Our Solution Part X

People, Ideas & Objects service providers are the sub-industry that we are developing in our ecosystem that will provide for the oil and gas producers administrative and accounting functions. These will be in replacement to the internal capabilities that the producer has currently developed. Making the change from a reliance on these internal capabilities to a reliance on an industry wide administrative and accounting capability. As we have mentioned this is a key element in our ability to provide the value proposition that we are able to provide the industry. And it should be noted here that the scope and scale of the processes that are managed by the service providers would include those that fall under accounting, land, production and exploration administration domains. Some have argued that this would never work. That the broad scope and scale across the industry would be too difficult to undertake. I would point to our value proposition is well within the trillions of dollars and that the service providers have as their competitive advantages several tools that are not otherwise available to the current producers.

Take for instance the principle of specialization. Most producers do not have the scale in terms of their processes management that can use this principle in their organization. What may be required is a production accountant for the new property and the work required by that property would total 1200 man hours per year. You would naturally assign that work to one individual and there would be no means in which you would be able to apply specialization to any of those processes involved in the position. Whereas with the service providers, we can take each element of a producers accounting and administration and strip it down to the basic elements and design them to be managed by one specific service provider. That service provider will then staff that process in the manner that provides the most effective and efficient means of processing the industries transactions and data. The service provider isn't manually processing these transactions and data, they are applying the most advanced management sciences to reduce the costs and increase the quality of the information that they provide. Specialization and the division of labor are the two principles that are responsible for all of the economic growth that we have experienced in the past 250 years. Constraining ourselves by using just the capabilities of the producer provides us with no capacity to improve the performance of the administrative and accounting capabilities. By establishing the service providers we are able to apply the principles of specialization and the division of labor to the administrative and accounting processes. And in so doing, increase the throughput of the industry.

Currently computers are used within the oil and gas producer to assist in the management of the processes that they are responsible for. Up to this point in time they have been of great assistance in helping people to do their work. However, they have never really been able to have an impact on the productivity of the people that are employed in the industry. In many ways the people who are working in the industry are doing the same things that were done in the industry in the 1960’s and 1970’s. To make any changes requires a wholesale investment of time and money, like what People, Ideas & Objects budget requirements dictate, in order to achieve the differences that are required. These investments in software development and process definition have been too expensive for one producer firm to undertake on their own. There has also never been an initiative that undertakes to raise the funds and organize these developments across the industry until People, Ideas & Objects has. The service provider who works to enhance the process they manage with specialization and the division of labor. Who also has the software development capabilities, and user community of People, Ideas & Objects permanently available to them. Has a new and robust environment in which to conduct the constant development of their processes.

It is harder for me to see how the industry continues on in the fashion that it is. The ability to develop software for each producer's individual administrative and accounting capabilities has quite obviously failed. As there is no one who is successful in the business. There are limited scope and scale applications available to the producer firms, however none that provide an overall vision or value proposition such as People, Ideas & objects. What is expected from the existing software developers is that producers will cobble together the works of several independent software developers in order to cover off a reasonable amount of the scope of the producer. So that it is impossible for People, Ideas & Objects, given our budget and value proposition, to put together the process management of the industry with the help of our user community and our service providers. However, it is expected that each producer does this within their own shop with their limited budgets, out of applications that have no shared vision or value proposition. It sounds to me that the arguments that are against People, Ideas & Objects, our user community and service providers are coming from bureaucrats who are defending their own turf! Not some reasoned explanation as to why our solution won't work.

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 IX

To provide the software for the next generation of ERP systems. There is one aspect that can not be overlooked. The method in which they are developed. It is with that understanding, with the scope of what we are undertaking in People, Ideas & Objects Preliminary Specification. And my personal belief that systems that are developed with close user involvement are far superior to those that are not. That we are user community based software development. Our primary focus is the development of our user community. Spreading our message throughout the industry and connecting with like minds who know that there is a better way in which to operate the oil and gas industry. It is the user community that we are developing who will have the power and capabilities within the new environment to affect the changes in the oil and gas industry. It will be the user community that will remove and replace the bureaucracy and put them in their retirement homes.

The mechanism that the users have to make this change is detailed in the user community vision. The mechanism itself is the Intellectual Property that is contained within the Preliminary Specification and any of its derivative works. When change needs to occur within the industry it will be the user community that has the capabilities to make the changes to the Intellectual Property. The People, Ideas & Objects software developers will only look to the user community for their development direction and details. They take orders and directions from none other than the user community. If a producer wants to see a change in the way that the system operates within their firm, it is the user community that they will need to discuss this with. No one else has the power or capabilities to make any changes to the Intellectual Property or to the software code itself. Only the user community.

It is the user community participant that is also the principle in the sub-industry of service providers that is being created. The service providers are the replacement organizations to the producers current administrative and accounting resources. In the environment where the Preliminary Specification exists, the prototypical producer is reduced to the C class executives, the earth science and engineering resources, land, legal and some support staff to enable their focus on their key competitive advantages of their earth science and engineering capabilities, and land and asset base. The service providers will focus on a specific process and have the entire industry as their client base. Therefore focusing on their competitive advantages which include the principles of specialization, the division of labor, automation and many others. It will be through this window of their service provider operation that the user community participant will see the actions and interactions of the producer firms. It is the service provider who is the ultimate user of the software that they have developed in the user community. And they will be able to bring new value and efficiencies to the dynamic, innovative and profitable oil and gas producers.

It is this ecosystem of our software developers, the user community participants and the service providers that will provide the means in which the oil and gas industry has their administrative and accounting needs handled. This will be an industry wide administrative and accounting based capability. Freeing up the individual producers from having to develop the administrative and accounting capabilities themselves. Consider that today, each producer has to develop their administrative and accounting capabilities in order to function in the industry. Each producer replicating the same administrative and accounting capabilities as each of the other producers. Yet none are able to share these capabilities in the current environment. This inability to share these capabilities is a major impediment to the profitability of all producer firm’s today. It will become an even more difficult impediment in the future as the government regulations and requirements continue to expand.

It is this industry configuration that provides the producer with the flexibility in terms of their production deliverability. If a property isn't profitable at the current commodity price the producer can shut it in. And in so doing they will reduce their operating costs, royalties and the overhead costs of their operations. That is because none of the service providers will receive any of the input variables from a shut-in property. Therefore they will have no work to conduct on that property and hence no billing will be generated to that producer for that property. Enabling the producer to realize a null operation, which will increase their firm's overall profitability. It will also save their reserves for the day in which they can be produced profitably. It removes the marginal production from the commodity marketplace, placing upward pressure on prices. And keeps the capital costs of their reserves lower, as a result of not having to add the losses on operations that otherwise would have occurred.

The user community is the critical resource that enables the business model of the oil and gas industry to be employed and deployed. If changes are required it will be able to implement them. This is what the industry needs for the 21st century. The capacity for change. With People, Ideas & Objects we provide a software development capability that includes the user, the service providers and that critical capacity.

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 VIII

We have been highlighting the major points of difference between the Preliminary Specification and the status quo bureaucracy in a series entitled “Our Solution.” Today I want to have a look at the Partnership Accounting and Accounting Voucher modules Material Balance Report which is a critical process / document within the specification. The purpose of the Material Balance Report is to balance the production and flow of products within a Joint Operating Committee. It is also designed to balance the production of the industry by using the information within each Joint Operating Committee as the inputs for an overall industry wide balancing. By doing so, the information that is contained within each Joint Operating Committee will become unimpeachable in terms of its accuracy. This system balance, as we call it, will provide each producer with the understanding that their production is accounted for accurately.

There are many sub-processes that are derived from the information that is contained within the Material Balance Report. These include all of the production accounting, revenue and royalty accounting, nominations, marketing data, inventory and many others. Since we will have balanced the Joint Operating Committee with the “system balance” across the industry. We will have also balanced the production, inventory and sales volumes across the partnership with the “partnership balance.” And have balanced the material with the “material balance” that deals with the allocation of production of by-products back to the individual Joint Operating Committees. This will provide an integrity in the value of the information contained within the Material Balance Report. This integrity enables the next step of the module, automation of the follow on business processes.

First, everyone knows that these volumetric values are subject to what seem to be an endless stream of amendments. And there is little that can be done to change the number of amendments throughout the process. What we can do however, is automate the processes based on the volumetric values that are processed at any time. Understanding that at the ultimate end of the process the accuracy of the volumetric information will be there, all of the information that was processed up to that point in time can be automated. Therefore all of the processes that use volumetric information within the Joint Operating Committee, producer firm and the industry can be developed with the understanding that they are automated based on these assumptions.

What we will be doing is removing the work that people are currently doing that is best suited to being done by computers. Now everyone fears that computers will be taking over, and that fear has been proven false many times over in our history. The fact that so many man hours are consumed in the processes that are involved in the Material Balance Report. This time could be better used elsewhere which is part of the larger point that we are undertaking in People, Ideas & Objects. We are leaving the work that is best suited to computers, the storage and processing. And enabling the people to do the value added work that involves the leadership, issue resolution, decision making, creative, collaborative, research, idea creation, design, planning and thinking. In essence we are making the computers work for us as opposed to the current situation where we are working for the computers.

Automation of these key business processes will eliminate a large and difficult franchise of the bureaucracy. Those that are part of the bureaucracy will probably leave the industry through retirement or other means. Those that find this to be the appropriate direction to be taking in the industry will join People, Ideas & Objects user community and establish themselves as a future service provider in one of these many processes. Does anyone believe in this day and age that these processes should be managed in the manner that they are today? Is this how we move forward in this industry? We all know there is a better way. And the moment we are freed from this cumbersome and time consuming burden, then we can begin to develop the potential of what this industry can do.

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. 

What Our Tactics Are Part II

There are two major trends that People, Ideas & Objects are capitalizing on in order to make the necessary changes within the oil and gas industry. The first has been the focus of most of the discussion that has taken place here on this blog. That being the unsustainable business model of the current bureaucrats in the industry. With them there is no future, no plans and no vision. Just more of the same losses and nothingness. The other trend that is as strong and is accelerating each and every day is the impact that Information Technology is having on our lives. People are experiencing change at a rapid pace in their personal lives. What could not be done a few years ago can now be done by the average four year old. It is truly remarkable. To disregard technology, which has been the attitude of many people, is now a dangerous position to put oneself in.

The effect of Information Technology in the business environment over the past ten years is of course a different story. The unchanging bureaucracy know that if they adopt the new technologies they lose control of their dominance and their desired form of organization. They need to stay in control and the way that they do that is to ensure that no technologies enter the organization that will ultimately render them even more obsolete.

So where do we stand in terms of the overall Information Technology horizon. I think that to state up to this point, the whole exercise has been a great exercise. The technologies have not been mainstream or powerful enough to make the promised changes. They have needed to mature and round themselves out in order to deliver on the promises that have been made. This history is one of the main reasons that people point to them as being irrelevant in the current marketplace. I think they are wrong. But its not too late. Now is the time in which to get on board and ride this train to its ultimate destination. Industries such as oil and gas will be fundamentally different as a result of the Information Technology revolution. And People, Ideas & Objects, I think, is the beginning of this trend.

When I began this journey in 1991 there was no way in which to implement the vision in any manner. The Internet was still a half decade away. Oracle’s technology was as dominant then but it was unable to carry the load. And computers, servers for that matter, were no better than what we have in our phones today. Probably most importantly was the problem of the user. How would they fit in? Its different today. I don't need anything more from Oracle other than for them to continue in their innovative ways. The Internet is more than capable. Computers and servers can do what we need in no time. And on that point there is an excellent article from the Wall Street Journal on where we are headed. And lastly the user is well educated and capable in the use and application of technology for their needs. I have what I need to implement the Preliminary Specification within the oil and gas industry. Something that until very recently I was unable to state.

So where do you fit in? Do you think the oil and gas industry needs to change? Is Information Technology an enabling capability to where you think it can go? Do you have ideas on how to improve the way in which we work? What will you do about it? I expect the bureaucrats to self select in the overall process. Either through the implementation of People, Ideas & Objects Preliminary Specification or not. They will retire from active employment in the oil and gas industry. Why do you think they have been spending so much of their money on their cabins these past few years? Either they will leave the industry to us, or they will leave it in shambles, they don't care. Their pensions are vested with the insurance industry. The point should be, what actions will you be taking as a result of this opportunity?

If we look at the Wall Street Journal article and understand the consequences of Information Technology in the workplace. Where can the individual go to implement these technologies and ideas in their business and realize the opportunities that are intimated in that article. In oil and gas people can move with People, Ideas & Objects. A vision of how the industry could operate captured in the Preliminary Specification. One that has as its primary focus the user and the importance of their role in the industry and the software that they develop and use. Its an exciting time to be alive. The next 25 years in oil and gas, and what that means in terms of the application of Information Technology, is as interesting as I think it gets.

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. 

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.