Proof as to Why Overhead is Such an Issue

 Remember the days when Houston rightly claimed to be the global center of the oil and gas industry. That was the industry that was passed down just a few decades ago. These bureaucrats have achieved so much in their pursuit of financial damage and destruction. Now, we’re just a bunch of old guys reminiscing about the good old days. Dare I say… Houston, we have a problem.

The secondary reason that profitability is unattainable in North American oil and gas is the level of overhead incurred by producer firms. Overheads appear reasonable on financial statements due to the significant level of overhead that’s capitalized. It is these capitalization policies that are the primary and indirect reasons there’s a constant drainage of cash from the producer firm. Demanding producers to find new sources of capital to replenish the firm's cash. This drainage of cash has been unaddressed by producer bureaucrats throughout these past decades as they’ve had the willing supply of investors wanting to invest. Investors driven by the specious profits reported when producers focus of the firm was to “build balance sheets” and “put cash in the ground.” Over reported asset values such as these create equal and commensurate over reported profits. Few if any costs outside of operating costs, royalties and the smallest amount of depletion were recognized in the current period. 

Granted I will admit that the overhead issue is symptomatic of the larger issue today and the one that I am indirectly addressing in this post. I’m trying to reconcile the two perspectives between People, Ideas & Objects and the bureaucrats. Why is it that we believe we must make radical changes to the structure of the industry to alleviate the difficulties that plague oil and gas? Capitalized overhead represents the beginning of industry’s decline and is well represented throughout that decline. Taken over the lifetime of this practice, which began in the mid 1980s, the cumulative amount of overhead, in our opinion, is how we assign the material classification. There’s more to it than that however. It became the source and method of how bureaucrats game the system. And then it became the means in which, indirectly, accountability slipped out of the conscious thought of these bureaucrats. Subsequently, the greater destruction is represented in the chronic and escalating erosion of producer value to the point where the costs of oil and gas production are not, and have not been captured and passed to the consumer and recovered in the commodity prices sold. Today efficiencies of the industry are as comprehensively degraded as the value represented in the financial statements are mythical. And what would be the bureaucrats' alternative hypothesis of their performance? The investors gave producers the investment to establish a Lamborghini dealership and now own a “pick-n-pay” junkyard. What future does that provide?

The majority of costs of the producer are being capitalized and depleted over the usable life of the reserves based on the independent reserve reports. Decades would pass before all of these costs would be recognized and substantial incremental investment would be necessary to maintain the reserves. Shale reserves have brought about the era of abundance complete with new cost dynamics. What producers were unconcerned about is that the cash that was consumed and “put in the ground” was not being returned for decades, they had investors. Their financial deception enabled them to continue to the point where the financial performance of the assets, because they were not objectively being evaluated, due to the bloated profitability and balance sheet, and lack of critical financial evaluation, dropped well below what a commercial operation would need to sustain itself. As a result of this long term erosion, eventually the majority of the producer's costs could not be recognized in the prices of the commodities they were selling to the consumer. The consumer was paying for a sliver of depletion, operating costs and royalties with little room for anything else. It is best to consider the capital costs were just being inventoried on the ever growing, built back better balance sheet. Causing cash to be permanently and comprehensively consumed on a monthly basis, where a revolving cash “float” was never established with new cash being replenished from the sale of commodities. Today a cash level that is adequate to cover all of the producer's costs is unattainable in any pricing environment due to the depth of the erosion of the producer's performance. People, Ideas & Objects believe that a capital intensive industry should have their capital intensive costs passed on to consumers in the price of the commodity. This was not done when investors were available to make up for the cash shortfall. 

Overhead’s consequences have therefore been material in nature in the industry. How much is a mystery and there’s no evidence anywhere to support my claims. As a result of these allegations some producers have begun detailing the amount of the overhead they incurred and the amount that was capitalized during the year. I’ve reviewed the numbers of those producers who’ve published them. I’m not of the opinion they fully capture the issue, and are inconsistent with my understanding of the material nature of overhead. Based on our sample of producers, field activities in 2020 dropped to 25% of 2019s. Why did 2020s capital expenditures remain at 60% of 2019’s expenditures for our sample of producers? Conversely, why did increased activity levels in 2021 not have a commensurate increase in the volume of capital expenditures? Is there some fixed cost involved, or are capital expenditures not discretionary? There are too many anomalies and I’ve reviewed too many producers in my career to know better. The deficiency of cash as a result of what I believe to be this overhead issue is systemic across the population of North American producers. Is there some issue above and beyond these consequences of capitalized overhead that’s causing the chronic leakage of cash? And why was the lack of cash so material that investors were called upon annually. And since 2015 when their funding ceased, why has that lack of funding caused producers so much distress? 

The Preliminary Specification turns all of the producer's costs variable based on production. We achieve this outcome by reorganizing the accounting and administrative resources of the producers into our user communities service providers. Each service provider will be focused on one process and will have the entire industry's producer base as their clients. Therefore if the property is profitable and therefore operational then it will be incurring these overheads, such as the recording and calculation of royalties at that specific Joint Operating Committee. Enabling the producer to be able to capture all of their overhead costs in the current period when service providers charge their process fees directly to the Joint Operating Committees. With the preparation of financial statements for each Joint Operating Committee each month, a process which is not done and cannot be done with today's ERP systems and methods of accounting. In the Preliminary Specification if the property remains profitable, these overhead costs are therefore intuitively being captured in the price of the commodity sold. And returned to the producers as cash within the next few months instead of the next few decades. If the property is unprofitable it is shut-in and moved to the producers inventory of innovative projects to return it to profitable operations. While there it will incur no costs, create no profit, but also no loss, a null operation. Producers remain profitable at any level of their production profile. Recognizing the actual costs of the products sold enables these costs to be included in the determination of the Joint Operating Committees profitable operation and therefore recovered from the sale of the commodities. In addition to the overhead, a monthly allocation of the producer's remaining asset balance for that property will be depleted consistent with the capital markets expectations of financial performance. By obscuring and attempting to exclude these costs from recognition has all but destroyed the industry. And what would be the bureaucrats' resolution to their hypothesis as to why their cash began to diminish in the late 1980s. And why was this never resolved outside of their demands on investors?

Cloud computing takes a capital intensive, technically difficult and difficult to support corporate necessity and removes these elements for its customers. Replacing it with an easier to use service available for pennies per hour. It introduces a shared and shareable model of use of these resources where the surplus capacity that customers need to build into their systems for just-in-time purposes and other redundancies are eliminated. Where cloud computing providers are able to specialize and divide the labor in ways that are unique and value generating to the customer. Value that was unavailable and unattainable in the customers previous model of operation. People, Ideas & Objects are adopting this shared and shareable criteria in developing, supporting and implementing the Preliminary Specification in the North American producer market and extending it through our development, user communities and their service provider organizations. Taking the full scope of administration and accounting out of the producer firms and reorganizing them on the basis of a shared and shareable service provider offering. Producers today are replicating, duplicating and consuming vast overheads in order to conduct these capabilities and capacities in-house. There is a just-in-time surplus capacity that is necessary for those times when more is required from the producer's administrative and accounting resources. In today’s workplace and despite even Exxon’s size the scope and scale of specialization and division of labor is limited in its application. By introducing the shared and shareable model with our user communities service provider organizations these capabilities and capacities become variable costs, timely, accurate, standardized, actual, objective and more cost effective than each producer having to maintain these same non-competitive, unshared and unshareable capabilities within each of their domains. It is these costs of these unshared domains in each and every producer that are redundant and the secondary reason for the lack of profitability in oil and gas. People, Ideas & Objects et al will provide the industry with higher levels of throughput from the same resource base due to the use of specialization and division of labor that ensures profitable energy independence is achieved on the continent. 

People, Ideas & Objects, our user community and their service providers with the Preliminary Specification are introducing a complex and comprehensive ERP system on top of the Oracle Cloud ERP offering. By far the most comprehensive ERP system ever used in oil and gas, once built. To introduce this complexity into each and every producer, which includes the start-up producers, that fall within our domain of concern of all North American producers, is something that was considered untenable. However, just as the technical infrastructure provided through cloud computing no longer needs to be purpose built within each producer firm. The combination of our user based developments and the service providers being owned and operated by our user community members. There will be a layer of service oriented accounting and administration resources that are instrumental in the development, implementation, support and transaction processing of these software and services. All of this is available on a variable cost based on usage when profitable production occurs and only if the specific process of that service provider is used. Dare I ask what alternatives are there? Isn’t this type of system the reality of what we’re dealing with in today’s disintermediated business world and particularly with the financial issues in oil and gas? And what exactly are the bureaucrats proposing? (Please note this eliminates the impossible situation where start up and junior producers have to create an excess of $3 million / year in cash flow to cover the base overhead costs of what a public producer requires. And offers those software and services on an as required, variable cost basis. This I believe is the appropriate and value-added use of the Internet.) 

Until 2015 these arguments were summarily dismissed. Investors finally realized they were the mark in the room when shale began to look like an expensive science experiment and a losing proposition. Shales tremendous reserves allowed so much more costs to be absorbed over their usable life. And when depletion takes total “capital” costs divided by proven reserves, the amount of capital costs per barrel were negligible, and therefore profitable under today's methods. And therefore none of these capital costs were being captured in the price sold to the consumer so that producers could always claim profitability in order to “build balance sheets.” The continuous erosion of cash and value has diminished the performance of the industry to the point that the dependence on outside capital sources was absolute and necessary. My estimate was this process began during the very late 1980s. With the 2015 investor withdrawal of outside capital, bureaucrats sought other areas which included abuse of the service industry, enhanced overproduction, and now what we suspect to be the active cannibalization of partner producers cash flow. It is the end of the road for the bureaucrats as even today's prices are woefully inadequate to deal with the cumulative effect of these issues and value degradation they’ve created. Last year bureaucrats even declared that shale was not viable! They drilled it and then figured that out? And just as they’ve chased every other industry trend in the style of the Keystone Kops. It was to run out shale’s back door and onto the riches in clean energy down the alley. There is never any subsequent effort to put in the hard work to make shale or any of the previous trends viable. Even with People, Ideas & Objects pointing out how to do it for them. What is their thinking here, or am I advancing them too much credit in asking?

Chevron’s fourth quarter report states it may lose 3% of its production in 2022. That it will be focused on profitable production. Why are they stating this, are they admitting they never produced profitably before and what’s changed to make them profitable now? Saying something is what oil and gas producers do. Outside of that there’s never any action or follow through. This is their culture and their reputation. There is no persistence or desire to perform. There’s no understanding of the concept and with the culture they’ve created, what changes are they able to make? Where’s the vision and what’s the plan? Outside of higher prices, how? They’ve always found that people believed them, and when it came time to act or perform no one asked them. It’s not that no one remembered. And now we see profitable production is the new trend in the industry so the Keystone Kops are sure to catch that bandit this time. If we remember, and if you can imagine they said the industry wasn’t viable just last year!

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering? We know we can, and we know how to make money in this business.

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

Gambler's Paradise

 With this title reference meant to apply to the characteristic of producers' share prices. I’ve suggested before that North American oil and gas producers might be seen as a haven for bottom feeders and my assertion today would be the same. Some bad news came across late last week that may not have been noticed in this fast paced blitz we live in. The Biden regime has some plans for the Federal Reserve that also doesn’t include a continuation of the capitalist system as we know or understand it. At least in terms of the oil and gas industry. Two allegedly un-Woke Federal Reserve Governors were accused by Senator Elizabeth Warren of insider trading. Under the legions of her woke mob the Governors resigned. In the “Build Back Better” line up are three Federal Reserve Governor candidates who are proponents of the belief they need to put wholesale pressure on banks to cease banking with carbon polluters. That carbon is a polluter is part of the science that began more than 5 days ago. The third candidate is a replacement for Fed Chairman Jerome Powell whose term is up in February 2022. The issue of course is you can’t refute 81 million ballots. This is additional bad news for a capital intensive industry that has destroyed its reputation with investors and bankers. With the needs to rebuild and refurbish the existing infrastructure of oil and gas, combined with its future capital demands. Capital will be hard to find in such an environment. Capital that is willing to earn next to nothing or even negative returns may be impossible to source. In any gamblers paradise, the saying is you can’t win if you don’t play, and the house never loses. 

It will be a hard run for producers these next few years anyway, with the decline in field capabilities and capacities. The resources having been scattered to the four winds. I can see the highly experienced driller on the rig who was convinced to come back having to work with recent high school graduates to teach them, on the job, the art and science of multilateral fracing. Victor Davis Hanson stated on one of his podcasts last weekend.

We’re regressing, progress is not linear, it's cyclical.

With producers' capital structure being potentially constrained in the development of oil and gas. The Preliminary Specification determined the industry's source of capital would need to be addressed. Our solution captures the common sense business logic that a capital intensive industry would have a large component of capital included in the cost of the product they pass on to their consumers. And we do so through our decentralized production models price maker strategy. Where each property is evaluated each month through full financial statements that include the direct overhead charges from the service providers affiliated with People, Ideas & Objects, eliminating the inadequate overhead allowances currently in use. There is also the need for a monthly accrual of depletion that will provide a competitive return on investment consistent with the properties remaining capital balance and the capital markets expectations. When, in the Preliminary Specifications price maker strategy, all production is profitable, the capital that was deployed to the property is being returned at a rate that is consistent with these capital market expectations. Why else would you be in business? If it wasn’t profitable then the property would be shut-in and moved to the producers inventory of innovative work-in-progress. Where it would be worked over and returned to profitable production as soon as possible. While shut-in none of the service providers are receiving any data from the property, are not conducting any activity on the properties behalf and therefore none of their overhead related billings will be rendered for the property. Turning all of the producers' costs variable. Causing the property to incur a null operation, no profit or loss. 

A producer who doesn’t have the wherewithal magic ingredients that make for a successful oil and gas producer would still have profitable production and a profitable operation. However not at 100% of their production profile. Let’s assume they’ve had to shut-in 50% of their production due to unprofitable operations. This company under the Preliminary Specification remains profitable and each producing property is achieving market returns. However the producers performance would be substandard when compared to other producers who are able to profitably produce at 100% of their production profile. Investors will know they’re carrying dead weight when their returns on investment are lower due to the low production profile compared to their invested capital base, and therefore their action would be necessary. Alternatively, if the producer were to attempt to hide their low production profile percentage and produce some of their properties at a loss, offsetting their profitable properties profits and inevitably incurring a loss in the producer firm, they would be telling the market their performance was even worse. The Preliminary Specification provides this necessary method of production discipline that North American oil and gas producers will ensure unprofitable production is kept off the market in order to achieve maximum corporate profitability. This is the discipline they’ve lost and the reason chronic overproduction has been able to destroy their business. 

In what atmosphere does a profitable oil and gas producer turn to clean energy for their future? They wouldn’t, and the shuffling noise we hear at times in oil and gas is that of bureaucrats feet, or as I’ve described their herd mentality being similar to a Keystone Kops routine. There have never been any profitable clean energy companies. Processing CO2 out of the atmosphere for soda pop companies doesn’t stand up for me. Why wouldn’t Coca Cola invest in these facilities? The fact is the most profitable environment in oil and gas today is the conventional oil and gas that was abandoned some time just after the last century. They’ve been producing for decades, have retired all of their capital costs in a capital intensive industry and do not need the excessive rehabilitation of shale. 

Compare and contrast the environment created with the Preliminary Specification to today’s environment and we see the difficulties that we’re in. Producers build balance sheets and sell their souls to the banks to keep the hamsters fed. Meanwhile their revenues atrophy in comparison to the capital deployed to the point where, although each and every producer remains handsomely “profitable,” they don't generate enough cash to keep the lights on. This homogenized, homologated means of oil and gas operations doesn’t allow for anyone to know who’s building value and who isn’t. It does however, clearly indicate who the best talkers are. 

One of the understandings of bureaucrats regarding capital costs has been correctly applied by them and we’ll continue with that activity. Excluding the recognition of capital costs during the short term where there’s a distressed market or financial difficulties is correct. In the Preliminary Specifications instance, properties wouldn’t be charged with any depletion for those months they were shut-in. The difficulty that bureaucrats have had with the implementation of this understanding is the assumption of theirs that oil and gas has been in financial distress for four decades and minimal capital was recognized during that time. This was the case under their administration and became the primary reason for the culture of “building balance sheets” and “putting cash in the ground” that took over any business logic. I always found it comical that they would, on the one hand, belittle the charge for depletion, stating “that’s just an accounting charge for stuff that happened in the past.” Which is true but caused a serious loss in the producer firm. While at the same time issuing more shares to investors to fund next year's capital budget. Never seeing them as the same thing and choosing to be accountable to those past shareholders. When they had new shareholders in the next room who were transfixed by the EBITDA (Earnings Before Interest, Taxes, Depletion and Amortization) numbers reported in the producers press releases. In the vernacular of the Vegas gambler / producer CEO it would go something like, “this table is hot.”

We’re heading into the third quarter reporting season and I don’t expect much change in the producers' performance. That’d be the real performance being reported. The losses on hedges are going to be tremendous and that has set up a particularly difficult year end reporting situation for producers. The issue of Non-GAAP earnings or EBITDA with hedging losses excluded have been what’s quoted throughout the business community in oil and gas. Fueling the culture of “building balance sheets” and “putting cash in the ground.” Among many more myths and fallacies. The SEC has put a stop to that in the fourth quarter of 2021. I’ve been wondering how many producers will bite the bullet and start reporting that way in the third quarter? Would that be a benefit to get out ahead of the bad news in the fourth quarter? Or is it best to get lost in the crowd at year end where no one knows, or will remember your name. In a world where integrity is a concern I would suggest the third quarter is the time to start. However, there would be no consequences to producers by getting lost in the crowd at year end, is there. 

In Wednesday's WSJ (Paywall) and Reuters there was an article that reviewed the decisions being made at Exxon’s board of directors. It was fascinating. They had made some significant investments in the past in a natural gas field offshore Vietnam and an LNG facility development in Mozambique. Both represent multi-billion dollar investments to date with much larger commitments to complete. The argument at the board level was whether to continue with them in light of the political and climate related difficulties. Vietnam’s offshore investment was in the disputed South China Sea and Mozambique has unrest and terrorist actions being undertaken at another company's LNG facility which is also under development. The overriding concern at Exxon’s board was the concern and the commitment for the environment by the new Engine No. 1 directors who were elected in last year's annual meeting. That being said, the question was, was Exxon going to continue to commit multi billion dollars of investment to dirty oil? The final comment of the article was the contrast between the board and CEO Darren Woods who obviously fell on the oil and gas side of the fence. The two questions that I had about these articles and Exxon were. Why was there so much indecision and lack of foresight being discussed at Exxon’s board? And not that discussion and conflict are bad, but who’s airing this dirty laundry in public and why?

Why waste time in back alleys playing three card monte when you can discern the meaning of financial statements from producers or read about Exxon’s board meetings and gamble on the potential performance outcome. To find ourselves in the situation we’re in and to now be presented with these antics in this example is surreal. The lack of leadership in the largest producer of the oil and gas business itself is disconcerting. That they should withhold investments in oil and gas to consider that it may best be deployed in unrelated industries is not what the shareholders signed up for. What is intended by the publication of these articles is unknown but I’ve been around long enough to know that they’ll be self serving for the officers and directors mentioned.

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering?

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined GETTR and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here. 

I Thought This Was Just an Investor Problem? Part II

 The number of companies that have made the decision to permanently work from home appears to be increasing, at least in the Calgary market. As a proponent of this method of organization I support the trend and find that the best of this change has not yet been experienced. During lockdown and fear mongering by dictators people haven’t been able to get out as they would normally. And once living as free individuals again they’ll begin to find that working from home has many attributes and advantages above those already experienced. The many key features of the method realized today include the ability to control your day’s effort from both a professional and personal standpoint. Higher productivity from the employers point of view. Reduction in the travel time to and from work, but also to meetings and a possibly temporary reduction in business travel. These are just a few of the highlights with the constraint of a 9 to 5 office being somewhat of an archaic idea that is seemingly limited in its purpose. Companies can experience reduced costs and an expanded number of working hours per day. Covering off all the time zones of the North American continent as the time in which they’re operational. Accepting that some people are morning people and I am not.

This is an opportunity that is embraced in the Preliminary Specification and was considered prior to the virus induced trend. Our solution provides a means in which producers are profitable everywhere and always. It also resolved the reason that producers consume cash in the horrific manner they have in the past four decades. Looking at the overhead costs incurred by the industry we see in the financial statements of our sample of producers have incurred 3.59% of revenue as of the second quarter. These are immaterial amounts and no one would be concerned about those. However they’re also not the amount of overhead that is incurred by the producer firms. People, Ideas & Objects suggest that on average 85% of the overhead in the industry is capitalized to property, plant and equipment. We’ve requested on many occasions that producers could educate us on what these amounts are, and what they consist of, however none of them have taken us up on our free audit offer. Of course we don’t want to belittle a cost of only 3.59%. I can only go on my personal experience in the industry which is what defines the 85%. What’s included in those accounts are what we believe to be material amounts of executive compensation above and beyond what may be known. But that is just a suspicion based on that same personal experience gained in decades of employment in the industry. Remember boom times are good times. Perks, once established… 

Overhead costs are recurring monthly expenses that are recaptured in the prices of the products and services a company sells. However, when a producer sells oil or gas, their defined purpose is to “build balance sheets” and “put cash in the ground.” This overhead treatment of capitalizing large portions of overhead ensures they’re meeting their defined purpose. However leaves them short of material amounts of cash that were incurred in paying the overhead costs of the firm each month. When investors were compensating for the entire year's capital budget, these overhead costs were included there and as a result were covered in their majority. And now they have to be sourced by “new” sources of money each month as they’re not included in the price of the commodity other than the sliver of depletion recognized each year. The disappearing cash issue is there is no cash float in the oil and gas producer where the majority (85%) of the overhead costs are replenished through the sale of oil or gas. Cash and working capital have diminished into a critical issue in the industry as a result of these “3.59%” overhead costs. This material and constant drain on cash has been rectified in the Preliminary Specification in a variety of ways. 

First we eliminate the overhead allowances that are used to charge the Joint Operating Committees for the approximate costs of the overhead incurred. The issue that People, Ideas & Objects have with these is they’re not adequate for the purposes of dealing with the costs of overhead in the industry. Secondly the monthly and annual value of all the overhead allowance charges incurred within the industry total nothing. Zero may also not be an accurate representation of the overhead costs in the industry. Swapping charges in the Joint Operating Committee are not representative of the true cost and avoid the reality of recording actual overhead to the property during the month in order to determine the Joint Operating Committees actual performance and spontaneous, summary and universal declarations of profitability. Other than during periods of negative $40 oil prices. The Preliminary Specification, through our decentralized production models price maker strategy, reallocates the administrative and accounting resources of the producers into the service providers that are owned and operated by our user community members. These are the individual firms that are handling the individual process of accounting and administration on behalf of the industry. They’ll charge a fee for their services directly to the Joint Operating Committee. Therefore each property will now be evaluated on the basis of its actual, factual costs and if it remains profitable it will remain producing. Returning the cash of all of these overhead costs back to the producers in what is considered a cash float. If it is shut-in due to its inability to produce profitably then no information will flow to the service providers, no services will be provided and no billing will be rendered to the Joint Operating Committee. Therefore the property would incur a null operation, no profit, but also no loss. Our decentralized production model changes the makeup of the industries overhead costs from the fixed cost, producer based accounting and administrative capacity and capability. To become industry based, variable cost, accounting and administrative capacity and capability. Variable based on production where production is only produced if it's profitable. This is only one aspect of the many changes we make in the Preliminary Specification. We need to tack back to the point of the post now.

The topic at hand is working from home in combination with these complications from the producer's overhead issues. The ability of the Preliminary Specification to convert the Joint Operating Committees overhead to the actual, factual costs that are incurred by the individual service providers. And do so on a variable basis depending on profitable production that includes the actual overhead costs. The reallocation of the administrative and accounting resources of the producers into the service providers can be done in combination with the permanent shift to the work from home of these resources. That assumes the service providers choose to work from home with their staff. That would be their decisions as to how they operate their business; however, accessing the talent pool that they need may require them to have access to a geographically diverse resource base in order to provide their most competitive offering. 

The competitive advantages that are being brought forward through the development of the Preliminary Specification and formation of the service providers are substantial. Turning overhead costs from fixed to variable nature is necessary but another key point may be missed in the transition. And that point is the secondary reason profitability is an issue in oil and gas. That is the desire of each bureaucracy to build their necessary infrastructure of administrative and accounting capabilities and capacities, which are substantial in oil and gas, into each of the oil and gas producers. None of these costs are shared or shareable in their current configuration, or form part of the producers distinct competitive advantages. Each of the producers are incurring 100% of these costs individually. These costs are not in any way different than the hundreds of other producers in the industry. People, Ideas & Objects et al standardization and building of an industry wide administrative and accounting capability and capacity eliminate the redundancies of each producer attempting to replicate these same costly non-competitive attributes within each firm. If overhead was 3.59% it would be a waste of time. With the diminishing cash and working capital consumed by the capitalized overhead it becomes a necessity. The extent of these two changes of making overhead costs variable, and an industry based shared and shareable capacity and capability are dramatic. We have discussed the development of industry based capabilities on many aspects of the producer firm to include our ERP systems, which include Oracle Cloud ERP. Oracle now has a 90 day release period that demands executive attention. These system changes have to be accommodated in the organization and need executive focus on how they’ll do so. Attributes such as these, when using an industry based capability as contemplated here, can disperse the workload across the industry on a shared and shareable basis. Implementing the solution within the service provider organizations. 

Additional competitive advantages of the service providers include and are not limited to the following. Quality, specialization, the division of labor, automation, innovation, leadership, integration, issue identification and resolution, creativity, research, ideas, design, planning, thinking, negotiating, collaboration, compromise, financing, reasoning, judgement. There is a strong division of labor between People, Ideas & Objects delivery of the software and the service providers as well. The Preliminary Specification captures the explicit knowledge within the software and the service providers use their tacit knowledge in deployment of their service in combination with our software. When CFO’s in oil and gas have had difficulty over the course of the past four decades in determining where their cash has been going. Hence the demand for repeated stock issuances. You can only imagine the difficulties that I’ve had in trying to market this kind of logic. Discussing fixed vs variable, shared and shareable, cash float by recovering overhead costs, corporate vs the Joint Operating Committee did nothing to help them “build balance sheets” or “put cash in the ground.” Or maybe, it was the director's choice not only to ignore the opportunities to adopt our initiatives, but to also mismanage their cash these past decades? Keeping their ERP systems providers on the starvation diets makes for ready excuses. After all, what is it they’ve been telling us?

The point of this series is to show why this is not just an investor problem. That it has now manifested itself into the financial destruction of the producers. Which has taken the service industry and comprehensively destroyed it. Where the capacity and capabilities of both oil & gas and the service industries are unable to meet the needs of consumers. To hire back the people with the promise of healthy compensation is met with the reasonable question, for how long? Investors in the service industry are far more jaded than the oil and gas investor. Having watched their equipment being cut up into scrap metal for cash. Natural gas is currently selling for $40 in Europe (as of Tuesday October 5, 2021), homestead of windmills where the wind never blows. Which is not all that high considering Russia has now increased its price guidance to $295 to $330 (Approximately $8.80 to $7.73 /mcf)for the winter months. It was also 9 degrees in Helsinki and 21 degrees celsius in Rome on that day. This is the road that these producers directors chose to take their firms when they decided that all of their previous decisions, made in Keystone Kops fashion, didn’t reveal the riches they promised. I can categorize the discussions I’ve had with directors over the course of the past twenty years into two different types. Paraphrasing in both instances of course. The first would be “what’s that.” Meaning what are ERP systems. The second would be “I’m not talking to the management about this, they’re doing such a great job that this would not be worth their time discussing.” As a consumer of oil and gas, and if you’ve been reading this blog for any period of time, this is the unfortunate but absolute 100% and easily determined outcome of such bureaucratic… fix your own adjective here. Officers and directors of oil and gas producers are wholly responsible for this. People, Ideas & Objects have proven the cause of this began as far back as that Calgary Herald article from July 26, 1986 “OPEC Minister Can See Economic Destruction” which eerily sounded like the difficulties over the past thirty five years and predicted today’s outcome. People, Ideas & Objects solution to this was published in the form of the Preliminary Specification in December 2013. How many more second chances should they get?

No one outside of these officers and directors received any of the financial benefits from any of the prior periods activities. Nothing has or ever will change as we’ve documented that the shareholders representatives, or directors as they call themselves, will never consider alternatives. If you think they didn’t have enough time to consider their options then please scroll down to the time I began writing about these issues. What makes anyone believe now that prices are headed to a period of unconstrained panic driven premiums will we now see any of the proceeds from these producer bureaucrats. The last thing that we will ever see happen is the investors move back into the oil and gas and service industries while these officers and directors occupy their current positions. They left in 2015 and bureaucrats' proven and absolute behavior will stand as it has for the past number of decades. To have a dynamic, innovative, accountable and profitable oil and gas industry requires these people to be purged with extreme prejudice, the investors will then return with new officers and directors in new producers to begin the development of the Preliminary Specification et al. Besides, current management can move on to their chosen direction in clean energy. Let them feel the burn as a startup clean energy company without the revenues from oil and gas making them complacent and idly biding their time. Motivate them to do the hard work while the heat is on to get it done before they run out of their personal money. Only through that risk will clean energy issues be resolved. 

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering?

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined GETTR and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here. 

To: The Board of Directors, Our RFP Response (S&DOL), Part III

 It can go by any number of different descriptions. “Cut and run,” “bail” or “cut your losses.” The one consistency in all of these is the fact they define failure. Shale oil and gas has now been deemed a failure by our good friends the bureaucrats. They’re getting out, selling properties and writing down those assets that held such promise in all of those investment offerings. These Keystone Cops are on to the real thing now with clean energy and are making the transition with the revenues established by prior investors in an unauthorized fashion. Remember it’s cut and run. Our white paper published on July 4, 2019 entitled “Profitable, North American Energy Independence -- Through the Commercialization of Shale” suggests a means and method in which the industry could turn shale profitable. Granted it’s self serving as it involved developing the Preliminary Specification and demanded the bureaucrats conduct some serious effort, or work! After two years of this paper's publication; is it now acceptable to just walk away from the catastrophe they've created and venture off into territory that has proven never to be profitable? Or do they have a plan to make clean energy profitable? If so they should have submitted that in the business plan they needed to seek authorization for such a radical change in the underlying business. Why is it acceptable to let the bureaucrats saunter off now and forget about the failure they’ve created? Who will hold them responsible and accountable, it should be the boards of directors. And why is this method of failure the consistent behavior of these bureaucrats over the past four decades? Or am I mistaken about this and am unaware of some amendments to the Directors and Officers Insurance contracts? This behavior is unacceptable and reflects their moral and ethical depravity. And why would they do anything about this if they’re never held to account?

With this post we begin a series within a series where we’re describing the number of organizational structures in the Preliminary Specification that support the dynamic, innovative, accountable and profitable oil and gas producers. These define the “what,” “how” and “why” of the Preliminary Specification. But most of all adopting a serious approach to the business focused on profitability everywhere and always. What would commonly be considered the behavior and culture of a successful business. 

I have to admit I’m quite excited about this marketing phase People, Ideas & Objects are in now. I no longer have to concern myself with the bureaucrats and their activities, they’ve left a legacy they need to live with and I’m sure there will be more to talk about. I’ll find no argument anywhere that they’re the ones responsible for the industry wide damage that’s been done, no one is listening to them anymore and they’re probably on their way out anyways. The untenable nature of the producer firms is reflected in the downward trajectory of these organizations. The extent of the damage is so severe they are beyond remediation and the economic principles of creative destruction and disintermediation are fully in play. The situation on the ground is therefore ripe for a solution such as the Preliminary Specification, our user community and their service provider organizations. Marketing is a much more enjoyable situation for me as I do not need to be the grumpy guy in that far off distant corner of the Internet anymore. Our appeal to the directors of the producer corporation is simple. They decide which ERP software to implement within the organization. People, Ideas & Objects know that the directors are just as concerned with continental self-sufficient deliverability of profitable oil and gas operations and providing abundant, affordable energy to the consumers. People, Ideas & Objects assert, as in every business today, it’s not enough to just own the oil and gas asset anymore. It’s also necessary to have access to the ERP software that makes the oil and gas asset profitable. Without ERP software focused on delivering profitability everywhere and always there is no way in which to organize today’s society in a profitable direction. This is proven through the quality of the ERP systems used in oil and gas today and the systemic lack of profitability throughout the industry. It is what we refer to as a “modern day software bug.”

The creative destruction being undertaken provides opportunities for everyone, except the bureaucrats, and these opportunities would definitely include the directors. The new producers may be the best opportunity we’ve seen for a long time in the industry and what these companies could use more than anything is a steady hand to help navigate this road ahead. The advantages that People, Ideas & Objects Preliminary Specification brings for all producers is significant. Whether that is Exxon or the producer firm that was started at the breakfast table this morning. This also applies to any and all other types of secondary and tertiary industry firms involved in the greater oil and gas economy, no matter their size. However, in the categories of the junior and startup oil and gas producers, the advantages we provide put their organizations in the driver's seat in terms of how they’ll prosper and grow. They’ll have distinct competitive advantages over the methods of organization provided under the bureaucrats' business model. This will begin being detailed in our next post. 

The producer organization that we define and support in the Preliminary Specification sets out to employ and deploy much higher levels of specialization and division of labor. We feel the overhead costs of the producers demand these be dealt with by making these organizations more efficient through the application of an advanced, and continually advancing, specialization and division of labor. We also turn their overhead costs from a fixed producer based capacity and capability, into a variable industry based capacity and capability, their variable behavior being based on a Joint Operating Committees ability to produce profitable production. Another reason for the high overhead costs of each producer is that all of their capacities and capabilities are replicated within each producer firm in an unshared and unshareable form. Today these accounting and administrative capabilities and capacities are purpose built within each producer organization to meet the demands of the various stakeholders and these overhead costs are the secondary cause to the lack of profitability throughout oil and gas. These costs do not form part of any of the producer's distinct competitive advantages.

What the Preliminary Specification defines and supports is a reallocation of the producers administrative and accounting resources into the service providers who are headed by one of the People, Ideas & Objects user community members. Our user community and their service providers are independent businesses that are specialized on one administrative or accounting process and conduct that process on behalf of the entire industry as their client base. Whereas if that Joint Operating Committee was producing for that month, under our decentralized production models price maker strategy, we can reasonably assume it’s profitable. Then the processes that are specifically administered by each of the service providers will be invoked and their associated billings for each process will be charged directly to their Joint Operating Committees. If it’s not profitable then the property will be shut-in and none of the service providers will therefore receive any data from our task and transfer network and therefore no processes will be conducted and subsequently no service provider billings will be rendered. The shut-in property does not incur a profit or a loss, but a null operation. In either scenario overhead costs are covered in the current period through either profitable operations or the fact the cost behavior is variable under the Preliminary Specification, and as a result not incurred. 

There are many benefits for producers to begin their operations in this manner. First they will reach their optimum profitability when losses are no longer diluting profitable properties. Whether that is at 25% or at 100% of the producer's capacity. When all costs are variable, production will be profitable at any volume of their production profile. This will preserve their oil and gas reserves for a time when they can be produced profitably. Those reserves no longer have to carry the incremental costs of the losses that would otherwise have occurred if they continued to produce unprofitably. The commodity markets will find the marginal price when the unprofitable production is removed from the marketplace. Increasing the value of all the producers' production. Keeping the commodity as reserves can be seen as an affordable means of storage where the costs of production and storage are zero. Producer bureaucrats assert this is collusion. If making independent business decisions based on detailed actual, factual, standard and objective accounting information that is determining profitability is collusion, then? Once the bureaucrats realized their collusion claims were moot they stated unequivocally that they could never shut-in any production, it would cause the formation to “fold over on itself” or other such nonsense. That is until they ran the oil price down to negative $40. The refineries had to tell them they wouldn’t take anymore, forcing production to be shut-in. Upon resumption of production the reserves reflected there was no damage whatsoever. These are just some of the many reasons for the Preliminary Specifications implementation. Oil and gas commodities are price makers, not the price takers the bureaucrats assumed they were for all these decades. One critical aspect of a price maker is that they only bring on new production when it’s profitable. The method we’ve developed is detailed further in the Preliminary Specifications Preamble. 

Overall our decentralized production models price maker strategy invokes a high level of production discipline within the North American oil and gas industry. Achieving maximum profitability can only be gained through the fact that unprofitable properties dilute corporate earnings. Therefore the need to ensure they are fulfilling their primary task of maximizing profitability becomes the predominant method of production discipline. In order to compete in the capital markets of the 21st century will be much different than what it was in previous years. With technology and other industries providing growth opportunities, for oil and gas companies to assert they are in a growth mode precludes them from that competition. They are a primary industry with commodities that are subject to the price maker principles of economics. This will also affect the producers capital allocation and capital discipline too. Capital investments will only be made with the assumption or demand that they be immediately profitable, and why would they invest in them if they can’t achieve that criteria. This invokes a far different criteria as to what is done in the industry and we can cast the foolishness of “building balance sheets” and the like to the scrap heap. 

Cash demands in the industry are currently one of the producer's pressing difficulties. This is due to all of the producer's costs outside of operations being more or less capitalized and then recognized as depletion over the course of several decades. Including the capitalization of large percentages of overhead and interest. By not recognizing overhead costs in the current period producers are able to more easily declare their specious profitability. However, the cash that was consumed in those overhead costs is not returned in the current period in the prices of the commodity charged to the consumer. These overhead costs then sit as assets on the balance sheet in property, plant and equipment, or as we call them “the unrecognized capital costs of prior production,” for the next few decades. Therefore the search for new cash each month to replenish the cash float has been the issue for the past number of decades. When investors were willing, this was not an issue with the annual top up of investors dollars. Now the reality of their specious accounting haunts them daily as they try to find this new cash to cover the basic costs of their operation. Working capital has been and will continue to be a crisis in the industry under the current business model. No matter what commodity price is attained. Basic cash management would have indicated this to the bureaucrats many decades ago. (I wonder why they never changed these methods? I’m sure they must have had their reasons!) With the Preliminary Specification recognizing overhead in the current period as part of the operation, capturing that in the price charged to the consumer, return of the cash to the producer will occur within that production month. That however assumes profitable operations are conducted and all costs are accounted for appropriately. I’m on record, and allege that hasn’t happened. Calling the producers accounting specious and deliberately deceptive. I do at times wonder what costs are in that capitalized overhead that no one is aware of. Both in terms of its size and its composition. 

As a director of an otherwise terminal organization this might appeal as a more exciting type of work. With a directors experience, skills, knowledge and ideas, or what form the basis of an individual's capabilities. The directors would be valuable and rewarded throughout the industry. Don’t count yourselves out. The only solution as it stands today, from a creative destruction and disintermediation point of view, is People, Ideas & Objects, our user community and their service provider organizations implementation of the Preliminary Specification. The natural forces of disintermediation and creative destruction are being obstructed through the diversion of industry revenues away from the development of initiatives such as the Preliminary Specification. And therefore are unnecessarily directly supporting the status quo behaviors that have been proven to be disastrous.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. Users are welcome to join me here. Together we can begin to meet the future demands for energy. We’ve joined GETTR and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

The Bureaucratic Opportunity of a Lifetime

 Increased activity within oil and gas creates the appearance of opportunity in the producer firms. Where and how, but most importantly for whom will be discussed in this post. Buoyed by higher oil and natural gas prices producers feel they have the cat by the tail once again. However this time is different, and in so many ways. Betrayal by our political leaders, the media, scientists and big corporate interests has more or less been fundamentally accepted by the majority of people. Being dealt with dishonestly these past few years has not been uncommon it seems in retrospect. Who do you trust, and why would you still be trusting them? Is the question that’s being asked again and again. It is in this way the oil and gas industry has shown great leadership over the past decade. The self-serving bureaucrats have, once again in retrospect, failed in everything they’ve attempted to do. And lied about the reasons and purposes in doing what they said they were doing. 

Unfortunately today we no longer have the hollowed out carcasses of the oil and gas, secondary and tertiary industries. Even the skeletal remains of what we once knew have begun to turn to dust. There is an inherent acceptance and capitulation of these facts in the bureaucrats' calling and forceful charge towards “clean energy.” All for the moral and ethical benefit of our grandchildren's health and to ensure the planet remains in one piece for them. Who could argue with that? What clearer indication do we need that they haven’t any idea what to do, where to go and how to get there? Those hooked on the consolidation dream are only remnants of the old school talking points. Such as this article from World Oil discussing Contango Oil and Gas Chairman John Goff’s consolidation with KKR backed Independence Energy. Goff’s only point worth discussion is the size of the projected production volume with the comment “massively larger than where we are today.” Production volumes will double again in the near future and what follows on implies growing more after that. Not a hint of financial performance or the conduct of the business from a financial perspective. Just growth, as if it was competing with a startup tech firm in Silicon Valley. The following comment however somewhat asserts that there is an “overhead burden” issue in the industry? 

“When I look at the backdrop of the industry, it’s still ripe for continued consolidation,” Goff said in an interview. “We’re tracking numerous opportunities of assets and companies that are stranded that are either in the hands of non-natural owners or they have too much leverage or they have too much of an overhead burden and just can’t really survive in this era of the energy sector.”

It’s been implied throughout these consolidated producers that the reason for all of the damage is there are too many producers. And that the smaller producers are at fault for collapsing the prices by overproducing to meet their bank commitments. Ok, let's assume for a minute these derelict, culprit producers are smaller, which implies a generalization that they would also be younger. And therefore they’re the ones that are responsible for the overproduction that began, as we’ve documented in this blog on many occasions, back in July 1986? That makes sense, founded in 2010 responsible for the damage that began in 1986! That’s a sellable point on the capital markets. Here’s an alternative plan. Implement the Preliminary Specification across the industry so these smaller producers, or do bureaucrats refer to them as the unwashed, giving them the means and methods to ensure their production is produced profitably everywhere and always. I’m certain the bureaucrats considered that. If the smaller producers were accessing the Preliminary Specification they would be wildly profitable and very attractive to the investment community. They’d be transparent and accountable in terms of how they accounted for their businesses and oddly enough, performing as they planned and stated. “On second thought let's not do that.” The Hive Mind.

It’s also interesting to note that I suggested that the asset valuations focused on building balance sheets were misguided many years ago. Producers should have adopted the meme of the WallStreetBets Reddit community of “To the Moon” as the natural follow on to their “building balance sheets.” Nonetheless in the depths of despair when commodity prices tanked and financial markets were closed bureaucrats tried to raise cash through the sale of their producing assets. Only to find the market had been beaten down to the point where asset valuations were pennies on the dollar. No one would or could sell, and the issue quickly became how could they establish the prior value they had built “to the moon” on their balance sheets. First was the need to stop the increases in production. Consolidation was where the Keystone Cops were sent to next. They dusted off their share printers to acquire the highly inflated asset values of other producers at the value that they were once stated at. The follow on to that plan was to use whatever remaining share buyback authorization they could afford to quickly pump up the value of their share prices and make it appear that a recovery had taken place. The ultimate objective of these two transactions would be that this “managed industry” would be able to find those investors who were naive and stupid enough to buy the charade, again. It appears the only one so far is the Kolbert Kravis Roberts or KKR group, a firm that started the leveraged buyout phenomenon and were once good at it in the 1980s. If Dr. Fauci declared another pandemic. Would anyone listen? Producers should ask themselves similar questions such as these.

These questions may come in handy as the foundation of a good legal defence. Lawyers as we noted over the past few months have found the oil and gas industry to be a lucrative field in which to mine for their craft. Recently Southwestern Energy and EQT have had investigations launched by shareholder litigation firms over the valuation of their takeover targets. Suggesting that Southwestern and EQT may have overpaid for the assets! Who would have thought? The consolidation drive is to secure the bureaucrats' life line that has been able to keep them in place throughout these up and down cycles. The cash flow that is generated is a result of oil and gas being a capital intensive industry. Cash flow in oil and gas is nothing more than the return of previously invested capital. It should be clear to everyone that there is no incremental value earned by the bureaucrats. Therefore producers cash flow is and has always been just the return of capital, less a sizable bureaucratic tax. These were adequate, with annual top ups from willing investors, to keep the facade operating in whatever environment the business may be in. And only call the attention of the bureaucrats back during times of crisis such as negative $40 oil prices. Bureaucratic resiliency has been fueled by these cash flows. The lack of transparency throughout the industry in terms of the gross amount of overhead that is incurred and the characteristics of those costs remains unknown and unknowable, everywhere and always. If I were to ask one question of a bureaucrat during an annual meeting it would be what was the level of materiality that was determined by the public auditor during your annual audit. Now we’ll only have to take the word of these people until next year. They need to know the level of materiality in order to ensure their expense accounts pass well below that criteria. That is if expense account is what it’s still called. 

Corporate history has shown that for a variety of reasons when the company becomes untenable the rats jump ship first. Sorry, that should read “bureaucrats jump ship first.” I’m on record throughout these writings that the overproduction of oil and gas was deteriorating the financial base of the industry. The company's earnings never existed. It was all just investor and banker money being spent. Investors withdrawal would lead to a financial catastrophe that would see the producers collectively lose control of the financial, operational and political frameworks of the industry. These losses would lead to a precipitous decline in the overall capacities and capabilities of the North American producers. Historically the next step was probably the most destructive of all and that is the bureaucrats would leave their posts. This will be the point where we’ll soon find ourselves and People, Ideas & Objects Preliminary Specification will be desperately needed. Until then we’ll see the trend of CEO’s leaving, such as Chesapeakes at the end of May, three others being terminated without cause and last week's exit of Ovintivs CEO. Ask yourself, what is it that a CEO can do to fix this situation? All I think they can do is ride the inevitable collapse downward. When the ship is sinking you need to get away from it as fast and as far as you can. Or you will be sucked down by the water that is drawn in from it’s passage to the bottom and you will drown. Therefore this “managed industry” they’ve now “achieved” can be the opportue point to state unequivocally they left the ship in good hands during the good times. And there’s more, if they funded the Preliminary Specification on the way out the door, they could also state, they left it with a prosperous and profitable future.

There is a serious upside for these CEOs from their exit from these producers. If you were a bureaucrat, would you want to continue to be harassed by People, Ideas & Objects who are holding them to account and challenging their performance? Identifying their history and legacy? An alternative might be they could move into the unaccountable world of clean energy where performance has never been the objective or concern and never will be. Where after ten years of alleged clean energy related capital expenditures those bureaucrats that chose to stay will be able to state unequivocally “that they’ve failed, it's a difficult challenge yet they haven’t given up yet!” Or take this opportunity to get out as fast as you can, now.

The only solution as it stands today, from a creative destruction point of view, is People, Ideas & Objects, our user community and their service provider organizations implementation of the Preliminary Specification. The natural forces of disintermediation and creative destruction are being obstructed through the diversion of industry revenues away from the development of initiatives such as the Preliminary Specification. And therefore are unnecessarily directly supporting the status quo behaviors that have been proven to be disastrous.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. Users are welcome to join me here. Together we can begin to meet the future demands for energy. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here. 

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

 We noted in our last number of posts that in the future, unsuccessful oil and gas producers would be parking themselves in the reception area of all the major investment houses. Unable to achieve profitability through their continued support of the bureaucracy and lack of desire to be transparent or accountable by using the People, Ideas & Objects ERP system that comes about from the future development of the Preliminary Specification. While at the investment firm they’ll watch as the industry's successful and profitable producers are continually and repeatedly greeted with open arms and warmly welcomed while the producer proudly delivers another handsome dividend check. This is the alternative vision that is painted by us when we’re provided with the financial resources to proceed with building the Preliminary Specification. 

Using an innovative business model designed to ensure that the producer firms are provided with the most profitable means of oil and gas operations everywhere and always. Addressing the two critical issues that have plagued the industry for the past number of decades. Overproduction as a result of no production discipline anywhere in North America. And the pure symptom of that issue, the chronic lack of any capital discipline. Or do I have the source and symptom of the issue backwards? No one doubts the bureaucrats have feathered their nests as their one and only priority. In doing so the consequence is the size and disproportionate appearance of their “balance sheets” and the pride they show in them. The fact that they strut these things about has to be the modern equivalent of the emperor's new clothes. They are disgusting vile things that show they are heavily indebted and have never made any real or fake money. That’s right, it’s been so long now that the quality of their earnings generated through their specious accounting are being seen as inadequate and a disgrace too. 

We recently discussed the cultural trend of the bureaucrats “groupthink” that we call the “Keystone Cops.” Traveling about the continent at full tilt to the next great thing, only to find the riches really weren’t there and then immediately, in lock step, on to the next. Clean energy being the direction we’re all headed to now in an unauthorized and unaccountable manner. Clean energy has never been considered an area where investors have been provided strong accountability or where anyone has sought performance, it’s the base where the greens do their moral preening. Therefore bureaucrats anticipate a warm welcome and to be treated as the kings they believe they are by bringing legitimate, recurring revenues to the table. Iterations through each stop along the Keystone Cops route are coming faster and faster. Just yesterday it seemed that consolidations were the new nirvana that held so much promise. Strapping another equally large albatross on top of your albatross will certainly assist in overcoming any airborne issues. The destruction of Occidental through the process of acquiring Anadarko was not instructive. Occidental, one of the premium independent producers was well positioned to weather the storm and prosper however the industry developed. At the time the Keystone Cops were after the Permian and what better than Occidental to take the wealth of value they had and acquire Anadarko for an enterprise value of almost $70 billion. To make it even more real they had the stamp of legitimacy with Warren Buffett putting in tens of billions of dollars to finance it. The acquisition was made a mere 18 months ago and it's times like these that Occidental can look back, already, and say those were the good old days. But here’s a tip, don’t mention Warren Buffett’s name, I did, but I think I got away with it. 

I've been running around writing about solutions to what bureaucrats believe are invisible issues in oil and gas. Making accusations about the quality of their earnings and the value of the assets that are reported on their “big, bold, beautiful balance sheets” of producers. Their attempts to sell properties to generate the cash to make up the difference from the investors' absence haven't worked as the entire industry is having to live off the net proceeds that it generates. Which is almost nothing after the bureaucratic take. These property sales were not effective in raising any money as there was no market or cash held within the industry, however they had the effect of diminishing the perception of the value of oil and gas assets in the marketplace. If oil and gas producers began trading properties for $0.10 on the dollar they’d finally come around to reality, I thought. Therefore I believe the purpose of these consolidations was to ensure they reestablished the “asset markets” value based on evidence of the value producers had recorded in property, plant and equipment. Somebody then brought up the dusty share printer from the basement, cleaned it up and the bureaucrats began issuing share certificates to other companies as currency in the “consolidation” process. Lawyers were even thinking their days had returned. Producers then used their favorite currency, shareholder dilution, to reinstate the value of their balance sheet assets by paying full book price and more for the acquired companies. Brilliant? With the small amount of cash available to purchase shares in the first quarter being so much smaller than in 2020. The amount of shares purchased in the first quarter was $754 million in 2021 down significantly from 2020’s purchases of $1.28 billion. We’ll have to wait for the full picture to be reflected in the second quarter. This has been a long term “feature” of the bureaucrats' management. For example stock repurchases in 2019 were $3.04 billion in the second quarter for a total of $6.34 billion in the first half of that year. The point being that once reestablishing the market price of these assets of other oil and gas companies they only needed to purchase their own shares aggressively to bring that price up. This may go down as one of the hallmarks of a well “managed” business in bureaucratic mythology.

If you consider the value proposition that the oil and gas producer bureaucrats have been using. Which is also the business model they are proposing to continue with. Theirs seeks to allocate these inflated capital costs equally across each molecule of petroleum reserve that they’re able to book as reserves. Recognizing only the current production volume / the reserves volumes as the percentage of capital that is recognized in the current period. This is a reasonable and valid business model that would provide long term value for all stakeholders, in 1820. A time when incidents and accidents, events and occurrences didn’t happen over the period of time in which the thirty years those reserves remained potentially productive. Today, the industry itself is challenged with many business issues that question how and what will the future of oil and gas be even next year. Consumers are being educated today as to the real value of gasoline as a result of a pipeline cyber attack. Investors today are being treated to a wealth of options that were never considered even a decade ago. These are providing real value and a performance trajectory that is setting the standard for all investments to compete within capital markets. 

Oil and gas can’t, won’t and will never achieve the types of performance trajectory that are available in other industries today. What they can offer is substantial performance on a reliable, consistent and secure basis. Using the People, Ideas & Objects Preliminary Specification we provide for the dynamic, innovative, accountable and profitable oil and gas producers with the most profitable means of oil and gas operations, everywhere and always. Once we’ve built the system that is. Where if the property is producing its profitable, and profitable from the real sense of the term profit. The performance trajectory of each producer will still be differentiated in the marketplace as the key capability in the market is their land & asset base, their earth science & engineering capabilities and capacities the producer is able to employ and deploy. Profitability in the real sense is not a fixed characteristic; it is a variable that is defined as anything above the threshold of costs. This is People, Ideas & Objects, our user community and their service provider organizations definition of the value proposition that we provide oil and gas. Contrast the current value proposition of the 1820’s model; which reflects a calm and serene environment, to the management effectiveness reflected in the Keystone Cops routine we’re presented with. 

Lastly we should all welcome Chesapeake back into our sample of producer firms. Reviewing their first quarter financial statements are quite remarkable. If all of our good friends the bureaucrats were considering bankruptcy you’d be crazy not to pursue it as aggressively as you could. And don’t forget to declare those $29 million pre-bankruptcy bonuses for the bureaucrats. With an increase in working capital of $1.7 billion to negative $253 million, $1.4 billion of this being a reduction in short term liabilities. Reduction in long term debt of $7.3 billion and a reclassification of retained losses of $23.9 billion to retained earnings of $295 million. All thanks to the service industry, investors and bankers being cast adrift in the middle of the Pacific ocean to experience the real consequences of the bureaucrats actions and the bankruptcy courts. The one consequence that I could see is they dropped 15,575 boe / day and now only produce 431,000 boe / day. Such is the cost. The CEO did vaporize in the first part of May. Was he pushed or did he leave? Now would be a good time to exit but there is one question remaining. Chesapeake the corporation declared bankruptcy and absolved itself of its obligations. The officers and directors did not do so, and as a result remain accountable and could be sued for their actions in causing the well quantified damage to the service industry, investors and bankers prior to and creating the bankruptcy. If only the service industry, shareholders and bankers could source some evidence such as the July 26, 1986 Calgary Herald Page 33 on newspapers.com documenting the beginning of the OPEC war on North American overproduction and the beginning of their financial demise. Or the Preliminary Specification which resolves this specific issue that was published in its final form in December 2013 to the bureaucrats. Then they might have a case against Chesapeake or any other producer in North America.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. Users are welcome to join me here. Together we can begin to meet the future demands for energy. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here. 

I Swear, The Cops Were Here Two Minutes Ago

 Clean energy transitions are all the rage in oil and gas. Producer bureaucrats have been committing to the transition in hoards this past year in an attempt to outdo one another, please note it’s never on the basis of any performance criteria. It’s just the place to be, and if you’re not there get your press release drafted quickly or hire a public relations firm before your Annual General Meeting. “Sophisticated” producers will have those greenpeace demonstrations and “smart” investors making their green new deal talking points well known during the Annual General Meeting question and answer period. Rallying support for the cause and the diversion of investment that must be considered a necessity when the “issue” is so prevalent in consumers minds. Don’t fall for it. Outside of the producer firms talking points and Biden’s latest trillion dollar spending bill there doesn’t seem to be too much investment happening in the clean energy “industry.” Maybe it's all make believe? If Warren Buffet’s Berkshire Hathaway does not receive shareholder approval to file annual environmental reports. Where the voting was 75% against, I’m certain that oil and gas producers unauthorized diversion of their revenues into clean energy will be fine, don't you? What I do know is that the oil and gas industry has had a characteristic behaviour, a culture, that I’ve labeled the Keystone Cops that moves the industry wholesale from one favored investment into another in lockstep. Clean energy is the newest target, previous targets, from a Canadian perspective included heavy oil, SAGD, and any other number of activities that demanded the producer to be fully committed if they were to have any hope of ever competing for and in fact raising capital from the markets. 

What we do know about the comedy routine of the Keystone Cops was as soon as they entered the storefront of where the burglars were reported, seconds later they would be exiting out the back of the establishment and running down the alley to the next alarm, all within a matter of seconds. And that is what we see today with our producer bureaucrats. Shale was it as we know. Except it didn’t perform and no one is being fooled anymore. Now those who established the shale frontier and were the first officers into the building in an attempt to catch the shale burglar are the first out the back door, and on to the next five alarm calls. And I’m speaking of course of Chesapeake who are actively getting out of oil shale now that the performance of the firm, post bankruptcy, is not what investors were looking for. We see the placement of their oil shale assets onto the market a day after the CEO suddenly announces his (forced?) retirement. Two days notice for a CEO is the expectation these days. So if you were involved in a shale producer in some form and are now feeling lonely and abused you too may want to keep up and get an understanding of where to go in this fast paced world. “Responsible emissions” are what Chesapeake’s looking towards. Something I’m sure that’s performance based. This is what accounts for responsible and accountable performance by bureaucrats. There’s no more value in oil and gas for the Keystone Cops to chase so they’re moving on to other industries. Clean energy is the one that satisfies for today, there has never been the expectation of any “earnings” so they’ll fit in this time. Tomorrow it may be electric vehicles, satellite Internet or the space race itself. Haven’t you heard, Elon Musk is famous! I just don’t know why no one believes anything the bureaucrats say anymore. 

This is the nature of the past four decades in oil and gas. If it works out great, if not where’s the next alarm ringing. Never has it been thought to stop and try to make what it is they’re doing profitable or perform from a business point of view. Such as People, Ideas & Objects describe in our White Paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” Producers current accounting is not even structured, configured and is not sophisticated enough to determine which property is profitable and which ones are not. This is probably due to the fact that the bureaucrats all know the properties are not making anyone any money, why then would they want to prove it to themselves. It’s times like these, what could be described as the anticipated beginning of the much awaited boom to compliment the boom / bust culture that we see things are truly different. Usually it was all about positioning to “make hay while the sun shines.” Maybe it’s the results of the covid restrictions but it looks more to me like an abandonment of the industry is underway. The movement to clean energy and CEO’s dropping their resignations is the only clear sign of any activity. Oh, and profits too, the reporting of vast profitability.

The Wall Street Journal is reporting that up to 90 new airlines are being launched around the world in 2021. I’ve never understood the airline industry. It violates a basic principle of mine that companies fall within one of two categories. Capital intensive, or labor intensive, airlines being both types of business which seems to me to be too difficult to break out of the unique demands of both. Add to that the devastation that’s occurred during the pandemic to the airline industry and you have an industry that’s in significant difficulty. Not as much as oil and gas in my opinion but significant. Yet here we see abundant entrepreneurship and venture capital being put into an industry that is structured for radical change. Oil and gas, a couple of shrugs, two “oh woe is me” and on to clean energy. Sprinkle in a bankruptcy or two and have the service industry take the real consequences of the abuse and fraud perpetrated upon them by the bureaucrats these past decades. You can still see signs of investors on the horizon, that however is just the dust they’re kicking up as they gain real speed getting away from this industry. 

Of the producer firms in our sample, People, Ideas & Objects have been harping about working capital as an issue that has been growing more difficult since the investors began leaving five years ago. We noted that banks somewhat caught on to the charade of the bureaucrats last year and were commenting publicly that they were surprised and disappointed to see the actions of management in the Chesapeake bankruptcy. The granting and distribution of a substantial pre-bankruptcy management bonus. Where the announcement of that bonus was just hours before the actual bankruptcy. It would seem that the first quarter producers are still struggling with their ever increasing working capital deficiencies. The first quarter of 2021 is no different as the producers' banks seem to be draining producer bank accounts nightly in some cases. And demanding the repayment of their loans on an accelerated basis in order to retire the outstanding debt. There’s lots to look forward to in business after the virus, just not in oil and gas.

In a case of “fool me twice,” for what I believe to be the fifteenth time. It would appear that everyone has caught on and are acting as expected when they’ve been so fundamentally betrayed. Possibly Chesapeake’s CEO feels he’d better get out now and people will forget his name when all the other producers CEO’s soon follow out their doors too. I’ve been writing about the solutions to these issues for 30 years now as I know it was early in the month of May 1991 that I began this trek. I’ve asked a lot of questions as well as developed the Preliminary Specification. It’s interesting to me, and it might be interesting to you my readers, that at no time in the past year(s) were any answers to my questions provided. It’s as if they’re ghosts with the only sign of their existence being the fact they’re still drawing paychecks and the occasional resignation letter. 

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. Users are welcome to join me here. Together we can begin to meet the future demands for energy. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.