"Organizations Don't Change, People Do," Part IX

We continue to process user community applications for the part-time positions of users in People, Ideas & Objects user community. The application process is spelt out here. These are the critical positions in which the Preliminary Specification will be defined, refined and built based on the knowledge, understanding, skills, experience and ideas of the community. These people will collaborate in their areas of expertise with other members of the community and general population of the oil and gas economy. Gathering, innovating and presenting the needs of the software to our developers. Developers who are authorized to listen to the user community exclusively for input. Users are the critical resource of the oil and gas industry that will ensure that the dynamic, innovative, accountable and profitable oil and gas producers are always provided with the software and services needed to fulfill that criteria. Ours is a dynamic offering that avoids the locked-in, software driven, organizational constraints to industry change. If this interests you, preparation of your application should be well on its way. We are looking for a total population of approximately 3,000 user community members. It is also the user community members that we are looking exclusively to, for the development of the service provider organizations that are necessary to fulfill the dynamic nature of the industries operations. The user community member will be the principle behind the service provider. It will be within that organization that the user community member earns their primary sources of income. 

It will be through the service providers where the people and organizations that the administrative and accounting resources of the producers will be reallocated to. There they will manage one process on behalf of the entire industry as their client base. Using specialization and the division of labor, the software that they develop with People, Ideas & Objects to ensure that a standard accounting and administration is conducted across all of North America’s oil and gas properties. This standardization is critical to ensure that any production that is produced is deemed to be profitable, then the producer is ensuring their corporate profits are the highest possible by only producing profitable production. And that determination of profitability is the standard that was applied to all their properties as well as all other production in North America. All producers therefore know that the criteria used to evaluate profitability, and hence production, is consistent throughout the industry. 

In addition to being standard across the industry service providers will be offering producers there services on the basis that their costs are variable. If the property is shut-in as a result of not being profitable, then that property will not have any of the service providers receive any data through the Preliminary Specification that will cause them to conduct any work, or generate any billing for that property. Creating for that producer a null operation for the property, no profit but also no loss. And ensuring that all the costs of oil and gas exploration and production are captured in the prices that are passed onto the consumer through People, Ideas & Objects price maker strategy. Particularly the capital costs, to ensure they match the timeliness and recognition that is necessary in this era of rapidly declining shale formations. It is in this way that shutting-in any unprofitable properties will stop diluting the producers corporate earnings from their profitable properties. Enabling the producers to achieve the highest level of profitability that they can achieve. Shut-in reserves will be saved for the time in which they can be produced profitably and those reserves will not have to carry the increased burden of making up for the continued losses if the property were to continue unprofitably. The commodity markets would also find their marginal costs when the unprofitable production is removed from the market. The effectiveness of removing production from the market during the coronavirus validates this theory. Consistent application of this process across the industry, always, would enable the oil and gas’ greater economy to fulfill its responsibilities of abundant and affordable energy to the consumer for the remainder of the oil and gas era. A key point as the costs of each incremental barrel produced increases.

What People, Ideas & Objects ERP software will be providing to the oil and gas industry is the explicit knowledge that is captured in the ways and means of industry operations. This will be nothing more than an aggregation of what is already known and available elsewhere, repackaged in our offering through the efforts of the user community. Not to belittle our role here but that is the role that software plays in society. The value lies in the tacit knowledge of learning by doing as well as a myriad of other definitions contained here. It is the critical component of the process that we are all undertaking in making the oil and gas industry dynamic, innovative, accountable and profitable. To not approach the source and application of both explicit and tacit knowledge in the changes we are making would lessen our chances of success. The user community and service providers are the source and application of tacit knowledge, and therefore the keys to success. This has been the perspective of People, Ideas & Objects since the beginning of our efforts in August 2003. If you’ve read the Preliminary Specification you can see clearly the impact that the Agile Manifesto (2001) has had in the development of the software and services that are needed to make the industry and producers dynamic, innovative, accountable and profitable. Specifically the manifesto’s most applicable rules that apply to the user community and their service provider organizations are numbers 1, 2, 4, 5, 11 and 12 which are as follows.

1) Our highest priority is to satisfy the customer through early and continuous delivery of valuable software.

2) Welcome changing requirements, even late in development. Agile processes harness change for the customer's competitive advantage.

4) Business people and developers must work together daily throughout the project.

5) Build projects around motivated individuals. Give them the environment and support they need, and trust them to get the job done.

11) The best architectures, requirements, and designs emerge from self-organizing teams.

12) At regular intervals, the team reflects on how to become more effective, then tunes and adjusts its behavior accordingly.

By no means are these the only rules that we’ve applied, these are only the ones that I’ve highlighted today for the purpose of the user community and service providers. One can also see that there is a role for the producers as well. They’ll only get out what they put into this process. If they decide to sit back and wait for others to carry the freight then they’ll be sorely mistaken when it comes time to use the software and services. It will be far more advanced than what they can comprehend immediately and they will therefore fall back in terms of their performance. In the future it is not that critical to own the oil and asset as it is to have access to, and be able to function with the software and services that make the oil and gas asset profitable. 

People, Ideas & Objects user community and their service provider organizations are the industry structures that need to be built in order to make the changes in the industry to ensure that everyone can prosper. “Can” being the appropriate word since there has to be a willingness to participate. Providing the profitable means of oil and gas operations to the dynamic, innovative, accountable and profitable oil and gas industry. Does anyone argue the critical role real profits provide everyone in an industry? They are the only reason for the existence of the industry and the pursuit of cash flow has diverted the attention away from the value that profits provide, and now everyone is suffering. Accounting is about performance, and ours will be a standardized and variable service measuring the timing and accuracy of the producers performance. 

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

"Organizations Don't Change, People Do," Part VIII

The process of bankruptcy at Chesapeake will seek to deal with the $9.0 billion debt burden the company has incurred. With negative shareholder equity of $3.9 billion, and negative $442 million in working capital there will be no room to maneuver. The Motley Fool has an analysis that is worthwhile to review. All of this occurred during the shale heyday which was also a time of “easy money” or a period where interest rates were negligible. This is the future of the North American producer. If not bankruptcy such as Chesapeake and the few that have already pioneered that route. But delisting as what happened to PennWest, or as they called themselves Obsidian. Or Pengrowth which was purchased for a nickel a share. A Canadian nickel at that. These, as are other companies in the industry, are trading at such small percentages of their former glory that it’s even too painful for me to bother to calculate. Usually one or two companies hit hard times in an industry and are culled from the field. Why would anyone pay over $9 billion for Chesapeake? These are the albatrosses that have been incurred in the competitive environment where “building balance sheets” becomes all the rage. With the expansion of their assets producers did not see any cash being returned due to the low commodity prices producers were charging. To offset those big, bold, beautiful balance sheets that now hold 80% of property, plant and equipment, 9% are inventories and accounts receivable the rest in other assets and goodwill. These “assets” which are really only testaments to the spending spree, are therefore offset with ever expanding volumes of debt and eroded investor contributions. They represent in People, Ideas & Objects opinion the only value remaining in the industry, the unrecognized capital costs of past production, which might be recoverable in the form of cash in the future. How did, and could this disaster happen?

What producers need yesterday is a ready supply of cash. And the only form of cash is more production, which leads to further deterioration in the business but might help with the rent, the lights and payroll that are all due tomorrow. Production discipline in this environment will not be the principle that producers stand by for the next decade. Overproduction will continue until the last producer falls into the same pit as the three mentioned above. 

In the meantime people from every walk of life are thrown into a dilemma as to what to do. You could stay with that promise of big money from the producers. Or take what you’ve got and rebuild your lives elsewhere. That’s what we did in our role as investors, didn't we. We didn’t like being treated poorly and our money used to fuel the lifestyles of the rich and famous. So we left and headed to other industries. And hasn’t that worked out. The NASDAQ has recently been in record territory over 10,000 points, the S&P Oil and Gas Index SPSIOP is 2,277. (NASDAQ was 1,700 in February 2009, SPSIOP was 6,133 in May 2010 and 12,642 in June 2014.) And the NASDAQ used to be considered the dead zone 20 years ago. But the future is inevitable for Chesapeake as it is for the industry. What producers need to do is simple. Recognize how they’ve destroyed the industry and the need to rehabilitate it. Stop lying, blaming others, making excuses and scapegoats and instead take responsibility and act to resolve these issues by funding and building the Preliminary Specification. This will be the most effective way in which they can mitigate their current risk and potential damages. Then operate the industry on a profitable basis for the next decade and prove to the world that this past performance is behind you. 

The industry as it stands today is worthless. The whole point up until now was to find oil and gas reserves. What value do these reserves have? Nothing, if they can’t be produced profitably their present value is zero. Right now they can’t be produced for as much as their operating costs, and they’re almost always produced well below the point of break even. Chronic negative present value. And these reserves are backed by debts that are very highly leveraged. Therefore the sum total of these bureaucratic activities of the past four decades is that the industry is worthless, a drain of investor and banks cash and the banks will always have to be paid first for the vast amounts of disproportionate debt they’re owed. This unfortunately is the reality of the industry's state of affairs. There are no alternatives or opportunities that I can see during the next decade. And this next decades scenario assumes that remedial action is taken today. If it's not...

The belief of the bureaucrats is that investors will swoop in and find great deals now. This is a fallacy of monumental proportions. What the investors see in the industry is representative of a person living in a dumpster, which in Chesapeake’s case is also $9 billion in debt. This individual was once famous and powerful for heading an oil and gas company. Born of the pedigree necessary to find the reserves, they just need help to get out of the dumpster. Is that where and when you throw another billion or two at them? Or, do you hand them your card and say if they ever get back to where they once were to give you a call. It’s about performance, not promise. They didn’t end up in the dumpster because of their high performance. Why would you continue to subsidize their poor performance? Why would you invest in dumpsters when you can make real earnings elsewhere? Oil and gas needs to prove they have the wherewithal to deal with their issues. Taking care of someone on life support because they have an alleged history but refuse to accept they’ve made and continue to make mistakes. That they don’t listen to anyone and continue in their destructive ways, doesn’t appeal to anyone. The only thing that will help in these kinds of situations is the humble approach of looking inward and dealing with what is found. 

I know, organizations don’t change, but people do. What we, as concerned individuals, can do is rebuild our own oil and gas industry to replace this bunch and do so in the vision of the Preliminary Specification. Why not, I am at a loss to find one aspect of the industry that is operating efficiently and profitably. Producers may argue they're not living in dumpsters, but they’re quickly learning. I originally gave them until August 31, 2020 to face their ultimate demise but I think that timeline will be shorter. There is not much time for them to act. And if they don’t, they’ll have no support from anywhere. I’ve spelled it out in this post quite clearly, preaching what each step they need to take. So, let them surprise us and see them do what is necessary. 

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

"Organizations Don't Change, People Do," Part VII

People, Ideas & Objects Preliminary Specification presents a different vision of what the industry provides its stakeholders. Profitability in the real sense, is necessary in order to ensure that everyone is well established and taken care of throughout their careers in the greater oil and gas economy. This way they can maximize their contribution to the economy and ensure that they can build a life for themselves and their families that will be uninterrupted by unnecessary disruptions due to abuse and neglect by others, or as we call them bureaucrats. Ours is a different vision than the one that has brought the industry to the point that it is today. Ours uses the capitalist system in its expanded role of ensuring all stakeholders are considered in the process of exploration and production of oil and gas. Without profitability in the real sense, vs. what we have today, nobody is winning other than the select few who have put the entire complex in jeopardy, the bureaucrats which consist of the C Suite and Directors. 

Stretching everyone to their breaking point is a necessity that happens now and again as challenges are faced within any industry. The fact is the people who are employed in oil and gas have had to “put in 110%,” “make the effort,” and “we have to push through” constantly without any measure of normalcy other than the times where they're laid off. “It’s boom or bust” don’t you know. Which is a ridiculous assertion in the 21st century. Producers should now understand that this has been, and is, unsustainable and inappropriate. We have a concerned and exhausted workforce that knows there are few replacements standing in to take their place. In addition to the exhaustion of the people, there is no cash in the producers which makes all the issues exponentially more difficult. There is no conceivable way for these bureaucrats to comprehend what it is they’re doing wrong. Or is it just guilt and insatiable greed that keeps them hanging on to their old ways? Why in the 21st century would anyone run a primary industry this way?

With the amount of work that needs to be done in the industry, where is the cash coming from to do this work? If we can’t even capture the operating costs incurred to produce, we can’t capture the past capital that has been invested. And we can’t begin to think what will be required for the future capital demands of the industry. Where does the cash come from to manage this demand? Bureaucratic attitudes are that investors and bankers will be so enamoured with their big, beautiful balance sheets that they’ll give them all the money they’ll ever need. Although we’re looking at this issue from the perspective of today, tomorrow is not another day. It is delusional to believe that this bunch can make any headway in this direction based on their current and past performance. 

We noted in our white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” That any commodity that is subject to the characteristics of a price maker, such as oil and gas, would be invoking price destruction by producing below the technical definition of breakeven. Which involves all of the costs associated with oil and gas exploration and production, including capital. Producers today feel that trading the commodity for the price of its operating costs is the acceptable business that they’re presented with. But what we have in oil and gas is an entire industry that has produced everything, everywhere and always below the breakeven cost for the past four decades. Eroding the prices of both oil and gas commodities across the globe. It is in this graph that the production discipline that the industry must adopt, and can adopt through the implementation of the Preliminary Specification, where nothing is ever produced below a properties breakeven point. Providing the producer with the most profitable means of oil and gas operations by ensuring that none of their losing properties dilute the earnings of their profitable properties. Saving their reserves for a time in which they can be produced profitably and those reserves will not have to carry the incremental costs of the additional losses that it would otherwise incur if it continued to produce. And the commodity markets have the marginal production removed from the market and therefore find the marginal price.

The oil and gas industry is a capital intensive business therefore it follows that most of the costs that are passed onto the consumers would therefore be capital in nature. Bureaucrats believe that capital costs are to be collected, saved and cherished on their big, beautiful balance sheets. Which is nothing more than the industry wide talking point for their scam. The current myopic and short term focus has the entire industry on bucket brigade patrol. There is no concept of tomorrow and there is certainly no concept of success or failure, strategy or vision. Not only in terms of how the future success of the industry will be achieved and wholly attributable to the people that will be involved. Those costs between the breakeven point and shut-in price are capital in nature and I can assure you that 70% of these costs are a result of paying for the work that people are doing. It’s also been a result of these people that have provided whatever success that was achieved in the past. Working against the bureaucrats chronic abuse and misuse. (The bureaucrats apparently are grateful and thank us for all that has been provided to them.) Industry as it is structured today doesn’t have the wherewithal to make the changes or the organizational structure to reap any benefits of any future scenario.

After the first quarter reports we learned that Shell had cut their dividend substantially. The first time their dividend has been cut since World War II. Noting that the virus had made unknown, permanent changes in the way that people will be working through technology. Others did not follow and we see now BP follow through on their promise of cutting more people. A simple choice of who do you see suffering the most under the current conditions, the investors or staff? On June 8 the BP CEO Bernard Looney announced the following.

BP has announced plans to cut 10,000 jobs following a global slump in demand for oil because of the coronavirus crisis.

The oil giant had paused redundancies during the peak of the pandemic but told staff on Monday that around 15% will leave by the end of the year.

He then follows up with an interesting quote about the current situation.

We are spending much, much more than we make - I am talking millions of dollars, every day

The second quarter reports of the producers will not be as bad as the first quarters in terms of the earnings. The scam must continue. There may even be some improvements as a result of the reversing some of the depletion that was recorded in the first quarter. Negative depletion in the second quarter will go straight to the bottom line. However what I think Mr. Looney is talking about is the cash that BP is having to spend in order to attain the production that BP is producing. North American producers were claiming their production costs were anywhere from $23 to $36 / bbl which puts production at any time this quarter as a losing proposition, except for the negative depletion, but also a drain on cash. Cash has to be hemorrhaging out of the industry at such a pace that heads are spinning. 

The justification for the Preliminary Specification is evident to all who are knowledgeable in the ways and means of the oil and gas industry. There are many motivations for those that are not interested in continuing their employment in the industry and we understand that decision. There are many people who share my concern and are as adamant that the solution needs to be undertaken quickly and efficiently. These are the people that we see as members, and potential members of our user community.  

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

"Organizations Don't Change, People Do," Part VI

The surreal nature of sitting in a vast wasteland once known as the oil and gas industry is contrasted by the issue of overabundance of the two commodities. Society is fortunate to have this overabundance and we know intuitively that it’s temporary. With the ongoing destruction of capacities and capabilities ultimately leading to reduced deliverability, we’ll be able to remember that so much was being done on the strength of the domestic energy supply. As we now watch and wait while the bureaucrats crawl back onto their couches to resume their siesta, “muddle through” and “do nothing” postures. Gluttony was never attractive but it is inherently understood to be terminal. What does it take to make the necessary changes for the industry to resolve itself and focus on a dynamic, innovative, accountable and profitable future? Please don’t ask me because I’ve known that these days were coming a long time ago and have worked to resolve them. And I don’t have an answer, these bureaucrats have punished me at every opportunity they could. Focusing on building the Preliminary Specification and profitability everywhere and always in this industry generates nothing but bad attention from the couch potatoes who’ve done nothing whatsoever to resolve these issues. Until action is taken we can only be assured that things will get worse.

The problem when we get into a downward spiral and trajectory such as we’re in now is that they become the momentum and only decisive, long term, focused action is capable of reversing that trajectory. Clear, productive and active direction needs to be made by those with the capacity, authority, responsibility and capabilities to do so. People in the industry see none of the necessary actions to rectify these issues and can clearly see the downward trajectory taking us in a direction that no one outside of the bureaucracy and ANTIFA wants to go. I mentioned last week that the overabundance of natural gas that began in 2009 has now spread globally to the point where we may begin a further breakdown in natural gas prices. Or maybe the bureaucrats, the CEO’s and other officers, directors of the producers, will just up and leave? Trajectories and momentum are great things when you build towards the future. 

People who’ve dedicated themselves to oil and gas now want out. It’s not that they’ve had enough, it's that they know where we’re headed and what’s the purpose of traveling further down this road with this bunch of do-nothings? The United States in the post virus world will be the land of opportunity and now is the time to exercise the personal changes to ensure your part of it. I am seeing signs of panic in some of the healthier companies and firms in both oil and gas, the service and subsequent tertiary industries where their primary concern is employee retention. The promise of “big bucks” just doesn’t carry any weight when it comes to that which we’ve seen here for the past decade. It's been ten years since natural gas prices declined! A decade. And nothing whatsoever but lies, blaming, excuses and scapegoats. But then maybe we'll have a “cold winter this next year.” The “active” management in oil and gas can’t even think of new excuses so they're going back to the start and recycling their past diatribe. 

The greatest amount of pushback that I’ve ever received at People, Ideas & Objects was a result of my last Tuesday June 2, 2020 post. The one where I noted that I’ve been constantly harping about this issue since August 2003, and on this blog since December 2005. That the Preliminary Specification was completed in December 2013. All without a pennies worth of assistance from these bureaucrats. All of these have been documenting how the scam the bureaucrats have been running would eventually lead to the death and destruction of the industry. That it was a history lesson, not rocket science. Anytime there is an overt deception to overstate assets and profits there has been a scam being perpetrated by the insiders. That this fraud has been identified and documented by People, Ideas & Objects to exist since the late 1970’s. Leading to a culture that most people in the industry are unaware that it’s wrong, “it’s just the way things are done.” That of course is not the case with the bureaucrats who knew all along what it was they were doing, reaping their personal bounty. That I have been abused consistently by those that are perpetrating this fraud. And now that everyone can see what usually happens in these scams, the fallout, the trillions of dollars in losses for everyone but the scammers. The attempts to silence People, Ideas & Objects and steal our Intellectual Property over the course of the past 15 years proves that they were fully aware of what they were doing and were putting that effort in to conceal their scam from being discovered by others. And therefore the liability they’ve earned today, by finding that today’s oil and gas destruction is 100% consistent with what the Preliminary Specification resolves, makes our good friends the bureaucrats guilty and culpable. 

It has been bizarre that nothing’s ever been done about this isn’t it? A decade of steep downward trajectory and nothing is done. Well let's rephrase that in light of what we know. It’s not bizarre, it was deliberate and now obvious to everyone. If you could be “waiting for a cold winter,” “building your balance sheet,” “rebalancing markets,” “putting cash in the ground” or “seeking Artificial Intelligence and Cloud solutions” that was good enough, wasn’t it? The people in the industry and the associated industries deserved better than to be used and abused by these scammers. I hope some of the bureaucrats have remnants of a conscience and it’s these people they’ve betrayed that haunt them in their elderly years. But… It’s not that the people who’ve been betrayed and are leaving the industry don’t care, they’ve been fighting otherwise for more than a decade. It’s just the obstinance of the couch potatoes is legendary. 

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

"Organizations Don't Change, People Do," Part V

OPEC+ are meeting again Thursday to discuss production volumes. Specifically what is the size of the cut for the month of July? It was agreed previously that their July cut would be reduced from 9.7 million boe / day to 7.7 million boe / day. There are conflicting objectives between their two largest producers Russia and Saudi Arabia. Russia wants to stick to the plan for the July 2.0 million boe / day increase in production and Saudi Arabia wants to extend the 9.7 million boe / day cut until the end of the year. There seems to be room for compromise in the extension of the agreement of 7.7 million boe / day for the remainder of the year. No doubt Saudi Arabia is feeling pressure from the Americans whose credibility is increasing in OPEC+ each day as U.S. deliverability continues to decline. Nonetheless, a two month old agreement with its parties disagreeing publicly, who were allegedly at war with one another prior to those two months, looks really promising to me. 

The severity of the cash situation in the industry is becoming increasingly difficult and more severe, earlier than I thought it would. There are more lay-offs being announced throughout the industry and there is a sense of urgency beginning to be seen in the actions of some of the more senior producers. Cuts this deep must make those people that are remaining wish they were the ones selected. How these producers think they’ll continue with so few resources on a go forward basis is beyond me. But that would not be the point would it. This shows the starkness of the reality that the producers have placed themselves in. That bureaucrats believed they could muddle through this and do nothing about it was a betrayal of the people who work in the industry. That natural gas began this destructive process over a decade ago is evidence that actions should have been taken by now. Now as oil maps the same trajectory and plan that bureaucrats instituted for natural gas, they feign disbelief and are only now beginning to act. As we’ve noted before, if G&A is only 2.9% of revenues during all of 2019 for our sample of producers. Then why is it a 10 - 15 percent cut in G&A is seen as necessary? The fact of the matter is that G&A has always been part of the ponzi scheme's facade. And at today's oil price G&A is, by our calculations which we challenge anyone to prove our numbers otherwise, 28.5% of revenues. 

Continuing in the bureaucratic management method which sees whatever issue is screaming the loudest at the moment. Our White Paper “Profitable, North American Energy Independence - Through the Commercialization of Shale” documented how the monthly overhead and capital costs drain the cash resources of the producers each month with no replenishment. There are no adequate returns of cash in this capital intensive business to make up for the spending that the producer conducts. And as a result you had the unique situation of the annual shareholder fleecing, or as they described it, raising more capital. Only to go back to the market each and every year and tell the investors that the money they gave them last year are now sunk costs. Unfortunately for the bureaucrats the oil and gas investors eventually figured out they were the mark in the scam and left. Again nothing was done. Cash continued to drain in apparently a transparent manner with only myself jumping up and down about it. The issue about cash, and the one that is facing the producer bureaucrats this morning is that without cash you have no business. No cash = no business. And as I noted on Monday: A disaster yesterday, and certainly one today, only to be followed by a bigger one tomorrow, only to add today no cash, no investors, no bankers, no excuses and no scapegoats. Since the publication of the Preliminary Specification I was unable to convince the producers to invest in their businesses profitability by implementing our software, user community and service providers. Suggesting that an industry that doesn’t invest in its own profitability isn’t one that anyone should be interested in. 

Another point about the capital assets of the producers is of course the ponzi scheme aspect of them. Bureaucrats claim they’re costs are $50 / bbl however we believe them to be $150 / bbl when you allocate the costs based on the decline curve. Producers allocate their costs to every known molecule of oil and gas reserves that they have. Then only recognize the smidgen of capital costs for the production from those reserves. Even though those remaining reserves will not be accessed this decade and without massive additional capital expenditures and steep decline curves. Returning cash to the business was never an issue when you had investors to fleece, especially when you lined them up three times around the block. 

The desperation for cash was noted late last week when Occidental cut their dividend to $0.01. That’ll impress the future investors and give the current ones every reason to stay. This is on the heels of an 86% cut from $0.79 to $0.11 on March 10, 2020 and lets not forget how well the stock is doing. Such foresight, such wisdom, such planning, such effective management. The $0.11 dividend never even made it into existence; this management is so proactive. I am trying to be positive here. Cut and run, cut and run. Sorry I was reading ahead in the manual “Bureaucracy for Dummies.” What is there left for our good friends, the bureaucrats? They’ve earned their keep and this was always someone else's fault, that is if you were listening to them. The mass exodus will begin now, I believe, prior to the second quarter reports. The all knowing directors may be the first to go. We’ve mentioned before their insurance coverage may expire if they don’t. Such wisdom and foresight on their behalf, it was just mid May when they committed and were voted in to sit as directors for the coming year. That was just over two weeks ago. This is not rocket science, and I’m not Elon Musk, this is history and should have been well known by the bureaucrats and their directors, especially since I’ve been yelling at them about this. I wonder at times though, does the fact that I was pointing this issue out so long ago attach a liability to the directors and officers of the oil and gas producers? Other evidence exists that shows a lack of action by these bureaucrats. OPEC was instrumental in making production cuts these past three and one half years that had material effects on the price of oil. Yet all we heard from the North American bureaucrats was a continued belittling of them. The shareholders now have evidence of these “officers” and “directors” fraudulent behavior and will now want to recapture some of their investment from these bureaucrats bounty these past decades, and let's not forget they’re insured for this type of risk! Change only happens if we create change. These last statements will have the insurance companies motivated won’t it. Lawyers are starting to perk up, they need work too. After all lawyers like shareholders are people too.

August 31, 2020 may have been too generous of a time allocation for the producers. It would appear that time is slipping away much faster than when I first established it. The one advantage bureaucrats are finding in this coronavirus shutdown is that they don’t have to face those that they’re laying off. We should all question the actions of these bureaucrats in the process of laying people off. Why do that when the next issue that’ll be screaming the loudest will be what triggers the bureaucrats resignation? 

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

"Organizations Don't Change, People Do," Part IV

While Rome is burning we see the leadership in the oil and gas industry undertaking a discussion that represents a complete disconnect between reality and their mindset. Lately conversations that these people are having makes me marvel that they’ve ever attained their positions of responsibility in the industry. A geologist commented that no amount of accounting changes will make the basin profitable. A reflection of the disrespect that engineers and geologists have for the accounting profession and its designated role in oil and gas of “just paying the bills.” A researcher who stated that hydrogen as an energy source was the real future. A former partner from Deloitte & Touche suggesting that the service industry needed to up their game and invest in Information Technology. Or others that are heart broken that deliverability is moving downward from previous high watermarks and may never be achieved again. These were the people we’re finding who were only assigned the responsibility for rearranging the deck chairs on the Titanic, and instead occupied themselves with the bright shiny objects in the sky. Is it any wonder that $2.2 trillion of investor dollars have been wasted in the past decade with such activities occupying these minds. There’s no inherent capacity to see the damage and destruction they’ve caused out of guilt or absolute inability. Or is it a continuation of feigning stupidity to cover up their crimes. Let’s find out.

What most people are seeing and feeling towards oil and gas these days is absolute disgust at the leadership in the industry. Negative oil prices appear to have been the last straw. Moving people from denial that there was a problem, and that all was needed in order to overcome these issues was a little faith, determination and dedication. This has been most people’s position since the decline in natural gas a decade ago. Going through the process of negative oil prices has caused these people to be angry. Anger at the choices they’ve made of choosing a career in oil and gas. Anger at the loss of any future prospects. Anger at the prospect of having to start all over again in either a new industry or rebuild from these ashes. They see the obtuseness of this leadership without the inherent bias of an insider now, and they’re angry that they’ve been so deceived. 

Is the state of the industry all that bad, really? “Real” profitability should be the goal and desire of everyone who works within an industry. I suggest exclusively, that is the business. Not one oil and gas producer that I’m familiar with over the past four decades has dedicated themselves to this principle. It’s always been some theory or excuse that was topical at the time that drove the discussion and direction of the producers. “Building balance sheets?” It was management by way of the head lines in the media and through the rumor mill. The principle of profitability is the necessity that industry requires everyday of their existence to ensure that all those that are working within that industry are being taken care of. In oil and gas this includes the producers, the service industry, tertiary industries and the general economy that directly benefit from a profitable and healthy oil and gas industry. But let's not forget the investors, who are nothing more than you and I, and the bankers. Who’s exit from the industry has received at best a passing shrug from our good friends the bureaucrats. It's all of these groups and people who directly support the industry and are the critical resources that make the industry function. Does anyone argue that profitability is no longer required in oil and gas? It was this argument that was thrown at People, Ideas & Objects for most of our existence. “Profitability doesn’t matter, it’s cash flow, no one cares about profits,” I was told at least a thousand times. 

Shale’s performance is now as expected and what we’ve documented in the White Paper. With financial deterioration other frameworks are quick to follow in terms of the same decline. Now we are seeing the decline in both oil and natural gas shale performance as a result of the chronic inactivity and lack of profitability by the bureaucrats this past decade. These declines will be a permanent and significant demarcation of the performance of the producers. Not for any physical reason as a result of the formation or operations in the field. But due to the financial collapse of the industry. We have screamed and shouted about leaving all of the costs sitting on the balance sheet as being highly inappropriate and now the industry will face the worst most devastating aspect of this. And it's just as we noted in the White Paper, the investors commenting that shale “was a rapidly depleting asset.” Investors always seem to capture the full scope of the issue in one sentence. And yet, no one seems to have heard what they said or even noticed that they’re gone! The production decline curve is a result of the shut-ins certainly, but mostly attributable to the lack of continued drilling. Note all of this damage and destruction would have been avoided if the industry would have adopted the Preliminary Specifications decentralized production model’s price maker strategy on a timely basis. The first graph is from Bloomberg and the second is from EIA.

Performance and profitability have been the theme that we have harped on here at People, Ideas & Objects. The Bloomberg graph shows precisely how the performance of the industry will become the most tragic event any industry has ever witnessed. Capital costs have been stored on the balance sheet for generations in order to build bigger, better balance sheets, for whatever reason a company would even think that that is a corporate objective. Just part of the ludicrous culture in oil and gas. Here we see the deliverability of shale declining to half in 18 months. Also note that 2017’s contribution to the total is substantially below what appears to be 20% of its original. Shale’s cost according to this website is $73. This price assumes that the capital costs have been allocated to each and every molecule of oil in the reservoir. Of which there are a substantial volume of. However those reserves and the continuation of that high deliverability will only be realized as a result of several iterations of drilling a new lateral, casing, cementing, perforating, fracing and putting back on production. The majority of the costs that were incurred in initially drilling the first phase of production remain in property, plant and equipment assigned to all of the vast booked reserves. Therefore, in the bureaucratic world, new investor money would be used to drill and complete the next lateral and the costs would be added to the reserves in the formation, never to be captured through the second decline curve etc. However investors rejected the bureaucrats' ponzi scheme years ago and these bureaucrats had to let the charade play out completely so that they could make as much as they could before they left the industry. It should be inherent in any “business” that the initial shale drilling and completion costs be profitably captured and returned in the form of cash in the initial 18 months of flush production! Now with mountains of unrecognized capital costs, depleted deliverability volumes and significant capital requirements for the next phase… 

Clearly the bureaucrats have resolved that nothing can’t resolve itself and will quickly do so sometime this century. These passive, lazy people have completely destroyed everything. There is no value inherent in anything in the industry. The sum total of the industry demands cash in order to operate and that number is going to skyrocket in the second quarter of 2020. Eliminating the liquidity of the industry for at least the next decade. You can’t run an industry without liquidity, and we should ask them how is it they’ll be able to regain it? The full scope of the damage will be on full display for everyone who’s worked in industry to gain a full appreciation of how completely destroyed their efforts these past decades have been. No doubt the virus will have been solely responsible for that and the chronic excuse and scapegoat machine will roll on once more. People I don’t think care anymore. It is difficult to view what has gone on here as anything but a fundamental betrayal of these people’s trust and goodwill. Bureaucrats will say that will work itself out too, they’ll just pay these people really well. As if that is the only reason that good quality people work these days. People are interested in building and participating in things. Making them successful and growing with the opportunities that arise. Resolving the issues as they confront them and dealing effectively with them. And now what they’re presented with is the idea that hydrogen is a good place for energy to go? People also need to know that the promise of good money is a consistent, honorable commitment for the long term. Producers can promise the sky right now, but where’s the money going to come from and, quite literally the question people have is, what about next month, will that promise still be valid then?

People are resilient too. Once faced with a difficult situation and odds they’ll rise to the challenge if they can see their way through. Today they’re presented with muddling through which is a very effective vision for everyone to rally around. Who believes this small minded garbage now? They’ve been presented with excuses and scapegoats for the past decade as to how the situation was going to be reversed. But organizations don’t change, people do. Right now people want a change. A change in their environment in the form of a new industry, or a change in the direction of the industry in the form of new leadership. It’s bad enough that this alleged leadership didn’t see this coming. It’s just that People, Ideas & Objects have been screaming about it for the past number of decades that makes it a crime. It’s one thing to have these bureaucrats wandering around as they do now, oblivious to everything failing about them. Imagine the situation if the industry was profitable in the “real” sense and the cash flows were strong. Their lack of focus and drive to perform would lead to untold riches, for themselves, and a continuation of their management style that we’ve always known them to employ. A disaster yesterday, and certainly one today, only to be followed by a bigger one tomorrow. 

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

"Organizations Don't Change, People Do," Part III

I’m finding that people within the industry and elsewhere are concerned for the producers and also share People, Ideas & Objects sense of urgency regarding the time for action. August 31, 2020 needs to see the situation in oil and gas met with direct action by those that have the authority. I am almost 100% convinced that doesn’t include in any way the current producer bureaucrats. They’ve had plenty of time to have acted and any feigning of stupidity about this situation only reflects their guilt. For them to be giddy about today’s mid $30 price of oil is a cover story that doesn’t wash with anyone. People are now clearly understanding what the costs of oil and gas exploration and production are. There are now just slightly more than three months for action before the existing producers begin to lose control of their operations in a cascading collapse of capabilities and productive capacity. Already discussions of how the productive capacity of the U.S. oil deliverability may never attain its pre-virus levels can be found. This is unnecessary, we do not have to go there with the Preliminary Specification showing what is necessary for the industry to be built to provide a dynamic, innovative, accountable and profitable oil and gas industry and producers. And our White Paper “Profitable, North American Energy Independence - Through the Commercialization of Shale” details a three step plan of how to get there. This plan includes rebuilding the industry on the vision of the Preliminary Specification, expand the throughput capabilities of the industry through specialization and the division of labor and then build the profitable, sustainable energy independence needed for our society to prosper. The question now is, how has this critical situation come about in oil and gas?

Some of the research we conducted and included in the Preliminary Specification were the reviews of Professor Lord Anthony Giddens Theory of Structuration and Professor Wanda Orlikowski’s Model of Structuration. In essence Giddens theory has society, organization and people moving together at the same pace and interacting with each other in a harmonious way. However, if one of these three elements were to accelerate ahead or lag behind the others, there would be disruptive conflict. Professor Orlikowski’s Model of Structuration noted that Information Technologies were an element of society. Therefore IT would have a defining and supporting, but also constraining role in the change, or as Giddens puts it, transformational development of economies. 

What we have today is society and its people are accelerating their needs and understanding at a much faster pace than ever before. These are creating demands on our organizations that are best represented in the current term of disintermediation. Organizations that are incapable of making the transition to these new Information Technologies that people are using, those which are forming new societal structures and creating conflict. We see this today in the ability to Work From Home (WFH). Nonetheless oil and gas organizations have resisted the changes in society, particularly those that have affected Information Technology, and are unable to maintain the pace of change that people and society are demanding of it. This was initially represented, I believe, in the investors distaste for the industry, followed on by the banks and now the people’s disenchantment. People, Ideas & Objects therefore believe that only user based software, with a defined change enabled capability will enable the industry to accelerate with society and its people forward with the pace necessary to approach the issues and opportunities we face in the next 30 years. Yesterday’s thinking, as represented by the bureaucratic malaise, will not be the solution to tomorrow's problems. As we accelerate further and faster oil and gas organizations must keep up. 

We have documented throughout this blog and elsewhere in the Preliminary Specification that the costs recorded as property, plant & equipment on the producers balance sheet were nothing more than the unrecognized capital costs of past production. That the real cost of oil and gas exploration and production were in the region of $150 / boe. Our solution assumes there is a defined and absolute need to recapture the capital that has been invested in property, plant and equipment and have it returned to the producer in the form of cash. The means in which to capture the higher, or actual, capital costs of exploration and production are through the commodity prices charged to consumers. That is what businesses do. What I feel this shows is a trend in the current industry to defer the recognition of any cost, no matter how large or small. The focus of bureaucrats on cost control has been an exercise in spending bloat with the magic elixir of new, and yes their claim to innovative, ways by just deferring the recognition of those costs. 

It is in that sense that we see society beginning to move faster once again. This example shows that not only are the producers somewhat flatfooted in terms of the accelerating demands from society and people, they have conveniently sought to defer these newly identified and unrecognized costs which have been known over the past number of decades. The example is as follows. A regulatory ruling in Alberta on May 13, 2020 may have blown the lid off of another kettle in the industry, creating a substantial escalation in the actual capital costs of production and making it difficult for investors and bankers to find oil and gas appealing in any way they look at the industry. It may also single handedly eliminate the asset divestiture market in Canada. But before we go there, I wanted to mention too that these inflated capital assets on the balance sheet have had the benefit of impressing naive bankers in the past decades. Banks have loaned money on the basis of the reserves and not on the real profitability of the producer organizations. The organizations have been reporting specious profits and the debts that have been incurred are now substantially out of context in terms of the performance capabilities of the industry, and I mean all producers based in North America. Banks measure of risk is now disproportionately skewed throughout the industry making it difficult to see how that avenue of capital will soon become available to the producers. Now, back to May 13, 2020.

In this article it is documented how and what happened in a transaction where Shell Canada tried to sell three sour gas plants to a firm named Pieridae Energy. Pieridae is the classic, highly leveraged, risk oriented start-up that takes on gargantuan risks and suffers through to the big payday. Except there was some pushback from locals who felt that Shell was absolving themselves of the responsibility to deal with the cleanup of the three plants and its wells. Over the course of decades of production it was believed that Shell was the one responsible for the cleanup costs, estimated at $100 million and was absolving themselves of that responsibility through the sale to Pieridae. Noting that Pieridae’s future was not tenable, the Energy Regulator cancelled the purchase / sale agreement. Returning the assets to Shell.

 

What will the effect of orphan wells have on the future of the industry? The Alberta government has assessed this cost at $100 billion. This ruling received support from other Canadian producers who sought to avoid the clean up costs they would acquire if the purchaser(s) (Pieridae) are unable to continue as going concerns. Claiming they would be responsible for the cleanup if Shell was able to sell the three gas plants and Pieredae was unable to continue. Two of these producers Canadian Natural Resources, who purchased all of Shell’s heavy oil operations, and Cenovus, who purchased all of Conoco’s heavy oil operations, both of these transactions taking place in 2019. And therefore, these two Canadian producers do not have sparkling clean hands in the event that the regulator cancels Shell's purchase / sale agreement with Pieredae, which may leave Shell and Conoco on the hook for those massive heavy oil cleanup costs, absolving the current heavy oil owners in the process, the Canadian producers. Maybe, the issue of cleanup costs was not an unidentified issue in the sale and no one was seeking to avoid these? The issue is that Pieridae Energy is deemed to have a high risk of financial failure. Leaving the costs to others. Cenovus and Canadian Natural were not deemed to have been high risks at the time of acquiring the heavy oil projects from Shell and Conoco. And certainly if they were deceived regarding the cleanup costs then they’d probably best be quiet or be taken for fools again and again. 

If the need to deceive by deferring capital costs was not so strong over these past four decades we may now better understand the real costs of exploration and production. That’ll be something for this new industry to discover and ensure they capture. Is this a precedent, will it be replicated in other jurisdictions in Canada and what about the United States. I’m sure those that were motivated by the deferral of orphan well costs were expecting to dump them off to someone else. If that is no longer effective, will this new industry be able to absolve themselves of these costs and begin with a lower capital cost threshold than what currently exists?

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

"Organizations Don't Change, People Do," Part II

Just when you thought it was safe to think otherwise, Shell announced it’s laying people off. 

Royal Dutch Shell will use measures including voluntary severance for staff to bolster its finances as the coronavirus pandemic batters profits, according to people with knowledge of the matter.

and

BP Plc promised its employees their jobs were safe at least until the end of June, but companies including Chevron Corp., Marathon Oil Corp. and Halliburton Corp. are laying off employees.

That is more than a whole month of extra job security if you work for BP. Such are the benefits of working in oil and gas these days. If we’re expecting a change from this behavior then who would technically be the fool? What producers have set as precedent, that it’s ok to blame the people for their difficulties, then they’ll find it difficult to make any changes from that in this “coronavirus pandemic” environment. Our sample of producers recorded 2.9% G&A costs in the first quarter of 2020. Exactly the same 2.9% for the entire 2019 year. Odd isn’t it that oil prices ranged from $53.36 to $63.47 for 2019 and only $20.10 to $51.01 in the first quarter of 2020 yet the percentage of G&A remains the same? I think what this proves more than anything is that overhead costs are much higher than what bureaucrats want us to believe. The amount I’m familiar with is 85% of overhead is capitalized, which would make the 2.9% really 19.3%. An amount that would be more consistent with my understanding. Throughout the time that I’ve been writing here I’ve found no argument or disagreement when I make that assertion. If the overhead burden for oil and gas operations was only 2.9% why lay off people? Accepting that our sample producers’ losses on revenues of $52.3 billion in the first quarter of 2020 was $33.6 billion. Would a reduction of the 2.9% in overhead, or the $1.53 billion in reported overhead costs for the first quarter of 2020 make any difference? At some point producers have to come clean with their numbers. If however overhead was 20% of revenue then cutting these costs would make a material change to the losses that were incurred. 

I’m pleased that producers have / are / will be learning how best to manage their organizations by better managing their production volumes and inventories, based on commodities prices. Proving People, Ideas & Objects hypothesis that oil and gas commodities are price makers would have been easier if they just read how the Preliminary Specifications price maker strategy operates. Tearing the place down wasn’t necessary in order to learn this, and the extent of the damage is now well beyond what can be remediated at any point. Creative destruction is a powerful force in the marketplace. Despite today’s dancing in the street by the bureaucrats who feel they’ve solved all their problems. (We noted how that’s not the case in last Thursday’s post.) Commodity pricing issues, in addition to their second quarter 2020 financial issues, should have them asking what is it that OPEC+ will be doing in the short to medium term. Or, what is OPEC’s long term strategy? With oil prices near $35, OPEC+ are in good shape, and North American producers hopefully better understanding what their role as swing producers involves. What will the expectation be in the marketplace? I think it will prompt OPEC+ to maintain production volumes at 100% of their capacity. As the low cost producers that is what the economic theory would dictate, and that would be my suggestion of what will be happening. One thing for certain is that these producer bureaucrats could blame OPEC+ for putting them out of business. A world class excuse and scapegoat.

https://knoema.com/vyronoe/cost-of-oil-production-by-country

What will be needed is a more dynamic, innovative, accountable and profitable oil and gas producer and industry throughout North America. This is the objective of People, Ideas & Objects Preliminary Specification and to do so we need to rely on nothing from the current organizations in the industry. Ours is a new industry organization that is the creative aspect of the creative destruction principle. If you believe these producers have a chance with their current financial position then you won't be interested in our offerings. I just don’t see the capabilities and capacities in senior management to make the appropriate decisions. Besides organizations don’t change, people do. The demand for change in the industry on a wholesale basis is a necessity and I’m sure we’re all grateful that we’re dealing with an abundance of energy at the moment. This new industry configuration will be dependent upon the people that make up the industry. You will never generate a dynamic, innovative, accountable and profitable industry from what exists in these organizations. But you most certainly can with the people who know intuitively what the situation is. This change begins with the People, Ideas & Objects user community. Who we see taking a leadership role in this industry transformation.

Our user community involves the understanding and knowledge that usable software is only developed with user input. Users are critical to software quality, usability, user experience and accuracy. People, Ideas & Objects will not develop software without user community involvement and has listed our user community as one of our three competitive advantages. Intellectual Property and research are the other two. With the scope and scale of an industry wide implementation and comprehensive functionality of an ERP system we believe that our user community will consist of approximately 3,000 individuals. This is in order to cover off the expected number of processes in the Preliminary Specification. Each user community member will contribute to the overall success of the software by contributing what they know and understand about the industry and how it operates. It will then be determined through an Artificial Intelligence algorithm developed by the user community themselves, which assesses the contribution of each individual user community member throughout the softwares development, and assigns an individual process within the software to be the domain of the user community members assigned service provider organization. Their service provider organizations are where they will provide their assigned processes management of the software and services to the entire population of industries producers, as their clients. The service providers bring the critical change to the industry structure that enables the Preliminary Specifications decentralized production model to turn all of the producers property costs variable. The process domain that is assigned to the service provider is the exclusive domain of that organization, supported by our Intellectual Property. There will be no competition based on price within the service providers. Competition will be based on specialization, division of labor, quality, automation, innovation, leadership and integration as their critical competitive advantages. To name just the highlights. Using our Intellectual Property that is generated in the User Community Vision as the basis of that competitive structure. 

As we’ve mentioned, service providers are a new sub-industry that will provide the accounting and administrative aspects of the oil and gas industry. These organizations will also be the change leaders that make the industry more responsive to the opportunities and issues that it faces. Due to the fact that the user community members are the only people that People, Ideas & Objects developers will look to for direction on the development of the software, it is the user community that controls the direction the industry will move towards. People, Ideas & Objects, are a permanent software development capability and capacity that will be available to the industry through the user community. Only user community members have exclusive access to our developers through our user community vision, and oil and gas producers seeking to have their wants and needs provided can have those attained through the user community. There will be no one else that will be able to solve the producers issues. As we’ve always suggested, who do you see today about making a change to the software that you use? What we’ve learned is that organizations are defined and supported, but also constrained by the software that the organization uses. Without a change enabled capability built into the new oil and gas industry, we would be cementing these organizations in a constant state. 

These user community member positions are new to anything that has existed before. They will earn a contract fee for the part-time work they do with the People, Ideas & Objects developers. And have their service provider organizations as their primary means of earning a living. When we understand the size of the administrative and accounting costs of the industry today, not the G&A that is recorded by producers, and then allocate the real overhead costs of the industry across the 3,000 service providers we see that these organizations will be substantial in terms of their size and revenue base. 

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

"Organizations Don't Change, People Do" Part I

We’ve noted before how Chesapeake Energy had to pay an upfront $25 million bonus for its bureaucrats to stay motivated during this next year. The announcement for this was dropped on a late Friday night with the companies first quarter 2020 financial statements. This courageous act has not been well received by the individual investors who may have had to recall their stock was once worth $12,635.76 vs. the $12.49 at the time of this writing. Say one thing about Chesapeake, they've kept the math simple. We’ve all sat and watched in amazement these past few years while the industry circled the drain. No action, not even any discussion, has been taken by any of the producers to remedy their situation, only excuses, scapegoats and “they’d been through this before.” Negative $40.32 oil had a somewhat temporary motivating effect for the bureaucrats to start rolling off the couch and do something. Shutting in production which we’ve heard nothing but howling about for the whole time People, Ideas & Objects suggested it was necessary. Unfortunately now negative prices also appear to be the motivating factor for people involved in North American oil and gas to give up on the industry and look elsewhere. Or was it the absurd $25 million Chesapeake bonus. Either one or both, with the coronavirus also providing an opportunity for people to make their personal changes, change seems to be catching on throughout the oil and gas industrial complex. Which proves the well established rule that organizations don’t change, but people do.

There is no other industry that I can think of that treats its people in the manner that oil and gas producer bureaucrats do. They believe they’re “disposable, temporary and costly units that sometimes are needed.” What description would bureaucrats use? They love to claim they’re the most sophisticated technical industry in the world yet they treat their people the worst compared to all other industries. Producers will claim that they pay the best, however, now that these people’s education has been exclusively oriented to the industry, they have a small family and a mortgage, they can see when they take their compensation from the good years and spread those dollars out over the good and bad years, their compensation has been below minimum wage. The risk, the anxiety and the fear of another downturn looming on the horizon is not something anyone grows familiar with as their career advances. Resilience in the general population of an industry is a limited resource. The amount of that resiliency or goodwill which the oil and gas producers have consumed from its people, is beyond what is tolerable and / or acceptable. People are done. 

I thought that the producers had until August 31, 2020 to move towards a new strategy and vision. Clearly I’ve miscalculated the timing here, the actual time may have passed as early as April 20, 2020 when oil prices went negative. I’ve also miscalculated the full impact of the coronavirus’ and how that’s being seen as an opportunity for people to make some changes. If the producer bureaucrats are claiming that they’ve incurred all this damage as a result of the coronavirus why can’t others use that excuse too. This phenomenon that I’m seeing is not limited to the oil and gas industry. It affects all of the people that are involved in the oil and gas complex. Including the service industry and general economy, but also the cities in which the industry is operating in. Whether that is a head office or field areas. What is it that they have to lose if they made the career move to another region, another industry and worked there for their remaining 20 - 40 productive years?

One of the reasons that August 31, 2020 was the point in which I felt the industry had to make a determination of its future strategy and vision was their June 30, 2020 financial statements were going to be a surprise to everyone concerned. Everyone can understand that half way through the quarter we see prices have now broken through $30, that just isn’t doing anyone any good. Add to this looming disaster the financial consequences of shutting in production, or reduced production volumes and you’ll have an even more dramatic effect on the producers. People, Ideas & Objects have always been proponents of shutting in production in order to remove the marginal production from the marketplace. And that is being done through today’s industries actions. However there are many other attributes that the Preliminary Specification provides which include changing all of the producers' costs to variable, based on production. The real kicker therefore in the second quarter of 2020 is going to be the costs of the producers remaining fixed and that is going to be devastating to the producers financial performance. Bureaucrats are giddy at the moment thinking they may have solved the problem of overproduction by shutting in production, which they always claimed they could not do. This has and will have an effect on the prices of the commodities. What the Preliminary Specification also provides is profitability as the method of production allocation and most importantly a method of production discipline, profitability based on an actual accounting, and determining which properties to shut-in based on that actual accounting performance. Producing only profitable production. Today it may be that only the profitable properties are being shut-in as the producers, I can assure you with 100% confidence, currently have no idea where they earn their money. Look for the operating and net losses to hit new records, and working capital to be consumed as never before.

One of the distinguishing capabilities of the U.S. economy is that anyone can uproot themselves and move to the place where the jobs are. No other place in the world is as dynamic as the U.S. economy. Concentrations of industries are able to aggregate in specific geographical areas and leverage like minded people from throughout the U.S. People then gravitate towards those industries and towns where their jobs and interests are. Europe tries to do this with their labor mobility between countries but it just doesn’t offer the economic dynamism that is the inherent part of the creative destruction that is a feature of the U.S. economy. Also, to make the change within the megacities of Houston and Dallas most people only have to walk across the street in order to change the industry they’re involved in. The one thing that these people know and understand better than anyone is that there’ll be no bonuses for them to perform or stay this next year. But they do have high probabilities of being laid off or terminated the more experience they gain. There is no capacity within the current oil and gas bureaucracy for them to make or consider the necessary changes, therefore the people are now making their own changes. We know that organizations don’t change, people do. 

And that point in time has come where the extent of the damage that has been caused by the current producer organization, is incapable of making the necessary changes to correct what is killing the industry. What more proof do we need to determine this? It’s therefore time to replace it with a new method of organization that deals with the issues of the industry but also provides a vision and strategy for the future. The Preliminary Specification for example. That way the industry can be rebuilt stick by stick, and brick by brick while what exists today falls to the wayside. We should all be grateful that the issue we’re dealing with is an abundance of oil and gas. 

Next Tuesday in Part II of this series we’ll be discussing how People, Ideas & Objects Preliminary Specification provides the organizational change necessary for industry to deal with its issues, provide profitable production everywhere and always, but also a place for these people to grow and prosper by participating in the development of the Preliminary Specification.

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

User Community Developments, Part XXXIV

I’ve yet to hear a valid argument against People, Ideas & Objects (PI&O’s) assertion that oil or gas should only ever be produced profitably. No one’s been able to provide a reasonable explanation as to why we would ever produce oil and gas unprofitably. These are commodities that are unlike any other in that they’re not replaceable; you can’t grow a new crop next year or melt them down for reuse. What other commodities meet those criteria? Continuing to produce unprofitably, I believe, is the equivalent of robbing future generations of the use of their energy in ways that are wasteful. If the products were produced profitably, then we can assert consumers used them effectively and efficiently and were therefore not wasted. Are we able to say that about the production of hydrocarbons in the past decades?

We have frequently discussed the Preliminary Specifications standardization of accounting and administration that will be undertaken in oil and gas by our user communities service provider organizations. Every property would be subject to the same objective and standard treatment that is applied to any other property in North America. Natural gas is much more costly to account and administer for, due to its byproducts. Some properties are significantly more complex than others. These will be reflected in the unique cost structures of each and every property. In addition the administrative and accounting costs are all variable under the Preliminary Specification. Making all of the costs of the producers variable based on production. Enabling the implementation of our price maker strategy and ensuring the profitability of each and every producing property.

It will be the role and responsibility of our user community to ensure that the accounting and administrative aspects of each property are both timely and accurate. As well as the method of accounting that is applied is both objective and standardized throughout the North American producer base. As a result producers will know that their profitable production is profitable in direct comparison to all other production across the continent. (There will need to be some special consideration for the consistent full production of heavy oil as its scalability is not economic or viable under any circumstance.) It should be noted that included in those profitability calculations will be the actual prices that were received at the property. Any differentials would be applied however there would be no consideration for any hedging. That is a corporate activity that is something the producer may consider continuing if they so desire. It does not affect the criteria of whether or not to produce a property. The property will be the only basis of evaluation in terms of profitability.

In a world of ever increasing costs due to the advancing difficulty in producing each incremental barrel of oil and gas. The need to remain active and proactive on a costing methodology for how the capital is recaptured and its cash reused by the producer is of concern. Conventional oil and gas will be treated differently than what shale would or should be. With its flush production, steep decline curves and costly reworks this will take a more precise accounting than what has taken place to date. Our user community will need to apply their most advanced thinking in terms of what and how the costs of oil and gas exploration and production are realized. As we’ve also mentioned the recognition of capital provides a return of the cash that was previously invested. Providing a ready source of capital for the producer to reinvest for the future. With the capital expenditures that are forecast the need to source adequate levels of capital are necessary. The only source of capital available to the industry is the recycling of their capital costs on a higher frequency than the multi-decade basis they’ve done in this “build a balance sheet” era. Our user community will need to ensure that adequate capital resources are provided to the producers for this purpose.

Bureaucrats have been intoxicated with the cash flow from oil and gas production in the past decades. The industry is a capital intensive industry and therefore the return of capital that was previously invested has always been strong. The deferral of capital recognition for decades has been a result of the levels of cash they’ve been able to generate in these producer organizations. It has taken them significant effort to understand and develop unique and innovative ways in which to divert these funds into their own pockets. The issue that we have today is that with the Preliminary Specification the volume of cash coming into these organizations is going to be an exponential increase from the bureaucrats' days. Luckily we’re disintermediating them and won’t have to concern ourselves with their hands sliding back into the cookie jar. Where did all that value go? Nonetheless the cash that is generated will be substantial and the need to have better control over this will need to be instilled within the industry, producers and larger oil and gas dependent economies. We should build some software like the Financial Marketplace module of the Preliminary Specification that deals with this!

We’ve seen some discussion recently about production quotas with OPEC+ and Texas, and also some discussion about government imposed production allocations. Our White Paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale” discusses these in addition to our price maker strategy. These discussions are consistent with the Alberta government's production allocations that reduced the province's production by 350,000 boe / day since January 1, 2019. These are not the remedies we’re looking for. They are ineffective as they are unable to impose the production discipline that is needed in the marketplace. Producers shut-in the production to meet the quota and then begin to figure out how to get around the quota. In Alberta there are several ways of doing so. None of the production is evaluated as to whether it is profitable or not, and therefore it is all detrimental to the producers bottom line. Currently the Alberta based production is receiving single digit oil prices. Low prices as a result of continued overproduction as the government mandate has done little to solve the problem they were created for. The only method in which the market will institute any production discipline is through the use of profitability as the means in which a producer is evaluated upon. Then they are motivated by the value enhancement of doing so. The increases in value from implementation of the Preliminary Specification includes saving the reserves for a time in which they can be produced profitably, ensuring that the costs of the reserves don’t have to carry the additional burden of the successive losses that would be incurred if the property continued to produced unprofitably, the producer only produces profitable operations and no longer dilutes their earnings with unprofitable operations and the commodity markets have the marginal production removed from the market and hence the prices will find the market price. Our user community will be the critical resource to enhancing the profitability of the energy industry. Our methodology or price maker strategy has been known in oil and gas since at least 2007. If it were able to be implemented within the current configuration of producers, would it not have been done so by now? The fact is producers and the industry are not configured in any way to provide this information or this mechanism, it is impossible for them to do so. Only the Preliminary Specification can.

Global oil inventories are alleged to be at around 750 million barrels as of Monday March 23, 2020. Oil storage capacity is believed to be about 1 billion barrels. If the demand for oil has dropped by 20 million boe / day and overproduction is at 2 million boe / day. The remaining 250 million barrels of storage may be filled in as little as ten days, or the day after April fools. When storage is full will it be the coronavirus or overproduction and oversupply that occupies the minds of the producer bureaucrats? Will President Trump have time to hear the producers concerns then? What we will know is that oil prices will go negative, the differentiated prices are not that far from zero today, single digits and falling. Maybe producers will understand the best form of storage is the reserves themselves. For example, don’t produce unprofitable production. Maybe the North American producers will wake up to the fact that they’ve been unprofitable all these decades. Maybe they’ll realize they’ve been so unprofitable that they’ve consumed value and cash with each barrel produced. They were only viable when someone else was providing consistent cash infusions. Maybe they’ll realize that investors saw this a few years ago and got out. Maybe they’ll realize that OPEC is still making money as the low cost producers, and will continue to do so. Maybe they’ll realize with all the doors slammed in their face, that blaming everyone, cutting everything and everyone the time for a reckoning will be at hand? That having the ability to withhold unprofitable production is not market manipulation as they have always claimed but just plain business sense.

In summary what’s it going to take to make the transition from the current oil and gas industry to the one we’ve described in the Preliminary Specification. First of all there has to be a continental wide destruction of any and all value contained within the oil and gas industry. Check, complete and good job bureaucrats. There is development of the Preliminary Specification with its highly capable, dynamic, innovative, accountable and profit oriented user community and service providers with the software and software development capabilities that facilitate change. Ones with the power, control, Intellectual Property, budget, leadership, people, revenue sources, licensing, distinct and comprehensive competitive advantages, timing and accuracy of the costs of exploration and production, quality of service, objectivity and standardization of administrative and accounting services and lets not forget the responsibility and authority to get it done. This is a new capacity, capability and functionality in the oil and gas industry. It is not available today and needs to be purpose built to deal with today’s issues and tomorrow’s future.

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.