"That Giant Sucking Sound"

To quote H.Ross Perot when he ran for president. That is what he thought the North American Free Trade Agreement (NAFTA) was going to do to jobs in the United States. The giant sucking sound you here on the streets today is the confidence in the bureaucrats evaporating. Faith has been placed in the powers that be, that all was under control. Today we begin the reporting for the third quarter which will show the full scope of the devastation these bureaucrats have created. They put their reputation that all was well on the line. Now we’ll see exactly how they have been doing.

Recall that the earnings reports were one of the three issues we felt that bureaucrats would not be able to overcome in the month of October 2015. That there were three issues. The third quarter report, the breach of natural gas storage capacity and the bank review of their lines of credit. We originally raised these points in a blog post entitled “In Summary” on September 16, 2015. What we stated was these issues would prove that these bureaucrats will never, ever change. That what was required was to throw the bums out and start with the development of the Preliminary Specification, our user community and the service providers. Then we will have a dynamic, innovative, accountable and profitable oil and gas industry.

As we speak the natural gas prices are doing well. All sarcasm aside, what do you think these people will do on the oil side of the business? Keep producing until the storage is filled to capacity. I don’t know what happens operationally when 15 bcf / day suddenly has no market, but we’re about to find out. Bureaucrats have been overproducing natural gas for almost six years. It's a continental price. This isn’t OPEC’s doing. We have heard that they are “rebalancing the market” for these past six years. The devastation that is happening now in natural gas is 100% attributable to the bureaucrats. They have no one to blame and they have spent all of their political capital in terms of having any say in the management of the industry. It’s therefore time to throw the bums out.

The oil market is no different than the natural gas market. Other than slightly more advanced issues in terms of time. What OPEC has done is said that their production will be the one constant in the market. And others will have to fill the swing producer role. The higher cost producers will have to occupy that swing producer role. And as a result the bureaucrats argue that the Saudi’s need something like $185 / barrel because of the high social costs of their government's budget. And that the Saudi’s are therefore the higher cost producers. Then in the next sentence they state they’ll be profitable at $20 / barrel. The fact of the matter is these are lies. If you used the same basis as they used to calculate the Saudi’s costs, the American producers would need $10,000 / barrel. There is also no way that they can even account for their overhead with $20 production. These bureaucrats have lied and abused the goodwill of our governments, the press and society in general for so long they think they can get away with saying anything. What they really should do is run for the democratic nomination!

The fact of the matter is they don’t know when to stop, they don’t know how to stop, it's an engineering induced nightmare. Today is the first day that we will see the producers third quarter reports. I could be wrong but I think that people are going to be surprised that bureaucrats would think that they could continue producing when they are losing so much money on each barrel of oil and mcf of natural gas. Why would anyone continue to do things that are that destructive to themselves? They don’t care! And that will be evident to everyone. Look for the bureaucrats argument that the writedown of assets is a sunk cost. Well those sunk costs represent the money they took from the investors and promised a return. And if we are to ignore these sunk costs in terms of your third quarter report, when exactly do we consider their performance with those investments. It is systemic throughout the industry that you never have to account for the money that you took from the investors. The fact that you consistently diluted them and abused them during the good times means that they will continue to take the abuse now. So why quit?

Sunk costs are one issue but the fact that oil and natural gas is unprofitable as soon as you dislodge it from the rock to begin the production process is the other. Operating losses will be horrendous. Losing money on basic operations on this scale is something that only a fool would do. This is the end of the credibility of the bureaucrats who run the show. That giant sucking sound will be getting much louder as the next few weeks pass and the scope and scale of these issues begin to be realized. Watch our twitter stream after today’s close to enjoy the show up close and personal. The bigger issue here for the bureaucrats is that they have built a house of cards. They have no cash, no working capital, no credit facilities, no access to debt or equity markets. Basic operations burn cash. And they have the fixed overhead that on a good day would consume 25% of their revenues. And they produce until the storage can’t take anymore. This is the end of the oil and gas industry as we know it. Our own unique style of 2008 type of failure. Join me as I watch and enjoy those who laughed and laughed at me as they have their credibility shredded and destroyed by their own hands.

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. 

A Long History of Overproduction

During the 1980’s and 1990’s the price of oil was very low. In the late 1990’s it was predicted by the Economist magazine that oil would fall to $10.00 a barrel and stay there. Thankfully 2008 has taught us not to listen to economists. The point was that it always appeared to me that a small amount of production being withheld from the marketplace would have a significant increase in the price of oil. That the industry was in fact a price maker. This theory was untested as I was looked upon as I was somehow missing the point, and OPEC was actively in the mix with significant non-producing capacity. Nonetheless the difficulties in the industry were two fold. In reality you could not tell which property was profitable no matter how hard you tried. And secondly there was no mechanism to fairly allocate production between producers. Who would be the one to shut-in their production.

Nonetheless I continued and was unable to solve the problem until the summer of 2003. I was doing the proposal for my master’s thesis and it came to me. It was the Joint Operating Committee. Now this was not my most eloquent argument. When I told people that the Joint Operating Committee was the solution. It was the equivalent of blurting it out in a crowded theatre just before the movie started. A few of the senior bureaucrats in the industry did however understand the implications. One stating that “this would solve all the administrative problems in oil and gas for the past 50 years.” And we know what they did with the knowledge of the discovery of using the Joint Operating Committee. The legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the oil and gas industry.

What was clear to me was that I needed to spend some time to fill in the blanks of what the idea needed. To determine what the producer and industry would look like if we had the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. This took a bit of time and was a bit harder to do than I had initially realized. After ten years of researching this I was able to publish the Preliminary Specification in December 2013.

As luck would have it producers fell into the same patterns of overproduction in the natural gas business around 2010. And they began the trip down the same rabbit hole a year ago for Oil. The issues that motivated me to act in 1991 to develop software are back and they may take as long as they did to resolve themselves as they did in the 1980’s and 1990’s. And as I recall that was a different time a different place and a different industry. As I have said rebalancing the market” is a blunt instrument and that applies to the experience in the conventional market. In the unconventional market it will never work. It was what seemed to be decades of low oil prices that plagued the industry before. Natural gas wasn’t as affected as there was the U.S. gas bubble and gas wasn’t used as much as it is today.

Can this industry stand to wait for a “market rebalancing” like last time? Of course not. The difficulty today is that we are not dealing with conventional reserves. We are dealing with the prolific nature of shale and the dramatic effect they have on every aspect of a producer. Higher costs. Greater reserves. High flush production. Higher operating costs. And longer life. A producer can go out and find a TCF of gas or a billion barrels of oil as easily as it was to generate one hundredth of the value of those reserves. And that is the prize, the reserves. However the high cost of the shale reserves dictate that you have to produce to pay for them. And so we get into the overproduction problem.

If we had a proper accounting at the Joint Operating Committee of the actual costs that it takes to produce. The revenues, less royalties, less operating costs, less actual overhead to manage the property and less an appropriate amortization of the costs of capital. And determined that only the properties that were profitable based on this accounting would produce. Then the producers overall revenues would not only be higher, all of their costs would be covered, and they would be profitable in their operations. Withholding production from the marketplace is the only way that the industry is going to stop the difficulties that it’s in. The solution is the Joint Operating Committee, if that means anything to you today. And we have the Preliminary Specification, the user community and service providers to help provide 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. 

Hedge Funds "Can't Miss"

The Wall Street Journal is reporting that hedge-fund and private-equity managers are caught in crude oil’s fall.

Hedge-fund and private-equity managers over the past year began piling into debt issued by troubled energy companies, hoping to profit off a reversal of oil’s slide. They raised billions of dollars for the effort, in many cases telling backers it was a once-in-a-generation chance to pounce. But crude has continued to fall, slamming the companies and many large investors who thought they had bought in near the bottom.

The problem is they didn’t consider the effect of shale based reserves in their calculations. Hedge funds were using history to determine what will happen in the future. Which is what made this a “can’t miss” investment. They need to consider what the effect that the shale reserves will have on bureaucratic behavior. Shale is prolific. It can overwhelm the marketplace with flush production. And there is a lot of shale properties. The behavior of the bureaucrat is that it will be someone else's problem. In this case the hedge fund investors.

“A lot of hot money chased into what we believe are insolvent companies at best,” said Paul Twitchell, partner at hedge-fund firm Whitebox Advisors LLC, which he said steered clear of the trade. “Bonds getting really cheap doesn’t mean they are a good buy.”

In March, Carlyle co-founder David Rubenstein said at a conference that he was looking to “buy now” on the theory that prices would rebound.

“People got crushed. They really got destroyed,” said Blackstone Group LP Chief Executive Officer Stephen Schwarzman

The bureaucrats problem today is that the losses being incurred by the hedge funds. The losses being incurred by private equity. The losses being incurred by the banks. The losses in the junk bond market. And the losses that are being incurred by the shareholders. Are forming the basis of a new history in which to be used when they determine how they will approach an investment in oil and gas in the future. The question I guess is who’s left? Grandma might have some money stuffed under her pillow. Outside of that everyone in terms of any type of classification of oil and gas investor, their toast. Burned at the stake. And roasted by these incompetent and self serving bureaucrats. Tell me honestly, looking at the situation in the industry today. Knowing what we know, would you stick around to try and fix this?

Oil and gas producers are now the proverbial junkie. Strung out and desperate for a fix. They will do anything including begging, borrowing and stealing to make their day better, man. They also have the financial health of what a junkie would have in terms of their personal health. Diseased and infected with limited life expectancy. The producers financial health was predicated on high levels of capital assets listed on the balance sheet. A reflection of their propensity and capability to spend money. A skill that everyone in the world has. And that is it. The assessment of performance over the past few years has never considered any of the costs of those capital assets because “those are sunk costs!” Well now the assessments of the value of those “sunk costs” is far below what they have been recorded at and the performance criteria will begin to look somewhat like it should have been for the past decade. Soon everyone will realize these bureaucrats have built a paper empire! An F- in terms of grade. After all what do you expect from a junkie, man?

This is the beginning of the end of the oil and gas industry as we currently know it. There is no hope for it when this level of damage has occurred. We are now breaching the natural gas storage capacity as we speak. Oil will soon do the same. Watch for sizable downward price adjustments based on the reduction in demand. The bureaucrats have their running shoes on and the door is open. People, Ideas & Objects, the user community and service providers will have to pick up the pieces I guess. And implement the Preliminary Specification without anyone responsible holding the fort in the meantime. Brilliant. One thing for certain, this is going to rekindle the confidence that hedge fund managers have in synthetic CDO’s.

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 Ultimate Doomsday Scenario

People, Ideas & Objects, our user community and service providers have a timely solution to the issues that the oil and gas industry faces. This week I have expressed my point of view regarding the scope and scale of the issues that the industry is facing. We’ll see the extent of the damage in the oil and gas producers these next few weeks. I expect people to be surprised at the extent of the damage that occurred in the third quarter. Producers are weak from a financial point of view. When they were told to build their balance sheets they expanded their asset base by spending more on capital expenditures. That is not what a firm does to build its balance sheet. Today the producers are asset heavy, heavily indebted, cashless, have negative working capital, no lines of credit, and no access to debt or equity. They, I think, are also operationally losing money if you consider the costs of the overheads they have to pay for. They are stuck with this poor financial performance that has also been jaded by the bureaucrats stiff arm towards the investor class over the past number of years. I can’t paint a more dire picture. Systemic and chronic overproduction is leading to a steady and further erosion of the commodity prices as inventories begin to breach their storage capacities and commodity prices begin to collapse completely.

The press have given the producers a pass based on the goodwill they had built up over the years. The bureaucrats have been spending this goodwill by stating they are making money and surviving these difficulties ok. This downturn will be devastating to the producers from the point of view of the structure and capabilities of the industry. A numb, mute and unthinking bureaucracy is about to be taken over by caretaker administrations that will appear to make the old bureaucrats dynamic. Those bureaucrats that are responsible will naturally exit the stage faster than you can believe. They’ve been lining their cribs for many years now so they’ll be ok. No one will be able to find them in the disaster that the industry will have become. For lack of a better analogy, this is what 2008 was for the banking industry.

Who wants to stick around to fix what is most likely unfixable. If it was fixable why would the producers, after almost six years of declining natural gas prices, be selling Marcellus Shale gas for $0.66. With the Marcellus region producing 28% of the U.S. natural gas this is not an immaterial point. There is no such thing as business as usual in oil and gas today. A failure has occurred that can not be handled by the status quo. The dynamic that can not be managed is shale based reservoirs and the abundance of supply that those reserves provide the oil and gas producer. Putting those reserves on the market only makes the situation worse and yet no one, not a single bureaucrat has called me to ask how they can get the price maker strategy of the decentralized production model operational in their shop. That commotion you hear is the rush to the exits!

What I need is my budget funded and I don’t expect it to come from the bureaucrats. They are conflicted and for all intents and purposes gone. Mentally and figuratively. The investors who have been betrayed by the bureaucrats will need to step up. That’s a highly charged sentence, even for me. I’ll have to write that down somewhere and keep it for my collection. It's true that the investors have been betrayed. No question. And it is the investors that must fix the situation as without them their will only be the government. And no one wants or needs that. And to fix the situation it is necessary to fund the Preliminary Specification and the user community. Then we will build the software necessary to implement the price maker strategy and turn the industry into a profitable, dynamic, innovative and accountable one. Imagine 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. 

A Bureaucrats Thoughts

What does a bureaucrat do before they skedaddle? That's the question of the day. If you had the power and control of the oil and gas industry. Saw that it was in the state that it was in, wouldn’t you do something to rectify the difficulties? Why do we get the cartoonish blank stare and blinking of the eyes from the bureaucrats instead of any action? Is it that they are waiting for the starter's pistol to begin their exit out the door? Blaming everyone else and cutting costs is only making the problems more difficult in the future. They're on autopilot. There is no rational thinking or solutions being discussed, or actions being taken anywhere in the industry. They are blind, deaf and dumb.

We’ve all had those jobs in our career that were, how would you say, not necessarily your favorite. But you pushed on through waiting for the day when you would be moved again into something more to your liking. In the meantime you had these tasks that you despised or had difficulty in fully comprehending. And there always seemed to be a few exceptions in those areas that made life a living hell. Over time they were unresolved in this job that you hated and they became what are known as the skeletons in your closet. No one knew about them and no one was going to know about them. You would just strategically leave them in the in-basket for the individual that followed you. Until then you looked for that other job, kept your mouth shut and fingers crossed.

That’s what's happening here. The problems in oil and gas are beyond the current bureaucracies capacity to deal with them. Today’s performance is the skeleton in the closet of all of the bureaucrats. They don’t want to deal with them, or anyone that has a solution, or anyone that wants to discuss them. “Please just go away.” They will say. We’ve all been there and understand the mental gridlock that this kind of situation creates. The problem is that this is a bit more than just a clerical error or processing problem. The entire industry is effectively being destroyed by the inability to act to rectify the problems in the business. Selling gas for $0.66 in the Marcellus region this past week is clear evidence that bureaucrats are operating on zero corrective capacity at this time.

Technology looks like a strong industry in which to move to. It also looks interesting. If the bureaucrat can push their resume out that way then maybe they can get a new job where no one knows their name. And then they can start with a fresh new slate and the freedom of a good night's sleep. When people ask why the oil and gas industry didn’t fix itself, the bureaucrat can respond by saying “that they did everything they could.” And off they’ll go. The good thing about Obamacare is that it has been great in terms of its demand for bureaucrats. So there’s another avenue to ply their trade.

So under this bureaucratic silence is a lot of paper being transmitted by these bureaucrats looking for the exits. Exactly “what difference does it make” to quote Hillary Clinton if they leave. They are just one individual. They’ll think they are too old and too tired to stick around and deal with the problems. Not only the problems that are pretty clear to everyone today. But the future ones like finding the people to run the industry. Encouraging investors to come invest. Or the dreaded search for service industry representatives. That will only make their jobs more difficult on an exponential basis. So it is best that they just blink and keep their mouths shut until they finish that fifth interview for that cool job in the technology industry, or the sixth interview in the health industry. Both of these industries seem to appreciate that oil and gas bureaucrats will work for so cheap.

This is called CYA in the bureaucratic handbook. You don't want to feel the full impact of the kick to the posterior so you get it covered. Looking at the calendar the time for accountability will begin with these third quarter reports, and anyone left in the industry in April 2016 are on their own. These are the thoughts of the bureaucrats who are in power and control of the industry. Expect to see many announce their retirement here in the next two weeks. That's because CYA implies cut and run.

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. 

How We Need To Be Structured

Any opinion about what the future oil and gas demands by consumers will be, might get you a cup of coffee. There are a wide range of scenarios including the prospect that electricity will fill batteries magically and we’ll use that as a replacement, to a doubling of the world consumption of oil and gas. Nonetheless it's fair to assume that the competitive differentiation of oil and gas will continue and therefore the demand for our unique products will remain for the rest of this century. Under any scenario that is plausible, the demands on oil and gas will be significant. I think it will be the most robust time in the industries history. We can approach the situation from a North American marketplace point of view and become the energy superpower that some have suggested. But not with the industry we currently have, run by these bureaucrats. They are not structured to succeed, organized, capitalized or staffed appropriately for the job.

Getting to the level necessary to approach the next 25 years will be difficult. How will they convince the capital markets that they can make money? Where have they been successful before? And who is prepared to operate these organizations for this challenging time? I’m sure this quarter's financial statements will provide many of the answers to these questions. I on the other hand propose a different approach. One that is different and more than capable of answering these questions today. The difficulty with my approach is that it eliminates the bureaucracy once we are finished with them. And that is a critical point. Once we are finished with them. We need them to keep the ship running while we are building the software and services to replace them. As it stands today the bureaucrats are not talking to us and are, whether they will admit it or not, going to skedaddle soon. Then we’ll all be in a pickle. But that’s the point as far as the bureaucrats are concerned. All they want is to send postcards from the tropics asking if we miss them yet. A more responsible approach would be to involve People, Ideas & Objects, the user community and service providers in the development of the Preliminary Specification. And then transition to it. But I don’t currently see that happening.

To answer the three questions that were asked at the beginning of this post. We will be able to convince the capital markets to invest in the oil and gas industry on the following basis. The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. This is at the core of the software, the user community and service providers and the structure that we put in place. If the property isn’t profitable, it doesn’t produce. Implementing a price maker strategy across the industry. We also recognize that past capital expenditures and future capital expenditures are not a sunk cost. We understand that they are a critical component in how a producer is evaluated in terms of performance. Therefore the determination of those profits will include the capital costs that have been incurred to date. Those assets that are sitting on the bloated balance sheets of the producers today. And we will include the future capital expenditures amortized on a rapid basis, within at least three years. This will provide a return on investment and return of capital that is necessary to instill the confidence in the investment community to invest the needed resources for the next 25 years.

We will need to provide a basis in which the differences in how we operate the industry will be different. There are few places in North America that the oil and gas industry operates that can be stated that are successful. They are engineering marvels and commercial failures. The need to address the past capital expenditures is one aspect. The other is to recognize that the way the business was done was not successful and that a new structure is to be put in place. That is the Preliminary Specification and the use of the Joint Operating Committee as the key organizational construct of the dynamic, innovative, successful, accountable and profitable oil and gas industry. Then with elements such as the decentralized production models price maker strategy, the structure will be in place for the industry to be successful.

The last question regarding who will operate this industry is a difficult one. Certainly the engineers and geologists who recently graduated from the universities might have an idea or two. They can be reached at the local Starbucks for comment. Or maybe the high school graduate who sees their cousin now working at the Starbucks might be convinced to be the one to lead the charge in oil and gas by following their cousins lead. Or maybe all those people who begged to be laid off and start their early retirement could show those two cousins how a real barista does it. The fact is the industry has done a god awful job in this area. They have been going “oh whoa is me” that no one wants to work in oil and gas in order to replace the soon to retire brain trust. The fact of the matter is the industry has always had a clearly identified issue burning in the background here. They’re just dumping gasoline on it right now.

And the service industry has had nothing but the full throttle or full brake being applied to them by the oil and gas producers. These violent cycles make it hard for them to manage their business. What it also does is make it very hard to innovate. As much as the bureaucrats like to take credit for the innovative ways of the industry. It's only after decades of “marketing” a new idea to the deadbeat bureaucrats that they finally try something like coil tubing or Packers Plus. As an alternative I propose a steady profitable operation over the decades to come which will help to smooth out the ridiculous manner in which the industry has been operated. The bureaucrats are fools in this area particularly. And the Preliminary Specification deals specifically with how these will be mitigated.

To listen to the bureaucrats talk about the issue of overproduction. It's the field service operations that need to be scaled back to solve the problem. And since that isn’t working they’ll now just lay off the head office staff instead. Our solution addresses the issue of overproduction. And this is how we’ll structure the industry for success. Capital can begin to reform on this basis and the people can be comfortable in knowing that dedicating their career to the industry is a possibility. Which is a novel thought I know.

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. 

Earning Season is Upon Us

It is this week that we will begin to see some of the producers report their earnings. Remember the line that will solicit our sympathies is “oh whoa is me.” There will be nowhere to hide the scope and scale of the difficulties producers will be reporting. The loss of any material hedging expired in June 2015 and it is believed that only 11% of production is currently hedged. If you were, or expect to be, laid off, have invested in these firms or are actively cannibalizing your service industry firm. Make sure you show a little sympathy for the bureaucrats who brought us to this difficult and unnecessary place.

There does not seem to be an end to the drop in commodity prices. Natural gas prices will see a significant step downwards towards the end of next week. That is when the natural gas storage facilities will be full and there will be no place to put the excess 14 - 15 bcf / day that is currently going into storage. The other aspect of natural gas prices is that the bureaucrats either felt embarrassed about the fact that they were praying for a cold winter a few years ago. Or maybe with all the work of putting the boat back into storage for the winter. They seem to have forgotten to pray for a cold winter. Whichever, it was recently noted that the long term forecast is for a very mild winter this year. Certainly won’t do anything for the demand of natural gas or its price.

When we see the financial reports for the third quarter I think people will be shocked that producers have been continuing on with such poor financial performance. Why would you continue to produce if you were losing such large amounts of money? There won’t be any earnings. There won’t be any positive margins. There never has been positive cash flows from operations. The producers will have been burning cash in the process of producing and even that didn’t stop them from continuing. And don’t expect them to change. What we will see is a number of producers cut the staff right to the bone due to the lack of cash. Even when these firms were “healthy” they had no working capital. The industry for the last ten years has lived off OPM. Other people's money. And there is none of that anywhere. The companies in other industries that have already reported in the third quarter of 2015. Who were losing money have been dealt with very harshly by the stock markets. The oil and gas stocks are rallying in anticipation of good news, it therefore might be a good time to sell.

The concept of an industry raising its own cash from operations to fuel its capital expenditures is so foreign a concept that we won’t even go there. The idea is to produce. And do we ever have a lot of that. To offer an idea that would mitigate the issues that the industry faces is the wrong thing to do. Trust me I know. These bureaucrats have it well in hand. Is it surprising to anyone that I have not received one call from any of the bureaucrats? They know what they’re doing and they will be the ones to ride off into the sunset. Remember what we stated yesterday, bureaucracies do fail and when they do, bureaucrats skedaddle. An element of moral hazard at play.

The trick is not to think of the loss of these shale reserves in terms of the waste and destruction of good valuable property. $0.66 that the Marcellus producers were getting for their gas last week is of value! Who’s to say that that’s wrong? The decline in commodity prices have happened before and the bureaucrats have been able to turn things around by doing nothing before. So have some faith!

On top of all these self inflicted difficulties it seems that the economy is taking another dip into the recession category again. People are seeing that interest rates are going to go up in the next few years and are concerned with how they will pay for their debt service costs. Therefore they are starting to hoard cash. Here’s a tip if it ever happens again. If someone offers you a half million dollar mortgage make sure you run in the other direction as fast as you can. In Calgary there are probably about a million mortgages of that size. Just a thought. The idea since 2008 should have been to pay the debt off, not acquire more debt. The point here is that the demand for oil and gas, on a global basis, could decline if we do fall into a recession. It just gets better and better for these bureaucrats.

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. 

Langlois on Chandler

I went through some of the earlier posts on this blog looking for a reference to Alfred Chandler’s comments about how the bureaucracy had failed before. It was through a couple of posts that I was able to pick up a couple of interesting quotes from Professor Richard Langlois who has made Chandler a key area of his study. I can remember those days doing the ten years of research that are codified in the Preliminary Specification. I nearly broke my brain, some may think I did. Whichever the case, the work is done and the product can build value for the industry, the people that work in the industry and society in general.

The references for today come from Professor Richard Langlois in his book “The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy.” From it I summarize the process of how a different kind of failure could occur in the oil and gas industry today.

• Management have little to no stake in the producer firms. 
• If a crisis were to strike a firm, the management would resume elsewhere. 
• It is the investor and debt holders who would shoulder the costs.
• Management currently hold the reigns, and are mindful that their options may lay elsewhere. 
• Ownership, in the same fashion as the Merchants will need to start over. 
• Starting over begins with supporting People, Ideas & Objects, our user community and the service providers.
• Chandler noted that management have failed before. 
• During the great depression. 
• A time when government had to increase its involvement in the economy.
• Management may not see the more global picture, and therefore, may fail again.

Today there is a clear global picture. Shale based reserves have changed the dynamic in the industry. The global picture can be seen by everyone. What is unknown is why the producers don’t act to mitigate the overproduction in the commodity marketplace. I have asserted repeatedly that the ability for producers to know the actual costs of any property is unavailable to them. Therefore they can’t answer the question of which properties to shut-in. They also have to cover off the costs of their high overheads. Overheads of approximately 25% of revenues that would seem disproportionate at anything other than full production. So they produce. See if you can spot the similarity in what Professor Langlois notes here.

Indeed, traditional command-style economies, such as that of the former USSR, appear to be able only to mimic those tasks that market economies have performed before; they are unable to set up and execute original tasks. The [Soviet] system has been particularly effective when the central priorities involve catching up, for then the problems of knowing what to do, when and how to do it, and whether it was properly done, are solved by reference to a working model, by exploiting what Gerschenkron ... called the “advantage of backwardness.” ... Accompanying these advantages are shortcomings, inherent in the nature of the system. When the system pursues a few priority objectives, regardless of sacrifices or losses in lower priority areas, those ultimately responsible cannot know whether the success was worth achieving. The central authorities lack the information and physical capability to monitor all important costs—in particular opportunity costs—yet they are the only ones, given the logic of the system, with a true interest in knowing such costs. (Ericson, 1991, p. 21).

It is here that Langlois best describes the futility of our current pursuit of “best practices.” The inability to know the costs, and particularly the opportunity costs, is also a prevalent issue with the producers. These producers opportunity costs are our value proposition. The loss in value of the oil and gas commodity prices as a result of overproduction and the inability to do anything about it. So what can we do about it and how can things change. And it is on this point that I think history will provide us with the best answer.

The first, and most obvious, point is that it was an outside individual, not an organization, who was responsible for the reorganization of the industry. Lazonick is right in saying that genuine innovation involves reorganizing or planning (which may not be the same thing) the horizontal and vertical division of labor. But it was not in this case “organizational capabilities” that brought the reorganization about. It was an individual and not at all a “collective” vision, one that, however carefully thought out, was a cognitive leap beyond the existing paradigm. If SMH came to possess organizational capabilities, as it surely did, those capabilities were the result, not the cause, of the innovation. p. 46

I see this as a strong endorsement of this community to work within the Preliminary Specification and build out the software necessary to run the industry. This is how it has been done in the past and will be done in the future. I am not aware of any other ideas that exist in the marketplace today. Based on the amount of time that I had spent developing the Preliminary Specification, do we have the time to take any new ideas to the level that the Preliminary Specification exists today?

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. 

Third Friday Off

A Sad State of Affairs

Natural gas prices in the Marcellus region reached as low as $0.66 last week. A clear indication to anyone, that after almost six years of very low natural gas prices, bureaucrats won’t, can’t and will not ever change. The Marcellus region represents 28% of all of the natural gas that is produced in the U.S. What should also be clear to the people who are being laid off, the investors who were told that gas had value, and the service industry that is being forced to work for their meals is that they are not the concern of the bureaucrats. They quite obviously could care less. What is this mindset of a bureaucrat to produce at any price? Certainly there are hedges and other financial devices used by bureaucrats. However, look at the business, it is suffering from a small amount of overproduction that is causing massive price declines! Dumping product onto the market at $0.66 is what a fool would do.

What is needed is the change to the Preliminary Specifications decentralized production model. Enabling the price maker strategy. This is the only way in which the industry is going to get out of this difficulty. It may be radical surgery, but the cancer that is eating at the industry is certain to kill it. After six years of overproduction in natural gas. Where there is never any consideration that the industry is a price maker or a price taker. We find the producers dumping 28% of the natural gas. That’s 20 bcf per day on to the marketplace for as little as $0.66. What do we expect to happen in the future that will correct this situation? Why will this situation rectify itself? Why are we sitting around and writing in the quarterly reports “oh whoa is me?”

The plan is to wait until the reserves that the investors paid so dearly for are used up and dumped onto the market at $0.66. Then a gas shortage will occur and the bureaucrats will have their heyday once again where prices would skyrocket to who knows how high. This is called “rebalancing the market” by cutting capital expenditures. The most blunt instrument known to mankind. Its production that’s the problem, not the level of field activity. When natural gas prices skyrocket in this scenario. It will be “oh whoa is me” that the service industry is being greedy and lazy. That is both of them, because that’s all that will be left of the entire industry by then. And that they can’t find any engineers or geologists to run the industry. “Oh whoa is me.”

It’s almost a cycle. Predictable and automatic. The problem is the extremes are becoming more and more acute. Maybe I’m wrong but I don’t think we can have an industry that is this important to our society bouncing being the extremes of abundance and rationing. What we do know is the response to higher commodity prices will be muted due to the poor financial capabilities of the producers and their exceptional record with the investor class. As a result prices will go ever higher to the point where you’d be crazy not to be invested in oil and gas. This is when the bureaucrats can begin pouring the foundations for the west wing of their cabins. I wonder what I’ll be doing?

As a point of clarity. The other day we discussed how the surplus capacity costs of the producer weighs it down financially in the current high throughput production model. Citing the Nissan case as an example. Some people have asked why this doesn't apply in the People, Ideas & Objects Preliminary Specifications decentralized production model. It is because the costs of administration and accounting will have shifted from the oil and gas industry to the new sub-industry we call the service providers. It will be the service providers who will shoulder the administration and accounting costs of any shut in production. And will understand that at any time their revenue streams may be cut by 15% as a result of shut-in production. As a result they will be able to control those costs. This providing oil and gas producers with the capability to be able to control their administration and accounting costs without having to lay people off.

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.