Cash is King!

We hear in the marketplace that producers are still covering their “cash costs” from the sale of their oil and gas production. Imputing that they are, on a cash basis, still able to generate cash by producing. Such is the optimistic outlook that bureaucrats have of the industry. Energy is a finite resource, that when used is lost forever, and can be produced for a net benefit of some cash! Welcome to the mindset of a bureaucrat. This isn’t a business, it's an activity, like daycare, someplace to take the adults to ensure that their cared for and don’t hurt themselves or get into any trouble. Let's play pretend that we’re an oil company! This will be the status quo for the next 5 to 10 years. The time that is necessary to “rebalance the market.” It will be during this time, in this pretend world that the bureaucrats create, that there are no consequences.

First let me say the producers will continue to produce until the price of oil drops to $1.00. And even then they will not stop producing. The question that should have been asked at the $75.00 oil price is why would you continue to produce unprofitably? None of this charade takes into consideration the fundamental change that has occurred in the marketplace. That shale reservoirs make oil and gas abundant and the business model that was developed to produce a scarce resource, doesn’t work in this new environment. The only way in which to deal with shale reservoirs is to change the business model of the industry. And the only manner in which to achieve that change is to use the Preliminary Specification.

If we look at these “cash costs” when oil prices are at $30.00 we see the desperate nature of the producers today. Breaking down the “cash costs” into production, royalty and overhead costs we find that producers are generating marginal cash from their operations. Let's assume production or lifting costs are $6.00, royalties are, at the minimum, of 12.5%, or $3.75 and the cash consumed in paying all of the staff. Including the C class, geologists, engineers, accountants and administration. Field, supervisory and let's not forget contract. Back when commodity prices were normal, these G&A costs were determined to be about 5% of the revenues on the financial statements. However, let's assume that 75% of the producers G&A costs were capitalized to the balance sheet. Therefore the G&A costs, back when commodity prices were “normal,” were about 20% of the revenues of the producers. This would represented approximately $18.00 / barrel in “cash costs” (20% x $90.00). We are also talking about the same amount of “cash costs” here. The money that walks out the door each day. You can’t change the makeup of the G&A in a high throughput production organization. This is not accounting or anything that would require any sophistication outside someone’s pocket. Money comes in, and money goes out for these costs. “Cash costs,” my rambling here reflects that I’m overwhelmed by the brilliance of this strategy.

Therefore the “cash costs” of the producer are in the range of approximately $27.75. Generating net cash per barrel of $2.25, a windfall by any standard. Of course none of this analysis considers the “cash costs” regarding dividends or interest and bond payments. But like profits we can probably ignore those. We now understand why the bureaucrats have traditionally focused on cash flow. It's so much easier to account for and look productive. It’s almost as easy as making a drilling rig out of Play Doh, but that’s only on Tuesday’s.

The financial statements of the producers are being published this week for the fourth quarter of 2015. It’s important to look at the extent of their retained earnings with regards to the capital structure of the firms. Notice how, in almost every case, the amount of the retained deficit exceeds the amount of the capital raised by the firm. That means they have taken all of the money from the investors and burned it. Any value that they may have made during the time that prices were $100.00, and recall our prior discussions that those profits were questionable from an accounting point of view, are also gone. It's about cash flow you fool! Profits and investors don’t matter!

So we enter our next era of the oil and gas “business” where we “rebalance the market.” What should we expect. We are still the prisoners of this daycare mentality that is running the industry. Where can I put my money! Sign me up! I want to punch some holes! In the patch! Despicable.

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. 

Glasnost Comrade!

Glasnost and perestroika were the terms used by Mikhail Gorbachev during the fall of the former Soviet Union. A form of organization that ceased to build value for anyone. One of the reasons that it failed is that people were lined up at the bakery waiting for bread. Since no one was working anywhere else, the bakery was eventually unable to make any bread. This was the phenomenon that was running throughout their system. The system eventually collapsed upon itself and had to be rebuilt from the ground up. Everything is controlled by the government in a socialist system. Nowhere on earth has a socialist system prospered. Which raises the question what’s with the support for Bernie Sanders all about?

In the Preliminary Research Report I suggested that western industries would be subject to a demise similar to that which destroyed the former Soviet Union. That the method of organization used in the west was subject to similar difficulties and that it too would cease to provide value for anyone. I provide the following quote from the May 2004 report.

Of note: participants in the Japanese economy have not taken any risks, live in an environment where protection of companies mistakes is mitigated by government policies, and no innovation, failure or economic growth occurs. Conversely, why have Apple and 3M, companies built on innovation, fared better than their competitors? Apple has demonstrated resilience and has come back from near death experiences, and 3M has consistently outperformed others in value generation, on the basis of innovation, for decades.

One of the reasons cited for the former Soviet Union’s economic demise was the inability for the economic system (that propelled them to alleged greatness in the 40’s, 50’s, and 60’s) to accommodate change or innovation. Things were done because that was the way they were done. The lack of questioning and process inefficiencies continued until the system began to collapse upon itself. Are large organizations incapable of reforming and embracing innovation as a means of competitive survival? Enron lead the way with what was heralded as organizational innovation, only to be found criminal and eventually bankrupt. Since then the all time top three corporate bankruptcies have occurred in the United States and many CEO’s have been arrested and organizations shut down due to fraud and other inappropriate actions, a key example being the former accounting firm of Arthur Anderson. What is the cumulative effect of these occurrences, and are these parallel to the experience of the former Soviet Union?

During the past 15 years we have also seen a fundamental change and understanding in the individual’s role within organizations. The trust and commitment of people in their organizations has diminished through systemic and chronic downturns, layoffs, early retirements, pension revocations and brutal downsizing. The emergence of the superstar CEO and escalating pay scales for senior management has had the dual effect of recognizing the value of intellectual talent, and, further eroding the trust and commitment of the staff within those organizations. Today we see Disney, which was one of the greatest companies built on the basis of intellectual property, challenged by key employees and contractual relationships with suppliers and partners. Pixar Entertainment, Jeffrey Katzenberg and the Current CEO are collectively more profitable than the entire capital and intellectual property base of Disney. This dissection of value continues unabated, and essentially unidentified as a detrimental trend to the health of large organizations. Is this the beginning of the identification of this capital dissection, and the beginning of the legal remedies necessary to mitigate insidious devaluation of shareholder trust and value?

The point being that the issues have been obvious for years. Barack Obama heralded in a new era of government as the solution to the ails of society. Regulation, control and taxing alleged abhorrent behaviour is the new norm in western societies. Zero Interest Rate Policies have been implemented to remedy the 2008 financial crisis created by government funding of mortgages to unqualified candidates. In return, in a capital environment where zero is expected in return, asset prices stay at lofty heights. This facade is beginning to be dealt with by the Fed returning to normalized interest rates. We can therefore expect to see, if things progress, the Dow, half its value and the majority of house prices do the same. The quicker the government gets out of the business of trying to manage the economy, and the bureaucrats are removed from the corporate picture the better everyone will be. How will this happen?

It's already happening and in significant ways. First this article from Foreign Affairs is a must read for everyone. Secondly we see in the Republican party, and most specifically in the candidacy of Donald Trump, the anger and movement of the people against the status quo. People, Ideas & Objects are part of this movement in general. We are timely in terms of solving the oil and gas issues. And we are timely in terms of the trends of Information Technology, or the fourth industrial revolution the Foreign Affairs article speaks of. This tearing down of the Cathedral is the necessary first step to implementing the types of changes that will make society much better in the long run. And the reason that it will be successful and positive is that it is in the hands of you and me, and defined by our needs.

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. 

"Let Them Eat Cake"

The World Economic Forum in Davos Switzerland is now over and the topic of oil was ever present on the minds of the participants. It appears that this downturn in the energy industry will be followed by an upturn in the prices as a result of the shortages from the declines in capital expenditures. The participants noting on many occasions that this has been the case before. Others such as Blackstone's Stephen Schwartz felt that there were opportunities to be had if you could hang on for the next 5 to 10 years. Obviously I have misunderstood the purpose of why we are in the business of the oil and gas business. It is to suffer and survive for decades, impose pain across the people who work in the industry and lose money for decades at a time. When the leadership of the world takes a hike from any responsible point of view, I think it's time for a deep and prolonged recession. It’s as Garry Kasparov stated in his book about Vladimir Putin “If they admitted the truth, they would have to act, and nobody wants to act.”

Blackstone is supposed to be the largest money manager in the world. If they are taking this attitude regarding the oil and gas industry, I’m sure the bureaucrats are working hard to resolve the problems back home. What will almost ten years of zero interest rate policies give you. Complacency. It's good they were able to sample the fine air in Switzerland, and the camaraderie of their kind. Soon they will be faced with the fact that the oil and gas industry, as it stands today, is in a severe crisis. There just is no cash to continue beyond the April 2016 time frame. At that time they will find the banks are closed. The junk bond market might be offering, but at the interest rates that they’re offering at, it will only tell the world that you as a producer are in such deep difficulty that you’ll be run over even faster if you take their money. And of course the investors are just not interested in getting involved. Particularly if this is going to take a decade to resolve.

I think the question that will need to be answered in the April time frame is what exactly do you do when your paycheck bounces. The nonchalant response from those at Davos, that the industry will come back eventually, strikes me as we should all be happy with the cake that we have to eat. It's the people who have committed their careers to the oil and gas producers in the past decades. Who may have been educated in the unique areas of petroleum engineering or geology that will be paid to suffer, as many others will. Entering their 40’s with mortgages and kids, this is how they envisioned their career progressing.

It didn’t have to be this way. Anyone who was paying attention could have foreseen this. I did and I prepared a solution that would fix this. I’ve had enough bureaucrats call me crazy these past few years, I wonder what that makes them now. Lazy, careless, self-interested and irresponsible. No one is this stupid. Its carelessness. Simply not giving a damn. Do you hear anyone expressing a concern for the future of the people's lives they destroyed?

After all the screaming and all the yelling. We need to move on with the bigger issues ahead of us. The industries health itself. The Preliminary Specification is about building the capabilities of the industry for the next generation. The capabilities that the bureaucrats are about to destroy. We have a job to do in developing the Preliminary Specification. I don’t know how we’ll ever get funded. I have faith that one day we will. Without the oil and gas that is produced by this industry, society has a lot bigger problems than the ones that I have been ranting about on this blog. I understand that our personal situations are serious problems, we however, also have a responsibility. Who else is going to ensure that society continues on and develops in the manner that it’s able to. Without the oil and gas that we provide society, we will all have great difficulties. And that is thing we need to focus on, and maybe if we run into a bureaucrat down the road we’ll feel satisfied in giving them a swift kick.

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. 

This is not a Short Term Issue

As much as everyone is hoping that the prices for oil and natural gas begin to reverse and rise again. We can also see how futile it is to “hope” that this will happen. Natural gas has been depressed since 2010. Those prices began their shale induced decline in 2008. Has anyone seen any response whatsoever from the natural gas producers. The pure natural gas players like Chesapeake and Encana are mere shadows of their former selves, down 89% and 82%. This is the future of oil as well. “Hoping” for a better future is not a solution. What exactly are we hearing from those that are in charge, our friends the bureaucrats. Nothing, not a word, it's as if they didn’t care that they are running the ship aground.

To think of this as a short term issue and that it will be resolved by rebalancing the market is pure fiction. Why hasn’t that occurred in natural gas? Capital expenditures have certainly been reduced. However the production profile of the various regions continues to increase. You would think that the producers would cut their most lucrative and prolific projects first! Well of course not, that would be foolish. The only thing that is happening in this rebalancing is that the producers are sharpening their pencils and achieving the same results with fewer inputs. That’s what people do at times like this. They overcome the cuts in their budget and make do. Quality instead of quantity. The fact of the matter is with shale, no amount of market rebalancing will ever occur. The shale reservoirs are too prolific and lucrative.

What is needed is a means to impose production discipline throughout the industry. When you have 300 years of natural gas reserves as in Canada, profitability is the only equitable means to determine what produces. We need a method in the industry where the property only produces if it's profitable. The only manner in which they’re going to achieve this production discipline is when the Preliminary Specification is implemented. First by determining profitability in an equitable and standard way, and ensuring that all of the producers costs are variable. That way any shut-in properties will not drag down the producers profits. It will be in that way there will be a fair and equitable means of evaluating profitability and implementing the discipline necessary.

At the rate that the bureaucrats are moving we could be here for a while. They have shown no initiative to do anything regarding these issues. What will motivate them? None of these issues in oil and gas are going to be resolved by them in the short term. And therefore nothing will happen in the mid to long term either. That is because this latter point is moot. The producers themselves have only minutes of survivability in terms of the financial means in hand. As we noted last Friday, the strong balance sheet that they thought they had were nothing but a testament to their spending. Standard & Poor’s, the bond rating agency, have a junk bond rating on over three quarters of the oil and gas industry. Hence the heavy use of the junk bond market in the past few years. The banks won’t be providing cash for much longer, if they still are. And the investors have been on a holiday in the industry for the past decade. I guess you do reap what you sow.

What happens when three quarters of an industry runs out of cash? We are going to find out in about three months. If you look at the market capitalizations of the oil and gas producers they have been hit very hard. Most of them are well below 50% of what they used to be. Household names in some cases are mere shadows of themselves. If this was the banking business the Fed would have already stepped in, taken over, and started rebuilding the industry. Such is the nature of the business we choose.

It disturbs me that I am reduced to picking off the obvious deficiencies of the bureaucrats. I have worked very hard to ensure that we would never see these days. There never will be a bureaucrat that accepts the Preliminary Specification. It takes them out of the game. They will ride the ship down if they have to. Anything but accept defeat. It is however, very soon that we will be called upon to replace these bureaucrats. Failure of this calibre has a very defined stench.

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 Business Model in Oil and Gas is Flawed

First of all I want to make a note regarding yesterday's post. We are focused on user based software developments. Some may be concerned that providing industry with an option on the shares of People, Ideas & Objects leaves the user community in a poor position regarding the future of this project. I disagree. The user community is being looked upon to provide the direction and understanding of what it is that they want from this software. The user community vision will live on irrespective of the specific ownership interests in People, Ideas & Objects. You are a separate and distinct group that is independent of People, Ideas & Objects. The user community will also be the founders of the service provider organizations that provide the People, Ideas & Objects software, with their services for the administration and accounting to the oil and gas industry. I see the user community in complete control of their future.

To the point of the blog post today. And that is the business model that is in use by the oil and gas producers today is flawed. There are three primary reasons that it is flawed. There is nothing being done about any of these three reasons for the industry failing. And like so many businesses in today’s market, technology is providing the means in which to implement new business models that are more efficient and effective. The three reasons that today’s producers business model is flawed is that they have what I call bloated balance sheets, the introduction of shale based reserves and production focused operations. Let me address each one below.

I’m the only one that is harping about bloated balance sheets in the industry at this time. I prefer to be alone. Since 1977 the SEC has permitted the use of full cost or successful efforts as the method of accounting for capital costs in the industry. Both have the effect of capitalizing everything under the sun and recording it as an asset on the balance sheet of the producer. The outer limit of what can be recorded is the amount of the reserves, based on the engineering consultant's report, times the amount of the commodities prices at the end of the year. At any point in time the producers assets are approximately equivalent to the total possible lifetime revenues of the producer based on its current reserves. A ridiculous number. What we are seeing now in the industry is write downs of the capital assets that are reflecting that the asset values recorded on the balance sheets are higher than the reserves of the engineering consultant's report times the commodities prices at year end. Which is another ridiculous number. The total assets are higher than the lifetime revenues from the reserves at current prices! These bloated balance sheets have been used to raise capital in the equity marketplace. And they have been used to raise debt with the banks and junk bond markets. What you really have is a bubble that is floated with the cash that the investors and banks are willing to provide to the producers to continue to spend money to increase the size of their balance sheet. And at no time, during the good or bad times, did the producers generate enough cashflow to fund their own capital expenditure programs. They almost always had to raise the money from the equity and debt markets. This is not a business, it's a spend fest.

What happens at year end is the production for the year is taken off the reserves on the books and recorded as the depletion expense for the current year. Usually these numbers are quite small. Leaving the balance sheets relatively untouched, especially in light of the increases from the capital expenditure program. The producer is therefore never really recognizing much of the costs of capital, in a capital intensive business. And as a result they are reporting higher profits, particularly for the years when the prices are rising. These are at best paper profits that do not generate the cash that an industry needs to fuel its growth and health. The balance sheets of the producers, if it was recording and depleting their assets appropriately would have small amounts for the capital assets remaining in the business. All of the capital costs would have been written off in a timely fashion, say three years. And significant amounts of net cash, accounts receivable, marketable investments and other financial instruments would have been generated in a healthy company. In oil and gas capital costs go to the balance sheet to die for three or four decades instead of flowing to the income statement where they can assess the performance of the management. And if that management is still capable of producing a profit after recognizing the capital costs, in a capital intensive industry, then they will be generating abundant cash. That is how a business survives and continues. The facade that is the producer today is a bloated balance sheet of capital assets with about 15 minutes of staying power from cash and other financial instruments at these commodity prices. The myth of these producers having strong balance sheets is about to explode into the next bubble of our never ending bubbly and highly managed economy.

Shale based reserves simply transformed the basis of the business from one extreme to the other. The oil and gas business has traditionally been considered an industry where the commodity is scarce. Shale makes oil and gas abundant. The business model that operated the scarce industry is wholly unsuited to operate an industry that is now abundant. This should be clearly abundant! The capital costs associated with shale are the determinate factor in their development. These can’t sit on a balance sheet for a few decades. They need to be recognized by the producer quickly and either they earn a profit or loss, prosper or go out of business. It's time that bureaucrats be evaluated on their performance based on all of their spending. Including capital. And it will soon be found that they have been using debt and equity to subsidize the consumers of oil and gas.

Lastly the business model itself is focused on the deliverability of the producer. It needs to change to the profitability of the producer. When the producer is focused on the deliverability it is expected to grow by 10% each year. If it misses its targets, its finished. This is why there are so many producers continuing to produce unprofitably and attempting to increase their deliverability. If they don’t they lose the confidence of the markets and they are toast within three months. The problem with this model is that most of them are toast now anyways. The demise of the industry is upon us. There are no financial resources to keep the lights on and the bubble is about to explode. If you never recognize your costs by leaving them on the balance sheet for decades. The company looks like its earning money. Which leads to other competitors entering the business. Who show an equal propensity to spend. Which leads to overproduction. Which after many decades after the SEC’s ill advised implementation of these guidelines leads to the downfall of the industry. And in defence of the SEC they define the outer limits of what is acceptable. That doesn’t mean that each producer hits those limits every year. What is a flawed business model will go down in history as one of the dumbest ways to run an industry, particularly in the 21st century. Good riddance.

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 Preliminary Specification Makes Shale Commercial

It was in May 1991 that I had a vision of what “this” could all be. I then formed a company and began negotiations with Oracle on a new system for oil and gas. We then embarked on the development of the software with Oracle in 1992. This was the beginning, and the first attempt to bring this vision to reality. There were always difficulties with making the “vision” work in reality. In 2000 I felt that I would enhance my education with an MBA and work to bring the vision forward with that effort. It was sometime in the summer of 2003, I was working on my thesis proposal and the final piece of the puzzle fell into place. It is the Joint Operating Committee that is the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. I then published the proposal in August 2003 and Preliminary Research Report in May 2004.

You can imagine the response that I received from the majority of the people who I mentioned this to. Running around stating that the Joint Operating Committee was the answer. In hindsight I think they were wondering what the question was. Most just thought I had really lost it. There were those of the major independents who understood the implications of identifying and supporting the Joint Operating Committee in the software of the industry. It didn’t matter which way a person saw the foundation of this initiative, they didn’t want anything to do with it.

Realizing my slight communication error. Since I was the only one with the vision, I was the only one who could clearly see the solution and how the Joint Operating Committee was part of that. In order to define the solution people would need to see the system spelled out and understand the implications of what it would do. I therefore began the research into doing that, and on December 13, 2013 the edited version of the Preliminary Specification was complete. In hindsight I am surprised that I have survived. What we have now is I think best described in the following paragraph of the abstract of the Preliminary Specification.

What we have discovered is that the Preliminary Specification certainly resolves the administrative and accounting issues when the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks are aligned with the compliance and governance frameworks. However, when it comes to the operational concerns of the oil and gas industry, it also provides the frameworks and means to solve those problems as well. Whether it is the ability to agree amongst the partnership and reduce production during commodity price declines, or moving the industry to a decentralized production model, where production and administrative costs more accurately match revenues. Or where the innovation is generated through two major processes in the Preliminary Specification, which do not directly conflict with tight operational control. Or how the division of labor and specialization are enabled, defined and supported through the software to provide for the industry to expand its output from the limited resource base of earth scientists and engineers. These are just some of the features of the Preliminary Specification that impact the operations and enable the producers to enhance their organizations. And although they have been used to highlight today's operational issues they will also provide solutions for tomorrow's issues and opportunities.

This work having been completed, it was necessary for the situation in the marketplace to develop for the Preliminary Specification to solve. It's always good to be lucky. Natural gas prices began to decline in 2008 and oil began its slide in 2014. Creating a unique situation where both sides of the business were not performing. But this downturn is so much more than that. Shale has introduced a whole new dynamic into the oil and gas marketplace. It needs to be asked if shale is commercial? Clearly it isn’t. However the production from shale makes up such a large percentage of the deliverability that to eliminate it from the market would increase commodity prices to such highs that the economy could not withstand them. Therefore a means of production discipline is needed amongst the producers to ensure that all production is produced profitably. Then and only then can shale be considered commercial and we will proceed with the energy resources that society will need. The Preliminary Specification makes shale commercial. That is a bold statement, and I’m glad that I can write 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. 

An Option for the Industry

In order to speed things along and make things more palatable to the oil and gas industry in terms of accepting People, Ideas & Objects. I am today proposing an option be provided to the industry, in addition to all of the other commitments that we have made, in exchange for funding our budget. The option would provide the industry with the ability to purchase 100% of the issued and outstanding shares of People, Ideas & Objects. The time frame in which the option would be exercisable would be twenty five years from now. This would give them the opportunity to eventually own the software that makes up the industry's ways and means and provides them with the value that that generates.

As I’ve stated in the Revenue Model, the shares provide little to no value for the holder outside of the distribution of earnings. The marketplace for oil and gas accounting systems is too small and is not an area where there is any competitive interest. The shares attraction to public or private shareholders is also reduced due to the fact that our revenue stream will be cyclical based on the level of change that is occurring in the oil and gas industry. Ownership of the software by the industry is an issue that is unaddressed in the People, Ideas & Objects Preliminary Specification proposal. This option provides the industry with the ability to secure that ownership in the long term.

It is difficult to assert any probable scenario as to what the situation will be in 2040. However this option is being offered in the hope that it will mitigate some of the issues that industry has with People, Ideas & Objects today. This 25 year time frame provides me with an opportunity to fully explore and develop the ideas inherent in the Preliminary Specification and fully deploy the value of that business model. That there is a potential payday for my shareholders at the end of the day would be of value to me.

The valuation of shares at the time of the exercise of the option will be a contentious issue. As I indicated the oil and gas accounting systems marketplace is too small to be commercially viable. There will not be a ready marketplace for the shares in order to value them. There will need to be a negotiated agreement between the two parties in terms of what would be necessary to motivate the shareholders to sell at fair value. That understanding can be determined by evaluating other software companies market capitalizations and other factors in the marketplace. These determinations will need to be settled and agreed to in the first year of development of the software.

Our published budget has $2 billion in earnings through the years that we are under initial development. These earnings will be distributed to the shareholders on a percentage of completion basis of the project. In stating this, I am imputing that these earnings will be used to cover any cost overrun. Industry feels that our budget is an outsized payment for the job being done. I would point to our value proposition of $45.7 trillion and the fact that we have not recalculated this for over 18 months, and the timeliness of our offering in terms of the issues in the oil and gas industry. It is in this context I would state that I feel we are being reasonable. I started this work in May 1991 and have not received a penny in compensation from industry. I might’ve been crazy, or I might’ve known what I was doing. Solving what is the unsolvable problem for the industry is what I have done. It was not easy.

It's time to proceed with the developments of the Preliminary Specification. This option mitigates the industry issues regarding the long term ownership of the software. With oil and gas commodity prices behaving as they are, it would be my recommendation to act.

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 Plan

The plan for the oil and gas industry is to continue in the manner that it is currently “managed.” Why would there be any changes? The bureaucrats can’t, won’t and will not ever change. And that is the only fact that needs to be considered. In the past number of years, in either of the natural gas or oil markets, there have been no behavioral changes in the approach to the business. Without any change in the approach to the business, it will continue to be business as usual. At a time when leadership is needed so desperately in the industry there is none. Not a word, no concern, no leadership and most disturbing, there is no plan.

It might be that I am on the outside looking in, but I don’t think that’s the case. I have been involved in oil and gas since 1977 and this is by far the most dire event in its history. At times either the natural gas or the oil markets have had difficulty. Never both sides being hit at the same time. And the extent of the damage being done is by far the most significant. The illusion of oil and gas producers being well capitalized by them having bloated balance sheets is hiding the fact that the cupboards are bare. There are no residual financial resources in the industry to weather this storm. Producers will be financially destroyed in record time. There is no staying power for the industry past what I think is the May 2016 time frame.

So in summary there’s no leadership, no resources to weather the storm that we are in and no plan to get us out of it. As I noted last week denial seems to have overtaken the industry stem to stern. Maybe when there’s no cash to pay anyone reality will settle in.

People, Ideas & Objects, our user community and our service providers have a plan. We have been promoting it in the industry for many years now and it's one irrefutable fault is that it eliminates the bureaucrats from the oil and gas industry. The plan is, we build the software we call the Preliminary Specification, create the user community and they generate the service providers that will provide the administration and accounting to the industry. Developing software in the 21st century is the necessary first step to enact the changes that we want to occur in our organizations. What we want our software to do is to change the makeup of the prototypical producer to be the C class executives, the earth science and engineering resources, some land and legal, and support staff. The accounting and administrative people are reallocated to the service providers that will focus on a single process and use the entire industry as their client base.

It is this configuration of the industry, and the producers, that enables them to shut-in any unprofitable oil and gas production. A necessary first requirement of the Preliminary Specifications price maker strategy. The service providers then only charge for the work that they receive information on and process during that production month. If the property did not produce, then no administrative or accounting work was done and the Joint Operating Committee is not charged with any of the overhead costs from any of the service providers. Essentially turning all of the producers costs into variable costs based on whether or not the property produced. The effect of this will be that the marginal production is removed from the marketplace and the commodity prices will increase. The profit of the producer will be higher because the profitable production of the producer will no longer be diluted by the unprofitable production. And the reserves of the producer will be saved for a time when they can be produced profitably. It is in this way the industry can deal with the prolific nature of the shale oil and gas reserves.

If producers were able to operate their firms in this manner they would have revenue streams that were at least three times the size they are today. Sure their production profile would be lower, by maybe 10 percent, but the effect on their revenues would enable them to earn profits based on an actual, historical accounting! Bureaucrats don’t want to discuss their performance. That would imply that they need to do work. It's far easier for them just to continue on with what they’ve been doing for the past decades.

It's clear to me that the industry and the producers are going to hit the wall in terms of the difficulties that are ever present. They will not change until they are forced to change. That means they have to run out of cash. That will occur in May 2016 to the large majority of the industry. I don’t know how People, Ideas & Objects will be funded but we’ll pick up the pieces soon thereafter. The writing is on the wall for the bureaucrats. You can run the ship aground. Or give me a call. My money's on seeing you out of the business by May 2016.

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 Producers Price Maker Strategy

There has to be a lot of CFO’s in the oil and gas industry sweating bullets at the moment. From stating that their operations continued to be profitable at $30.00 and comparing that to their year end accounting reports. They have some explaining to do. I guess it comes down to what the meaning of profit is. And that is the point. If you have been saying to a business reporter that your company is profitable at $30.00 then you are saying you are profitable at the SEC prescribed meaning of profit. If that is not what you meant then you should've kept your mouth shut. But that is why you get paid the big bucks. You maintain different risk profiles than the average human.

I wanted to reiterate the fact that one of the key differences between the Preliminary Specification and the manner in which the industry is “managed” today. Is that the Preliminary Specification enables the producer to employ the price maker strategy through the decentralized production model. The oil and gas commodities fall into the classification of a price maker. For some reason the bureaucrats operate the industry on the basis that the commodities are price takers. It is this thinking that that the industry is a price taker that allows them to continue to produce despite what the prices are. As price takers, they think, they have no influence on the commodities price.

If we look at the economic definitions of price maker and price taker we find the following.

Price maker

A monopoly or a firm within monopolistic competition that has the power to influence the price it charges as the goods it produces does not have perfect substitutes.

This kind of price maker is also a profit maximizer as it will increase output only as long as its marginal revenue is greater than its marginal costs.

Price taker

An investor whose buying or selling transactions are assumed to have no effect on the market. 

A firm that can alter its rate of production and sales without significantly affecting the market price of its product. 

Our analysis of these terms is based on the following facts. The inability to carry electricity in a bucket or store it anywhere. You can’t lubricate an engine with electricity. Or that positioning a chemical plant next to a hydro dam would provide any value. These prove that oil and gas compete in a monopolistic competitive environment of a price maker. There are no replacements. However the real determining factor is that it is believed that the price of oil has fallen in excess of 70% on the basis of as little as 2% overproduction. This characteristic and attribute disqualifies oil and gas from being a price taker according to the second part of its definition.

Recoverable natural gas reserves are estimated at 2,276 tcf of gas. A number that is beyond the comprehension of most people in the oil and gas business. Certainly well beyond mine. It is this 90 year supply of natural gas that is racing to the market and causing prices to collapse. In Canada there is a 300 year supply. Unprofitable overproduction will continue until the industry has a means of allocating production based on a fair and equitable manner, say on the basis of profitability. Oil prices are slightly different, although the prolific flush production of shale is causing oil's price to decline. There are however not the reserves that provide the many decades of production. The current business model of the producers is to produce oil and gas at spectacular losses at the expense of the investment community. This new shale reality requires a new business model, based on the price maker strategy. And only the Preliminary Specification offered by People, Ideas & Objects provides 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. 

No Vision of our Future

It’s certainly beneficial that the bureaucrats were able to foresee the difficulties in the industry and ensure that the crude oil export ban was lifted in a timely manner. It is these kinds of actions that make the difference in the industry. I wonder where they will focus their energy now? They seem to be caught in the dilemma of the dog catching the car, what does it do with it. Just as they prayed for a cold winter a few years ago, and we did have a rather cold winter that year. The removal of the export ban can be removed from the list of useless, irrelevant distractions for bureaucrats. Strong leadership in times of crisis always gives the people in industry a sense of comfort.

As I stated, my time during the Christmas break was spent preparing for the next four months. It was a time in which I thought that we would be able to convince the investment community to move to fund the Preliminary Specification in the face of such difficult times for the oil and gas industry. A time in which to adopt the plan to build these systems to offset the difficulties in the industry. The times certainly haven’t improved, and I suspect that April and May will be difficult for the producers to get through. But I don’t have any positive feelings regarding the work that I have done with the investment community. Whether it is denial on a wholesale basis throughout the oil and gas industry and the investment groups. Or a fundamental capitulation of any responsibility by everyone involved in this business, it's difficult for me to tell.

It certainly isn’t the investor's problem. If anything they’ve been duped and fundamentally betrayed by the bureaucrats. I just don’t see anyone standing up for the future of the industry. The truth of the matter is that there is overproduction in the industry. Claims that rebalancing would resolve the problem have proven to be false as the deliverability in North America continues to grow. The point that I am making is that all the lies that have been told about what was going on in the industry are now beginning to be seen as lies. The validity of what the bureaucrats say is taken as much into consideration as what people who have no understanding of the business. Maybe that’s the point or the objective of the bureaucrats, for what purpose I couldn’t tell.

Much of what I have said in the past few years about this situation is what has happened. Most specifically the bureaucrats can’t, won’t and will not ever change. And overproduction will continue. Even now with the price of oil in the $29.00 range don’t expect any change in the behavior of the bureaucrats or the production profile of the producers. The news of the day is that overproduction is going to continue for as long as the bureaucrats are in power. Even with the Preliminary Specification staring them in the face they have chosen to do nothing. The fact of the matter is the Preliminary Specification eliminates the bureaucrats from the oil and gas industry. We’ve seen similar actions be taken in other industries as a result of new technologies coming in and offering new methods and ways of doing business. The term is disintermediation.

In terms of where we go from here I have always had a plan and a direction as to what I needed to do to get there, and a clear idea as to where I am heading. I’m sorry to say that I do not have any vision at this time as to what is going to happen next in the industry. Overproduction is going to continue for ever with these bureaucrats. Someone has to take the industry away from them. I also don’t think the bureaucrats care enough to keep the place tidy for the next tenants who come in. The investors have lost so much that they are either out of the business, or are seriously contemplating the exits. I didn’t see the extent of this damage coming so quickly. And I seriously don’t know what’s next.

What we can do is continue to push our solution in the marketplace. Our value proposition increases substantially each and every day. There are many people who are committed to seeing this solution in the marketplace. We have much work to do. And maybe instead of knowing where we're headed we can at least be satisfied that we know that we’re doing the right thing.

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.