Canada Eh!

We’ve noted these next six months will be difficult in the oil and gas industry. Then again maybe Opec will solve all the overproduction issues by cutting their production and shale producers can then produce as much as they want and continue drilling for more! Bureaucrats should notice that proposed cuts in production do have an upward increase in prices which supports our Preliminary Specifications price maker strategy. Has anyone noticed these stories out of Opec seem to be serially produced fairy tales, or are bureaucrats really buying what they’re selling. Maybe I’m wrong, and something will come out of the meeting. Before we would know we’d need to see the formal seating plan for the members at the meeting. If that issue is ever is settled then I might begin to believe. Here in Canada things will be very desperate for the next six months and will dive into the deepest of ditches after that. The desire to fix the overproduction doesn’t exist in Canada either, and we are about to begin significant overproduction of natural gas.

I read the other day that the Marcellus regions producers are focusing their marketing efforts on the Ontario and Quebec marketplace for their natural gas. This market has traditionally been serviced by the Western Canadian based producers in the form of a multi-billion dollar pipeline from Alberta to those markets. With this distance you can be sure the tariffs are significant which makes the Marcellus gas attractive at one sixth the overall distance. Canada used to produce 16 bcf / day and now produces only 12 bcf / day. This is mostly due to the lack of export demand into markets in the U.S. that are now serviced by the American shale producers. If U.S. shale begins to provide Canada’s two largest populated provinces with their natural gas, there will be little demand for that current 12 bcf / day of Canadian production.

Our current federal government is about to bring about its first budget which I think in traditional Trudeau fashion is going to shaft the province of Alberta by cancelling any pipelines under review, in the name of global warming. Therefore I think it’s going to be a hard time in Canada for the next few decades to find work in the oil and gas industry. Bankruptcy trustees aside. There is a notion in the snowboard instructor, bar bouncer of a Prime Minister that we have that we should be more focused on the manufacturing areas of the economy. The oil and gas, and coal are dirty and really beneath Canadians. We Canadians like to just tag along when the going is good. My recommendation is don’t buy real estate in Alberta.

Somebody else will always fix the issues in the oil and gas marketplace. That’s the position of the bureaucrats who reside within the investors and producers. No matter what, they don’t have to do anything. Someone else will fix their trillion dollar issues for them at no cost to them. I really should have accepted this logic when I began this initiative so many years ago. I could have started coding the Preliminary Specification at the start and we would therefore be only 4,975 man years from completion. Which is what I think is missing from the equation in being assessed as not doing enough, I can’t produce an iPhone app that organizes the industry in the manner of the Preliminary Specification. With the user community, and service providers where the producers only produce if it’s profitable based on a detailed accounting. This of course would sell for $1.99 and be available in an Android version as well.

Well I know what I need to do now, that $1.99 will come in mighty handy I can tell you. But then that just shows you the value of technology today, solve a multi-trillion dollar industry wide issue with a $1.99 app. Who would have thought.

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. 

Our Low Interest Environment

The Federal Reserve is in the news once again. Changing their position on interest rate increases for the remainder of 2016. Having such low rates in the marketplace has been the wrong policy for about four or five years. It’s time to return to normal and stop the chronic bad decisions that are being made in business and in individuals personal lives from such low rates. Here in Calgary people are buying their first homes with $400,000 mortgages which is about as bad a decision you could make in your life. You could never pay that amount of money off, and at some point regular interest rates will resume and you will have valued your debt at that ridiculous level. With housing values based on the carrying costs of the home, in an era of rising interest rates, your home could be worth half of your mortgage in just a few years. Then what do you do. Its these kind of bad decisions that need to be avoided by increasing the interest rates to normal now.

The same can be said for the business community. All investment decisions are based on the anticipated return and its performance in the marketplace. When secure investments provide no return, pretty much any kind of investment appears to make sense. This leads to the overproduction that is systemic in a disinflation and deflationary environment. One that low interest rates are attempting to avoid.

I want to make it clear that I don’t think low interest rates are what have lead to the systemic overproduction of the oil and gas commodities. Opec is certainly a constant that appears in the oil markets of today and of course back in 1986 through to this century. They had upwards of 10 million barrels of surplus capacity that was believed to be part of the reason for the low prices in 1986. I think however you have to look at the business model of the oil and gas industry, on an international basis, in order to find the real reason behind the systemic overproduction. And that business model is the high throughput production model. It takes significant infrastructure in order to be an oil and gas producer. These infrastructure costs are what drive the need for more production. In addition, the never ending demand for higher production volumes from the investment community is further application of the high throughput production model. The element of shale, on top of the inherent overproduction arising from the high throughput production model is the toxic destructive environment that demands a solution in both commodities.

Whether we agree on the aggravating causes of the price declines over the past history of the industry is probably unnecessary. We could all agree that shale is an aggravating factor that will not be handled without some intervention in the market in the short to mid term. Shale has changed the oil and gas business fundamentally. Moving it from commodities that are scarce to abundance in a material way. As a result what the Preliminary Specification seeks to do is to move the industry to our decentralized production model and away from the high throughput production. Turning the producer from a reliance on their administrative and accounting infrastructure, to a reliance on the industry based administrative and accounting infrastructure of the People, Ideas & Objects Preliminary Specification, our user community and our service providers. And therefore turning their infrastructure costs from fixed to variable in nature.

Making the change to the existing oil and gas producers is not something that is contemplated as being a possibility. Organizations don’t change, but people do. The bureaucracies that exist today are the same that began in the 1920’s, only accelerated by today’s computer technologies. The hierarchies useful life has ceased to exist in many of the industries that have been disintermediated. They are replaced by networks of people who are capable of dealing with the opportunities and issues in the specific industry. Changing a hierarchy into a network would require the energy equivalent of what we have in all of the shale based reservoirs today. You won’t see me volunteering for such a frustrating and difficult job as that. We are relying on the forces of creative destruction to make the change from the hierarchy to our networked world quickly and effectively through implementation of the Preliminary Specification. We should thank the producers for following our script so diligently to this point, failure has a distinct feeling, now if they would just step aside.

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. 

Low Water Mark

You want to establish a high water mark in terms of your performance during your career. The proven track record that you can succeed at a high level consistently. In oil and gas the bureaucrats have now established the low water mark in terms of how bad they run the industry. In these days where the oil price reaches $40 we get the sense that the worst is over and the good days are around the corner. To establish the pressing need for change in the bureaucrats now would be a hard sell, don’t you think? They were able to muddle through the worst period the industry has seen and they were never challenged in terms of their franchise being questioned or challenged. That is other than by a blogger. There were no calls to make the necessary changes to the business model, just to wait out the time necessary for “market rebalancing.”

I have argued that the next six months will be by far the worst period that the industry has ever seen. These temporary price increases will not last much longer. It appears to me that people are covering their shorts in both the stock and commodity markets. This attitude of the bureaucrats is telling. They did nothing then, and they’re feeling bolstered by the prospect of the good times. Time to start working on fixing up the cabin for the upcoming season. My visits to downtown Calgary reflect that the planning and execution of the summer time activities is well on the way. There is no discussion of business that you overhear. It's all personal business that is the topic of discussion. The pace in which people walk from point to point has a sense of entitlement and leisure that I have never seen before. There is no sense of urgency anywhere. There is no concern as to the future of the industry or their business.

We sort of new the store wasn’t being minded by the bureaucrats all along. They don’t care. The oil and gas industry is ripe for disintermediation and the destruction that it has set itself on. If the bureaucrats don’t see it now, and are not concerned in the least, then they won’t be part of the battle of ideas that will be raged in this next six months. They have nothing in this field. Other than rebalancing the market which has been the operating strategy in natural gas for six years. Nothing is being offered as a strategy or idea by the bureaucrats. Six years is an economic cycle. Is the oil and gas investor expected to sit out many economic cycles in order to treasure an oil and gas investment? Other than the Preliminary Specification, there is nothing, just a quiet, passive death of a way of life known as the old oil and gas industry.

This is the standard of expectation of an oil and gas investor! How the bureaucrats were able to get away with this is unknown. Our own campaign in the past three years has generated no interest from these investors. They must feel that our value proposition does not build the trillions of dollars of value that these bureaucrats are losing for them. Whichever. The point of the exercise is that disintermediation is occurring in all industries. Information Technology is defining new ways to organize and build value where the old can’t. This is the larger trend that People, Ideas & Objects needs to tack towards. Holding out the trillions in our value proposition in terms of the prize that is available to those that are willing to do a little hard work here. What we see in oil and gas today is an industry that will do nothing to defend itself or offer up any challenge or resistance. The investors who have been taken to the cleaners apparently couldn’t care less either. An industry that is well past ripe for the taking.

What we have also learned through this process is that it is not enough just to own the oil and gas assets. Now, in this Information Technology driven world it is necessary to have access to the software that makes the oil and gas asset profitable. The existing bureaucracy have proven themselves to be a complete failure and incapable of being resurrected as a viable going concern. Now we just have to position ourselves in the manner to disintermediate the industry.

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. 

Some Operational Concerns

Only a fool would continue operations as we are at People, Ideas & Objects without a penny from the bureaucrats in these past 25 years. Especially after having been assessed by the investment community of not doing enough to solve their trillion dollar problems. Yet here we are. Well I take offense to being called a fool, and would state that you don’t have to be crazy to do this job, but it sure helps.

We’ve had a lot of fun this past week highlighting the conflict and contradictions that we find ourselves in. Bureaucrats are bureaucrats whether they exist within the producer firm or in the firms that invest in the oil and gas producer. And those investors continue to invest in the oil and gas producers. My argument about investors subsidizing consumers for their costs of energy doesn’t seem to have been made. Maybe the oil and gas investors should just buy the commodities instead of the producers. They’ll get the same performance but with no risk of the firm defaulting. Which brings into question what is it that the bureaucrats are doing if they’re just mirroring the commodities moves. I thought I read somewhere at sometime that the point of management was to eliminate the downside risk of investing in the commodity.

One area that the bureaucrats criticize me for is the broad scope and scale of the Preliminary Specification. Applying this across the industry would be difficult and doesn’t seem, to them, to be a viable solution to the issues facing the industry. I agree with the scope and scale point of view. It is very broad and includes the accounting, administration and operations of an oil and gas producer. Which raises the question how is it that the bureaucrat is able to cobble this solution together within their own shop, but feels it would be impossible on a broader scale? I will have a much more efficient budget where the costs of operations will be covered on a greater percentage basis than they can achieve. For example, the costs of managing an email server takes 30% of one individual's time within the producer. Whereas it may take ten fully committed specialized team members at People, Ideas & Objects. Yet these ten team members costs when allocated over the production profile of the industry will be mere pennies on the dollar compared to the individual producer's costs. We also have the advantage of specialization and the division of labor to expand the industries capacities and throughput when and where it is necessary. These traditional economic tools are not available to the bureaucrats small internal technical teams with their limited capabilities when applied against this broad scope and scale. We also have the budget in terms of our ability to research and develop new initiatives and capabilities that will provide value to the producers in the future. Something that the producers don’t appear to have today.

If we were to commence developments without the full budget secured. Then we would be at risk of having the bureaucrats cancel our project each time the price of oil went up by more than $2.00. Their attention spans do not breach the next quarterly report. Therefore we need to have these resources secured to ensure that the outcome of the project is viable, but there is a far more important issue here. The bureaucrats are vindictive and will take the baseball bats to those that are involved in this project. If those people find that their opportunities in this initiative are suddenly cut off, then they’ll only have the angry, vindictive bureaucrats to deal with to save their careers. No one should have to commit career suicide in order to save the industry from these most lovely people.

I want to point out why Exxon, BP, Shell and Chevron can’t go it alone in terms of their own systems development and why we need them in the user community. The big guys like to do things their own way and we can all understand their reasoning for that. But we need them. It is their production profile that will be responsible for offsetting much of our costs. Or in other words they’ll be paying most of the freight. They’ll be doing that anyways with their own systems development, and once their system is built there will be no one else that’ll touch it. Is Devon going to want to use a system that was developed by Exxon? People, Ideas & Objects independence from any individual producer, working on behalf of the best interests of the producers, providing producers with the most profitable means of oil and gas operations, is the objective way in which all producers, large and small can willingly use a system that was designed and developed by a user community.

I’d also like to point out the recent discussion we had regarding IBM and Oracle’s participation in the oil and gas ERP marketspace. After many years of trying to secure support from the producers they were wholly unsuccessful and left the market. All of the producers stood united together expecting that the Information Technology vendors would be the ones that “invested” in the producers ERP applications. IBM and Oracle could see the devastation that had been created in the oil and gas ERP space over the years. For more on that read our Revenue Model. Now, outside of the existing SAP and P2 installs which have no further development plans, there is only People, Ideas & Objects who have a value proposition in the trillions of dollars, which coincidentally has been determined to be not a good enough effort by the producers and their investors. The fact of the matter is they wouldn’t do anything then, and they don’t do anything now. The only difference today is that I have provided them with a comprehensive vision of how and what the producer and industry would need to operate in order to earn our multi trillion dollar value proposition. Creative destruction is about the old being washed away by the new. We obviously don’t know who will be the ones who step up to earn those trillions of dollars. What we do know is it's not the existing bureaucrats.

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

Options for Investors

What the oil and gas investment community should be thinking about these days is their options for dealing with the difficulties they are experiencing in oil and gas. I have to assume that at some point the story that the market will rebalance itself is going to begin to look a little tired. Someone is bound to notice that it’s the same story that’s been told for almost two years in oil, and for six years in natural gas. And its not working. We should ask the bureaucrats, what exactly it is they’re doing? Is there anything being done? How have things changed as a result of the discovery of shale based reserves, and how will these changes fix the issues we are experiencing. These I would expect would be the questions that are being asked in the marketplace.

I sat in amazement in the 1980’s and 1990’s when all of the producers, and I mean all of the producers, continued to overproduce oil into the marketplace. It was clear to me that if each producer was to shut-in some of their production, and only a very small percentage of it, then they would experience significant increases in price, revenues and finally earn some profits. This never happened and the producers only complained about how bad it was and waited for the market to “rebalance” itself. After what I think was at least 15 very bad years the market rebalanced itself and things resumed somewhat with prices that at least covered costs. Why did they continue to overproduce? Because that is the way they are structured. They can do nothing but produce at full capacity at all times. What would enable the producers to change to a more appropriate method of organization? What was that method of organization? And could it continue to meet the needs of the marketplace and to also earn a profit?

Then in May 1991 the vision of the Preliminary Specification came to me. Now not in a coherent, expressible way that made sense. I knew however that given time I would be able to solve this problem. I also knew that software was the means in which to implement the solution. I then started out with these ingredients, built a team, promoted Oracle on this vision and raised some money. We then began developments on a solution to solve this vision that I had. The history of the next six years is well documented in this blog. Unable to continue with the software developments, I was still able to work on solving what eventually became to be known as the “business model.”


In 2000 I started my MBA with the specific purpose of fully vetting my ideas through the process of that education. It was in the process of writing the proposal for my thesis that I finally determined that the Joint Operating Committee was the key organization construct of the dynamic, innovative, accountable and profitable oil and gas producer. I then ran around town announcing that it was the Joint Operating Committee that was the answer to the problem and most people looked at me and asked what exactly was the question. Many of the very senior people in the industry fully understood the implications of using the Joint Operating Committee. I also knew that although I solved the problem, the implementation needed to be determined. That is, what would the industry and the producer look like and operate as if we adopted the Joint Operating Committee as the key organizational construct.

The Preliminary Specification which represents the codified research that determines what the industry and producer would need to look like and operate as if we adopted the Joint Operating Committee as the key organization construct was completed on December 20, 2013. It total’s 175,000 words and is based on the 1.5 million words of my research that have been published on this blog. That was a little over two years ago, based on a vision that I had almost 25 years ago, about an issue that I saw in the industry around that time. Some may think I haven’t done enough, but then I’m the only one who did anything.

The point of this history lesson is that the bureaucrats have rejected the Preliminary Specification in its entirety. It eliminates the bureaucracy through the technology that disintermediates the industry. A phenomenon that is happening in every industry, and one that is being battled between the old and new ways of doing things. If there is to be a third way that is generated to operate the industry. That is if you think the bureaucracy is as much of a dead end as I do. To generate a new implementable business model could be available as soon as 2041. I wonder what things’ll be like 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. 

Stealth Mode

We have to focus on what we can do to solve the issues that are present in the oil and gas marketplace today. Our primary time constraint is the development of the user community. If we had our budget in hand it would be the development of the user community that would dictate the pace in which we developed the Preliminary Specification and our delivery date. Since we published the Preliminary Specification, development of the user community has been our primary focus. With the Internet we have the means in which to communicate with people of similar mindsets and prepare them for this work. Giving us the opportunity to state that we are working as quickly as we possibly can to solve the issues in the marketplace today. That those people who are out the trillions of dollars don’t see this, is one of those unique contradictions that we all know and love in the business world. Maybe they’ll realize the bureaucrats are feeding them a line and understand who is really working for their best interests. In time they may see that our efforts are to provide them with solutions to the bureaucrats failings, and that by providing them with options gives them the choice to move in the appropriate direction to solve their problems.

Our user community is the critical element of People, Ideas & Objects products quality. And they are much more than that. They are the means in which the oil and gas industry will affect the administration, accounting and operational strategies and changes in the industry. Software defines and supports the organization. As the bureaucracies have shown it turns them into unchangeable cemented fixtures. Without a dynamic user community with the power and control over the software that defines and supports the organization then there will be no dynamism in the oil and gas industry. We will simply re-cement the industry with the Preliminary Specification and live with the consequences of that. Not an acceptable outcome. We look to our user community to also provide the service provider organizations that will deliver our software and their services to the oil and gas producers.

The capability of the user community to enable this dynamism in oil and gas is provided through the user community vision. This grants them the effective control over all aspects of the software and ensures that they are the ones that are seen as the people who are able to make the necessary changes. People, Ideas & Objects software developers are blind, deaf and dumb to anyone and everyone other than the user community. We will have no Service Level Agreements with the producers. It will be the user community that is the exclusive organization in which to deal with the softwares form and function. The user community is designed to include approximately 3,000 part-time members and each will have an interest in one or more service providers that are providing a processes management to the entire oil and gas industry as their client base. Through licensing it is the user community that has full access, control and development of the Intellectual Property that makes up the Preliminary Specification and its derivative works. It is this power that will make them the effective go-to group to have the industry's problems solved. Which bureaucrat do you go to today to have your issues resolved? And if you find one, will they have the power to do anything?

We have set up a process where people can apply to become members of the user community. No one better than I understands the vindictive and insidious way in which the bureaucrats operate. This application process remains completely confidential until such time as the full resources of our budget are secure. There is no reason that anyone needs to risk their career as a result of being seen to be involved in this initiative. You can think of us as being in stealth mode until such time as it is safe from the likes of our good friends the bureaucrats.

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

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.