Profitability is the Issue

It is now clear to most everyone that oil and gas has a very serious problem. It's times like these that make it worthwhile to be able to provide a solution to the serious problems that our organizations face. And that is what our user community participants will have in hand by joining this user community. They will be the ones that develop the specific solution, based on the Preliminary Specification, that the industry needs to move forward in the 21st century. A solution that’s value proposition reflects the seriousness of the issues the industry faces. Providing real value to the work that is conducted here at People, Ideas & Objects, the user community and the service providers that will be created by the user community.

This won’t be the same oil and gas industry when we're finished. The producer itself will be much more flexible, capable and dynamic in their operations. Having offloaded all of their administrative and accounting processes to the service providers who in turn collectively provide the industry based administrative and accounting based capabilities. The producer can scale up or down their operation based on the profitability of their properties. This will immediately increase or decrease their administrative and accounting costs based on their production profile. There will never be the concern for developing the firm's administrative and accounting capabilities in line with the anticipated production profile. The administrative and accounting needs of the industry and each individual producer will be determined, managed and implemented by the user community and the service providers.

The producers will then be focused exclusively on developing their earth science and engineering capabilities, their land and asset base. These are the competitive advantages that provide the real value for the producer. You should quickly sell the stock of any producer who is claiming their administrative prowess as a competitive advantage. Compared to our service providers, the producers today have no scale in any of their administrative or accounting processes in which to apply the service providers competitive advantages of automation, specialization and the division of labor. The service providers global scope and scale of using the entire industry as their client base enables them to apply these tools in innovative and value creating ways for themselves and their clients, the oil and gas producers.

People, Ideas & Objects, our user community and the service providers claim is that we provide oil and gas producers with the most profitable means of oil and gas operations. Profitability is the issue that the industry is having. And no one can compete with our business model. For you to participate in the user community is your opportunity to enable this new environment to be established in the industry. Real, substantial work that will deliver so much value for our organizations, society and the people who work in this industry.

What we do know is technology is changing the face of business today. But it's not technology that is the main driver in these changes. It is the business model that is supported by IT that enables the changes to be made. And that is what we are doing. We have provided the user community with the power to affect change in the business model and Intellectual Property that makes up this environment. We are also providing them with the software development capabilities to implement those changes. It is the user community who are determining what is right and what is needed for the next great leap to come from the oil and gas industry. An entire new way of doing business.

I want it noted for the record here that at no time in this post did I mention the bureaucracy. I apparently can constrain myself from doing things to a certain extent.

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. 

We Have Options

One thing that became evident during this second quarter reporting season is that this downturn in oil and gas will not be resolved in the short term. If you read the earnings press release from Shell it's clear they are expecting difficulties for many years to come. The same can be said about the general tone of the discussion in the press about the industry. Recent discussion by Nouriel Roubini on Bloomberg was particularly dire. Nouriel is historically very accurate and doesn’t hedge his commentary. He is the only economist to have predicted the difficulties that occurred in the 2008 financial crisis. The point he made on Bloomberg is that shale based oil and gas will keep prices low for many years. He also says that there will be demand difficulties created by the decline in the Chinese economy. This doom and gloom scenario is what has been the concern of this blog for many years. I don't see it getting any better without fundamental changes in the way the industry is operated. Shale brings about a new era of abundance demanding that producers adopt the price maker strategy available from the decentralized production model of the Preliminary Specification.

These difficulties certainly don't have to be like this. The number of layoffs announced in the past week, although surprising, will become commonplace in short order. Layoffs make the bureaucrats feel even more important as fear can be instilled in anyone in very short order. That oil and gas treats its people like unskilled and uneducated labor when it faces some difficulty. Shows the breadth and depth of management thinking in the current bureaucrats. I have been arguing for years to have the price maker strategy of the decentralized production model implemented. If the bureaucrats would have begun what they should have they would be looking like intelligent, hard working and caring managers. It’s not only obvious that the industry will be faced with a significant decline for an extended period of time. It is becoming quite obvious to everyone that the bureaucrats just don't give a damn. Why concern yourself with the business when it's so easy to just lay people off when you screw up?

What to do in a situation where up is down and there are no side ways. We have all invested heavily in our careers and have the right to expect that we'll be rewarded for that. To be subject to layoffs and downturns at this time and in this place is despicable. I know that many people have had enough and expect to look elsewhere. We can only wish you well. For those of you, like me, that see the bigger picture and know that oil and gas is a critical element in the way our society functions. I think that People, Ideas & Objects has something for you. Our user community is the effective management of the industry in this new dynamic we are creating. It has the power to manage the industry through the user community participants ownership interest in a service provider. It is also empowered to make the changes to the Intellectual Property that makes up the software and services that this user community creates. It is how we remove and replace these bureaucrats for good.

In a way the bureaucrats are fighting for their own survival. They don't want any part of what we're doing and that has been the case since August 2003 when I first proposed these ideas. They knew then that I was bad news and they are still fighting to keep control for themselves. What is becoming clear to everyone concerned is that they are not doing their jobs. They are more interested in their own “take” and are managing for their retirement and potential exit from the industry. This is irresponsible, and they will get away with it. What we need to do is to work to prepare the solution defined in the Preliminary Specification and ensure that its funding is secured in a timely basis. And we are doing that.

If you were recently unemployed and have an interest in what we are doing have a look and see if there is something that you can do to help out while your between jobs. We have an immense amount of work to do and the fun has really only begun. I wish you all well in this terrible and unnecessary environment and look forward to the day we have this solution prepared.

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 Posting Today

In recognition of Alberta's Civic Holiday.

Onward and Upward!

My hopes that maybe the bureaucrats would be held accountable for their actions have fallen to the wayside once again. It is clear that the ability for them to snow the investment community continues. And on the other hand, although our readership is impressive, we are not reaching enough of the people we need to in order to make a difference. We will however continue to build on what we have here and be the thorn in the bureaucrats side. The lack of oil and gas profitability will continue until such time as the Preliminary Specification is in place. Shale reservoirs ensure that this will be the case. There are a number of other issues that the industry refuses to face, such as yesterday’s discussion of the service industry and the potential decline in its capabilities as a result of the current actions of the bureaucrats. And of course none of the past problems, like the difficulty in transitioning the earth science and engineering brain trust from those that will be retiring soon, are being addressed. I hear that recent university graduates in these disciplines are quite good baristas. Check them out at the local Starbucks.

I get complaints from some people that they are unable to read this blog while at work. I can only assure them that it's not as a result of anything on our end. Some of the producers may be blocking access at the firewall. Which sounds familiar to me. Nonetheless it would be helpful to this cause if we could expand the readership by sending our url’s to others who may be of like mind. One caution is to ensure that you know they are not going to use it against you. We have a job to do and it is going to be done on the basis of everyone doing things that are done differently than the way we do them now.

Our friends the bureaucrats also seem to be relying on a low interest rate environment to maintain the false economy that exists and which they seem to prosper in. Without the demands of an alternative investment that pays 7 or 8% for sitting on your money. The bureaucrats know there is nowhere else that you can invest. Therefore your stuck with their poor performance as the best that there is. What the investors in Encana have realized with the 90% decline in that shares price. Is that there is a potential loss that can occur as a result of sticking with the producers.

And I was thinking more about Encana since their quarterly report. They've lost 90% of their share value due to the fact that they were an almost 100% natural gas producer. They recently acquired an oil producer to offset this exposure. The point is that the natural gas market has been down for more than five years. Shale gas has destroyed the pricing of that commodity for these past five or more years. Maybe it takes five years for the effects of these poor prices to have the types of share price declines that Encana has experienced. If so, and with oil being down for almost one year, we have four more years before the entire industry loses the 90% of their market cap. A reasonable assumption.

I don't see anyway out of the oil and gas industries difficulties without the Preliminary Specification being put in place. And it will take a few years to do that. But then I am biased the bureaucrats would assert. The issues are bad today. And there are many issues that were unaddressed in the recent past that still need to be addressed but have been forgotten. And there are many difficulties in the very near future that I can see. What we do know is the “muddle along strategy,” which has poorly served this business for so long, will still be ineffective. All of these issues are challenging the capacity and capabilities of the industry, and therefore our way of life. And therefore should be considered by the bureaucrats in that context. It is however late July and their cabin’s are in their prime season at this time of year. People, Ideas & Objects have a tiger by the tail, as they say. And therefore we will live to fight another day.

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. 

"Implementing Effective Cost Control"

Another casualty of the downturn in oil and gas is the service industry. Just as the people who work directly for the producers, the service industry are dependent on oil and gas producers for their revenues. Oil and gas being a primary industry receives their revenues from the oil and gas sales. These oil and gas sales represent more than just the money that the bureaucrats are entitled to. It has been the experience of the past decade, when prices where higher, that these same bureaucrats were calling the service industry as being lazy and greedy for the prices that they charged to conduct field operations. Not realizing the difficulties these bureaucrats impose on the service industry by cutting field operations to the core one year, while the next two years doubling, tripling or quadrupling their capital expenditure programs. Feast or famine is how they have to deal with this in the service industry and that is how they have learned to survive in this environment dictated by the bureaucrats.

It’s 2015, is this the appropriate manner in which to operate the oil and gas industry? How is it that the service industry is able to innovate and provide for the ability to develop the technologies that producers are so dependent upon? Technologies such as horizontal drilling, multi-stage fracing, or to pick just one company Packers Plus. Based on the history of Packers Plus and my own here at People, Ideas & Objects. The declaration of war against the bureaucrats in oil and gas is a necessity. You really are treated like garbage if you have an idea. That’s because ideas belong to the oil and gas industry. In the bureaucrats mind that is. For you to secure an idea outside of the “legitimate” areas of ownership leads to punishment until one side in your war wins. This is how the industry is operated, surely no one believes the producers are actively working hand in hand with the service industry to develop new products and innovations? That’s a hollywood fiction.

It was Encana, the large Canadian natural gas producer that was calling the service industry lazy and greedy when prices were high. That was back when Encana’s stock was in the $90 range. With the recent announcement of their losses in their second quarter report. Their stock is performing well at around $7.50 but all of this decline has been attributable to the 1,400 people that they've laid off and the fact that the service industry is greedy and lazy. A company that has lost 90% of its market cap is a real life zombie. Two more years and they will be in receivership, with their assets picked away at by crow’s looking for a deal.

The fact is the service industry needs to be able to rely on the oil and gas industry for their revenues. In order for the service industry to perform in the best interests of the oil and gas industry, those revenues need to be stable and secure. The fact that oil and gas is a primary industry means that the responsibility for this falls on them. After all they are wholly dependent on the service industry and you do reap what you sow. This is the manner that the Preliminary Specification deals with the difficulties that we face in the future. The Research & Capabilities and Resource Marketplace modules provide for this environment to be created and managed. Is it so unreasonable, in this day and age. To expect that the producers will control themselves and not overproduce. By implementing the Preliminary Specifications decentralized production model they can do this. And make the prices that are necessary to support both industries in an appropriate manner.

As it stands now, with this downturn, people are leaving oil and gas and the related service industry for good. They've seen the character of the bureaucrats before and know that this downturn will be no different. What will be different is their actions. Instead of waiting for the next upturn. They're going to take what they may have been able to secure and are moving on to some other more secure industry. This is happening wholesale in the service industry, and to the people who work in oil and gas. Many of which I know are burnt to the core. Add on top of this the fact that the bureaucrats, when faced with the results of their own stupidity, always hightail it to greener pastures and you have to ask yourself. What and who are left?

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. 

Administrative Nightmares

Ask a bureaucrat why they haven't shut-in the unprofitable production these days and you’ll see the thousand mile stare followed by a frustrated and angry response that you don’t know what you’re talking about. Its the question that needs to be asked and the honest answer from the bureaucrats is they don't have a clue which properties are profitable. Their entire operation, from an accounting point of view, is a giant fudge factory. They employ the accounting and administrative people to conduct the necessary activities on behalf of the “joint account,” or what is commonly referred to as the accounts of the Joint Operating Committee. And because there are partners in most of those “joint accounts” they are authorized to charge for overhead on percentages of capital spent, a number of fixed dollars per producing well per month and a few other ways. It is generally agreed that none of these overhead charges make up for the real costs to account and administer a property. They are estimates based on best guesses that have been in place since, I think the 1950’s.

There is no consideration in these overhead charges for natural gas operations or oil operations. Anyone who knows the business will understand the complexity and difficulty involved in natural gas, from an administrative and accounting basis, is an order of magnitude more complex than oil. These overhead estimates are also the same irrespective of the volume of production from the well. What bureaucrats want you to believe in this quarterly report season is that the costs to carry the people on the payroll have been the source of their difficulties. Laying these people off will be the natural resolution to their difficulties. My argument here is all a moot point the bureaucrats will state. As the people in head office, the accountants and administrators, costs are capitalized anyway. Which is very true, so why lay them off. Could it be that you're just looking for a scapegoat?

The point of this post is to document the difficulty in determining the profitability of an oil and gas property under the present systems. Producers can determine the revenues, royalties and operating costs of the property and use that as the basis of determining what is providing some contribution to the margins. But these calculations are unable to determine the costs to administer and account for these properties and they never include the costs of capital that was incurred to explore and develop the property. Those are what are called sunk costs in the business. It is these sunk costs and the overhead that can be widely variable between properties and producers in determining a Joint Operating Committees profitability. That is, when and if they could ever be calculated properly by the producer.

To account for the administrative and accounting costs on a property basis has never been conceived of before. The necessary armies of accountants, with very sharp pencils, would be thick and deep. Therefore the need for overhead allowances has been the most practical application to deal with the way to administer oil and gas. That was the case in the 1950’s and 1960’s and has been continued throughout the last 50 to 60 years. However, we have these computers now and if we organized ourselves around the possibility of using them to do the things that they do well, and have the people do the things that people do well. We could determine with exact detail on a monthly basis each well's performance in terms of revenues, royalties, operations and exact accounting and administration costs, and just for fun I'll throw in the fact that we can determine what a reasonable person would determine the costs of capital was for the month as well.

By having our service providers replace the accounting and administrative resources of the producers. They will use their staff, who are the reallocated administrative and accounting resources from the producers, and our software to provide the administration and accounting of a specific process on behalf of the entire industry. It will be in that way that they can charge for their services to each Joint Operating Committee, or well, the exact costs of what they incurred to process that Joint Operating Committees specific administrative or accounting process. If the well wasn’t on production then none of the service providers would have done any work and none of the service providers would have issued an invoice to any of the Joint Operating Committees for any accounting or administrative work. That way if the well wasn't earning a profit the producers could shut it in and wait until such time as the commodity prices rose to the point where they could make a profit, or alternatively they could put that Joint Operating Committee in their inventory of engineering and geological workovers and try to innovate to bring it back to profitability sooner.

The way that the industry is currently structured is to accommodate the world as it exists in the 1950’s. Computers are around today but the organization and methods are still stuck in the 1950’s. The Preliminary Specification will change this by providing full income statement and balance sheet reporting for each individual Joint Operating Committee and well. We need to make these changes in the Preliminary Specification in order to provide the dynamic, innovative and profitable oil and gas producer with the most profitable means of oil and gas operations.

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.  

The Probable Scenario

If we fast forward three years to the year 2018. We find that this oil and gas price decline / overproduction has passed and all is well in oil and gas! The bureaucrats are congratulating themselves with handsome bonuses for surviving what may have been the most difficult period in the industry. Things could not look better. Restructuring of the junk bond market has made ample investment capital available and those drilling locations have been dusted off and negotiations for drilling rigs have begun. Bureaucrats are on the record in their last quarterly report that their production profile will be 15% higher than what it is currently.

What did you expect? A change in the methodology, strategy, operations or attitude of the bureaucrat? I was on record for this past year that they can't, won't and will not change their ways. This was in contrast to the constant barrage of news and information that the industries production profile would decrease and pricing would recover. I suggested it would never recover, and for proof just look at natural gas. Suggesting, in our scenario above, that in three years oil prices will recover to the point where drilling plans will be dusted off and drilling rigs will be contracted was the most optimistic that I could possibly be about the current situation. I give this scenario around 3% probability of becoming reality in 2018. More likely we will see the court's full with bankruptcy claims of the producers, their banks and the junk bond investors.

Oil and gas has a problem and it’s primarily the bureaucrats. However there are secondary elements to it as well. Shale being the biggest of the secondary elements. It is very expensive. It is prolific. Its flush production overwhelms the commodity marketplace. And is for all intents and purposes a non-commercial exercise. But is it? Today the U.S. derives 58% of its natural gas from shale. And for oil it's at least 25%. The moral of the story is we are junkies and we are hooked on the most expensive stuff their is.

The fact of the matter is that the next leg down in this industries destruction will not be on the oil side. Natural gas volumes in storage will be filled to capacity upwards of a month before the fall demand begins. That will take upwards of 14 bcf / day, or almost 20%, of the U.S. demand off of the market during that time. Where oh where will the producers put it? Expect our friends the bureaucrats to do the most intelligent and constructive thing that is humanly possible at that time. Remember, they don't care about the business so they will say this a temporary situation or an anomaly. Or you could short natural gas futures contracts.

We come back to this. The producer need a means in which to allocate production. The only reasonable and fair methodology is on the basis of profitability. If the property is profitable, then it produces. Otherwise it remains shut-in where the reserves can be held until such time that it can be produced profitably, it removes the marginal production from the commodity marketplace which increases prices and ensures that the producer only produces profitable properties and doesn’t have those profits diluted by having to cover unprofitable properties. The only way that this will happen is if the industry adopts the Preliminary Specifications decentralized production model. This can be done by funding our budget.

BP’s earnings will be released today. It will set the tone for the industry in terms of earnings reports for the producers. Expect to see those magic profits we've talked about here before, maybe for the last time. Hedges will have expired and lower overall prices will become evident in the next quarter's report. Bloated balance sheets will need to be addressed by then as well. What will be interesting about today’s quarterlies is that these companies will have to be honest about their future projections. This could trigger some big blow downs in the stocks of the producers. Also expect to hear the keywords “implement cost controls” from many producers. These are the three magic words that show investors you're focused on their interests. These three words have been able to save some otherwise dismal companies from facing the music this quarterly report season.

Things are happening quickly now for the oil and gas producer. As I stated we are at the end of the beginning of maybe the worst era in oil and gas. And it is all the bureaucrats fault. This situation is all avoidable and fixable. I have been “harping” about this and promoting the Preliminary Specification for many years. Years in which the pain being experienced by everyone could have otherwise been resolved and avoided. Instead thank your bureaucrat, and listen to them carefully in the conference calls and see if you can hear the waves from the lake where their calling in from.

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. 

Never Means Never

Oil, and to a lesser extent, natural gas prices are suffering from the market’s surprise that “more” oil or gas haven’t been removed from the production profile. North American production being up over one half million barrels is confounding the marketplace. If you've been reading this blog for the last year or more, I've been suggesting that this would happen. The bureaucrats can't, won't and will never change. They also don’t care. I found this interesting quote that provides some understanding of why this happens and some insight into the future direction of the oil and gas bureaucrat. It’s from Henry Kissinger who states.

When enough bureaucratic prestige has been invested in a policy, it is easier to see it fail than to abandon it. 

We also have this “never means never” dilemma facing the raising of our budget. The bureaucrats fight us at every opportunity that they can. Their actions against us are subtle and more oriented to my frustration level than anything else. You see the difficulties in other technology companies having their products implemented in the marketplace. Uber is being aggressively pursued by the New York Mayor. Hillary Clinton has commented that she’s not a fan. The vested interests that are aligned against those with alternative business models have difficult protracted battles ahead of them. Our ability to raise our budget is something that on most days seems to slip further away. Unlike Uber we can’t be operated as an app on someones phone. We have a much broader scope and scale that needs to be developed in order to provide the solutions that the market needs. We do however provide a substantial value proposition once we've developed those application modules of the Preliminary Specification. And that is the choice, a profitable industry with our solution, or continued financial destruction with the status quo.

The real key to our future and the quality of our product is our user community. We continue to focus on its development over the next few years as we await developments on our budget. The question I guess is how much pain can the oil and gas investor handle. The user community will never commit to us in the volumes necessary until such time as the financial resources are secured. We can however communicate with the larger community and get the word out about what it is that we are doing. Have the people in oil and gas understand the process and methods we are using to solve the issues in the industry. Have them informally prepare themselves for the day when we do finally receive our budget and then they can join the community. This is highly constructive work that we are doing today and the audience that we are reaching is growing and is substantial. Without the Internet this would have taken an immense effort and a reasonable budget to accomplish. Today that is not the case. And we can continue to do this for the foreseeable future and make this all happen. I'm not surprised that I am not the only dissatisfied person in oil and gas, I am however surprised at the enthusiasm of our targeted user community. This is doable.

One thought that I continue to speculate on and maybe the oil and gas investors can think more about. Is regarding the raising of our budget needs. Imagine what would happen to a producer's stock if they funded their share of People, Ideas & Objects budget. What would happen if the investment community put pressure on the board of directors of a producer to forward their share of our costs. Understanding the impact of the Preliminary Specification, the going concern concept and the efficient market hypothesis. Would that producers market capitalization then reflect the value of the producer as if they were operational on the Preliminary Specification on a proforma basis. The theory is put into practice every day. And if the bureaucrats were smart, they could maybe earn an extra year or two of quiet vesting of their pensions while we were busy doing our work. Think about that.

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. 

The Asset Swagger

In oil and gas assets are things that you collect on your balance sheet. The more that you have the bigger the swagger that you can carry off as you walk down the street. These are the governing principles in oil and gas. Shale properties are pursued by bureaucrats because they are consistent with the governing principles of the industry. They are costly, leading to higher balance sheets. Have steep decline curves, which lead to less and less recognition of any depletion of those assets in subsequent years. They are the perfect asset to pursue.

I'm paraphrasing here but I think this is the general operating procedure and logic being employed by the bureaucrats. It seems to be the only logical reason why we are doing what we are doing. At the end of the year the firm will be so much bigger because we blew so much investor money that they'll be impressed. So the bureaucrat thinks. Now that’s performance.

I have argued here on many occasions my difficulties with the capitalization policies used in oil and gas. The SEC dictates that either full cost or successful efforts define the maximum amount that a producer can record as their assets. Either method bloats the balance sheet by including everything under the sun as an asset on the balance sheet. But what accounting firms and bureaucrats don't seem to understand is that the SEC defines the outer limit. Any reasonable business person would look at the balance sheet of a producer and state that it is overstated, or more appropriately, bloated. When did reasonable lose its application to assets in oil and gas? I think it was around 1978.

Assets are not collectables, they are costs that need to flow to the income statement. For a healthy firm and industry, the sooner the better. There is no reason for an industry to be carrying the last two decades of capital expenditures on its balance sheet. The only reason that you would do so is to make the bureaucrats look like they're “performing.” Sure the producers have been reporting profits, but if you never recognize the cost of capital, in a capital intensive industry, you're going to report profits. Note too however, these profits as a result are of the paper variety. If these profits were real, the producers would be flush with cash. Almost no producer has positive working capital. An industry that operates on negative working capital! And they provide no return to their investors, in general. Clearly the overproduction has been endemic for decades fueled by the deception of a profitable industry.

This is a fine critique but what are the alternatives. There are two things that we will be doing in the Preliminary Specification. First is we will be including the cost of capital and actual overhead into the calculations of prices necessary for the Joint Operating Committee to earn a profit. These price calculations will be done on each and every property and well in the industry. They will be accurate and timely. On the basis of these calculations the producers will then be able to determine if the Joint Operating Committee can be produced in the current commodity price environment. If it can produce a profit, then it will produce, otherwise it will be shut-in.

The second element of our policies is that we will employ a different capitalization policy. One that recognizes the costs of exploration and development in a more timely fashion. What is generally considered controllable equipment in the industry, pump jacks, tubing, wellheads, etc will be capitalized. The uncontrollable, and more specifically the intangibles like drilling day work, cementing, logging and fishing will be expensed in the current period. Irrespective of the results of the well. This change in policy will be consistent with the SEC requirements as it does not overstate the assets of the firm.

What these two policies will do is draw down the bloated balance sheets of the producers. Retiring these bloated asset costs and having them recognized for the costs of the business that they are. There would be no more fooling ourselves that producers are profitable. We would need substantially higher prices in order to achieve this profitability. A mechanism, the decentralized production model, is provided in the Preliminary Specification to bring prices to the level where they are covering the costs of the industry. This capitalization policy would also return the capital to the investors who have invested in the industry in good faith over the past decades. That is because the oil and gas industry is a capital intensive industry and oil and gas exploration and development is expensive. Giving the commodities away cheaply as we are doing now is only bankrupting the industry and leading to any number of bad decisions by industry and consumers. This is foolishness and it has to stop.

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. 

The Vested Pensions Business

We are nearing the end of the beginning of this oil and gas crisis. I have seen many downturns in my 38 years in the business. I remember the decline in oil prices in the 1980’s being the worst. It lasted for a long time and had an affect on people’s thinking about the industry for a generation. This is not a downturn like anything that I have seen before. This is the first crisis that has occurred in oil and gas. One that is particularly difficult because it could have been avoided with action from the current installed bureaucrats. What is clear by their behaviour in the past. Is that they can't, won't and will not do anything to correct the situation. It was their expectation that they would ride out another year telecommuting from their cabins at the lake. It's time to cut and run on these bureaucrats, they will never sort this out. It was clear to them that they had this scam running for another year, at least. The problem is the industry is deteriorating under the bureaucrats feet and it should be obvious to everyone by now that they just don't care. Its pensions, fully vested pensions, that’s the business to be in.

Our solution to the issues in the industry have been summarily rejected by the bureaucrats. It is clear when you read the Preliminary Specification that they are relics of the past century and have been dispatched to the history books in the process of implementing our solution. Which interferes with the business of vested pensions. Our solution requires significant changes to be made to the industry. With the level of distress that I see being generated in the near future. Our changes will be able to be implemented. In a normal environment we would have to compete with the status quo environment. With all hell breaking loose, people will be looking for alternatives. That makes our job much easier than having to compete with people who are comfortable in their lives and competent in their jobs.

The prototypical producer in the environment where the Preliminary Specification is operational. Will be a stripped down version of its current configuration. Consisting of the C class executives, the earth science and engineering resources, some land, legal and support staff. The administrative and accounting resources of the producer will be reorganized to service providers who are focused on a process or subprocess and will use the entire oil and gas industry as their client base. It will be in this way that we move from the producers administrative and accounting based capabilities to an industry based administrative and accounting based capability. By doing so we render all overhead from these administrative and accounting costs to be variable in nature, as opposed to their fixed nature as they are today.

With the administrative and accounting costs taking on the variable characteristic very little of the producers costs will remain fixed. Rent, lights, power etc for the head office but those will be for a smaller configuration than what they are now. The majority of their current overhead, the people and their associated costs, will be variable in nature in the following manner. With the service providers they will operate based on the activity they receive from the Preliminary Specifications task and transfer network. If a well is on production, then production is reported and the service providers that are required within those processes, revenue accounting, paying royalties, production allocations, etc are involved in those tasks. They will conduct their activities and issue a billing for the administrative and accounting activities they conducted to the Joint Operating Committee. Not the producer. If there was no production, none of the service providers will receive anything from the task and transfer network and therefore no activity will be incurred by the service providers and no billing to the Joint Operating Committee.

The producer will, as a result of this, know with better clarity than they do now, exactly what their profits are for any specific Joint Operating Committee. An allocation of capital, revenues, operating costs, royalties and actual overheads incurred by the service providers will give them a precise accounting. It will be on the basis of this accounting that if the property is not producing a profit. A profit that also considers the costs of capital and actual overheads. Then the property would be shut-in or suspended until such time as the commodity prices would provide profitable operations. While shut-in, nothing will be generated from the property to trigger any of the administrative and accounting service providers to conduct any of their activities in the task and transfer network. Therefore creating a null operation, no profit, but most importantly no loss either. Only the cost of capital is uncovered during times of shut-in production.

As a result of our decentralized production model. The producer saves these reserves for a time when they can be produced profitably. The commodity marketplace supply is reduced by the marginal production, leading to higher prices. And the producers report higher profits on lower production profiles. Profitable properties are not having to make up for unprofitable ones. This industry based organizational structure is what is required to deal with the abundance of the high cost, highly prolific shale based reservoirs. Dumping overproduction onto the marketplace just doesn't seem to be working. Unless, you're in the fully vested pension business that is.

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.