What If the Bureaucrats Win?

You may have been distracted the previous time that I noted our value proposition. People, Ideas & Objects, our user community and service providers provide the oil and gas industry with $45.7 trillion in incremental value over the next 25 years. We also have the added feature of putting the industry back on a profitable footing. Enabling it to reclaim much of the greater than $1 trillion in lost market capitalization over this past year. But today I think we can add to these small industry incentives to act to implement the Preliminary Specification. By adding the losses that the producers are incurring during the 2015 fiscal year to the list of things that would not otherwise happen if the Preliminary Specification existed. Some may think that this is a simple double counting of the value proposition, I as you can imagine, beg to differ.

These losses represent the incineration of the capital that the bureaucrats were entrusted with. They could have used the Preliminary Specification to ensure that they are providing their shareholders with the most profitable means of oil and gas operations. However, they are not doing that and have instead chosen to destroy the industry. I see these as two separate and distinct acts. Both as a result of the deliberate carelessness that our friends the bureaucrats are becoming known for, but the losses are different than the value proposition. They are, dare I say, like the loss in market capitalization, more real.

If we calculate the losses of the producers that have been reported as of last Friday we find that the total comes to $8.043 billion for the fourth quarter of 2015. Not bad for three months work. And that is just eight producers. Anyone notice that the amount that these eight producers have lost is higher than our budget? I guess no one will be giving us any grief about our budget anymore. After all if you're willing to lose this kind of money in a quarter, you surely would not mind spending it in productive ways.

I have a great deal of difficulty understanding why any of this is acceptable. There is no bureaucrat that seems too concerned about the situation. Is it that the bureaucrats are frozen in fear, or is it that they don’t care? They’re all singing from the same hymn sheet and stating that the market will rebalance. Let's give them the benefit of the doubt and assume that happens. They’ll then need to work off the huge balances of oil in storage that has built up in the world. Rebalance that! But nothing effective is done other than to get the press off their backs! Sure they changed the oil export restrictions, but how has that worked out? I think they just stare out the window dreaming these dumb ideas up. This is the muddle along strategy in its finest hour. Shrug your shoulders and assume that nothing can be done and go on doing the paper shuffling thing that they do. Hoping that nothing bad happens to you. Absolutely brilliant!

The Preliminary Specification is designed to make the industry dynamic, innovative, accountable and profitable. None of which it currently is and never has been while I’ve worked in it. The current business model was developed in the 1920’s and has had no changes to it since. In the dynamic, fast changing world we live in, we end up with a bureaucracy that is so out of tune with the times that it can’t even defend itself. Are we to expect that we’ll keep this in place for the foreseeable future. Will this be the way that the industry is managed in 2025, 2040?

Why would anyone give more money to these bureaucrats to lose. The industry has had no response to natural gas for six years. No response to oil for two. Is anyone else seeing a trend? What do we think will happen tomorrow or ten years with this bunch? That is exactly what the bureaucrats want. To ride this through with no expectations of performance and then to resume normal operations where investors line up for the next round of fleecing. Then the bureaucrats will be so established and permanent that we’ll never be able to get rid of them. I say if we don’t toss them out in this current environment, and soon, we’ll end up paying for it for a long time.

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 News Here

We should be building the oil and gas industry to address the needs of society in the next 25 years. Instead we’re hunkering down hoping that our most recent paycheck wasn’t our last. Here we are with all the intelligence and technology in the world to deal with our difficulties. And we can’t overcome the inertia of the organizational methods that were established in the 1920’s. I’ve provided so much comedic relief to the bureaucrats over this past decade. It's good to know they’ll at least have the thought that they knew better. It’s pretty obvious now, as it was in the 1980’s and 1990’s, that the lack of production discipline is with us as long as the bureaucrats exist. The news is here we sit, no change in the status of this initiative, other than the bureaucrats don’t laugh anymore. They can’t, won’t and will not ever change. We apparently have to completely destroy the industry before they're convinced they're wrong.

As far as I’m concerned the damage to the industry has and will be extreme. We have only begun to see the pain that we will need to endure. Sitting around hoping for higher prices and stating that the market will rebalance itself is sticking our heads in the sand. It appears to me that every producer is hurting except for Exxon. I think half of the industry will end up in bankruptcy. And the people who make this industry work will have had enough. What we’re talking about here is a generational time frame in order to rectify the damages being done now. I haven’t seen the rush to the door by the bureaucrats yet, but trust me that is coming, and they’ll take that aspect of the industries capabilities with them as well. Leaving us with that hole to fill on top of everything else.

We have, and will have, work to do. I have budgeted 5,000 man years of effort necessary to put out the first iteration of the Preliminary Specification. This is going to be very hard work to do and will demand a lot from the people who are involved. I guess the point is why do this hard work, disrupt the entire industry in the process, if it's not necessary. Just let the market rebalance itself as it always has. And that is the decision that is made. Muddle along and do nothing, let the forces of stupidity take hold and the good times will resume.

I don’t see that happening this time. First of all you need cash to buy the time to get there. We’re in February and there is less and less cash each day that passes. Getting there also assumes that the prolific nature of shale is somehow eliminated. That overproduction, which is systemic, unforgiving and destructive will be solved in the long term. Which it won’t and we’ll be back here at $30 for oil and $2 for gas in no time, assuming rebalancing does raise prices. Hope does spring eternal.

I can see the tombstones of some of the walking dead already. These are the firms that are no longer going to be with us. Give it a year and no one will remember them. Chesapeake, Encana, PennWest, Pengrowth and Bonavista. A lot of Canadian names in that bunch but all of them are trading at less than 10% of their all time highs. Which reflects a complete capitulation and lack of any faith in the managements or assets capabilities to be able to return to a viable company. Zombies.

It didn’t have to be this way. Disintermediation is a trend that is shaping industries across the business landscape. Technology with organizational changes are building substantial value propositions, as do we, and are the reasons that companies are moving in that direction. Why didn’t the oil and gas industry? What is the unique characteristic that caused them to oppose this initiative from the start and refuse to consider it? I don’t think we’ll ever know. But one thing is for sure, the opportunity in oil and gas is on this side of the fence. This post may seem dire, but I think I’m telling it like it is, it really is pretty sunny over here on this side.

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. 

Securitization

Securitization invokes the 2008 financial crisis with thoughts of mortgages being purchased from banks, parsed based on their credit rating, and repackaged as investments on Wall Street. Add in some sloppy accounting and poor legal work, some innovative ideas like synthetic credit derivative obligations, then you can see how a good idea can become the source of a banking crisis. Securitization, I think, has a role in the revised oil and gas industry. It could be a source of capital that is necessary to develop the industry in the future. If working interest ownership positions within various Joint Operating Committees were repackaged as securitized investments and bought and sold on exchanges. Then some of the capital necessary to fund the next leg of the industry might be available.

My concern is that the industry thinks that they’ll wait to rebalance the market. Like they’ve done so many times before. That low commodity prices are a natural part of the cycle that has to be worked through. You take the good with the bad and after all the screaming you make some money. I ask who is going to loan or invest money to anyone who has this attitude in the 21st century. If you feel that this is a good place to put your money go down and invest in an oil and gas company today. The bureaucrats in these companies are deluded to think that their vision is going to attract anything but flies. And we should make sure that these industry bureaucrats are shown the curb for thinking that this would be acceptable.

We went through the latter part of the 1980’s and the better part of the 1990’s listening to the oil and gas bureaucrat say “oh whoa is me, commodity prices will recover soon.” We’re hearing it again, and if we don’t do something about these dead beats we’ll be hearing about it in ten years from now. Just when did this become acceptable. That is all that we will ever hear if we accept this behavior today. “The market will rebalance and all will be well.” Investors are being destroyed. People’s careers are being destroyed along with their lives. The service industry, where the entrepreneurial and innovative talent in the industry exists is being destroyed. And the best that can be suggested is “the market will rebalance itself.” I think we should call an end to the muddle along strategy right here and right now.

The damage that is being done in this business is not something that’ll be fixed in the short term. The investors will not be lining up to give the people who are running this ship aground another turn at the wheel. They’re spitting mad. And they want scalps. Once they get those scalps they’ll lick their wounds for some time before they’ll venture into oil and gas again. Same with the people who are being laid off. “It was good while it lasted, but maybe we’d be better off shifting into something else” they’re thinking. The capabilities of what and how the industry does was it does can only take a big step downward in a scenario such as this. Thank your bureaucrat for all of this fun and excitement.

To the point about securitization of oil and gas properties. The Financial Marketplace module discusses this point as one of the elements of how the industry is funded in the future. This is enabled in the Preliminary Specification through the service providers detailing their work at the Joint Operating Committee level for the administrative and accounting costs. Each Joint Operating Committee will have the actual overhead costs to administer the property each month. Add these detailed overhead costs to the detailed royalty and operating costs and you have all of the Joint Operating Committees actual costs in their entirety being recognized. Actual detailed accounting each month! With the capital costs of the well known, the property can then prepare audit-able financial statements for any Joint Operating Committee for any month of the year.

Therefore the net profits of the Joint Operating Committee are something that can be calculated and determined accurately every month for every property. With the reserves data, working interests in these properties could be securitized and the producer able to generate additional capital through the process. One other aspect of the way in which the Financial Marketplace module of the Preliminary Specification is different is that due to the way the accounting is done in Preliminary Specification, the operator and the working interest owners overhead costs will be the same on a working interest basis. The operator will no longer be carrying the significant administrative and accounting resources and costs necessary to operate the properties on behalf of the Joint Operating Committees. And they will not be forced to capitalize these costs in order to hide them. The actual costs incurred by the service providers will be distributed based on the working interest distribution to all the working interest owners on an equal share basis. And this is why the producers will use the service providers for their administrative and accounting needs. Otherwise they’ll be footing the bill for their administrators and accountants to the full extent, as they do now.

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. 

Rats and Sinking Ships

My apologies, I forgot to edit the title, it should read bureaucrats and sinking ships. I meant no disrespect. It gives me no pleasure in being the scorekeeper in this disintegration of the oil and gas industry. There were many opportunities for producers to act to mitigate these problems. The natural gas business has been displaying elements of overproduction since 2008 and that has been more than enough time for us to have had the Preliminary Specification developed and in the marketplace. The giggling of the bureaucrats had to carry on for the many years since then so that they could achieve the satisfaction of expressing their opinion about the Preliminary Specification. The fact of the matter is today we have an industry with no cash resources and a brick wall that will be hit in the next two to three months. The time is now in which we’ll see super human action and resolve from the bureaucrats in their abilities and capabilities to resolve the issues underlying the oil and gas industry. Maybe not.

It's time to jump ship, man what lifeboats there are and save yourself before there are two many people looking for the same thing, the bureaucratic thinking will go. The first to get out has the best chance of surviving to live another day. Everyone for themselves will be the mantra of the stellar bureaucrat! I think this is our future. And I think it will begin to happen very soon. In Canada the production month’s receipts are distributed on the 25th of each month. That means we can keep the lights on for a few more weeks, and as we all know now, make the February 1, 2016 payroll. After that it's up in the air. The other consideration is that if you wait until the next month's production distribution, the 25th of February, that gets awfully close to late April and early May when the fan ceases to operate at all. Waiting until the end of February might cause people to remember your face and name.

Whatever the bureaucrats thinking. They need to make sure that they are at least in the crowd of defections that will be announced in a hurricane of activity. Hiding out in the crowd is a good strategy but remember that it's important to be in the lifeboats early. You don’t want to get stuck with the women and children in a sinking ship. If you look closely at the behavior of the bureaucrats, they are clearing their offices of personal items, shredding the evidence, deleting the data and milling about the exits. These people are smart, they can read a cash balance. The trick will be to avoid the stampede of bureaucrats when it does occur. They are ruthless in a pack.

It will be after this that “what now” becomes the question. Will the environmentalists who fundamentally believe that powering vehicles with coal, or sorry electricity, is our future, finally be proven correct? Will solar and wind rise to save the day from dirty oil and gas. I think these, I'll call them myths, will be found to be the misguided adventures that they are. Oil and gas is the source of our societies advanced capabilities. I think we will be learning this lesson, once again, the hard way.

There has been a strong turn towards government and regulation since the Obama administration began. The bureaucrat has had their day in all aspects of societies dimensions. This was due to the 2008 financial crisis which has been blamed on Wall Street greed. The fact of the matter is that Fannie and Freddie, two government agencies, supported by regulations and legislation regarding mortgages are the reason for the financial crisis. The bureaucrat’s day has never been so entrenched and secure as it has been this past decade. Where they can go is of no one's concern at this time. We just need to ensure that we note their absolute failure and keep them off the ships that we build in the future.

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 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.