What Our Tactics Are

Over the past few weeks we have been able to define a few issues within the oil and gas industry. We have also been able to show how People, Ideas & Objects Preliminary Specification would provide the capabilities for the dynamic, innovative and profitable oil and gas producers. All of these were focused around the capabilities of enabling “price maker” strategies for producers. And what was included in the costs of oil and gas production to ensure those prices were capable of ensuring profitable operations. What we have proven is that the average North American producer is losing money on operations in both oil and natural gas. And that the capital costs of the industry sit on the balance sheets of the producers where they provide no value other than to subsidize the consumers of these commodities.

These elements are some of the components of the Preliminary Specification and are part of the business model that is included within it. There are also many other components that add value to the producer firm. The quantification of all of these elements for the next 25 years stand at $45.7 trillion in incremental value over what the bureaucracy are offering today. Our value propositions base case of operations will be on display in the next two weeks as the earnings are announced by the various producers. It will be important to remember that the costs of capital should be included in their profit / loss calculations. When it costs 30% on average for a producer to maintain their production profile. With all of these costs and more being capitalized. And they only recognize 6-10% of their asset base as their annual depletion. They are inflating their asset base on an annual basis. This takes away from the investor, and the producer, the opportunity to ever earn a return on their invested capital.

Now we will see the extent of the issue with the earnings that will be announced in the next two weeks. Tomorrow we have two of interest in BP and Hess. Wednesday will have our friends at Penn West, with Exxon and Conoco. Thursday will see Chevrons. And then next week we will start with Occidental, Anadarko, Pioneer and EOG. Tuesday Husky, Chesapeake and Tourmaline. Wednesday is Apache, Canadian Natural Resources and Marathon. And Thursday we'll finish with Bonavista Energy.

People, Ideas & Objects have put our plan and vision forward. What is the bureaucracies? We need to look at the next 25 years and how it is that society will be provided with the energy that consumers need. Will this be at the expense of the investors? Those investors who have built this business to this point? Or will there be a change by the industry to the Preliminary Specification that provides for a sustainable business model. I don't think we could frame our solution any better than what we have by providing the Preliminary Specification. Which uses the industry standard Joint Operating Committee as the key organizational construct of the dynamic, innovative and profitable producer. The Joint Operating Committee is the legal, financial, operational decision making, cultural, communication and innovation framework of the industry. By identifying these frameworks in our software and aligning them with the compliance and governance frameworks of the hierarchy, we achieve a speed, accountability and innovativeness in our producer organizations. It is through these frameworks and their alignment that we are able to approach the issues of the industry, whether they are in the administrative, accounting or operational domain, and provide solutions for them.

What do the bureaucrats have. Fudged numbers of how they have been managing this industry. Continued overproduction in the natural gas industry as a result of shale reserves is the precursor to continued overproduction in the oil industry. Yet you hear nothing of this phenomenon and any approach to fix it! It has been five years in the natural gas business since prices have been destroyed. Not a word. No action. This being the first year in which the oil prices have declined. What we have is the same behavior. Not a word. No action. What is it that is expected from this unchanging and incapable form of organization? What we need to do is build the industry from the bottom up based on the Preliminary Specification. That way we will have the capabilities to deal with the industries issues and opportunities in the next 25 years.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

No Postings This Week

I will be taking this week off from posting, returning April 27, 2015.

Our Solution Part VII

Now that we have established our accounting methodology is different from the status quo. I want to reiterate the value proposition we have in providing the oil and gas producer with the most profitable means of oil and gas operations. Through the decentralized production model, and the accounting methods we have discussed here this past week. We are able to generate $5.7 trillion in additional profits over what the bureaucracy will provide in the next 25 years. By accounting for the capital costs of the industry in the price of the commodity we are returning the capital that was used by the industry. Providing a return on investment back to the investors. If the expectation is that the industry will be spending $40 trillion in the next 20 years. Then the investors, under our methodology, can look for a return of those funds as well. Providing, at a minimum, $45.7 trillion more than what the bureaucracy have traditionally provided. And as we all now know, bureaucracies can’t, won’t, will not, ever change. As we have seen in the past few days. The price of oil has shown some strength due to the possible decline in U.S. production. This is the elasticity of supply and demand at work in the pricing. This however won't stop the bureaucrats. Expect more of the same of what we have been seeing the past few years to happen in the future.

Like most people I’m happy with our value proposition. Reading this blog and the Preliminary Specification shows that it is a valid model that will work within the industry. The thing is there’s much, much more. The basis of the Preliminary Specifications research was on innovation. How can an industry that is based on the earth sciences and applied science of engineering become more innovative in its makeup? What we learned in the publication of our Preliminary Research Report was that innovation can be a defined and replicable process. Therefore, what would be required within the industry in order to enable those people with the innovations to come forward and enable them? The answers to this question have been captured and implemented in the Preliminary Specification.

Take as an example our Work Order system. There are two key aspects of the system and the first is a means in which to capture costs within the producers organization. Having the earth science and engineering resources accounting for their time and efforts on a daily basis. And in turn having these costs charged directly to the Joint Operating Committee to which they are working. These people are not overhead. The overhead of the producer has been shifted into the service providers. These are the people who are working in the projects that are Authorized for Expenditure. It will be to the various AFE’s that the majority of the earth scientists and engineers time is allocated to. In the Preliminary Specification there will no longer be a cost associated with being classified with operatorship as the earth science and engineering resources will be charged directly to the Joint Operating Committee.

The innovative aspect of the Work Order is its ability to work within the industry across producers and service industry participants. The ability to organize an ad-hoc group of companies to research or study some idea or innovation. These types of activities have occurred occasionally in all producers. They are however an accounting and bureaucratic disaster awaiting the individual with the innovative idea. These bureaucratic disasters are the constraint to these individuals and producers and the reason they are not undertaken more often. In an innovative, science based industry such as oil and gas. Where the demands of the consumer will become more difficult for the oil and gas industry to supply. The need for high volumes of these research and study groups to be undertaken will be necessary. Significantly higher volumes. Therefore we needed to create a system that would enable the innovator to organize the like minds from within the industry, raise the resources, both cash and other means, and deploy those in a manner that was less onerous than raising an AFE, or the current bureaucratic ad-hoc approach. One that employed a system where the commitments of each producer could be obtained and employed. The bills incurred and paid and the results of the research shared by those participants. And this will be done through a simple interface that eliminates the bureaucracy from this process. And doesn’t question the innovators integrity with questions from accounting each quarter.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Our Solution Part VI

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

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

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

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

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

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Our Solution Part V

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

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

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

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

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Our Solution Part IV

Allowing the producers to have their balance sheets bloated with assets that are never written down. And as a result, their income statements realizing only small portions of the real costs of capital incurred in the production process. Leaves the investors twisting in the wind waiting for a return of their capital from the industry. Although the bureaucrats may report profits. They really are just the gross margins of the producer firm. The actual overhead and the capital costs of the property are never moved to the income statement. The overhead of the producer is capitalized to the balance sheet and sits there for eternity to pass. The net result of this process is the producers look spectacularly effective in their operations. Their assets continue to grow as long as they spend. Their profits are high no matter what they do. However in terms of really producing anything of value, forget it. As the investors are now learning, oil and gas is a lost cause.

The focus of People, Ideas & Objects derision of this process has been squarely on the SEC and the public accounting firms. They want to relate to the world that they are cool and understand the sciences of geology and engineering. So they've come up with this contrived process of capitalizing everything that the producer does and recognizing almost nothing in terms of the annual depletion of its capital costs. But who is it to say that what they do is wrong? And what’s to say the manner in which People, Ideas & Objects calculates profits at the property is the more appropriate method of dealing with the costs of capital?

If you look at the average oil and gas producer. And yes I am making generalizations here. The producer is expending approximately one third of their asset base in current year capital expenditures. These capital costs are what are required to sustain and grow the deliverability of the firm. These are all being added to the asset classes on the balance sheet. In addition the accountants capitalize most, if not all, of the overhead that is incurred in the head office. You will then notice, that most producers, take approximately 6 - 10% of their asset base as their depletion for the year. These capital costs are moved to the income statement of the producer. Leaving the asset life approximately equivalent to the reserve life index of the reserves. In most cases the reserve life index is ten years and the assets on a simple mathematical basis would therefore also be written off in ten years. This is what the public accountants would say they are doing. Matching the capital costs of the business to the life of the business.

To whose benefit does this provide any value. In a capital intensive industry the oil and gas producer needs to deploy their capital effectively. When every producer capitalizes every dollar spent each year. How do you assess the effectiveness of their capital deployment? According to the accountants using their process, you need to look at the firm from the point of view of the capital assets life, or reserve life index, or in this example the ten years. I feel the horse has bolted from the barn and locking the gate is useless. Investors need to have a more timely gage in which to assess the capabilities of the management of the producer firm. I would also suggest that the assets at the ten year mark will probably sit for a while longer yet. I suggest that we look at what the costs that were incurred to maintain and expand the deliverability. That this cost in the current fiscal year is the cost of capital necessary to maintain and grow the deliverability of the firm. And is therefore a cost that is spent. That this cost has been expended and is irretrievable, and therefore should be expensed in the current fiscal year. Or in other words the size of the capital asset depletion should be the same or even much larger than what the amount is expended in the current year to maintain and grow the deliverability of the producer.

Only then, when the capital costs of the producer firm flow from the balance sheet to the income statement, can the investor assess the performance of the producer. It will become apparent quickly who is wasting money and who is building a sustainable firm. All of the producers will be passing large costs to their income statements each year. If they are unprofitable then they are not going to be in business for long. Something that we can not assess of the current crop of producers. If they are profitable then they are operating the firm in a manner that is consistent with good business practices. If this is done in the short term as suggested by People, Ideas & Objects method of accounting for all of the costs at the property level. Then the investor has the ability to make the assessment of the producers performance. And they will conclude, as I have, that the investor will need to stop subsidizing the oil and gas industry in terms of the prices that are received for the oil and gas commodities.

Measurement of a firms assets and the timing of their movement to the income statement is a key principle in accounting. I think the public accountants and the SEC have messed it up badly in oil and gas. Leading to the investment community essentially subsidizing the oil and gas consumer by funding the capital expenditure programs of producers with no expectation of any return on investment, ever. This has to change if the industry is going to approach the needs of society in the next 25 years. Undertaking the $40 trillion in investment that is alleged to be necessary with nothing but disgruntled investors is not going to do it. Sure investors sit on producers that are well capitalized in terms of their assets on the balance sheet. But they never make any real money. And at the end of the day, all that happens is that a new day begins with the bureaucrats who run this business. We need a change.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Our Solution Part III

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

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

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

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

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

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Our Solution Part II

Our user community will be the key to the quality of our software and service solution. There is much work to be done to take the Preliminary Specification and define the software that will be used by the industry. It is this work that the user community will undertake. The detailed work of determining what is needed in order to ensure all of the producers processes are covered off and managed in an effective way. This work will require the full understanding of the industry and involve the estimated 3,000 members of the user community. Taking what they know about the industry, designing new software to define and support the work that they will do in the new oil and gas industry.

It will also be the user community that provides the foundation and entrepreneurial spirit behind our service providers. It will be our users who will form these service provider firms on an exclusive basis. Using their understanding of what they’ve developed in terms of the software processes and the need to manage these processes by their people. It will be their opportunity to build a service based organization to provide the services and software to the producer firms. This will be done under license and provide the service provider with the exclusive rights to the domain of the process they manage.

Therefore from a producer point of view the difference between the way in which the industry is operated today and the way it is done in the future will be significant. First they will no longer have any of the administrative or accounting people on staff as direct employees. This allows them to be freed from the fixed costs of the overhead that is currently causing them to lose money. It also relieves them from having to build the administrative and accounting capabilities needed to operate within the industry. Producers can then acquire these capabilities from the service providers on an as needed basis, based on production at each individual Joint Operating Committee. And it will be the service providers focus on specialization, the division of labor, control of the development of the software and automation of the processes that will enable them to provide the producers with better and more cost effective services than what the producers were able to build themselves prior to the industry changing to the Preliminary Specifications decentralized production model.

It is this change from the reliance on the producers administrative and accounting capabilities to a reliance on the industry based administrative and accounting capabilities that provides the production flexibility needed in the shale era. When a property falls below the marginal cost to produce. Then it can be shut-in without penalty to the producer firm. It will actually be of financial and long term benefit to the producer to shut-in their unprofitable production. Their firm will perform financially better, with only profitable operations being produced and none of these being diluted by unprofitable operations. The reserves will also be held for a time in which they can be produced profitably. And of course the commodity markets will have less of the commodity in the marketplace, leading to overall higher commodity prices. A win-win situation that occurs due to the fact that when the production is shut-in no operating costs, no royalties and no overhead will be incurred by the property. Only the costs of capital are uncovered during times when properties are shut-in.

It is the service providers competitive advantage to provide a quality service to the producer. This will be in the minds of the users when they are in development of the software that will be derived from the Preliminary Specification. How can they make this environment, where they are building the industry based administrative and accounting based capabilities, far better for the producer firm? By using specialization and the division of labor, control of the software development and automation of the processes they manage. The user community participant and service providers will be able to develop far more significant value than what each individual producer is able to generate within the constraints of providing the administrative and accounting capabilities themselves.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Our Solution

Members of the user community will provide the oil and gas industry with a solution to the issues that I so frustratingly discussed yesterday. We will have changed the manner in which the producers are able to manage their operations so that each property can be engaged based on its optimal strategy. And only if it is profitable. The producers will be able to do what is in the best interests of the property and their shareholders, whoever they may be. A change from the focus on increasing production at all costs. To a focus on increasing profitable operations. Specifically we are moving away from the high throughput production model to the decentralized production model of the Preliminary Specification. In Professor Richard Langlois writings he has described the decentralized production model as follows.

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p.58

We have applied the decentralized production model to the oil and gas industry in the following manner. In order to make the overhead costs of the property variable. We have to turn the fixed overhead of the producer into the variable overhead cost of the Joint Operating Committee. It will be in this way that when the property is shut-in, due to its inability to earn a profit in a low commodity priced environment, the property will be able to incur no overhead in the Joint Operating Committee or the producer firm. And when we talk about the overhead we are talking about all the administrative and accounting costs incurred to own and operate the property. We do this by stripping the prototypical producer down to the C class executives, the earth science and engineering resources, some land and legal, and support staff. The administrative and accounting resources are then reorganized into service providers who focus on a process or subprocess and use the entire industry as their client base. Therefore when the property is shut-in no activity in the property is incurred and no administrative or accounting resources of the service providers are used during the month when production is shut-in, and therefore each of the service providers generate no billing or charges for that property.

The property then incurs a null operation. No profit and no loss from operations. And the producers other profitable properties will not be eroded by losses on the poorly performing properties. The commodity markets have less of the commodity on hand, raising prices to the marginal price. And the producer doesn't have to make up for the properties current losses from future operations. Making the Preliminary Specifications decentralized production model the most profitable means of oil and gas operations. Any producer that continues to produce unprofitable properties will be dealt with by the investment community. As there will be no justifiable reason to continue to do so.

This structural change in the way that the industry operates will provide the flexibility in terms of the industries production profile in both oil and gas. With high cost shale being as prolific as it is today it is necessary to ensure that this flexibility is afforded the dynamic, innovative and profitable oil and gas producer. The ability to overwhelm the markets with flush production from the shale formations has shown the capability to collapse both the oil and natural gas commodity market spaces. This is unfortunate and a reflection of the elasticity of supply and demand of the commodities. With little excess demand or supply of the commodity in the market, the price of the commodity reacts significantly. Therefore any overproduction must be mitigated before the price declines precipitously. Creating a means to allocate production amongst independent producers will only lead to difficulties if it is not seen as being fair and reasonable. And the only reasonable and fair method of allocating production in an environment such as the oil or gas industry is on the basis of profitability of the property itself. And the only way that we are going to be able to implement that method is through the adoption of the Preliminary Specifications decentralized production model.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Some Rambling Thoughts

Some might argue that our criticism of the bureaucracy would seriously affect our revenue stream. I can assure you that it hasn’t yet. As it is not in the bureaucrats best interest to be supporting People, Ideas & Objects. We eliminate them from the landscape of the oil and gas industry with the Preliminary Specification. So our criticism is more sporting than it is of a practical deficiency to us. This has always been the case and the bureaucrats have certainly never let an opportunity pass to take a swipe at us. One thing that is a negative outcome is the fact that this blog and all our communications are handled on essentially public facilities provided by Google. One should find this humiliating and embarrassing. Not to toot my own horn here but we appear to be the only ones that are addressing the profitability and pricing issues of the industry. The only ones who are offering solutions to these issues. And I do hope that the bureaucrats are humiliated and embarrassed that this is how these issues have to be resolved. A multi-trillion dollar industry has its issues resolved outside of the industry on a shoestring budget.

The bureaucrats “deer in the headlights” appearance might be acceptable if only they didn't have their own best interests as their priority. The concern for the business has been lost for some time and they have expressed no interest in making things right. After all what’s in it for them. Mostly just hard work. If I am at fault of anything in my derision of the bureaucracy is that I am pointing out what clearly needs to be stated. The truth about the situation in the industry today, and what it looks like in the future with the status quo bureaucracy that needs to be stated. The failure that we are experiencing is the danger that we need to be concerned about. Not only from the point of view of the failure itself but for the fact that these bureaucrats may cut and run to brighter pastures if their personal cash flows become jeopardized, or the problems in the industry become too difficult to overcome.

If the bureaucrats do turn out the lights and lock the door then they certainly will have created the type of situation that puts us all in jeopardy. Instead of preparing alternatives like the Preliminary Specification to provide a means in which to manage the industry they will have moved on from a difficult situation irresponsibly. I have worked in oil and gas for 38 years and I can't think of a more precarious time for an industry. Banking prior to the 2008 fallout is probably the best example of another industry that was hiding from its obvious difficulties. Maybe I'm being alarmist but I have stated before that there is no Fed that is capable of flooding the market with deliverability if the industry should fail to meet the markets demands. That might be an odd thing to say when overproduction is the issue of the day. However the overproduction is laying the groundwork for the inability to meet the markets demands of tomorrow.

What I do know is that the way the industry is operated now is fading in all industries. The Internet is becoming the means in which to organize people more effectively, everywhere. Bureaucrats are out in terms of a future. The issue is that they still control the money and the power in oil and gas. And that puts us all as secondary considerations to their personal needs. I don't know how to break this situation in a timely fashion. I thought the owners and shareholders would be wise enough to see these difficulties coming. Aparently not, nor are they motivated to do anything about it. What we are seeing is the failure of the corporate model as it was conceived in the early 1900’s. Creative destruction is our future.

And it might well be that the Preliminary Specification, our user community and the service providers will not be the means in which the industry is reorganized. It is difficult to say one way or the other. I know that I will keep pushing this model of user based software developments as the means in which the oil and gas industry can deal with the issues of the industry for today and tomorrow. And who knows maybe we'll get that big break that we need. That is what I think we really need to make sure that this industry keeps operating.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.