Showing posts with label Profit. Show all posts
Showing posts with label Profit. Show all posts

Friday, November 03, 2023

OCI The Preliminary Specifications 11th Anniversary

 On August 9, 2023 People, Ideas & Objects marked the 11th anniversary of the Preliminary Specification. We are pleased to be in the position we are due to our work in resolving marketplace issues for North American oil & gas producers. Our dealings with producers are difficult and rife with conflict and contradictions. Throughout our history we’ve experienced none of the behaviors that we would expect from our approach to providing the most profitable means of oil & gas operations everywhere and always. Why is this? What’s wrong with profitability? Why would producers continue to produce a property unprofitably for years or even decades at a time? 

During this past decade, these producer firms have destroyed their financial, operational and political foundations. They’re now incapable of meeting the needs of their shareholders and bankers, incapable of sourcing the manpower to deal with today’s market demands, a service industry that has lost much of its capacity and capability, officers and directors seemingly unaware that tomorrow only brings greater challenges and today’s energy consumers will be looking to producers for more at a time when their cupboards are bare. Whatever objective producer officers and directors were pursuing it will cost society detrimentally and unfortunately put our way of life in jeopardy. I cannot understand what their objective was. The Preliminary Specification is the solution to avoiding all of this. All concerned, who have been fundamentally betrayed in this process, would have gained substantial value from this alternative. Everyone in all corners of the greater oil & gas economy can now fully understand and appreciate why profits are necessary. And today we can recognize that the Preliminary Specification is in its second decade. 

What are the consequences of the inactions of North American oil & gas producers? To summarize the status quo as I see it today.

  • Producer firms have diminished and in many cases unsupported and non-existent capital structures.
    • Either through chronic losses or specious accounting which saw everything as a capital asset and never recognized as a cost, in a capital intensive industry. Conversely, creating equally inflated earnings.
    • A capital intensive industry would imply the costs passed on to consumers would contain significant capital costs.
      • Instead bloated asset values are now supported by excessive leverage.
    • Abandonment in 2015 by their investors due to the producers' inability to deal with unacceptable profitability and accountability. A signal of supreme dissatisfaction.
    • Abandonment by their banks who recognized similar issues. 
  • An inability to accept the global role of high-cost, swing producers on global oil markets. To believe that markets would accept any level of output with no consequences. Never learning the business basics of overproduction.
    • Where the great depression was largely caused by overproduction.
    • Where July 1986s oil price collapse saw the first of dozens of commodity price collapses due to North American oil & gas producers' chronic overproduction. 
    • I count six “good” years in the industry out of the past thirty seven years. Scoring the true effectiveness of "muddle through."
    • In 1991 I began the pursuit of what has become several attempts to resolve the chronic overproduction of oil & gas. I've set out to develop software systems to alleviate systemic oil & gas overproduction.  
    • In May 2004 published our Preliminary Research Report that set the foundation for the Preliminary Specification. A total of ten years of research to determine “what, how and why” the industry and producers would need to operate and eliminate their issues to provide for the most profitable means of oil & gas operations. Leading to publication of the Preliminary Specification on August 9, 2012.
      • Throughout this period producers have only sought to violate our Intellectual Property. None of them inquired constructively about the solution. 
  • July 4, 2019 People, Ideas & Objects published a paper “Profitable North American Energy Independence -- Through the Commercialization of Shale.” The paper has been well received by the market, receiving significant distribution. 
    • Producers expressed no interest in the paper’s proposal. 
    • We ultimately received the producers' final response to the ideas contained within the Preliminary Specification and the July 4, 2019 publication. When officers and directors allowed oil prices to drop to negative $40 in April 2020. 
  • Seeking to remain unaccountable ERP systems and accounting are unable to provide the detailed and accurate information to base appropriate business decisions upon.
    • Creating a culture within producers that achieves profitability and success by just spending money. 
    • No measure of performance is evaluated, understood or earned. 
    • Creating an environment where the difference between profitability and unprofitability is not understood, attained or cared for. 
    • A slackness pervades the overall culture when anything and everything is reported to be profitable.
    • Arguing otherwise will cause career ending repercussions.
  • Throughout 2020 and 2021 declarations that shale would never be commercially viable and asset sales of shale properties were announced with many producers exiting from that business.
    • Maintaining their cultural propensity to bail and abandon prior investments instead of remediating or attempting to make something of their “failures.”
    • Alleged “shareholder driven initiatives” to reconfigure the producer organizations as clean energy providers were announced as the new frontier for oil & gas producers.
      • Overnight they began listening to their shareholders about clean energy? An industry that is scientifically and commercially unviable, as pointed out in our July 4, 2019 publication. An industry with a history of repeated failure, poor accountability and massive government involvement. A bureaucrat's dream. 
      • Contrast this with the fact that they've ignored and continue to ignore investor concerns regarding profitability and accountability issues for almost a decade.  
  • For decades producers claimed they needed to ensure oil & gas prices remained competitive so that alternative energy could never get a foothold. 
    • Now it is these same officers and directors who take producers' cash and oil & gas revenues to fund their unaccountable activities. This is in an industry that has never performed even with government subsidies. An industry they have no understanding or competitive advantage.
  • Choosing an alternative business direction shows they’ve never had the focus and drive necessary to remediate and rehabilitate the oil & gas industry. By abandoning shale they’ve proven they have no right to lead.
  • Consolidation is their solution.
  • Difficulties in sourcing field resources have become a primary concern. 
    • Producers have repeatedly betrayed service industry firms and their staff. Nothing is being done to remediate these relationships. 
    • The resulting field capacity and capabilities damage and destruction have severely impaired producer's future deliverability. 
  • 2022 Lockdowns are lifted and consumption resumes leading to price increases at the pump. Consumers are concerned about their energy supply.
  • October 2023 saw nothing done to deal with these issues and opportunities. Consolidation continues as evidenced by mega deals such as Exxon - Pioneer.
  • With higher oil prices will it be reasonable to leave the industry in such incapable hands?

It is their specious and unrepresentative financial statements that are as useless as their business objectives of “muddle through,” “building balance sheets” and “putting cash in the ground” are. Only they had the authority, responsibility, accountability and resources to act. Action via “muddle through” is exactly what they did, even while the Preliminary Specification existed and damages increased.

Consider the following. What has been the historical norm established since the great depression is the exit of the management class from the scene when their administrations become untenable. As I understand it, the traditional message of investors withdrawing their support signifies dissatisfaction and the demand for change. Which occurred in 2015 and was the point when producer firms became “untenable.” Why I’m writing this in August 2023 is that the traditional tools of a market economy have failed and are being exploited by these officers and directors to benefit themselves exclusively? 

Bankruptcy or business failure is no longer possible as it reinstates officers and directors and eliminates angry shareholders. Forces banks to dilute their loans and start again for the requisite period of time between bankruptcies deemed acceptable. The game is played with such skill and brashness now that officers and directors declare pre-bankruptcy bonuses. 

Serendipity is where organizations change with the times. Unfortunately our advanced, software driven world encases organizations in metaphorical cement. Only through active ERP software change can organizational change occur. This has been the reason that no change has occurred in any ERP systems for producers. Maintaining officers and directors' administrations in perpetuity. All Tier 1 ERP providers left by 2005. And a Tier 1 ERP solution needs to be implemented by the industry as an explicit demand from investors.

Spontaneous order occurs when people see an opportunity in the market and act. In highly diverse continental markets where people are connected through electronic means the ability to see and organize markets efficiently and effectively has been rendered obsolete. Things need to be actively pursued to succeed. Bureaucratic inactivity is the method of operation by officers and directors of producer firms.

Creative destruction has been massaged from producer firms' financial statements. Producer firms have massive capital costs in property, plant and equipment. These are not representative of the firm's performance but attempt to represent the producers' value. The result is a homogenization of producers. Each firm has the same cookie cutter financial statements that only differ by the size of its production profile. Can anyone discern from financial statements who is the hero and who is the zero? Outside of bankruptcy that is. 

Another behavior of these officers and directors we can reliably count upon is their ability to retreat in the face of criticism or opposition to their (in)actions. Only to eventually resurrect their prior behaviors through the “muddle through” culture they’ve fostered and enabled. Reimposing previously unacceptable behaviors quickly. Dishonesty, blaming and viable scapegoating have been in officers and directors' toolkit for decades. There are a litany of reasons why they can't do anything. Things don’t work in their favor or obstacles are in their way. The defining characteristic of this behavior is that all producers will sing from the same hymn sheet in perfect harmony. 

With the authority and responsibility to control large amounts of money, they are unaccountable, uninterested, unprofitable, culturally conflicted, unmotivated and uncaring. The eleven years of the Preliminary Specification attempts to enable the most profitable means of oil & gas operations, everywhere and always is all the evidence anyone now requires to discover the otherwise permanent issue our society faces. The inability to appreciate or concern themselves with the fact that each barrel of oil is equivalent to 10,000 to 25,000 man hours of mechanical leverage in the most advanced economy the world’s ever known is irrelevant to them.

This is evidence that exists today. This is the dark and dreary future they created and sent us down to. It could have been so different if the alleged leadership did their job and made the appropriate changes at the appropriate time. 2015 when investors withdrew their funds was the point where action was definitively necessary. Now that we face such an issue that change needs to be forced upon the producer's directors and officers. They are not responding to the usual forces or following traditional behaviors in times of financial duress in our economy. They are entrenched and have proven to be untrustworthy and unworthy of our continued support. 

Possibly, they are preparing the groundwork for ultra high oil & gas prices by realizing the damage they've done. Then they’ll be able to rally the cause of solving consumers' energy security concerns by doling out dollars from a primary industry here and there. This is to those that will be subjected to their classic methods. Making themselves out to be the savior of the damage no one will remember they caused. (I would point out the October 11, 2023 blog post detailing the anomaly in natural gas pricing over the past few decades. Identifying why that money was not realized should be their first concern.)

My day-to-day interactions with those in the oil & gas industry are remarkable for their consistency. The industry may be undergoing an existential crisis as I’ve described which contrasts the officers and directors' calm and reasoned approach to the situation in their utterance of “muddle through.” I would argue the destruction and frittering away of the value of an asset each month for decades may be described by officers and directors as an opportunity cost, and if that were correct it would not be a concern of management. However that argument needs to be reevaluated by producers. This is evident in the fact that as monthly losses are incurred at each and every property in North America, we are moving into the second decade of the Preliminary Specification. Of which I am able to report that I have had zero expression of interest in the development or interest in the remedial efforts necessary to establish the most profitable means of oil & gas operations, everywhere and always, by any and all officers and directors of North American producers. It is the fact that the Preliminary Specification disintermediates them from their lofty positions of power that concerns them. Enhanced profitability in the form of the Preliminary Specification as an ERP system, which is standard fare for any organization, is demanded by investors to be from a Tier 1 provider such as Oracle Cloud ERP, would attract interest from any common sense business person. Therein lies their conflict.

With higher oil prices providing increased revenue, is it reasonable to leave the industry in such unqualified hands? Have they learned that the need for profitability is paramount? Do they understand the differences between a profitable and high performing organization? Do they have a plan to overcome their culture that resists changes to increase profitability? What assurance is there that they'll remain focused on oil & gas, or maintain their current desire to satisfy shareholders? For years we have detailed that a profitable operation would provide a producer firm with all the financial resources it needed to as it required. Yet nothing is done.

Wednesday, September 30, 2015

Bureaucrats Have Made Money

To understand what’s in store for oil prices we have the situation in natural gas to show us the way. For almost six years the bureaucrats flooded the marketplace with unprofitable natural gas production. Losing progressively more money each fiscal year as they went along. The response was to cut capital expenditures to balance the markets supply and demand. Each of those six years cuts to the annual budget were made. Natural gas is now at $2.50 and costs many times that to produce. In areas like the Marcellus shale they are lucky to get a $1.30 for their production. You have to remember that the bureaucrats are paid out of the money that comes in from general revenues. So they can’t cut off the hand that feeds. And who cares what natural gas prices are, there is nothing that the bureaucrats can do about them. So they state. Has anyone noticed the level of discussion in the industry about its current situation is a little frightening?

We discussed the decline in natural gas prices that will happen as a result of the continental storage filling to capacity in the next few weeks. We have some more news that should hit the natural gas prices here immediately. It would seem that all of the international LNG contracts are priced based on a factor of oil prices. With oil prices down, it doesn’t make economic sense to ship LNG from North America. The cost to purchase the gas, liquify it, ship it and return it to a gas is beyond the price in the destination countries. This is what I mean when I state that the bureaucrats are not taking care of business and as a result we risk losing the capacities and capabilities of the industry from a societal point of view. The investors who were committed to building the LNG facilities were told they would be making money. But just as in all things oil and gas, only bureaucrats make money.

This drop in demand from the LNG facilities, and inability to make any money will push natural gas prices lower yet. Making the industry more difficult to turn around. If it has been six years in natural gas, that means we have five more years in the oil side of the business before we see this kind of destruction. And with these bureaucrats, their sense of urgency, you know we’ll get there. In the future getting the investors to follow the industry is going to be next to impossible when all they did was lose their shirt. All I see is devastation. An infrastructure that doesn’t provide any value for anyone. A history of losing money for years on end in terms of the shale technologies impact. All of that natural gas has gone to waste in the form of a large subsidy to the consumers at the expense of the investment community. No plans, no ideas or worries from the people who manage the industry. Just carry on losing.

When the bureaucrats ran me out of the industry for my ideas. They knew what the implications where if we implemented them. The elimination of the bureaucracy. They laughed and enjoyed themselves in their turning the screws and making my life miserable. Sure is funny now isn’t it. They’ll have to live with the fact that they had made the decision not to go with my ideas more than eleven years ago. If they would have, the industry would have had the price maker strategy implemented and oil and gas prices would be profitable for all of the oil and gas production. However, now they do have their cabins and boats to keep them company. So there is that.

No doubt all the silence is attributable to the plans that are being made for the mass layoffs that will be announced around Christmas. The investors are not going to want to invest in a business that never pays. People are never going to want to come back into an industry that when it finds itself in difficulty it lays people off like it was 1920. They’ll move on to bigger and better things. Something more reliable. And so the seeds of the destruction of the industry are being sewn by these selfish, corrupt bureaucrats who had the chance to do the right thing. It only conflicted with their personal best interests.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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

Tuesday, September 29, 2015

No Money Being Made Here

Any idiot can spend, just give them the money. And that is what we have in oil and gas. A bureaucracy that can spend. Commodity prices are up, increase spending by 200%. Commodity prices are down, reduce spending by 10%. Commodity prices are up once again, double spending again. If you're an engineer or geologist with oil flowing where their should be blood. Forget it. You're nobody in a world of bureaucrats with checkbooks and contacts in New York. How can you compete in a world where there is no differentiation between the things that are done? Everyone just spends, drills and reports profits. Miss your projected deliverability targets however, and you’ll find yourself in the ash heap of history. Those are the rules.

The problem is that none of the production, at any point in time, has been profitable if you consider the actual costs. Production needs to include the capital that was used in the drilling, equipping, and production facilities. And would also need to consider the costs of all of the overhead of those people and offices. These costs are never counted because they are capitalized and only the smallest sliver of them is ever recognized in any one year. When bureaucrats verbally state if they are profitable or not they are not subject to any regulatory requirement of what a profit is. So they state the “netback” which is the revenue less royalty less operating costs number that never ceases to amaze and confuse.

So commodity prices have fallen as a result of the mismanagement and inherent unprofitable overproduction by the bureaucrats. This shell game is going to be exposed here for what it is in the financial reports of the producers in the next few months. What we need to focus on is the state of affairs of the industry today. The trajectory it's on. Where the investors are in terms of their thinking about the industry. What needs to happen to ensure that society maintains its standard of living in an uninterrupted manner. And mostly importantly, what trajectory is the industry needing to be on? There are many things to be done.

I know that today’s and yesterday’s discussion may have left some people behind in terms of the value that the industry has generated. They point to the fact that properties sell for far greater amounts than the costs. And that their cousin Vinny made a killing in the stock market. Both are true statements. But stock markets should not be confused with earnings in an industry. And we are talking about accounting, not market values of properties. The difference is that the accounting is the basis of valuation and profits of the management of the firm. If the basis is skewed, which I am suggesting that oil and gas is skewed by capitalizing everything and recognizing very little of the capitalized costs. You then skew the basis of the company's earnings. An oil and gas company only needs a few drops of oil in order to report an annual profit. This is not the reality of the situation that is occurring in the industry.

Offsetting these bloated balance sheets is the other side of the issue. Yes they are balanced by the overstated earnings of the producers. But here’s the catch, the producers have not been reporting very good earnings! In light of the fact of the distortions on the balance sheets they should have been reporting windfall profits. This goes to show you how much more valuable the commodities are than what they are being sold for. The other offsetting element to the bloated balance sheets is the amount of equity they have been able to generate from the markets. Which has been substantial. However the largest offsetting element is the debt these firms are carrying. In most cases, large debts based on the reserves, those same reserves used to value the company in the accounting. These bank loans and debt instruments make the producers highly levered.

Back in the 1980’s I did a stint in Touche Ross’ bankruptcy practice. This was during the last time oil and gas producers were going bankrupt. I was surprised by all of the trustees and judges were of the opinion that if the firm had good cash flow then it would be restructured as a viable going concern. Since the SEC and accounting firms implemented full cost accounting practices in the late 1970’s, that’s all I’ve heard about in the oil and gas industry. It has good cash flow. I don’t think this similarity is all that coincidental.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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

Monday, July 13, 2015

Commodity Prices

It’s been a bad week for oil and gas prices. It would seem to me that the bureaucrats who used the recent strength in these commodity prices, when in March they moved from $50 to $60 in May. While at the same time they were trying to convince their shareholders that all would be well “next year” at their annual general meetings. Selling this impossible scenario as the theme to cover for their poor performance of 2014. We have also recently learned that those “earnings” that were sold to the investors in the 2014 annual reports, were supported handsomely by $90 hedges. Now not only are the prices going down, again, and substantially, but the producers hedges have been expiring and they are fully exposed. There must be something about chronic overproduction of commodities that prices just fail to appreciate.

Its not that I feel any great enjoyment at the misery that is being experienced in the oil and gas marketplace today. People are getting laid off in the producers, service industry and elsewhere. Investors are losing significant money, and as we have documented in this blog, they are losing far more than what the producers are reporting. It didn’t have to be this way but bureaucrats will be bureaucrats. Natural gas prices have been declining for over five years. Plenty of time for the Preliminary Specification to have been developed. Its just that for that niggling fact that the Preliminary Specification does eliminate the calcified bureaucracy as the only reason that it hasn’t been developed.

The fact is though that low commodity prices are the greatest gift that I could ever ask for. I can now say that I got lucky. It provides the justification to go through the changes to make the Preliminary Specification the manner in which the industry operates. Our value proposition is the reason why and secondly, these bureaucrats will never change. They can't and won’t. We have seen a level of disintermediation in other industries such as the makers of cellular phones. This past week Microsoft says for all intents and purposes they are out of the smartphone business. Nokia, which they bought were the dominant brand less than ten years ago. Its not just these industries that have been disintermediated. Look at all the industries that are now being lined up to have the process undertaken by some upstart. Uber, AirBnb and Lyft are what are now called Unicorns. Private companies that are able to raise money on the basis of billion dollar valuations. Something that has never been seen before. And there are now over 100 of these beasts.

Oil and gas is being disintermediated by People, Ideas & Objects Preliminary Specification. We are developing the software, the user community and service providers that will remove and replace the bureaucracy from its comfortable position in oil and gas today. We will be changing the organizational structure of the industry to one in which the producer firm can compete based on their competitive advantages of their earth science and engineering capabilities, and their land and asset base. We are using the Joint Operating Committee as the key organizational construct of the dynamic, innovative and profitable oil and gas producer. It is the legal, financial, operational decision making, cultural, communication, strategic and innovation framework of the industry. When we align the seven frameworks of the Joint Operating Committee with the compliance and governance frameworks of the hierarchy. We achieve a speed, accountability, innovativeness and profitability in our producer organizations. We also enable the decentralized production model that provides the individual producer with the price maker strategy needed in today’s shale enabled oil and gas business.

Key to this transition is the user community that we are in development of. It is these people who will be the critical resource that makes the Preliminary Specification the software that it can be. Software that isn't defined, designed and developed by the user is useless. And that is why we have endowed our user community with the power to effect the changes necessary in the oil and gas industry.

We can continue on in the losing ways of today's oil and gas industry. I’m sure we can all assume what will be said by the bureaucrats next annual report season, or even the next ten after that. They are on record that the business was going to improve and they had it under control. Well it doesn't look so to me. To learn what is really happening map the last five years of natural gas prices as being what the future holds for oil prices. That’s what is going to happen until People, Ideas & Objects budget is funded and we are able to bring this solution to the marketplace. With our value proposition creating upwards of $45.7 trillion in incremental value over the next 25 years, I would think that it's time.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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

Thursday, April 16, 2015

Our Solution Part VI

Through People, Ideas & Objects the accounting that is carried out will change significantly when we implement the Preliminary Specification. With the decentralized production model enabling the price maker strategy for all oil and gas properties. Producers will be able to shut-in those properties that are unable to produce a profit in a low commodity price environment. And the determination of what the costs of that property will include is the capital costs on an accelerated amortization schedule. This will bring the costs per barrel much higher and into the territory of what it actually costs to produce. Requiring higher commodity prices for the producers to meet the criteria of producing any property.

At some point in every industry this transition has to be made. In the beginning the build out of the industry has to be undertaken by the investment community. Then when the assets of the industry mature, it is then time to earn the profits from what has been developed. Oil and gas is a mature industry. The bureaucrats continue to consider that it is other peoples money that they need in order to fund their operations. This is inconsistent with reality. The industry should be providing the investment community with a return on the invested capital, and an annual profit on those as well. Instead the bureaucrats let the assets sit on the balance sheets to eternity and never let the costs flow to the income statement. This subsidizes the consumers of oil and gas by paying for the capital costs of the industry. The prices of the commodities never adjust to the real costs of the industry.

Under this change to People, Ideas & Objects methodology the makeup of a producers balance sheet will ultimately change. From having a dominant position in terms of fixed assets, and negative cash positions. To having high values of liquid investments and much smaller amounts of fixed assets. They will be financially much healthier. They will be able to dividend out large portions of their earnings to the investment community. Pay down debt. And fund large portions of their own capital expenditure programs. All as a result of finally realizing the real cost of oil and gas exploration and production!

It will be the level of capital expenditures in the past three years that dictate the oil and gas prices. It will be these properties that carry the higher costs per barrel due to the large balances of capital they still have to amortize to each barrel of oil equivalent produced. If we are generally writing off all of the properties assets in the first three years of the life of the property. It will be these that have to meet the criteria of being produced or shut-in first in a low commodity price environment. Those properties that have exhausted their asset balances will be able to produce large profits no matter what the oil and gas price is in the marketplace. However, it will generally be the work done in the past three years that dictates what the actual costs of production are. And it will be that higher threshold that the oil and gas prices will have to reach to bring on the past three years production. In an industry that has the elasticity of supply and demand characteristics that the oil and gas commodities have, it will be the higher prices that the industry will need to realize in the People, Ideas & Objects accounting methodology and decentralized production model.

The SEC and public accounting firms detail the methods that capital assets are written down today. They define what the limit of reasonableness is in terms of what is Generally Acceptable Accounting Practices. Their position is to define the limit and ensure that the producer firm does not breach that limit. However, the bureaucracy are taking the limit as the standard in terms of what “should be” used as a method of depleting the capital assets. This, I believe, is unreasonable when it is taken to the extent that the bureaucrats have. Bloated balance sheets provide no value to anyone. It will be People, Ideas & Objects service providers, the sub-industry that we are creating to replace the bureaucrats, that will use a much more aggressive three year method of writing down all of the capital assets. That way prices will reflect the real cost of the commodity. Producers will be able to “make” the necessary prices to recover their costs through the decentralized production model. And the investors can freely invest in the oil and gas producer knowing that the money they invest will be returned to them with the bonus of an annual profit as well.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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

Wednesday, April 15, 2015

Our Solution Part V

Only People, Ideas & Objects provides the oil and gas producers with the most profitable means of oil and gas operations. That is our focus and our drive. As we have noted here many times, the bureaucracy have been too busy lining their own pockets to concern themselves with the interests of their shareholders or anyone else. The discussion we had yesterday should have been made many years ago, and been resolved at that time. Then, as is now, all that we hear are crickets. I find the level of self interest by the bureaucracy to be very questionable. It is People, Ideas & Objects who have researched and published the Preliminary Specification. A means to operate the industry in the 21st century based on the Joint Operating Committee. We have published the decentralized production model that provides the producers with the price maker strategy. And now our argument regarding bloated balance sheets proves the industry has been allowed to sink into a groupthink mentality of never fully accounting for the costs of their operations.

Our focus on profits is critical to a well functioning society. Without appropriately calculated profits the producers will not have the resources to develop the industry in the manner that is required. They will not be able to hire the people necessary to make the industry what it has to be. And it will not pay the taxes and royalties that help to fuel our governments needs. Continuing on in the manner that they are will not provide society with the energy that it needs to fulfill its opportunities. Will the United States be the first country to willingly reduce its energy consumption, and hence economic output, as a result of the industries inability to meet society's demands? Or course not, then who will? With the recent publication that the breakeven for energy production was now $72. That means each barrel of oil is being produced at a loss of $20 per barrel. And “breakeven” does not consider any of the invested capital that was used in the production of that barrel. It is therefore expected that investors will provide another $20 per barrel in further capital investment so that the bureaucracy can sit and do nothing regarding this issue. An industry that is well on its way to bankruptcy. Quickly.

Currently the business model is flawed, the bureaucracy is conflicted and incapable of changing this situation. We are therefore subject to the forces of creative destruction. However, how much damage would society realize during the downturn in capabilities of the existing industry? And can we afford to experience that pain without a “Fed” willing and capable of intervening with the ability to flood the market with deliverability? We should therefore carefully consider the situation we find ourselves in today and determine what the self-interested bureaucrats are doing. There is a risk.

But then again I am selling my book as they would say. And I am the one who will benefit greatly by raising our budget. Our budget would be a significant cost if the project were to fail or the bureaucracy miraculously transformed. So there is that risk too. I don't have to make the decision, I'm here to argue the facts. Taken in the context of the next 25 years of the oil and gas industry it would seem to me be a slam dunk of a decision. How the industry needs to operate will be based on the Internet and not on the innovations of the 19th century. How these changes are made is the question.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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

Monday, April 13, 2015

Our Solution Part III

The only way that producers are going to be able to make any money in this business for the next 25 years is if they institute some form of production allocation. The current business model that has the producer delivering all of their production to the marketplace will only continue to depress commodity markets. There will be no change in this situation until such time as the producers change. And as we have mentioned here many times before, bureaucracies can’t, won’t, will not ever change. There are many industries in which we can look too to prove this fact. Bureaucrats are the fundamental, necessary, precursor to creative destruction. Without bureaucrats nothing would ever die or otherwise fall apart.

Our solution provides, as an alternative, the industry wide capability to make decisions based on facts. To produce a property, or not, based on profitability. Something that no producer is able to provide in terms of the information they produce today. Ask a producer what it costs for a property in terms of its royalties, operations, overheads and a reasonable allocation of the capital cost and they will work for decades trying to find that factual information. None of them can. They can provide estimates of what the overheads were based on, which were allowances. But to know the actual overhead necessary to operate a specific property it is impossible for them to ever know in the current system.

Yet it is the overhead that they incur in developing their fixed administrative and accounting capabilities that cause them to have to produce everything that they can. It is the high throughput production model that needs to be operated at full productive capacity in order to ensure that all of the “high fixed cost machinery and organizations, variations and interruptions that leave significant overheads uncovered” are covered off. This business model has worked somewhat for the oil and gas industry when the oil and gas resources were scarce. Now that the oil and gas resources are in abundance, it is an absolute failure. What is needed is a new business model that takes the high fixed cost organization of the current producer and makes them the variable overhead cost of the Joint Operating Committee.

With the Preliminary Specifications decentralized production model. The industry will have a business model capable of dealing with the abundance brought about by shale. Employing a production allocation methodology based on profits is a fair and equitable means of determining who can produce and where. The decentralized production model ensures that the entire industry is employed in profitable operations. And employed in real profitable operations. Not the gross margins of revenue less royalties and operating costs that are claimed by bureaucrats these days. Profits based on the revenues less royalties, operating costs, actual overheads and the real capital costs of the production. Real profits, not gross margins the bureaucrats try to get away with today.

It is on this basis of accounting for the actual costs of operations that our business model, the decentralized production model, provides $5.7 trillion dollars in additional profits over the next 25 years. A bold claim, and one that can be verified by reading this blog and the Preliminary Specification, and understanding how it is different. A new way for the industry to operate. One in which the future investors, whoever they may be, will actually have with that promise of higher profits, and because we include the cost of capital in determining the cost of production, their investment in the industry returned to them as well. Currently producers are using accounting methods designed by the SEC and public accountants that allow the balance sheets to be bloated and the income statements to never see any of the real costs of capital. Leaving the current oil and gas investors to wonder when it is that they will ever get profits or even their investments back.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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

Tuesday, April 07, 2015

Where Will Prices Head Now?

It seems now might be an appropriate time to note that the natural gas prices in North America are ripe for another major step downward. Natural gas storage facilities are already starting to show signs that they have completed the seasonal drawdown and will soon begin the rebuilding process for next winter. Storage volumes are up to 575 bcf higher than they were at this time last year. And the turnaround in the inventory rebuilding process appears to be about a month ahead of last years. Not bad considering last years storage volumes were depleted severely by the cold winter. The one constant in the makeup of this storage situation is the deliverability of the natural gas producers. Particularly from shale formations. It now appears that shale gas production exceeds 40 bcf per day and has no signs of slowing. The trajectory of the shale gas production increases remain the same over the past six years that natural gas producers have been suffering from low natural gas prices. And that is the point that we need to understand regarding the behavior of our friends the bureaucrats.

Which brings up the concern we should have for oil prices. Everyone believes that producers will soon curtail production in order to keep the prices from declining further. Oil storage is about to reach capacity which would put a limit on the ability of the market to absorb production. The inability to absorb the oil production would affect the prices in very negative ways. I think these past few months will lead the oil and gas producers to think back to these times as the best of times.

Surely the producers will realize the overproduction is the issue with respect to oil prices? Well they haven't learned that overproduction is the issue with natural gas prices. And that has seen almost six years of pricing that doesn’t support profitable operations. What will change and cause the producers to see the light now and curtail their oil production? Nothing. The only thing that will cause them to change would be a change in the business model to the Preliminary Specification with its decentralized production model or the exhaustion of the shale reserves. Remember bureaucracies can’t, won’t, don’t and will not ever change.

And that is the point. The Saudis understand well the characteristic of the oil shales performance. Unlike the natural gas reserves of the shale formations, which will last for decades or a half century. The oil shale reserves will only last about a decade. At which time the Saudi’s will be able to swing back into action and become the swing producer once again. Unless the high cost producer, being the shale oil producers, learn to allocate production based on profitability, a lesson that they have refused to learn in the natural gas side of the business, the next decade of oil prices will remain depressed. The Saudi’s have stated clearly that they believe that the high cost oil producers should not push out their low cost oil from their market share position. From a business point of view the Saudi’s position is 100% defensible and the shale oil producers position is 100% certifiable.

And so it is that we will take one more downward step in terms of the natural gas prices this spring, with oil following not far behind. How much pain can these bureaucrats really create for themselves and their shareholders. What we do know is that neither of those two groups will do anything about the losses that are piling up in the industry. It is deemed to be acceptable for the industry to be losing money as there is nothing that anyone can do about it. This lack of imagination will catch up to them soon and the realization that the industry has accumulated too large of losses to sustain operations will one day occur. And it will be at that time that those that have the foresight to disintermediate a dying industry will be able to come in and scoop up the value from these dinosaurs. And the fact is that day is not as far away as it seems.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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

Thursday, April 02, 2015

Just a Small Difference

What we had identified in yesterday’s post is a significant difference in our value proposition in terms of the amount of money that is returned to the owners of the producers. We have asserted and supported our value proposition provides $5.7 trillion in additional profits over what the bureaucrats are able to offer. The is over the next 25 years. What we have been able to establish is that our method of accounting at the property level is going to provide a return of the capital that is invested in the business in addition to those incremental profits. So in summary, over the next 25 year period. Assuming it is correct that $40 trillion were invested in the industry. And we don't know what share of that would be attributable to the North American marketplace. And if the current bureaucrats continued as they were they would provide an approximate $1 trillion in profits, I'm sure I'll be accused of creating a biased estimate. People, Ideas & Objects accounting methodology based on the decentralized production model would return $46.7 trillion to the owners of the producers. And the bureaucrats in their current configuration would provide $1 trillion.

The basis of the difference once again is the fact that we are using the cost of capital and overhead in the determination of what the cost of the property is. That no property will produce unless it can produce a profit. Imputing that the oil or gas revenues would need to be adequate to cover all of the costs. Fixed, variable, operational and capital. No matter what the type of cost it would be included in the calculation of what the property required in order to earn a profit. This would therefore remove the production from the marketplace that was being unprofitably produced. Leaving only profitable production in place, based on a complete accounting. Therefore removing a large percentage of the production profile of North America for oil, and most particularly gas. Imputing that much higher commodity prices would be required before the production from shale returned to the market. This would create the market conditions in which shale could be produced profitably. When you have a commodity that can be produced abundantly, this is the only reasonable methodology that will extract the industry from its current situation.

The fault for being in the situation that we are in is mostly attributable to the accounting firms that apply the SEC regulations of full cost accounting and successful efforts. Accountants have had a miserable life. From having their briefcases taken in grade school, to being bullied throughout high school. And some of the accountants that I know are still paying their lunch money to kindergarten bullies! For them to be cool and hip, the center of attention is something that is foreign to them. So when the producer wants to report high levels of profits by leaving the balance sheet bloated. All they have to do is flatter the partner at the accounting firm. As a result the industry ends up with a valuation on the books that is so unreasonable that it makes no sense. It also makes no sense to declare that these producers are profitable. What they really are is marginally cash flow positive. And that is all that they are. As a result of this, they are creating a dynamic which creates a production profile that is inconsistent with the commodity price.

It should be the objective of the producer to have their capital costs depleted fully in a three to four year time frame. From a business point of view there are many reasons to want to do this. We don’t need to go into them here. Full cost accounting and successful efforts define the limit of what can be capitalized, not what is reasonable from a business point of view. If after three to four years the property will achieve the point where it has returned all of its capital and will be able to earn a profit from that point forward. Or at least it should be able to. In the process however the commodity prices are high enough that the return on that investment can be adequate to provide a good return of the capital. Which is something that a ponzi scheme is consistently unable to achieve.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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.

Wednesday, April 01, 2015

Annual Report Season is Here!

This is the time of the year in which we can clearly identify who the bureaucrats are. They are the ones that are hiding under their desks while their phone rings constantly. This is the one time of the year that they need to stand up and be accountable for the mess they've caused. Questions about those skeletons that have been neatly packed and highly compressed in the closet can only lead to misery as far as they're concerned. If anyone of those skeletons is discovered the whole closet could explode due to the high numbers of them so tightly compressed. If only they could take their vacation now and come back after everything dies down.

We should expect to see some awful performances from the producers this season. Having both oil and gas prices so low was never a scenario that was considered. Shale based reserves have truly changed the dynamic in the industry. It is now an abundant industry with very high costs. I read in World Oil last week that the Saudi’s Opec representative commented on the following.

The world needs $40 trillion of oil investments in the next two decades to meet growing demand by emerging nations, al-Madi said. Demand will grow 1 MMbopd every year for the next 15 years to about 111 MMbopd, Nasser Al-Dossary, Saudi Arabia’s OPEC national representative, said at the same conference on Sunday.

We should all be surprised by that $40 trillion number. However it must have some credibility. That’s an average of $2 trillion per year which seems within the ballpark. It is also a global number. What it would be for the North American market is unknown. The point is there is an important question that needs to be asked to the bureaucrats who are under the desk, if only they would answer the phone. What is the vision, plan and idea for earning a profit on those investments? And what kind of return are you providing the industry now? Now you understand fully why they hide.

The answer is this is an industry that operates on gross margin. Bureaucrats don't consider the cost of capital in determining the cost of business. That’s probably not the right thing to say. Its truthful but it sounds stupid. As we have discussed before the past investments of the industry sit on the balance sheets of the producers. Bloating them out of all sense of proportion to their revenue streams. With the amount of depletion that is recognized, the income statements in the past few years have looked OK, but as I said we only work on gross margins, or cash flow as we call it in oil and gas. And with the low cost of our head office being such a small percentage of our revenue you'll see we run a tight ship. Just don't ask about how much of the head office staff that we have capitalized to that already bloated balance sheet.

So here’s the deal the bureaucrats will say, trust us, we’ll make you money…

Doing some simple math in terms of the $40 trillion investment should shock the average bureaucrat in believing there is a capital cost associated with the oil and gas business. A simple allocation of the $40 trillion over the 111 million barrels per day for the 20 year period brings in a whopping $65.82 / barrel in additional capital for each and every barrel. Not bad for a product that sells for $50. However if you look only at the incremental production and allocate those costs over those 15 million barrels. It comes to $487.06 in capital costs per barrel. Maybe I'm beginning to see the light as to why the bureaucrats preclude any capital costs in the calculation of their profits.

And of course People, Ideas & Objects, our Preliminary Specification, the user community and service providers are different. We include the costs of capital and overhead in the determination of profits at the property level. Then if the property is profitable it will be produced. Otherwise it will sit in the shut-in inventory where the engineers and geologists can apply all of their innovative thinking to make the property profitable. This is our plan, our vision, our idea and how we provide an incremental $5.7 trillion in profits in that approximate time period. Real profits after that $40 trillion has been returned to the investors. Not profits that are declared with the $40 trillion in investments still sitting on the balance sheet.

Oil and gas is a failing industry. Bureaucrats will fail to meet the market expectations described here. They will fail to provide a business case for the investments to be made. And they will fail in providing answers to the critical questions that are going to be asked here this month and next in what is commonly referred to as annual report season. And if the bureaucrats can get to mid-May they will have made it through another year where they can continue to incinerate more capital and maybe even think about expanding that boat launch after all.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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

Thursday, March 19, 2015

My Oil and Gas Overvalued Hypothesis

The book value of a firms assets are not particularly relevant to the day to day operation of the business. Particularly when the business is a public company with shares traded on an exchange. The market value of those shares will provide the real value of the company based on the markets perception of its value. The book value is what concerns the accountants and is of relatively little concern other than it has significant impact on the firms profitability. And that is determined in the matter of how the assets of the firm are depreciated or depleted in the oil and gas industries case. It is my hypothesis that the oil and gas industry is carrying excessive asset values on their books. These are a result of the SEC’s requirements to follow either successful efforts or full cost accounting requirements in the determination of those assets. This overvaluation of assets. Which I suggest is systemic, large and unreasonable. Leads to material overstatement of profits in the reporting of producers earnings. These are the differences between what I claim the industry, on a wholesale basis, is losing money, vs. the average producer continuing to report earnings in this low commodity price environment.

If producers were to recognize a reasonable depletion of their capital costs. A method that is closer to what a traditional business would use. Their depletion expense for each year would be higher than what is currently reported. By assigning all of the costs involved in the producers capital costs to the asset base of the producer, this inflates the assets on the high side. Traditional businesses who are involved in elements of research are required to expense all research expenses incurred in the current period. Any unsuccessful operations would also be expensed in the current period, however that is not the case in oil and gas. The other aspect of oil and gas capital costs that causes them to bloat the balance sheet and over report earnings is the fact that the capital costs are deducted across the reserves base. In many cases the reserves base is continually expanded from year to year. And the reserve life index of the firm in most cases exceeds a decade. Leaving the situation where most producers are deducting far less than 10% of their assets within a reporting year. This seems inconsistent when the costs to maintain that reserve base and deliverability can and does usually cost upwards of 30% of the asset value of the firm on an annual basis. This would appear to me to determine that the capital costs of the producer should be depleted over a three year term.

Clearly this overvaluation is the SEC’s fault and the accountants at the audit firms accept this thinking as it makes them feel cool and hip in the eyes of the engineers and geologists of the producer firms. Something that they are not generally known for. The problem is that the engineers and geologists are not trained in the accounting requirements and are unaware of the distortions within the balance sheet and income statements that they are producing. They think their activities which are building the firm and its profits are moving the firm in the right direction. Whereas a more conservative evaluation of their asset base would instill a more conservative use of their discretionary cash flow and earnings. If there were any. The net effect of a more conservative depletion methodology would be a more focused industry. In my opinion.

What we have now is the fire alarm ringing and producers running about spending money on the shale based plays that are the place to be. Expanding their productive capacities, building their asset bases and destroying the commodity marketplaces. The continuation of these activities in the face of such losses is not evident to them. Even though they are having to finance their negative cash flows, which on an industry wide basis are projected to be negative $100 billion just for shale. A ludicrous and incoherent manner in which to run an industry.

Clearly the bureaucrats are unable to change. But the incentives and the requirements of being in business are being distorted by a methodology of accounting that doesn’t recognize the real cost of the business. Until a new business model, the Preliminary Specification, and the user community and service providers are able to provide the industry with these kinds of appropriate accountings the industry will be run in this distorted manner. Remember the SEC defines the upper limit of what can be recorded as assets. That doesn't necessarily mean that everything has to be reported as an asset or that the upper limit has to be reached. In an industry that expects to spend the money the oil and gas industry does in the future. Estimates vary and range in the many trillions of dollars over the mid-term. Its important to put those costs in the proper context. Are they assets, or should they be written off in an appropriate time table. One that leads to systemic, large and unreasonable industry wide losses.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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

Tuesday, November 25, 2014

A Foolish Consistency

“A foolish consistency is the hobgoblin of little minds.”
Ralph Waldo Emerson

That is what comes to mind when I read so many comments from oil and gas bureaucrats regarding how they perceive the decline in oil and gas commodity prices. Each of their responses are the same “that we are still making profits” and nothing has changed. My first argument concerning these comments is that the net proceeds from the field are not profits, they're margins. When you take the revenues less royalties, production and transportation costs that is the margin that the property is providing the producer. There are significant additional costs included in determining the profit of that property. Such as what it cost to drill the well which needs to be depreciated and the reserves depleted. Additional costs include an allocation of all of those thousands of people you employ in the head office. Then maybe you will begin to determine what “profit” really is.

As I have stated before it is detrimental to the industry to display that the bureaucrats have such a poor financial understanding. If they do not comprehend the business from a level in which they can articulate the situation to the financial community. In a way that is consistent with financial expectations then they should find someone who can or just be quiet. Right now all this talk of continuing to be profitable is setting up expectations that they are still profitable. And we all know that if the producers are operating on skinny margins in the oil sector, they are losing money after the deduction of the capital costs of current production and the associated overhead. Adding the losses on the oil side to the known losses on the natural gas side of the business and these bureaucrats will be reporting big losses in April and May of 2015 for the fiscal year of 2014. So why set yourself up for angry and disappointed investors that will believe you deceived them?

One producer was quoted in World Oil as stating...

“They're not shutting in because that’s all ‘sunk costs,’” he said of U.S. shale producers, “So you're not going to get a lot of producers stopping at 75 buck oil.”

This logic is a holdover from the 17th century. In the 21st century the dynamic, innovative and profitable oil and gas producer will use People, Ideas & Objects Preliminary Specification. Which will enable them to use the decentralized production model and agree among the Joint Operating Committee to shut-in their unprofitable properties. And by doing so they will be able to remove the excess production from the marketplace, increasing the price of the commodity. Save their reserves for the day when they can be produced profitably. And reduce the unprofitable property from their inventory of producer properties, therefore increasing their firms overall current profits. Again this would be a more constructive posture than applying confusing messages to the investment community and applying 17th century thinking to the current situation. However, I am on record as being on the outside of the industry due to the bureaucracies dislike of my ideas. Therefore I am liberated in my application of criticism of their performance, or lack of it.

Does anyone believe that these bureaucrats would, could, wanted to, are capable of, or are willing to change? I think the investors are beginning to see the extent of the little minds that are at play in the bureaucracy of the oil and gas industry. I see the commodity price issues as being a severe challenge to many of the oil and gas producers. There however seems to be an ongoing orchestrated discussion regarding climate change, carbon capture, carbon tax, carbon exchanges and the like by the CEO’s of the major producers. Why, it should be asked, would they discuss the potential losses they're incurring? This situation is fascinating to me. It will soon be time for the investors to act and direct their producer firms to fund People, Ideas & Objects and begin a new way of operations in the oil and gas industry.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative and profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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

Monday, September 22, 2014

Two Good Examples

My discussions with the industry, or at least the Canadian part of the industry, continue to be frustrating and unfruitful. Talking to people who can make the decision to participate in People, Ideas & Objects development efforts receives the standard response, that they will join in when the product is fully developed. They say its not their job to participate in software developments. To which I ask if its their job to lose money? To which they repeatedly blink. Its this type of attitude that we are fighting in the industry. Why our appeal is to the investors to direct these people to fund our developments. To create our own permanent user community so that we never have to rely on these blinking people. They don't have the capacity to see the problems that are in front of them. They don't have the capacity to see the solution or to implement a solution that is offered. They are paralyzed and incapable of change.

I have two good examples today of how the situation is in the marketplace today. The first is our friends at PennWest Energy who recently announced their revised quarterly financial statements. Recall that they had to restate them for the purposes of revising the royalties back to operating costs from being capitalized. The second example is Noble Energy in the United States who recently went through a software implementation with Oracle. This was a custom one off implementation that is highlighted by Oracle as a success.

To the first example, PennWest Energy. The Press Release is here. Its interesting to note that the culprits that capitalized the royalties were the staff. At least that is what the press release says. We know the bureaucrats do nothing but sit around and point the fingers but rarely do they do it in a press releases. It might be that the staff did it but capitalizing royalties shouldn’t pass the laugh test beyond the first bureaucrat. And, its important to note, that the bureaucrats are keen to point out in the press release that they have reduced the payroll by almost 50% since this time last year. Therefore, I’m sure that it was the inspired staff after all. The pressure to make profits is quite strong and its coming from the investors in the industry. The bureaucrats way is to cut the staff by 50%. What rationale this supports is unknown to me. I'm just glad I don’t work in an oil and gas company.

Review of the PennWest financials has left me perplexed. The company appears more profitable than the previous statements. Reversing $200 million in capitalized royalties benefiting the bottom line is a bit confusing. But that seems to be the case. Maybe the most creative accounting I have ever seen. The comment from the Chief Executive is that the production, the land and the ability to execute are unaffected by the accounting crisis. The message that tells me is that the accounting is such a mess, probably because there is no one left, that we've given up, so should you.

With the following video from Oracle regarding a software development and integration for Noble Energy.



You can see that the entire focus of the company is on the ability to execute. Is that all an oil and gas company is today. Another project to execute? No appreciation that we are doing this work in a commercial environment. That we should be making money at this. It seems that the idea that this is a going concern and is part of a larger organization that is focused on providing that organization, the society that it operates in and the people within that society with an increase in value is lost. It’s all just activity for the sake of activity. Now there is discussion of the impact on the community, all the right buzz words spoken by all the right people, about the number of truck trips to reduce etc. It is however the responsibility of the oil and gas companies to be making profits. That is their role in society, not sitting in a sewing circle and singing kumbaya.

When I talk to someone in the industry, a decision maker, and I’m turned down because making money is perceived as someone else’s job. And at the same time I see the misguided adventures at PennWest. Or the lack of a clear focus of an enterprise at Noble Energy. I see why our focus on profits makes us the odd man out.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative and profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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

Tuesday, September 09, 2014

Challenging Industries Pricing Assumptions

In today’s post I want to take one of the assumptions that industry is operating on and challenge it in terms of whether or not that really is the method that they want to operate the industry. The assumption is that the producers need $6.70 / mmbtu for their natural gas in order for them to be profitable. It is this assumption that we have also used in determining that the decentralized production model would provide the $700+ billion in opportunity costs to the industry. It is the calculation of $6.70 that may be incorrect in that it provides an average across the industry. Where the conventional gas profits, which would be substantial at that price, more than offset the losses in the unconventional areas. This I think is the inappropriate manner in which to operate the industry. Under this scenario, the unconventional gas should remain shut-in until the prices realized in the marketplace are adequate to produce a profit on the unconventional gas production as well.

This change would introduce much higher gas prices and higher opportunity costs for industry than what we have calculated before. Some may feel that People, Ideas & Objects are just looking to accelerate our value proposition by pumping up the value of the industries opportunity costs. The effect of this change could be in the order of three or more dollars in the price of natural gas and a doubling of our opportunity costs. The focus should not be on whether the oil and gas producer is profitable as a whole, it should be on the profitability of each individual property. If the property is producing, that imputes that it’s profitable. And that the producer is only producing profitable properties. Not that the producer is producing a mix of profitable and unprofitable properties, but on a whole is still marginally profitable. That is not the production discipline that we are seeking to instill in the producer firms.

The current high throughput production model rewards the producer with the highest production output that they can attain. That is why there is so much emphasis on the producers boe / day by the investors. The higher the production output the lower the costs of the overhead per barrel of oil. However, that metric no longer applies in the decentralized production model. If your producer firm is capable of 100,000 barrels / day of production. Your overhead per barrel of oil is $x.xx / bbl of oil whether your yield is 20,000 or 80,000 barrels on a given day. The fact that you are profitable at either 20,000 or 80,000 barrels per day is the point that needs to be considered. It is far more important to produce only profitable production as the criteria of concern rather than the overhead per barrel of oil in the high throughput production model. Investors will adjust to this new model and begin to recognize and appreciate the production discipline that profitable producers implement.

Holding properties off of the market will become the common sense thing to do in the oil and gas marketplace. Since there will be no charge for operations, royalties or overhead in the decentralized production model. The shut-in property will record a null operation and will not influence the companies financial performance in the quarterly financials. Whereas by producing the property today has a negative effect or drag on the performance of the firm. The point of this blog post is that in order for the industry to be at full natural gas production will require the industry to realize much higher prices than the $6.70 that is currently assumed by the marketplace. To cover the costs of the unconventional gas production the price may have to breach $10.00.

If we attain $10.00 on all of the gas that is produced in the North American marketplace the opportunity costs as a result of the move to People, Ideas & Objects decentralized production model, moves well into the multi trillion dollar values for the decade 2009 to 2019. Producers have a choice. They can continue to develop the shale gas reserves with no hope of ever making a profit. Or adopt People, Ideas & Objects and earn the profits that the investors demand of the industry. It’s their choice.

The Preliminary Specification and user community provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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

Thursday, April 17, 2014

Our Priority, the User Communities Development

It is our current number one priority at People, Ideas & Objects to be developing the user community. The user community is the third pillar of our offering to the innovative and profitable oil and gas producer. As we develop the user communities capabilities to provide the oil and gas industry with an alternative means of organization. We can then challenge the bureaucracy and its hold in the administration of the industry. We do this on the basis that there are significant issues unaddressed. Primarily the financial performance of the industry. Capital is being destroyed at a remarkable rate and there is no plan, no hope and no prayers to do anything about it. The bureaucracy are satisfied that they are in control and expect to remain unchallenged. Their interpretation of “earnings” is an example of the disrespect and slack approach they take to the business of the oil and gas business.

I’m confused, when a CFO or a CEO touts their earnings numbers in an investor meeting, do those numbers include a deduction for the costs that the producer incurred for overhead or depletion? Someone should ask that question directly because I think that in most cases the investors assume that the overheads are deducted, and in nine cases out of ten, the bureaucracy has not included the deduction for overhead when they are promoting their next big program. What they are selling is just the revenues less royalties less the operating costs. And that’s it. The overhead and the costs of capital are things that will be eventually accounted for in the Annual General Meeting that will spill all the bad news at once. And say “things didn't turn out like we expected them to.”

And these are the earnings of the industry according to the bureaucrats in power. What came into one pocket, and left the other pocket, leaves what's left, which is my profit. Why would an industry operate on such a basic level? Think about it for a minute. It makes things so easy. There is no hard work in an environment where all you have to do is count the money that’s left at the end of the day. No planning, no budgeting, no thinking about the things that you should do right. Its just what you have in hand at the end of the day. For a bureaucrat it is a great business.

Some investors have become wise to the ways that the industry has operated. They see the bars fill up at 4:15 each day and have stopped wondering where these people are coming from. The party is almost over and there will be a reckoning for those that participated in this charade. Or alternatively, I'll get even fewer invitations for lunch. At some point the industry will need to account for the actions of the past decade and the value that has been destroyed.

What needs to happen is for a proper accounting of the properties performance begin to be provided. That is the revenues less royalties less operations less the overhead costs, a return on investment, and depletion of the capital be accounted for. And in that way if there is no profit recorded questions can be asked as to why. Because there is no reason that the producer should be producing losses at this time. Particularly with the industry wide capabilities in the Preliminary Specification to make the natural gas prices what are necessary for profitable operations. This shrugging of shoulders and shaking of heads that “its not my fault that prices are this low” isn’t going to fly anymore now that a solution has been proposed. A solution has been proposed and the bureaucracy has done nothing to work with it to make it viable in the industry! How does that work when you go to ask for more money?

It will be the user community that provides the alternative to this charade. And its development is our priority at this time. Real profits are what make the industry operate for the short and the long term. And real profits are the hard thing that an industry has to do. That is why the bureaucracy has avoided the topic. Its the hard work and they are not accountable to anyone, so they have let the profitability slip. Therefore its time to hand the reigns of the administrative power over to someone new and that is the user community who are defined in their own vision.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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

Monday, April 14, 2014

A Quick Summary of Where We're At

In the past week we discussed profits in oil and gas and the differences in how People, Ideas & Objects provides the most profitable means of oil and gas operations, and the current bureaucracies “plan” to calculate profits at the property level. The bureaucracies plan is designed to counter People, Ideas & Objects claims in the marketplace, theirs being a “bullshit baffles brains” strategy. We also discussed the difficulty they will have in calculating profits at the property level and suggested that the bureaucracy would not be doing any of the changes to make these calculations permanent. That they only needed to get through annual report season with an alleged “plan.”

When making changes to the industry methods of accounting required a process of getting everyone on the same page. A process that I referred to last week as herding cats. I also stated that I had given up on herding cats as a career choice but with so much change in the Preliminary Specification and decentralized production model. How could one believe that they could orchestrate so much change without the task of herding cats at some point?

The behavior that we see in the bureaucracy is consistent with the behavior that was apparent back in 2004. And it will be the same behavior that will be demonstrated in 2024 if we keep them in power. They are not going to give up to any alternative means of organizational method in the oil and gas industry by choice. The power that they have to administer the industry has to be taken away from them. That is the only way in which they are going to lose the capabilities that they currently enjoy. And that is why we are focused on the user communities development as an alternative means of organization for the oil and gas producer.

We are not waiting for someone to grant us the approval to begin our work. We are focused on providing the oil and gas producer with the most profitable means of oil and gas operations. Providing a choice to the oil and gas industry, a self interested bureaucracy without a plan, a hope or a prayer, or a user community focused on the producers most profitable means of oil and gas operations. That alternative is what we are preparing to the producer firm and oil and gas investor and comes in three pillars. The first is the Oracle Fusion Middleware and Applications as the technological base in which we operate. The second pillar is the overall vision captured in the Preliminary Specifications eleven modules, three marketplaces and two business models. The third pillar is this user community complete with their own vision of how they operate. This is the alternative that we offer the producer firm.

As time passes and the user community develops to offer a substantial alternative to the bureaucracy then we will be able to secure the funding necessary to build the software and support the user community. These costs are detailed in our budget. We will build our solution in the manner that it needs to be built to provide the oil and gas producer with the most profitable means of oil and gas operations. And that means that we will not be compromised in the way that we would by dealing with the bureaucracy and having to herd cats for a living. Ours will be a clean sheet operation where we start with the Preliminary Specification and build what is necessary and what we want from there. The bureaucracy doesn't want to deal with us and therefore we don't have to deal with them. This ultimately works in our favor.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. 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