The Consequence of Being a Primary Industry

 The Greater Oil & Gas Economy

In discussing the North American oil and gas marketplace, including producers, the service industry, and other suppliers, I often refer to the oil and gas industry as a primary industry. While I don't always use the term in its purest sense, I do so to highlight the issues and opportunities within this greater economy. Today, I want to expand on why classifying oil and gas producers as a primary industry impacts other areas of the economy and what needs to be done.

Primary, Secondary, and Tertiary Industries

People, Ideas & Objects' classification of primary, secondary, and tertiary industries aligns closely with textbook definitions. Primary industries, as I see it, include oil and gas producers who receive revenues from oil and gas production. These revenues stem from capital, field service capabilities, engineering, and geological science. Oil and gas producers must recognize their business as a primary industry, bearing the responsibility to ensure the health and prosperity of all participants in the greater oil and gas economy, from investors to grocers supplying field services. The only income source for these participants is access to the primary industry's revenues, making it crucial for producers to manage the industry effectively and efficiently—an obligation they have abdicated.

The difference in our classification of secondary industries lies in the exclusive nature of the service industry's work for oil and gas producers. Field service providers have done their jobs impeccably for decades. The foremost reason is the geographical regions in which a producer may have interests can be varied and broad. If producers maintained their own field capacities and capabilities, their productivity would significantly decrease. Specialization and division of labor in geographical regions allow the service industry to thrive based on market demand from producers. This method has expanded our standard of living and prosperity for nearly 250 years. Indirectly building and maintaining these resources is a key obligation of a primary industry. No other industry needs drilling and fracing services.

The Abusive Cycle

I have chronicled the abuse suffered by the service industry over the decades. During boom times, producers express frustration over the inability to complete as much work as desired. During busts, they mitigate fallout by cutting activity levels, demanding deep discounts, delaying payments, and turning a blind eye to the destruction of the service industry's capacities and capabilities. The service industry is now operating at 30% capacity, rapidly depleting due to wear and tear and fleet cannibalization. Baker Hughes' recent announcement to shift focus off the continent is a testament to this decline.

Any attempt now to deal with oil & gas producers, the service industry will demand radical operations be undertaken within their organization. Paying high prices for the highly skilled labor that knows they’ll be laid off at some point. Worked for excessive hours for months on end in remote areas when the “good times” do arrive. Keeping an eye on the critical nature of the task at hand and the need to have the client satisfied with commercial production. While at the same time attempting to operate a profitable operation themselves. Only to find the next bust is staring them in the face, their prices and activity levels are each halved unilaterally by producers. Facing 25% of the revenues they had just the prior quarter, they’re exhausted and frustrated, only to reorganize and repackage themselves “one more time.” This cycle exhausts and frustrates them, leading to repeated reorganizations. The focus of the service industry must be profitability above all else to ensure long-term value and guarantee quality and safety.

Except this time is different isn’t it. The discipline, work ethic and reliability doesn’t seem to be evident in the youngest generation. They’re not motivated by the same challenges we were. Where we wanted to solve problems and get things done. They want to find places where they can use their phones. So if there’s no one manning the grocer at 11:00 PM to buy the food for the rig, then they’ll have to close the store until 7:00 in the morning. The fact your rig costs hundreds of thousands of dollars per day is unknown and irrelevant to them.

Those who found purpose in running rigs and making things happen have started families and bought houses. During the last prolonged layoff, which began when investors withdrew support in 2015, they moved to other industries that appreciated their skills and offered steady work. They’re not coming back. The loss of physical equipment is compounded by the loss of the skilled workforce needed to operate it. From the EIA.

They started working in other industries that appreciate their skills and offered steady work for decades. They’re not coming back. Of course the ability, the understanding and way in which a ten kilometer lateral well can be drilled and fraced successfully is easily achieved by any highschool dropout. The rig operator turns to their investors who built the equipment that was cut up and sold for scrap during covid to survive. And can see their best choice for survival is to just buy them a drink. It's therefore not just a physical loss of capacities and capabilities in terms of the equipment. It’s a loss of the resources necessary to make the equipment operate. The owner / operator of the drilling rig looks at this situation and thinks he can put it all together for another six month boom cycle, and then thinks about retirement instead. Such are the consequences of operating a primary industry where all the money belongs exclusively to the oil & gas producers. 

Moving Forward

We recently discussed the declining natural gas volumes in shale. Stopping this decline requires 200% of the effort it took to grow productive deliverability. Moving from 30% to 200% capacity will be a significant challenge for producers.

The service industry, however, remains unconcerned. This blog has long argued that losing investor support in 2015 would lead to diminished capacities and capabilities and declining production deliverability. In a shale-based world, with high capital costs and technical difficulties, the management by officers and directors has been akin to skydiving without a parachute. The investors' ultimate message of dissatisfaction in 2015 was ignored, which should have focused the officers' and directors' minds exclusively on remediation.

Everyone who has dealt with oil and gas producers and experienced their "it's mine, it's all mine" attitude towards cash has a front-row seat to this unfolding disaster. Accusations, blaming, and scapegoating have run their course. The officers and directors themselves will be seen as the impediments to progress. Politicians will be the first to raise concerns about declining natural gas deliverability, and when consumers understand the failure orchestrated by these leaders, the full extent of the catastrophe will be revealed.

Their signatures are all over this fiasco. Running and hiding is impossible; even Elon Musk hasn't colonized Mars for them to escape to. The lawyers and courts will likely pursue them for damages, slowly selling their assets to cover the costs.

Who’ll Step Up?

Candidly, I doubt anyone will step up. Some jobs are too difficult and the results too tenuous to be worth the effort. We should start over and rebuild the industry from scratch, based on the vision of the Preliminary Specification. Reorganize through new partnerships and acquisitions of prior producers' properties, focusing on profitability first and foremost. We've seen the consequences of ignoring profitability.

We know the transition won't be smooth. The continent will lose some productive capabilities, partly due to actions by new producers. Unlike previous officers and directors, we don't need to offer excuses or scapegoats. The old producers will be the ones under scrutiny, not us. For us, it’s all about seizing the opportunity.

But It’s Just Not That Bad!

If you can’t see the issues, enjoy the show and wait. This will not end well for the current officers and directors. The opportunities are now. Understand the impact of the Preliminary Specification in the rebuilt oil and gas industry. Get organized and move on with the attractive opportunities you see. Don’t worry about the current leadership; worry about the clock ticking and opportunities being taken by others.

"That Jarring Gong," Part XVI

 The Urgent Need for Change

People, Ideas & Objects have reflected on what we believe to be a crisis in the boardrooms of oil and gas producers. There is no longer the support or goodwill necessary for the officers and directors to continue as viable going concerns. Bold assertions, but we’ll make our point clear. Despite having stretched the period for decisive action well beyond normal expectations, the inaction of these leaders is best represented by the investors' suspension of capital support in 2015. For nearly a decade, producers have engaged in desperate and foolish activities, attempting to prove they didn’t need their investors' money. Believing investors would eventually return when they recognize the brilliance of their plans.

These actions avoided seizing available opportunities and employed failed strategies and tactics, many of which were at least unethical and probably illegal. This has created devastation in every corner of the greater oil and gas economy. The only beneficiaries over the past decades have been the officers and directors themselves. Every other group, including career professionals, service industry businesses, investors, and bankers, has been played for fools by these leaders.

What remains of the producer organizations is not worth keeping. No one trusts or has any faith in the current cohort of officers and directors. The value developed in the industry before the 1980s has been eroded, and the value granted by the investment community has been squandered. The industry is now worthless for several reasons:

• Unprofitable Reserves: The oil and gas reserves cannot be produced profitably.
• Inability to Manage: Producers cannot determine how, where, when, or what is necessary to produce oil and gas profitably.
• Lack of Business Understanding: The industry holds a rudimentary understanding of business principles, unable to determine the appropriate direction.
• Herd Mentality: The collective will of the crowd, akin to the Keystone Cops or buffalo herds running off a cliff, prevails.
• Shale Abandonment: Producers divested shale, admitting they couldn't make money, then took oil and gas revenues to invest in clean energy, only to return to shale and claim consolidation as the answer. What will be next?
• Missed Opportunities: Producers lost out on hundreds of billions of dollars in LNG exports to unknown operators due to their lack of business understanding and incompetence.
• Deceptive Accounting: Producers cannot identify why a property is losing or making money due to massive overcapitalization and deceptive corporate accounting.
• Overcapitalization: Balance sheets primarily consist of property, plant, and equipment (PP&E), with working capital at 2.08% to 3.32% of PP&E over the past 12 months. Overcapitalization creates overstated profitability.

All these points are known and understood. Officers and directors have acted on nothing, and nothing has changed since 2015 or even earlier. They are waiting for a time when former investors realize the brilliance of their unpublished plans. 

Today, they are isolated and responsible for the industry’s performance and current status. They had the resources and responsibility to address opportunities and issues but have destroyed the entire North American oil and gas economy. A fundamental rebuild is necessary to commence functioning again. Officers and directors have proven they can't, won't, and will not change, rendering any expectations of improvement foolhardy.

The current state of affairs has probable and almost certain shale decline curves affecting the natural gas deliverable volume in the United States, reflecting the destruction authored by officers and directors. The infrastructure of capacities and capabilities needed for a turnaround is no longer available and needs rebuilding. The resources to do so are no longer accessible to the current officers and directors, and there is no goodwill left in these producers. The only viable path forward is through profitability in a primary industry, a task at which the current officers and directors have proven woefully, if not purposely, incompetent.

Officers and Directors Issues at Hand

The political situation created by the myths propagated by producers will soon be exposed if these natural gas decline curves come to light. Public expectations are that this issue should be resolved without negative consequences to the economy or political stability. Given the claims of record profitability and cash reserves, the public will not understand why the problem was not addressed. Tolerance for high prices or shortages will be zero, and the public will not accept any excuses, blaming, or scapegoats. The era of “muddle through” will finally meet its end.

The critical question remains: who will the officers and directors turn to for solutions? They have had the authority and responsibility, yet they’ve dodged accountability and misused industry resources. They have stayed well past their prime, chosen to underperform, and displayed no leadership. Oil and gas is a primary industry, so leadership accountability is essential. However, the industry has become an ossified bureaucracy, unwilling to act outside the status quo and clinging to a “muddle through” mentality. This inability to take risks has led to comprehensive and complete failure, delivered as a feature by its leadership.

Given the chance to resolve the issue themselves, officers and directors did nothing. Investors provided clear evidence of necessary actions in 2015, yet the leadership ignored it. The Preliminary Specification, designed specifically to address these issues, was published in August 2012, but no action was taken. Instead, they left the industry, declaring shale’s performance non-commercial, and sought unrelated ventures with no competitive advantage. They indirectly communicated to their staff and the service industry that they were no longer part of the leadership's direction, taking oil and gas revenues to invest in clean energy without proper authority—essentially committing fraud by diverting investor funds.

Officers and directors have no vision for the future. They argue that the Preliminary Specification is too big to be viable, but its size reflects the scope of the problem. The accounting and administrative system needed to organize the producer and industry for profitability may represent only 5% of the global issue they now face. In reality, they need to start from a position far worse than from scratch—perhaps negative 90%. The reasons for this are:

• Lack of Trust and Goodwill: No one trusts or has faith in the current leadership.
• Perpetual “Muddle Through” Mentality: This has been the modus operandi for decades.
• Operational Ignorance: The industry is unaware of how and where to earn profits, maintaining an uncommercial level of competitiveness due to an accounting method that equates spending with profitability.
• Arrogant Culture: A belief that their business sophistication precludes external advice.
• Risk Aversion: A culture that avoids rocking the boat and taking risks, assuming profits will make up for any downturns.
• Complete Failure: The industry is unprofitable, unprepared, unaware, uncaring, unaccountable, and irresponsible in its actions.

Consequences and Implications

Officers and directors have consistently followed one another off the cliff, like buffalo, never choosing to lead since the 1970s. Their reaction to the collapse of commodity prices, often caused by their own confusion, has been to retreat rather than to lead. Now, they must get out of the way. Nothing will change while these untrustworthy leaders continue to drive producer organizations into the ground. If there is any hope for the future, it lies with new leadership that understands the issues and opportunities, has a track record of performance, and possesses unimpeachable integrity.

Before they step aside, they must initiate the rebuilding process. This includes funding the Preliminary Specification to halt the waste of time and resources. While some may accuse me of opportunistic self-promotion, I have spent many decades dedicated to solving this exact problem, without deviation since August 2003.

Actions will speak louder than words. We've heard enough from the producers over the past decades to know their promises were insincere and misguided. Future leadership will be judged on their performance, not on press releases or their dedication to DEI or climate initiatives. A recent article in the Wall Street Journal highlights the political difficulty producers have created for themselves. All the expected political maneuvering must be handled by oil and gas leadership. As a primary industry, oil and gas will have to fund the follow-on industries to build out capacities and capabilities.

Conclusion

Producer officers and directors have sold a bill of goods they cannot deliver. Over the past two decades, the facade of profitability has unraveled with their investors. This is an issue they still do not acknowledge and perhaps do not understand. The service industry met every demand placed upon them, even exceeding expectations. The innovation and development of shale is solely credited to the service industry. Producer officers and directors, who claimed to be the innovators, were merely the benefactors, sharing the benefits only among themselves. They produced misleading financial statements to mask the destruction of what should have been the greatest wealth generation the industry had ever known. Now, two decades into the shale “revolution,” the results are catastrophic.

But this is not just a matter of opinion. The public and politicians have yet to see the purported wonders brought about by the producers' so-called innovativeness, management, and wealth generation. The challenge now is for officers and directors to deliver on these promises. And do so alone, constrained by their “muddle through” culture, without the ability to innovate, the inability to profit and no financial resources or support of their capital structures. We all have front-row seats and look forward to seeing if these heroes escape again in their unfolding drama.

"That Jarring Gong," Part XV

 A Reasonable Hypothesis

One of People, Ideas & Objects’ basic hypotheses is that the oil and gas industry has not built value since the late 1970s. Instead, it has been incinerating capital on an unimaginable scale. Without annual share issuances through the ongoing support of the investment community, the capital built in the industry prior to the 1980s was exhausted. This forced producers to source fresh capital to maintain their organizations as going concerns. Our hypothesis is derived from the 1986 oil price crash, which made the situation more difficult and seemed to culturally separate commodity pricing from decision-making. Capital was sourced and spent on whatever was the most attractive catchphrase to Wall Street at the time. Our hypothesis was confirmed through repeated oil and gas commodity price collapses that were highly destructive and largely ignored by the current crop of producer officers and directors. Even without the repeated price collapses due to chronic overproduction, or unprofitable production as we describe it, overproduction continues to erode oil and gas prices. Officers and directors fundamentally believe they are price takers, where commercial operations are obtained by making it up on volume.

We argue that the industry has become a spending machine, learning through specious accounting methods that spending money is profitable. Performance, therefore, is measured by the capacity and capability to spend money, as all money spent is considered profitable according to audited financial statements. Capitalizing almost every cost incurred by the producer creates overcapitalization, which is only equaled by the volume of overreported profitability. Despite what the results or performance of the property may be. This circular relationship is designed to, as officers and directors claim, “build balance sheets” and “put cash in the ground.”

Our hypothesis also suggested that once the accounting magic was discovered for what it was, investors would become wise to the producers’ eventual fate. Producers would and have become hollowed out, poorly performing, and capital dependent. Today, producer firms are leaderless and lost. They lack a basic understanding of business and are unable to function as businesses. Declaring shale uncommercial, they exited the industry, taking oil and gas revenues to fund clean energy investments with them. Meanwhile, they allowed others to maximize profits by developing the significant global LNG marketplace, leaving the domestic market to producers.

Locked out of the global LNG market, producers are now relegated to domestic prices subject to frequent price collapses. They failed to realize they couldn't take oil and gas revenues with them to fund clean energy investments, proving their lack of commitment to oil and gas. Abandoning shale as uncommercial shows they admit failure, and lack the understanding necessary to implement the appropriate remedial efforts. Their complacency allows significant oil & gas business opportunities to be easily missed in a preoccupation with unrelated clean energy technologies and unrelated industries of which they hold no competitive advantage.

Producer financial statements’ reliability and the officers and directors’ business capabilities became issues for investors in 2015, leading to their suspension of further support for producers' capital structures. This situation should have concentrated producers' efforts on remediating investor concerns. A decade later, nothing has been done, leading to chronic cash and working capital shortfalls, an embarrassment to all of them. Media and politicians claim producers are earning record profits and hoarding cash, yet critical analysis shows minimal working capital is unable to support a capital-intensive industry. Producers' capital expenditures budgets are only considered funded by including 100% of their lines of credit. 

After decades of believing that spending was profitable, there was no performance or competitive criteria to eliminate weak players. The homogenization of producers’ performance has dropped to about 25% of what commercial enterprises need to attain.

When working capital is an issue in a primary industry whose commodities are price makers, a phenomenon unique to the business world. The damage caused to the trust, faith, and goodwill by the oil and gas producers towards the service industry is significant. Producers conducted operations with accounts payable being paid in 18 months, slashed activity levels, and demanded huge discounts, cutting service industry revenues by 75%. COVID-19 exacerbated these difficulties, forcing the service industry to cut up equipment for scrap and sell horsepower to other industries. Now operating at 30% of prior capacity, the service industry is declining rapidly due to equipment retirements and fleet cannibalization. Producers will need to rebuild capacities and capabilities on a direct, philanthropic basis to regain the service industry's trust and respect.

Winston Churchill

When the situation was manageable it was neglected, and now that it is thoroughly out of hand we apply too late the remedies which then might have effected a cure. There is nothing new in the story. It is as old as the sibylline books. It falls into that long, dismal catalogue of the fruitlessness of experience and the confirmed unteachability of mankind. Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong—these are the features which constitute the endless repetition of history." (Martin  Gilbert, Winston S. : The Prophet of Truth, 1922-1939 (Volume V) (Winston S. Churchill))

The last point of our hypothesis aligns perfectly with Churchill's sentiment and is the "Jarring Gong" everyone must wake up to. This is evident in the EIA’s "Monthly U.S. Dry Shale Natural Gas Production by Formation" graph. Notice anything significant?

For the past year, I have speculated about the turning of the natural gas basins, and there is now undeniable evidence that they have indeed turned. How will this be remedied? Clean energy, consolidation, or perhaps a board meeting? Let's not confuse ourselves with the obvious facts that support this.

• Shale is the greatest endowment of riches known to man. We are fortunate to have them and therefore secure, reliable, profitable and affordable energy for all of North America is attainable, at a minimum, for at least the remainder of this century. Of which we’ll need. 
• The level of incompetence required to destroy an industry while producing these resources is staggering. Officers and directors are 100% responsible, should have been accountable, and had the resources to address the issues and opportunities they face. However, they did nothing but “muddle through.”
• A solution in the form of the People, Ideas & Objects Preliminary Specification has been available since August 2012 to tackle these specific issues.
• Chronic and systemic overproduction of natural gas continues and will continue.
• Natural gas prices are producing unprofitable production, therefore it is overproduction. 
• Shutting in of any natural gas production announced by producers in March 2024 was effective however temporary. Prices have resumed their declines.
• Of the 12 shale basins, 6 have turned.
• Marcellus on 12/2021, Down 5.7% as of 5/2024
• Utica on 12/2019, Down 53% as of 5/2024
• Barnett on 11/2011, Down 66% as of 5/2024
• Fayetteville 11/2012, Down 84% as of 5/2024
• Mississippi 10/2022, Down 16% as of 5/2024
• Rest of U.S. 10/2012, Down 57% as of 5/2024
• Reversing this trend to previous growth levels will not be achieved by merely returning to 100% field-level capacities and capabilities. It may require over 200% of the prior capacity to grow production deliverability and overcome these basin's decline.
• Where will these resources be sourced for these capacities?
• Who will be motivated to sacrifice their capital in the manner expected by current officers and directors past actions. 
• How will those field hands who’ve now moved on to other careers in other industries be motivated to return. It may require more than one big paycheck. 

The Producers Logistics

I estimate it takes a minimum of seven years to transform a concept to a producing oil and gas property. Investopedia quotes a study indicating that the period from discovery to production is 5.5 years, which aligns closely with my estimate. Since investors stopped supporting producers in 2015, capital, working capital, and cash have significantly diminished. Alternative sources were found to meet their needs, but these have now dwindled. Despite my attempts to convince producers that the Preliminary Specification would generate substantial profits and provide all the cash they need, they resist due to concerns about their personal career security. Nonetheless, in times like these, focusing on internal cost-cutting is the obvious strategy.

The oil and gas industry, being capital-intensive and reliant on external capital for all its costs, has been performing at just 25% of a commercial operation threshold. Having lost investor support they’ve now exhausted their seven years of work in progress, producers now lack the field capacities and capabilities to drill more than 30% of prior growth levels. It's as if old Mother Hubbard went to the cupboard to feed her children and found that the kitchen had been taken in last night's tornado.

Given the seven-year timeline for this process and their limited understanding of business, cutting costs in the initial stages would be prudent. Starting in the first year of difficulties, it would be most effective to cut costs incurred in the first year, hoping to reclaim resources once business returns to normal. If this proves insufficient, cut costs in the second year, and so on. This approach allows the process to continue for another seven years from the onset of difficulties, with the expectation that normal business operations will eventually resume, preventing permanent loss.

Prior growth level capabilities may be woefully inadequate. The shale characteristic of steep decline curves becomes critical when a basin cannot maintain the necessary level of activity to sustain and grow deliverability. Shale offers immense wealth, but with conditions, and the steep decline curve has always been known. Officers and directors may not have understood the business principles behind managing a diminishing resource. If they did, they would not have ignored their investors' concerns for nearly a decade. It's as they say, math is hard. During this period, officers and directors were proudly parading their "biggest, most beautiful, and well-built balance sheets" down main street.

Conclusion

The actions and behaviors of the past few decades suggest that officers and directors will only make a sustained effort to turn the industry around once they fully understand the consequences of their actions. While some may cynically believe their commitment would last mere days, I would wager it might extend to a few weeks. Their best opportunities will lie in finding new sources of cash from areas unfamiliar with their past antics. The media and governments, which the latter have significant financial resources, could be prime targets.

Producers have signaled to their investors that profits are not a priority. Their inaction implies a lack of concern for both the oil and gas business and investor interests. Allowing the industry to be destroyed to prove their point. This attitude suggests that they are uninterested in the future, which holds unlimited potential for everyone except the officers and directors. Their lack of motivation I would suggest is due to the fact they control the oil and gas revenues. It will become increasingly difficult for them to explain to their investors why this limitless future is of no interest to them.

Blaming the declining productivity issue on the government might be a strategic move, especially with the media support producers currently enjoy. However, this strategy could backfire if the truth about these outcomes from producers' past actions becomes public knowledge. A more hostile environment could emerge if it is revealed that producers have been misleading the American people. I would not want to be around when the public turns against these officers and directors.

What we’ve heard before is a long litany of excuses, blaming, and viable scapegoats as to why producers could not do this or that. Most of these excuses did not pass for basic common sense, such as “waiting for a cold winter,” or were outright mistruths, like “shutting in production will damage the formation.” The creativity in generating these excuses has been impressive, and there seems to be no diminished capacity in this regard. The expectation might now be to "drill baby drill," which contradicts the arguments that have stymied them in the past. Who will they blame then? The service industry, investors, or anyone else they desperately need to depend upon?

As a former auditor, I have a propensity to want to kick dead horses to see if they are, in fact, dead. Therefore, let’s review: Producer officers and directors will need to undertake a significant effort with no capital or support, no ability to earn money and no money on hand, no internal capabilities to conduct operations, and a reputation in the recruiting industry where no one is generally interested in them when exciting opportunities abound elsewhere. They lack field-level capabilities to conduct any operations from operators that would trust, believe, have faith, or goodwill even if the check was certified. Lastly, they have no organizational capability to do things in a way that doesn’t just cause more damage and destruction. Yea, this horse is dead.

"That Jarring Gong," Part XIV

 Compliance

During our time off, the United States Supreme Court ruled that the Chevron doctrine is no longer law. This is welcome news for those who believe the administrative state had become unconstrained in creating and applying administrative law, seemingly for its own benefit. A review of any producer's quarterly and annual reports reveals the extent to which corporate America is burdened by compliance with regulations that offer little tangible benefit. Although Sarbanes-Oxley weathered the financial crisis due to its legislative support, many climate and diversity, equity, and inclusion (DEI) initiatives seem driven more by controlling narratives rather than practical outcomes. 

In my opinion, if climate change becomes a trillion-dollar issue, dynamic and innovative solutions will emerge. Until then, it's just more unaccountable taxes claimed to resolve the issue, yet perpetually demanding higher taxes as the job is never done. DEI initiatives have constrained organizations in unimaginable ways and opened them to criticism for noncompliance. More time, energy, and money are spent here than on profitability, which doesn't even make the top ten priorities.

The future of these regulatory burdens will hinge on the outcome of the U.S. election. One side may eliminate them, while the other may support them by passing enabling legislation. The reality is that producers have not focused on profitability for many years, lacking the time and money to do so. The compliance and governance burdens have fostered a "compliance first" culture that understandably seeks to avoid noncompliance pitfalls. If many of these regulations lack a legal basis, an alternative might be to ignore their requirements and let the courts determine their validity. The chosen route will soon be evident, but North American business is too regulated and not dynamic enough to meet future demands.

In our view at People, Ideas & Objects, the consumption of time, energy, and money on compliance is unacceptable. We believe compliance and governance should be the natural consequence of the actions taken by the producer firm. Within the Preliminary Specifications Compliance & Governance module, we align these "corporate" frameworks with the Joint Operating Committees' legal, financial, operational, cultural, communication, innovation, and strategic frameworks. This alignment brings increased speed, accountability, and profitability to the Joint Operating Committees. 

Whatever the future holds for compliance requirements, the Preliminary Specification offers producers an opportunity to have our user community prepare for their Compliance & Governance needs. This approach identifies specific compliance and governance costs at the property level and ensures those costs are covered by its performance.

A Bridge Too Far?

The question we need to answer is: how do you build a bridge? How do you create anything of material value and substance that doesn’t generate revenue until it’s completed? This is the issue we face with the Preliminary Specification. The scope and scale of the issues in the oil and gas industry are so vast that tinkering at the edges with one or two producers will only be wasteful. Approaching the existing culture with a wholesale change will not succeed unless we can summarily ignore that culture and commence a comprehensive restructuring based on a new vision. We believe we’re at that point, as the industry has been ground down to a valueless non-entity. If we don’t rebuild it with the vision of the Preliminary Specification, then which vision would you prefer?

This debate doesn't address whether we're crossing the Atlantic or Pacific Ocean with our bridge. Given where we are today and where we need to be to address the next 25 years, the distance is as vast as the Pacific Ocean. I cannot convince the industry leadership that they have a problem and that a reorganization is necessary. To solve any problem, the first step is to organize yourself to approach its resolution. People, Ideas & Objects have a clear vision of what the industry needs to do and how to organize it. However, the industry’s leadership clearly doesn’t want to fulfill their role in what needs to be done. They believe that absolving themselves of the compliance risk from their new regulatory masters supersedes all other aspects of leadership. This mindset reveals their redundancy and underscores the urgent need to resolve this leadership vacuum.

Culture is Direction

What we’ve learned over these number of decades is that as much as producers claim to be responding to their environment and instituting changes. Actual change is quickly overruled by their culture. Today we see the industry is regressing back into its cultural influences. Companies such as Ovintiv are now focusing on the balance sheet once again. EQT were highlighting the performance of their hedges. Although it would have appeared that overproduction of natural gas was understood and actions were being taken by a number of producers to deal with the excess production in March of 2024. Being rewarded with a doubling of natural gas prices as a result. Those days have now passed and the lessons learned appear to be forgotten. Natural gas prices have fallen 35% since June 10, 2024. 

The persistent cultural influence of “muddle through” is accepted as fact, with nothing being done about it. The responsibility, authority, and resources to address the issue are often avoided to save resources for another day.

I often find myself impressed with the technologies claimed to be used in oil and gas and their applications. Whenever the question arises whether producers are doing enough to implement advanced technologies, we are bombarded with buzzwords like Artificial Intelligence, Machine Learning, Internet of Things, and more. These technologies are always touted as “promising” and “game-changing” when applied to oil and gas, leading one to believe that what is represented as a factual case study is more of a vendor's technological dream.

These claims contrast sharply with the legacy difficulties that People, Ideas & Objects face in getting the Preliminary Specification accepted. Organizing data and optimizing the organization for performance and profit seem to hold no interest. It's not just us that are concerned about the economic viability of the industry; shareholders have been withholding their support for almost a decade and are now capitulating due to producers' inability to act or perform. On one hand, there are issues that manifest into existential threats and business solutions that are ignored, alongside shareholders' concerns and an industry taken to the brink of having no value. All this while supposedly using the most advanced Information Technologies available? The contradictions are too glaring. These fairy tales belong on the heap of other mistruths that have been spoken. Perhaps in the second quarter 2024 reports, producers' officers and directors will adopt a policy that honesty is the best policy. See, even People, Ideas & Objects can float such fairy tales.

Conclusion

Although the leadership of oil and gas may be tinkering with Artificial Intelligence, Machine Learning, and the Internet of Things, these technologies will likely only serve to enhance their resumes for future career moves. They are chasing after new, shiny objects, knowing full well that their failure is inevitable. The industry is on a trajectory with the momentum of a 30” log rolling down a hill, unstoppable and destructive. The opportunity to intervene and change course was long ago, and they did nothing. Now, there’s nothing anyone can do to stop it, and it will annihilate everything in its path.

Reinstating their vision through consolidation is not the solution it may have seemed in the 1950s. This outdated strategy is causing more people to realize its negative consequences. Besides, consolidation is nearing the end of its 18-month cycle in terms of the industry's attention span. Soon, they might shift focus to offshore drilling or another distraction, attempting to dupe everyone once again.

Reflecting on their performance over the past few years reveals a series of missteps and failures. They abandoned shale, declaring it uncommercial, and diverted oil and gas revenues into clean energy. Realizing their mistake, they returned to shale, only to find the industry in shambles. The damage done to the service industry by these officers and directors is particularly severe. Faced with the uncommercial nature of shale once again, they decided consolidation was the solution.

The legacy of failure these officers and directors have left behind is damning. They have consistently shifted from one area to another, much like the buffalo did in the 1800s, moving from SAGD, heavy oil, natural gas storage facilities, offshore drilling, unconventional natural gas, and unconventional oil, to clean energy, then back out of clean energy, and now to consolidation. One wonders if they are finally discovering the cliff that the buffalo always seemed to gravitate towards.

Capital destruction through facility overbuilding has been their modus operandi, executed with expert skill and a complete abandonment of rational thought. Their only strategy is to run with the herd, overbuild, realize the damage, then move on to the next big thing without ever considering using the market to guide their capital investments. They have never considered remediating poorly performing assets into profitable operations. Instead, they perpetuate propaganda about the next big thing and how they’ll succeed if given a few more billion dollars.

This leadership has repeatedly proven its incompetence, leaving a legacy of broad consequences that will be felt across North America. Their propaganda has convinced politicians that they can do anything. But the truth is different. Officers and directors should prepare for accountability being demanded from another group. Will the politicians stand behind the investors, bankers, service industry participants, and others who’ve been harmed by these leaders? Or will they jump the queue and demand answers immediately?

"That Jarring Gong," Part XIII

 The Opportunity

People, Ideas & Objects offers the Preliminary Specification for North American producers, providing them with the most profitable means of oil and gas operations, everywhere and always. A primary industry that previously relied on outside capital must now transition to become profitable enough to fuel its capital expenditures, investor dividends, and bank debt repayments. This industry transition is challenging at any time and place, demanding a cultural shift from “muddle through” complacency to a dynamic, innovative, accountable, and profitable model. Changing the culture to focus on preservation, performance, and profitability requires wholesale changes to rebuild the industry with that vision. Orchestrating such change internally would be futile and counterproductive. Change of this magnitude can only be successfully achieved through creative destruction, eliminating what no longer functions and replacing it with what will.

Thankfully, producer officers and directors have proven their culture is incapable of functioning any further and demands replacement. Objectively, the industry is beset by long-standing difficulties that have resulted in a protracted waste of inherent value. Producer officers and directors have failed to address the challenges they’ve placed on the greater oil and gas economy. The information contained within this graph from @Soberlook on X confirms what we suspected and supports our belief in the necessity of moving forward.

Who could blame the investors? For over four decades, officers and directors have used the industry to fuel what may become the greatest destruction of wealth and value known to mankind. Energy in the form of oil and gas is critical to our quality of life, economy, and survival. The documented destruction in this WorldOil article is just the beginning of the difficulties the industry will face. 

• The Permian basin is expected to join all other basins in experiencing production declines. 
• 2023 saw 123 rigs dropped from the fleet and now stands at 654 rigs.
• (As of July 2, 2024 there are 585 rigs.)
• Drilling and Uncompleted Wells, or DUC’s have declined. As the WorldOil article states “the lower the count becomes, the longer it will take for shale supply to return.”

How is this happening? People, Ideas & Objects have clearly identified that it is the officers and directors, their “muddle through” mentality, well-built balance sheets, and other nonsense that have brought us to this point. Why has this happened? Not a penny of profit has been made by a single producer in the industry since the late 1970s. Nothing but the expenditure of investor money gained from specious accounting claiming oil and gas reserves were valuable. If they’re so valuable, why were they not produced profitably? What has been proven is that with willing investors, the useless spending machine of officers and directors will destroy any and all value.

Officers and directors used to proudly preach to me, "Who cares about profits? It's about cash flow.” They hardly understood why profits were necessary or that their talk about cash flow was ridiculous. Cash flow is nothing more than the return of capital invested. They never recognized that they were not profitable. With their always looming “ceiling test write-downs” proving they don’t even return all of the capital invested. They never understood what was needed to earn real profitability in a competitive market. What they have proven is they have no understanding, concern, or need to operate a profitable business. Since 2015, investors have given them ample time to figure out how to earn real profits. And what did they do? They declared shale unable to be commercial and moved on to clean energy, using oil and gas revenues to support their spending. If they want to pursue another industry, they should quit their jobs and pursue clean energy as a startup. What they did was at a minimum unethical.

In 2015, the Investors Acted

Outside of the media, merely claiming profitability does not make it true. Producer financial statements have been distorted to the point where they no longer represent performance through the accurate and timely recognition of costs. Instead, the objective has been to bloat balance sheets to approximate the value of the reserves. Given this context, a reevaluation of the industry is necessary to assess the "real" performance of producers. Overreported asset values have never sustained successful business models, achieving their success in ponzi schemes or fraudulent businesses, over the long term.

For the past nine years, no new investment money has flowed into oil and gas. Now, with a decade of inaction from producers to address profitability issues and the disaster documented in the WorldOil article, investors appear to be selling their positions and moving on. We see this as confirmation of People, Ideas & Objects' Preliminary Specification. Investors have lost patience with officers and directors and are leaving. The current outflow of funds is significant, and we expect this trend to continue for some time. This indicates the distaste that producer officers and directors are causing investors. Therefore, we believe now is an opportune time for the Preliminary Specification to move forward in our fundraising and software development activities.

These signals from oil and gas investors provide us with a clear understanding of the future. Our concern was that starting our software development without a clear signal from producer investors about their future actions could result in a terminally failed project. Such a failure would jeopardize our goal of rebuilding the North American oil and gas industry as proposed. We have represented our position to the investor community: if investors suddenly resumed financial support for producers, funding their capital expenditures with new funds, it would have been terminal for People, Ideas & Objects. We, along with our user community and their service provider organization, would have failed spectacularly due to a distinct lack of credibility and support in the short term. We would have seen such an action as a betrayal by investors toward the future of the oil and gas industry and all those who expect and depend on a turnaround. If the industry's spendthrift leadership in the form of officers and directors regained their investors' trust, faith, and goodwill, People, Ideas & Objects would be set back significantly in terms of our product horizons.

Therefore, to keep the overall opportunity open, we had to be patient until we saw what investors would do. We kept our powder dry and our candles lit until we knew where we were headed. Now, we have that clarity. We would not risk our user community's careers, nor waste their time or money, by associating them with us and potentially subjecting them to the producers' vilification. We have a viable business model, a plan, and a vision to address the industry's current issues. We indirectly have the support of oil and gas investors who have not supported producer officers and directors since 2015. These investors have tried to deal with dysfunctional leadership and are now abandoning them due to their inaction. I see investors' actions as terminal to producer firms' leadership. There is no stronger message that theirs is a flawed and failed corporation than having their investors give up on them.

Commissions

I am pleased to announce that People, Ideas & Objects are instituting a Sales Commission Program for our Preliminary Specification, targeting North American-based producer firms. This program is open to individuals within or outside the oil and gas industry who believe they can close the sale of an ERP software development, as defined in the Preliminary Specification, to North American producers. This includes direct sales to producer firms, investor groups seeking attractive licensing opportunities in oil and gas production and technology, or others interested in participating in our Profitable Production Rights.

Now is the time to offer this opportunity. Our perspective on the industry is well-documented in our writings. Our vision, plans, and Preliminary Specification resonate with those within the industry. What officers and directors dismissed as “opportunity costs'' over the past decades has materialized into a substantial value proposition, irretrievably lost due to their inaction. Our concern for the industry's future if these issues remain unaddressed is severe, with significant detrimental effects on the oil and gas economy. This turning point calls for changes, such as those defined in our Cloud Administration & Accounting for Oil & Gas software and services. This service, funded by Profitable Production Rights proceeds, will control producer access. Chronic inaction and destruction by producer officers and directors necessitate others taking steps to resolve these industry difficulties. The first step is to organize ourselves to tackle these issues effectively. In the 21st century, a software system that defines, supports, but also constrains an organization needs to be built. Organizing North American producers toward a dynamic, innovative, accountable, and profitable outcome will not occur otherwise.

We are at a point where sales must begin, and our budget needs funding. Our pricing is based on our value proposition. We assert that implementing the Preliminary Specification will generate $25.7 to $45.7 trillion in incremental revenue and profitability for the greater oil and gas economy over the next 25 years. Our Intellectual Property provides substantial and proven value, as evidenced in the North American natural gas market over the past year, and is exclusive to the Preliminary Specification business model. Decades of evidence show that producer officers and directors are unable to resolve these issues. Producer firms have chosen to do nothing, and others will now take it from here.

The commission for closing a sale is 15% of the sales price to the producer. Producer costs are based on the North American sourced production assessment per barrel, plus commission. The per barrel assessment is $1,000/boe, including commission is $1,150/boe. People, Ideas & Objects pricing is based on the value proposition we bring to the market. Without the Preliminary Specification, the industry is engaged in wasteful pursuits and lacks plans or vision for the future. Sales commissions are paid upon closing.

The sales process may be long and complicated, incurring costs that are the responsibility of the individuals participating in this commission program. People, Ideas & Objects will support the process to the extent of our ability. Unlike our Whistleblower Program, there is no exclusivity granted to any individual. However, for a fee of $5,000 USD, individuals can buy a two-year exclusive license to sell to a specific producer. License renewals are granted but will lose the exclusivity of the initial license.

For startups and small oil and gas producers, two classifications dedicated to People, Ideas & Objects et al Cloud Administration & Accounting for Oil & Gas software and services, we do not expect initial sales interest. It is likely they will join on their own or towards the end. The Preliminary Specification provides enhanced and distinct benefits over other producer firm classifications. Their participation will not be material to this Sales Commission Program unless an individual expresses otherwise, possibly as an allocation for startups or small producer firms with an aggregate production profile of X boe/day representing a number of producers.

Driven by a strong sense of urgency, I have seen exponential growth in the market's sense of urgency. Therefore, I am announcing our "First to Close Bonus" on these Sales Commissions. A "First to Close Bonus" of 2x commission will be paid to whomever secures the first sale. This bonus will be paid from People, Ideas & Objects sales proceeds.

Conclusion

User community-defined ERP software developments, such as People, Ideas & Objects' Preliminary Specification, are the only effective methods to generate quality ERP systems. Asking developers, trained in their specific disciplines, to write software for oil and gas accounting and administration on the broad scope and scale of the Preliminary Specification is impossible without direct user involvement. However, user involvement significantly escalates the budget for ERP development and implementation, often making it the first budget item to be cut. Given the scope, scale, and necessity of resolving issues in the oil and gas market, we cannot afford to make such cuts. Our proven value proposition, understood by all in the industry, renders discussions about our budget moot. The industry wastes the value of our budget every month.

There are substantial conflicts and contradictions in seeking funds from existing producers to rebuild the industry. One perspective is that we are indirectly assessing a royalty or fee on oil and gas production through the Profitable Production Right license. Each barrel of oil equivalent (boe) per day will need to secure this license to be processed through our Cloud Administration & Accounting for Oil & Gas software and service. This indirect cost on profitable production is appropriate for fostering a dynamic, innovative, accountable, and profitable industry.

I see an obligation on behalf of those officers and directors who have willingly destroyed the industry to support this initiative. Doing the right thing would mitigate their personal risk in terms of maintaining their Officers and Directors Liability Insurance, a risk they do not share with us. They seem uninterested in addressing the fact that their investors have acted in ways demanding action. Alternatives in the market have identified and resolved the issues, but these officers and directors falsely refuted those alternatives, flipped in and out of the oil and gas and shale industries, and remain indifferent to the tragic losses and damages they’ve caused.

The reality we face is that, after decades of dealing with this difficulty, the details of how these communities are financially supported remain unclear to me otherwise. Profitable Production Rights licenses assess a fee on oil and gas production for the use of our Cloud Administration & Accounting for Oil & Gas software and service. This will be the only method through which North American oil and gas producers can produce profitably. Otherwise, they must explain to any interested parties why they are not.

"That Jarring Gong," Part XII

 Introduction 

We return refreshed and ready to continue our campaign to raise the financial resources People, Ideas & Objects needs for the first year's budget. This is an opportunity to take decisive action before time further erodes industries issues and opportunities. Our initial budget is relatively modest, with a goal of $10 million USD to commence the Preliminary Specifications development while securing additional funds for subsequent years.

In this post, I will attempt to capture and represent the current state of affairs in the North American oil and gas industry. The systemic issue producers face is the chronic overproduction of oil and gas. Commodities that follow the characteristics of economic price makers, leading to significant price erosion from overproduction. We believe the root cause of this issue lies with the leadership of the oil and gas industry, specifically the producer officers and directors, who are directly responsible for trillions of dollars in damages that could and should have been avoided. This was their opportunity and obligation. As it remains for the future.

People, Ideas & Objects use a representative example from 2022 and 2023 in the North American oil and gas marketplace as it relates to this century's shale production. This example illustrates the magnitude of monetary and reserve damages and losses. We believe the issue of chronic overproduction began in the late 1970s and first manifested itself with the 1986 oil price decline. What 2022 and 2023 capture is an acceleration in the destructive cycle driven by producer officers and directors seeking a purpose in their lives and in their roles. In doing so, they have proven to be irrelevant and damaging to the financial and operational health of the industry, demonstrating a clear lack of understanding of their responsibilities.

The Issue

To understand the scope and scale of incompetence, corruption, and negligence of the officers and directors in the oil and gas industry, we only need to consider their actions in recent years. The unanimous declaration that shale will never be commercial and the announcement of clean energy as the new frontier illustrate their misguided approach. They claimed they needed to remain competitive with clean energy and justified keeping oil and gas prices below the alleged costs of alternatives. They made this switch by trying to use oil & gas revenues, without shareholder support, understanding, or competitive advantage, treating these factors as mere technicalities. 

Declaring shale uncommercial has only led to further degradation of natural gas prices due to chronic overproduction. The heating value ratio of 6 to 1 for oil deteriorated to over 50 to 1 in early 2024. Export markets began to form with sizable capacity for shipping LNG to foreign markets, allowing producers to experience global natural gas prices. However, officers and directors were preoccupied with inspecting solar panels and laying off reservoir engineers. While North American natural gas prices averaged $4.50 in 2022 and 2023, Japan and the Netherlands experienced prices exceeding $50 at times. The cost to refrigerate and ship was approximately $8.00. Today's average North American natural gas price is in the low $2.30 range.

In late 2023, People, Ideas & Objects determined that North American producers did not realize these foreign prices. They sold their natural gas at the Henry Hub to unknown purchasers who then refrigerated and shipped the LNG to Japan and the Netherlands, realizing the price differential. None of the producer firms did this themselves. Evidence of this was the rash of producers rushing to secure LNG contracts for "free on board" shipments to foreign markets, signing for contracts on unapproved and uncommitted facilities beginning as early as 2028. Locked out of existing LNG facilities by those who exploited the producer officers and directors naivety.

The fact that producers' officers and directors did not understand the principle of "net back pricing" or "free on board" highlights their lack of general business knowledge. This ignorance is evident in their decades-long declarations of "building balance sheets" and "putting cash in the ground." This nonsensical approach includes their current posture of waiting for investors to return from their 2015 hiatus. They do not understand that losing the support of their capital structures should have been their primary focus, as foreign a concept to them as realizing natural gas prices in Japan.

Consider this: while others established contracts to refrigerate and ship LNG to foreign markets, capturing hundreds of billions of dollars per year, oil and gas producer officers and directors declared in perfect harmony that shale would never be commercial. They then diverted corporate resources to unauthorized clean energy businesses, eagerly awaited the return of their investors, subsequently found clean energy not to be “commercial,” returned to shale and focused on consolidating larger positions in the Permian shale—the least profitable due to high costs and steep decline curves.

Companies like Conoco actively participated in the LNG business with substantial investments in facilities on the Gulf Coast, Australia, and Qatar. This continued focus on bright, shiny, highly engineered facilities over the business realities of oil and gas raises the question: why would a producer invest in LNG capacity when its value is realized through a sales contract? Or is this news to them?

The Opportunity

I have had the opportunity to put forward an alternative to the status quo method of oil & gas organization and operation in the past number of decades. The Preliminary Specification disintermediates the greater North American oil & gas economy. It sets in place user community defined ERP software developments to deal with the issues and opportunities that are ever present in oil & gas today. It is comprehensive in its vision and designed to replace the failed culture with one that is structured to provide producers with one of preservation, performance and profitability. Making all North American oil & gas production profitable everywhere and always. As economic price makers, oil & gas will follow the characteristic that new production will only be brought on stream that is profitable. Ensuring our claim is valid. 

Oil and gas exploration and production have demonstrated that the easiest and lowest-cost production is extracted first. Consequently, all oil and gas E&P is subject to increased costs due to the greater effort required to retrieve incremental barrels of oil. People, Ideas & Objects believe the replacement cost of produced oil, reflecting exploration and production costs in a rising cost environment, must be recognized by consumers at the time of consumption. This financial recognition will provide the resources necessary to replace what is produced today. A dynamic, innovative industry will be required to expand deliverability beyond current capabilities and to control costs. Enabling this capability in North America is a core function of the Preliminary Specification.

We achieve this by implementing the only reasonable and fair means of production discipline across the industry. If a property produces profitably, it will continue; otherwise, it will be shut in and added to the firm's Innovation Work-in-Progress Inventory until it can return to profitable production. Production discipline is realized through capital market discipline. Producers need to compete for capital in North American markets against all other industries. If they continue to perform as they have, they will continue to have no access to capital. Shutting in unprofitable production ensures that no losing properties dilute the earnings from profitable ones, maximizing overall profitability. This approach also safeguards assets, as reserves are held until they can be produced profitably, minimizing storage and production costs and avoiding incremental losses that must be recovered in the future.

Profitability will replace the “muddle through” complacency of today’s industry. The current industry's performance is abysmal, and returning it to the commercial, profitable status of the 1960s and 1970s is beyond the mindset of today’s officers and directors. They are unable to understand these perspectives because they cannot identify the issues and opportunities they face, which stem from their indecision about which industry they want to invest their time and others' money in.

Conclusion

This melodrama has flip-flopped repeatedly over the past two years and on many fronts, revealing a consistent, failed business model throughout the industry. Our interactions with producers highlight this issue. When I began People, Ideas & Objects, my focus on profitability was met with ridicule. "No one cares about profit," they said, showcasing a clear lack of common sense that is evident in all of their thoughts and actions.

On July 4, 2019, I published our white paper, “Profitable, North American Energy Independence -- Through the Commercialization of Shale” which they refuted by claims that shutting in production would damage the formations. Ten months later, faced with negative $37 oil prices, 25% of global production was cut. Our method of commercializing shale, initially alleged to be flawed, was subsequently proven necessary and effective. This led to the producers' capitulation on the commercial viability of shale, indirectly admitting that the uncommercial nature of their business was a significant issue. Choosing to ply their trade in the “clean energy” industry of which they have no competitive advantage or understanding.

Since then, they have focused on radical changes to resume shale, to consolidate, and when those efforts inevitably fail, then what? This is disqualifying. Too many opportunities have been granted to these officers and directors, who have proven at every turn that they are incapable of effectively managing the industry. If the damage and destruction caused by their inaction and incompetence ended there, I might agree with those who suggest leaving them alone to wallow in their filth. However, that is not the case.

• Producer officer and directors were dishonest about the viability of the Preliminary Specifications shutting-in of production.
• When forced to shut-in 25% of global production, they subsequently stated no formations were damaged.
• “Others” continued to secure deliverability capacity of LNG out of the Gulf of Mexico “free-on-board.”
• Producer officers and directors declare "shale will never be commercial" and saunter off to clean energy with oil & gas revenues in hand. 

Oil and gas play an outsized role in North American society and are crucial for maintaining our economic standard of living and political influence. Without energy, particularly oil and gas, we cannot compete with those who have it. Those who do have it may soon understand this and compromise our economic and political influence to provide us with the energy they believe we need. Is that the point when we ask the officers and directors for their plan? Or are we already crossing the point of no return regarding our capabilities and capacities on the continent? The faith, trust, and goodwill in these officers and directors vanished long ago. It must be the cash they keep putting in their pockets that keeps them showing up so persistently. 

"That Jarring Gong," Part XI

 Who’s Accountable Now?

Reflecting on past market failures in oil and gas ERP software development and implementation, it became clear that unaccountability is the producers' strategy. The software I was developing and selling from 1991 to 1997 offered enhanced accountability with granular data and transparency. This same realization likely led Oracle and IBM to exit the oil and gas sector in 2000 and 2005, respectively, and explains why SAP still doesn't offer a dedicated oil and gas system. They have no vision or plans; it's just an implementation that reinforces the status quo. Consequently, no significant systems development has occurred in oil and gas since our work in the early '90s. Competitors in the ERP software market have done phenomenal work to hold their companies together in a hostile environment with producers, operating on shoestring budgets as "blind sleepwalking agents of whomever will feed them."

The accounting on top of these poor systems is opaque. Capitalizing costs, aggregating accounts for “simplicity,” and focusing on the corporation make management information and performance reporting non-existent. This accounting can't change materially if the software remains static, which it has under current administrations. ERP vendors focusing on accounting and administration, both rightly seen as producers' non-competitive advantages, diminish the drilling budget. Therefore getting the job done has been prioritized over addressing system design or accountability issues. There’s no time or budget for systems or enhanced accountability. If suggested, it signals that accounting and administration have too much time or budget and they need to have budget cuts administered.

Another element that isolates officers and directors from reality is the Officers and Directors Liability Insurance, which has become standard in corporations. How much does this insurance indemnify producers' officers and directors from personal litigation risk? And have producers further eliminated accountability by paying the insurance premiums? And where is the risk if producers further indemnify officers and directors if insurance finds certain actions beyond their coverage? Has this allowed vision, strategy, and direction to fall from their priorities? Has it enabled a collegiate, collaborative dynamic where the operating strategy is best described as "muddle through?"

How do we see comprehensive market failures such as shale gas volumes eroding the price structure to such a degree? How do we see the market expansion opportunity from LNG developments slip through the producers fingertips with nothing but an oops? Where the basis of business knowledge and understanding have been reduced to such elementary levels as to be unrecognizable. Or shopping adventures in unrelated industries. They’ve never been held to account and it shows.

There are alternatives for officers and directors to choose from. In recent years, use of bankruptcy has evolved as a method to eliminate disheartened shareholders and associated difficulties. Directors may be temporarily gone, but officers often remain through the process, those that get along becoming the incumbents in the recapitalized organization. Officers can even declare "bankruptcy bonuses" just before the big announcement. When officers and directors of North American corporations follow this pattern accountability is lost, and unaccountability is prioritized. 

Accountability has been lost due to the deliberate desire of officers and directors to avoid it.

Without Accountability

I've painted a grim picture of the North American oil and gas industry. We're heading in a direction that is neither positive nor beneficial to anyone. I believe officers and directors will soon bail to find prosperity in other industries, leaving the industry in shambles for others to clean up. They will exit in a stampede, ensuring no one remembers their names, providing them with the escape they desire. Oil and gas producers are definitely heading in one direction and only one direction. Active involvement and action are needed by almost everyone in the greater oil and gas industry to right this ship and get it back on its journey. Leadership may be the first tragedy to occur from a chronic, systemic, and purposeful lack of accountability.

Regaining accountability within the industry has to be a primary target of any steps forward. This can only begin with a fundamental reorganization and rebuilding of the industry based on a new vision of how, what, and why we’ll do so. Without a shared understanding, we’ll be floundering in the dark and spend endless hours recreating what has already failed. In today’s society, organizations are defined and supported by software, most specifically by the ERP software they use. Without this organizational rebuild, we will regress to what exists already. Accepting the vision of the Preliminary Specification is a choice that needs to be made to proceed. Any new ERP system will have to come up with an original idea, spend a decade researching how, what, and why it would work within the producer and industry, and importantly, avoid the Intellectual Property of People, Ideas & Objects. Officers and directors have “muddled through” long enough, leaving the decision to the only qualified choice: the Preliminary Specification. Time is wasting, and it is the only resource the industry has in limited supply.

The depth of distrust, sense of betrayal, and feeling of being played for fools by producer officers and directors will not be resolved by them. Those individuals will be dealt with separately. Participation in the rebuilding process will be voluntary, but nothing will be done on a good faith basis. It's time the oil and gas industry had some skin in the game and financed the rehabilitation and rebuild from the primary revenues that only the producer officers and directors have benefited from. This needs to be done philanthropically and out of the goodwill of what is left of the producers. Maybe if the producer firms have some skin in the game, they’ll learn there is more to what makes an industry successful.

Nothing else in the industry will be done without profits. The cupboards are bare. The volume of capital expenditures necessary for the rehabilitation, refurbishment, reclamation, and expansion of North America's oil and gas industry is far in excess of what it has faced in the past. For the next 25 years, the record of fiscal performance of the officers and directors will need to be proven otherwise. The need to generate the “real” value that will fuel all of this has to be earned by oil and gas producers. There is no one else that will volunteer to do it. Volunteering will have your capital incinerated. Competition from the capital markets offers NVIDIA, Tesla, Apple, and many other opportunities that investors will find far more appealing. Oil and gas and the service industry now have financial performance records, and investors know who’s at fault. The producer's efforts in the next 25 years will need to prove that record wrong and compete in the capital market.

Capital Destruction 101

One major issue that People, Ideas & Objects identified and resolved in developing the Preliminary Specification is the inherent conflict between the corporate producer and the partnership represented in the Joint Operating Committee. The Joint Operating Committee holds operational decision-making authority, exercised through the Operating Procedure, with a threshold for decisions. If a decision is made to drill a well, the designated operator undertakes the drilling on behalf of the Joint Operating Committee. The conflict arises when the Joint Operating Committees operational control is transferred to the producer firm, where the knowledge and capabilities reside. Accountability is lost in this process.

Let's assume the well fails. Who is accountable for that failure? How are the successful attributes defined? This is where the problem of “muddle through” comes into play. Besides being the operational decision-making framework, the Joint Operating Committee is the legal, financial, cultural, communication, strategic, and innovation framework of the partnership represented in all oil and gas operations. The Preliminary Specification addresses this by moving the Compliance & Governance module and therefore the accountability frameworks into alignment with the Joint Operating Committees seven frameworks. It also moves the Knowledge & Learning module to the Joint Operating Committee, ensuring that combined knowledge, accountability, and operational decision-making authority are together in one property where the domain is known to all, and performance is the focus and objective.

In the coming weeks, an amendment will be written to all the modules in the Preliminary Specification. Every decision and requirement will be noted by the individual who created it, along with who is responsible and accountable for it, including their name and contact information. This way, when the source of an issue is identified, and the success or failure can be pinpointed, the individual accountable can be apprised. This is not for retribution but for learning and development, benefiting both the individual and everyone involved in day-to-day operations.

People, Ideas & Objects believe there has been no accountability at the field operations level due to this conflict. As a result, “muddle through” has become the culture, persisting as individuals progress to officer and director positions within the organization. If they never learned the value and process of accountability in their career, they certainly won't begin learning it as officers and directors.

"That Jarring Gong," Part X

 Torts

Let’s begin by refreshing our memory as to what’s involved in Tort law.

A tort is an act or omission that causes legally cognizable harm to persons or property. Tort law, in turn, is the body of rules concerned with remedying harms caused by a person's wrongful or injurious actions.

If someone were to sue an officer or director of a producer firm for willful misconduct, a tort, then to succeed would demand the following:

To win a tort case, three elements must be established:

• 1. The defendant had a legal duty to act in a certain way.
• 2. The defendant breached this duty by failing to act appropriately.
• 3. The plaintiff suffered injury or loss as a direct result of the defendant's breach.

It is People, Ideas & Objects' contention that producer officers and directors did breach their legal duty of care to act in their shareholders' interests. Since 2015, shareholders have been unable to influence officers and directors to act appropriately, leading to material losses during the structural breakdown of natural gas prices. As of December 2023, this has resulted in $4.1 trillion in revenue and/or gross profit losses that would have otherwise been realized. Alternatives were proposed in the marketplace to mitigate these specific issues; however, producers chose not to address them.

People, Ideas & Objects also assert that producer officers and directors may have misrepresented the facts of their situation by promoting their financial statements as representative of their performance. Their arguments over the past decades about “building balance sheets” and “putting cash in the ground” are not performance-related and are antithetical to the going concern concept. Corporate strategies of “muddle through” have been broadly adopted, eliminating the innovative and competitive structure of the industry. Sitting on one's hands and doing nothing is considered the natural complement to spending being profitable. People, Ideas & Objects began discussing these and other issues as far back as our March 19, 2006 post entitled “Petro Canada Earnings.” That discussion stands up today and represents their focus and drive then and now.

People, Ideas & Objects Argument

Throughout this period, from that early 2006 post to today, one theme has driven our work: chronic and systemic overproduction of oil and gas in North America on an unparalleled scale. Overstated assets lead to an equal amount of overstated profitability. Let's call that the “motive.” Overstated profitability leads to investors rushing in to capture those earnings. Let’s call that the “means.” This overinvestment in productive capacity leads to overproduction and further erosion of the economic “price maker” characteristics of oil and gas.

The “opportunity” is detailed coherently in the March 19, 2006 blog post entitled “Petro Canada Earnings.” Their officers and directors made out handsomely in the 2005 year, even though their profits were down a billion dollars from the prior year. Such is the way it goes. This is only to document the annual lottery and benefit that has come to be expected by officers and directors. At the same time, we have consistently raised the issue of overhead and noted that 85% of it is capitalized to property, plant, and equipment. Spending is profitable, first of all. Second, capitalization hides the details. We have noted the nature of these overhead expenses and how they are beyond reasonable when it comes to the officers' and directors' burden.

The consequences of their overhead policies and the difficulties they cause include their working capital. Cash is consumed in the capitalization process, leaving producers seeking new money to cover overhead each month. Yet no action was ever taken, as covering their “overhead” costs appears far more important than the cash resources to the firm. This “cash” issue is detailed as early as our “Is It Naivety” March 28, 2019 blog post. Yet “muddle through” was their approach in dealing with working capital drainage?

“We’ll Be Profitable at $XYZ”

Unconcerned with much of anything that has to do with reality, producer officers and directors soon realized that what they said through the producers' non-officers or directors' staff to the press could be excused. This became the means to present the idea that producers were working hard, innovating, and ensuring they maintained their hard-earned profitability during times of rapidly declining commodity prices.

From August 2013 to February 2016, crude oil prices declined from $102.15 to $23.58. This was not of concern. Producers remained profitable throughout the period, declaring profitability at every price point: $80, $60, $40, down to $23.58. At no point was there any accountability or justification made to support these claims.

The difficulty is twofold. First, the majority of any real savings were due to the abuse of the service industry. Cutting industry activity levels in half caused pricing softness in the drilling and fracing firms. Then, deep discounts averaging approximately 50% ensured the service industry's revenues dropped to 25% of what they were a few quarters ago. These revised pricing estimates made it onto the purchase orders and into the capital budgets of the producers. Future costs were reflected here and factored into the "what if" scenarios conducted on the reserves reports. Their objective was to minimize capital expenditures and materially increase bookable reserves through proposed spending.

What we have is commonly referred to in the industry as "recycle costs." These costs have nothing to do with the historical accounting costs that will actually show up when reported. When well over 95% of the capital asset inventory is operational and carries historical costs, why would producers quote the potential, possible, or even imaginary level of profitability from "recycle costs?" This is a difficult question to answer as to where it should be classified: Is it part of means, motive, or opportunity?

What’s My Point?

This is the culture of the North American oil and gas industry, a culture shaped by the SEC’s 1970s Full Cost method of accounting. This method allows companies to lump all expenditures into property, plant, and equipment, shifting the purpose of accounting from measuring performance to reporting value. Assets could be reported up to the limit of the petroleum reserves' value, incentivizing spending to reach that limit. The only concern was the “ceiling test” write-down, which required an impairment to be recorded when asset values exceeded reserve values, bringing assets back in line with reserves. Thus, the ceiling test marked the point where a producer was swapping investment dollars for even smaller amounts of output.

Most of the time, this made the industry appear profitable the more it spent, leading to "muddle through" as the only competitive differentiator between oil and gas producers. Today, the industry's commercial performance sits at about 25% of what is necessary to sustain itself. For decades, it has hoodwinked investors with specious financial statements that have no basis in reality, performance, or validity. These statements, however, do show the industry is “well built” and has lots of “cash in the ground.”

The culture in the industry knows no different. Considering that the most competitive posture would be to have no assets valued in property, plant, and equipment (because they earned abundant profits to recognize those costs) is not part of their thinking. The officers and directors are the ones responsible, accountable, and in control of the firm's resources to ensure this did not happen. They have ignored shareholders' calls for action since 2015 and have disregarded market offerings such as People, Ideas & Objects that could remedy these issues. Therefore, they are responsible to their shareholders for the losses incurred, starting with the $4.1 trillion in revenue losses from natural gas price structural degradation.

Making Our Case!

From October 11, 2023, to May 1, 2024, People, Ideas & Objects presented our case through 44 blog posts under the “Notice” label, focusing on lost revenues and opportunities in natural gas over the past. We documented the revenue loss attributable to the deterioration of natural gas price structures since 2009, where the traditional heating value of 6 to 1 fell to as much as 50 to 1 in early 2024. Comparing the differences in value between 6 to 1 and realized gas prices, we identified $4.1 trillion in revenue losses and a lost opportunity to rehabilitate this pricing structure through LNG market expansion.

I am frequently confronted by those who believe these opportunity costs are tertiary to the industry's pursuit. I argue these are not opportunity costs; they are the responsibility of the officers and directors to maximize and realize shareholders' asset values. This is value leaking out of the bottom of the bucket, not a mere possibility. These concerns fall well within the domain of what an oil and gas producer should pursue and are necessary to make shale commercial. Distractions toward clean energy and a focus on “building balance sheets” will cause such leakage to occur.

These are not unknown unknowns. They are within the control and fiduciary duty of oil and gas producers. Addressing them requires only the most basic business understanding. The misguided culture of idle navel-gazing and pretense, driven by "muddle through," has led to these issues being neglected. Failing to address them in the market, while pursuing other unrelated, unprofitable industries where oil and gas producers hold no competitive advantage, constitutes willful misconduct based on misrepresentations to shareholders.

Officers and Directors Liability Insurance may be canceled due to this litany of purposeful degradation. Insurance firms may successfully accuse producers, officers, and directors of willful misconduct on many levels.

• Late 1970s the SEC regulates oil & gas producers to adopt Full Cost accounting. Officers and directors misinterpret this as license to overstate asset values.
• As noted, overstated assets create equal amounts of overstated profits. Attracting investors seeking the enhanced profitability, overinvestment therefore leads to overcapacity leading to overproduction, or unprofitable production.
• Oil & gas are “price makers” from an economic perspective. No readily available substitutes, small changes in supply / demand have enhanced impact on prices. 
• Oil overproduction is documented in a July 27, 1986 Calgary Herald article causing oil prices to collapse from $30 to $10.
• Deliberate SEC overstatement of assets formulating a culture of “spending is profit” and “muddle through” begins in oil & gas.
• Misrepresenting financial statements based on value, not performance.
• Corporate strategies begin to incorporate bankruptcy. Chesapeake declares a $25 million pre-bankruptcy bonus, and returns officers to manage the new organization. 
• Natural gas prices began their permanent structural degradation in January 2009.
• Preliminary Specification published in August 2012
• Publication provides proof officers and directors knew of market alternatives.
• Investors suspended further support of oil & gas producers' capital structures in 2015.
• People, Ideas & Objects published a July 4, 2019 white paper: “Profitable, North American Energy Independence -- Through the Commercialization of Shale.”
• Receives broad distribution yet producers refute the Preliminary Specification as unworkable as shutting-in production will damage formations. 
• April 2020, ten months after the publication of our white paper, oil prices hit negative $37.00. Subsequently 25% of world oil production is shut-in.
• August 2020 producers capitulate on the viability and commerciality of shale. Transition to pursue clean energy in an unauthorized corporate redirection. 
• Undertaken throughout the industry.
• Producers shale interests are disposed of. Such as Shell’s.
• Oil & gas service industry realizes they are no longer a concern to clean energy producers.
• Resumption of 25% of global oil production, producers report no damage to any formation was reported anywhere. 
• Realizing the unauthorized nature of their transition to clean energy and shale appearing better in the rear view mirror. Producers return to oil & gas.
• People, Ideas & Objects ran our “Notice” series of blog posts documenting in detail these points and calculating the $4.1 trillion revenue losses in natural gas prices. 
• Interestingly SAP sales to oil & gas producers have increased markedly since October 2023.
• SAP will sell you an oil & gas ERP system. However SAP does not have an oil & gas ERP system.
• During this period People, Ideas & Objects realized the unbelievable waste being generated in LNG exports arising from the comprehensive mismanagement of LNG.
• Producers did not understand and did not implement the appropriate means to sell natural gas beyond the Henry Hub as their point of sale. 
• All the export sales of natural gas that was shipped via LNG was priced based on Henry Hub prices. Not their ultimate point of sale in either Japan / Korea or the Netherlands.
• Paying for the refrigeration and shipping costs would have provided them with the opportunity to rehabilitate the domestic natural gas price back towards its 6 to 1 heating value factor. 
• Upon publishing our finding the industry undertook rapid action to sign agreements to do exactly that.
• However, contracts were not for existing facilities. Not for facilities under construction, or facilities that had received regulatory approval, or facilities that had achieved the point of approval for the decision to build the facility!
• The volume of these contracts was so significant that President Biden announced that no new LNG facilities would be approved during the remainder of his administration. 
• This and other callosal blunders by officers and directors shows the catastrophic breakdown and cataclysmic failure of their administrations are not happenstance, isolated, inconsequential or acceptable. This is disqualifying, and those responsible need to be dealt with urgently.
• Personally I find the capitulation of the political landscape of the oil & gas industry to the politicians, the environmentalists and others abhorrent. Playing the victim, silence and whining that so and so did such is comprehensively unacceptable. Standing up and selling the value the industry provides is the last thing on their minds. They are weak, afraid and their opponents understand this. While at the same time expressing an extreme lack of care and duty towards their shareholders.

The Consequences

Shale has to be the greatest endowment of value known to mankind. It is undoubtedly the reason that the North American economy will be unconstrained in its ambitions in the 21st century. Shale was mapped out by the U.S. Geological Survey in the late 1800s. The service industry is responsible for the development and implementation of the methods, procedures, tools, and equipment that made production a reality.

However, shale has been fundamentally destroyed by the officers and directors of North American oil and gas producers. They have capitulated on this endowment, and we should hold them accountable. The immense value represented in shale oil & gas and the amount produced cannot be accounted for anywhere. Investors are disenchanted and have stopped supporting the producers' capital structures. The service industry is but a shadow of its former self, heading at light speed into a black hole. No one wants to work in oil and gas as a career choice, and those remaining are there for the money and benefits. Yes, shale has been mismanaged.

Officers and directors do not deserve the time of day based on this record. They knew what was happening, were apprised of alternatives, refuted them with untrue statements, and abandoned the industry to pursue the most unaccountable, unprofitable, and uncommercial path known to man in the clean energy industry. People, Ideas & Objects have proven they consistently fail to grasp the most basic business concepts. Opportunities such as LNG market development have been left to others to siphon off that value. There is no previous example of failure as comprehensive and tragic as what has occurred in oil and gas today. It is incomprehensible how officers and directors have ignored their investors' lack of support since 2015. There is no more critical message that can be sent to a firm!

But that’s not all. What happened to the value built before the officers and directors arrived? Where is the additional money taken from investors? What about all the money invested in the service industry? Where is the cumulative value of all those careers spent working diligently to ensure the industry was profitable, secure, and reliable? There is nothing left for anyone now. Most of it was wasted while those responsible, accountable, and in control ensured everyone knew they were in charge. And the vision they propose today is consolidation? This is counterproductive to all other decentralized initiatives successfully implemented in the last two decades. The Internet may be the one opportunity for the industry to get back on its feet, yet they want to use the old Soviet Union's methods—a method that shows they will be more obstinate and stuck in their ways than before because they’ll have more bureaucratic control.

Conclusion

The tragedy will ultimately unfold when society's economy and political influences are dictated by those who supply North America with its oil and gas. North America is the most powerful economy and the largest consumer of energy. Few see the immense amount of oil and gas being shipped in pipelines, ships, tank cars, and trucks. They don't realize the global consumption of 100 million barrels of oil daily, nor do they see what’s in their vehicle's tank until they pay for it and feel the cost is too high for the little they received. They believe that covering their roof with solar panels or seeing windmills across the landscape will replace oil and gas, failing to grasp their insignificance.

I’m asking for a choice to be made. We either go with those whose performance is what we know, and live with them, “accepting the reality that all countries are the same and paying our fair share for once.” Chanting their woke agenda along with them. Or we change to a dynamic, innovative, accountable, and profitable oil and gas industry with People, Ideas & Objects Preliminary Specification, our user community and their service provider organizations. 

Time has been wasted and the point of what I have been writing about is as plain and obvious to anyone who cares to look. We can document the destruction of the producers' officers and directors; however, if we continue without any action from here, it will be more than this small, select group of individuals who will be responsible for the tragedy that we realize.