21st Century Service Providers - Part XXVII

Market Variables  

Cash  

People, Ideas & Objects have been documenting the expanding difficulties of the industry's working capital. This is a result of the combination of having their capital structures rendered inoperable. And the decades in which they were able to report earnings by deferring the majority of overhead to capital along with a “variety” of other costs. Enabling producers to report profitability consistently, which has had the effect of reducing the industries overall competitive performance materially. After a decade of managing under this environment performance degraded due to underinvestment. The industry wide performance is now represented in the working capital availability, cash in hand and cash flow generated. 

On the one hand you have investors who have expressed their need to see fundamental changes in the producers accountability and performance. This has been the case since 2015 and there has been nothing done since then. Investors continue to hold their investments, and it's important to note that institutions are holders of large percentages of the major producers, upwards of 70 to 80% in most cases. What they suspended was any further capital investment in 2015. Banks followed the investors lead in the 2017 to 2019 period leaving performance the only measure of cash generation to rely upon. 

Producers then turned to every possible alternative to make up for their cash needs. The greatest source was the service industry. Initially they cut their demand for field services by 50% and demanded 50% discounts. Effectively reducing the industries revenues to 25% of previous years. What they determined then was particularly difficult for the service industry was they ceased paying them for upwards of 18 months. Then Covid struck and oil traded at negative $40 / barrel causing the producers to panic. Essentially shutting down all service industry operations until producers could find their way through the 25% market decline in energy. It was at this point the service industry began to sell off the heavy, shale induced investment in horse power and cannibalize their fleet with cutting torches to sell the scrap metal to survive. Producers did nothing in support of the service industry. 

The service industry sits at 25% of its prior capacity and has no motivation to deal with the producer's business. Actively looking for business opportunities offshore and in other industries the question arises who would invest a dollar in the oil & gas service industry? Any surplus horsepower is finding demand in the development of Artificial Intelligence facilities and shale is beginning to be developed in other areas of the world. If the basins in North America are beginning to turn, which it appears they are, why would anyone invest? Especially when some of the industry's leadership that has brought about this environment has decided to pursue those international opportunities instead. 

North American energy independence is best represented by the diminishing cash availability of the producer firms. The volume of cash is woefully inadequate to meet any of the needs mentioned. However those are not the difficulties that occupy the boardrooms today. The difficulties are the cash allocation between the dividend policy and the bank demands. Never have they faced a greater issue than this. 

If they cut the dividend and fulfill their banking obligations they’ll signal the investors that it’s the time to move on. The stock being predominately owned by institutions will create a collapse in the stock's price. Several alternative scenarios arise from this action. On the other hand if they cut their banking commitments they’ll signal to the banks they’re in default of their covenants, or no longer able to manage the assets appropriately. The bank may seize the asset causing the value of the firm to decline and the investors to realize a material loss. More than that will be the material loss in what faith and trust remains after the past decades of inaction. One must recognize that even a substantial commodity price appreciation cannot remediate structural deficiencies that have atrophied over several decades. Should incremental capital materialize, the competing priorities for those funds would remain overwhelming. Furthermore, the North American capital markets may intervene to ensure that the allocation of any future cash flow is sequestered from the discretion of those officers and directors whose prolonged inaction established the current crisis.

I want to point out that this scenario was the one that People, Ideas & Objects have been warning about since the publication of what has become Synallagi. I have been laughed at and ridiculed by those that followed this script and destroyed the most critical industry to our way of life, standard of living and well being. They have done nothing while they were warned repeatedly. Officers and directors were aware and chose to do nothing. This is evidenced by the fact that People, Ideas & Objects have generated absolutely nothing in terms of revenue as a result of this work. 

We have prepared Synallagi and its associated organizational structures for a dynamic, innovative, accountable and profitable oil & gas industry. By rebuilding the industry’s culture around reserves preservation, performance and profitability, North America can realize the value of its shale endowment and fully participate in the Artificial Intelligence-enabled Information Technology Industrial Revolution.

Chaos  

We spoke of the inversion of how we have upended the method in which people work. On top of changing the organization and industry. Introducing the most comprehensive technologies into one of the most complex businesses that exist. A little chaos is what we’ll have and what we should expect. Let's get comfortable with the fact and approach this appropriately. 

We belittled chaos in our prior paper of this series on our user community. Chaos is the operating condition Synallagi must be designed to confront, absorb, and convert into productive value. Markets are messy. Innovation is uncharted. Anyone who believes this project will proceed along paved roads, with clear maps and predictable milestones, misunderstands the terrain. Anyone who believes they will control every material element of the process is inviting disappointment and frustration.

What Synallagi requires are creative problem solvers with vision, discipline, judgment, and the capacity to work within the boundaries established by Synallagi’ definition. They must operate in a vast collaborative environment, within markets shaped by uncertainty, failure, resistance, and opportunity. The tragic failure of producers must be overcome, and human emotion must not be permitted to drive decisions from the back seat.

Constructive chaos, properly understood, should not be feared. It should be managed as an input. When approached with structure, governance, Intellectual Property, Artificial Intelligence, and disciplined market design, chaos can become constructive. It can expose obsolete assumptions, force prioritization, reveal weak processes, and accelerate learning. That does not mean the work will be comfortable. It will be frustrating for everyone involved. But frustration is not failure. It is often the price paid for building something that existing institutions could not imagine, let alone execute.

The chaos producers must avoid is the destructive form discussed in our prior paper, which referenced George Sivulka’s Seven Pillars framework. His first pillar is decisive:

• Individual Artificial Intelligence creates chaos.
• Institutional Artificial Intelligence creates coordination.

This distinction is central to Synallagi. Abstinence, avoidance, ignorance, and “muddle through” will not protect producers. On the contrary, they open the door to the uncontrolled deployment of Individual Artificial Intelligence or Agentic Artificial Intelligence inside producer firms. That may prove to be one of the most consequential non-decisions of the next decade.

Individual or Agentic Artificial Intelligence will often arrive quietly. It will not necessarily be approved by boards, structured by governance, constrained by Intellectual Property, or aligned with the enterprise. It will be introduced by individuals attempting to optimize their own work, defend their own turf, or automate fragments of business processes they do not fully understand. These deployments may appear harmless at first. In reality, they may become insidiously destructive, much like people naively playing Jenga with the institutional structure of the firm.

The resulting failures will damage the reputation of Artificial Intelligence itself. They will create doubters, opponents, and activists who will claim that Artificial Intelligence is inherently dangerous, when the true failure will have been institutional negligence. Accepting chaos that is destructive, not constructive. The fault will lie with officers and directors who defended their turf, muddled through, kept their noses clean, and failed to see the broader picture. They will have refused to recognize that Artificial Intelligence requires institutional architecture, not individual experimentation.

General Eric Shinseki’s warning is appropriate here:

Why should we expect chaos? Because any serious transformation of oil & gas accounting, administration, operations, markets, and governance will unsettle established interests. Chaos is not an exception to transformation. It is evidence that the existing order is being challenged. A Melissa Swift Massachusetts Institute of Technology discussion on chaos identifies two constructive effects that are relevant to Synallagi. 

First, chaos accelerates personal development. When people are required to handle many unpredictable events at once, the frustration they experience is often the result of being challenged beyond their established routines. That challenge produces growth. Many executives identify chaotic periods as the crucible in which their strongest capabilities were formed.

Second, chaos can rearrange the corporate chessboard in productive ways. Disruption exposes opportunities that stable institutions suppress. In periods of disorder, new responsibilities, roles, capabilities, and leadership structures can emerge. For those prepared to act, chaos can create lateral and diagonal growth rather than merely preserving linear career structures and inherited authority.

The academic treatment is cautious, as expected. The professors are writing for senior executive and academic audiences, and they remain measured in their conclusions. Even so, their commentary travels farther than many institutional observers are usually prepared to go. They acknowledge that disorder is not merely a risk to be eliminated. Under the right conditions, it can become a source of growth, opportunity, and organizational renewal.

In oil & gas, the question is more severe. We do not need to ask whether chaos exists. It does. The industry has lived with chronic overproduction, poor accountability, value destruction, supply instability, investor distrust, and managerial evasion for decades. The relevant question is whether the industry will continue to allow that chaos to be unmanaged, personal, emotional, and destructive.

Does the industry, under its current administration, have a viable future? What do investors believe after more than a decade of disappointment? What role can current producer leadership credibly fill in the future? These are not rhetorical questions. They define the strategic opening for Synallagi.

Synallagi does not eliminate chaos. It institutionalizes the capacity to govern through it. Its purpose is to transform uncoordinated disorder into coordinated action through defined markets, the Joint Operating Committee, our user community, service provider organizations, Intellectual Property, Artificial Intelligence, and disciplined Enterprise Resource Planning software. Chaos itself is not the enemy. Unmanaged and destructive chaos is.

The referenced MIT article proposes a four-step plan for addressing what should properly be understood as unmanaged and destructive chaos. Its third step is particularly relevant: explicitly guard against the bad behavior that chaos can conceal. This includes identifying bullying directed at individuals or groups. That point requires some reflection on my part. My repeated references to the officers and directors of producer firms may be received by some as bullying. That is not the objective, and it should not be the method. The objective is accountability.

The frustration is real, however, and it arises from the scope and scale of the damage imposed across the broader oil and gas economic structure. These are not abstract concerns. The damage has affected investors, service providers, employees, communities, consumers, and the long-term productive capacity of the industry itself. More concerning is that many of these issues were identified, analyzed, and accompanied by proposed solutions well before the current condition became so severe.

Action did not occur. The issue, therefore, is not personal criticism for its own sake. It is the need to distinguish between legitimate accountability and destructive disorder. Synallagi is designed to provide that distinction institutionally. It channels conflict, uncertainty, competing interests, and operational complexity into governed processes. It does not pretend that chaos can be removed from oil and gas. It provides the architecture through which chaos can be made productive rather than destructive.

If my criticism of the officers and directors is perceived as bullying, then I accept that characterization as a consequence of the position I have taken. They were the individuals with the authority, responsibility, resources, and fiduciary obligations to prevent this outcome. No other group in the industry held that combination of control and duty.

The broader oil and gas industry is populated, from stem to stern, by many of the finest and most dedicated people working in North America. Engineers, geologists, accountants, administrators, field personnel, service industry representatives, contractors, investors, and many others continue to work diligently every day under difficult and deteriorating conditions. My objective is to distinguish those people from the officers and directors whose decisions, omissions, and prolonged inaction created the circumstances the industry now faces.

If that distinction is made clearly, then the criticism has served its purpose. It is not directed at the industry’s people. It is directed at those who had the responsibility, resources, authority and capacity to act, yet failed to do so.