I Always Have to Ask Why, Part II

 Our user community and their service provider organizations will benefit from Synallagi through a materially different treatment of overhead. Tuesday’s blog post addressed how overhead is predominantly treated in oil & gas today, and how that treatment has become one of the underlying causes of the deterioration authored by producer officers and directors.

The comparison with the methodology prescribed in Synallagi is stark. It will, by itself, become a major contributor to the ability of producer firms to achieve and sustain profitability. Today’s post addresses the Synallagi methodology and explains how People, Ideas & Objects can claim what may appear to be a ludicrous reduction in overhead costs across the industry—to potentially single-digit percentages of what is incurred today.

The highlights are straightforward.

First, through the unique configuration of the industry’s accounting and administrative resources into our user community and their service provider organizations, producer overhead becomes variable and tied to profitable production. If Synallagi produces financial statements with the granularity of each Joint Operating Committee, and a property reports an actual, factual profit, production continues. If the property is unprofitable, it is shut in and since all costs are variable it creates a null operation: no production means no profit and no loss.

Second, even the largest producers are now reaching the limits of specialization and the division of labor within their own organizations. Their internal structures cannot support increasingly specialized positions with sufficient transaction volume. Where throughput is inadequate, any theoretical efficiency gained from further internal reorganization is lost.

Synallagi resolves this constraint by defining and supporting the reorganization of accounting and administrative work through our user community and their service provider organizations. Because each service provider process applies across broad industry-wide activity, the necessary throughput exists. That transaction volume supports hyper-specialization, the division of labor, automation, and autonomous intellectual leverage. The result is a level of productivity and cost reduction that producer firms cannot replicate internally.

Since 1776, economic growth has been driven by the expansion of specialization and the division of labor. Adam Smith’s work on the pin factory, published in The Wealth of Nations, demonstrated that reorganizing work into specialized tasks produced a dramatic increase in productive capacity. That example also benefited from the mechanization of physical labor. Today, oil & gas faces an equivalent opportunity in administrative and accounting work: hyper-specialization multiplied by automation and autonomy.

As our third consideration of how overhead is different in Synallagi. People, Ideas & Objects adopted its corporate name in 2008, drawing from Professor Paul Romer’s New Growth Theory. We applied that theory by examining the producer resource configuration and asking a practical question: which administrative and accounting needs could be performed more effectively by firms whose actual business is accounting and administration?

Producers do not claim competitive advantage from accounting prowess. Their competitive advantages are their land and asset base, and their engineering and geological capacities and capabilities. It therefore makes little commercial sense for every producer to build and maintain duplicate accounting, administrative, Enterprise Resource Planning, and Information Technology infrastructure.

A consolidated, standardized, objective, actual, and factual accounting infrastructure, shared across the industry through Synallagi, eliminates that redundancy. The infrastructure is built once and used across the industry on a variable cost basis tied to profitability.

This produces two critical benefits that directly address deficiencies in the current model.

First, if a property is shut in due to poor performance, none of the associated variable overhead costs are incurred for that month. Producer cash is preserved. 

Second, if the property produces, those variable overhead costs are included in the commodity price of the profitable production. The cash incurred to pay the overhead cost is then returned to the producer within approximately sixty days for reuse. A cash float is created. Again, producer cash is preserved.

Under Synallagi, overhead needs to be financed for approximately sixty days. That is all. Once financed, the system provides the financial resource to replenish itself each month.

Contrast that with the current industry methodology discussed in Tuesday’s blog post. For reasons that remain unexplained, producer overhead continues to be treated under the same legacy methodology despite the existence of this solution. The result has been the loss of substantial liquidity each month, the loss of support for producer capital structures, and wholesale damage to the value of the industry, including its secondary and tertiary industries.

That does not mean producers' current methodology is without advantage to someone. What remains unknown is what is contained within capitalized producer overhead that makes officers and directors continue such a damaging practice. Until that is known, the persistence of the methodology remains a material question.

People, Ideas & Objects has been able to reasonably estimate natural gas revenue losses arising from chronic shale overproduction this century. Those losses now total approximately $5.0 trillion and continue to build at roughly $33 billion per month. Oil overproduction would likely represent a similar order of value, although there is no practical, objective method to measure or quantify it with the same precision.

The consequences of overhead treatment belong in the same category. They represent a major component of Synallagi' value proposition.

These are only three of the many tangible ways Synallagi can create substantial value for oil & gas producers. Producer officers and directors may dismiss these matters as opportunity costs and continue to say they will simply “muddle through.” We disagree.

These are not abstract opportunity costs. They are tangible forms of value that any real business would identify, measure, and remedy.

Drill and produce is not a business model.

And if these losses are merely opportunity costs, as producers suggest, then why did Shell and others sue Venture Global last year in an unsuccessful attempt to recover some of these natural gas revenue losses?

21st Century Markets - Our User Community, Podcast # 36

 As I mentioned in Tuesday’s blog post, the two Artificial Intelligence hosts distance themselves from the content of the paper I published, largely due to the direct criticism directed at the officers and directors of producer firms.

Over the next few years, the scale and depth of the destruction authored by these individuals will become increasingly apparent. What will also become clear is the inadequacy of the industry’s response. Under normal circumstances, when an industry is called upon to step up its effort and deliver, it would be expected to leverage the value accumulated over prior decades. That accumulated value would provide the foundation from which new opportunities could be pursued and incremental value realized.

The difficulty with oil & gas is that there is no remaining value available to leverage. It has been squandered, dissipated, and leaked out of the industry.

Producers appear to believe they will simply resume normal operations once investors back the money trucks up to the loading dock again. What they do not appear to understand is that investors now expect profitable organizations. How profitability is achieved, why it is necessary, and how it is sustained still seems to escape them. Confident in their existing outlook, producers continue to believe that changes to their overhead methodology or organizational structures are unnecessary. The language of “building balance sheets” and “putting cash in the ground,” along with other less offensive variations of the same thinking, will likely experience a resurgence in popularity.

Synallagi’s position is different. In a capital-intensive industry such as oil & gas, capital should be the predominant cost passed to the consumer through the commodity price. If a producer’s Property, Plant, and Equipment balance were reduced to $0.00, that would not only be regulatorily compliant; it would also indicate that the producer had become highly competitive. There would be no remaining capital cost to price into the commodity. All production would be profitable. And a producer would have the independence of thought to pursue their own direction.

People, Ideas & Objects believes it is in producers’ best interests to ensure their capital performs on a basis competitive with the North American capital markets. When capital is properly costed into the commodity price, the cash incurred to secure the asset is returned to the producer. That capital can then be redeployed repeatedly, pay dividends or retire debt. Profits are the hard work of determining what performs, how to make it perform, and what does not perform. In other words, actual, factual accounting is a tool for engineers and geologists to commercially tune their projects performance.

The other aspect of the podcast that requires clarification is how Synallagi treats capital. At 19:18 in the podcast, the female voice states:

“Capital must be recognized, passed through to the token holders and recouped quickly so it can be redeployed back into the economy.”

If I were rewriting that script, it would read:

“Capital must be recognized, passed through to the consumer, and redeployed back into the producer firm for capital expenditures, dividends, and the retirement of debt.”

The distinction is material. The capital cost is ultimately borne by the consumer, who pays the full replacement cost of the commodity. Token holders, as described in the podcast scenario, would not incur that cost. Nor would they be interested in an investment structure that required them to pay twice, only to receive the 1% return described by the presenter. The actual return to token holders would depend on their skill, judgment, understanding of oil & gas, and historical costs.

Those are the podcast errors that should be noted.

The practical difficulty with NotebookLM is what I would call the 95% rule. It may get 95% of the material correct on the first run. However, when a second version is generated, the system often assumes the first version needs to be reinterpreted. It then moves in a different direction, where the error rate can increase rather than decline. For that reason, it is often necessary to accept the initial run, correct the material points manually, and recognize the immense value of the tool despite its limitations.

Pod up

🎙️Podcast

📝Synallagi

📚Index

I Always Have to Ask Why

 One of my preferred sections in yesterday’s publication was the comparison of overhead costs and their treatment under current industry practice versus the treatment proposed in Synallagi.

In a soon-to-be-released Artificial Intelligence-generated podcast, the two simulated presenters criticize the level of animosity I display toward producers, officers, and directors. They make a point of stating that they had nothing to do with the paper and that they are not endorsing either position.

I regard that as something of an achievement. When Artificial Intelligence qualifies its own output based on the intensity of my criticism toward producers, it suggests the argument has been presented with sufficient force to require contextual distance.

My reasoning is straightforward. My frustration arises from the scale of the disaster authored by producer officers and directors, and from the fact that these consequences were foreseeable. They had ample warning. The investment community’s actions and communications in 2015 made the problem explicit. A market-based remedy, Synallagi, was available. Yet the issues were not addressed.

The following is some of the allegedly offending text from the paper. Given the scale of the financial and operational damage involved, I have to ask: why is civility still presumed to be the appropriate standard?

Comparing Our User Community to Today’s Overhead Structure

People, Ideas & Objects has raised the industry’s overhead problem many times. We have documented it extensively. At one stage, we also identified capitalized interest and stock-based compensation as costs receiving similar treatment. Notably, interest and certain related costs were later removed from this reporting method under discussion and, soon afterward, from broader industry practice. We first noted this development on our blog on November 10, 2008.

What remains materially unchanged in 2026 is the capitalization of overhead. Why has gross overhead continued to be reported in the same manner? The discussion that follows suggests this is one of the principal mechanisms through which cash continues to bleed from the industry and their accountability reporting distortions continue to persist.

The relevant question is why capitalized overhead has not been corrected. Is there a specific intent behind the desire of officers and directors to continue reporting overhead in this manner? If so, what is that intent? Why has it persisted? And why were some related costs remedied while overhead remains untreated eighteen years later?

People, Ideas & Objects maintains that, under Synallagi, our user community and their service provider organizations would operate at single-digit percentages of today’s fixed gross overhead. If there is a chronic and systemic source of overproduction in oil & gas, it lies in the fixed gross overhead carried by producers. That is where the problem begins to reveal itself. Capitalization is the mechanism that makes the issue less visible. It creates a distinct cash flow problem while also distorting reported financial performance.

The argument begins with two observations.

• First, overhead costs at any point in time amount to roughly 10 to 20 percent of revenue.

• Second, at any point in time, approximately 85 percent of gross actual overhead is capitalized.

A related issue concerns overhead charged to Joint Operating Committees. Those charges are based on estimates agreed through the Council of Petroleum Accountants Societies. In the broader industry picture, those overhead allowances are effectively zero. Any amounts charged are earned by the operator. Any net recovery merely reduces post-capitalization overhead costs. Under Synallagi those overhead allowances are replaced by the actual, factual overhead costs.

The core issue is straightforward. When overhead is capitalized, those costs are recovered over the life of the reserves. Producers allocate capital costs across all proven reserve volumes reported by their independent reservoir engineers. The cash spent on overhead in a given month is therefore returned in small increments each month over the life of the property.

That creates a structural cash problem. Each month, each producer must find new cash to fund the next month’s overhead. No cash float is created because overhead is not priced into the commodity, is not passed through to the consumer, and is therefore not returned to the producer in the current month to fund the next month’s overhead.

The materiality of overhead in oil & gas therefore creates a persistent drain on cash. This was masked when investors were subsidizing the majority of producer capital expenditures, which included capitalized overhead. Once that support disappeared, producers turned after 2015 to every available source of capital to sustain operations and overhead.

Today, with working capital diminished and in many cases negative, producers are financially and operationally impaired. They are barely able to fund the capital spending required to sustain production. Each year becomes more difficult as their competitive position depreciates further. Their prior conduct toward the service industry has compounded the damage, leaving trust, motivation, capacity, and capability far below what the service industry now requires.

People, Ideas & Objects therefore asks why a policy that has been in place for decades, and that is demonstrably destructive to producer cash requirements, has remained unchanged after more than a decade of industry discussion. What is it about capitalized overhead that makes it so necessary?

For all practical purposes, capitalized overhead has been a root cause of the loss of support for producer capital structures. That loss of support began in 2015, when investors withdrew because of poor performance and a fundamental lack of accountability. 

Nothing meaningful has been done to address either issue. How, then, does this critical cash problem remain in place in 2026?

There must be some continuing intent, motivation, or institutional desire to preserve the practice despite the absence of liquidity, the loss of capital structure support, and the existence of alternatives such as Synallagi.

This leadership has taken shale, one of mankind’s greatest endowments of wealth, delivered to the greatest economy known to man, and for the sake of whatever remains concealed in overhead accounts, destroyed its present value.

21st Century Marketplace Vision for Oil & Gas - Our User Community

I am pleased to present the second paper in our 21st Century Marketplace Vision series. This paper addresses our user community: People, Ideas & Objects’ primary competitive advantage, operational focus, and ultimate customer.

A 21st Century Marketplace Vision for Oil & Gas

Synallagi with Autonomous Asynchronous Transaction Orchestration

Part II: Our User Community

The value contained in this paper is substantial. It should be read by anyone with an interest in Synallagi, and by those concerned with the financial and operational performance of North American oil & gas producers. It sets out why our user community is central to rebuilding the industry around dynamic, innovative, accountable, and profitable operations.