The Producers Dichotomy

Up until producers were able to develop shale based reserves their job was well defined and easily understood. Build value by finding oil and gas reserves. The ability to increase the reserves of the producer, verified by an independent engineering firm, created value for the shareholders of the producer firm. In the past this effort was conducted in an industry whose resources were scarce and the capabilities of the producer were reflected in the growth of their reserve base. Those that understood engineering and geology could win by simply applying their trade. And that is how the producer operated and built value for their shareholders.

Shale came along and turned the industry from one of scarcity to abundance in terms of the oil and gas resources. Today there are many producers that didn’t exist a decade ago that have 1, 3, or even 5 tcf of gas booked as their reserves. This is as a result of what I refer to as the prolific nature of the shale reservoirs. These producers, prior to the price collapse, were as a result, presented with handsome market capitalizations. A tcf of gas would have normally been the domain of a senior independent, now we have startups with that volume of gas available to them. What to do?

The producer can’t sit on these reserves and do nothing. They involved the deployment of significant capital resources and the costs of those resources demand interest and dividend payments. Therefore the producer must put these reserves on production. On an industry wide basis this amounts to throwing the full 2,500 tcf of natural gas in the United States on to the commodity markets. And as expected this has had the effect of pushing the commodity prices down. The producers dichotomy is the flooding of the market with shale gas has the effect of diminishing the value of their natural gas reserves and rendering their operations severely unprofitable. This all seems to be obvious and rather elementary in terms of determining what the issue is in the industry today. The real issue is that there is no restriction on the producer to restrict the volume of production in any way. It is to produce everything they have. And that is the theory behind the high throughput production model that the industry operates under. Production needs to be as high as possible in order to cover the significant overheads that exist at any production volume.

Production disciple is not something that has ever been considered in the oil and gas industry before. Producers claim to have capital discipline, however, in a zero interest rate policy environment that is a moot point. Production discipline is what is necessary to ensure that the industry doesn’t continue to throw 100% of the reserve base of the industry onto the commodity markets at once. If you hadn’t noticed, it's not working. Some might suggest that production discipline is collusion, and I fundamentally disagree. Others might suggest that the government should get involved and determine the threshold production volumes or allocate supply as they do in agriculture. This would also be a bad decision.

The means in which to attain production discipline is to appeal to the dichotomy that the producer has put themselves in. Have them operate in their best interests at all times. Their best interests could be defined as a high market capitalization for their stockholders based on the market value of their reserves. Imputing that those reserves were priced based on a commercially viable price. And that all of their production was indeed profitable. These should be the guiding principles of what a producer should be motivated by. Their best interests.

To do this. To attain production discipline requires the Preliminary Specifications decentralized production model which uses the price maker strategy. This will enable a clear and precise accounting of the Joint Operating Committees performance. It will be this performance that is the determination of whether that Joint Operating Committee is profitable. And if it is profitable it will continue to produce. If it is producing a loss then it will be put in the producers shut-in inventory to determine how it can be returned to profitable production. It is this method, used across the industry, that will ensure that the producer is provided with the most profitable means of oil and gas operations. The reserves of the producer will be saved for the time that they can be produced profitably. And the commodity markets will find and reflect the marginal costs based on a clear and concise accounting at each Joint Operating Committee.

There is no way in which to determine if a Joint Operating Committee is profitable using the current systems that are in use by the producers. Their methods of accounting use overhead allowances that badly estimate what the actual overhead for a property would be. They assume the costs to administer natural gas is the same as the cost to administer oil. And they are woefully inadequate in terms of what the real costs of overhead are. Overhead is a big shell game in the industry. Most of it is shuffled off to the capital assets on the balance sheet to be amortized over an infinite lifetime. The cost of a production accountant for example, is not recognized at the Joint Operating Committee, it is capitalized on the producers balance sheet. These overhead costs, which are substantial, must be brought into the determination of whether the Joint Operating Committee was profitable.

The capital costs are also needing to be brought into the equation. Leaving these to wrought on the balance sheet for eternity leaves the producer with bloated balance sheets that prove they are nothing but spendaholics. The capital costs never flow through to the income statement to evaluate the performance of the management, and generate the cash resources necessary for the business. This is why the oil and gas industry will be running out of cash in the next three months. They have useless bloated balance sheets. Already PennWest has announced that they are living from weak to weak based on their cash balance. They and a lot of other producers are finished. There are very few producers that will be left in a few months that can participate in the building of the Preliminary Specification, those that will be I would suggest act quickly.

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. 

Too Timid of Leadership

With the Preliminary Specification it is a necessary position of the leadership of the oil and gas industry to stand up and say to the consumers that yes, we will operate a profitable industry. Over several generations of congressional hearings, press beatings and general commentary that oil and gas producers are gouging consumers with windfall profits. There is no one that is currently willing to stand up and say to the consumer that they’re wrong. It’s far easier to run the business into the ground, lay people off, destroy the service industry and generally hide under the desk. This is one of the principle issues that bureaucrats see with the Preliminary Specification. It requires that they justify why they should earn a profit.

Societies need for energy is critical. It is the oxygen that fuels our economy. Without energy we are back in the stone age. Instantly. This is the message that needs to be communicated and expressed to the consumer. That the needs of society for oil and gas is paramount to our way of life and to our advanced standard of living. Energy is critical to society's needs and that is the focus of what People, Ideas & Objects, our user community and service providers will continue to provide. We also provide the oil and gas producers with the most profitable means of oil and gas operations. Profits are a necessary element of ensuring that society is provided with the energy that it needs.

Energy is also irreplaceable. We therefore have a responsibility to ensure that the energy that remains is used in the most effective manner possible. That requires that we produce it profitably. That way we will know that nothing is wasted in the production process. Trading on “cash costs” could be argued that today’s production is being wasted because it is not being produced profitably. Secondly the appropriate price that the consumer pays for the commodity will ensure that it is used wisely. By having the price of oil so cheap ensures that decisions for its use are being made recklessly. Is this a responsible manner in which to manage our limited resource of energy?

Running the industry into the ground and destroying the lives of the people that work in the industry, and the service industry, so that consumers can get a short term discount on their energy is foolish. Show some backbone. That People, Ideas & Objects want to implement a price maker strategy for a product that displays characteristics of a price maker. Is the appropriate and responsible position that should be for every producer. Why do I find such push back and fear that they will be doing something wrong when I promote this initiative. It's time to show some initiative and start dealing with the business of the oil and gas business as a business. One that is profitable.

I don’t hold out a lot of hope that these bureaucrats are going to take any of the advice that is contained in this blog or the Preliminary Specification itself. Bureaucracies don’t change. We see the effect of disintermediation being undertaken on other industries in the marketplace and the one constant is the previous administrations are not part of the new administrations. They ride the ship to the bottom of the ocean and wonder what happened in a never ending battle in bankruptcy court. That is their very limited future, that is our promise.

The one constant in the change dynamic of the fourth industrial revolution, disintermediation or this initiative is the focus on people in the industry. Making it simpler and easier to buy music, to get somewhere or to get a room while on vacation. The old industries can’t function in the new interconnected and dynamic world where the people are empowered to make the changes they want or need. We have structured a unique organization where the user community is the center of the oil and gas industries administrative and accounting functionality and process requirements. It is also the structure of the management, direction and leadership of these domains and it is the dynamism that the oil and gas industry needs. No wonder the bureaucrats are frightened.

If it’s as the marketplace expects, that oil and gas will rebalance itself in the next 5 to 10 years. If it's willing to wait that long to earn some money on their oil and gas investments, why not try something different? I can assure them with a $45.7 trillion value proposition they won’t be disappointed with the Preliminary Specification. And besides what type of future are the bureaucrats offering us past that 10 year timeline? Are we certain that the bureaucrats, when left to their own devices, will break out of their captive thinking by then?

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.

That's Two Key Trends

When potential participants in People, Ideas & Objects user community think about the future. They will have the existing oil and gas industry, with all that it offers in terms of a future, and they will have the potential of the Preliminary Specification as a choice. Our choice provides them with the opportunity to put their career in phase with two key trends that are occurring today. The contrast could not be any stronger. The oil and gas industry operated under the current bureaucracy is denying that there are any problems. Yet they have never faced such a dire situation in the history of the industry. I only see the integrateds and a handful of producers that are on the cutting edge of the business being able to survive 2016. Most of the pain is going to be realized here this spring. Such a dire prediction, but it's the bureaucrats inaction that has brought us here. Anyone seen or heard of a plan coming from them lately? The best we can hope for is to rebalance the market in 5 to 10 years.

Our two key trends are the ability to solve the industry's difficulties with the Preliminary Specification. Although it may seem to be a simple solution it took a great deal of effort to prepare. People, Ideas & Objects plan for the industry provides a user community vision of how we can build the systems our users need in a manner that will resolve the problems of the industry. Specifically initiating a price maker strategy and stopping the overproduction. This will also provide a framework for dealing with the future issues in the domains of the producers administration, accounting and operations. As the deterioration of the industry continues under our friends the bureaucrats, we can begin the rebuilding of the new oil and gas industry that will meet our needs and those of societies. This oil and gas specific trend also dovetails with another trend that we strongly resonate with.

A few days ago I mentioned the Foreign Affairs article entitled “The Fourth Industrial Revolution.” Information Technology with changes in organizational methods is a powerful tool in building value for everyone. Did I ever mention that we have a value proposition of $45.7 trillion. But Uber, AirBnB and other companies are remaking other industries in ways that were unheard of before. Uber, a private company, now has a market capitalization in excess of $50 billion. The impact that they have on the taxi industry and that infrastructure is devastating. The fight that Uber has had to sustain against the taxi commissions is just some of the friction that exists in the Fourth Industrial Revolution. I did however notice that the largest taxi company in San Francisco has filed for bankruptcy protection. Others will be soon to follow.

People, Ideas & Objects user community vision provides the opportunity for you to participate in the marketplace of ideas as a user in the development of the Preliminary Specification. This is a particularly important role in the development of our software. The reasons are detailed here. Most specifically the users will be the ones that we will be looking too to establish the service provider organizations that will operate the software that we develop, and provide the services to the oil and gas producers. In the Preliminary Specification, the reorganization that takes place has the administrative and accounting people moved to the service providers where they focus on one process and use the entire industry as their client base. As a user community member you will establish a service provider organization that will be able to build value for your clients and yourself in that manner. It's a business opportunity that I think is significant. The amount of producers G&A expense that is expected to be shifted from the producers internal resources to payments to the service providers is estimated to be approximately $45 to $60 billion per year. We are looking to establish approximately 3,000 users in our software development initiative. Simple math will provide you with an understanding of your service providers projected revenues.

The more the bureaucrats destroy the industry the more likely our solution becomes the new standard. They will not change anything. They are too vested in the status quo and will never accept that they are the issue. It’s up to us to make the change for them. The individual decisions of the people within the industry will be the reason for the success of People, Ideas & Objects and the Preliminary Specification. Just as it is in the Fourth Industrial Revolution for all industries.

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

No posting today.

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.