This Destruction Was Deliberate

The investors who have built the producer firm, where the bureaucrats work, don’t call back. The bureaucrats feel they really need to talk. The bank keeps calling, don’t want to talk to them. Partners of the Joint Operating Committees are calling now too. They want to know where their money is. And of course the thousands of robo calls from the service industry. Logistics is now an art of the possible. Getting a truck from point A to point B is a masterstroke of engineering. The staff are all beginning to take on that deer in the headlights look. This is not your confident bureaucracy.

Capabilities. Progress usually denotes that what you did yesterday can be repeated today and at will any time in the future. We don’t have that anymore. We are regressing in terms of our capabilities and the thing that should be realized is that this is what it looks like and it's deliberate. This is indeed what “market rebalancing” is all about. Have the industry erode to the point where the production volumes decline to where they match demand. Uncreative destruction if you will. Brought to you by the progressive and thoughtless minds of the oil and gas bureaucrat.

Well if this is all planned then they should have a solution to get us back to where we were just a few short months ago! I don’t think so. I think this is permanent. We won’t see any “building” process come out of the oil and gas industry until such time as there is a fundamental change in the operation of the industry. Doing the same thing over and over and expecting different results, is the sign of a bureaucracy. I think that’s how that saying goes. Action is required to change the music that’s playing. Without action and a different business model, this is what we will have.

There won’t be anyone jumping into save these carcases. There is too much pain to be realized before any money will be fronted to the bureaucrats. You’d just lengthen the misery and pain for longer and maybe deeper, and as a result lose your investment. Most of the money that has been invested in the industry has already been lost. The perspective that I have been pushing here about bloated balance sheets is becoming clearer in the minds of many. What is the answer to that critique that I have levied on the manner that oil and gas has been managed. Silence.

The investors see that something is wrong. The bureaucracy has done nothing about it. I have been pounding the pavement for over three years with the investor class about my ideas. The situation has come about as I had predicted and the solution to this situation is the Preliminary Specification which the bureaucrats have rejected completely. Who has the better story now. And I don’t really care what the price of oil and gas will be in the future. The reputations of the bureaucrats have been set in the mind of the investor class. The bureaucracy deliberately let things erode to “rebalance the market,” rejected all alternatives, destroyed the business and the investors money. This is all well documented and pretty clear.

A failed business model only becomes evidently clear when it completely fails. I may be premature in my declaration of the oil and gas industries business failure. I should've probably held off for another week or so. We should thank our bureaucrats for being so thorough. They have done a fine job. The difficulty now will be their exit from the scene. They will just disappear in most cases and never account for the mess that has been made. Because that is what bureaucrats do. In every situation such as this, they are the first to jump ship and leave the remains in a complete shambles for others to deal with. Let someone else answer all those phone calls. What’s their upside, as they always like to say?

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

Third Friday Off

No posting today.

An Interesting Dilemma

In terms of building value, the oil and gas industry has been anything but. The money goes in and is never seen again. The bureaucrats take from the banks and investors, spend like drunken sailors, lavish themselves with handsome compensation, destroy the business on a deliberate basis, if I understand “market rebalancing” correctly, and then? What is the next step? I always thought the point of everyone getting in their car first thing in the morning and going to the office was to build value. That the purpose was to increase the worth and welfare of organizations, people and society. This is a matter of perspective as well, possibly, and maybe I need to reorient mine to a more realistic possibility. I don’t think so either.

Cash is king. Meeting payroll has become the task that will never be satisfied as we look at the next six months of difficulties. Extreme difficulties. The difficulty with a cash crisis at this level is that everyone knows it's a cash crisis at this level. Which means that everyone grabs their wallet and hangs on tight to it. Leaving only production, and more specifically new production, as the bureaucrats only source for more cash. This will be difficult to do as well.  As bad as the oil and gas industry currently is, the abuse they have levied on the service industry has been epic. They probably don’t have any gas for their trucks to get to the site to do the job. Nor do they have the food energy to do it anyway. Remember how Encana called these people lazy and greedy just a few years ago. Despicable. The point is the only way the service industry is going to conduct any field operation is with cash paid up front. And only after their years of accounts receivable have been cleared.

As we stated yesterday, Northwestern has the exceptional situation where they have the cash to survive the next six months. This assumes prices remain as they are in the mid $40 range. I wouldn’t be surprised if they toppled back to $26 which would make this the greatest disaster in corporate history. I have been arguing about this situation for many years now. I have spent 25 years coming up with the solution to this problem. The Preliminary Specification deals specifically with the issues facing the industry today. It also renders the bureaucrats redundant. And therefore I have experienced the most abusive treatment at the hands of these bureaucrats that I know anyone else ever has. Am I the only person that saw the difficulties and the flaws in the business model of the oil and gas industry? Maybe. I am however the only one that did anything about it.

Now the producers have put themselves into a situation that is very difficult. The Preliminary Specification costs $6 billion U.S. and has to be paid up front. If you thought we would go forward on a pay as you go basis then you thought that I was a fool. Would you build the Golden Gate Bridge on a pay as you go basis? People, Ideas & Objects budget is beyond what the industry can afford now. So what do they do? Our value proposition is in the range of $25.7 to $45.7 trillion and is proven to provide that value to the producers. It is the best investment the industry can make. It is the best investment any producer could make. Without the Preliminary Specification they have proven that our value proposition is unavailable to them in their current business model. We went through this in the 1980’s and 1990’s. And we’re going through it again. Only now with the added feature of shale based reservoirs to make systemic overproduction a permanent feature of the industry. This has been going on for six years in natural gas and over two in oil. And no resolution.

The producers can cobble together the last cash they have to pay for the development of the Preliminary Specification. And end the reign of the bureaucrats and set the industry on the path of generating value again. Or sit and deteriorate further and faster each passing day. It’s an interesting problem. Who’s going to come to their rescue? They blew every bridge that existed between them and those investors and banks that might have helped. Now they have no way of getting to the bureaucrats, and certainly no desire to get there.

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. 

Energy Self Sufficiency?

It has come to my attention that there is some confusion regarding the determination of profitability in the oil and gas industry. Some people are assuming that if we only produce profitable production then the North American industry will never grow to the size where they can service the North American marketplace. That to achieve self sufficiency in terms of our energy supply would never be possible under the Preliminary Specification. That last sentence I think captures the issue correctly and sets the point for this post. I disagree on both sides of this issue. That we will never achieve energy self sufficiency if the current producers continue to incinerate investor capital. And that the only way we are going to achieve energy self sufficiency is through a dynamic, innovative, accountable and profitable oil and gas producer.

We’re producing all of our natural gas consumption and approximately half of our oil. Therefore in order to double our output of oil production we would need approximately the same amount of investment that has currently been incurred, invested again. That may be simplistic, but for the purposes of this example adequate in terms of logic. We currently have disenchanted investors and bankers. There has been chronic investment in oil and gas for the last few decades. Even when commodity prices were high the amount of the annual investor squeeze didn’t seem to abate in the least. Is it on the basis of this poor performance that we should consider the industry should achieve energy self sufficiency?

Let's take for example the first quarter report of a producer. A random sample provides that the first producer to report is Southwestern Energy Company. They received a 15% bounce in their stock on the basis of the publication of that report. I think the key attribute of the report is that Southwestern was able to tap their line of credit for $2.6 billion before the bank was able to evaluate them. Precluding them from the cash crisis that is the oil and gas industry. However that will be temporary in nature. The results of the lifetime of the company are not that positive. They are now reporting the cumulative losses have totaled $2.3 billion. Meaning that most of the investor money that was given to them was wasted. The key however is to look at the remaining asset value of the company. It still maintains net property, plant and equipment of $6.5 billion. These are the bloated asset balances that I consistently argue against. If the company wasn’t capitalizing everything they touched, these costs would have hit the income statement by now. And under any reasonable assessment, the company is losing money today and is questionable as a viable going concern, in my opinion. The $6.5 billion would be added to the cumulative loss for a total of $8.8 billion.

This is a matter of perspective. I see the company unable to have earned a profit during its lifetime. Its current operations are unable to sustain the organization without investor or banker support. That support has now terminated. Looking to achieve a doubling of output from this base of producer in order to attain energy self sufficiency is delusional. The increased output would cause further erosion in the price of oil and make the situation worse.

The Saudi’s have a three year plan to continue to satisfy their customers. Meaning they will continue to produce at the level they are at or above for the next three years. Southwestern doesn’t have that opportunity. Although it has net cash of $1.4 billion remaining. Just the line of credit will require a commitment of over $800 million in order to keep that facility in place. Operations are going to take at least $400 million during 2016 and the current portion of long term debt could take another $800 million. Overhead costs will therefore put them into a tight cash situation within as little as six months. Remember, they were one of the very few who were able to access their credit facility before the banks review began this April. Many producers were not as fortunate as Southwestern was and we will see which producers that was in the next few days.

The policies of the current producers is that they are unable to economically sustain their current production profile. Or what they call “market rebalancing.” If they let the industry economically deteriorate to the point of destruction of productive capacity, then prices will rise at which time they can start fleecing a new batch of investors and bankers. Brilliant. And it is on this basis that the United States and Canada will become energy self sufficient?

The only way we can achieve the objective of energy self sufficiency is to set out a new basis for the industry. And that is that if the property can produce a profit based on a detailed actual accounting that evaluates all of the costs reasonably. Then the industry could grow its production profile. As the highest cost producers in the world this will not be on the basis of setting out production profile goals. It must be on the basis of operating a profitable industry first and foremost. Only then can the industry conduct itself in a manner that provides society with the energy resources that it needs to fulfill its promise.

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 Material Balance Report

My frustration with the status quo is at fever pitch. I find it best to fight this battle with ideas from the Preliminary Specification. Today I want to discuss the Material Balance Report which resides in and between the Accounting Voucher and Partnership Accounting modules. Traditionally the material balance report was a document used in the downstream part of the oil and gas business. It was used to balance the systems that a refiner and marketer would employ during the month. Either storage or tank car, gathering and processing systems were balanced across what the owner was responsible for. These were required to balance each month and provide a basis of the reporting that is done by these owners.

The issue that the Material Balance Report in the Preliminary Specification resolves is the automation of the administration and accounting processes involved in the production of oil and gas. Today production accountants are employed by the operators to conduct this work and prepare the information to the various stakeholders. These include working, royalty and regulatory interests. Additional information is derived from these such as marketing, revenue and royalty accounting. The process of production accounting is complex and involves the reconciliation of many variables across a plant or system. These can take upwards of a number of months before all of the actual facts are provided to the accountants and they are able to submit the final production numbers. This entire process is currently highly labor intensive. Each change has implications for all the people within the process to amend their information. Several amendments are required in order to eventually balance the system. And what can seem like a complex, disorganized and difficult process is really quite simply the balancing of the production of the facilities, realizing the appropriate prices and inventory implications.

What if we balanced the oil and gas production across the North American producer population. Where the integrity of that system, after a reasonable time had passed to collect the facts, was unimpeachable in terms of the integrity of the production information. I know that the Alberta Government has balanced the province of Alberta’s oil and gas production in this manner for at least the last few decades. And they assess any shortfalls on the producers who they think are responsible for the royalties on those “missing” production volumes. And if we had this level of production data within the People, Ideas & Objects application. Where the industry has their cloud computing provided. Then on the basis of the quality of that data we could automate the subsequent processes that are dependent on the volumetric production data. This can be done.

There will be a variety of modes in the Accounting Voucher that is a Material Balance Report. The Accounting Voucher is the mechanism that we are using to ensure the integrity of the system. The Material Balance Report is a part of an Accounting Voucher with the inherent necessity to balance the financial elements of the voucher. The production volumes will be balanced via three modes known as system balance, partnership balance and material balance.

We are not dictating production allocation methodologies. If a Joint Operating Committee has adopted the chemical composition as the basis of allocation then that is what the production accountant will use. If there is an agreement amongst the participants in the Joint Operating Committee as to what the production allocation will be, then that will be the basis of the allocation. Whatever the current policy is, or future policy of the property is, that will be the allocation method that will be used. What the Material Balance Report provides is the assurance that it is balanced within the property, within the royalty and working interests and the overall production environment as a whole.

I understand the scope and scale of the undertaking of this task that we are setting out for ourselves. To build a system today that does not automate these processes to the highest level, and then iterates on that would be a wasted opportunity. We have budgeted the necessary resources to approach the engineering required to achieve this objective. A budget that is well beyond what is possible for one firm to pursue. It is also something that a single producer is unable to pursue on their own. This must be done from an industry wide perspective so that each producer can benefit from these software developments. Based on my background in oil and gas I know that this can be done. And I know in the Preliminary Specification it will be done.

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.

Game, Set and Match

I kept quiet last week out of a false sense of respect for the bureaucrats. It's not everyday that you have your future painted in such stark and bleak terms as it was last Sunday. We didn’t see any real action in the price of oil, yet. The Kuwait labor situation kept the price high for a while longer. These temporarily higher oil price dynamics should prove to those last few doubters that oil and gas falls under the category of price makers. We had all that build up to the meeting of Opec on Sunday. That an agreement between the parties would eliminate the problems in the marketplace and it would bring sunshine and rainbows to oil and gas again. Didn’t happen. Now we here that the meeting wasn’t that important and that ya da ya da ya da. T. Boone Pickens even tweeted

“#OPEC #Doha sideshow a joke. More significant: Major bullish outages in Kuwait, Venezuela, Nigeria & Ecuador past 7 days. Those matter.”

Well actually those outages have mostly been resolved, and the meeting does matter because it affects the prices today, and what they will be in the future for as long as we can see.

What the outcome of the meeting was is that there is no outcome. Further that some countries, like Saudi Arabia, may increase production by as much as 2 million barrels per day. The Saudi Prince is taking over administration of the Saudi strategy. The Saudi oil minister was mute after the meeting. Leaving the comments to the young Prince. The Prince will be making a major speech on Saudi oil policy soon in his National Transformation Plan and we will see the extent of their commitment to their customers. Just to note, this is no time to be proposing plans, now is the time to accuse others and hang on to fleeting rumors. Anyway, if the Saudi's were to concede the market to the high cost shale producers, eventually they will have low oil prices and no customers. Their current strategy has them holding on to their customers. Theirs is a rational strategy. The North American producer is clutching at straws trying to find some solid ground in which to secure a foothold. Last week we heard that there may be a meeting in Russia in May to reset the production freeze. That Iran is now considering joining in that agreement to freeze production. These are the rumors that you want to base the future of the industry on.

There is no solid ground in the North American oil and gas marketplace. If you take the People, Ideas & Objects hypothesis that the SEC accounting is at fault. That the bloated balance sheets have led to inflated profits, which have led to overinvestment, which has led to the current overproduction. Then the fact of the matter is that after six years in natural gas, and now for over two years in oil. These companies have extinguished every nickel that was ever available to them. They have raided the kids piggy banks and they’re begging for money down at the homeless shelters. Taking this scenario one step further, the companies with bloated balance sheets have borrowed extensively against that spend fest of a balance sheet. Meaning that they are now all highly levered. So badly leveraged that the cash generated, even in a low interest rate environment, cannot pay the interest. They are unable to weather the slightest of storms for any period of time. In the meantime they criticize the Saudi’s for losing money. The Saudi’s have all the money they need to weather this storm for at least three years. What are the bureaucrats going to do for this period of time? Blame others and hang on to rumors?

This is a failed business model. It doesn’t work. The Saudi’s know it. And the North American oil and gas producers better stop coming up with excuses as to why the “other” guy has bigger problems. The biggest international issue in oil and gas is the imminent demise of the North American industry. We can run around in panic or start dealing with this constructively. Ask yourself why is People, Ideas & Objects, through the Preliminary Specification, capable of providing the most profitable means of oil and gas operations, having such difficulty convincing an industry that is in this state of financial affairs? Is it because I’m unkind to bureaucrats? I think someone should be telling the truth about the situation that is going on in the marketplace. It’s because the bureaucrats don’t care! And that is unacceptable.

If you believe that this will be resolved in 2016. It won’t. It won’t be resolved until 2025 which will be the day that North America stops any and all oil and natural gas production. For good. Then of course it will be someone else's fault just as it is someone else’s fault today. When are we going to put the big boy pants on and act accordingly? You don’t like being talked to this way, tough. I don’t like seeing a major industry flushed down the toilet due to bureaucratic laziness and self interest. Particularly when it’s unnecessary.

And let's not argue that we’re profitable. The cost to produce in North America is well over $100 / barrel by my calculations. Those numbers floated around that say producers can produce at $30 / barrel are what are called “recycle costs.” Show me the video of the CFO of any firm stating unequivocally that his firm’s costs are $30 / barrel. Recycle costs are fairy tales. Not one accountant was employed in their production. Not one CFO will stand behind them. They are fudge. Not one historical fact is included in them. Not one actual cost was employed in the development of them. They are myths. Based purely on the fact that today’s price of $40 means we can produce profitably at $38. And tomorrow when the price is lower the cost will be lower, just like that.

We’ll be seeing the extent of profitability starting this week with the 2016 first quarter earnings. If all these producers were making profits at $30 then it should be clearly evident. Otherwise we can continue down the road with the story of the day scenarios for as long as the bureaucrats want. The fact is these stories are getting tiresome and their switching from one to the other as soon as they are proven wrong is beginning to be noticed. And these financial statements will show there is just no cash. Action is needed now to fund the Preliminary Specification. We have many years of work ahead of us and much to do.

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 Work Order System

Within the Preliminary Specification, in addition to the Job Order we discussed yesterday, we also have what we call a Work Order system. It serves two roles in the dynamic, innovative, accountable and profitable oil and gas producer. The first is that it captures the costs of the technical resources of the producer and charges them to the appropriate cost centre of the producer or Joint Operating Committee. Secondly the Work Order provides a means in which producers are able to quickly organize an ad-hoc working group to study or research specific elements in the technical fields. The simplicity of the concepts surrounding the Work Order are complicated in the Preliminary Specification when we move to use the Joint Operating Committee as the key organizational construct.

As we have discussed in the past few weeks the sources of revenue of the oil and gas producer under the Preliminary Specification consist of oil and gas revenues, and the deployment of their earth science and engineering capabilities to the Joint Operating Committees that they have an interest in, and to other producers who may be looking for the specialized capabilities of the producer's talents. Therefore we need the Work Order system to collect the costs of these resources and either bill them to the joint account or an internal overhead account. Or alternatively they will be part of the Cost of Goods Sold in the sale of these capabilities.

Staff of the producer firm will need to be charging their time to an overhead account or Joint Operating Committee AFE or lease at all times that they are on the job. This will record their time, their payroll costs, and the fees at which they can be charged to the Joint Operating Committee. It will also be necessary to determine what a charge out rate will be for these resources in the event that they are billed to a third party producer. Under the Preliminary Specification this system will be intuitive and simple to implement for each of the staff. Through a smartphone app they will be able to detail exactly what work they are doing and who is responsible for their cost while it is being incurred.

As with everything that we do in the Preliminary Specification. We are never limited to the sole producer in terms of the application of our domain. Frequently we need to look at the situation from the point of view of the industry. And that is the case with both roles of the Work Order. The Work Order that would be billed to a Joint Operating Committee will need either an AFE or a lease code to ensure that approval of that time is authorized. This authorization would occur at the time the user logged on to the specific Work Order. The Work Order that the staff from producer A may be working on an AFE for a Joint Operating Committee of producer B that producer A has no working interest in. The need for the Work Order to scale across the industry is a feature of the Preliminary Specification. This is also a critical element of the second use of the Work Order.

What we learned in terms of what an innovative oil and gas producer needs is captured in the Preliminary Specification. One of those needs is that the base of the industries research needs to expand. Critical to this expansion is the ad-hoc working groups that independent producers set up to study specific elements of interest. It is People, Ideas & Objects opinion that we need an order of magnitude increase in volume of these working groups to be established to enhance the innovative foundation of the industry. It is also our opinion that the impediment to this is the bureaucratic nightmare such a volume of ad-hoc groups would create for the industry. Participation in these is low due to the high level of moral questioning undertaken by the accountants trying to reconcile the costs to how the deal was structured. Leaving the earth science and engineering people to swear never to attempt to do such a thing in the future, and reinforcing the love affair between accountants and engineers.

What the Work Order does is establish an interface that is industry based in terms of its domain where the elements of the “deal” can be captured in the Work Order. Company A will contribute the seismic, company B will contribute cash, company C will contribute the staff, etc. All will share in the outcome, the results and the data. An accounting nightmare. However, once a deal is captured in the interface of the Work Order, the participants will know that the accounting will be processed on that basis and none of the accounting questioning, if any, will be about their moral fibre. Then the ability of the industry to accelerate its innovativeness on the scientific basis will begin.

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 Job Order System

It's a battle of ideas so far this week. I mentioned the Work Order and Job Order systems of the Preliminary Specification and how they enable the producer and Joint Operating Committee to implement the tacit knowledge of the producers within the Joint Operating Committees. I wanted to discuss these further and reflect on how they enable greater levels of innovation to be generated through the industry. We’ll discuss the Job Order today and the Work Order tomorrow.

The Job Order system is a means in which the Joint Operating Committee is able to document the command and control of their operations. Within the Preliminary Specification we resolve the demand for earth science and engineering resources, the talent that will be retiring in the next decade, and the demand of the sciences to expand based on a further specialization and division of labor. Hypothesising that these two elements will disable most producers ability to attain what is commonly known as “operator” status. The breadth and depth of these resources within one firm will require such scope and scale that their costs will no longer fit within the commercial environment.

We resolve this through the concept of pooling these technical resources through the Joint Operating Committee. As each producer within the partnership focuses on their specialized and key competitive advantages in the earth science and engineering capabilities. It will be necessary to pool the specializations of the producers in order to attain the “operator” status from many producers. Including producers who are not party to the Joint Operating Committee. Therefore a means of command and control over any operation within the Joint Operating Committee is going to be necessary from that Job Order system. A system that spans the organizations represented in the Joint Operating Committee.

In order to facilitate this there needs to be a command structure that is put in place over the technical resources that are dedicated to the Joint Operating Committee. Within the Preliminary Specification we call this the Military Command & Control Metaphor. A bad name I know but it will be up to the user community to come up with a better one. This will allow the technical resources to recognize a chain of command and to enable the designation of authority and other attributes necessary for the organization to function and document the activities within and throughout the operation.

Multi-lateral and Multi-frac wells are rather large and expensive operations. For that matter drilling a conventional well is a large risk for most producers. The need for operational control is not a nice to have, but a necessity. Innovation is not the counter to tight operational control. If anything you can’t have innovation in a free for all. The need to have integration of the oil and gas and service industries to the level discussed here in the Resource Marketplace module is a large and expensive undertaking. In terms of operational control the “Capabilities Interface” of the Research & Capabilities module provides a means to have everyone on the team operating from the same hymn sheet. Everyone knows what the plan is and everyone knows what everyone else is doing. Now we need a means in which to execute the plan. In the “Planning & Deployment Interface” as well as in some of the other interfaces, users will have access to the “Job Order System” of the People, Ideas & Objects application. This will provide the ability for a member of the operational team, with the operational authority as designated in the Military Command & Control Metaphor, to issue a Job Order to execute a certain operation. Simply nothing is done during any field operation without the Job Order being issued.

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 Price Maker Strategy

The overproduction in both the oil and gas market will continue for the following reasons. Bureaucracies don’t change, ever. Shale formations are prolific. Introducing the motivation to expand the value of the firm substantially by increasing shale exposure. And the accounting for the past 40 years has created a culture where the balance sheet stores the capital costs incurred forever. Leaving the revenues to never recognize the high costs of capital of the business, overstating the reported earnings, leading to overinvestment and overproduction. A trend that we saw play out for almost two decades in the 1980’s and 1990’s. Now People, Ideas & Objects have come up with the Preliminary Specification and its decentralized production model. These, in addition to many other attributes, provide the dynamic, innovative, accountable and profitable oil and gas producer with a price maker strategy. What is this, and how does it work.

Price maker is the economic definition of the marketplace for the oil and gas commodities. These commodities have been misunderstood by the producers to be price takers. That any production of theirs will not have a material effect on the price of the commodity, therefore the structure of all of the producers is to produce at 100% capacity. This is the high throughput production model which seeks to cover the high costs of their overhead with full production. Price makers will only produce volumes of production if the production is profitable. Applying these principles to the price taker marketplace of bottled water we find that no matter how much bottled water you produce the consumer will always pay approximately the same for the product. Whereas the oil and gas commodities prices have collapsed upwards of 70% and more on the basis of as little as 2% overproduction. Characteristics of a price maker. Oil and gas commodities are price makers and the Preliminary Specification corrects the industries misapplication of price taker. For further clarification of the technical requirements of price taker and price makers, see the economic definitions here.

The next change we need to make is to the accounting for oil and gas. In order to determine if the Joint Operating Committee or property is profitable we are going to have to have a clear and concise accounting. We have as the basis for this the foundation of the Statement of Expenditures for capital costs, and the Statement of Expenditures for operations in the oil and gas industry. These are enhanced in the Preliminary Specification by the removal of overhead allowances and replaced with the actual overhead charges of the service providers that we will discuss in a moment. These service providers will be charging their actual overhead costs of accounting and administration to each Joint Operating Committee on a monthly basis. Therefore we will have a clear revenue, less royalty, operating cost, overhead and capital allocation to determine the profitability of the property. If it is profitable based on this detailed, actual cost accounting it will continue to produce.

The structure of the producer and the industry are changed in order to obtain the price maker strategy for each producer. The prototypical producer will be a stripped down version of the current organization. It will consist of the C class executives, earth science and engineering resources, landman, some legal and support staff. The remaining accounting, administrative, production administration, land administration and exploration administration resources are reallocated to the service providers that we mentioned before. The service providers are headed up by the user community members of the People, Ideas & Objects user community. They focus on one process and service the entire industry as their client base. Therefore if the property is unable to produce a profit, based on that detailed, actual accounting, the property is shut-in. The service providers therefore do not receive any information from our task and transfer network in which to work on that property. Therefore there will be no billing from any of the individual service providers. The Joint Operating Committee will therefore be recording a null operation. No revenue, royalty, operating costs or overheads. Some capital costs may be incurred during times when a property is shut-in. These null operations will replace the losses that are being incurred in the industry today and are diluting the profitable operations of the producer. These null operations will also stop the costs of the current losses having to be recovered from the existing reserves, in addition to all of the properties capital costs that exist today. They will remove the commodities production from the commodity marketplace allowing the marketplace to find the marginal costs, based on a detailed, actual accounting. And will raise the prices realized for the producer on the other profitable properties that they are producing.

The bureaucrats need to be in control of the industry. The Preliminary Specification disintermediates the bureaucrats in the manner that Uber eliminates the need for taxi commissions and taxi dispatchers. The Internet doesn’t exist, and will never exist in the bureaucrats world. So we must wait until they tire of beating me or retire from the scene. One way or the other the Preliminary Specification will be the method that the industry operates. Just don’t mention that to 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. 

Processes and Capabilities

Working to win the battle of ideas in these next few months we were recently discussing how the Preliminary Specification was built on the foundation of innovation. Using the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable producer. Whereas People, Ideas & Objects aligns the compliance and governance frameworks of the hierarchy with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee. Doing so provides the oil and gas producer with the speed, innovation, accountability and profitability that we seek in our organizations. How this is done is partially through the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. It is through these two modules that we manage two large processes within the producer firm and the Joint Operating Committee.

The first key process is the development and deployment of the innovations that are generated. What is unnecessary and should be avoided at all costs is each Joint Operating Committee field testing their own ideas on what to do to expand the sciences and the capabilities of the producers involved in the Joint Operating Committee. This would be redundant and lead to a disorganized mess in no time. Having anything of value generated would be happenstance. With the ability to deploy any innovation further within any of the producer organizations coming close to a lottery in terms of its probability of success. That is not how the industry can move forward constructively. The Research & Capabilities module enables the producer firm to structure a division of labor between those that will develop the research and innovations within the producer firm, and those that will implement and deploy the innovations within the Joint Operating Committees. This deployment is through the Knowledge & Learning module.

The other key process that is managed in these two modules is the removal of a major conflict that exists within each oil and gas producer. That is an organization must either move the knowledge and capabilities to where the decision rights exist, or alternatively move the decision rights to where the knowledge and capabilities reside. In oil and gas the producer designated as operator has the knowledge and capabilities to operate the properties. They however do not have the decision rights. Those decision rights are held by the Joint Operating Committee in the operational decision making framework. These are defined by agreement at the beginning of the project and are voted on by the representatives of each producer at the Joint Operating Committee. To remove this conflict we can either move these decision rights to the operator. In which they would have de facto control of the property. Or we can move the knowledge and capabilities to where the decision rights reside. In the Preliminary Specifications Research & Capabilities and Knowledge & Learning modules we enable the process to move the knowledge and capabilities of the producers to be available to the Joint Operating Committee.

Finally I want to revisit the question that we answer in great detail in the Preliminary Specification. And that is, what are capabilities? We have a variety of excellent academic definitions of the capabilities of a firm which include the following. Quotes are from Professor Richard Langlois “Transaction Costs in Real Time.”

‘Routines,’ write Nelson and Winter (1982, p.124), ‘are the skills of an organization.’ p. 106

What we capture in the Research & Capabilities and Knowledge & Learning modules is the explicit knowledge of the organization. The tacit knowledge can not be captured, however is deployed through our Work Order and Job Order systems.

Such tacit knowledge is fundamentally empirical: it is gained through imitation and repetition not through conscious analysis or explicit instruction. This certainly does not mean that humans are incapable of innovation; but it does mean that there are limits to what conscious attention can accomplish. It is only because much of life is a matter of tacit knowledge and unconscious rules that conscious attention can produce as much as it does. p. 106

Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. p. 359

Although one can find versions of the idea in Smith, Marshall, and elsewhere, the modern discussion of the capabilities of organizations probably begins with Edith Penrose (1959), who suggested viewing the firm as a ‘pool of resources.’ Among the writers who have used and developed this idea are G.B. Richardson (1972), Richard Nelson and Sidney Winter (1982), and David Teece (1980, 1982). To all these authors, the firm is a pool not of tangible but of intangible resources. Capabilities, in the end, are a matter of knowledge. Because of the nature of specialization and the limits to cognition, organizations as well as individuals are limited in what they know how to do effectively. Put the other way, organizations possess a pool of more-or-less embodied ‘how to’ knowledge useful for particular classes of activities. pp. 105 - 106.

Professor Carliss Baldwin provides us with a further definition of capabilities as “knowledge beget capabilities, and capabilities beget action.” Lastly Professor Richardson also notes that capabilities are the “knowledge, experience and skills.” (1972, p. 88) I would note that People, Ideas & Objects have added “ideas” to that to read “knowledge, experience, skills and ideas.”

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.