If Not Us, Who? If Not Now, When?

 This title is a Quote from John F. Kennedy

What right did the bureaucrats have to destroy the value of the greater oil and gas economy when they were the ones authorized and responsible to safeguard it? Starting with the oil and gas investors and working their way throughout to those in the tertiary industries that support the people in the oil & gas and service industries. No one but the bureaucrats have remained financially unscathed by the damage that’s been done. On the contrary, these bureaucrats have benefited financially throughout this period. Why has this happened, and was it done on purpose are just two of the many questions that can be legitimately asked? Particularly when the solution in the form of the Preliminary Specification has been available to them since December 2013, the overproduction issue prevalent in global markets since July 1986 and absolutely nothing has been done to even acknowledge the issue or People, Ideas & Objects solution other than blaming, excuses and the creation of viable scapegoats. There’s no one who begrudges them their fair share of any executive compensation they’ve earned, if they’ve earned it. Profitability from the real sense of the term was never a concern to them. If producers were to maintain real profitability the inherent, necessary and associated revenues of a primary industry would be provided to sustain the greater oil and gas economy. We can now see and agree that this did not happen. Real profitability was never relevant or a priority in oil and gas, it was cash flow. It is now after decades of this thinking that we find this focus has led to its inevitable conclusion. Cash flow is nothing more than the previously invested capital of a capital intensive industry being returned. There never was any incremental value being built, only the prior investors' cash being returned, and then freely diverted to what the spending machines' most recent selling point happened to be. Today it’s the move to clean energy. And just like the Keystone Cops our bureaucrats are consumed by their new passion to catch that bright shiny object.

People, Ideas & Objects have tried to hold them to account, they’ve failed to respond to their investors leaving the industry, they’ve failed to respond to the commodity markets signals not to overproduce, they never accepted any criticism and never sought to resolve their issues or conduct any change to their methods. Proving time and again they are culpable and guilty. What’s worse is that they’re in no way indicating their intent to do anything other than what has put them in the lofty financial position they’re in, and the difficulties everyone else is in. These facts do not absolve us from action today. We must recognize and enforce our obligations to fix it. We have no right to sit back and point fingers, let them take the blame and do nothing about it. If it is as I suspect that people believe covid to be the culprit for the industry difficulties, then we’ll learn soon enough the truth of that possibility. It is easy to forget the trajectory of the industry was steeply downward and although covid makes for viable scapegoats of continued bureaucratic inaction, that is all that it has achieved. I see the trajectory that we were on last year has only steepened and accelerated further during the past year. Producers' debts have become difficult to understand how they’ll improve and not become critical soon. Oil prices are high as the desire to avoid the comprehensive loss of control exhibited by North American producers in natural gas pricing has been OPEC+ governing principle during the pandemic, in my opinion. The resumption of their war on North American producers will restart soon and North American producers will have substantially less in which to deal with the situation. This may be considered a dire prediction that will never be validated. I would encourage anyone to review the history of the North American producers pricing and actions over the past forty years. It’s in fact just the same old, same old. 

Bureaucrats have well established that responsibility is not their forte’. Why are we expecting different behavior and conduct at this time? Change of the nature and scope that is prescribed by these issues is beyond the cultural tolerances of these producers. They are failed organizations and they have failed by the choices these bureaucrats have made. Choices that were made in the bureaucrats best interest. It is remarkable to me that the understanding that oil and gas commodities are price takers is still their only acceptable point of view. Producing oil or gas into large markets where all products are magically taken away to their final destination, is what I assume is the conclusion necessary to support this thinking. Price makers demand that producers use market signals of the price of the commodity to determine if the price permits profitable production, if so produce, if not shut the production in. That is what businesses in all other industries all over the world do. For bureaucrats to justify this fairy tale belief in markets they’ve constructed elaborate Rube Goldberg machines that require staff to “determine the market” based on Artificial Intelligence of the height of the shadows of floating oil tanks captured by satellite images around the world. Using this analysis to determine what the global inventories are and what these guru’s expect to see, while their prices continue to decline due to overproduction. To me this thinking is madness that has driven the entire industry and all those that depend upon it into unnecessary corporate and personal financial difficulties. Why didn’t bureaucrats listen to their investors as they walked out the door? Losing the support of your investors is the most detrimental thing that can happen to a firm. Why don’t they listen to the commodity market price and stop producing well before it hits negative $40? When was it that their Rube Goldberg machines were indicating the oil price was headed to negative $40? There is nothing that can be done to reach these people, sit them down and be rational about. Their conduct is abhorrent. 

Why haven’t these obvious and detrimental errors been corrected? They once claimed the Preliminary Specification was not viable? A reasonable conclusion, however one that is now refuted by the fact that so much devastation has been caused by their management inactions and the fact that their business model has failed. The output of one man, the Preliminary Specification is inherently fallible? Agreed, however the first and next step in our development is for our user community to expose it to that larger community and build upon it. To fill out the skeleton of what the Preliminary Specification currently is with the necessary detail. As the counter argument, I’d also point out that any “committee” or other “working group” set with the task of resolving the industries issues through a newly designed organizational structure and software configuration would have their compromised and incoherent specification available in about a century. It is the type of work such as the Preliminary Specification that can only be conducted by one individual. It requires the lonely “walk through the woods” to find the answers to the problems. Taking the necessary time to explore each and every one of those frustrating bunny trails. Research of that nature which took me over a decade to complete. A decade of seven days a week, nine hours a day with a sense of urgency that I was late and it was needed yesterday. That is the method that these types of developments are made and the only way they’re completed.

I have argued repeatedly that the risk we run in this destructive process is that the situation gets out of control and out of hand for anyone to deal with. Then, as their history dictates, officers and directors seek greener pastures elsewhere. Last week we saw the “sudden” departure of Chesapeakes CEO. Not to speculate, but why? We also see in the few first quarter reports that have been published the sunshine and rainbows accounting has returned in full force. Their profits to me are wholly illegitimate. Will people buy it this time? Will it be assumed all is in hand once again, forget about the necessary changes and leave the situation to only manifest itself again at the end of this year. Where overproduction destroys the commodity prices, OPEC+ declares a war and the remainder of that script has been seen and understood many times before. This is madness and it certainly is not business.  

This is my frustration, this is my dilemma. This is my unsolvable problem. Bureaucrats know that no one can stop them from their methods. As long as they hold the primary revenues of the industry they’ll control what goes on in the future. Which is nothing but destruction. It has become so corrupt that the only purpose is to line the pockets of those bureaucrats. Mouthing the same words in harmony with all the other producers is their security that no one will be able to rise above them. Today that message is clean energy. The questions, I believe they should be asking themselves are the following. If they resume business as usual in the financial state the producers are in, what will OPEC+ next step be? And maybe it won’t be this month or quarter, or even this year. The industry is in a terrible state and could be finished with one minor correction to the production deliverability of the cartel’s profile at any point. That wouldn’t even need the declaration of a price war. They’ve already begun this process and are 25% the way in and North American producers are behaving like they have the world by the tail. Do we truly need to wait for that day to happen? Or do we have to wait until the banks realize their exposure is too great and the capacity of the industry to repay their loans is in question? Or any other number of scenarios that the industry is not configured to withstand the slightest headwind of any kind. We have been left with a looming disaster that bureaucrats are acting out their best performance to try and deceive us with. What are we to do when that happens? Is that the point we should wait for, before we act? 

Maybe I’m too biased and bought into an effort that I’ve invested my career into fixing? Possibly, and I would be certainly willing to accept that if things didn’t appear to be spinning further out of control. I only hope these comments about me being too invested are based on a comprehensive analysis of my research and the Preliminary Specification as developed, and not on a quick and cursory review of the last one or two blog posts. I can accept that I’m wrong but the industry, or whoever, had better not be wrong in their evaluation as to what to do about this. There is more at stake here than the success or failure of People, Ideas & Objects, and as the title suggests; If not us, who? If not now, when?

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. 

The Preliminary Specifications 13th Module, Artificial Intelligence (AI)

 With People, Ideas & Objects, our user community and their service provider organizations we have a powerful combination of proposed capacities and capabilities available for the dynamic, innovative, accountable and profitable oil and gas industry and producers. Assuming our budget is financed at some point in the future. Which I can only conclude at this time will occur as long as the associated difficulties in oil and gas persist. And therefore our funding is a certainty. When we add to this the incomprehensible list of capacities and capabilities of the products and services of Oracle Corporation. Add to these the models and markets that are built upon the use of the Joint Operating Committee in the Preliminary Specification. We will have a strong foundation in which to begin the resolution of industry issues and ensure that real profitability is earned everywhere and always throughout North America. I dare ask what the bureaucrats are offering? And will the cost of their option be any less than the trillions of dollars irretrievably lost so far?

People, Ideas & Objects have chosen our distinct competitive advantages to be our user community, Intellectual Property and research as the three areas of our domain to focus upon. These are how we earn our profits. We are a commercial operation and we will always be one as we’ve learned, as has everyone else in oil and gas, what the meaning and value of real profitability is. Without real profitability there is nothing. Within the Preliminary Specification there is the Security & Access Control module that sets out the necessary security and data access to those in the industry. Providing access to the right information at the right time to the right people with the right authority at the right location. Two other modules are the Performance Evaluation for the Joint Operating Committee and the Analytics & Statistics module for the producer firm. These modules are tools that build upon the basic data within the greater Preliminary Specification and Oracle applications in order to provide value to users. Organizing this data in an integrated matter and permitting two different perspectives of that same data. One perspective from the point of view of the Joint Operating Committee, accessible by each of the members of that committee. And the other perspective of the producer overseeing their entire proprietary accounting and administrative data. 

Recently we announced that People, Ideas & Objects would be developing as part of the Preliminary Specification, our own data model as a core part of our Intellectual Property. Our data model will be unique to our user communities needs and accommodate the data models used within the Oracle ERP Cloud products. In addition, another aspect of People, Ideas & Objects is the Technological Vision we set out on August 26, 2006 of this blog. It has four components that are in place today, and we feel they provide us with significant differentiation of our product and service offering and will provide real value to the oil and gas industry and producers, enhancing their profitability once implemented. These four technologies consist of Java, Wireless Networks, IPv6 and the application of what we describe as Asynchronous Process Management. A term that we developed that we won’t be getting into today, but will soon. We are wirelessly capable today with both WiFi and Cellular networks. Soon we’ll have the addition of space based networks such as Elon Musk's SpaceX StarLink network. As background these four technologies enable the Internet of Things (IoT) in an industry that is based on the earth sciences and the applied science of engineering. Where the chemical components of oil and gas are measured and monitored in terms of pressure and temperature. The capacity and capability to monitor and control an unlimited means of devices throughout the producers domain. Java and IPv6 enable the addressing capabilities to ensure that the device that is being sought to monitor and control, is the precise device that is being accessed. Java is a typed language which doesn’t confuse itself as to which variable is which, etc. IPv6 networks may appear as if they’ve not been implemented, but that is not the case. They are available through Oracle’s ERP Cloud offering. And the most significant IPv6 implementation to date has to be the cellular phone networks since 4G or LTE. Cellular phones such as Apple and Android devices are IPv6 based devices accessing network voice and data over an IPv6 network.

Therefore it is here we will have the total data set of the historical and proprietary data for the producer firm. The historical data of each Joint Operating Committee. Analytical tools to enhance the meaning of that data and generate the necessary ad-hoc information that the producer may find of value for their unique competitive advantages of their land and asset base, earth science and engineering capabilities. Although these will be used in ways that are unique and value generating in each of the producer firms. And within each of the members of the Joint Operating Committee. There will be a base infrastructure that’ll be prepared and provided to each of the producers on a continuous basis through the People, Ideas & Objects et al infrastructure that I’ve defined here. 

Let's talk about that data. The reason there is no production discipline in the oil and gas industry is that every producer is a spending machine focused on the “great science experiment” as I call it. Therefore it’s not a business and never will be a business with business objectives as long as the bureaucrats remain in place. Production discipline could be imposed by forming a North American cartel, (illegal) government production mandates where no one is ever satisfied with their allocation or implementing the Preliminary Specification. Only the Preliminary Specifications method of production allocation based on “real” profitability provides for fair and equitable means of production discipline. If the property continues to produce a profit then it continues to produce. Otherwise why would you continue to produce if a properties loss reduces the overall profitability of the producer firm, effectively destroying the value of the properties reserves, adding the cost of the ongoing incremental losses to the costs of the reserves and removing the marginal, or unprofitable, production from the commodities market so that they may find their marginal prices. Marginal prices not just for the unprofitable property but all properties across the North American continent. Markets provide one thing and only one thing, their price and bureaucrats refuse to listen to prices even when it's negative $40. They claim our method of production allocation is collusion which is laughable. If making independent business decisions based on detailed, actual, factual accounting that determines the state of the properties profitability is collusion, then bureaucrats belong back in the former Soviet Union. 

It is our user communities service provider organizations that provide the means to instill the production discipline across the North American oil and gas producers. Service providers are a reallocation of the existing producers administrative and accounting resources into approximately 3,000 individual companies. There the service provider will focus on one process and apply that process across the entire industry's data set. It will be at each of the service providers where the application of the individual process will be conducted on a standard, objective, actual and factual basis across the industry. This will be done as a result of each of these processes will be highly engineered during the development of the Preliminary Specification and continuously improved by the user community members in order to meet the requirements of the industry, regulators and all other stakeholders. And of course the producers and Joint Operating Committees needs. Therefore when the time comes to review the Joint Operating Committees individual, complete and comprehensive financial statements for the month, a feature of the Preliminary Specification. And they find that a property, for whatever reason, is no longer profitable they can confidently conclude the property needs to be shut-in. They’ll know that every other property in the industry has been assessed on the same objective, standard, actual and factual accounting basis and as a result each producer can accept that the accounting treatment they received on that property was no different in terms of being better or worse than any other property of theirs or any other producers. And therefore knowing that the focus of the producer is to maximize profits everywhere and always, any unprofitable properties only dilute their overall corporate profitability as well as collapse the commodity prices across their production profile and therefore will appreciate the value of this objective accounting information. They will be able to move the property to their inventory of shut-in properties where their earth science and engineering capabilities can be innovatively applied to rehabilitate the property in some manner to bring it back to profitability. All net positives for the producer and industry overall. 

In summary once again this infrastructure we’re building is to provide the North American oil and gas industry with the most profitable means of oil and gas production, everywhere and always. As discussed, on top of this data we have two modules, the Performance Evaluation, and Analytics & Statistics modules that will provide enhanced tools to analyze this framework for their competitive advantage. The Preliminary Specifications thirteenth module that we’re announcing today is to simply enhance this ERP framework with Artificial Intelligence and that is the name we will be applying to our thirteenth module. Why would producers and the industry be satisfied to continue with low grade and failing ERP systems and specious accounting practices? Each producer as a single entity has nowhere near the resources, capabilities or capacity in which they need to be able to begin developing the automation of their business processes, specialization and demands of this environment. An environment that will be a given from a technological architecture point of view. However, we do know bureaucrats are more than capable of muddling through these technical changes. Maintaining poor quality systems and specious accounting have fulfilled their purpose in oil and gas. Allowing the bureaucrats to continue with their charade will only take the industry into further jeopardy.

The structure of our user community is the means in which the producer firms enhance their ERP software. If they want or need changes to their existing systems, who do they go to in today’s environment, who has authority at the producer, who has authority at the software vendor? Good luck with that question. In the Preliminary Specification people will only need to speak to the relevant user community member(s). Only the user community is licensed to make changes and prepare derivative works of the Intellectual Property of the Preliminary Specification and any additions. Our developers are licensed to take directions only from user community members in terms of what to develop. They are blind, deaf and dumb to all others. User community members population is approximately the same as the service provider organizations they lead. They are focused on their area of expertise and are applying their specialization, division of labor, quality, automation, innovation, integration, leadership, issue identification and resolution, creativity, collaboration, ideas, design, planning, thinking, negotiating, compromising and using conflict and contradictions to get to the source of the issues as their key competitive advantages throughout their organization. User community members are the principles of the service providers whose role it is to provide their tacit knowledge as a service, in addition to the explicit knowledge that is captured in the People, Ideas & Objects Preliminary Specifications software, by the user community member, of which their service providers are using and providing to the industry.

This user community and their service provider organizations are the intellectual framework of the oil and gas industry in terms of accounting and administration. It would be my hope, my anticipation and expectation that one day this would provide the industry with the software and services that anticipated the needs, issues and opportunities that oil and gas would face. The Preliminary Specifications software would be dealing with what it is that’s concerning the industry. Taking a leadership role in the development of the administrative and accounting of the industry. Therefore leveraging this framework as I described it earlier would be a natural extension of what it could, but most importantly should be doing. Moving the Artificial Intelligence for ERP domain within the user community and service provider domain therefore is a natural and necessary fit. My thinking on this began as a result of the announcement by Mr. Thomas Siebel and his Artificial Intelligence firm C3.ai Inc. Thomas Siebel sold Siebel Systems to Oracle Corporation a number of years ago. The purpose behind C3.ai Inc is consistent with the theme that is present in the ERP marketplace. Individual companies can spend vast amounts of money and time internally on ERP systems or Artificial Intelligence with no benefit, wasted investment and unnecessary demand on critical AI and ERP resources. Mr. Siebel suggests that there is a 99% failure rate of internal corporate AI initiatives. We’ve seen this in oil and gas with their announced AI initiatives of a number of years ago being applied at the time to their chronic lack of profitability. The results of those initiatives are forthcoming, I guess. 

Centralizing the resources of the industry into Artificial Intelligence based ERP developments which will be developed and deployed through the People, Ideas & Objects et al framework that I’ve described in this post. Is an efficiency that is consistent with the theme of ERP developments. The demands of software development are no longer a capability that can be attained in-house in order to ensure the full scope of the organizations needs are covered. The same applies to AI. Therefore the Preliminary Specifications consolidation of the industries resources on one focused development in an objective, standard and compliant manner offers better functionality and capability at considerably less cost. Oracle has AI initiatives with their Oracle ERP Cloud, the base of our solution, and we will therefore be adopting those tools. I believe that the addition of the thirteenth modules AI capabilities is a natural extension of our user community and their service provider organizations and an efficient use of industry resources. Enabling producers to focus on their key competitive advantages of their land and asset base, earth science and engineering capabilities profitably. Incurring the time and energy to build the capacity and capability of ERP based AI once, and sharing the cost and this initiatives success across the industry. But there's more, the demand on the AI resources in terms of the practitioners would be too high to ensure that any producer was able to attain any level of AI competitive advantage or even competency in the industry in ERP based AI. It would also be duplicating the capability of the user community in this area. Just asking for a friend, why is there that 99% failure rate? What’s that saying; garbage in, garbage out. 

One of the aspects of the Preliminary Specification is that the administrative and accounting burden of each individual producer is substantially reduced as a result of the changes we will be instituting. These changes are a result of the burden of the producers' fixed, unshared and unshareable, administrative and accounting capabilities are reallocated to the variable and shared administrative and accounting capabilities of the industry. Variable based on production. Another key attribute that we’re using to reduce the costs of administrative and accounting, yet increase the performance and quality of our offering is by using specialization and the division of labor to be distributed across our service providers. These two elements of the Preliminary Specification will work to enhance the cost performance of the producers as we believe that overhead costs are substantial, and are one of the reasons responsible for their chronic unprofitability. Specialization increases the performance trajectory of the service providers administrative and accounting resources by increasing their capacity with the same or even fewer resources. We also apply this principle in the area of software development. More importantly is the unshared nature of the current, bureaucratic and redundant spending of the same overhead costs within each siloed producer organization in areas that are not distinct competitive advantages of the producers.

A key difference between what People, Ideas & Objects have proposed is the Artificial Intelligence module is properly constructed after the models, markets, architecture, infrastructure, functionality, organization and data is assembled. Bureaucrats have been using Artificial Intelligence to enhance their thinking for the past number of years. It has provided no results that we can see or are aware of. In fact it seems to People, Ideas & Objects that AI may have just been another viable scapegoat at the time to ensure their investors knew the bureaucrats were on the job. Except they haven’t any data that is usable. Without that data being organized and managed appropriately what purpose is AI? Oracle has recently stated that IoT may increase the volumes of data five fold by the year 2025. It may be a good time for the industry to start concerning themselves with such petty and annoying things like data and profits, but then I’m biased. Secondly each producer running around spending money on a new initiative that is the next great thing is consistent with the phenomenon we’ve seen repeatedly in the industry and have tagged with the “Keystone Cops” label. 

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. 

How Producer Bureaucrats Overstate Cash Flow, Part IV

 Bloomberg reports that “Energy has slumped to less than 2% of the S&P 500 Index, down from more than 11% a decade ago, even as the wider market rose to record levels.” Reflecting the reported earnings and cash flow of the producers has been questioned by more than just People, Ideas & Objects! Those that have been responsible for this destruction have proven many things during this past decade. They have a litany of excuses, blaming and viable scapegoats in which to draw upon. Executive compensation has never been better. “Muddle along” and “do nothing” are now proven to be viable strategies, when they're focused on the “right” personal objectives. Will it be for these reasons that investors will turn to these producer bureaucrats, who were in control of the firms during this era of destruction, to move them back to the 11% of the S&P they once knew. Well actually no, it won’t be. Why would you place your bet on a field mouse in the Kentucky Derby? 

People, Ideas & Objects noted in our White Paper “Profitable North American Energy Independence -- Through the Commercialization of Shale” that there has been a distinct trend in the industry over the past number of decades. It is also evident in the litany of excuses that are used by all producers singing in harmony from the same hymn sheets. The trend is what I have referred to as the “Keystone Kops.” This first showed itself in Canada during the late 1990’s when “SAGD” (Steam Assisted Gravity Drainage) was suddenly all the rage. Soon it moved on to heavy oil in any of its forms. If you weren't into these assets you weren't in the oil and gas business. Producers would shift their investments overnight into the “next thing” and make the announcement. This trend moved on to unconventional natural gas and then from there…  The rest is history just as pretty much most of the industry is. Today the Kops have a new calling and its consolidation. If you’re not merging with someone this month you’ll be the one left out, as in the game of musical chairs. Shotgun weddings are being arranged every day it seems. This is the future of the oil and gas industry. The great, innovative, creative and intelligent minds of the producer bureaucrats have all received the same precinct alarm telling them to merge or die. They know and understand the math, it's one decimated and financially crippled producer plus another equals the super hero they know they can be. When you’re on the verge of drowning the worst thing you can do is start holding on to someone else. You’ll find that was your final, fatal act. 

The purpose of these consolidations is to provide synergies between the two firms assets administration. Or in other words they can cut overhead further. When did overhead become an issue in oil and gas? It seems that the Preliminary Specifications ability to make all of the producers' costs variable, and particularly the overhead costs of administration and accounting, based on production, is not understood by the producer bureaucrats. Or they have no desire to learn. It will be interesting to see what the outcome of these mergers will be in terms of their accounting treatment. The focus of building balance sheets may be ending as the bloated values of those producers that are acquired may be written down to their market value at the acquisition date. No such luck on writing down the debt though. This will be further evidence of the Keystone Kops type of management. Not knowing fully the implications of their actions. I guess this is why muddling along and doing nothing was always so attractive. 

Regarding the Preliminary Specification we’ve also heard from these bureaucrats that “there is no issue, they have it under control and their plans and vision on how to remedy everything are beginning to be prepared now.” In 2025 they’re promising you’ll be impressed. I just checked, the first document I published regarding the use of the Joint Operating Committee was the Preliminary Research Report in May 2004. I started writing this blog in December 2005. After 2,906 blog posts; all to do with the use of the Joint Operating Committee and the research associated with how the producer and industry would use that innovative organizational construct in order to provide the most profitable means of oil and gas operations. Just as Qatar’s Oil Minister Mana Saeed Oteiba saw and warned of the dire consequences to the North American producers business as far back as July 26, 1986. Both OPEC and People, Ideas & Objects have tried to work with these bureaucrats to avoid this outcome. Maybe I should add the producers’ investors to our little group as I’m sure they’ve had some disagreements with the way things have been moving these past years. I think I now agree with the bureaucrats, they do have bigger issues to deal with, but those would have to be classified as personal issues. What I can assure my readers is that I was in no way part of this disaster. Once I published the Preliminary Research Report that was it for me. I was clientless and in retrospect it seemed like it was almost overnight. Which means I’ve earned no revenue from these producer bureaucrats who see nothing but threats of disintermediation and I’ve done no work for oil and gas outside of this project since May 2004. I therefore have clean hands, as they say, but probably could use a manicure.

Back in the 1980’s interest rates were designed to punish and destroy anyone who came within a 100 yards of a bank. Topping out at over 20% for most loans it was no time to be in debt. Therefore the motivation for producers to “innovate” on the basis of capitalizing more costs to property, plant and equipment. As with all innovations of such characteristic the tradition across the industry became an inherent part of its culture that continues today. It’s interesting to note that since we began questioning the validity of capitalizing interest, these types of adjustments to property, plant and equipment have become more transparent in the producers financial statements. The percentage of interest that is capitalized appears to also have been scaled back. Overhead however has achieved no such transparency and nothing has been scaled back there I can assure you. 

In almost all cases I was able to determine what the producer incurred in terms of interest from the financial statements. Many only show the net interest costs after the capitalization and netting of any earned interest income. I was only interested in the gross interest paid. Today with interest rates falling into the negligible category this “feature” of capitalizing interest has become less of an issue. Possibly the reason for the transparency and the scaling back of the amount of capitalization. Nonetheless the amount of interest recorded by our sample of producers in 2019 was $7.8 billion. If we add accounts payable, deferred liabilities and bank debt of $338.3 billion we see the producers incurred a total interest cost of 2.31%. Basing these interest costs just on the bank debt of $152.4 billion the interest rate is 5.13%. Which is inline with the expectations of the investment community for a producer to be paying in terms of an interest rate. However, I know that interest is not just charged on the bank debt. The producers are successful in general not paying any interest on the accounts payable debts owed to their suppliers. There are times in which they are unable to avoid the paying of interest on debts other than their bank debts. These costs are fought with a fierceness that is rarely seen in bureaucrats. Increased charges for interest will set one's career off in another trajectory. They are generally avoided. 

Capitalization of interest follows the same route as the overhead costs we’ve documented earlier in this series. Initially overstating assets and earnings are well understood and the follow on consequences of these over reported earnings is they become excessively attractive to investors which eventually leads to chronic overproduction and unprofitability. The interest cost deferrals in this process are substantially higher than the amount of interest that would be deemed to have been included in depletion. If we take a non-GAAP measure of the total capital expenditures and divide it by the amount of depletion for that year we come up with a figure indicating the number of years it would take to deplete the remainder of the balance holding all things equal. A situation that would never occur. What we do see by calculating this amount over time is that in 2016 it was 6.18 times, 2017 is 6.74 times, 2018 is 7.71 times and 2019 is 8.01 times. A number that never quite seems to be lower than the prior year. In specific cases producers can have this factor as high as 26 times. There is a constant growth in the amount of property, plant and equipment due to the fact that rarely is depletion larger than capital expenditures, and sometimes materially so. This “leakage” or “slippage” is the differential of what is imputed for depletion for overhead and interest, vs the actual overhead, interest and what we’ll be discussing tomorrow that occurs in the fiscal year that is capitalized. It is this leakage or slippage that I suggest is material and as a result overstates cash flow in addition to the earnings and assets. 

Professional accounting firms have never heard of anything so comical in the business world before. The deficient level of sophistication in my analysis is wanting and I agree with them that it is not within their understanding of what is appropriate accounting, its analysis. We do however need to keep in mind that it is these Professional accounting firms that have been signing off on the financial statements of these producers for the past four decades. I therefore question their motives in their alleged criticism of my analysis. The point I would like to make is that 8.01 in 2019 minus 6.18 at the end of 2016 reflects 1.83 years of capital expenditures having been increased over the course of those 3 years (2017 - 2019) over depletion. Showing the leakage or slippage here is in effect for a three year increase of $183 billion in capital expenditures. Therefore our factor of 1.83/3.0 = .61 shows that $111.63 in capital expenditures qualifies as the leakage or slippage that we’re discussing. Go big or go home should be the motto of the oil and gas industry bureaucrats. 

The producers will claim they have the reserves to back up their property, plant and equipment. Those values are not prepared by the company but by independent reserves engineering firms. Using industry standard engineering principles. I am in no way suggesting that is inappropriate. What I am suggesting is that accounting is about performance and not valuation. The competitive producer would want to ensure that their sales were cost appropriately to ensure that their assets, profits and cash flow were stated on the basis that they were real and could be relied upon. Not “build balance sheets” for whatever reason. What we can clearly see now in the decimated landscape of North American oil and gas is that the investors have been paying for the capital costs and the consumers only ever paid for the operating expenses. For evidence of all this, just look at the balance sheet of any producer and note that the only thing that sticks out is that property, plant and equipment might have been transplanted from another company. They are disproportionately, in material ways, weighted to long term assets, negative working capital, heavily in debt particularly from the point of view of leverage if we adjust for the “bloated” aspect of property, plant and equipment. And shareholders equity is a comedy routine. We recommend a pro forma adjustment be made to move 65% of any producers property, plant and equipment account directly to retained earnings. That will provide readers with a better understanding of the situation of any North American oil and gas producer.

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. And don’t forget to join our network on Twitter @piobiz, 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 That We're Looking For, Part XLI

I want to make clear that I’m not rubbing the bureaucrats' noses in the mess they’ve made. Their own reporting for the rest of 2020 will be humiliating enough for them. What I am doing in these posts, and this post in particular, is identifying the source of the issue that created the oversupply and overproduction of oil and gas. And I want to clearly set out that not only did they blame everyone else for their loss in revenues, which were under their complete and total control, they identified spurious issues that were purposeful distractions from their real problems. We need to ask ourselves why was it so difficult for these bureaucrats to focus on the maximization of revenue, or ensure that all production was profitable? Yet at the same time they were taking their time and enjoying the obstructions that they could put in front of People, Ideas & Objects way. The consequences of these bureaucrats “management” are that everyone has, and is, suffering due to their inaction which they very well knew better. Why they acted against everyone's interest was to better line their pockets and reap the bounty of their absolute power and unaccountable activities. This continues today with cuts to capital spending, cuts to staff and cuts to dividends being the method which they employ to conserve cash and ensure they’ll never have to take any water with their wine. I am not being partisan at a time when we need to work to resolve these issues. I noted last Monday that we were ready to work together with industry to do that. We however are not going to work with the responsible bureaucrats and we will be holding them to account.

We’ve noted before that producers, and indeed the industry at large, have lost control of the financial, operational and political frameworks of the industry. We see today’s political framework is compromised by commentary regarding the past decades healthy and profitable shale surge. The producers' panic call for government support last week didn’t have the support of anyone. President Trump is happy that American consumers will be able to secure their energy at lower cost. Additionally, calls for tariffs on Saudi oil imports reflect the bureaucrats desire to never get down to do the hard work on identifying and resolving their business issues, And are alternatively actively pushing the continued muddling along and do nothing strategy. Seeing much of the same in the situation that they face today that they’ve seen so many times before. I’ll point out to them the significant difference that today’s situation presents with the following fact. For the past three and a half years OPEC+ has been actively removing about a billion barrels of oil from the markets. For the past three and a half years oil and gas investors have been exiting their positions in the North American producers. My suggestion would be to admit who’s fault this is and take care of business. That is not going to happen based on the bureaucrats history and initial actions since last Monday.

I understand that People, Ideas & Objects rubs bureaucrats the wrong way, that’s my job. For them to be taking this extreme of a stance in terms of their abstinence is a reflection of their absolute power and lack of skin in the game. Of the 20 producers we cover, their market cap was $129 billion last night. At the end of 2019 it was $362 billion. A loss of $233 billion just for our sample of 20 producers who are producing slightly more than 10 million boe / day. These losses would be in excess of three quarters of $1 trillion for the gross North American production base. Not bad considering they could have paid just 1.03% of last weeks industry wide loss to finance People, Ideas & Objects Preliminary Specifications software developments and mitigate the past decades downside. Again that was last week, in 2016, not a great year, these producers had a market capitalization of $523 billion, a loss of $394 billion for our sample producers and probably a $1.3 trillion loss for the North American industry. The primary reason that oil and gas companies don’t do this simple math is because People, Ideas & Objects provide for the most profitable means of oil and gas operations. And here is the kicker that makes them apoplectic. It is as we have always said not enough to own the oil and gas asset anymore, you must also have access to the software that makes the oil and gas asset profitable. And they were oh so profitable don’t you know. Even reporting profitability throughout 2019, yet the cupboards are bare and they have no resources in which to sustain even five minutes of this further downturn.

People, Ideas & Objects have had a policy of not speaking to the press. Ours is a complex point of view that can be easily misunderstood and distorted. We are seeking to have oil and gas producers become profitable. And we’re discussing oil and gas accounting systems which to me is the most exciting topic, ever. We therefore have a somewhat small audience but we have a good share of that audience. We are not of the belief that we can maintain this policy of silence for much longer. I would give it about a year. I would ask the oil and gas bureaucrat what it is they’ll tell their staff, their service industry representatives, investors, bankers and all the others who depended on them, and in turn the producers will find who they depend upon, how will they deal with the backlash when all these people outside of People, Ideas & Objects current market realize that the Preliminary Specification is exactly the remedy for this issue and has been available since December 2013? A time in which the loss of trillions in oil and gas revenue is real. A time in which the tangible losses of individuals have been tragic and unlike any time before. A time in which investors and bankers, the service industry too, have all experienced many billions of dollars of losses each year since that time. All unnecessarily so! Will bureaucrats then begin to tell the truth, the fact that their pocket lining was the priority, and they’re sorry? You are sorry aren’t you? Or will they continue to say that I haven’t worked in industry for a reason?

Now that I’ve blown off a little steam. I noted in Friday’s post that we'll be discussing a phenomenon that I found interesting throughout my time working in oil and gas. That is if we take the earnings that People, Ideas & Objects have calculated for our sample of 20 producers for 2018 and 2019. Those being a loss for those two years of $100 billion. Which reportedly generated $160.5 billion in “cash flow.” And understand the decline in working capital of almost 75% during that time. The production volumes at 12/31/2017 were 9,336,293 boe / day for our sample of producers and at 12/31/2019 was 10,106,339 boe / day. An increase of 8.25% over two years. Shale is part of this, however the phenomenon has held all the time that I’ve been in this industry. Engineers and geologists do their jobs well and the natural decline curve is the headwind that they fight against. That is their challenge and their objective is to minimize the impact of it on a year over year basis. They’re also responsible for the further development of, and exploration of new reserves. They don’t give up, they don’t stop and they never seem to fail. There are instances where the production volumes do vary from year to year. As in the years where the financial situation becomes untenable and these efforts are abandoned while the producer is marketed for sale, etc. However left to their own devices, irrespective of the noise going on around them, they succeed. I expect even in tragic times like these, producers' production volumes will continue to rise.

We recently heard from and commented on Chevron’s CEO how they would focus on their pristine assets. It is People, Ideas & Objects belief that this is not where the profitable upside of the oil and gas producer resides. This is elephant hunting with the largest armaments they can get their hands on. Through the Preliminary Specification we implement a different approach to how the industry is operated. Only profitable properties are produced everywhere and always. Any unprofitable properties are placed in an inventory of shut-in properties where the engineering and geological resources are able to apply their innovations to enhance the property and return it to profitable production. We believe this to be a greater challenge, a greater opportunity and one with far greater upside than the current elephant hunting / keystone cops routine. Enabling the producer to focus and prioritize where it is they need to spend their time and efforts as opposed to following along with the parade. Fundamentally remaking the allocation of capital towards productive value driven objectives. Making the business more dynamic, accountable, innovative and profitable.

And finally, in the Wall Street Journal last week Occidental CEO Vicki Hollub was quoted as saying.

“Due to the sharp decline in global commodity prices, we are taking actions that will strengthen our balance sheet and continue to reduce debt,” Occidental Chief Executive Vicki Hollub said. She added that the company can break even with U.S. benchmark oil prices in the low $30s a barrel, though that metric typically excludes several costs.

Our White Paper noted the ability of producers to magically reduce historical costs. When a barrel once cost $60 to produce and can now be produced for $30, historical takes on a new meaning. Today when Occidental quotes a $30 break even price it’s not as though they’ve stopped lying about their cost structures, or that they’ve stopped reinterpreting history, as above they just now indicate when and how it is they’re lying. Speaking of which Ovintiv was promoting themselves after a decline of 72% on March 9, 2020. Noting they had a “Strong Capital Structure, Significant Liquidity and Operational Flexibility. Well no they don’t. At the end of the fourth quarter of 2019 they had $10 million in cash, and negative working capital of $563 million. To put this in context, Ovintiv also has current liabilities of $2.4 billion. There’s a lot that they can’t do with that. I personally have more liquidity and flexibility than they do. Saying whatever strikes them as a positive attribute will continue as the manner in which bureaucrats operate this industry.

Therefore in summary producer bureaucrats will continue to cut the costs of those that are not involved in their personal compensation. Cutting capital, staff and dividends leaves them with adequate “cash flow” for them to survive handsomely, and they politely thank you for that. Secondly, nothing is going to be done when the coronavirus, government largess, the Strategic Petroleum Reserve, Saudi Sanctions, anti-dumping investigations or litigate the actions of Russians and Saudi’s occupy these bureaucrats minds. There’s no shortage of issues that can be raised and in turn raise the short term benefits to their “management.” The trick is not to focus on their performance, revenues or profits. And lastly, there seems to be no propensity for honesty in any of the bureaucrats. Continuing on as if nothing has happened is the modus operandi, and I would assert, it is the ingrained culture of the producer firms. We know an organization’s culture, particularly one as ingrained as the producers, can’t be changed. Therefore it’s time that we exercise the change, one in which bureaucrats are no longer involved.

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. 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. And don’t forget to join our network Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Exploding Myths, Part I

We return to 2020 with an interesting point of view being reflected by our good friends the bureaucrats of the oil and gas producers. The two things that I noticed the most were the continuation of the exits, the most prominent of which being Mr. Harold Hamm giving up the CEO post at Continental Energy. The second point seems to be a desperate attempt to seize the narrative. As a result I’ll be running this “Exploding Myth” series countering the arguments in the producers narrative. First up at bat is Chevron’s write down of $10 to $11 billion in the fourth quarter of 2019 for their natural gas properties. Chevron had $169 billion in property, plant and equipment as of 12/31/2018, a 7% write down doesn’t seem material enough to me when natural gas prices are down 26% since that time. Granted Chevron’s property, plant and equipment includes oil, downstream and international assets, it just isn’t a prosperous time in oil and gas. My argument has always been that the majority of these “assets” are better described as the unrecognized capital costs of past production.

One of the differences between the Preliminary Specification and the manner in which the industry is operated today is the management of property, plant and equipment. We believe as a capital intensive industry oil and gas should reflect a large portion of capital as part of the cost of the commodities price in providing the product to the consumer. Current producers believe capital assets are to be used to bloat the balance sheets in order for the CEO to strut about town with the biggest balance sheet. We believe the Preliminary Specifications timely recognition of capital costs in the commodity price would provide producers with the return of the previously invested cash resources necessary to fund future capital expenditures, dividends and pay down debt. Current producers seem to think that investors enjoy the brilliance of the deployment of their cash in the development of state of the art engineering experiments. We believe oil and gas has not been profitable for four decades as a result of these policy differences, which has created a management culture that is systemic, unchangeable and terminal for the status quo. A culture that knows no difference and is unwilling to accept responsibility. We also believe that the value that oil and gas provides the consumer, the 23,200 man hours of labor per barrel, is significant and ask: why would we ever sell any oil and gas that is unprofitable? How would we justify such actions to future generations? At least if it was profitable then we would know it was not used inappropriately or wasted. Asking if renewable energy, a substantial energy user during its development, had to pay the real cost of oil and gas producers exploration and production would they ever become economic?

The Wall Street Journal wrote about the Chevron write down, Chevron’s CEO Michael Wirth comments.

Chevron Corp. is writing down the value of its assets by more than $10 billion, a concession that in an age of abundant oil and gas some of its holdings won’t be profitable anytime soon.

The com­pany is also un­der­tak­ing a re­struc­tur­ing, go­ing from four global pro­duc­tion units to three. “Com­pa­nies that wait un­til change is forced upon them fail,” Mr. Wirth said in a video sent to em­ploy­ees last week. “We’re not go­ing to let that hap­pen at Chevron.”

We have to make the tough choices to high-grade our portfolio and invest in the highest-return projects in the world we see ahead of us, and that’s a different world than the one that lies behind us.”

This sounds to me to be a capitulation of any responsibility for the past development of sub-grade assets, and the desire to do anything about them! People, Ideas & Objects have argued that our business model provides oil and gas producers with the most profitable means of oil and gas operations. Is this the response to our business model? It also appears to me that Chevron’s CEO is unwilling to take his own advice to make the necessary changes before changes are forced upon Chevron.

I mentioned in our White Paper the analogy that I draw to the bureaucrats in the oil and gas producers. These bureaucrats as Keystone Cops are always running around to the next best thing in oil and gas. Heavy oil, SAGD, unconventional gas, shale… Once everyone jumps on board and the “new” thing is determined to be uneconomic, they all run to the next great thing. “High grading” Chevron’s portfolio is them running down the back alley to the next great thing. The Preliminary Specification looks at the producers portfolio of properties and evaluates them on the basis of a standardized accounting that determines the properties profitability based on all of their actual costs. Revenue, royalty, capital, operations and actual overhead. Then if the property is profitable it will continue to produce, otherwise it will be shut-in where it will incur no profit but also no loss. Enabling the producers to focus on their shut-in properties and innovatively bring them back onto production. While these properties are shut-in they will be leaving their reserves in place for a time in which they can be produced profitably, not adding the incremental losses to the cost of the reserves to be captured in the future, ensuring the producer reaches their highest profitability when only profitable properties are produced and allowing the commodity markets to find their marginal cost. Instead the narrative to refute our logic is that we’ll ignore the assets that aren’t as pristine from an engineering “high-grade” point of view, as they aren’t as entertaining to us? Maybe Chevron’s write down should include those assets they are no longer interested in.

In our White Paper we documented how producers alleged the business model in our Preliminary Specification is collusion. We argued these past years that it’s not, and anyone making independent business decisions to shut-in production based on actual, factual accounting data to determine profitability was not collusion, otherwise we are the new Soviet Union. It’s actually good business and what most industries do that don’t have investors lined up around the block. Those were the good ol days weren’t they? Our argument seems to have permeated the craniums of the bureaucrats and they’ve now come up with the “high grade” reasoning to refute our claim of providing the most profitable means of oil and gas operations.

It’s our argument about their storage of cash in the ground that the producer bureaucrats refuse to listen to. By capitalizing everything for decades they’ve locked the investors cash into the ground until such time as they recognize it as depletion. However, this game has gone on for four decades now and the revenues being generated by these assets are so pale in comparison to what they should be, they’re not generating adequate cash due to the heavily discounted commodity prices producers created for themselves and have been selling their products for. Storing these capital assets on the balance sheet also reflects the amount of the capital subsidy consumers have enjoyed which the producers investors have unwillingly provided. If oil and gas was a business they would begin to treat all properties somewhat the same. If they’re profitable then they’ll produce but oil and gas hasn’t been a business for many decades. It’s been an exercise in destruction, whose purpose is almost complete and will not be resolved constructively or judiciously.

The other aspect of the cash deficiencies these producers are unwilling to accept or listen to is the fact that most of their costs are capitalized. We point out this has become so extreme that the receptionists time, telephone service and Post-it-Notes are all capitalized and left as property, plant and equipment for decades too. This therefore has turned the producers into chronic spending machines wholly dependent on continuous outside funding, until these past few years that is. Their oil and gas revenues have become poor in comparison to what they should be. And whatever is earned is inadequate to cover all of the current costs of the producers as they continue to sink every dollar they find in the ground each month. When you had willing investors lined up down the block and breaking down the door this was not an issue. Now however, the cash drainage each month is epic. Money goes in, and never comes out. Then the search for next months cash begins, and so on. Hence we have the producers stuck in a never ending cash drain of their own making, refusing to admit they have an issue and only refuting the claims that we’ve made in our Preliminary Specification and White Paper. This cash issue will be the terminal factor that they’ve refused to address over the past five years of diminished investor interest. Now with severely deficient working capital, time has become their biggest enemy. Time remaining in which they can keep the doors open.

We recently learned that Houston’s office vacancy rate has hit 26% which represents 60 million vacant square feet. Calgary has over 30% vacancy rate with 15 million vacant square feet. Meaning Houston has more vacant square footage than Calgary has square footage. Nonetheless I’m always called to prove my claim that overhead is in the range of 20% of revenues. No one knows what the overhead is in oil and gas. The question I have, if the producers claimed costs of overhead at 2 to 4%, why would they shut down so much of their head offices? The best they could be saving here is 0.6% to 1.2%. Seems to me to be too much grief and pain being realized for a 1% cost reduction? Maybe bureaucrats find layoffs to be the best part of their job!

This working capital issue is more than just what the operational producers will concern themselves with. During bankruptcy a “client” will always command respect from the justice and the administrators when they have strong cash flow. Oil and gas is a cash flow industry. Until it is realized that the cash flow that is produced is incapable of providing the day-to-day operations of the producer. The administrator will assess these firms on the basis of their cash generating capabilities. Which we have seen in the past 5 years and even in the past 10 years since natural gas collapsed, doesn’t exist. I would argue that the accounting has been suspect since the late 1970’s but then I’m alone with only the facts on that. I leave you with one question: how does an industry, a primary industry at that, become worthless?

Here’s a clue as to where all the value went. This graph from the WSJ’s Lev Borodovsky was included in the White Paper. It accurately captures the attitude in oil and gas. It states when a producer would shut-in a property and it’s breakeven point for a variety of shale properties. (Note, never have I seen a property shut-in for its lack of economic performance. Ever.) Assuming if we could that the shut-in price in this chart is the variable operating costs of the property that were not capitalized. The well breakeven price is a fundamental misunderstanding of what breakeven means. Nonetheless, we’ll take their numbers and assume the amount is the capital and operating costs of the property. Essentially the graph proves that the producers will always produce as long as they were covering off the variable operating costs. Now this is what I said in the White paper that captures the fallacy in this thinking.

What People, Ideas & Objects provide in our Preliminary Specification, if we could assume the accuracy of this graphs numbers, is the point at which the property would be shut-in would be at the breakeven point and below. The reason for this being the production discipline gained through knowing that producing any property unprofitably only dilutes the producers corporate profits. Producing below the breakeven point is the point where unprofitability begins. Producing below the breakeven point for one producer, in an industry who’s commodities are price makers, will have the effect where the price of the commodities will be dropped below the breakeven price for all producers. When all producers continue to produce below the breakeven price for four decades you have an exhaustion of the value from the industry on an annual and wholesale basis. Times were only “good” when investors were willing.

We have also argued the allocation of capital costs to each and every barrel of oil in reserves is inconsistent with the capital investment market. Whether the barrel is produced today, this decade or even this century, we believe this SEC allowed outer limit of what is allowed is unacceptable for each producer to reach each year. Therefore the actual cost of these shale production volumes capital costs would be substantially higher if allocated in a manner consistent with a market economy.

As we look toward the next 25 years in this industry we know we can’t get through this period with the producers that we have today. The legacy of their bloated balance sheets will haunt them from this point forward. Their capital structures are permanently destroyed through decades of not recognizing adequate costs of capital in the products they sold. Now they’ll be forced to compensate for that with revenues and cash flows that are wholly inadequate due to their destruction of commodity prices. They’re incapable of surviving today’s business environment, how bad will it be in just three years? The only way to approach this next phase of oil and gas is through a redefined industry and producer structure. One based on succeeding always and everywhere, where producers are dynamic, innovative, accountable and profitable. Where everyone can depend on the primary industry that oil and gas is to fuel the careers, prosperity and quality of lives that have not been provided in the past 29 out of 34 years. At least I think we’ve had 5 good years. Where the next 25 years capital expenditures demand the $20 to $40 trillion necessary for the next phase of North America’s development, will be sourced from the commodities sales themselves. Investors are saying it won’t be them. This is beginning to almost sound like a plan! And what is the industry’s plan? Much like Chevron’s, ignore the majority of their non-performing properties, they cover the overhead, and look for gleaming, state of the art, engineering projects. After all it’s what they do.

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. 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. And don’t forget to join our network on Telegram @piobiz or Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

You Can't Buy Time, Part V

I’ve stumbled upon a graph that I’d never seen before. It was sourced from Lev Borodovsky who publishes the DailyShotWSJ.com, and can be reached on Twitter @SoberLook. As far as I can tell it has most of its input from the bureaucrats who operate today’s oil and gas producers. I can state this due to its representation of their view of the world. A world view that is skewed culturally as a result of four decades of specious accounting that People, Ideas & Objects document in our white paper “Profitable, Energy Independence in North America -- Through the Commercialization of Shale.” When I first saw this chart it confused me until I could figure out that it was representing the status quo perception of costs and how to handle the management of them in oil and gas.

Looking at this from the perception of the producer bureaucrats. Their total costs of each barrel of oil produced in the various shale formations is in the range of $48 to $54. The operating and royalty cost of each barrel varies between $28 and $37. I would point out the $18 to $23 in capital costs are based on an allocation of all of the capital costs across the entire reserves of the property. In our white paper we’ve argued that this allocation is unreasonable in a capital market where the demands for the performance of capital are far greater than what can be achieved when a producer is cycling their cash through their investments in a manner that retrieves their cash over several decades or more. As an alternative, People, Ideas & Objects recommend in our Preliminary Specification that the producer retire all of their capital costs within the first 30 months of the properties life to provide for the reuse of the previously invested cash. Providing them with the means to meet the demands of their future capital costs, shareholder dividends and bank debt repayments, and better match the rapid decline rates experienced in shale. This can only be done if the producer is selling their commodities at a price that is above their break even point which considers an appropriate accounting of the costs of operations and capital.

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

What People, Ideas & Objects provide in our Preliminary Specification, if we could assume the accuracy of this graphs numbers, is the point at which the property would be shut-in would be at the breakeven point and below. The reason for this being the production discipline gained through knowing that producing any property unprofitably only dilutes the producers corporate profits. Producing below the breakeven point is the point where unprofitability begins. Producing below the breakeven point for one producer, in an industry who’s commodities are price makers, will have the effect where the price of the commodities will be dropped below the breakeven price for all producers. When all producers continue to produce below the breakeven price for four decades you have an exhaustion of the value from the industry on an annual and wholesale basis. Times were only “good” when investors were willing.

People in other industries operate with the appropriate level of production discipline. Producing only above the breakeven point. They are considered businesses and do not have the luxury of new investors at the ready. They don’t immediately shut-in what is unprofitable when the conditions in the next month or two are going to change positively. That is unnecessary. All industries will wait a month or two to see if conditions change before they’re forced to shut-in production. If conditions don’t turn around then it’s time to make the changes to ensure that losses don’t pile up and, in this case, the commodity markets are permanently damaged (from 6 to 1 to 20 to 1) such as natural gas has been and oil is well on its way to becoming. The same situation would occur with an upswing in conditions, a producer would wait to ensure that the revised situation held before moving too quickly to return to production.

One of the consequences of using break even analysis such as we’ve done here reflects the Keystone Cops mentality that is on constant display in the industry. Today the entire industry is focused on shale as the only aspect of interest anywhere. Conventional just doesn’t excite anyone. Before it was heavy oil sands projects, Steam Assisted Gravity Drainage, before that there were half a dozen trends which saw the producer bureaucrats scurrying in an animated fashion to reconfigure themselves for that new “future of the industry.” Remember oil and gas is not a business. Using break even analysis today would reflect that the most profitable place to be would be in conventional oil and gas properties where the capital costs have been captured and returned, the breakeven costs are therefore very low and hence continue to be profitable at these prices. Returning even more cash to the producer. Yet the Keystone Cops have done everything to divest, cannibalize and let these “assets” atrophy in order to position themselves by investing all of their cash flow in shale. Ghawar in Saudi Arabia being discovered in 1948 and therefore conventional, North American producers behavior would have abandoned it because it's not shale.

What we do know is that no producer at any time in the past four decades has shut-in any oil or gas due to its lack of economic performance. Here is the very difficult aspect of the behavior which is conducted in oil and gas today. Not only do they continue to produce systemically, everywhere and always below the breakeven point. They’ve attempted to deceive everyone by allocating their capital costs to each and every molecule of oil and gas held in reserve no matter how long it will take for that molecule to be produced. Will it be this year, this decade or this century in the case of shale reserves of natural gas? Therefore deceiving everyone with the misguided belief that their breakeven costs are $50 when they’re really $150. Causing the erosion of value and wealth to accelerate even faster.

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. 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. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.