My Pricing Analysis

The level of hope and anticipation that the oil price will finally begin its inevitable climb back to $100 is so strong this past week. Any news that was positive was heralded as a clear indication that things would be better soon. When you don’t have a plan. When all you do is sit around and watch the price of oil and natural gas, these can occupy a bureaucrats day. Therefore they are imputing anything and everything that is positive into any news. We also see the overall depression that sets in those days when the performance of these commodity prices aren’t on an upward trajectory each and every day. What we have also witnessed is many more people being shown the door. Those that have worked in the industry for decades, with mortgages and kids, who thought they had attained some job security are faced with the reality that they have little more than the starting laborer on a construction job. I find this element of the performance of the bureaucrats to be particularly vile as it was unnecessary. If they had only moved to the Preliminary Specification.

If you look at the recent price history for natural gas it began to decline during the financial crisis. In the first year it fell from approximately $13.50 to $2.75. Shale gas production grew from 5 - 8 bcf / day during this period. Bureaucrats who were thinking that this was attributable to the financial crisis, watched the market then move upward to a little over $6.00. In subsequent years the market fundamentally broke down from chronic oversupply. This as a result of shale gas reservoirs producing approximately 42 bcf / day today. The only time since then that the natural gas prices were on an upward trend was during the very cold winter of 2014, for the rest of this eight year period it has been more or less on a continual downward slope. Expect to see these same characteristics over the next six years in the oil price.

Rebalancing of that marketplace is therefore due to occur in 2105 by my estimates. Take for example the most recent news out of the Marcellus shale region. Production volumes had been in decline for the past year or so. As we know the Marcellus producers have been very fortunate to receive a price for their natural gas that began with a $1 in front of it. Pipeline capacity restrictions keep the prices severely depressed, yet the bureaucrats continue to produce. In the last couple of weeks additional pipeline capacity came on stream and the Marcellus region is now reporting an increase of 2 bcf of additional production.

What we have is a “machine” that produces. When oil breached $30 from its lows some investors were on Bloomberg saying they were investing in oil and gas again. Citing the opportunity of a lifetime. These bottom feeders were rushing in to buy the stock issuances of the producers at firesale prices. From the investor to the mail clerk this is a “machine” that does nothing but produce as much as it can get its hands on. Every nook and cranny of pipeline capacity must be filled at all times. No matter what the costs. Well, hell, who cares about the cost. Nothing must stay below the surface to be produced profitably later.

The other thing that was notable last week was the “strength of the producers balance sheets.” I must of heard this term being used for every class and every quality of producer in the marketplace. That they were going to “defend their strong balance sheet.” This has to be in response to my arguments about bloated balance sheets. If you want to see a strong balance sheet look at Apple’s. $76 billion in short term assets, $177 billion in long term marketable securities, $22 billion in property plant and equipment, and notably $5.2 billion in goodwill. Approximately the same amount of goodwill that both Encana and Devon have. The difference is that Encana and Devon have approximately the same amount of shareholders equity as they have in goodwill. Note too, that all three have approximately the same amounts of property plant and equipment.

These aren’t healthy balance sheets. These are testaments to the spending orgy that the bureaucrats undertook with shareholder and banker money. The subsequent elimination of most of the shareholders equity shows that the decades these bureaucrats have been in power have seen them destroy that money. Recall too that they have now written their assets down to the amount of their reserves times the prices at year end. These assets therefore represent the sum total of all future revenues of the producer. That’s not an asset! They have also destroyed the oil and gas marketplace by systemically over producing oil and gas. They did this in the 1980’s and 1990’s and they are doing it again. And if you think they will stop, you should read about the characteristics of shale reservoirs. This “machine” that they have developed, which can not be changed because it is the same “machine” that existed in the 1980’s, and shale based reserves, when combined are a toxic, destructive force. This “machine” must therefore be eliminated and replaced by the Preliminary Specification or we will have no industry left. People, Ideas & Objects is the only solution in which we can rebuild the industry to take on the challenges we face in the next 25 years.

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. 

Status of This Project

Why do producers continue to produce at full capacity when these prices do not generate profits? They need the cash. And so we have an industry, with such spectacular overcapacity, that will continue to produce for the little amount of cash that they can generate. Oil prices in the mid $30 range brought about a sense that the worst was over. And I keep pointing to the natural gas side of the business. I can announce at this time there will be no change in the operating strategy of the industry on a go forward basis. These losses and the continuation of the layoffs will not stop for the foreseeable future. We are about to enter a period of time in the oil and gas industry that I can only assume will be looked upon as its darkest ever. But the bureaucrats are safe. They’ve made it through the publication of their 2015 financial statements. They can now, once again, take the rest of the year off.

The situation in the marketplace is ripe for change, destruction is everywhere. Everyone can see this as clear as day. Overproduction in the commodities is killing the industry. There are trillions of dollars being destroyed. Our strategy was to appeal to the oil and gas investor community and to have them support People, Ideas & Objects. After all it is they who have suffered the most in terms of financial losses. Over $700 billion in lost market capitalization alone. I don’t use the label feature of this blog anymore, people can use the search feature much more effectively, but I had used the label “Investor” on 388 individual posts. This represents the number of times over the past three years that we made our appeal to the investor community. This was in addition to the many phone calls, emails and representations to those people in the financial industry. I was also aggressively pushing our message out to the international press attempting to accelerate our exposure in every area.

I am announcing today that the results of these efforts over the past three years are a complete failure. I can tell you today that the investors will not participate in the rebuilding of the industry in the fashion that was put forward to them by People, Ideas & Objects. What I think the issue is, is that the investment capital is separated from its owner and is managed by its own bureaucracy. They may see the issue as we do here, however they also see People, Ideas & Objects as regular business. There is also an expectation that a 5,000 man year software development project will be completed on a volunteer community basis that solves their trillion dollar issue, by tomorrow. They don’t necessarily see it as I do in the context of creative destruction and the need to actively make the radical changes to the industry that the Preliminary Specification dictates. Which of course is their choice and their decision to make. They have a relationship with the bureaucracy in the producer firm and will seek to work within the organizations that they’ve established. Hence they should schedule more losses in the future. It is clear to me that they need to feel more pain and misery. This will also come to be known as the time when you can find us passively waiting by the phone for someone to call.

My issue is the same issue that I have had since I first determined the Joint Operating Committee is the key organizational construct of the dynamic, innovative, accountable and profitable producer. That issue is that I glow radioactive. The bureaucrats know that I am toxic and eliminate their future in the industry. The press knows the bureaucracy will not support the initiative and therefore don’t get involved. Users, and many more of them these days, see their future in the Preliminary Specification more clearly than they do in the status quo. And we will continue to develop our user community. But we can now see that the investors in the oil and gas industry have not yet suffered enough.

Which leaves us with the question of where do we get funding. Our Revenue Model still stands and it is the producers who need to pay for the development of the Preliminary Specification. The oil and gas producers, as detailed in our Revenue Model, have a checkered reputation for not paying for the costs of ERP software developments. As a result they have to pay upfront, otherwise they’ll just abuse another vendor and I’ve played that game. It was always assumed they would pay these costs under the direction of the investors. I’ve said it a million times. Software defines and supports the organization. If the oil and gas bureaucrats never support any ERP software, then their franchise is never challenged because no “market” will be created without any financial resources. Ensuring the bureaucrats future.

How we source our funding is unknown at this time. I have never had the support of anyone in this initiative. It looks like it will be a lonely pursuit for a while longer. There is no doubt in my mind that the need for energy in the next 25 years is at risk with the current structure. That it will be more difficult to do this job is no big surprise to me. I went into it with my eyes wide open and titled our Preliminary Research Report “Plurality Should Not Be Assumed Without Necessity.” Explaining this as “It's not what you know that you do not know that hurts you. It’s what you do not know, that you do not know that will. It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to bring about a new order of things.” That was certainly the case at the beginning of this initiative and it certainly is the case today. Just because my job is difficult doesn't mean it doesn't have to be done. It does mean that we should brace ourselves for serious difficulties ahead. All hell is about to break loose.

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. 

Dead Cat Bounce

In an industry that is as capital intensive as the oil and gas industry is. Where all of the costs are in the capital costs of drilling, completion and equipping of a well. Where the monthly costs to operate outside of the royalties are minimal. Isn’t it odd that the bureaucrats choose to preclude the capital costs from the accounting of their performance. “Those are the sunk costs, we don’t consider those in calculating our costs to produce.” When senior intermediates like Devon Energy are depleting their sky high capital costs over the course of 13 years. You see the extent of the game that is being played in the industry. It is elementary accounting that you let your costs flow to the income statement. It’s how you recover the capital that you incurred when you spent the money. Are there no accountants employed within those vast layers of bureaucrats?

Oil prices rebound on speculation that some countries would freeze their production levels at the current output. I think this has led to the speculators covering their shorts. But we’ll see in the next few weeks what the market has in store. Mark me down as expecting to see further erosion in the price of oil. Why so pessimistic? Have you seen the price of natural gas. Into the $1.60’s this week, the sixth year of systemic overproduction. We went through a period of time in the 1980’s and 1990’s when there was chronic overproduction. All that was needed was for each producer to reduce some of their production in order to increase the price. It never happened and they all kept producing at full capacity year after year. Now we see the same phenomenon happening, if only they cut global supply by 2% they would realize an $70 increase in price, cover their costs and provide their shareholders with a return. Which as we calculated, is what is necessary to earn a profit. Now we have the overproduction phenomenon again, but with the added excitement of shale based reservoirs.

What is needed is for the industry to come clean on its accounting. What has gone on in the past has destroyed too much. And it is here that I blame the bureaucrats 100%. So much is being destroyed and we are seeing the irrational decisions of people such as Aubrey McClendon. I have to ask what would have happened if he had the Preliminary Specification operational during his tenure at Chesapeake? That is what I think we should look forward to in the next 25 years when people like him are able to do the building of the industry. And do so in a manner that is properly managed. Not one that is summarily destroyed by an uncaring, self interested bureaucracy.

I don’t hold out any change in the status of the industry. The bureaucrats are fine as they are. There’s no need to make any changes or to disrupt their lives in the downturn that we’re in. This downturn is being experienced by the shareholders, the bankers and the people who do the work. Cutting to the core of the organization leaves the bureaucrats in place and able to continue their lives as long as they maintain control. Who is going to make that change? A blogger? Which is what they have effectively reduced this initiative too.

I will be taking this next week off and will return on March 14, 2016.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Corrupt Accounting Practices Part III

We are left with an accounting of the costs of production and royalties in determining what the actual costs of production are for the oil and gas industry. These costs should be relatively straightforward and present no difficulty in determining the final number. We will then summarize the total costs of production on a boe basis. Beginning with the production costs, we’ll keep with the information that we used in the overhead and capital calculations, Devon Energy’s 2015 report.

For 2015 we have the Lease Operating Expenses and Production and Property Taxes that total $2.492 billion. These cost do not present any issues as they are all expensed in the current period and therefore reporting would not change under the Preliminary Specification. The calculation would therefore be to allocate these across the throughput of the company for the fiscal year. Devon produced 571,000 barrel / day and therefore these costs are $11.96 / barrel of oil equivalent.

Royalties are a bit of a difficult calculation to undertake. Most, if not all producers report their production as their share only. Royalties are the compensation paid in order to earn the title to the products produced. They are therefore in theory never the producers products and to report them as their products is to overstate their revenues. Therefore, in order to determine what the cost per barrel is we’ll have to calculate the royalties that were paid. There are two ways of doing this. I am going to take it from our cost point of view because we are in essence determining what the producer needs in terms of price in order to cover their costs. Therefore the costs to produce today consist of the overhead of $11.10, the capital $49.71, and the operating costs of $11.96. These total $72.77.

To impute a fair and reasonable royalty I’ll use what I think is an average industry value that is reasonable for both oil and gas. That is 18% royalties on all of the production. Therefore the prices needed to generate a 10% profit would be $101.05. If Devon were using the Preliminary Specifications price maker strategy they would immediately shut-in all of their production. As would every other North American producer. Which would lead to the solution to the problem. Then as the prices rose to around $80.00 they could start to bring their lower cost production back on stream. This is an extreme example that I am suggesting here. I only suggest such an extreme example to counter the extreme example that the producers chose to do when they mindlessly produce oil at $30.00 / barrel.

If your tactics are to produce to cover your cash costs then you will continue to produce no matter how much it costs you, and you will continue to do so for as long as you remain in control. There are other motivations that are in place that are leading the bureaucrats to continue to produce at these prices. And I think we have covered that topic. “Recycle costs” is the name of the game and it is played by determining what the price of oil is. Asking what cost would be necessary to be profitable at that price, and then stating that that is your cost of production. The significance behind the recycle costs is that the use of accountants, historical accounting figures and logic are not the necessary ingredients. You can make up the number that you need no matter what the price of oil or natural gas is. When someone asks you how you reduced your costs in such a dramatic way, in a capital intensive industry, that is based on historical accounting, tell them that you have been innovative in the field! There is a reason that this series has been entitled corrupt accounting practices. People generally go to jail for these kinds of comments and slights of hand. Just one mans opinion.

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. 

Corrupt Accounting Practices Part II

In the second part of this series we want to determine what the capital expenditures would be for a producer. Yesterday we determined that the payroll costs of a producer totalled $11.10 / bbl. It will be through this series that we’ll determine what the actual costs are to produce a barrel of oil in the current exploration and development environment. If we look at Devon, we need to determine a reasonable capital cost per barrel of oil produced for the 2015 fiscal year. We are not going to apply any ceiling test or incur any impairment of the assets. We’ll leave the balance of the assets as they were. However, we’ll look critically at the two components of the capital costs. The first being the capital expenditures in the current year. And secondly the amount of depletion recorded in the normal environment. We’ll assess these values, based on the asset balances, on a more reasonable basis to determine what I would, and I think most investors would determine to be a reasonable method of depletion.

When you capitalize everything under the sun, you significantly reduce the capital cost per barrel of oil. My thesis has been that the annual stock offering of each producer has subsidized the consumers of energy through this mechanism. The investor believing that the producer is growing their balance sheet by building value and reporting profits based on little to no costs being recognized, has distorted the actual costs of the industry. Only now after chronic, significant and unrelenting overproduction brought about by over investment do we see the extent of the performance of the oil and gas producer. The accounting, only now, seeks to remedy, in a single charge to the income statement, that which it should have done more appropriately each fiscal year before. Recognizing the actual cost of oil and gas exploration and production.

If the producers did recognize the actual capital costs of each barrel of oil in the appropriate manner these costs would have flowed off of the balance sheet onto the income statement. It would have been at this point that the producer would have been able to report a profit or loss and the investor could assess the capabilities of the producer's talents. Instead nothing was recognized, and any revenue was also essentially reflected as a profit. This distortion worked against the producer’s best interests. If they were recognizing their capital costs and reporting profits they would be realizing the return of their capital in the form of tax free cash from the prices they were charging the consumer. Generating the money needed to invest further in their business. Ceasing to issue stock annually to raise the capital expenditure program would also cease the chronic dilution of the investor base. This never happened, and with the overproduction, the prices were never high enough to truly make the industry profitable other than through convoluted accounting.

If we look at Devon Energy we see that they recorded capital expenditures of $6.324 billion and depletion of $3.129 billion. We need to reduce the capital expenditures by $1.2 billion for the recognition that it was G&A in yesterday's calculation of the $11.10 / bbl making it $5.124 billion. Before we make any calculations I want to question the substance of the depletion number and determine if it adequately captures the true costs of the production that year. The net capital recorded on the balance sheet sits at $36.296 billion as of December 31, 2014. Adding the 2015 capital expenditures the total becomes $41.420 billion This represents approximately 7.7 times the 2015 revenues. A high number. However, Devon is only depleting their capital costs by $3.129 billion or over 13.24 years. An even higher number. Again the question is why are we harbouring these costs for this period of time. Let them flow to the income statement so the cash that has been incurred to develop them can be retrieved. Are these precious works of art that must be kept for ever?

Let’s therefore reduce the amortization of the capital costs from 13.24 years down to 4 then the depletion for 2015 would therefore be $10.355 billion. Now we need to determine what the throughput of the organization was for the year and determine what the capital costs were for each barrel that Devon produced. That was 571,000 boe / day. Therefore the capital costs per barrel is $49.71. Now those that might find this calculation to be unreasonable may want to recall that Devon reported a net loss of $14.4 billion in 2015. Which is a net loss of $69.09 per barrel of oil produced. The key difference is my method would produce the same results for at least the next four years. Probably for all of the future years based on the level of capital expenditures in the current year. Whereas the actual 2015 loss is once in a generational accounting. And with the price maker strategy of the Preliminary Specification, prices of the produced products would exceed their costs and these capital costs per barrel would be returning to the producer in the form of cash. So we should really state that the company would have a cash balance at the end of 2015 of $10.355 billion in incremental cash. What do you know, a business! Wait, $49.71 plus $11.10 plus more costs to come, $30.00 oil price, maybe not so much of a business after all.

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. 

Corrupt Accounting Practices Part I

When there’s distress in a business or an industry why is it that the accounting always seem’s to be in question. Up until now the accounting these producers had been putting out was accepted as fact. I want to kick off the discussion here for the next few months about how the accounting in oil and gas is really a pile of s___. I have been barking for a number of years about bloated balance sheets in the industry. What we have today with Devon, Chesapeake and Apache are losses that are essentially saying, “everything that we have been doing these past decades has been a fraud.” You thought you were investing in a viable going concern, that just hasn’t been true. This post will help to clarify how I see the situation and add a little credibility to my past arguments about capitalization of assets in oil and gas.

If we look at Devon, Chesapeake and Apache they are each recording G&A expenses that are 4 - 17% of revenues. The first question we have is if the G&A is this low why lay anyone off? If you slash half your staff you’ll save the shareholders 2- 8% of the revenues. Is this a worthwhile exercise when you're recording $23.1 billion in losses for 2015? The G&A number on the financial statements is the residual number after the majority, and I do mean majority, has been capitalized to the balance sheet. For whose purpose is this slight of hand being developed for? What is the objective in capitalizing G&A and why, in most producer cases, is it 75 - 80% of the total G&A that is capitalized? Competitive pressures? I think the producers need to come up with a better reason here.

If we look at the Devon text on page 3 we find that they are looking to further refine their G&A and operations staff in the coming year.

Devon’s workforce reduction program, which includes G&A as well as operating personnel, will decrease Devon’s employee count by approximately 20 percent in the first quarter of 2016, bringing the total workforce reduction to more than 25 percent over the past 12 months. These workforce and non-personnel related cost reductions are expected to decrease G&A costs by approximately $400 million to $500 million on an annual basis, exclusive of reorganization charges, and are designed to maintain capacity to respond appropriately to increased activity levels when the commodity price environment improves. 

I read this as saying Devon’s G&A costs, including operating personnel, could be as high as $2 billion in total. No wonder their balance sheet was so big. The reported G&A expense of Devon was the 17% factor and was $847 million. Therefore we can impute that $2 billion would be approximately (I’m using only their oil and gas revenues) 37% of the revenue going to G&A in operating staff and overhead items for 2015. These are the cash outlays that Devon has to make. If we use the 37% to determine what the “cash costs” are for “overhead, operating staff, administration and accounting” you would come to .37 x $30 / bbl or $11.10 bbl. We’ll take that number from this point forward, it is much lower than my original analysis that showed $15 to 18.00. However comparing my number to the $1 - 2 that most producers claim, I’m at least playing within the city that has a ball park.

The culture within the industry is that everything that moves is capitalized to the balance sheet for eternity. The outer limit of what is acceptable is the value of your oil and gas reserves times the price of the commodities at year end. Which at any end of the year period is going to represent the total gross revenue that the company will ever achieve. The write downs that are causing the $15 to $23 billion in losses is so that the producers can fit within their total reserves times the price of the commodities at year end. So the company is still valued at the gross revenues of what the company will ever receive, it's lost up to $23 billion, it's worth nothing, produces no value and has no cash. Once again I have to ask where do I invest? Encana which now has negative $202 million in retained earnings. Has the audacity to keep $2.79 billion in Goodwill on the balance sheet! What Goodwill? Write this Goodwill off and report the proper $2.992 in negative retained earnings.

The argument might be that the situation in oil and gas is the commodity prices are low and that is creating the desperate situation. And that is true, the oil and gas industry is a price maker and the bureaucrats are making these prices. It is also the reason that I’ve been working to get them to change to avoid this scenario that they’re in. If they had employed reasonable accounting principles of capitalization over the past few decades these producers would have gone out of business long ago. They would have been forced to account for their performance within the fiscal years they were spending like drunken sailors. The SEC defines the outer limit of what is acceptable. It does not mean that each and every producer reach that limit each and every fiscal year.

If we wait until 2021 the market will have rebalanced and the inventories will have been drawn down. That assumes that you're believing this story and keeping these corrupt crooks in place! I have a vested interest in promoting the Preliminary Specification. Which I have been doing for as long as these people have been destroying the industry, which is a long time now. I feel very good about the work that I have done in the past decades. I can say that I did what I thought was right and necessary, and tried to make a difference. But I can also say thankfully, that this lot kicked me out of the industry in August of 2003 and took me to the woodshed because of my ideas. No wonder, they’ve been conducting themselves in ways that I would not have been part of.

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. 

Choices to Make

The alternatives could not be more stark. Stick with the bureaucrats and live in a mushy, blah day to day existence based on the producer's cash balance, for the rest of eternity it would seem. Or begin the developments of the People, Ideas & Objects Preliminary Specification, user community and service providers which will set the industry on a prosperous and dynamic course for the next 25 years. We have laid out the vision of how this will happen in the Preliminary Specification. The business models, organizational structure and strategies that will be used are included. The implementation through the user community to fully define what it is that is needed for them, as service providers, to ensure that their producer clients are provided with the most profitable means of oil and gas operations is clearly defined there. Our budget defines how we will build our systems and the services needed to operate the industry on this revised methodology. It’s all right there in People, Ideas & Objects.

So what’s with the name? People, Ideas & Objects is derivative of Professor Paul Romer’s new growth theory. It used to be that if you wanted the economy to grow you needed to invest in expanding the base of the economy in three areas. In transportation, finance or communications. New growth theory suggests that this has changed and is now based on People, Ideas and Things. Since we are object based developers we simply changed things to objects. How do we expand the economic output of the oil and gas industry? Not with the bureaucrats I can assure you. What it is they’re doing I am not sure of, but it doesn’t seem to me to be anything that is positive. It seems to me to be self-interest that is driving them and in turn destroying the industry at a rapid rate. The need for change today is significant, the industry can not withstand too much more of this destruction. It needs to begin addressing its long term needs and building for that. Therefore it needs to reorganize and start that process fresh.

When I first published our budget in August of 2014 the bureaucrats laughed. It was well before the decline in oil prices and they only saw the difficulties in the natural gas side of the business. They also assumed that those would subside once the “market rebalanced” itself. The scope and scale of our budget is the most significant software development that has been undertaken in the oil and gas industry, and that is why it’s so costly. When I proposed it I knew it was controversial for those reasons, however, solving the issues in the industry can’t be undertaken with a shoestring budget. I think my approach, as represented in my budget accurately captures the scope and scale of the issue that we all face today. I’m sure the bureaucrats would have been happier with a $6 million budget, that would be more in line with their level of thinking.

Managing expectations and setting timelines that are well into the future are the only things that the bureaucrats are able to do at this time. To discuss the issue and any resolution to them would have to consider their elephant in the room, People, Ideas & Objects. And they can’t do that. It’s suicide for them. It’s as if they’re taxi dispatchers in the world of Uber. They’re redundant. So they will hang on saying and doing nothing for as long as they can before someone comes along and kicks them out of their chairs. Until then they still get paid and can talk about “market rebalancing,” thinking that people are buying the story.

We’re at a critical time in our evolution as a solution to the industry. I can look back at the work that I have done and know that I wasn’t wasting my time. We have a bright future ahead of us in the oil and gas industry. The probability of success of the People, Ideas & Objects initiative, our user community and service providers is on the verge of being 100%. We have some very difficult work ahead of us. Each of us has the opportunity to contribute to solving this issue for the industry. And in the process establishing for yourselves a valuable position as a member of the user community with ownership in a service provider that will become a significant part of the new oil and gas industries infrastructure. An opportunity in a lifetime really, and I think some of the best work that we’ve ever had the opportunity to get our hands on.

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 Timing of Our Revolution Has Been Set

The International Energy Agency. That’s the IEA, not the EIA which is the U.S. Energy Information Administration. States were all good. That is the rebalancing will be completed in 2017 and a “price spike” will occur in 2021. They assume that between 2017 and 2021 the excess inventories that have been built up until 2017 will have been worked off by then. What can I say, the bureaucrats are correct. Sitting around doing nothing is the correct operating procedure after all. I’ll make sure that I delete this blog and the Preliminary Specification this weekend. Can you imagine the monumental mistake that would have been if we had secured our budget and completed the development and reorganization of the industry by 2021? It would have been a wasted effort! Oil leaped 8.1% on this IEA news!

What did I say yesterday about short attention spans? We are dealing with the reactions of an entire industry that is watching the price of oil at each and every minute of the day. Obtaining relief that all will be well when the slightest uptick occurs. And the massive depression that sets in when the price inevitably goes down further than it had before. It's good that we have the IEA to be able to know what the future has in store for us. I was also pleased to see Deloitte & Touche came out with a paper that summarised the strategies that a producer can employ in these difficult times. They actually had five different scenarios in which to follow, all of them being just a rehash of the status quo.

But wait a minute. Doesn’t the IEA’s projections assume that the industry has the financial resources necessary to get them to 2021? Even the Deloitte & Touche paper states that the producers are operating on negative cash flow, and in some cases, negative equity. “These are just details that will not cause any real difficulties in the long run,” we hear the bureaucrats say. The cash crisis will be a critical issue that will start in the next one to five months, I’ve stated here many times. Remember that PennWest announced it was living “week to week” based on its available cash. We’re going to see many companies unable to make payroll, I can assure you. Making it to 2017 will be a miracle, 2021? where can I invest today!

If we look at the heart of the issue. The overproduction brought about by shale, has been unaffected by any of these newsworthy items. If the IEA were 100% correct we would see the rush to drill and complete the frac log to bring on new production to overwhelm the “profitable” prices in 2021. And so it will go. Without the mechanism to fairly and equitably allocate production in the industry that the Preliminary Specification provides. Based on the real profitability of the property, based on an actual accounting which includes capital, operations, royalties, administration and accounting costs at the Joint Operating Committee. Not until then will the industry normalize. For evidence of this look at the natural gas industry. Gas is in its sixth year of overproduction. If only those Saudi’s would stop producing natural gas, too.

If one looks at the situation in natural gas we see rainbows and unicorns there as well. The EIA this time, not the IEA, is projecting that natural gas storage will be around 2.2 tcf at the end of the winter season on March 31, 2016. Getting a $1.80 for your natural gas is something that, as a producer, you might want to hedge your future production on. These are going to seem like good prices come April 15, 2016. But this is uniquely a natural gas situation. It shares no known characteristic with oil! That is other than the overproduction from shale is chronic, systemic and unforgiving, with no remedy from our good friends the bureaucrats. Remember the shale revolution began in the natural gas business before it was used in oil. Oil is just catching up to natural gas in terms of the market dynamic that shale brings to its markets.

Unless and until the producers have a means to allocate production, overproduction will continue, and I would say more likely until 2031. Bureaucrats don’t want to do anything for a variety of reasons. It takes their eye away from the screen where the oil price is displayed. They would have to work very hard on building the Preliminary Specification. And they’re eliminated from the oil and gas scene in the Preliminary Specification. Self preservation being the driving force behind the antics we see displayed in the industry. If you believe the facts you might want to have a look at what we’re doing here at People, Ideas & Objects. If you believe in fairy tales look at what the IEA, Deloitte & Touche and the bureaucrats are selling. Nonetheless they have set in place the expectations of when the timing of the return of “normal” oil prices will be. I should thank them for setting it five years from now. All that they are trying to do is to buy time and manage people’s expectations. Unfortunately for them, I know, that’s unacceptable to a certain group of people.

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 Elephant Sitting Next to You

We need to talk about the elephant that has been occupying space in our living room these past few years. This elephant is none other than our initial development budget which sits at $6 billion U.S. What is particularly difficult for the bureaucrats to accept is the allocation of our margins between earnings and Intellectual Property royalties. Our margins are consistent with any other software provider. That we detail how they are being allocated in our budget is to provide clarity and transparency in how the money will be spent. What the bureaucrats should be pleased with, is that we don’t include my Intellectual Property royalties as part of People, Ideas & Objects costs. Bureaucrats who take issue with the distribution of our margins, or with the size of our budget need to focus more on our value proposition. Did I ever mention that in the next 25 years we provide $25.7 to $45.7 trillion in incremental value to the oil and gas industry. If any bureaucrat raises the issue of our budget or margin allocation with the current state that the oil and gas industry is in. I would suggest that they’re not interested in solving the underlying issues of the industry. And as I indicated in yesterday’s post, we do not cater to, or expect any support from the bureaucrats regarding our initiative.

Identifying oneself as a member of the People, Ideas & Objects user community, the critical element of the quality of our offering, will give the bureaucrats a newly identified target to destroy. This has been the case with myself since the publication of the Preliminary Research Report in May 2004. When we proceed with the developments we need 3,000 people to join our user community and to take high profile positions within the industry. They will be active with many of the producers and investors. Having bureaucrats attack them is something we will learn to deal with as time progresses. We however can not have our people involve themselves in any career risk as a result of being involved in the user community of People, Ideas & Objects. The same can be said for our developers. Bureaucrats have long memories and are particularly vindictive. Our users and developers will be able to handle the abuse, however, there is no reason for them to risk their careers in the oil and gas industry as a result of the bureaucrats cutting our funding and leaving these people to twist in the wind.

Therefore People, Ideas & Objects needs to be funded in its entirety before any development work can begin. The protection the users and developers need to receive will be in the fact that they can finish the work that we set out to do. That we will be able to establish the alternative methods of organization and operate the industry in the manner proposed in the Preliminary Specification. If we do this on the basis of a pay-as-you-go type of development we will be subject to the manipulations of the bureaucrats and their flighty attention spans. These latter two issues also raise the overall business risks that People, Ideas & Objects would otherwise have to overcome.

As I documented yesterday, the history of the industry with respect to the development of any real software systems consists of serial failures. Bureaucrats have shown no initiative and no desire to challenge themselves to do more work and effort than what is required. Secondly, they have never invested the kinds of resources that are necessary to make the changes that are needed. Otherwise the oil and gas industry would not be in the situation that it’s in. For us to proceed without the producers having some skin in the game. Something that will keep their attention beyond the 9% spike in oil prices next Tuesday. It will be necessary for them to be financially involved. Whom is the benefactor of the Preliminary Specification becoming operational?

If I undertake the developments of the Preliminary Specification without the money secured then I am setting myself up for failure. The bureaucrats will ensure that my failure happens. The efforts that I put in from the point where the money is secured will have little to do with the success or failure of this initiative. It will be down to the user community. Establishing their independence is critical for them to succeed. And their motivation is to build themselves the types of organizations that will be the user / service provider that are critical elements of the future industry infrastructure. To get there they will need to have the risks of their businesses mitigated during our initial development. It is the producers, again, who will benefit as a result of this reorganization.

To take into context the $6 billion U.S. that is our budget. Both Chesapeake and Devon each incurred three times our budget during 2015 just in terms of their asset impairments! Also if we take the value of the price declines that are attributable to the overproduction issue. We come to roughly $70 per barrel. $6 billion divided by $70 comes to 85.7 million barrels of oil. That is 9.38 days of U.S. oil production in terms of the opportunity costs that the producers are incurring to develop the Preliminary Specification. And that is just on the oil side. So when the bureaucrats bark about our budget, ask what is it that they are really saying.

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. 

Comparing Capitalization Policies

One issue with the producers 2015 financial reports that I find interesting is the impairment charges that are being realized. In some cases these impairments are as large as the capital structure of the producer. Even Devon Energy, a senior intermediate, has an impairment charge of $20.8 billion that takes out much of the firm's total shareholder equity that stood at $26.3 billion as of December 31, 2014. We also saw Chesapeake’s third quarter 2015 report incur a $15.4 billion impairment. This severely damaging the $18.2 billion in total shareholders equity that they had in December 31, 2014. Isn’t it odd that these are not the numbers that the bureaucrats and the press talk about. They prefer to talk about the gross margin of the firm, so that they can state that the firm’s production remains profitable. What these numbers state, unequivocally, is that the investors and the people in these companies flushed their investors money, time and effort down the toilet for the past number of decades. It's been an exercise of taking people’s money, spending it foolishly on unproductive activities and having nothing of value to show for it. Note that it’s these things that Bernie Madoff is in prison for.

But of course we don’t talk about the impairments. No one cares about these in the industry. They are the sunk costs of the operation and have no effect on the cash position of the producer. All very true. And apparently you can fool all of the people all of the time. Devon was in the market recently, increasing their stock offering to $1.3 billion due to the demand for their shares. This after a drop of 48% of their stock price in 2015, and another 42% drop in 2016. The way that I look at this, is that these capital costs should be considered in determining the performance of the management of the producer firm. Of course they don’t want to be assessed on the same basis as Bernie Madoff but what better example is there? The investors have put their money in, and the stock of the company is, in Chesapeake’s case, worthless, and the activities that they spent their money and time “investing in” are not a self supporting business!

The Preliminary Specification takes particular concern regarding the capital assets of the Joint Operating Committee. (And recall our price maker strategy used in our model.) The SEC requirement is that the producer shall not breach the reserves value times the price of the commodity at the end of the fiscal year. Therefore any reasonable method of capitalization would suffice. The Preliminary Specification wants to achieve a much faster write down of the assets of the firm. Within at least a three year window. Capitalizing only the controllable equipment. Expensing the non-controllable and intangible capital costs will force the management's evaluation of their performance. In a capital intensive industry, the commodities prices necessary to produce profitably will then consider these costs of capital and therefore, while these capital costs are being expensed and written down, the cash from the higher commodity prices, which offsets these expended capital costs is returned to the producer in the form of tax free cash. That is how a business operates. It cycles its costs through the income statement. Storing capital costs on the balance sheet for eternity only leaves the producer with high asset balances, supported by high debt levels and never any cash being generated from the business itself.

Our methodology imputes that the oil and gas industry is an actual business. A viable going concern that is able to support itself without the assistance of constant debt and equity issuances. The bureaucrats never want to account for their performance. Each year they let the capital that they spent build up on the balance sheet as opposed to report their actual performance. When they can no longer hide the fact that they’ve been fooling everyone, and are forced to write these assets down through an impairment, they say these costs are of no concern and are the sunk costs of the organization. These capital costs represent the capital that has been taken from the investors and the banks. Again, oil and gas is a capital intensive business! The bureaucrats desire to ignore the capital that they spent is representative of the fraud that they undertake.

The need for the change to the Preliminary Specification is necessary to rectify this situation. The decentralized production model, our price maker strategy and other aspects of our business model will ensure that a proper accounting is done. This is important to establish the credibility of the industry and begin to address society's needs for the real energy they will need this century, from oil and gas. The focus on profitability is also necessary from the point of view of the future of the industry. It’s not becoming any cheaper to find or produce oil and gas. Each year we can expect to see increases in the costs per barrel of capital, operations, administration and accounting. Clearly accounting for these and having them recovered by the prices that the commodities sell for is what a business will do. And that is what we propose, is to put this monkey business out of business and run it like a business. The bureaucrats should be ashamed of themselves for not accounting for their pathetic performance.

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.