Synallagi’s Price Maker Strategy and the Consumer

We’re reviewing Synallagi’s price maker strategy: how it works, how it is constructed, and the changes it requires in the organization of oil & gas production. From there, we’ll consider what this means for consumers and their need for affordable, abundant, and secure energy.

The starting point is a distinction between the characteristics of a commodity market and the pricing power of an individual business. A price maker, in the conventional economic sense, has sufficient market power or product differentiation to influence the price it charges. An individual oil & gas producer generally faces prices established in competitive markets. Limited substitutes for petroleum do not, by themselves, give that producer control over prices.[1]

Nevertheless, oil & gas have characteristics that make production decisions consequential. Substitution is often difficult, particularly over short periods. Hydroelectricity does not lubricate an engine, and wind power cannot directly replace petroleum feedstocks in chemical manufacturing. Alternatives exist for some applications, but adopting them can require different equipment, infrastructure, and substantial investment.

When supply and demand respond slowly, relatively small changes in their balance can produce substantial price movements. A 2% reduction in available oil supply could have a significant effect, although the outcome would depend on inventories, spare capacity, demand, and market expectations. Price sensitivity is a characteristic of the market; it is not proof that every participant can set its price.[2]

Synallagi’s price maker strategy begins with the producer’s authority over its own production. The producer assesses whether a well can operate profitably and makes an independent decision to produce, shut in, or undertake remediation. Its commercial discipline begins with knowing the economics of its assets and acting on that information.

The negative natural gas prices experienced at Waha in the Permian during 2026 illustrate the consequences of supply exceeding available takeaway capacity. Production can continue because the economics of associated oil production support it, even when producers must pay to move their gas.[3] A negative gas price alone does not establish that the combined well is unprofitable. It does, however, expose the weakness of treating every additional unit of production as a desirable outcome.

The high-throughput production model reinforces that behaviour. Substantial fixed overhead creates pressure to maintain volumes and generate the cash necessary to keep the organization operating. Production becomes the means of supporting the cost structure, even where the financial return is inadequate. Changing that behaviour requires changing the cost structure itself.

Synallagi approaches accounting and administrative costs through shared capabilities, specialization, and a different organization of work. Our objective is to enable dynamic, innovative, accountable, and profitable producers by reducing the overhead that makes continued production appear unavoidable.

Our previous discussion considered the economics of cloud computing. Synallagi extends that principle to accounting and administration. We propose developing common capabilities once, maintaining and improving them through our user community and their service provider organizations, and distributing their costs across participating producers. Each producer gains access to capabilities that would be expensive to develop and maintain independently.

The scale of that undertaking warrants scrutiny. People, Ideas & Objects cannot accomplish it alone. Our user community requires sustained contributions from across the North American oil & gas ecosystem: engineers, geologists, accountants, administrators, contractors, service industry firms, technology providers, and producers. That involvement must continue throughout development and operation.

The familiar principle of “garbage in, garbage out” remains relevant. Reliable software requires reliable data, well-defined processes, and people who accept responsibility for both. The quality of the outcome will reflect the quality of that participation.

Producers considering alternatives must assess the full cost of achieving comparable capabilities. An independent development program would require software, specialized knowledge, implementation resources, ongoing maintenance, and the organizational changes necessary to use it effectively. It would also need to respect People, Ideas & Objects’ Intellectual Property. Existing ERP products offer other paths, but acquiring software alone does not establish the operating model described throughout our work.

Our user community and their service provider organizations are therefore designed around a variable service-cost model tied to profitable production. When a well becomes unprofitable, the producer should be able to shut it in without continuing to carry the same accounting and administrative burden. The well can then enter the inventory of innovative projects for assessment and remediation, supporting the 19 benefits identified in Appendix VIII of our Master Appendix.

We describe the intended outcome as a null operation: no production profit and no continuing production loss while the well is shut in. Achieving that outcome requires the relevant costs to stop with production. Any remaining lease, monitoring, contractual, financing, or other obligations must remain visible and funded. The model’s effectiveness must be demonstrated through the actual cost arrangements; shutting in a well does not automatically eliminate every obligation associated with it.

Synallagi is designed to provide actual, factual, standardized, and objective financial statements for every Joint Operating Committee, supported by sufficient well-level detail to identify the sources of profitability and loss. If a ten-well property reports disappointing results, management should be able to determine whether one well is responsible and whether shutting it in would improve the property’s economics. Where operationally feasible, the other nine wells can continue producing profitably while the unprofitable well is remediated.

That analysis must distinguish costs that disappear when production stops from costs that remain. Allocating overhead differently is not the same as eliminating it. The purpose is to improve actual economic performance.

Some officers and directors regard production discipline of this kind as collusion. The distinction requires precision. A producer independently evaluating its own economics is different from competitors agreeing on prices or restricting output. Accurate financial information does not, however, provide a blanket exemption from competition law. The FTC explicitly distinguishes independent market responses from agreements among competitors to fix prices or limit production.[4]

Synallagi must preserve that independence in its governance, information access, and decision processes. Shared software and accounting standards must not become a means of coordinating competitors’ prices or production. Each producer’s decisions must reflect its own circumstances, obligations, and economic assessment.

The commercial principle remains straightforward: production should earn a return sufficient to sustain the business over time. When it fails that test, management must identify the cause and determine whether to remediate, suspend, or discontinue the activity. The ability to generate cash today does not establish that the activity is economically sustainable.

Our natural gas analysis applies a roughly 6:1 energy-equivalence benchmark between natural gas and oil. In conventional industry usage, approximately six thousand cubic feet of natural gas represent the energy equivalent of one barrel of oil. That is a comparison of energy content; it does not establish that the two commodities must trade at equivalent prices.

Against that benchmark, People, Ideas & Objects calculates a cumulative natural gas revenue shortfall of $5.4 trillion for the twenty-first century. This is our measure of the gap between realized revenues and the revenues implied by the benchmark. The calculation depends on that methodology and should be distinguished from an independently established accounting loss. Disagreement with the benchmark does not resolve the underlying issue: producers still need to demonstrate that their actual revenues support profitable operations.

The consumer’s position deserves equal attention. Nobody welcomes higher energy bills. If production withdrawals increase commodity prices, consumers may face higher costs. Our argument must therefore address both immediate affordability and the industry’s capacity to provide reliable energy over time.

Two parts of the consumer’s energy expenditure need to be distinguished:

The costs incurred after the producer’s point of sale. Depending on the product and supply chain, these include transportation, processing, refining, distribution, retail margins, taxes, and other charges. They contribute to the final consumer price and are generally outside an upstream producer’s direct control.

The economics of producing the commodity. Producers are responsible for managing the costs and commercial decisions within their operations. Revenues must support operating obligations, capital recovery, future investment, and a return to shareholders. Sustainable investment also supports the service industry on which future production depends.

The point of sale is an accounting boundary, not a separation from the consumer’s interests. Upstream prices affect downstream costs. Equally, a low commodity price today offers limited reassurance if the economics behind it weaken the capacity to supply energy tomorrow.

For decades, cost control has been a dominant industry response to financial pressure. Too often, in our assessment, this has meant transferring that pressure to the service industry through lower prices, reduced activity, and payment practices that undermine suppliers’ financial capacity. Producers depend on those same businesses for the equipment, expertise, and innovation required to sustain operations. Repeatedly weakening them compromises the productive capacity the industry will need.

Synallagi seeks to address the producer’s underlying economics so that efficiency, investment, and supplier viability can be sustained together. Affordable energy depends in part on an industry capable of renewing its assets, developing its people, and paying for the capabilities it uses.

The expansion of LNG exports provides another reason to examine how value is distributed. Access to liquefaction facilities, shipping, and overseas markets enables businesses to purchase North American gas and sell into markets with different prices. The price spread must cover liquefaction, transportation, regasification, and other costs before it can be treated as a commercial margin.

Even after allowing for those costs, producers should examine whether their contracts and market access give them an appropriate opportunity to participate in the value their production supports. Selling heavily discounted gas does not ensure that the final consumer receives a corresponding saving. Depending on the contract structure, part of the benefit may accrue elsewhere in the supply chain.

We should not assume that every international price differential represents revenue a producer could have captured. Nor should producers assume that the price available through their existing arrangements represents the full range of commercial opportunities. Those opportunities require analysis, investment, and negotiation.

Producers cannot guarantee a market price, but they remain responsible for deciding whether their operations justify continued production and investment. The service industry cannot correct a producer’s commodity-marketing strategy, and shareholders cannot indefinitely supply the capital required to compensate for inadequate returns.

For at least four decades, in our assessment, the industry has too often treated continued production and access to cash as sufficient evidence of commercial success. Synallagi establishes profitability as the operating discipline: identify the economics, act on them, remediate unprofitable assets, and sustain the capabilities that make future production possible. Consumers have a direct interest in an industry that can meet their needs without repeatedly undermining its own financial foundations.

[1] Investopedia: Understanding Price Makers.

[2] International Monetary Fund: An Oil and Gas Model.

[3] Federal Reserve Bank of Dallas: Energy Indicators, August 20, 2026.

[4] Federal Trade Commission: Price Fixing.

Our Value Proposition, Specialization and the Division of Labor

 Since 1776 the only basis for increased value generation has been the expanded definition and use of specialization and the division of labor. Adam Smith proved in his research that by reorganizing a pin factory around specialization and the division of labor between individual workers, augmented through proficiency, automation and mechanical advantage, the factory output increased 240 fold. Today the opposite is true. Software and most particularly ERP software has sealed organizations to a definition that is unchangeable through any means other than changing the software’s process definition. This aids producers' status quo configuration when they don’t sponsor or initiate any change in ERP software. Instead, focus on engineering tasks such as cost cutting to generate business value. If we are to achieve profitable energy independence and meet consumer energy demands in the 21st century it will be the result of an “all of the above” energy strategy. For the next several generations the largest component of energy makeup will be oil & gas. Therefore, dealing with these issues and opportunities demands that we increase the industry's throughput substantially in order to meet the increasing demands of the North American marketplace. 

It is therefore necessary to ensure that we proceed from this point forward with the defined capability and capacity to enhance the ERP software used in North American oil & gas. And to do so to facilitate an increased level of specialization and division of labor that is iterative and constantly evolving. People, Ideas & Objects provide for this and are configured specifically to ensure this. Our business model depends on change. We generate revenues from software development changes initiated by our user communities interactions with industry. Our user community will be available everywhere and always to work with our developers to make the changes they’ve identified while working in their service provider operations. These service providers will be configured to deliver the explicit knowledge captured in our software and the tacit knowledge provided by their services. Our user community members are therefore on the ground in the industry on a day to day basis in the administration and accounting of producer firms. They are the exclusive, licensed individuals authorized to change our software's Intellectual Property. Our developers are licensed to accept no one else's input. In other words, our user community members have the power necessary to ensure that the processes they manage ensure the most profitable means of oil & gas operations everywhere and always. Only our user community members own and operate service providers. If anyone in the industry wants to know who they need to resolve their issue, they only need to contact the relevant user community member. 

For Whom?

People, Ideas & Objects Preliminary Specification brings significant advantages to all producers. This is a solution that should be used by all producers in the North American industry. Whether that is Exxon or the producer firm that originated at breakfast. This also applies to any and all other types of secondary and tertiary industry firms involved in the greater oil & gas economy, no matter their size. While we provide advantages to junior and startup oil & gas producers, we put their organizations in a position to succeed and grow. They’ll have distinct competitive advantages over today's business model. These are brought about through the reorganization of producer firms' administrative and accounting resources into our user communities service provider organizations. And the implementation of our Cloud Administration & Accounting for Oil & Gas Software & Service provided by them. 

The producer organizations that we define and support in the Preliminary Specification employs and deploys higher levels of specialization and division of labor. We feel the overhead costs of producers demand these be dealt with by making organizations more efficient through the application of advanced, and continually advancing, specialization and division of labor. We also turn their overhead costs from a fixed, producer based capacity and capability, into a variable, industry based capacity and capability, their variable behavior being decided upon a Joint Operating Committee's ability to produce profitable production. 

Our Preliminary Specifications support a reallocation of the producers' administrative and accounting resources into individual service providers headed by members of our user community. Our user community and their service providers are independent businesses that specialize in one administrative or accounting process. They conduct that process on behalf of the entire industry as their client base. If a Joint Operating Committee produced that month, under our decentralized production model price maker strategy, we can reasonably assume it is profitable. Upon production the processes administered by each service provider will be invoked through our task and transfer network. The processes undertaken and their associated billings will be charged directly to their Joint Operating Committees. If it’s not profitable, the property would be shut-in and none of the service providers would receive any data from our task and transfer network. Therefore, no processes will be conducted and no service provider billings will be rendered. The shut-in property does not incur a profit or loss, but is a null operation. Under either scenario, overhead costs will be covered in the current period through profitable operations or by the fact that costs will be variable under the Preliminary Specification. Meaning they won't be incurred when a property is shut-in.

• Producers will benefit substantially from beginning operations in this manner. 
• First they will reach their optimum profitability when losses stop diluting profitable properties. 
• Corporate profitability whether that is at 25% or 100% of the producer's production profile. 
• This will preserve their oil & gas reserves for a time when they can be produced profitably. 
• Those reserves will no longer have to carry the incremental costs of losses otherwise incurred if they were to have continued producing unprofitably. 
• Keeping the commodity as reserves can be seen as an affordable means of storage where the subsequent costs of production and storage are zero. 
• Commodity markets will find their marginal price when unprofitable production is removed from the marketplace. 
• Increasing the value of all producers' production by realizing marginal prices across their production profiles. 
• Providing for the replacement value of exploration and production.

Producer officers and directors assert this is collusion. If making independent business decisions based on detailed actual, factual, standard and objective accounting information at the property level that determines profitability is collusion, it is no wonder producers are incapable of profitability? 

Our decentralized production models price maker strategy engages North American oil & gas producers in disciplined production. Achieving maximum profitability can only be achieved when unprofitable properties stop diluting corporate earnings. Therefore the need to ensure they are fulfilling their primary task of maximizing profitability becomes the predominant method of production discipline. 

People, Ideas & Objects has pointed out the natural gas revenues lost over the past sixteen years as a result of a lack of production discipline. Noting $4.0 trillion in revenues that were rightfully belonging to the producers were allowed to pass to others who took advantage of officers and directors poor management. The same might be true for the oil side of the business however there is no objective way to measure what the price should be. What we can determine however is the skill that has been involved in “building balance sheets” has taken away from maximizing profitability. Although only $5.7 trillion of our $25.7 to $45.7 trillion value proposition was attributable to regaining these revenues through our decentralized production models price maker strategy. It is reasonable to assume that in the next 25 years we’ll be able to attain at least that amount. 

With our clear objective of rebuilding the industry brick by brick, and stick by stick. This is in a style of rebuilding that involves a dynamic industry based on a decentralized, connected environment such as the Internet provides. People, Ideas & Objects et al don’t have to break down oil & gas to rebuild it. The rebuilding is necessary due to the damage and destruction the chronic mistreatment industry has experienced at the hands of the officers and directors of the producer firms. Hierarchical strata of advanced paper shufflers define future failure. Consolidation of these will only seal them more permanently. To bring about an ERP system for the industry such as the Preliminary Specification provides, we must consider the opportunity of disintermediation. 

We will need to consider the cultural propensity to “muddle through” and its destructive ways. This culture needs to be replaced by one based on performance. Changing that culture can not be done from within, especially when the issue can not be readily accepted for several decades. We can accurately predict that producers will do nothing. 

The nature of this rebuilding process is the cannibalization of the processes that have occurred since investors sent their message of dissatisfaction to producers in 2015. Being solely dependent upon investor cash meant organization cuts were necessary. This was when the producers' sole source of value generation, the investors' annual injection of additional capital, was no longer available. Keeping production processes in place was the priority and those processes involved in the early stages of oil & gas exploration and development were subject to layoffs. Assuming that the situation is alleviated in the following year and those resources would be recalled. Since the inactivity and abstinence of the officers and directors has continued for eight years, we can assume that the process management has been cut well into the eighth year of the exploration and development cycle. Therefore either way it needs to be rebuilt. The comment that I find appearing in what I’m reading and hearing today that concerns me the most. Is the statement “gradually then suddenly” from Ernest Hemingway in terms of how change occurs. Or how change is forced upon those inactive participants.

However, bringing one of the most complex systems, Oracle Cloud ERP, into one of the most complex industries into the environment of the small and startup, or any producer, is a risky proposition to consider. How could that ever be a commercial software product? Or be provided to a commercially viable small or junior oil & gas producer? And that is the fact of the issue we are facing today as a result of the officers and directors “consolidation as a solution.” We need to ensure the future of the industry is in the hands of oil & gas men and women. They will knock down the barriers that stand in their way, just as so many have done before. The constraints and reality of regulatory, compliance and investment demands are real impediments to these needs. That is, if producers could not access the kind of systems necessary to operate in that environment, no matter their size, capital markets would remain forever closed. Today’s business model makes this an untenable barrier, and it will be even more so in the near future. Investors have explicitly requested Tier 1 ERP systems be implemented. Therefore all producers need to understand that the production discipline provided by the Preliminary Specification is necessary across all classifications of producer firms.

Under the Preliminary Specification a startup or junior producer would no longer need to establish the point where they’ll have to generate the full $3 to $5 million of free cash flow necessary to offset the annual base overhead of the producer firm. For administrative and accounting purposes, they will only incur the variable overhead costs of the service providers fees that they use. Accessing the explicit and tacit knowledge of the service providers process management through our Cloud Administration & Accounting for Oil & gas Software and Service. In addition, they will incur the costs of software development assessment by People, Ideas & Objects each year. As we noted earlier, not only are these overhead costs variable, but if they’re charged, that denotes profitable production. This indicates these costs are covered. In contrast, if the property is not producing it does not incur any overhead costs. And there are more attributes of our system that benefit the new oil & gas industry we are rebuilding. The ability to have your working interest partners within the Joint Operating Committee participating in the same ERP software developments and implementations will bring substantial advantages to all producers of all sizes. Our user community and their service provider organizations are a reorganization of the industries administrative and accounting resources. Focused on an individual process they maintain the software and service for that process across the North American continent. Using software and specialization to organize a producer's administration and accounting in a standardized, objective manner.

The Preliminary Specification also implements specialization and the division of labor across the producer firms, particularly in the earth science & engineering capabilities and capacities. As a first step in our solution for startups and junior producers, we listed this as the first step. These capacities and capabilities are becoming increasingly burdensome to each producer firm due to their unshared and unshareable nature. However, they are for different reasons than the administrative and accounting difficulties mentioned. The costs incurred to maintain these capabilities are growing as a result of the advancement of their science and technological development. This requires further specialization of the producers' capabilities, and critical competitive advantages. We believe that all producers have reached the point where the demands to maintain these capacities and capabilities have expanded beyond the usable population of these technical resources. Or will soon. With the retirement of the brain trust of the industry, and the universities not producing anywhere near the replacement number necessary, a critical shortage will soon demand that these technical resources will become too rare, too costly and too unavailable to maintain, not to mention, expand the deliverability of the North America-based industry. 

Consolidated producers will have particular difficulty managing this technical resource when entrepreneurs see the startup opportunities we’re defining here. That is, if only there was an ERP system that provided a solution for oil & gas startups to deal with the finance, compliance, governance and regulatory environment. This would enable them to access funding! In addition to this limited technical resource supply we also believe that producers' firms are reaching a point where the costs of their scientific engineering and geology needs are beyond their commercial grasp and necessary to maintain their just-in-time operator status. Even so, a higher level of specialization and division of labor will be needed in earth science & engineering. It is the unshared and unshareable characteristics of these capabilities that we find the nascent difficulties to overcome. As operators, producers require these technical resources for a variety of just-in-time purposes. If we assume that across the industry the utilization rate of these technical resources is 75% due to organizational inefficiencies. Then by releasing that other 25% and deploying that unused and unusable capability more effectively we’ll have what I believe to be the second aspect of the solution to these pending and most certainly future difficulties. A one-third increase in capacity with higher output from enhanced specialization and division of labor, providing a good start to solving this pending critical resource shortfall.

Instead of letting another issue manifest itself as a crisis level issue, People, Ideas & Objects et al have implemented a variety of changes within the Preliminary Specification. As soon as the Preliminary Specification becomes operational, the producer firm will have two revenue streams. Their oil & gas sales are augmented by their earth science & engineering capabilities being deployed and used for revenue generation. The individuals can consult with one of the producers' own Joint Operating Committees or with other producers / Joint Operating Committees, as their clients. Due to the specialization and division of labor demands producers will need to choose to specialize or acquire specific capabilities and competitive advantages. These producer revenues will then offset engineering and geological costs incurred and charged to Joint Operating Committees or other producer clients. And through this enhanced specialization and division of labor, we achieve the same benefits of the 240 fold increase in productivity that Adam Smith experienced in his pin factory.

The second source of revenue should be seen as the starting point of oil and gas industry startup revenues. The startup's capabilities and competitive advantage will be less specialized than those of more advanced companies. The additional costs of head office operations not considered in the administrative and accounting category will be offset by these revenues. And this will apply to all producers no matter their production profile. When producers specialize in their distinct competitive advantages, and all producers including Exxon, Shell and Chevron will need to do so, the demand for outside technical resources will be required to augment their needs.

In a world where software defines and supports organizations. This is some of the what, how and why we can provide when the Preliminary Specification is delivered to all producers in the North American industry. Instead of being mere serfs as the officers and directors wish to continue treating the engineers and geologists, they’ll be able to take control of their careers from this point forward. The facility most responsible for this capability of making direct labor charges to the Joint Operating Committee is what we are implementing in the industry. This is our Work Order. Officers and directors may claim that charging labor directly is already available through their systems. Which is true, they can allocate some of these labor costs to the field. However, some are assumed to be captured in overhead allowances which the Preliminary Specification eliminates the use of. However their methods do not provide the necessary features of raising it to the point of making it a defined revenue stream for the firm. Its ability to interact throughout the industry is also a benefit. Allowing for interactions between resources and where they need them. Subject to appropriate approvals and governance. Theirs does not enable the second purpose of our Work Order system, which promotes industry-wide innovation through the establishment of working groups etc. Our Work Order system bills its costs at all times to corporate overhead, Joint Operating Committee overhead, an AFE or to a lease. Therefore the billable time of the individual engineer or geologist should be deployed within the producer 100% of the time or not be working for the producer. A fundamental component of this is requiring these people to establish their own producer firms. These firms are based on their earth science and engineering competencies, capabilities, and Intellectual Property. An industry where it will be less about who you know, but what you know and what you're capable of delivering, what is the value proposition that you’re offering? Preliminary Specification facilitates dynamic, innovative, accountable and profitable oil & gas producers, whether they are startups, juniors, intermediates, seniors, or multinational companies.

Hyperspecialization

We live in a time of significant change, collaborative work and a specialized work environment. Hyperspecialization is breaking processes down further to the point where the aid of software automation provides enhanced productivity through the division of labor between humans and computers. The future holds that Generative AI will enhance these. Our user community and their service provider organizations are configured to enable these attributes for the oil & gas administrative and accounting aspects of the producer firms and industry. 

In late 2023 People, Ideas & Objects undertook the task of building our third and final competitive advantage, research. Our other two are our user community and Intellectual Property. This was a result of beginning a comprehensive review of hyperspecialization and finding we needed more capacity and capabilities in order to undertake the task. What we were able to determine at this time was our belief in the market would need to be preeminent in how these specialized services came about. And what we have chosen to do in our research is to provide an understanding of the issues and opportunities of hyperspecialization to our user community for their guidance in forming. 

In Summary

Producers gain substantial value through the Preliminary Specification when the reorganization of the administrative and accounting resources is reconfigured into our user community and their service provider organizations. Instilling a fair and reasonable means of production discipline can only be achieved through profitability. If a property is profitable, it produces; otherwise, it constitutes an economic waste. Earning the replacement value of what it will cost to explore and produce a new barrel of oil or gas equivalent is what is reasonable. All of these depend on a more accurate accounting. This involves providing each property with comprehensive financial statements based on actual, factual information every month. Financial statements that are objective and standard across the industry so that every producer will know when their property reports a loss there is no question as to the next step. This ensures that the assessment of profitability is consistent with that of other North American producers. Would any other producer trust the “objective” nature of an industrialized version of Exxon’s ERP system?

Unfortunately industry has now placed itself in a position where it has limited its options to People, Ideas & Objects, our user community and their service provider organizations. With that they have also imposed the fact that failure will not be an option. If the industry seeks profitability to achieve: 

• Energy independence for the rest of the century. 
• Provide consumers with abundant, affordable and reliable energy.
• Prosperity for all concerned within the industry, 
• A dynamic, innovative, accountable and profitable industry everywhere and always.

Today officers and directors do not have the culture, understanding or ERP software to do so. It does not have the capacity to change. An incapacity which has proven itself persistent over the long term. Despite the consequences of trillion of dollars of damages. Despite being faced with the most challenging future. Despite the desperate conditions the energy industry has been managed under them. A leadership that has proven itself unaware of existence outside of its own skin. Doesn’t care about profits, doesn’t know how to earn them and can not earn them from the remainder of what is left and the culture they’ve instilled. A leadership prone to erratic decision-making without clear reasoning. Never listening to shareholders who’ve expressed serious disenchantment. Declaring their past decades efforts uncommercial without a moment's thought as to how to remediate them or make them profitable. Wandering off into unrelated industries, only to return to what was declared uncommercial 18 months earlier. 

Specialization and the division of labor are the only means in which value has been gained. It has been argued that Adam Smith’s 1776 work in the Wealth of Nations was the turning point of western civilizations rapid expansion. People, Ideas & Objects believe software has stifled the ability of organizations to change. They cement the organization within the definition and without the capacity to change the software first, the organization remains static. Eliminating any future benefit from specialization and division of labor. People, Ideas & Objects also sees the capacity and capabilities we’ve built into our software development, especially our user community, we’re able to generate value in two material ways. The first is through the decentralized production models price maker strategies ability to instill production discipline across North America. And secondly, change enabled opportunities and capabilities that specialization and the division of labor have for generating value.

This One's Nuclear, Part IV

 People, Ideas & Objects observed North American oil & gas producers exhibiting disconcerting behavior. In October and November 2023, I highlighted how natural gas mismanagement and lost market development opportunities impacted pricing. Prices plummeted in July 2007 from a 6 to 1 ratio against oil to as much as 40 to 1 in 2023. We discussed how producers lacked production discipline. Suffered from chronic and systemic overproduction, and could resolve these issues through our Preliminary Specification. Since November 2023, the natural gas crisis has worsened. Reaching a magnitude of over $4 trillion in lost revenue during that 16 year period. A critical shortfall in LNG contracts is hindering producers' ability to stabilize the market for the foreseeable future. Their sole solution is to implement the Preliminary Specification's decentralized production model's price maker strategy. Enforcing production discipline based on the only fair and reasonable basis, profitability of the Joint Operating Committee. It is necessary for them to adopt People, Ideas & Objects, our user community and their service providers drive towards preservation, performance and profitability.

Oil & gas prices in North America have worsened because of chronic overproduction. Adopting our decentralized production model will introduce the most equitable means of production discipline available to producers. If the Joint Operating Committee earns a “real” profit, then it produces; if not, it’s shut in for these business benefits:

• Shutting in unprofitable properties prevents the dilution of a producer's profitable properties' performance, leading to their highest corporate profitability.

Reserves, safeguarding the firm's assets is a role of officers and directors.

• Producers keep their reserves in order to produce them profitably at a later date.
• Producers reduce operating and storage costs by leaving overproduction of oil & gas as reserves.
• Reserves do not need to cover the additional costs from prior losses.

Deployment of their strategic competitive advantages of their earth science & engineering capacities and capabilities.

• While shutting in a property, producers will work to innovatively restore the properties profitability.

Performance & Profitability.

• Making independent business decisions based on actual, factual, standard and objective accounting which determines a Joint Operating Committees profitability. Does not constitute collusion, despite what officers and directors suggest.
• North American producers benefit when they produce all their properties with marginal prices.
• Prices will reflect the replacement value of production. Price makers only initiate new production when profitable.
• Markets provide one thing: the price, which incorporates all information buyers and sellers need to make effective decisions.
• Producers with profitable operations will have their capital repeatedly returned when recognizing depletion in the price of the commodity. Investors in effect were subsidizing the consumer's energy consumption by paying the capital costs of the commodity.

Overhead burden is reduced, shared and made variable, based on profitable production.

• Our Cloud Administration & Accounting for Oil & gas Software & Service will be a shared resource for all producers administrative and accounting needs. 
• Reduces the need for each producer to build redundant, unshared and unshareable administrative and accounting capabilities. 
• With the Preliminary Specification, shutting in production results in a null operation. All producer costs, including overheads, become variable based on profitability.
• Producers recoup overhead costs as cash in the subsequent month when they include these costs in the commodity sales price. In today's producer business model overhead is capitalized and cash is recovered over a twenty year period.
• Creating the dependence on outside sources of capital.

Future capital needs will exceed any expectation that the past “investor-funded model” could finance. The Preliminary Specification provides the financial resources to support dynamic, innovative, accountable and profitable oil & gas producers. 

It’s crucial for producers to broaden their competitive scope in capital markets, leveraging innovative strategies outlined in the Preliminary Specification. Investors have alternatives in other industries, and oil & gas must offer competitive returns. 

• Competing in capital markets will foster the production discipline necessary across the industry.
• Producers who continue to neglect profitable production, dilute earnings with incurred losses. Continuing to fail to compete in the broader capital market and against peers.
• Why continue to lose money when significant capital demands are on the horizon.
• Profitability drives value creation, supplying the financial resources necessary for the producers. 
• But also generating value in the secondary and tertiary industries that support oil & gas.
• Businesses and industries operate on profitable business models. 
• Oil & gas producers have relied on investors to generate the cash they needed.
• Investors were deceived by the specious financial reporting that were conducted for several decades throughout the industry. 
• That’s over, they need to admit that and realize that profitable operations will provide them with all the money they need.
• However, today we can state unequivocally that the culture doesn’t know how, where or what that would involve for their organization to begin to earn profits. 
• Operations of the industry on this basis, for four decades, has diminished the assets performance criteria to well below standard.

People, Ideas & Objects, our user community and their service providers enable producers to restore oil & gas market prices and capture replacement costs as cash for reinvestment, dividends, and debt reduction—consistently and repeatedly. Only then can they tackle the next 25 years, a period that will be the most challenging in the industry's history. Instituting a new culture based on the seven Organizational Constructs of the Preliminary Specification. 

Producers firms' officers and directors have not engaged in any material or exceptional activity in retirements or resignations. It’s important to note that People, Ideas & Objects received no contact from the producers about our product since raising the LNG issue in November 2023. Clearly, they feel in control and will continue with their regular operations, despite facing a serious existential crisis with no support for their capital structure. Operational field capacities are at best one third of prior years and diminishing. From the eia.gov

They see consolidation as the solution to their unidentified and unexpressed issue. They have a culture that does not generate value, no plans or vision, or understanding of how to generate profit. They only mock those such as People, Ideas & Objects and now Reuters for raising trillion-dollar issues. And when issues materialize, officers and directors will “muddle through.” What will “muddle through” do with the higher cash flows necessary to meet the future capital needs? Will they begin using them prudently or revert to their cultural propensities?

Eighteen months ago, producers renounced shale's commercial viability for their clean energy adventures, only to be corrected. And in late 2023, finding that $4.0 trillion in natural gas revenues passed through their fingers. That non-participants of the oil & gas industry in fact have realized their revenues. Revenues that were available to them since August 2012 through the publication and development of People, Ideas & Objects Preliminary Specification. A decade lost! What will they say in their defence?

Or perhaps officers and directors realized they can’t leave now. If they do, their officers and directors insurance will be null and void as a result of not doing anything. The threat existed and now it’s real, and without the Preliminary Specification it will be lost on a prospective basis. The warning was being made on this blog and our Preliminary Research Report since May 2004. They can not say they were unaware. If they did, their officers and directors insurance wouldn’t cover them. Their fiduciary duty assumes they knew of the risk. And would therefore be subject to having their personal assets used to compensate investors.

People, Ideas & Objects rewrote the Preliminary Specification in 2023. I adhere to the U.S. dollar budget requirements detailed in the Profitable Production Rights model. If industry wishes to engage, People, Ideas & Objects is keeping the following option open until February 16, 2024. 

• Industry will need to send a non refundable option of $30 million U.S. to extend the offer until April 12, 2025. In time for the Annual Report season.
• Then pay the development funds by April 12, 2025. These funds support the development of the Preliminary Specification.
• If they miss either of these deadlines, they’ll face consequences by holding themselves personally accountable for the destruction we warned about, has manifested and they’ve disregarded for nearly two decades. 
• Accountability demands they do something to correct this. 
• None of that means anything to them. However, if they don’t they’ll only make their personal situation more complicated. It's the officers and directors' decision. 
• If they miss the February 16, 2024 deadline, we will reinstate the full Profitable Production Rights funding method. 
• Officers and directors will then need to explain to their shareholders the loss of an extra 5% or more in future revenues through that method of software development financing.
• Consistent with the Preliminary Specifications value proposition. Reuters stated that $2.6 trillion in incremental revenue is on the table in the next few years. This demands action from those who have the responsibility, accountability and resources necessary to deal with it. 

People, Ideas & Objects deadlines are structured to deal with the sense of urgency necessary for industry to resolve its issues and realize its opportunities. Time is of the essence. Our value proposition of $25.7 to $45.7 trillion dollars over the next 25 years is now recognized elsewhere, is valid and available through development and implementation of the Preliminary Specification. The argument we’ve put across in support of our business model has been met with consistent lies, blaming and what we call viable scapegoats from the officers and directors of the producer firms. They thought we were seeking attention by putting out ridiculous numbers to gain attention to what we were doing. On the contrary we were doing our job and had a clear handle on the scope and scale of what was not being managed appropriately. Today the oil & gas and service industry are in shambles. An active rebuilding is necessary on an all hands basis. Any rebuild, particularly one in the 21st century, needs to be organized first and foremost. And doing so outside of an ERP system would fail. This development needs to be outside the control of the current officers and directors for two reasons. 

• To avoid their cultural influences and establish the seven Organizational Constructs of the Preliminary Specification as the replacement culture. 
• It appears since the LNG contracts and the opportunity to remedy the prices in the past decade were missed. Officers and directors did not know or understand the issue.
• If they don’t understand the issue, how will they solve it?
• If they have to avoid the Intellectual Property of People, Ideas & Objects what will they use?
• Who will conduct the research over the next decade to build that business model?

I’ve been seeking to resolve this since the July 1986 oil price collapse. Organizing my first approach in May 1991. Undertaking the necessary and difficult decade of research to resolve the issues and exploit the opportunities in oil & gas. A task that has not been undertaken by producers or any of People, Ideas & Objects competitors. 

Please contact, and join me in making North American oil & gas producers dynamic, innovative, accountable and profitable. Only through profitability can the industry continue and obtain the preservation, performance and profitability we need from these two critical products. Everyone in oil & gas clearly understands why profits are necessary and what happens when they’re not earned. Oil & gas has its most challenging and demanding future ahead of it. It will demand the best of everyone and no one can be left out of this rebuilding process. If someone is looking for urgent, challenging and important work they’ll need to look no further than here.

OCI Partnership Accounting, Part VII

 In today’s marketplace, producer management's focus on cash flow is designed to deceive those that believe they're productive. However, only officers and directors believe cash flow reflects value. It is simply a measure of how much cash the company generates. And in a capital intensive industry these numbers will always be significant. Included in that cash is an invisible amount of investment needed to maintain the assets. So although cash flow can be a big number it comes with big commitments. And sometimes those commitments exceed cash flow. Yet that never stopped management from promoting gross cash flow numbers as value. 

What is needed is for the producer and Joint Operating Committee to focus on earnings, that is the real earnings of the property. Those are based on revenues, less royalties, less a reasonable and competitive portion of capital, operating, and overhead expenses. Competitive in the sense that oil & gas needs to compete for capital on North American capital markets. When a firm focuses on those and leaves Wall Street analysts to themselves, favorable things can happen to the value of a property or a producer. Property valuation could be based on its present value earnings. Having a lot of production with no earnings provides no value for anyone. It's an exercise in activity. An activity that satisfies a small group known as officers and directors. Anyone can drill a well and produce oil or gas. Oil men and women make money. That’s the toughest part of the business, making money. Having abundant reserves is valuable if they can be produced profitably. By profitably, this implies being competitive, which is what the North American capital markets definition of competitive is.

Therefore, how can we ensure that the property always produces profitably? By reducing property operations costs. That is the next step in the ability of this “decentralized production” model to make the Joint Operating Committee the innovative framework of the oil & gas industry. With this understanding and operation, engineers and earth scientists will be able to turn to the Knowledge & Learning module of the Preliminary Specification. And determine what capabilities exist within the producer population represented in the Joint Operating Committee. To see if there is any operation that they can conduct to enhance the profitability of the property. In essence each property stands alone as its own unique cost center. Being evaluated as its own separate business based on business values and expectations. The Partnership Accounting module provides each Joint Operating Committee with detailed, actual, factual financial statements each month to determine the properties' performance. With overhead converted to variable cost, all costs are now variable and any shut-in production will incur a null operation. 

In recent discussions we saw that the accounting costs prepared for each Joint Operating Committee are the actual accounting costs for that property. This is not an overhead allowance as it is today. By reorganizing accounting and administrative functions for the service providers, we can identify the exact costs for each Joint Operating Committee. The other implication is that neither the producer firm nor the Joint Operating Committee directly employs or houses these accountants in their offices. Instead they are charged for the variable costs incurred by individual service providers. Where the service provider incurs costs on behalf of the industry and charges an individual price to the Joint Operating Committees for their services. And producers incur costs related to only those service providers they use. These are some of the advantages of the Partnership Accounting module of the Preliminary Specification, and modularity in general. 

When we’ve discussed modularity it’s been in the context of the fourteen module Preliminary Specification. However, it could easily be that we are discussing the Joint Operating Committee. Each Joint Operating Committee is isolated and exclusive to all others. As Professor Richard Langlois noted in his paper “Modularity in Technology, Organization and Society.”

What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to modularity in the design of the organizations that produce such products. p. 1.

To have the entire accounting provided by accounting service providers who are not present in either the producer firm or the Joint Operating Committee does not seem to be too much of an issue. Dare I ask when anyone saw someone from accounting in an operations environment? Aren’t these people sequestered on their own floors or in other buildings most of the time? A revenue and royalty accounting service provider operating on behalf of several dozen Joint Operating Committees and representing fifty producers would need their own office space to organize themselves in a manner that provides them with the most efficient way to do their job. Production accounting may ideally be deployed closer to production locations.

Accounting service providers are not core to producers' or Joint Operating Committees' competitive strategy. Producers focus on their land & asset base. The engineering & earth science capabilities that make up their value proposition are where time and energy should be expended. Accountants can complete their work through meetings, emails and telephone calls no matter where they’re located. The producer's objective is to have these accounting overhead items match revenues within a Joint Operating Committee, particularly when production is shut-in. The decentralized production model will ensure that operational and overhead costs are reduced to zero during shut-in production. 

To achieve specialization and division of labor that will improve accounting efficiency. The accounting service providers will need to organize themselves in a manner that provides the highest quality service to their customers. These configurations will not represent how work is done today. In addition People, Ideas & Objects and our user community are designing systems to be as highly automated as possible. That’s not to suggest accountants' role is diminished in this environment. Their role will be more high level value added work, not transaction oriented. And they will have the support of the People, Ideas & Objects software development capabilities available to develop valuable and innovative systems and interfaces. And to do so with a permanent industry capability. By doing so, they will be able to innovate and evolve their services to producers.

In the industry wide reorganization of producer firms' administrative and accounting resources to service providers. It is our user community who are the principal owners and operators of each of them. There will be the generation of what Professor Richard Langlois in his paper “Transaction Cost Economics in Real Time” in the Journal of Industrial and Corporate Change describes as “Dynamic Transaction Costs.” 

Over time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost - the cost of transferring the firm's capabilities to the market or vice-versa. These "dynamic" governance costs are the costs of persuading, negotiating and coordinating with, and teaching others. They arise in the face of change, notably technological and organizational innovation. In effect, they are the costs of not having the capabilities you need when you need them. p. 99.

Previously, in other modules, we established an account to collect Dynamic Transaction Cost charges so that they can be identified and controlled. These costs will be incurred in the beginning stages of the transition from the firm to the market configuration. 

"F.A. Hayek (1945, p. 523) once wrote that 'economic problems arise always and only in consequence of change.' My argument is the flip-side: as change diminishes, economic problems recede. Specifically, as learning takes place within a stable environment, transaction costs diminish. As Carl Dahlman (1979) points out, all transaction costs are at base information costs. And, with time and learning, contracting parties gain information about one another's behavior. More importantly, the transacting parties will with time develop or hit upon institutional arrangements that mitigate the sources of transaction costs." p. 104.

It will be during this time when Dynamic Transaction Costs are high. It will need to be determined within service providers' Service Level Agreements how these costs are recovered. People, Ideas & Objects see our user community and their service provider organizations as responsible for the integration and implementation of our software and their services. And as time passes and the work undertaken by the various accounting service providers that provide services to the producer becomes routine, we will know the transition to the market is complete. Professor Langlois notes.

‘Routines,' write Nelson and Winter (1982, p. 124), 'are the skills of an organization.' p. 106.

And

Such tacit knowledge is fundamentally empirical: it is gained through imitation and repetition not through conscious analysis or explicit instruction. This certainly does not mean that humans are incapable of innovation; but it does mean that there are limits to what conscious attention can accomplish. It is only because much of life is a matter of tacit knowledge and unconscious rules that conscious attention can produce as much as it does. p. 106.

And

In a metaphoric sense, at least, the capabilities or the organization are more than the sum (whatever that means) of the 'skill' of the firm's physical capital, there is also the matter of organization. How the firm is organized - how the routines of the humans and machines are linked together - is also part of a firm's capabilities. Indeed, 'skills, organization, and technology are intimately intertwined in a functioning routine, and it is difficult to say exactly where one aspect ends and another begins' (Nelson and Winter, 1982, p. 104). p. 106.

To remove ourselves from the detail of the Partnership Accounting modules decentralized production model we find that the real value is gained by the oil & gas producer. The repeated collapse of oil & gas prices since July 1986s initial oil price collapse. These events have been unforeseen and no effort has been taken to remedy what is now obviously the result of overproduction or unprofitable production. And when prices have not collapsed such as in April 2020s negative $40 oil price, there are chronically depressed prices that are the result of overproduction, or unprofitable production. The most compelling example is the loss of natural gas’ pricing standard of 6 to 1. Moving to approximately 15 or 20 to 1 during 2009 to 2022. And this past year's prices ranged between 30 and 40 to 1. This is a non-event that requires no concern or effort on the part of officers and directors of producer firms. The value expected to have been lost due to this pricing damage across North America in just the past year is over $290 billion. We assert that these are not and never have been opportunity costs. This is pure and simple mismanagement and has occurred annually on both oil & gas commodities for four decades. This is due to chronic, unconstrained, unprofitable production. Fueled by deceptive accounting practices used to raise capital to make up for shortfalls.

The same applies to oil. However, oil being a global commodity it can withstand the abuse of North American producers better than natural gas can. Natural gas is transitioning to a global pricing market however that is taking much longer than expected. 

People, Ideas & Objects are well aware of the difficulties and costs producers will incur associated with the dynamic transaction costs that will be incurred in the transition to remedy these maladies. The cost today of not doing so is abhorrent. The value we detailed where unprofitable production was shut-in, reserves were saved for when they could be produced profitably, reserves were used as the low cost alternative to storage, producers would attain the highest level of profitability when property losses did not dilute property profits and marginal prices were obtained across the continent, are well beyond anyone's material threshold. 

People, Ideas & Objects' value proposition is composed of two components. Our first point is the incremental earnings the industry will earn from our decentralized production model. Over the next 25 years we’ve priced these at a minimum of $5.7 trillion. The second component is estimated to be worth $20 to $40 trillion over the same period. This value is earned due to the fact that capital will no longer be raised from investors, consumed by producers in order to “build balance sheets” or “put cash in the ground.” Internally generated cash due to overhead costs being recognized in the current period and capital costs being recognized in a time frame that is competitive on North American capital markets. Will generate adequate levels of cash to fund the capital expenditures necessary to rebuild the industry in the vision of the Preliminary Specification, pay dividends and pay off debt.

Due to the high costs and prolific nature of shale formations, a decentralized production model is required. Oil & gas is currently run by a bureaucracy that has no idea how to produce shale. Shale presents a fundamental change in oil & gas. A change that reflected the prior dynamic of scarcity is no longer valid, and has been replaced by an era of abundance. Other than through the generation of significant losses, we have ample evidence over the past decade and a half to confirm that officers and directors don’t care about profitability. They still get paid either way. They are entrenched and will continue to fight People, Ideas & Objects Preliminary Specification with everything they have. Theirs is a comfortable and convenient life that doesn’t expect or want to be disturbed. 

As little as two years ago, officers and directors determined that shale would never be commercial. And sauntered over to the clean energy frontier to save the planet. We have no belief in their ability to understand or produce profitably, to commit to the oil & gas business or act in any way responsible. One of the inherent benefits of the decentralized production model is that it considers the ever-escalating costs of oil & gas exploration and production. Each incremental barrel of oil produced is technically more difficult and costs more than any prior barrel. This natural cost escalation is evident in oil & gas and not present in any other industry that I know of. Actual, factual and detailed accounting being prepared for each and every Joint Operating Committee in the Partnership Accounting module will account for this escalation. This will ensure these costs are immediately passed onto consumers. 

OCI Partnership Accounting, Part VI

 Our Decentralized Production Model & Price Maker Strategy

When we consider the next aspect of this change, our decentralized production model, this assures that People, Ideas & Objects, our user community and service providers offer oil & gas producers the most profitable means of oil & gas operation, everywhere and always. What we've experienced over the past four decades in North American oil & gas is unique in all organizations and of all business history. Although we learned during the great depression the economic consequences of overproduction, and experienced its consequences in oil & gas since the 1980s, no one seems to have explained it to the North American producer. Oil & gas overproduction in North America has been systemic and chronic throughout the producer population and will continue to be without an effective means and method of production discipline being imposed. The history over this period is stark and clear. In the late 1970s the SEC imposed its Full Cost Accounting and associated Ceiling Test requirements on producers trading shares in the American market. These requirements allowed producers to record costs in property, plant and equipment as assets up to the limit of the present value of their independently evaluated petroleum reserves. This allowed an unnecessary flexibility in the financial statements that created distortions since that time. Simply, shifting the accounting from an evaluation of performance to one of value, hence the producer's foolish objective of “building balance sheets” etc came about. This is the mindset of our good friends, the producer officers and directors. What we know of business is that overreported asset valuations lead to commensurate amounts of overreported profitability. Leading investors to rush in to capture those profits and hence a process of overinvestment begins. Overinvestment in the productive capacity of the oil & gas producers leads to overproduction of commodities that are subject to the economic price maker principles and characteristics. 

It is this reason that has caused the repeated and systemic collapses of commodity prices throughout this past four decade period. The first commodity price collapse that we can document was during the summer of 1986 when $10 oil prices decimated the industry for the better part of a decade. This is counter to the cultural belief that oil & gas commodities are price takers. These definitions are from investopedia.com

Price maker

A price maker is a monopoly or a firm within monopolistic competition that has the power to influence the price it charges as the good it produces does not have perfect substitutes. A price maker that is a firm within monopolistic competition produces goods that are differentiated in some way from its competitors' products. This kind of price maker is also a profit-maximizer as it will increase output only as long as its marginal revenue is greater than its marginal cost, so in other words, as long as it's producing a profit.

Price taker

A price-taker is an individual or company that must accept prevailing prices in a market, lacking the market share to influence market price on its own. All economic participants are considered to be price-takers in a market of perfect competition, or one in which all companies sell an identical product, there are no barriers to entry or exit, every company has a relatively small market share, and all buyers have full information of the market. This holds true for producers and consumers of goods and services and for buyers and sellers in debt and equity markets.

As evidence supporting People, Ideas & Objects claim of price taker characteristics I make the following argument in our User Community Vision. Officers and directors interpret substitutes to be; if they don’t produce others will, therefore substitution is everywhere. This is not what substitution means. Does it mean that Elon Musk could make it to Mars if he replaced rocket fuel with a hydro dam? Or could we use wind energy to lubricate our crankcase? How about storing nuclear fuel rods in the convenience of a jerry can as you travel outdoors this weekend. And if you’d be able to return alive from your weekend adventure you might make it back to the office in that new solar panel, or pine bark suit you just bought. Alternatively, if bottled water ceased to be produced people would switch to soft drinks, tap water, juice or other substitutes. Any overproduction of bottled water would see inventories swell and the price remain the same, as would the price of the last bottle of water found anywhere in the world.

The connotation of the economic term price maker has caused producer officers and directors to conclude this is collusion. We argue otherwise when the Preliminary Specification and specifically this partnership accounting module, uses the Joint Operating Committee and will produce detailed, actual, factual financial statements for each property. Producer firms will definitively know the “real” profitability of each of their properties. A task that is not done today and more importantly can not be done today. And therefore producers will independently decide to shut-in their unprofitable properties to ensure they attain the highest level of corporate profitability. Invoking the necessary industry wide production discipline. Saving their petroleum reserves for a time when they can be produced profitably. Keeping their production and inventory costs lower by not incurring the costs of unnecessarily producing and storing unprofitable production. Ensure their reserves don’t have to recover the incremental costs of their prior losses as additional earned profits. And most importantly ensure that the marginal production is removed from the commodity markets allowing them to find their marginal price. 

While the property is shut-in the producer can apply their innovativeness, another Organization Construct of the Preliminary Specification, to return the property back to profitable production as soon as possible. People, Ideas & Objects and our user community are the appropriate business approach to the chronic and systemic overproduction of oil & gas and the persistent obtuseness of the producer officers and directors, not collusion as they accuse us. Profitable operations in a capitalist society do not necessarily denote collusion. Without “real” profitability there is only waste and deterioration as we’ve experienced these past decades. Without investors and bankers who were duped by these specious financial statements, there was no sustainable value generated, only destroyed.

The definition of collusion is provided by Wikipedia. 

In the study of economics and market competition, collusion takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market structure of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole. Cartels are a special case of explicit collusion. Collusion which is overt, on the other hand, is known as tacit collusion, and is legal. 

By definition then the Preliminary Specification price maker strategy may fall under the category of overt or tacit collusion. Which is legal. Each of the producer firms will be making independent business decisions of whether or not to produce at each and every one of the many properties that they own. Those decisions will be based on the actual, factual accounting that provides the information for that decision. The decision is to make a profit, if the property is shut-in due to unprofitability it will incur a null operation, no profit but also no loss. Achieved when the Preliminary Specification has made all of the producers costs variable based on profitable production. The decision to avoid a loss of corporate financial resources and assets, in the form of petroleum reserves, when producing an unprofitable property at a price that does not cover the marginal cost, in the long term perspective of marginal cost, (as per Wikipedia “analysis is segregated into short and long-run cases, so that, over the longest run, all costs become marginal,”) is a rational business decision, not collusion. This also provides, for the first time in the history of the industry, the ability for producers to indirectly control their overhead costs based on their profitable production profile.

The following graph was provided by Les Borodovsky from @SoberLook. What this graph is representing is the status quo perception of costs and how management of production is handled in oil & gas.

The perception of the producer officers and directors is that their total costs of each barrel of oil produced in the various shale formations is in the range of $48 to $54. The operating and royalty cost of each barrel varies between $28 and $37. I would point out the $20 to $23 in capital costs are based on an allocation of their capital costs across the entire reserves of the property. We’ve argued that this allocation is unreasonable in a capital market where the demands for the performance of capital are far greater than what can be achieved when a producer is cycling their cash through their investments in a manner that retrieves their investment over several decades or more, or even if at all. This is further aggravated when shale exposes prolific reserves, however demands substantial incremental capital to offset shales inherent steep decline curves in order to maintain deliverability. 

As an alternative, People, Ideas & Objects recommend that producers retire their capital costs within the first 30 months of the properties life to provide for the reuse of the previously invested cash. In turn providing them with the means to meet their internal demands for future capital expenditures, shareholder dividends and bank debt repayments, and better match the rapid decline rates experienced in shale in order to compete on North American capital markets. This can only be done if the producer is selling their commodities at a price that is above their break even point which considers an appropriate accounting of the actual, factual costs of exploration and production. And to reuse their cash repeatedly on this basis and not every second or third decade. 

This graph reflects the Well Break Even and Shut-in prices of the producers current policy position. At any point, and as long as the commodity price covered the operating costs, the property would continue to produce regardless of the impact on capital costs. If a dollar of capital costs was being returned, or one dollar above the shut-in price, that would enable the production of the property to continue. Only at the point in time where the commodity price dropped below the operating costs would the producer allegedly shut-in their production. This is a fundamental misinterpretation of the term break even, it is the reason the industry is in the difficulty that it’s in and why the producers have continued to lose money for the past four decades. Break even is not what is being interpreted here. What in fact the producer is assuming is that as long as there is cash flow above the operating costs then they’re making money in their opinion and will continue to produce. What they’re stating is they may not be breaking even, and as a result over the long term, stranding unrecovered and unrecoverable capital costs in abandoned properties is acceptable and commonplace.

What People, Ideas & Objects provide in our Preliminary Specification, if we could assume the accuracy of this graph numbers, is the point at which the property would be shut-in would be at the breakeven point and below. (Note that our breakeven point would be higher due to the competitive recognition of capital over a thirty month period.) The reason for this being the production discipline gained through knowing that producing any property unprofitably only dilutes the producers corporate profits. Producing below the breakeven point is the point where unprofitability begins. Producing below the breakeven point for one producer, in an industry who’s commodities are price makers, will have the effect where the price of the commodities will be dropped below the breakeven price everywhere for all producers. When all producers continually produce below the breakeven price for four decades it exhausts the value from the industry on an annual and wholesale basis. Which I believe occurred some time in the 1990s and since then, times were only “good” when investors were willing.

To avoid the allegation of collusion officers and directors would have us believe that they were operating the industry within the law. Losses of catastrophic proportions have been realized, displacing and disrupting the financial resources of each and every producer over the long term. Today the financial, operational and political frameworks of the industry are in tatters. This is considered normal course business operations for the officers and directors. Imposing the destruction of their firm's assets, the capacity and capabilities of the oil & gas and service industries is the price that they believed needed to be paid as a consequence of its acceptance of a “boom / bust” business by way of “muddle through.” This is unnecessary and unacceptable when the Preliminary Specification is available to operate the oil & gas business as a business.

The inverse situation is provided by the Preliminary Specifications decentralized production models price maker strategy. A contrast to the “muddle through” times we have found ourselves in during thirty one of the past thirty seven years since the July 1986 oil price crash in North America. In an environment where the Preliminary Specification will be operational, higher commodity prices would bring about production volumes that would meet the threshold of profitability and therefore previously shut-in properties would return to production. The enhanced commodity prices, everywhere and always, would allocate the necessary financial resources to search for innovative means for exploration and production. Providing the dynamic, innovative, accountable and profitable North American producer with the most profitable means of oil & gas operations. 

The organizational objective is to satisfy the consumer demand for energy on the basis of abundant, affordable, reliable and profitable energy. The value proposition of a barrel of oil equivalent is in the range of 10 to 25 thousand man hours of equivalent mechanical leverage. Going without oil & gas is not possible in the most advanced society with the most productive economy. The oil & gas producers value proposition to their consumers is therefore by far the most substantial of any other business. 

People, Ideas & Objects feel that oil & gas has a unique characteristic that needs to be recognized and adhered to. These commodities are valuable and limited in the long run. How do we ensure that we can prove to future generations that we used our share of these resources appropriately. The first way is to show that all of them were produced profitably everywhere and always. And secondly by passing along a profitable, viable, efficient and effective oil & gas and service industry. To do otherwise would be unwise and unjustified. Most of all it is unnecessary when the commodities follow the principles of price makers. Consumers are aware that the only effective way that they’re going to have secure, reliable and affordable energy independence in North America is when producers are profitable. Why this hasn’t been done is a question that needs to be answered by those that have not done this, and had the alternative in the form of the Preliminary Specification available in hand since at least 2012.

Yet, just as producers were forced to shut-in production as a result of almost negative $40 oil prices and refineries refusing to accept feedstock, they would find compelling reasons to return any property that contained shut-in production back on production in order to satisfy consumer demand and to do so profitably. Operating the primary industry of oil & gas profitably, everywhere and always, will enable them to maintain the capacities and capabilities of the greater oil & gas industrial economy. That People, Ideas & Objects were subjected to abuse and punishment for this position and other content contained within the Preliminary Specification is evidence that officers and directors knew better, that our alternative was available and it was refused as it disintermediated the officers and directors method of management and personal compensation, they’ll now need to live with their legacy of inaction.

What officers and directors were able to do was run the entire oil & gas industrial complex into the ground over these past four decades and completely destroy a large percentage of the service industries industrial capacity, eliminating that industry's capital structures and any faith, trust or goodwill between them. Go find a willing drilling rig investor or banker of a few years ago who subsequently saw the drilling rig they invested in cut up for scrap metal while producer officers and directors whistled their uncaring and inconsiderate tune of “muddle through.” It is now incumbent upon the producers to provide the financial resources to rebuild the service industry. And do so on a philanthropic basis. The rule is “producers broke it, the producers need to fix it.” Producers used and abused the service industry and now they’ll be needing to provide the money and backbone involved in the rebuilding effort, otherwise they’ll only use and abuse the service industry after they’ve rebuilt it again. Maybe when producers have had to rebuild the service industry themselves, putting some skin in the game, they’ll respect it. 

With the costs associated in exploration and production, and particularly shale reserves it's no surprise that producers have consumed the cash that is generated and any that is provided from investors and bankers. What is surprising is that producers have done nothing over this period to mitigate the overproduction that has caused the decline in pricing, subsequent financial losses, destruction of the producers reserves and greater oil & gas industrial capacity. And here we find the motivation as to why these methods continue. 

The reason for this chronic overproduction is the producers have to generate the revenues to cover the out of pocket costs of the overheads they incur in the “high throughput production” model they employ. This model has these overhead costs of the firm being incurred whether there’s production or not, and if any percentage of their properties are shut-in it makes their operation a high cost operation at any level of production. At lower production volumes, it skews their earnings and overhead costs appear out of place. Therefore this behavior of producing at capacity should be expected to continue on both the oil & gas sides of the business. Even in spite of significant financial loss or the inability to meet market demands. 

Although most producers report overhead costs of less than 2% in almost all instances this is not representative of the situation. We believe based on our experience that overhead costs range between 10% and 20% of revenues. These itemized amounts are never detailed or discussed in the financial statements of producers. If they were itemized the disproportionate and creative levels of executive compensation would be evident. Overhead costs are capitalized across the industry in the region of 85% to avoid the necessary accountability for these costs. Avoidance of accountability is the motivation for doing so, the consequences of these actions are as follows, and it should be noted People, Ideas & Objects identified this anomaly in excess of a decade ago. Yet nothing was done.

When all of the overhead is capitalized to the extent that it is in oil & gas it creates that giant sucking sound around the producers bank. Overhead in most businesses is recognized and passed to the consumers of the firm's products. In oil & gas it is capitalized. Therefore the “cash float” that all businesses have to have in order to finance these costs doesn’t function or even exist when overhead is capitalized. Producer cash is essentially stored on the balance sheet for decades and is passed on to the consumer at some point. When that will be remains a mystery. The industry phenomenon of a working capital deficiency was traditionally filled by the astute budget manager providing the amount of next year's capital expenditures in the prospectus. Without support for the capital structure, no real profitability earned and fundamentally inadequate revenues generated as a result of the decades long industry wide overproduction, we should understand the quality cash management skills being applied in the industry. When the business is a spending machine, what would you expect?

Our Preliminary Specifications decentralized production model is proposed and enables the dynamic, innovative, accountable and profitable oil & gas producer to implement our price maker strategy. This decentralized production model has been defined by Professor Richard N. Langlois in his book The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy. 

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p. 58.

Production discipline is attained through this process when the producer realizes that their maximum profitability is obtained through producing only profitable production everywhere and always. Therefore producers are incentivized to adhere to the principles of the Preliminary Specifications decentralized production models price maker strategy. Just as all businesses in the capitalist system follow these principles since the great depression of 1929. The individual decisions of each oil & gas producer, based on an actual, factual accounting of the profitability of the property, will determine if the property produces. That is how the oil & gas industry needs to deal with any low commodity price situation that it occasionally finds itself in. 

As properties begin to lose money in a period of declining prices, incremental properties are shut-in each month as they too may become unprofitable. The inverse of this is also relevant when commodity prices rise, producers will be raising production volumes when they attain profitability from higher prices and return their shut-in properties to the market. Shale based reserves will always overwhelm the oil & gas commodity markets with flush production and deliverability that are driven by shale's prolific nature. Production discipline based on profitability can only be achieved through the reorganization of the industry and producers based on the Preliminary Specifications decentralized production model. Where overhead costs are made variable and producers are using the facility we’re building in the form of our Cloud Administration & Accounting for Oil & gas software and service. Which enables our price maker strategy to provide for the producers and industries profitability and in turn ensures consumers are always provided with an abundant, affordable, reliable yet profitable source of energy. 

The effectiveness of our method is reflected in our logic. Producer profitability is maximized when losses on properties no longer dilute profitable properties profits. Reserves are held for a time when they can be produced profitably. And those reserves costs will not have to carry the incremental costs of any losses that would have occurred if the property continued to produce unprofitably. Keeping the oil & gas as reserves reduces the producers costs of production and storage of the excess, unprofitable production. Commodity markets find the marginal cost when unprofitable production is removed from the marketplace. Marginal prices for not just the unprofitable production but all production. While shut-in any unprofitable properties will form the producers work-in-progress where they can innovatively approach methods of raising production volumes, reducing costs or expanding reserves. Using profitability is the only fair and reasonable method of invoking production discipline. If it’s profitable it produces. 

It should be noted here that the Preliminary Specifications service providers will provide a standard, objective method of accounting and process management. Therefore any producer that finds a property is unprofitable, it will know that shutting it in is the most effective remedy as the assessment of unprofitability is the same standard and objective assessment that all other properties were evaluated under. The decentralized production model provides the financial resources necessary to ensure a prosperous industry controls itself as independent businesses. It is a method of determining the current replacement cost of oil & gas, as price makers only bring on new production when it is profitable. The method used today, capital discipline is a dull, blunt instrument that has proven time and again to be completely ineffective. By definition it is the willing destruction of productive capacity. Due to the decentralized production model and industry reorganization to the Cloud Administration & Accounting for Oil & Gas software and service. Overhead is only incurred when production is profitable. Overhead is variable based on profitable production and is not incurred if the property is shut-in. Therefore all overhead costs are recovered in the current period when they’re priced in commodity sales. Producers will therefore be able to indirectly control their overhead costs.