These Are Not the Earnings We're Looking For, Part LXXIII

 Composition of Our Value Proposition

Intangible & Unquantifiable Attributes, Con’t

Markets

At People, Ideas & Objects, we are advocating for a new organizational approach in the oil & gas industry, one that leverages the dynamic, innovative, accountable and profitable nature of markets. Unlike the corporate hierarchies that have dominated the past century, markets have historically been the foundation of economic systems. The alternative solution currently being explored—consolidation or centralization by existing producers—seems to be falling short of expectations. This approach runs counter to the broader trend of disintermediation and decentralization driven by the Internet. We believe the choice is clear, which is why we designed the Preliminary Specification as a market-oriented, industry-wide oil & gas ERP application.

The Preliminary Specification includes three distinct markets: the Petroleum Lease, Financial, and Resource Marketplace modules. Each of these modules is designed to replicate and interface with the physical markets that currently exist, supporting the transactions and collaborative decision-making necessary for producers to leverage their unique competitive advantages—whether in land & asset bases, or earth science & engineering capabilities. 

We’ve emphasized the superior quality of accounting information that People, Ideas & Objects’ Preliminary Specification will provide to producer firms, which stands in stark contrast to the opaque, disorganized, and often unused accounting systems in place today. If the current state of the industry—marked by its destruction—isn’t enough to illustrate the problem, one has to wonder why so many officers and directors still believe they are running prosperous businesses. Engineers and geologists bypass traditional accounting data, relying instead on reserve reports, which are not accurate, historical or factual.

To illustrate the critical importance of accurate accounting, consider this excerpt from David Serna of the Founders podcast, discussing a historical figure who revolutionized his industry through rigorous accounting practices:

It was a lump business. And until stock was taken and the books balanced at the end of the year, the manufacturers were in total ignorance of results. I heard of men who thought their business at the end of the year would show a loss and had found a profit and vice versa. I felt as if we were moles burring in the dark.

And to me, this was intolerable. I insisted upon such a system of weighing and accounting being introduced throughout our works as would enable us to know what our costs was for each process. And especially what each man who was working for them was doing, who saved material, who wasted it and who produced the best results. And he says he ran into human nature.

Every single manager in the mills was against his new system. And he said it took years before he was able to actually install an accurate system. But this was the end result. Eventually we began to know not only what every department was doing, but what each one of the many men working at the furnaces were doing and thus to compare one with another.

One of the chief sources of success in manufacturing is the introduction and strict maintenance of a perfect system of accounting. That's a main theme. How many times did you repeat this in the books before? So that responsibility for money and materials can be brought home to every man.

Investing in technology yields significant advantages, compounding savings and enhancing competitiveness, which can determine profitability.

Organizations often overlook the importance of precise accounting, leading to undiscovered waste and inefficiencies. Embracing modern technology, such as advanced furnaces, can substantially reduce waste and protect profit margins, even when initial investments are met with skepticism.

The Scottish-born American industrialist and philanthropist Andrew Carnegie was the leader of the American steel industry from 1873 to 1901. He donated large sums of his fortune to educational, cultural, and scientific institutions.

Born: November 25, 1835

Dunfermline, Scotland

Died: August 11, 1919

Lenox, Massachusetts

The Founders Podcast book being reviewed was Andrew Carnegie, Autobiography.

People, Ideas & Objects believe the reliance on markets will be fundamental for the producers ability to prosper. However it will not occur within the domain of the existing producer organization and their inappropriate accounting. If Andrew Carnegie was able to acquire this quality of accounting information from the computers that I can only imagine were available in the 1870s. Then why do we accept today's nonsense? The question to ask the producer officers and directors is “how do you get to Carnegie Hall?”

Relying on markets, supported by accurate accounting, is crucial for producers to thrive. However, this transformation will not occur within the current producer organizations and their outdated accounting systems. The complexities and speed of the oil & gas industry today demand a fundamentally different approach. Presently, many producers are uncertain whether shale is a viable investment or should be abandoned, whether clean energy represents their future, or if consolidation will succeed as a business meme. The past three years alone have made it abundantly clear that many in the industry remain "in total ignorance of the results." 

Markets, coupled with appropriate accounting, are just the beginning of the solution to navigating the increasingly complex landscape of the oil & gas industry.

Innovation

The pursuit of clean energy by oil & gas industry officers and directors may be considered one of the most significant leadership failures in recent history. By shifting focus to renewable energy sources like wind and solar, these leaders inadvertently signaled to the service industry—traditionally the primary source of innovation—that they were no longer a priority. This message also extended to the engineers and geologists who had been steadfastly enduring the industry’s boom and bust cycles. For many, this shift was the final straw, leading them to conclude that their skills and interests might be better applied in other industries. They likely recognized that producers were either being misled or were heading for disaster, as has occurred so many times in the past.

Now, with consolidation becoming the favored strategy, a similar disillusionment is taking hold. Consolidation often results in producers reducing the number of service industry participants they work with. The surviving company typically retains relationships with their suppliers, while the acquired company ceases to engage with its previous partners. This has led to a wave of bankruptcies among smaller service firms, as they lose significant portions of their customer base. What these trends suggest is that consolidation follows clean energy in the dictionary. And we can therefore conclude that officers and directors have a long way to go before their business education is complete. 

The Preliminary Specification is built on two foundational principles: establishing producer firms on a profitable and innovative footing. While there are many priorities we address, instilling these two principles go a long way toward transforming the industry. A key innovation process included in the Preliminary Specification involves a strategic approach to managing unprofitable production.

When unprofitable production is removed from the market by shutting it in, the firm's profitability increases, and a host of other significant benefits follow. One major advantage is that the property in question becomes the focus of the Joint Operating Committees innovative thinking to determine how best to return the property to profitable production. This can be achieved through various methods, and the Research & Capabilities and Knowledge & Learning modules within the Preliminary Specification offer valuable tools for conducting these types of operations.

This process of restoring unprofitable production to profitability is of immense value to the producer and should be a central focus for the firm. It addresses the company's most pressing challenges and offers significant opportunities for value generation. However, as Andrew Carnegie once noted, selling such ideas to those with vested interests can be a difficult task. Yet, this is precisely the kind of innovative approach that the Preliminary Specification advocates.

Discussion 

The Preliminary Specification is undeniably a dynamic solution, one that fundamentally reshapes the oil & gas industry. I've long asserted that it will change everything, and it undoubtedly will. The initial effects will likely be disruptive—marked by dislocation, disorientation, and, in a word, chaos. However, amidst this upheaval, there is a clear vision that can help guide the industry back to a place of stability and purpose. The real question is whether this transformation will come about through deliberate action or be thrust upon us by further failures.

Through our series reviewing producer financial statements, we have meticulously documented the financial devastation within the industry. It's intriguing to note that many of the foundational principles we laid out in our Preliminary Research Report in May 2004 and the Preliminary Specification in August 2012 were initially dismissed. When we published our projections of trillions of dollars in potential value, industry leaders laughed. Yet here we are in 2024, and those predictions have materialized, quantifiable in numerous ways. What remains incalculable, however, is the human cost—lost careers and opportunities that a viable, profitable, and prosperous industry should have provided throughout this century and will desperately need in the future. Despite this, those responsible continue to act as if they understand what they are doing, with the current push for consolidation leading us toward yet another disaster.

What frustrates me most is the clear value that the Preliminary Specification offers the industry—value that remains ignored. In decades of advocating for these solutions, I have been vilified, ostracized, and rendered persona non-grata within the oil & gas sector. I have sustained this pursuit entirely on my own resources, never receiving a single cent from any oil & gas producer. Meanwhile, as I predicted more than a decade ago, trillions of dollars in oil & gas revenues and value have been lost, and the capabilities of the service industry have degraded and continue to diminish. Entrepreneurs, organizations, investors, and leaders within the service industry are disheartened, unmotivated, and have lost all trust, goodwill, and faith that producers will act beyond their officers' and directors' narrow self-interests.

The service industry clearly understands that the lack of producer profitability is the root cause of the extreme boom-and-bust cycles. They also recognize that producers seem unconcerned with addressing this issue. After 33 years of commitment from People, Ideas & Objects, with no progress in getting producer officers and directors to take action, it is evident that the real dreamers are those in producers leadership positions. Initiative is dead—they’ve killed it. No one is willing to lift a finger to help them anymore, as there is no point in trying when producers themselves refuse to work towards improving their profitability.

Conclusion

The actions of oil & gas officers and directors have led to the industry's downfall. Lacking the necessary business acumen and refusing to accept input or solutions, they have failed to understand the broader role and responsibility they hold in ensuring the industry's health and prosperity. Instead, they have focused on self-interest, leading to a collapse that has left the industry in a state incapable of meeting its financial or operational needs. Meanwhile, they have misled politicians into believing that oil & gas resources will be readily available for political leverage, an assumption that is dangerously misguided. I wouldn’t want to be the one who made those promises.

I understand that these accusations may not sit well with those I’ve criticized. They may dismiss them as mere opinions. But ask them this: What tangible value has been generated from the development of the vast shale resources? Who has truly benefited, been rewarded, or prospered, and where does that value stand today? If they point to oil & gas reserves as the answer, then ask them how they plan to access those reserves and produce them profitably. If they claim it has always been profitable, you’ll have your answer.

On the other hand, consider the tangible and intangible value that People, Ideas & Objects have built into the Preliminary Specification. Notably, our key organizational construct is the Joint Operating Committee. What additional intangible value might be realized from aligning the legal, financial, operational decision making, cultural, communication, strategic, and innovation frameworks of the Joint Operating Committee with the compliance and governance frameworks of the corporation? The potential value is enormous.

In today’s advanced societies, organizations are defined, supported, and often constrained by software. To effect change, the software itself must first be changed. People, Ideas & Objects offer the most profitable means of oil & gas operations, everywhere and always. It's no longer sufficient to simply own an oil & gas asset; one must also have access to the software that makes the oil & gas asset profitable.

These Are Not the Earnings We're Looking For, Part LXXII

 Composition of Our Value Proposition

Intangible & Unquantifiable Attributes

Non-Rival Costs

The name "People, Ideas & Objects" is inspired by Professor Paul M. Romer's 1990 paper, "Endogenous Technical Change." This paper highlights the value generation that occurs through the sharing of non-rival costs, leveraging specialization and the division of labor. In a 2000 article in Reason, Professor Romer emphasized that growth would center around People, Ideas, and Things. As object-based developers, we adapted this concept, changing "Things" to "Objects" in our name. A prime example of applying non-rival costs is in cloud computing, where instead of investing massive capital into building and maintaining operational infrastructure, organizations can access what they need at a variable cost.

Cloud computing is enabling the expansion of software infrastructure, allowing for the development of applications that would have been unthinkable by other means—such as Artificial Intelligence (AI). The sharing of non-rival costs will be crucial in the coming decade, laying the foundation for transformative changes across the economy and creating untold value and performance improvements. It was for these insights that Professor Romer was awarded the Nobel Prize in Economics in 2018.

At People, Ideas & Objects, we recognize that the business model we propose in the Preliminary Specification shares similarities with those of AI providers like Grok and ChatGPT. Cloud computing makes applications like AI possible. Without it, the scope and scale of what is now available for as little as $15 per month would have been inconceivable. The infrastructure, including the development of specialized hardware like NVIDIA's AI chipsets, would not have progressed as it did. The billions of dollars required to create and operate AI models would have been beyond the reach of any single company and might have been delayed for another quarter-century. Yet, today, this technology is accessible to everyone for a minimal cost.

Traditionally, ERP systems have been designed as individual organizational solutions. However, People, Ideas & Objects have envisioned and applied ERP as an industry-wide solution to address the numerous challenges and opportunities within the oil & gas sector. Organizations are increasingly constrained by the law of diminishing returns due to the growing technical demands of specialization, which require finer divisions of labor. This creates a paradox: the low volume of work within a single organization doesn't justify such specialization, especially in the expanding fields of earth and engineering sciences. Each producer trying to cover all these areas pushes them beyond commercial viability. By approaching these issues from an industry-wide perspective, new opportunities for specialization and the division of labor are unlocked.

People, Ideas & Objects have specifically addressed these challenges, including those faced by startups and small oil & gas operations. We’ve tackled the difficult question of how to implement the most technically advanced ERP system, Oracle Cloud Infrastructure (OCI) of which the Preliminary Specification is based, within these organizations without bankrupting them or overwhelming them with unnecessary technical burdens. Our solution includes features like the Work Order, which introduces a second revenue stream for all producers. Our user communities service providers offer services that handle accounting and administrative functions for the entire industry, charging each Joint Operating Committee only for the management of individual processes when the property is produced profitably.

This approach ensures that startups and small producers have the administrative and accounting capabilities to meet the demands of their partners in the Joint Operating Committee, enabling them to participate as equally capable partners in any oil & gas operations. They can meet the regulatory requirements of capital markets and comply with the standardized and objective methods developed in the Preliminary Specification, all while maintaining a commercial approach to oil & gas operations—unlike what is commonly experienced today. This revitalizes the innovative foundation of the industry.

We have applied Professor Romer’s theories throughout the oil & gas industry, prioritizing their impact on producer profitability. Our user community and service providers will offer objective, standardized accounting and administration through our Cloud Administration & Accounting for Oil & Gas software and service offerings. These services will be delivered at a fraction of the cost that producers currently incur, while providing information of vastly superior quality. This eliminates the need for each producer to build redundant internal capacities and capabilities for administrative and accounting infrastructure, thereby reducing costs and expanding producers' ability to meet regulatory and technical demands.

Each producer operates under similar needs, focusing on the Joint Operating Committee—the key organizational structure of a dynamic, innovative, accountable, and profitable oil & gas producer. A single, industry-wide, objective, and standardized facility, accessible through Cloud Administration & Accounting for Oil & Gas, is the only effective approach to addressing the industry's challenges and opportunities. 

Our Preliminary Specification, finalized in August 2012, was ahead of its time in its scope and scale to develop an industry-wide ERP solution. However, the landscape has changed. Just as it is now unreasonable for any producer to develop a Large Language Model (LLM) independently, the scope and scale of an oil & gas ERP solution exceeds the capabilities and budgets of individual producers. A shared industry-wide approach is the only viable solution.

The costs incurred by People, Ideas & Objects would otherwise need to be replicated by every producer, differing only in scale, not scope. With the current shortage of earth science and engineering resources, aggravated by low university intake and high retirement rates among experienced professionals, the industry faces potential capacity shortages. People, Ideas & Objects address this by eliminating the traditional operator designation and introduce our concept of pooling, where working interest owners specialize in individual earth science and engineering capabilities and contribute them to the Joint Operating Committee. This approach enhances the technical resources of the Joint Operating Committees through markets of specialized providers, as exemplified by our Work Order feature.

In each of these categories, officers and directors are grappling with uncontrollable cost increases and major unresolved issues, such as the future demand for critical resources. Profitability is just the beginning of their challenges.

Specialization, Division of Labor and 

Specialization and the division of labor have been the driving forces behind all value creation since 1776. Adam Smith's Wealth of Nations demonstrated this concept through his study of a pin factory, which he reorganized and mechanized based on these principles. The result was a staggering 240-fold increase in productivity. At People, Ideas & Objects, we believe that we are at a pivotal moment where intellectual leverage can be maximized through software automation, enhanced specialization, and the division of labor—further amplified by the application of non-rival costs.

Specialization and the division of labor are significantly advanced by Professor Paul Romer’s theories on "Endogenous Technical Change" or non-rival costs. Adam Smith noted that the standard of living improved dramatically when the price of pins dropped due to the distribution of manufacturing costs across a larger production volume. Similarly, we believe that the service provider organizations within our user community will see substantial reductions in the costs of administering and accounting for oil & gas producers. These costs will be even lower when shared across the industry, as opposed to each producer building redundant capabilities within their own organizations—and missing out on the benefits that are otherwise unattainable.

However, in today’s advanced society, the law of diminishing returns from specialization and the division of labor has begun to take effect. Producers are reaching the limit of what can be achieved through further specialization. While additional division of labor holds potential value, the throughput required to benefit from this specialization is often insufficient within individual organizations.

Our user community's service provider organizations bring not only cost efficiency but also qualitative advantages in the form of data and information. By capturing data at the most granular level and employing advanced, shared, or non-rival automation in processing, we deliver the detail and granularity necessary to support performance-related decision-making. In a world where it takes ten ideas to earn what one idea once did—and soon, it may take ten times that—producers face being overwhelmed by decisions and ideas if they lack reliable data, information, automation, and organization. Without these qualitative aspects, which are directly tied to specialization and the division of labor, decision-making could grind to a halt—or perhaps, it already has.

Material Balance Report, as an Example

Within the Preliminary Specification, we have developed two key accounting modules: Partnership Accounting and Accounting Voucher. A significant component of these modules is what we’ve termed the Material Balance Report. Building upon the traditional purpose of a Material Balance Report, our design elevates it to an unprecedented level, covering the entire North American production profile and ensuring the physical control of oil & gas products up to the point of sale. This is undoubtedly an ambitious undertaking, but it is entirely achievable. Attempting such a task as an individual producer would be futile—costly, with minimal benefits. However, developing the Material Balance Report within the Preliminary Specification, utilizing non-rival or shared cost structures and hyperspecialization, creates immense value and opportunities for the entire industry.

Our approach to volumetric balancing, as proposed, will ensure that volumes are accurately balanced across product chemistry, the Joint Operating Committee, facilities, regions, and even the continent. This ensures that production and sales volumes and their allocations are consistent with physical realities or, where applicable, agreed allocations as per Construction Ownership and Operator agreements. This gives producers confidence in the accuracy of their production and revenue figures.

Once volumetric balancing is achieved, it sets the stage for automating production, accounting, and administrative processes across the industry. From field data capture via Internet of Things (IoT) satellite systems of wellhead production, plant, and gathering system data, all the way through to marketing contracts, LNG shipments, and deliveries to distributors, all this data can be balanced on a monthly basis. From there, derivative reports—from nominations to financial statements—can be fully automated from data that holds unimpeachable integrity.

While the one time, shared software development costs for such a system are undeniably high, the value it brings daily to the industry is immense. The current processes, which are heavily data-driven, consume vast amounts of time and energy—largely because the level of software engineering needed to achieve this was not feasible before the maturation of today's information technologies. Additionally, the configuration of service providers to manage individual processes on behalf of the entire oil & gas industry, coupled with the urgent need to rebuild the industry from the damage caused by producer officers and directors, underscores the necessity of this project. 

Though the concept is straightforward, the execution will be intricate, requiring extensive research and meticulous development. However, by sharing the development costs across the production profiles of North American producers, the expense for each producer would be minimal on a shared basis. The resulting benefits would include significantly lower administrative costs and access to the highest quality information available in the industry.

These Are Not the Earnings We're Looking For, Part LXXI

 Composition of Our Value Proposition

Tangible & Quantifiable Attributes

Profits

People, Ideas & Objects presents a solid value proposition, estimated to be between $25.7 trillion and $45.7 trillion over the next 25 years. This has been validated through the work we did in late 2023 to detail the revenue losses on natural gas incurred this century. The validation of this proposition comes from the deterioration of natural gas pricing structures over the years, which shifted from a heating value equivalent of 6:1 to as low as 50:1 by early 2024. These revenue losses, amounting to $4.1 trillion for the period from 2000 to 2023, have been portrayed by officers and directors as opportunity costs—a perspective we disagree with. The decline in natural gas prices stems from chronic and systemic overproduction. The Preliminary Specification we provide offers an ERP solution tailored for oil & gas producers to rehabilitate oil & natural gas markets. It’s clear that “muddling through” while oil & gas prices have deteriorated by over 800% in just two decades is simply unacceptable.

Our value proposition enhances overall oil & natural gas profitability through the implementation of the Preliminary Specification’s decentralized production model, projected to yield an additional $5.7 trillion over the next 25 years. The documented losses in natural gas reinforce the accuracy of our estimates concerning the impact of chronic overproduction. While we have quantified these natural gas losses based on observable price declines, objectively quantifying the revenue losses in oil has proven more challenging. Nevertheless, we believe our estimates are consistent with the historical trends observed over the past 23 years.

Our argument that oil & gas represent a primary industry seems to be overlooked by many officers and directors. However, we assert that much of the lost value also represents critical financial resources for the broader oil & gas economy. These losses affect not only producer profitability but also the essential resources needed by the service industry, including capital and operations for drilling and fracing fleets, and compensation to royalty holders for product title acquisition. The overall liquidity, functionality, prosperity, and profitability of the industry are at stake.

The responsibility to ensure the service industry remains vibrant and capable lies as much with producer officers and directors as it does with their own firms. The service industry is an extension of their firms, structured through markets to address the diversity of geographical regions and geological concerns. Without the market-driven solutions provided by the service industry, producer field costs would be exponentially higher, and the capacities and capabilities of the entire industry would face severe constraints. Rendering it far less productive.

Capital

The remaining $20 to $40 trillion of the quantifiable portion of our value proposition is derived from the innovative methods that People, Ideas & Objects employ to account for capital. These capital costs are essential for producers to build and sustain the oil & gas infrastructure and production across North America over the next 25 years. Our estimates are grounded in independently discussed capital expenditure projections within the market. Our value proposition hinges on the difference between the accounting method we advocate in the Preliminary Specification and the traditional practices that have dominated the industry for decades.

Currently, officers and directors operate under the belief that their role is to "build balance sheets" and "put cash in the ground." This approach involves capitalizing the majority of the producer's costs and depleting these over the life of the reserves, resulting in balance sheets that are excessively inflated and always inflating. When capital assets are overreported, it leads to the equal and inverse overreporting of profitability, which in turn attracts excessive investor interest for investment in the industry. This influx of investment contributes to further overproduction in oil & gas, leading to significant and ongoing price discounts, and occasionally, drastic price collapses—hallmarks of a market governed by the principles of price makers.

Their method is based on the flawed assumption that investors will cover capital costs, while consumers will bear operating expenses. However, since 2015, the withdrawal of investor capital has highlighted the industry's unsustainable reliance on external funding, revealing that genuine profitability is lacking. Despite our discussion and the evident issues, no significant changes have been made by officers and directors since 2015, leaving the industry in a state of peril.

In contrast, People, Ideas & Objects advocate for recognizing all capital within the first 30 months of a property's development—a method particularly relevant in the shale era, characterized by high costs, steep decline curves, and significant capital costs of rework. By recognizing capital costs over a shorter period, producers can pass these capital costs on to consumers, which is a reasonable expectation for a capital-intensive industry. Our value proposition aims to ensure that prior capital investments are returned to producers in the form of cash, enabling them to reinvest in further capital expenditures, pay dividends, and service debt. This approach eliminates the need for stock issuance or bank loans, except for substantial transactions. The continuous and iterative return of capital would provide producers with the financial resources needed to manage their operations effectively.

These attributes are the hallmark of a profitable firm. If producers seek more capital, they have the ability to generate it themselves by achieving genuine profitability. Despite my ongoing efforts over the years, producers have consistently refused to acknowledge that accounting plays a critical role in their performance. They often rely on the belief that only geologists or engineers can determine the profitability of a basin, as evidenced by statements like "shale will never be commercial" in 2021. This narrow perspective overlooks the complexities of business operations, focusing solely on the technical aspects while undervaluing the broader influence of accounting and business, which are often relegated to the simple task of paying the bills in producer firms.

Working Capital

When producers capitalize the majority of their costs, they include substantial portions of their overhead as capital. This practice results in the cash used for these monthly overhead expenses to not be replenished within the current period. Instead, the invested cash remains on the balance sheet for decades in some cases, forcing producers to seek new sources of cash each month to cover their recurring overheads. Essentially, producers fail to maintain what is commonly referred to in business as a "cash float." Over the course of a year, working capital is drained through capital expenditures and associated overhead costs. Since 2015, when investors ceased providing further capital support, the working capital within the industry has reached critically low levels. In response, officers and directors have resorted to extreme measures to sustain their capital expenditures, including delaying payments to the service industry for 18 months or more. This approach severely undermined the financial stability of the service industry, leading to a significant downturn, exacerbated by the subsequent COVID-19 lockdowns and then reduced activity levels among producers.

Producers must recognize that they operate within a primary industry, and their working capital should be viewed as a reflection of the financial health of the broader oil & gas economy. When producers mismanage their cash flow, they not only worsen economic downturns but also find themselves ill-prepared to take advantage of upturns or maximize opportunities. This situation arises because no one in the industry has sufficient cash to conduct the necessary level of business. The reliance on investors to meet the industry's cash needs is a phenomenon that can be attributed to oil & gas officers and directors who lack a fundamental understanding of business. The working capital of producers should be regarded as akin to the Federal Reserve’s role in keeping the industry operational—similar to the importance of maintaining the right amount of oil in an engine’s crankcase. The balance between too much or too little working capital is crucial.

Producers serve as the Federal Reserve for the oil & gas economy. The correlation between the decline in active rigs, as shown by IEA data, and the exit of capital demonstrates that a healthy industry requires a greater volume of working capital within producer firms, which in turn supports the broader oil & gas economy.

Producers are currently unable to recover the majority of their costs in this capital-intensive primary industry. I have been discussing this issue for over a decade, yet nothing has been done to change the methods that exacerbate the problem. The lack of necessary cash within the system causes unnecessary stress throughout the broader oil & gas economy. Some argue that we should return to the gold standard to stabilize the value of the dollar, which is an impossibility. The dollar serves as a medium of exchange, not a store of value. Limiting the amount of money in the system constrains the volume of transactions that can occur. When cash is scarce, its value increases due to excess demand, but the economy suffers because fewer transactions can be undertaken. This scenario is akin to a vehicle with no fuel in the tank or oil in the crankcase, rendering it inoperable despite being mechanically sound.

By recognizing capital costs on an accelerated basis through the Preliminary Specification, producers and the industry as a whole can rehabilitate their working capital and cash flow issues. Officers and directors often believe that SEC requirements for full-cost accounting compel them to report the largest possible balance sheet, using the ceiling test as a target rather than the outer limit it is intended to be. In contrast, People, Ideas & Objects advocate that the most profitable producers would aim to reduce their property, plant, and equipment account balances to zero, reflecting that they have been profitable enough to retire all their incurred capital investments. Profitability, not cash flow, is the appropriate measure. 

Cost Control

Controlling costs is a crucial endeavor for any organization, and it should be a top priority, especially since low-cost organizations tend to be more resilient. But what are the highest costs that oil & gas producers have been grappling with for decades? One of the most significant issues is the impact of unprofitable properties, which dilute the earnings of profitable ones. Producing reserves at a loss, particularly when prices are low or even negative, can be devastating to the prospects of financial recovery. For instance, if the cost of producing gas is $9 but it sells for only $3, the resulting $6 loss would require six profitable volumes sold at $10 just to break even. Such losses are highly destructive to earnings and diminish the reserve value of the producer—yet this reality seems to be beyond the comprehension of many current officers and directors.

Focusing on profitability is what truly generates value. When unprofitable production is shut in, it’s removed from the market, which increases overall revenues. By eliminating the dilution of profits from losing properties, the firm can report its highest possible profitability, no matter what its production profile may be. Unprofitable properties should be moved to the firm's inventory of innovation, where they can be returned to profitable production as soon as possible. This can be achieved through cost reduction, increasing reserves, boosting production throughput, or applying other innovative strategies. The goal is to use the firm's earth science and engineering capabilities to generate incremental profitability in the most innovative ways possible, finding the marginal price when only profitable production is maintained.

What many producer officers and directors fail to grasp is that these actions build incremental value. It’s true that no additional petroleum reserves may have been discovered or developed, but they’ve proven that reserves are essentially worthless if they can’t be produced profitably. This has been the case for decades, as the industry continues to consume cash in the process of production.

Alternatively, what would the present value of profitable shale reserves be? It’s here that we can find the limit of producers' business thinking. They believe that “building balance sheets” to a size that replicates the value of the reserves is the objective, for some reason. We discussed property, plant and equipment and the most profitable producers would have the lowest values recorded in that account. However, the reserves present value would soar based on the marginal price being realized and assessed against far greater volumes of the reassessed commercial reserves volume. Having “real” profitable operations however are not to be accepted. Recall the mid 1980s natural gas prices adjusted for inflation would today be about $10.00, not $2.14. Recall too that the mid 1980s was a time of 100% conventional production. 

Alternatively, consider the present value of real or genuine profitable shale reserves. This is where the limitations of producers' business thinking become apparent. Many believe that the objective is to "build balance sheets" that mirror the value of the reserves, but this approach is misguided. We’ve already discussed that the most profitable producers would have the lowest values recorded in their property, plant, and equipment accounts. However, if they focus on achieving a marginal price that maximizes profitability, the present value of their reserves would soar, driven by far higher prices and greater volumes of commercial reserves. Returning the investors focus back on to reserves valuations. Yet, the concept of maintaining "real" profitable operations is rejected. 

To put this into perspective, natural gas prices in the mid-1980s, when adjusted for inflation, would be around $10 today—compared to the current market price of $2.14. Shale has introduced new cost structures in the oil & gas industry; it has brought in initial or flush production volumes that have overwhelmed the natural gas price structure, driving it down from its heating value equivalent of 6:1 to as low as 50:1. This shift has had a devastating impact on the entire oil & gas economy. Devastating every source of value in every corner of the greater oil & gas economy. 

These Are Not the Earnings We're Looking For, Part LXX

 Introduction and Objective

Today, we are examining the oil & gas industry through an economic lens, considering the future opportunities and challenges we touched upon in our recent discussion of the broader economy. This analysis is crucial as it highlights the industry's current mindset and the potential pathways forward.

The Economic Landscape of Oil & Gas

Oil & gas producers often find themselves blamed for inflation, a perception fueled by government narratives that point to rising energy prices as the culprit. However, as Milton Friedman aptly put it, "inflation is everywhere and always a monetary phenomenon." The reality is that government spending is the primary driver of the current inflationary environment, not oil & gas price increases. Unfortunately, this misconception persists unchallenged because producers have largely remained silent, failing to defend their industry against such accusations. This lack of advocacy extends beyond inflation; it encompasses environmental and regulatory issues where producers have opted for a strategy of silence rather than engagement.

Consumers benefit immensely from oil & gas, which offers one of the greatest value propositions in any market. A single barrel of oil equivalent provides between 10,000 to 25,000 man-hours of mechanical energy at a cost of just $0.003 to $0.0075 per man-hour. The efficiency and value derived from this energy source are unparalleled, yet the industry has failed to communicate this effectively to the public. Even if oil & gas prices were to double, it is unlikely that this would trigger inflation or a recession. On the contrary, ceasing the use of fossil fuels would severely cripple economic output, as energy is the backbone of our civilization.

Market Based Solutions

It is astonishing that oil & gas producers continue to see themselves as price takers, adhering to outdated notions that ignore the reality of market dynamics. In truth, they are price makers, and the industry should be governed by market signals that determine the profitability of production. If a product is not profitable to produce, it should not be produced. This simple principle, followed by most other industries, has been largely ignored in oil & gas, leading to chronic overproduction and the resultant price collapses.

Producers have instead relied on complex and often absurd methods to predict future prices. Using technologies like Artificial Intelligence to analyze floating oil tank roofs from satellite images to determine global oil inventories. These efforts are misguided, focusing on predicting market behavior rather than responding to actual market signals. This approach has led to disastrous outcomes, such as the negative $37 oil prices witnessed in April 2020. Despite these failures, the industry has not learned its lesson, continuing to operate in ways that defy basic economic logic.

The industry's reluctance to embrace market-based solutions has had severe consequences. The April 2020 incident, where oil prices plunged to negative $37, was not an isolated event but a symptom of a broader issue—chronic overproduction driven by unprofitable production practices. This approach is unsustainable and has caused significant damage to the industry and its stakeholders.

The solution lies in leveraging the power of the Internet and modern software to create a more efficient, decentralized operational environment. The hierarchical structures that once defined corporate organizations are no longer necessary. Instead, software can facilitate more dynamic, market-driven operations that respond to real-time data and market conditions.

The Future of Oil & Gas

The future of the oil & gas industry, like that of the broader economy, will be shaped by those who can innovate, lead, and generate profits. The current leadership has demonstrated a profound inability to adapt to changing market conditions, clinging to outdated practices and failing to address the fundamental issues facing the industry. The result has been a series of failures, most notably in the development of shale, which should have been a transformative success but instead has been a financial disaster.

The path forward for the industry must be guided by profitability and innovation. The era of relying on investor capital to sustain operations is over. Instead, the industry must focus on generating real, sustainable profits that can fuel growth and pay dividends to investors. This will require a complete overhaul of current practices and the adoption of new technologies and methodologies that prioritize efficiency and profitability.

Conclusion

The recent comments from Shell’s CEO, Wael Sawan, underscore the failure of the current leadership in the oil & gas industry. Sawan’s acknowledgment that liquefied natural gas (LNG) is "the only credible solution that gives you both energy security and decarbonizes the energy system" highlights the shortsightedness of previous decisions to pivot away from shale towards clean energy. This shift was driven not by market realities but by a failure to understand and capitalize on the true value of shale.

Sawan plans to grow Shell’s LNG volumes by up to 30% this decade, either through acquisitions such as the recent purchase of Pavilion Energy, or getting its hands on third-party volumes. The company recently invested in ADNOC’s Ruwais LNG project in Abu Dhabi. 

Now, the industry is scrambling to invest in LNG facilities, a strategy that continues the pattern of overbuilding and misallocation of resources. This approach is emblematic of a leadership that has consistently failed to grasp the fundamentals of the oil & gas business, focusing on building balance sheets rather than creating value.

The cycle of failure in the oil & gas industry is clear, and it is driven by a culture that has persisted for decades. The only way to break this cycle is through a fundamental change in leadership and strategy. New leaders must emerge who understand the importance of profitability, innovation, and market-based solutions. People, Ideas & Objects Preliminary Specification offers a roadmap for this transformation, providing the tools and frameworks needed to build a dynamic, innovative, accountable and profitable industry.

The choice before us is stark: continue down the path of failure with the current leadership or embrace the opportunity to build a new, more prosperous future for the oil & gas industry. The time for change is now, and the direction we choose will determine the industry's fate for decades to come.

These Are Not the Earnings We're Looking For, Part LXIX

 Introduction and Objective

With the release of the second quarter financial statements from producers, we will delve into a three-part analysis. Today’s post will provide an overview of the broader economy and its potential future influence. The second post will focus on the oil & gas industry, examining the economic conditions that may shape its trajectory. Finally, our last post will evaluate the financial statements of the producers, assessing their readiness to navigate an uncertain and potentially exciting future.

The Overall Economy

There’s no doubt we’re facing challenging economic times. North America has been treading water, with the economy on some form of life support since September 2001. This century's mortgage interest rates have declined from a high of 8.05% in 2000 to as low as 2.96% in 2021. These rates reflect the broader trend in corporate and consumer markets during that period. While these rates may seem low compared to the 18.4% seen in October 1981, the current inflation feels more rampant, despite what official figures may suggest.

Nonetheless, once President Reagan had instituted supply side economics. The subsequent relief realized by lower interest rates, far more competitive firms arose to lead the economic prosperity for the remainder of the 20th century. What is the probability we’ll see that style of economic prosperity if inflation declines and possible interest rate relief? Markets are beginning to show distress and the decline in interest rates has begun in some areas such as Canada. While others such as Japan have increased their rates. Interrupting the carry trade which had fueled United States stock and bond purchases. 

Given the current levels of debt in North America, which ballooned due to prolonged low-interest rates, will businesses remain competitive with rates at 5% or higher? Governments and businesses alike have used the relief from low rates not to reduce debt but to expand spending, often through rounds of massive bailouts. The critical question remains: Can firms be competitive in an environment where interest rates are higher, and economic stress is evident?

A Brief History in Time

The first major call for the investment community to lower its expectations came after the terrorist attacks on 9/11. The need to finance wars over the following decade was met with the investment community acceptance of lower returns, as reflected in the lower Fed rates. The second was during the financial crisis when systemic risks nearly collapsed the economy. The government intervened, and again, the investment community accepted lower returns for the greater good. The third major call came during the COVID-19 pandemic, where the investment community again stepped up, trusting that the government would act with integrity, as it had in the past.

However, in recent years, the actions of the current administration have eroded that trust. Treasury Secretary Janet Yellen’s approach to government borrowing, which many view as inflationary, has broken the implied agreement that the government would maintain fiscal responsibility. This betrayal has raised concerns globally and set a dangerous precedent.

The excessive debt burden carried by governments, businesses, and consumers now limits any potential bailouts. The issue isn’t just high-interest rates; it’s the sheer volume of debt. As the market forces the Fed to reduce its balance sheet, the government faces a critical choice: restore credibility or continue reckless spending. The market may soon dictate these decisions, with significant implications for the economy.

Is There a Solution?

Absolutely. The cycle of bailouts and artificially extending economic life hasn’t fostered genuine prosperity. Instead, a reduction in the standard of living seems inevitable for many, especially in countries like Canada, where the currency’s value has plummeted, and housing prices have skyrocketed.

Yet, we stand at a unique point in history. Information technology is fully mature, and innovation is happening at a breakneck pace. Even tech giants like Facebook are struggling to stay relevant. The rapid evolution of technology is creating new opportunities, and those who can seize them will thrive.

In contrast, the oil & gas industry, much like other sectors of the economy, has been held back by outdated practices. Keeping unproductive companies alive, akin to zombies, is no longer viable. The time has come to move forward and embrace the opportunities that innovation presents.

The one quote that resonates with me is that of Cathy Woods from ARK Investments. Suggesting that innovation was responsible for “$19 trillion of equity market cap” today. Which would grow to $220 trillion by 2030. Whether that is available or not, the undeniable point is that innovation in tomorrow's market will be more dominant and valuable than at any other time. Participation is available for those that can see the opportunities. It’s that simple. 

Conclusion

The crossroads we find ourselves at today offers a choice that is as stark as it is consequential. On one hand, there is the opportunity to engage in a new, innovative, and value-driven economy—one that is brimming with potential but also fraught with inherent risks and challenges. This path is not for the faint of heart; it introduces a degree of chaos and uncertainty that demands a higher level of commitment, ingenuity, and resilience from all who choose to walk it. The rewards, however, could be unparalleled, offering satisfaction and the potential for unprecedented growth and prosperity. It is a deliberate choice.

On the other hand, there is the option to continue with the status quo—a path marked by minimal risk, but also one devoid of true satisfaction or substantial reward. This path represents a safe, predictable existence where the primary goal is survival rather than thriving. It’s a path that offers comfort in its familiarity but little else. The status quo may provide a sense of security, but it also comes with the cost of stagnation and missed opportunities.

Yet, this choice comes with immense responsibility. To opt for innovation and disruption means accepting the possibility of failure, navigating through periods of uncertainty, and enduring the pressures that come with pioneering new paths. It requires a mindset that is not just focused on short-term gains but on long-term value creation—a mindset that values adaptability, continuous learning, and the courage to challenge the status quo.

These Are Not the Earnings We're Looking For, Part LXVIII

 Issues surrounding the recording of capital costs are complex and the implications across the industry cause many tragic difficulties. The consequences are being realized today in what I consider serious fallout in every area of the industry. Officers and directors believe these are accounting issues and will affect the accounting debits and credits and not much else. Misunderstanding the business aspect of the discussion and the underlying subtleties. Accounting is about performance. It’s not about bookkeeping or "building balance sheets" or recording the volume of cash being put into the ground. These are serious issues and the toll on the industry is plain to see. I feel we’re headed towards a grave downward step in our performance trajectory, are ignorant of what the future holds and our leadership is wandering about in and out of the industry, selling themselves as heroes to one another and have comprehensively failed everyone else. Did I miss anything?

At the same time I have not been able to convey the subtlety of the issues in coherent form to those that refuse to listen or consider an alternative point of view. They contrast my arguments with their peers at the golf club and the response they received when visiting their Ferrari dealership. "They built the oil & gas industry." They are the chosen few who find these others have leached from their achievements and efforts. Others do not appreciate the science and skill put into what they do." Theirs is a myopic view of the world where they occupy the center and will do nothing to explain their point of view to those who they feel have no ability to comprehend. I think I’ve covered it. 

One of us may be right or there may be a hybrid of the two perspectives. Oil & gas is a business first and foremost. It has not been a business since the 1970s. The culture that formed around that time does not understand the difference between what is done, what should be done or why. A capital intensive industry will always generate adequate volumes of cash that overwhelm anyone’s objective thinking. When you deceive yourself by never recognizing the capital nature of the costs incurred, everything appears to be profitable, organizations have no reasonable measure to assess their performance against, they find themselves intoxicated by their ability to achieve alleged success at every corner in anything they try. They soon lose perspective and become unreachable and unteachable. As time passes, the culture becomes intractable.

I saw what was happening to the business and the need for change in 1991. As I said, mine has been a single voice in the wilderness for the better part of that time. That’s not the case anymore, and the level of damage and destruction is clearly seen by most people in the industry outside of those officers and directors. The details of what I’ve been concerned about are evident in the solution we propose in the Preliminary Specification. This solution is discussed repeatedly on this blog and the wiki. 

Let me be clear. This is not Joe Biden's or Justin Trudeau’s responsibility. If you want to accuse them, they’ll be responsible for all the good the industry has accomplished. They have done neither. It is not the service industry. They have given everything and have nothing left to give. They have no motivation, no desire and no need to be in the oil & gas service industry. Pipeline companies are in the same boat. They are regulated companies and are therefore protected financially. It is not the fault of investors who can earn superior returns in other industries and invest their money there. Those who today see that nothing will happen after eight years of waiting for those responsible for the damage and destruction fail to act. Employees of producers who have tried everything but are powerless without leadership. It is, and always will be the leadership of the producer firms as represented by the officers and directors. There is no one else with the authority and responsibility to ensure that all contributors profit, prosper, and serve their purpose. And do not let them say they made a mistake, they didn’t know or they’re sorry. For two decades they sought others to blame, excuse and created viable scapegoats for the damages from their “muddle through" strategy. Did nothing to correct their actions. And there was an alternative for them that began in August 2003 and continues today. They did nothing but choose to eliminate People, Ideas & Objects from the marketplace and try to steal our Intellectual Property outright 5 times. 

I’ve been reading Professor Richard N. Langlois's recent book “The Corporation and the Twentieth Century: The History of American Business Enterprise.” He has some fascinating information within the book and I highly recommend it to everyone. Professor Langlois suggests the Twentieth Century Corporation benefited from primary industries such as coal, oil & gas. Oil & gas' mechanical leverage today is between 10 and 25 thousand man hours per barrel. This was realized through innovations and developments in machines and tools deployed by 20th century businesses. And on the other hand, WWI, the Great Depression, WWII, and the Vietnam War each presented organizational issues that markets were too unsophisticated and unable to approach. Government and big business therefore found a role for the bureaucracy and the question needs to be asked, what exactly is the benefit of today's bureaucracy from the structured hierarchy? Its benefits do not seem relevant since Internet-supported markets are sophisticated enough to accomplish what bureaucracies cannot. Moreover, coal, oil, and gas are unable to realize the significant gains on an annual basis that offset outright the cost of bureaucracy. This is in terms of what I think has always been bureaucracies' forte. Negative productivity. I feel it's clear we don’t want or need them anymore.

These Are Not the Earnings We're Looking For, Part LXVII

 Our sample of producers' second quarter reports have been published and I have to say that I’m quite surprised with the producers' outcome. There appear to be some changes in the industry. These changes reflect officers' and directors' behavior, and second, the disenchantment it has produced. What I’m stating is that all the tricks used to make producers look more attractive in the past have been resurrected and are fully employed again. The disheartening aspect of this is investors who have been patient with producers since the beginning of their refusal to give them more money. It has been eight years. Are now giving up on waiting for producers to turn the ship around. That's the oil & gas ship, not clean energy or any other industry the officers and directors may find interesting on a Monday morning. This act alone probably sealed their fate with their investors. Producers' inability to compete on the North American capital markets affects investors' commitment to the industry. Other industries are positioning themselves for substantial upside in the long term and hanging around in the deadzone with zombie management doesn’t seem to have a future. Therefore investors are walking. 

Production discipline is a key issue. Natural gas prices ranged from 25 to 1 and 40 to 1 in 2023. Not a word is heard about the absolute catastrophe this is. Natural gas prices broke down from their historical 6 to 1 pricing in 2009. What we’ve seen is another step down in 2023 of natural gas prices from the revised pricing established in 2009. This direction seems mindless. Arguing that it's casing head gas or associated gas that is the issue, they don’t pretend to look at that issue from the point of view of resolving it. At the same time they continue to see the service industry unwilling to commit the resources needed to supply oil & gas producers with their needs for the long term. Who could blame them for that based on the treatment they’ve received over the past decades? Nothing will happen until producers commit to rebuild the service industry. And that means supporting them with generous philanthropic efforts. Producers broke it, producers need to fix it. This occurs at the same time they dump natural gas as a byproduct onto the market with catastrophic losses hoping to make it up in volume, or "oil prices are healthy enough to cover the loss," or "build balance sheets,” or “put cash in the ground.” Officers and directors may find my arguments repetitive, because they are. Imagine how their investors feel about them.

In terms of oil prices, the understanding is that oil & gas is a capital intensive industry which generates strong cash flows. As a result these strong cash flows enable officers and directors to keep the lights on and the circus moving. This argument is lost on producers. Most importantly, it provides strong executive compensation. The problem is that it's not profitable. Specious accounting, which we'll discuss later, is back in vogue, and I don't mean to suggest it ever left. Oil prices are too low to be profitable. They are certainly not enough to compensate for natural gas losses. What producers fail to consider is that Saudi Arabia has two million barrels of oil per day withheld from the market at this time. Will this reduction continue? Will a recession begin soon? What will be 2024s oil price?

Only People, Ideas & Objects, our user community and their service provider organizations configured with Oracle Cloud ERP in our Cloud Administration & Accounting for Oil & Gas have a proposed solution to chronic oil & gas overproduction. Production discipline is attained in the Preliminary Specifications decentralized production model. A proposed solution we have discussed since January 5, 2007. Natural gas volumes speak of this unconstrained production nightmare. Our method uses profitability to allocate production. We can therefore ensure oil and gas production in North America is profitable. This is a strong foundational element of our value proposition. What is clear is what has been stated simply as: “Think of it this way: If you've got a leaky bucket, you're better off fixing the leak before pouring water in the top." From January 5, 2007 until today, what would be the differential between the specious cost of oil & gas production reported and the revenue received? Vs. the comparison to the actual cost of oil & gas exploration and production, what revenues should have been received to be profitable in the real sense?

In the land of what could have been. Theoretically when interest rates are low it is capital intensive, labor saving productivity that firms should invest in. Overreported capitalization due to “building balance sheets” and “putting cash in the ground” enabled producers to leverage their positions excessively during two decades of low interest rates. Adding to the difficulties of chronic overproduction or unprofitable production. Creating a future crisis due to extreme debt levels during a period of normalizing interest rates. Officers and directors have now achieved neither benefits of these worlds.

We hear in the press about producers' phenomenal efforts to reduce debt. At the end of 2016 our sample of producers' debt percentage was 55.9%. As of the second quarter of 2023 it’s 61.7%. (Our numbers include short and long term liabilities.) Here for example is their previously tried and tested method of "hysterical" accounting. From Reuters.

To get a picture of how much improved the cost efficiencies are in 2023, conventional greenfield unit development costs (development cost divided by the reserves developed have been curbed by 60%, from US$16.1/boe in 2014 to US$6.5/boe today. It is claimed that oil wells generate nearly three times more production for the same unit of capital than in 2014. 

And later in the article.

“Contrary to popular opinion, the world is investing appropriate amounts of money in fossil fuel production to satisfy demand. Cost savings mean operators can produce the same amount of oil at a lower cost…” 

The issue is twofold. Producers should not celebrate the ability to force discounts on the service industry due to officers and directors treating them abhorrently. Doing so over a number of decades deserves special recognition however. The second issue is that the statement is false. These are historical costs, not recycle costs as producers call them. Capital costs are not variable based on what can be done in the field today. That is what producers think they can show profitability at, the $6.5, but can’t compete based on their actual, factual and historical cost of $16.1. And long term readers know I have significant difficulty accepting the $16.1 / boe cost being assigned to each of the 30 to 40 years of reserves as anywhere close to what capital markets provide from other industries. What we know is that shale exposes prolific reserves and the capital costs incurred to explore and produce them are allocated to each molecule of those reserves. Shale has steep decline curves demanding costly rework and recompletions assigned to the entire reserve base. Capital costs are never reasonably realized or passed on to the consumer. They are for the sole purpose of “building balance sheets” or “putting cash in the ground.” What they cannot understand is that running a truly profitable operation would provide them with all the financial resources they could ever need. It's easier for officers and directors to wait until investors finally see the brilliance of producers' unknown and unseen plans than to do something about these issues. Yet all investors see are mice scrambling for their daily cheese.

People, Ideas & Objects proposes the following. First, the current production cost is what the replacement cost will be. Ultimately, that's the cost of replacing the product. Oil & gas are unique products in that they are irreplaceable and irretrievable. This demands a different approach if we are to manage the industry appropriately. With the decentralized production model these costs will be recognized in the product price, passed to the consumer and therefore recovered as cash to be distributed for future capital expenditures, dividends and bank debt. Profitable operations seek to realize costs appropriately and on time to fund future operations. 

At times people argue that I contradict myself, recycle costs are production replacement costs. I disagree. My arguments are that a dynamic, innovative, accountable and profitable oil & gas industry, as a primary industry, has a responsibility for the service and other industries. This is to ensure that they are healthy, well-paid, and prosperous. Cutting the price of the services because they can get another drilling rig for half price because all producers have slashed activity levels, only drops the rig operators' revenues into the low teens. Cannibalizing those that work directly for you may not be an effective long-term strategy. Secondly, recognizing the actual cost of production by competing in the capital markets for capital, demands that capital costs be recognized on a performance basis that is in quarters, not decades or centuries. Certainly competitive with other industries.

We’ve seen over the past few years our sample of producers report hedging losses of $109.7 billion. Yet as of 2023 reported hedging gains of $2.863 billion. My argument regarding hedges is that it sets the high water mark for organizational performance. It also sets the low water mark for organizational performance. So why would any of the staff do anything other than what the officers and directors do in the form of “muddle through?" Conversely you could have honed your organization to operate at the peak of perfection as a producer. However, what good are you in a sea of sludge? Officers and directors foster and enable a culture of failure and shrugging shoulders at each and every other producer firm.

In what I call their bankruptcy business model. Officers and directors at Chesapeake survived this otherwise terminal process and were rewarded with $25 million in bonuses following their bankruptcy declaration. There is only one conclusion to be drawn here: the loser is the investor. Who was the fool in the oil & gas firm management transaction? In addition to "muddle through," specious accounting, dilution by repeated annual stock issuances, and now dilution by consolidation. These are cultural, time-honored traditions. 

Officers and directors should also be commended for their actions towards innovators, entrepreneurs, and thinkers. Companies such as Packers Plus and coil tubing providers have suffered through their own persecution and prosecution by producers. Though we have not brought a commercial product to the market at this time, we have brought more ideas to the administrative and accounting areas. In terms of solving profitability related issues and value generating ideas we’ve been working on some promising leads. We’ve seen 5 attempts by officers and directors to use our Intellectual Property in an unauthorized manner. All while receiving nothing but the wrath of the officers and directors and their desire to maintain control of the sinking ship. My argument here is that these should not be seen in isolation. Others see these actions and think, I’ll shrug my shoulders and “muddle through” as well. Eliminating initiative and therefore nothing gets done.

This is the environment, the culture and the status quo of what North American oil & gas producers want to be known for. There was a video I came across that suggested Canadian producers should stop listening to their investors because what they’ve said was wrong for them. Although I cannot find the video, it was on Yahoo! I'll continue to look for it or others as it seems to have that old familiar twist we’ve seen many times before from producers. If there is a recession in our future, if the Saudis reverse their production cuts, these are all the risks we need to face on a day-to-day basis. When we assess the North American oil & gas industry it's at times difficult to get a handle on my perspective, I’ll admit. The industry operates on hope and possibility. Never accounts for the way things are or who’s responsible. To reconcile yourself to my perspective however, only asks the question, where do we proceed from here, and how?

These Are Not the Earnings We're Looking For, Part LXXVI

 Scrambling to find as many high quality viable scapegoats as possible seems to be the only strategy being deployed by our good friends the oil and gas producer bureaucrats. And their investors are the ones being offered up to the public for their looming failure to meet the markets demand for energy. Producer bureaucrats' flat footedness and lack of response to the need for additional oil and gas production can not be met and they’re very aware of the reason this is the case. To suggest they’re not capable of doing so would never be stated as that would be counter to their best interests. The fact is they’ve used and abused the industry for the past forty five years. Symptoms of their abuse have been evident since the 1986 oil price collapse and all of the subsequent boom / bust cycles since. The cultural response of the North American based producers developed in the late 1980s and 1990s to where the expectations were that outside investors would fuel all of their capital investment needs. To the point where this became their dependence as the business itself atrophied around their chronic mismanagement due to their chronic and systemic overproduction. We all remember the days when the producers that were viable were those that had abundant access to sources of capital. If they didn’t they wouldn’t be around long, and if they didn’t meet their production targets, investors abandoned them and they would quickly disappear due to their lack of financial viability. This is the dismal history of the North American producer up to the point of 2015.

After a decade of throwing additional and vast volumes of investment into shale, investors began to see clearly that their money was nothing more than fuel. Putting additional cash into the industry only created larger flashes that quickly died down with the only residual being the demand for more cash to put on to the next even larger flash. Not only was their investment being diluted and incinerated, the cumulative value of all the prior years industry “activity” wasn’t generating enough to keep the lights on at the head office. Investors felt it was time to stop this wasteful “activity” and instill some rational, inward thinking so that oil and gas producers would make the necessary changes. That was seven years ago, and the producers were given a list from the investment community of what was expected of them. One of those points is that the industry must become accountable and install tier 1 ERP systems such as the Preliminary Specifications use of Oracle Cloud ERP. Nothing on that list that the investors expected in 2015 has even been discussed in the industry. Nothing has been done but to invoke the holistic, catch-all strategy of “muddle through.” 

This leaves the industry in a dire position financially and from a base of value to leverage its position forward that is structurally too weak and probably non-existent in most of the producers. Highlighting the status of the service industry is the only necessity here as the capacities and capabilities of these firms have been deliberately run into the ground in order to subsidize the lifestyles of these producer bureaucrats. Any source of value in these past seven years has seen these bureaucrats attack it as if it was a hungry mosquito. When investors left it was the remaining credit available on their bank lines. Then they continued their field operations and paid the service industry after 18 months. When these expired it was onto increasing production until oil hit negative $40. The list continued as the bureaucrats' needs and hunger is insatiable. 

Where this leaves us today is with a seven year lead time with no work in progress. As in all industries there are lead times in which companies operate. Hitting the switch to increase production is what John Q. Public sees and expects but there are massive undertakings to get to that point. When investors and bankers are no longer willing, when cash and working capital has been as short, as we’ve documented in this series of seventy six posts, to non-existent. Which area is cut first, this year's drilling operations or the activities involved in year one of the seven year lead time needed to drill future wells. And in the second year of a lack of cash, what is the next decision regarding priorities: cut the first and second year of lead time or stop the drilling. We’re in our seventh year of no new investment and maybe the producers will begin to think about hiring those who were involved in the first through to the seventh year of the lead time needed to drill a well. If they can find them. It’s been a while since anyone has seen them of course. Have we ever discussed shale’s notorious decline curve before? We're not only behind in our lead times, we’re also behind in shale’s decline curve. 

This is all “Ok” however. Producer bureaucrats now have what they need in order to make these past forty five years easily forgotten and eliminate the history of never making any money. Rahm Emanuel said it best when he coined the phrase, “never let a crisis go to waste” to take political advantage of a crisis situation. We’ve consistently documented their desire to blame, and as we euphemistically call what they do their excuses, but most of all the growth in the population of their viable scapegoats. We’ve also chronicalled their aspirations to get as much couch / recliner time as possible. Doing nothing is an art and science for these people. Evidence of this is contained in the fact that oil and gas is a primary industry. Where all of its secondary and tertiary industries have been financially pancaked by these producer bureaucrats greed and lust for financial gain and power. So yes, let's not think of that now, we have a crisis on our hands. Convenient isn’t it. 

To quote another famous politician “At this point, what difference does it make?” We’re asserting the producer bureaucrats think it’s the windfall of all windfalls. They’ve proven to be incapable of managing an enterprise. Incapable of uttering anything close to the truth at any time and incapable of getting up off the couch other than to visit the Ferrari dealership. Although a crisis is a fantastic plan and one I’m sure will solve the problem for them, who else is it going to be good for? What right do these bureaucrats have to put us in this treacherous position, especially when People, Ideas & Objects, our user community and their service provider organizations have been actively warning about this as the ultimate outcome of their actions. Warning that societal damage is the outcome of the breakdown of such organizational dissonance and the minimum of 10,000 man hours / bbl of oil equivalent contained in each barrel consumed. Mechanical leverage is an issue that this blog has been actively discussing since July 11, 2008. They’ve had every opportunity since August 2012 to proceed with the development and implementation of the Preliminary Specification yet have chosen to do nothing but ostracize and vilify this opportunity since August 2003 when these ideas were first proposed. 

Recently they had the opportunity to pursue “Profitable, North American Energy Independence -- Through the Commercialization of Shale,” in the People, Ideas & Objects July 2019 white paper. Unfortunately that involved them getting involved in effort and hard work. Then in as little as nine months they chose to produce oil at negative $40 and in 2021 summarily abandoned the oil and gas business to pursue clean energy instead of accepting any idea there's an issue or their responsibility in creating it. Since they wanted to leave the business it’s time we said goodbye to them. If they can’t accept the fact they’ve never made any money in the North American oil and gas business, what is the probability this crisis will facilitate their transformation of their business to the dynamic, innovative, accountable and profitable industry we need? This crisis has precipitated the need to increase production, they’ve not articulated the need to make money in the process, just for the investors to send cash. And they’re telling the public it's the investors fault they don’t have the money to drill. What we can say about their administration over the past forty five years is they’ve always done the exact opposite of what should have been done. Adding to all these difficulties we’re now hearing nothing but a litany of viable scapegoats of why they can not respond to the increased demand for energy! If the consumers can’t rely upon them, is that not the ultimate failure? Most importantly none of the producers have reached out to People, Ideas & Objects to inquire about the Preliminary Specification ever, and I just checked, not in the past month either.

What we need to do is to begin with the development and implementation of the Preliminary Specification, our user community and their service provider organizations as the alternative to this madness. This will be the quickest route through our difficulties and the most effective financially, giving us a highly performative industry for at least the next 25 years. One in which the North American producer is provided with the most profitable means of oil and gas operations everywhere and always. What surprise will the crisis management focused bureaucrats spring for us next year or the year after that. Do we really believe that we can trust them to do the right thing during their current manufactured crisis?

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering? We know we can, and we know how to make money in this business. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined TBD and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

These Are Not the Earnings We're Looking For, Part LXXV

 The uncaring nature of producer bureaucrats towards their business profitability has been on display for decades. The state of their business is in decline and severely deprecated in terms of its capacities and capabilities due to the long term financial damage sustained at their hands. That their business is in decline is not a concern for them and that is evident in the response we received to our July 4, 2019 white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” This paper was the most widely distributed document that I’ve ever produced and was wholly rejected by the bureaucrats. Why? When only nine months later oil traded as low as negative $40. History shows that since their rejection of the opportunity People, Ideas & Objects, our user community and their service providers were offering. Instead of seeing the effort needed to make oil and gas profitable everywhere and always, and shale commercial, we witnessed bureaucrats 2021 statement that shale was never financially viable and that clean energy was their future. I find it interesting to question what it is in these three events that reflect what the bureaucrats' motivation and desire is. They don’t want to consider making themselves “Profitable, North American Energy Independence -- Through the Commercialization of Shale,” concern themselves or even care about the day to day of their operations as they slip into negative $40 oil prices and prefer to ultimately abandon the industry in pursuit of other industries of which they have no understanding, capabilities or capacities. Maybe Elon Musk should be looking over his shoulder for his next competitors in space? The absolute shame of these officers and directors of the North American based producers!

As Russia is emphasizing to the world the importance of oil and gas, North American producers have declared they’re sauntering off into the sunset with dreams of solar panels and windmills. Seeking the ultimate environment of unaccountability in the clean energy industry that has never and will never perform. An industry where no one has generated anything of value and lives off the good graces of government largess. Where the ultimate viable scapegoat of, “we haven’t solved the commercial side of this business yet, but we’re close,” will be adequate to keep them in their familiar personal lifestyle of comfort and grace. And lastly let's recall that nothing was submitted or approved in these fundamental transitions of the focus of these producer firms. Transitions that are the polar opposite of the oil and gas business. An opposite that is best represented in the bureaucrats' decades-long allegation that they had to make sure that petroleum prices remained low enough to ensure clean energy never gained a competitive foothold. What they perceived as a looming, threatening competition in the form of clean energy and one in which they were willing to destroy their existing businesses through low prices to stop, is now the viable scapegoat they willingly invoke to justify sauntering off to. Is today’s flatfooted response to deal with North America's demand for more energy, where it seems that all of the consolidated producers have claimed they’ll not be responding in any way to increase their production, just a continuation of the muddle through we’ve seen from them these past decades? 

Overnight Germany has come around to the lack of any logic in their prior misguided multi-decade energy policies. The rest of the world seems to be waking up to the fact that oil and gas is critical to our existence as well. With war breaking out in Europe over the supply and delivery of natural gas. It will be interesting to see the final outcome of this initial conflict. Isn’t it also good to know that we have a dynamic, innovative, accountable and profitable industry here in North America? The mainstream media have been mouthing the words of any and all such nonsense for so long they don’t know what the facts are in anything. It’s their opinion that North America will just export what oil and gas we have to solve the energy difficulties of Europe. The fact that oil and gas is now the focus of the world has not and probably will not permeate the minds of these bureaucrats. The reason things are quiet on their front, with no comment about the situation may be due to their concern about looking directionless, leaderless, unknowing what to do and most of all uncaring about whatever business they may currently declare themselves to be in. It just so happens they can’t remember at the moment. It could also be a concern about what business they’ll have to shift to in the next quarter if things change again. “Probably best then just to muddle through.” If I sound disappointed with the performance of the North American oil and gas producers, I don’t know what gave it away. I obviously don’t see the opportunity in front of these producers in the fact that Russia provides the potential of such a high quality, long term viable scapegoat for them. And in terms of discussing new, sustainable, viable scapegoats, producers were quick to establish the Biden administration as another reason they’re unable to respond, while at the same time including their shareholders holding back capital from them to expand drilling but lets not forget the service industry. What they see is the crisis they’ve always depended on to “strike up the band” and get their party started. This time they know however, they’ll need to "turn it up to eleven." From World Oil. and here.

U.S. shale has a litany of complaints with the Biden administration, from pipeline permitting to leasing, and is still producing less oil and gas than before Covid-19 struck two years ago, even though prices for both are much higher. Shareholder demands to harvest the elevated prices for dividends and buybacks is the main driver for their conservatism, but executives claim a long-term commitment from the U.S. government to back fossil fuels could unlock more capital investment in fresh production. 

Vicki Hollub, CEO of Occidental

The world’s energy markets can’t rely on major growth in the Permian Basin U.S. shale patch to ease oil prices, according to Occidental Petroleum Corp. Chief Executive Officer Vicki Hollub.

It’s a “dire situation,” she said, adding that supply-chain constraints are severely limiting companies’ efforts to grow in the world’s largest shale basin. 

The Permian is also suffering from labor shortages, she said. Companies also don’t have enough rigs to support strong growth, and they’ve already used up most of the drilled-but-uncompleted wells that provided a quick uplift in growth in previous up cycles.

“The call for increased production from the U.S. at this point, especially with supply-chain challenges, can’t happen at the level that’s needed,” Hollub said. 

 OPEC meets with U.S. shale

Outgoing head of OPEC Mohammad Barkindo met with U.S. shale producers Monday night in Houston and said both groups are aligned in how they see the challenges posed to the oil industry by underinvestment.

“There’s no doubt we need to engage the investment community, the financial community, to address the encumbrances that are turning out to be obstacles on our way to access capital,” Barkindo said in an interview following the dinner meeting.

“The world is gradually but dangerously running out of spare capacity,” he said. “This is a function of the massive underinvestment in the industry in the last 10, 15 years.”

And then finally some sanity and focus.

OPEC Secretary General Mohammed Sanusi Barkindo 

It’s an oil civilization, and we cannot see, in all projections, where this will diminish.”

When asked if OPEC was concerned about losing market share if the U.S. and Canada ramp up shale exports, Barkindo said he is more concerned about meeting global demand, and at the end of the day, all oil producers are in the same boat.

It is important to now discuss my primary disagreement with how the producer bureaucrats account for the capital costs of their production. People, Ideas & Objects assert that a capital intensive industry will have a large component of the cost that is passed on to the consumer being capital in nature. Producers believe that building balance sheets and putting cash in the ground is their primary corporate objective. Theirs is a point of view which seeks to have the property, plant and equipment account emulate the value that is reported in the independent reserves report. Ours is the appropriate use of accounting as a measure of performance in the timely and accurate recognition of all of the costs of exploration and production. Their perspective is derived from their misinterpretation of the late 1970s SEC’s mandate that Full Cost accounting be used to value capital assets in oil and gas. They’ve misinterpreted this as the value must not exceed the reserves value, however they feel they need to come as close to the reserves value as possible. By doing so with all manner of spending by the producer capitalized as property, plant and equipment. We believe the most competitive and performant producers would seek to aggressively reduce the value of their property, plant and equipment account in order to achieve the lowest costs of any producer. The natural inverse of their method of overcapitalization is the overreporting of profitability in equal amounts. Leading to the overinvestment that has occurred with the systemic and culturally persistence North American overproduction that has been evident since the initial 1986 oil price collapse. The source of this chronic overproduction is easy to trace when we classify overproduction as being the same as unprofitable production. By recording literally everything that is spent as a capital cost of exploration and production, only operations and royalties were deducted from revenues with a sliver of depletion being the capital costs recognized for the years production volumes against the decades their reserve volumes will remain for that property.

And then came shale reserves. Which are highly prolific, high in their deliverability, massive in their scale of reserves over conventional reserves. Shale also has a much higher cost structure and a roller coaster ride of a decline curve. This decline curve begins as early as 18 months and can see the production deliverability collapse without substantial capital costs being incurred to remediate the decline. Only then to face the same decline curve in as little as 18 months. It is the high capital costs of the drilling of shale wells and the enormous costs of fracturing the formation that costs are so high. These capital costs are allocated across the reserves that are exposed to the well bore. And it is here, with the massive volume of those shale reserves that consume these high capital costs down to the relatively small dollar amount for each barrel of oil equivalent that is produced. It is then shale's precipitous decline curve that demands additional, extensive capital costs. Which of course is added to the capital costs of the reserves. Whether that is drilling additional laterals and fracing those or just re-fracing the existing lateral. What we know is that shale producers have been able to build their balance sheets handsomely in the shale era by putting an abundance of cash in the ground through shale operations. This accounting treatment in the financial statements is what investors, much like myself, were never able to fully appreciate, quickly learned it was as they suspected, and caused investors to begin their strike of the industry beginning in 2015. 

In 2020 the value of the reserves of the producers took a bit of a hit in terms of their value due to the prices of the commodities being severely depressed. Our sample of producers in 2020 were forced to recognize their capital costs on a more appropriate basis and that saw on a straight mathematical basis the amount of depletion being recognized over 4.0 years. Down from 7.43 years in 2019 and what we have in 2021 of 9.18 years. Who says bureaucrats are not culturally constrained. We see here that there is no desire to reduce their costs to lay claim to the lowest cost producer by continuing with the 4.0 years or lower. The opportunity to recognize greater volumes of capital costs due to the higher commodity prices is evident but not taken by any of the sample of producers. Regression back to the mean is their method of accounting operations. Nothing can, will or ever change, it is standard operating procedure.

I want to draw special attention to Crescent Point Energy and their financial statements for 2021. Crescent Point has raised $16.7 billion in their short existence. As of December 31, 2021 they had achieved retained losses totalling $11.3 billion, yes even in this specious reporting environment. In 2021 they recorded “profitability” of $2.376 billion Canadian. Which is a result of a 2021 reversal of a 2020 impairment charge to the reserves of $2.514 billion. Therefore in reality they actually lost $138 million during 2021 which in this reporting environment makes their performance disconcerting. What we now know of all of the producer bureaucrats from the 2021 financial reporting is that this movement back from 4.0 years in 2020 to 9.18 in 2021 is a simple continuation of the past, culturally this industry can’t, won’t and will not ever change. 

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering? We know we can, and we know how to make money in this business. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined TBD and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.