Arbitrage Strategy Part VI, Our Value Proposition
In a recent blog post, we discussed OPEC’s revised capital expenditure estimates for global oil and gas, projecting $6.3 trillion needed for North America over the next 25 years. People, Ideas & Objects propose doubling this to $12.6 trillion, factoring in the severe damage to the service industry, reduced producer capacity, and persistent unprofitability. Here, we outline the value proposition of our Preliminary Specification, delivered through People, Ideas & Objects, our user community, and service providers, for North American producers. Our solution generates an additional $5.7 trillion in profits beyond the $12.6 trillion in capital costs, totalling $18.3 trillion in value.
Financing Capital Expenditures
Historically, producers relied heavily on external capital. Our Preliminary Specification introduces a price-maker strategy, providing each Joint Operating Committee with timely, accurate financial reporting compliant with SEC standards (and other frameworks). Capital costs are included in production costs where profitable properties continue operations, rapidly returning capital to producers for reinvestment. We advocate for a 30-month capital turnover to compete in North American capital markets, moving away from outdated goals like “building balance sheets” or “putting cash in the ground.”
Industry Challenges
The industry’s capital demands far exceed available investor or government funds. The only viable solution is earning these funds through profitability. However, a pervasive “muddle through” culture, coupled with decades of prioritizing spending over performance, has reduced industry efficiency to roughly 25% of a profitable operation’s potential. Ignoring investor demands for a decade further highlights a disconnect from the need to establish performance and profitability.
By implementing our Preliminary Specification, North American producers can address these challenges, achieve sustainable profitability, and meet the industry’s immense capital needs.
Addressing Chronic Unprofitability
We’ve long argued that only profitable operations can resolve the industry’s systemic difficulties. Spending investor money without returns is never sustainable. Profitable operations require recognizing all exploration and production costs accurately and ensuring commodity prices cover marginal costs. Currently, consumers cover operating costs, while investors subsidize capital costs—a flawed business model.
Price-Maker Strategy
Our decentralized production model utilizes a price-maker strategy to ensure profitability. This is achieved by generating detailed financial statements for each individual property, allowing for the immediate shut-in of any unprofitable assets. This preserves valuable reserves for future production at higher prices and maximizes overall corporate profits.
Recent industry actions suggest a growing, albeit delayed, appreciation for this approach. For example, ARC Resources recently elected to shut-in approximately 60,000 boe/d of dry gas production, citing unsustainably low prices. As CFO Terry Bibby stated, “We just refuse to waste the resource when we don’t have to wait that long to make a better rate of return.” This decision, prompted by an AECO price of just $0.76/GJ in July, validates the core principle we have advocated for since 2012.
However, such actions are irrational and reactive rather than strategic. The fundamental issue is that without the analytical framework to determine profitability at the property level, producers cannot proactively manage their assets. If the industry adopted this granular approach universally, natural gas prices would stabilize above the marginal cost of production, preventing the catastrophic value destruction seen this century, which has resulted in an estimated $4.7 trillion of lost revenue.
While ARC’s decision is a step in the right direction, it is an extreme measure born of necessity. The scale of the problem, evidenced by a record-high oil-to-gas price ratio of 124:1 in Alberta this July, demands a systemic change. The industry must move beyond intermittent and reactive commitments to a disciplined, data-driven strategy that unlocks the true value of its assets. Only People, Ideas & Objects Preliminary Specification can provide this.
Two Different Perspectives
The oil and gas industry is at a crossroads, defined by two distinct operational philosophies. The first is the prevailing engineering-centric view, which treats profitability as a technical problem to be solved through innovation at the wellhead. The second is a business-centric model, which posits that profitability is a function of disciplined financial management applied across the entire asset base.
The current engineering-driven approach focuses on adopting new technologies to incrementally increase production. While effective on a micro-level—improving output from a handful of wells—this strategy fails to address the systemic issue of unprofitable production across the continent's ~853,000 wells. Corporate culture often reinforces this narrow view, dismissing comprehensive financial solutions as secondary to technical innovation.
People, Ideas & Objects propose a paradigm shift toward a business-management solution. This involves implementing a system that provides actual, variable overhead and depletion costs for every property on a monthly basis. This granular financial data allows for a clear-eyed analysis of what is truly profitable.
The strategic implication is profound. By identifying and shutting in unprofitable properties, the industry can systematically remove marginal production from the market. This would naturally align commodity prices with the true marginal cost of replacement barrels, benefiting all production and restoring a sustainable business model.
The industry can no longer afford to fund what have effectively become science experiments. With investors withdrawing, capital must be generated internally. The recent admission by Exxon that consolidation has not yielded the expected financial benefits is yet another signal that the industry's traditional strategies are failing. The choice is clear: continue with a limited, well-by-well approach or adopt a comprehensive business framework that ensures the profitability of the entire enterprise. The Preliminary Specification does both.
A Comment About Production Discipline
People, Ideas & Objects price-maker strategy establishes the only fair and reasonable method of production discipline in the oil and gas industry. Producers adopting this strategy will maximize profitability and enhance capital market appeal. Details of that value includes:
■ Maximized Profitability: Producers maximize profits when losses from unprofitable properties no longer dilute the gains from profitable ones. It’s common sense to limit one's losses.This market-driven approach mirrors a healthy economy, where prices guide production and consumption. Critics have falsely accused our price-maker strategy of promoting collusion. In reality, independent decisions based on accurate, property-level financial data—as enabled by our strategy—contrast sharply with the industry’s current practices, which could be seen as collusive.
■ Strategic Reserve Management: Holding reserves until they can be produced profitably means avoiding the incremental costs associated with losses from unprofitable production.
■ Cost Reduction: Keeping oil & gas as reserves reduces production and storage costs tied to excess, unprofitable output.
■ Market Stability: Removing unprofitable production allows commodity markets to find the marginal cost, establishing fair prices for all production. Eliminating industries' boom / bust cycle.
■ Reserves Valuations: Market prices accurately reflect the value of producers petroleum reserves. Expanding the volumes of proven recoverable reserves and fulfilling officers and directors fiduciary duty to safeguard assets.
■ Innovation Opportunities: While unprofitable properties are shut in, producers can innovatively explore ways to increase production volumes, reduce costs, or expand reserves. To return the property to profitable production.
■ Replacement Value: The realized market price of oil & gas must reflect the current market’s costs of exploration and development. It is the cost of a replacement volume of energy produced today.
■ Production Discipline: Using profitability as the criterion for production decisions is the only fair and reasonable method of production discipline.
■ Innovation as a Foundation: Higher commodity prices finance greater innovative activity.
■ Effectively Eliminating the Boom / Bust Cycle: Dynamic changes to the producers production profile ensure they remain profitable and are aware when industry overbuilding has begun.
■ Consumers will use the Products Price to Make Decisions: Consumer decisions based on price will stabilize the demand side of the market.
Industry consolidation concentrates control among fewer players, limiting responsiveness to market signals. For instance, despite calls for increased production, consolidated producers resist expansion. In contrast, the Preliminary Specification fosters an environment where startups and small producers thrive, empowering dynamic, innovative, accountable, and profitable companies to rebuild the industry from the failures of consolidation.
People, Ideas & Objects Preliminary Specification is designed for all producers. Establishing the environment for start up and small producers to be established once again. We are seeking to enable dynamic, innovative, accountable and profitable producers to rebuild the industry from the failed remains of what these consolidated producers created.
Arbitrage Strategy Update: The Revised Value Proposition
$18.3 trillion is the amount needed to be raised over the next 25 years. About $800 billion per year for 25 years. In last Monday’s blogpost some of this money was designated as sunk costs, remediating damages the industry has experienced in oil & gas and the service industry. This raised a number of questions with regards to our arbitrage strategy being less opportune than what may have been stated before. I don’t believe that to be the case and for the following reasons, I would identify this as nothing but good news for Arbitrage Strategy investors.
Our Arbitrage Strategy sees two groups diametrically opposed to one another. Existing oil & gas producers. And those who wish to invest in oil & gas, however are hesitant due to their experience showing a lack of trust and profitability have severed any hope of working together. Oil & gas producer officers and directors seem to be occupying the boardroom more in protest than any fiduciary duty. Believing they are the ones who have built substantial value and are unappreciated. Waiting for the time when the rest of the world catches up with their self perception. A surreal situation is made even more comical with each passing quarter as their financial performance deteriorates further and their artistic interpretation of that performance becomes more abstract and bold.
The Arbitrage Strategy uses these producers for their inherent strength in the market today, their desperate need for cash. Selling large amounts of properties and reserves as repackaged “non-operated” properties. Investors can reenter the oil & gas industry directly without the influence of the producers management or governance. They’re novated into the Joint Operating Committees and have the past producer to operate them in the field for the short term. In the mid to long term it’s assumed the Preliminary Specification will be available where the administration, accounting, engineering and geological elements of an exploration and production based producer will be in place to manage it for them.
The benefits of this are many and it first of all gets them back in the game. Animal spirits in the general economy are raging and energy is seen as a critical component to the 4th Industrial Revolution. These investors know the oil & gas business and how to make money in the business. Owning the reserves which they’ll theoretically purchase at the lowest prices ever, they’ll realize any price increases in all of those reserves. And when the prices rise reserves are reclassified from possible or probable to proven as they become commercially viable. Giving the Arbitrage Investors a substantial kick in their investment value. Immediate revenue should cover the operation and if quality is attained, maybe cash flow positive.
A common misconception regarding the Arbitrage Strategy lies in the perceived risk of acquiring assets during a period of depressed oil and gas prices. However, it is critical to distinguish between market-based valuation and book-based accounting. Arbitrage investors are purchasing properties at prevailing market prices—prices that reflect current conditions and forward expectations. In contrast, producers must reconcile these transactions against their carrying values, which are often inflated by historical capital expenditures now deemed sunk costs.
These sunk costs—though real for the producers—do not translate into transactional value. They are not priced into the sale; they are embedded in the producer’s financial legacy, not the asset’s market worth. As a result, the Arbitrage Strategy effectively transfers the burden of sunk costs back to the producer, while enabling investors to capture the upside unencumbered.
This asymmetry in cost structure produces a unique arbitrage opportunity:
- Producers require higher commodity prices to justify their sunk cost burden and maintain solvency.
- Arbitrage investors, by contrast, carry none of those historical liabilities, yet benefit from the same market price realization.
This is the essence of the Arbitrage Strategy: capturing market-based returns while remaining structurally insulated from legacy inefficiencies.
A Study in Contrasts
Has there ever been a greater contrast between what an industry has to offer? There is the failed, dilapidated and increasingly poorly functioning. Unable to even grasp the most basic of business concepts such as “free on board” or why their investors left? And there is the potential, entering a familiar industry without the baggage or legacy damage conducted by those who chose or pretend not to know better. An industry which is fundamental to our society’s competitive future. Realizing the value of what is possibly the greatest endowment of wealth, shale oil & gas reservoirs.
It will be drudgery for the officers and directors of existing producers if they don’t begin to change their positions. Will they allow themselves to be dragged grudgingly from one court room to another for the crime of being obstinate. Or will they get with the program and aggressively market their properties, pay down debt and return the rest to shareholders. Or continue to sit there blinking mindlessly at their desks and looking out the window. What will they do?
A clean slate is available for the investors who use the “Arbitrage Strategy.” The same goes for those who work in oil & gas. Our user community and service providers for the accounting and administrative functions of the new industry. And new dynamic, innovative, accountable and profitable oil & gas producers for engineers and geologists. Investors have already shown a willingness to invest on the basis of the arbitrage strategy, Carlyle and Citadel alone have put in $3 billion. What’s old is gone and what we build will never be enough for what will be expected. People need to come and they need to bring ideas by the hundreds, more than they’ve ever thought of.
