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?