Petro Canada some clarifications.

[Petro Canada]

Seems I missed some important information regarding the numbers that comprise Petro Canada's reserves estimate and stock options. In the interest of fairness of my criticisms, here are the clarifications.

(1) Reserves

I mentioned here that Petro Canada did not have an independent review. Well they also don't have a committee at the Board of Directors level! This lonely task is left to the audit and risk committee to be rubber stamped by the vice president responsible for preparing the reserves numbers, the CEO and the Chairman. How come their is no signed statement of the directors involved in the Finance Audit and Risk Committee? Just as well none of them are engineers or earth scientists anyways.

"The Company's staff of qualified reserves evaluators performs internal evaluations on all of its oil and gas reserves on an annual basis using corporate-wide policies, procedures and practices. Independent qualified petroleum reservoir engineering consultants also conduct annual evaluations, technical audits and/or reviews of a significant portion of the Company's reserves and audit the Company's reserves policies, procedures and practices. In addition, the Company's contract internal auditors test the non-engineering management control processes used in establishing reserves. However, the estimation of reserves is an inherently complex process requiring significant judgment. Estimates of economically recoverable oil and gas reserves are based upon a number of variables and assumptions, such as geoscientific interpretation, economic conditions, commodity prices, operating and capital costs, and production forecasts, all of which may vary considerably from actual results."

My miss print is that I said no outside review of the reserves was done. This may have been incorrect as it sounds like a large portion of work has been done by "independent" reserves evaluators. If this information was available why didn't the company just publish those numbers?

Publish the "real" and "believable" numbers before the annual meeting, and prove that your reserve calculations are accurate by submitting the companies reserves data to Sproule associates or GLJ for their professional and independent review?

2 Management Stock Options.

I also note a large variance in the amount of value that I associated to the stock options granted to the management compared to the decidedly smaller number in the Calgary Herald article noted here. To help reconcile the 180,000 stock options exercised by Mr. Ron Brenneman CEO, as reported in the Herald and the $199 million in value assigned to the management as I stated here. The discrepancy is the Herald reported stock options exercised, and to prove my point about the $199 million please note.

18,361,617 cumulative stock options granted x $46.93 U.S. = $861,710,685.81 U.S.

Of that $861,710,685.81 in stock value confirms and verifies the $199 million that management holds is "in the money".

These clarifications should also serve notice to management of Petro Canada how really easy it is to restate the same facts by just stating the truth.

(1) Source is page 39 of the 2005 Petro Canada annual report.
(2) Derived from page 35 of the fourth quarter 2005 report. (Note 14 Stock Based Compensation)

Petro Canada's conflicting statements.

[Petro Canada] (Click on the title for a puff piece interview with Mr. Ron Brenneman, CEO)

In oil and gas the most innovative producers, on the basis of their capabilities in earth sciences and engineering, are rewarded with higher levels of production. This has been a fact in oil and gas since the days of the Rockerfellar's and exists today, but only with the junior oil and gas company.

What has failed to provide the market with the volumes of energy required is that some larger oil and gas producers have "survived" the past twenty years and grown to dominate the industry. These producers have found their success in a "banking mentality." A mentality that makes investments in oil and gas based on a reasonable or market competitive return. This mentality has gained a foothold in some companies, like Petro Canada.

In stable times this banking mentality can sustain itself. The smaller companies that are technically successful grow to be purchased by the larger firms, with the poorer performing properties being resold. When times change, such as today's high priced commodity market the banking mentality fails. The failure occurs as a result of the firm has lost the ability to function from a scientific and engineering point of view.

It is my opinion that this scientific failure has happened to Petro Canada. Reading the CEO's interview on the website referenced above, it is a clear reflection of his sense of urgency regarding oil and gas finding costs and capabilities. This piece of literature only mentions the words "oil" or "gas" in reference to the support of the Olympic program. Stating that finding costs are $94.50 would be inconsistent with "good news" and directly contradict the previous representation that the CEO's compensation was a reflection of his performance in moving the stock up.

Now that Petro Canada and others have no answer to the market demands for more energy. We hear that "we're not running out of energy" or "there is lots of oil left". I don't think that I am the only person that finds the ironic conflict that producers such as Petro Canada are stating to the marketplace.

Petro Canada believes

[Petro Canada]

Annual report season, timing is just right. Petro Canada believes and that in a nutshell, according to the annual report, is its strategy.

Start off reading this annual report with a strong pot of coffee. Your going to need it.

The first item that comes across as a major misrepresentation to the shareholders is on page 7. The diagram "Upstream Production Forecast" shows that the "Range of Potential Outcomes" may provide no production increases to 2008, yet the text states that production will increase in the range of "8 to 11% average annual growth rate." The other graph on page 7 "Proved and Probable Reserves" is representing that acquisitions are responsible for the "195%" alleged increase in "P2" reserves.

But wait, there's clarification of what this means.

"The reserves replacement ratio is calculated by dividing the year-over-year net change in reserves, before deducting production, by the annual production over the same time period. The reserves replacement ratio is a general indicator of the Company's reserves growth. It is only one of a number of metrics which can be used to analyze a company's upstream business."

It's good we received that piece of data. What it says is that for every barrel of oil produced, 1.95 barrels were "replaced". I think we'll all have to take the word of the company on that one since there is no independent review of the reserves. I wonder why its the only metric of "a number of metrics" provided?

The annual report is also heavy in terms of identifying the associated risks of being in business. Two things that strike me as odd is the hostile environment that Petro Canada operates in comparison to its competitors. Second that it will not be the fault of the company if anything bad happens.

So much effort that is associated with identifying risks, a little more substance on the strategy, objectivity, reserves calculations and financial performance outside of the commodity price increases would probably work to mitigate much of the criticism.

No news like good news, especially for Ron Brenneman

A well researched and appropriate article of news in Saturday's Calgary Herald. The article discusses the total compensation of the CEO's of the major oil and gas firms in Calgary. Questioning the CEO's compensation, and asking if these payments were appropriate? The compensation was measured against their stock price increases and was questioning the validity of their claim for better stock performance.

Asserting that stock price increases are attributable to their performance is of course a sham, I can unfortunately recall during 1986 when the oil prices collapsed. A time when the poor performance of firms was blamed on the 1,000's of people that were laid off. Times certainly have changed.

Of particular note is Petro Canada, our favorite topic here of late. Mr. Ron Brenneman CEO scored the highest monetary compensation and the lowest stock performance. I would think that the reporters at the Herald would be very interested in some of the analysis that I have written about here, lets find out if they are...

Update on Maven POM

I have heard from Milos, and he has stated that his obligations require him to pass on the opportunity we wrote about here. I sincerely thank Milos and the Maven developers for the excellent work being done with Maven.

I am therefore opening the development and maintenance of the Maven POM for anyone who is able to help out. Just email me.

Google Finance

Google now does finance. If you missed the announcement click on this entries title. The information provided is much better then the competitors. You can see photos of the principles, stock charts, performance measures and research reports.

For some unknown reason PCZ (Petro Canada) doesn't post executive compensation! I wonder why that is.

Petro-Canada "earnings"

[Petro Canada]

Emphasis is placed on the quotation marks as I am concerned with the companies calculated amount of earnings. My concern is that they may be highly overstated. And secondly the tacit assignment that they were "Petro Canada's" earnings.

The need to represent these numbers as managements performance are the logical assumption, I think. When it costs this management team $94.57 per barrel to find oil, why would a company cost the reserves at $6.49? The answer to this question is in the financial statements.

If we divide the amount of depreciation that was recorded in 2005 by the total upstream assets we arrive at 6.31% of the total assets were depreciated by the company. Now if we divide the production by the reserves then we should have a ball park value similar to the depreciation recorded. However, we get 12.6%! Clearly twice as much production value was actually depleted vs. the actual amount that management removed from the books.

Recall these reserves numbers are based on last week's hocus pocus of the reserve increases noted here. If we exclude the hocus pocus we end up with 14.18% of the reserves were produced. This management certainly is creative. But then again they probably have lots of time because they only found 2.4% of their reserve base in 2005. Nonetheless, the difference in earnings is only $1,006 million, reducing total reported earnings from $1,709 million down to $703 million.

Why would Canada's former national oil company overstate their earnings? Upon further investigation I think I found the answer. Drill down to the stock tables and you'll see that the management exercised 3.54 million shares at $18.00 per share, and awarded themselves another 4.19 million shares at $35.00. So for the year, based on Canadian tax rulings the management team will have taxes payable of $34.6 million. But wait, there's more, that is to say in exercising the value of these options based on Friday's stock prices of $53.00 the management will have earned $199,394,270.00 to pay those taxes, so they'll thankfully be ok to make the payment.

Back to the point about earnings. I have to ask if the total stock compensation for the management is (199 / 703) = 28.3% that would look bad, don't you think. Instead, if the stock option compensation was (199 / 1,709) = 11.6% it becomes less of an issue. I propose we accept these numbers as reasonable on the basis of the management team? Not. See you at the annual meeting on the 25th of April.

I can already here the argument that the company will make on this. "Everything is within reason of Generally Acceptable Accounting Principles". And I would agree with that statement. But when you write your own reserve reports and personal checks, you open yourself to criticism. As this may be acceptable to the accountants, as a shareholder, I am concerned in the long term of what the "managements" performance was?

Next entry, how Petro-Canada issues debt to buy stock back from the management.

Have my ontology call your ontology...

[Development] [Ontology]

I want to mention that some readers may have difficulty in understanding how Genesys has structured the development environment from an ownership point of view. The license for these developments is such that the core is the Genesys system which operates as an interface to "other" systems that are owned and operated by "other" ISV's (Independent Software Vendors). These ISV's are involved in the overall development of the Genesys system, own and operate the particular geographical location that they operate in. The point of this discussion is the interface between the data elements of the core and the individual ISV's functionality. Depracated.

Firstly it is necessary to assume that the ISV is serving a specific geographical area from the perspective of the head office of the producer. If this is not valid then the area where the most activity for that producer is located. The ISV's producer clients will all have the consistent data in the system and therefore, no interface will be required. What will occur is as a result of a producers international operations the ISV has to deal with the core Genesys system and the region where another independent ISV is providing services to producers in that region. The translation of data may not, in a traditional sense, be the same. These data elements may be dictated by two separate royalty jurisdictions or other requirement, yet the disparate data needs to relate to the other.

Relating this situation from one region to the other will require the population of translations within Genesys to be 2 to the power of x regions. (a large number of translations). This type of system has not been done before, nor would it have been able to be done, if not for some key points and technologies.

• Obviously the first point is the XML that builds the ontology for oil and gas.
  
• As mentioned here, here and here, this ontology is Genesys and the ISV's intellectual property.
• Standards are the objective.
  
• PPDM is used for their database schema and their taxonomy.
  
• The core of Genesys and the individual geographic coverage by the ISV's are clean slate developments. No retrofitting required.
  
• We can develop the optimal solution without constraints.
  
• Use of generic's in Java may be prolific.

This point is exactly why XML was developed. For companies to talk to other companies, mechanisms were required to ensure that this issue was dealt with. I mention this as there has been some concern developing regarding the use of multiple software vendors (Genesys' core and the ISV's) and this would become a sticking point. In the old software world that would have been the case, however, with web services this point is effectively dealt with.

So you say potato and I say potato, and this is ok in the system, the only thing we can not handle would be former vice-president Dan Quayle's spelling of potatoe.

Partnership accounting Part II.

[Partnership accounting] [Java programming language]

I want to raise one of the major problems that Genesys needs to solve. This issue, I think is unique to the accounting for operations in the joint operating committee. The issue is the partnership or joint venture accounting, as discussed here and here, and focuses on the way the functionality and process is written. The way the system needs to be designed will use concepts that are not present in oil and gas accounting systems available today. I would also assert that these issues could not be addressed in prior programming languages. Java opens up many opportunities to handle and solve these types of problems, and I can see how it would be very effective in solving this issue.

The current systems, SAP in particular, focus almost exclusively on the accounting of the company of interest. The joint account is cleared monthly to the appropriate working interest owners, and from that point, little if anything is done other then from an internal perspective. With the change in organizational focus to the joint operating committee, this internal focus is maintained, and from an accountability point of view increased, however the partnership focus begins to take on a more substantial component of the interests of the collective organizations as represented by the joint operating committee.

I have discussed that many of the participants of the JOC will be more active in the day to day of each JOC. Micro Specialization is something that will have to come about as a result of the demands for so much work to be done by the existing and possibly declining population of oil and gas workers. I have also detailed here the use of personnel from various participants will be called upon to conduct activities, whereas currently, the operator and chairman undertook most of these tasks.

This point will help to mitigate the redundant and unproductive duplication of capabilities of the competitive oil and gas marketplace today. As Dr. Giovanni Dosi has suggested, the capabilities and qualities of each individual producer are currently being mirrored and this mirroring is constraining the understanding of the advancement of the sciences and engineering and their application in innovative ways. A more cooperative mindset is required to fulfill the markets demand for energy.

Currently the direction of data and information is from the operator to the non-operators. This by nature was a simple programming issue to overcome, and there will be some elements of this simple method in the Genesys system. The difficulty comes when all participants of the joint operating committee have each been contributing people, financial and technical resources, and direct costs on behalf of themselves, and / or, other members of the joint account. All the producers collective resources are pooled to attain the highest level of technical capability, management and tactical deployment available.

These costs and resources are being incurred on each producers behalf, or, their own behalf and not initially shared, but may be eligible to offset their obligations to other partners or need to be recognized irrespective. This is further complicated by the fact that many of the internal charges and overhead allowances that have been traditionally charged to the joint account also become redundant. These overhead style of costs are replaced by the specific costs and attributes that were directly incurred by each producer represented in the joint operating committee. The Genesys system will capture these components as they are incurred by the employee / worker / investor / consultant in an active job costing state as the user / worker is logged on.

What is therefore required in order to determine the 100% costs attributable to the JOC is a "pooling" of all the eligible associated costs and revenues involved in the property. Once these costs have been aggregated from each producer, then and only then, can the appropriate costs of each producer be determined, recognized and billed.

To only make things more complicated for the developers, this cost data should be compiled into its usable form at least daily and ideally on a live basis. The elimination of the month end process is one of the objectives of this system, and things need to be dealt with on a more current basis. Cash redistribution based on contributions would remain on a clearing basis at the end of the month or when reasonable.

When a cost is incurred, the system is required to be able to denote that transaction as an operated or non-operated cost and if it is eligible. These two attributes are telling the system that these costs are incurred on behalf of all of the participants of the joint operating committee, on behalf of the producer itself and if it should be recognized in the joint account or not. Therefore reflecting that their may be unique costing components of each producer represented by the joint operating committee.

Technorati Tags: Energy, Genesys, Partnership-Accounting, Technical Vision

Maven "Project Object Model" POM

[Development]

The title of this blog will take you to the February 20, 2006 blog entry regarding the technical architecture of the Genesys system. I highlight this entry as it received a comment from Milos Kleint. Milos is a regular contributor to the Maven project at the codehaus.

I am publicly asking Milos if he would be so kind as to write the POM for the Genesys architecture so that interested developers could build their own sandbox for work on the Genesys system. If Milos is still viewing this blog, I would also have him and his group at the codehaus and Apache review the licensing preamble to see if their are any areas of interest in this new community source project.