and the capabilities that they generate can raise to prohibitive levels the cost of adopting a new technology or entering new fields. Such inertia can develop to the extent that existing rules are both hard to discard and inconsistent with types of change that might otherwise be profitable. p. 10.

McKinsey Consulting suggests that large populations will join the middle class in 20 years. This will have a dramatic effect on the levels of energy consumption. If the oil & gas industry fails to respond to these demands due to bureaucracies' lethargic ways, will anyone note the Preliminary Specification was proposed?

Whereas major competence enhancing innovations may, in time, be assimilated, the creation of entirely new organizations may be needed to deal with innovations that undermine the capabilities or competencies of existing firms. p. 11.

Enhancements Through Data Oriented Programming

Recent technological advancements in the Java Programming Language, defined as Data Oriented Programming, have introduced new capabilities to People, Ideas & Objects, particularly in creating an AFE (Authorization for Expenditure) number. Traditionally, AFE numbers were serially assigned to meet unique requirements and fulfill database primary key demands. This method provided no intuitive understanding of the AFE's purpose; users had to pull the document to discern its details. 

What if the AFE number could inherently imply its purpose and provide intuitive understanding? For example, a prefix letter such as D, C, or E could denote Drilling, Completion, or Equipping, respectively. This could be followed by 24, representing the year it was raised, another letter designating the geographical region, one more for the targeted formation, and finally, a three-digit serial number. This system would allow users to sort through work based on various criteria, providing intuitive AFE numbers to members within the Joint Operating Committee.

This example highlights a potential enhancement, but our user community will be responsible for expanding the concept for AFE numbers, as well as Voucher numbering, Lease Identification, and other naming conventions within the Preliminary Specification. Implementing this has been challenging and previously considered taboo in systems development. However, Data Oriented Programming now enables us to make these changes. 

As database developers, we use Oracle Autonomous Database, deferring system processing and management to the database. However, generating field attributes in the way we propose has not been possible outside of multi-column primary keys, which often lose their intended purpose in translation.

Data Oriented Programming in the Java Programming Language aligns perfectly with our focus as database developers. Using Oracle Cloud Infrastructure and Oracle Fusion Applications, predominantly written in Java with ample use of SQL and PL/SQL, these features offer significant benefits. They facilitate creating the type of data we discuss here and allow us to manage AFE numbers as primary keys effectively. More details on these features are available in the following pages.

Postscript, applying this to the chart of accounts will also apply. Prefixing the account number with A, L, S, R, E, breaking the account number from there and imply further meaning from their.

• Data Oriented Programming in Java - v1.1
• Model Data Immutability and transparently - DOP v1.1
• Model the data, the whole data and nothing but the data - DOP v1.1
• Make illegal states unrepresentable - DOP v1.1
• Separate operations from data - DOP v1.1
• Wrapping up DOP v1.1
• Bonus: Why update DOP to version 1.1

Revenue Update

During my time off, I realized that my previous approach to imposing deadlines for raising the first year's budget was flawed in several ways. Firstly, treating it as a traditional fundraising effort, akin to raising debt or equity, was inappropriate since the Profitable Production Rights represent People, Ideas & Objects' revenue stream. Secondly, as with any firm's revenue stream, there should be no time limit or closing date imposed on participation. I had mistakenly attached undue significance to securing those funds, equating it with the potential failure of the organization. This perspective is neither predictive nor anticipated, especially at this advanced stage of addressing the issues in the oil and gas industry.

What People, Ideas & Objects needs to do with our Profitable Production Rights is transition to a commercial, successful operation, moving away from the project status. Most importantly, we need to leave behind the outdated thinking that limited our approach. This shift in mindset will better align with the realities of our business model and the industry's needs.