Victoria Day in Canada

No posting today.

Credibility

In the last two days I have detailed the reasons that the oil and gas industry is in the state of decline that it’s in. That accounting and economic misinterpretations have negatively influenced the culture of the industry. And the primary reason for this decline is inaction by the bureaucrats whose motivation is inconsistent with the needs of the industry, the investors, the people who work in the industry and the service industry. Bureaucrats are, as I have stated, only lining their pockets at the expense of others. They have a healthy operation that has served them well for the past several decades. Their motivation is to hold still to keep the status quo filling their pockets.

And let me be candid for a moment. It could be stated that Bernie Madoff didn’t fully comprehend the accounting principles in which he was reporting to his investors. And it also could be stated, in Mr. Madoff’s defence, that he misinterpreted some of the fundamental economic principles of the work that he was doing. Others, and there are many, think he’s a crook. Madoff went about misrepresenting the value of the assets that he held and reflecting higher profits than what the fund was earning. His operation was stopped when the FBI no longer accepted the story that was being told in his statements. Otherwise Mr. Madoff would have continued with his operation to this day. So when oil and gas bureaucrats talk about rebalancing the market, which is also known as deliberate destruction, what are we really talking about? Are they just trying to keep the operation going for a while longer? Or are they trying to get to the core of these issues and resolve them?

At what point does an industry move from being given the benefit of the doubt to being questioned as to its motivations? We have had a difficult past decade since 2008. The financial crisis. Natural gas prices collapsed and continue to slowly erode. The natural gas overproduction was then matched by the overproduction in oil to cause both sides of the business to be in difficulty. A situation that hasn’t happened before. Is this environment the one we should learn to accept as the norm with the lethal combination of shale and bureaucrats? The decline in the business has created the narrative of “market rebalancing” that took us through 2015’s earning season and annual general meetings, only to lead to no action, no plan and no discussion of the issues. Only destruction. It's at this time that the bureaucrats can start the party for the next eight months? No need to account to anyone.

How much of your money are you willing to invest in Bernie Madoff. And the related question, how much are you willing to invest in oil and gas. I wouldn’t touch either with a ten foot pole. Both have serious credibility issues that are unresolved in the marketplace, in my opinion. I think until those issues are resolved the credibility to raise any money will be in jeopardy for any serious producer seeking any serious money. And maybe I’m late to the game here. Or maybe I’m the one that’s keeping score. The amount of junk bonds issued by the producers had been significant in the last two years. Maybe the investors had these credibility questions well before this point in time leaving only the junk bond market as a source for funding. What I might be doing here is noting the point in time where the industry rope is going to suddenly become taunt. The rope being the proverbial rope that the investors were willing to give to the bureaucrats to give them the benefit of the doubt. Now with the Annual General Meetings out of the way with no action, no plan and no ideas. That’s it.

I have been barking about these points on this blog since 2005. I published related documents on this topic as early as August 2003. People are tired of me barking about this. I’m tired of barking. What has barking at the moon accomplished? Credibility that I understand what the issues are. I set out to solve this problem well before it was even seen as a problem. I also set out to develop the solution. The foundation of the Preliminary Specification is the use of the Joint Operating Committee which is what I published in August 2003. I’m either barking mad or I’m just really lucky. Either way I now have the credibility to reestablish the industry on the foundation of a commercial enterprise. The bureaucrats don’t, can’t, won’t and will not ever make the necessary changes. That may be a bit of a stretch for some people to accept. Maybe they’ll find a way to solve this in the future.

Our claim is that we provide oil and gas producers with the most profitable means of oil and gas operations. Something that should interest any company or person looking to enhance their performance. That the business model of the Preliminary Specification addresses specifically the issue in the marketplace today and is a workable solution doesn’t gain any traction with the bureaucrats. That I have difficulty selling profitability to these people should be of grave concern to the oil and gas investor. The bureaucrats are more interested in their personal franchise than they are in the business. They have taken the business to the level that it is today. Where it is now the biggest crisis since the financial crisis. And all they can do is suggest we’ll muddle along and do nothing. That this is somehow acceptable to them after filing quarterly and annual reports that show the level of devastation has been nuclear within their organizations?

Our value proposition falls within the range of $25.7 to $45.7 trillion over the next 25 years. It should be clear to everyone how that money would be earned through our price maker strategy. And all I hear from the bureaucrats is the pounding of baseball bats against my backside. It will be interesting to see where the credibility is given in the industry in these next six months. I have bored my audience to tears trying to convince others to institute these changes. And bureaucrats have done nothing but burn the place down. Who’s going to have the credibility to approach what has to be the new oil and gas industry. The one that we build from these ashes. It’s going to be an interesting few months.

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. 

Economics 101

In addition to the accounting issue we discussed yesterday. Oil and gas bureaucrats have misinterpreted an important element of their commodities economic behavior. They have assumed that the oil and gas commodities are subject to the principles of “price taker” when in fact they exhibit the classic behavior of “price makers.” Once again, the culture of the industry has developed over the years based on this misinterpretation and created the situation that we have today. That being of systemic destruction of the industry.

The culture is to produce. Investors are rewarded with higher stock prices based on higher deliverability. Production profile increases are rewarded with handsome, leveraged, increases in the stock price of the firm. Bureaucrats have caught on to this and have based their compensation on the performance of the stock of the producer. The more lucrative action in terms of stock price increases comes from projected production profile increases. As long as the firm can meet its targets, either through acquisition or drilling, the stock price will increase ever higher. The derivative of this thinking is that the commodities are scarce and there will always be a market for the products. That it’s beyond the producer's control to affect prices in any manner. Which is the case for most producers other than the majors.

In the past decades the investors saw that this was being achieved and reported in a profitable manner by the bureaucrats. Therefore they continued to encourage their bureaucrats to seek higher production profiles to gain more value in the stock. The investors were asked for the investment necessary to achieve these gains and the game went on and on. No one has stopped to ask why it is that every oil and gas company needs to issue stock or access their line of credit each year. This is not common in most industries, why is it the case in oil and gas? Certainly it’s a capital intensive industry but the amount raised each year only grows. Where does all this money go? Does the business ever generate its own capital? And do the investors see any of this money in terms of a quarterly or annual dividend? Or is this just “a build the company and exit” strategy? And not really the oil and gas business. Or, is it something else? We’ll discuss this “something else” tomorrow.

People, Ideas & Objects Preliminary Specification changes the economic basis in which the oil and gas commodities are produced. We provide the oil and gas producer with the most profitable means of oil and gas operations. And we do that by instituting production discipline across the industry by ensuring that every producer adheres to the principle that only profitable properties are produced. Which within our system is in their best interests to do so. And as we’ve noted, the Preliminary Specification uses the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. It is in this way the producer will know that all of their reserves will be produced profitably. That none of the oil and gas reserves will have any financial losses added on top of the capital costs that have been incurred on that property. And that their profitable operations will no longer be diluted by any of their other unprofitable properties. And the commodity markets will find the marginal cost as only profitable production is being produced by the industry. It is People, Ideas & Objects price maker strategy that enables these benefits to occur based on the producers independent decisions, based on a factual accounting, as to whether or not a Joint Operating Committee is profitable.

We do this bit of magic by changing the structure of the industry and of the producer itself. The producer is stripped down to the C class executives, earth science and engineering resources, landmen, legal and some support staff. The remaining administrative and accounting resources are reallocated to service providers which are discussed below. The producer is then able to focus exclusively on their earth science and engineering capabilities, and their land and asset base as their key competitive advantages.

The industry is restructured by taking the administrative and accounting resources from the producers and reallocating them to the service providers based on specific individual processes and sub-processes. Each service provider will specialize on that process that they have exclusive rights to within the North American oil and gas industry. Some consideration for some processes are necessary, such as production accounting related processes. When a property incurs an activity (production), that will be communicated to the service providers through our task and transfer network which will trigger their work on that property for that process. The service provider will then complete that process and bill that Joint Operating Committee for that service for that month.

The price maker capability comes into play when the property is determined, based on an actual detailed accounting, not to have produced a profit and as a result is shut-in. And as a result of being shut-in, none of the service providers will be reported any activity in our task and transfer network for that Joint Operating Committee. And subsequently no processes will be incurred and no billings will be sent for any of the administrative or accounting service providers to that property. The property ends up recording a null operation, no profit but also no loss. Enabling the producer to achieve the most profitable means of oil and gas operations.

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. 

Accounting 101

I’m not satisfied that I’ve communicated the scope and scale of the problem that the oil and gas industry faces. It's difficult to express the impact these accounting policies have had on the culture of the industry over the past four decades. These issues will not go away by themselves either. Market rebalancing will never provide for the return of a profitable industry. An industry that operates on the basis that all of its costs are capitalized will always appear to be profitable. That is the bureaucrats motivation. Any revenue you do generate will be offset by little to none of the costs that are left and a small allocation of the capital costs based on the production realized over the total reserves. A fool would be profitable in oil and gas. Based on the financial statements of a producer, you don't know if the producer is run by fools or geniuses. It’s becoming well known in the industry that the North American oil and gas industry is not a viable industry today. It’s also becoming known that it may not have been viable at any time in these past few decades. My narrative is resonating.

In addition to recording profitable operations, capitalizing everything under the sun creates balance sheets that are bloated with those assets. The sad thing is these are considered healthy in the oil and gas industry. These are only testaments to the spending festival that has taken place within the organization. A healthy balance sheet will be composed of predominately liquid assets that have the capacity to be deployed. Sitting with big balances of capital assets have only allowed the annual funding of additional capital from investors and bankers to appear that the producer is reasonably capitalized between debt and equity. The fact of the matter is those capital assets are limited by SEC regulations to be below the total of the reserves as determined by the independent engineers times the market prices for the commodities. Or, the total gross revenues of the firm in its remaining lifetime. A ridiculous and unreasonable method of valuation. And remember it's these assets that are being written down in the impairment charges by the auditors.

What would you do if you were approached by a businessman who wanted you to invest in his real estate business. And when you looked at the balance sheet saw that it was a significantly sized operation and very profitable, only to find out later he recorded the asset based on the 100 year life of the building times the monthly rental they received. You’d run! That’s what I would do. What’s happened in the last four decades is a stampede of investors trying to catch the profits and gains that were being reported in the oil and gas industry. And in some cases many people made money. It’s important however to segregate trading gains on a stock market and what‘s happening in these organizations. The organizations were all overspending their investors money and generating overproduction that lead to lower commodity prices. This is what happened in the late 1980’s and 1990’s and the producers were incapable of doing anything about it. They just muddled along waiting for the market to rebalance. Which did happen after a few decades.

Market rebalancing will not function at any point in time with shale based reserves being part of the makeup of the industry. Production discipline has to be implemented through the decentralized production model of the Preliminary Specification. I undertook to solve this industry issue before the shale reservoirs were discovered as it was evident to me well before then. Now it should be clear to everyone that the business model is incapable of providing any value. When I look at an oil and gas producer I generally wipe out the property plant and equipment off of the balance sheet to determine how they will be configured to approach this new shale based environment. Move those capital costs to the income statement where they belong and see how the producer survives. Not many producers can stand to have this treatment done and reflect a viable going concern. Only the majors are really able to see their way through to a new future in the industry. The rest of the producers generally have negative working capital and are heavily indebted. Some may think this is an unreasonable approach. I think it's highly appropriate. If you look at the assets of the producers today, are they generating any value, or pulling the producer under? What would the present value of these losses generate in terms of an investment's market value. That, I think is how the industry has to be perceived in order to reconcile the difficulties that it’s in and to put itself back in the position of being considered a viable going concern.

Accounting is about performance. Measuring it and making it comparable between organizations and other industries. Investors have believed that oil and gas was like other industries and were being accounted for correctly. They were accounting for it correctly under the guidelines, just the SEC has this manner that they allow for oil and gas and disallow for every other industry. If an organization tried to do this type of accounting in any other industry the SEC would shut them down within a minute. The inconsistency and conflicting principles here need to be reviewed and revised. Investors have to be told the correct story and the producers need to understand their performance based on a reasonable basis. The fantasy accounting that has gone on in oil and gas for these past four decades has become culturally ingrained and is destructive to the core. It must stop.

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. 

A 1950's Wildcatter's Vision

Natural gas was selling for $0.55 in Canada last week. Storage there is at 91% and the demand from the heavy oil plants declined due to the fires. If anyone thought that producers couldn’t earn a profit at $0.55, we all know now they were wrong. Bureaucrats can’t, won’t and will not ever change. They just don’t care. We need to make the change for them by implementing the Preliminary Specification despite them. It is the only way we are going to save this industry from this madness.

Last week on Bloomberg T. Boone Pickens was interviewed in Las Vegas. He made a couple of points that I found to be noteworthy. The first was that he felt that the Saudi’s were probably unable to increase production from their current levels. Recall the Saudi’s have stated they will increase their deliverability by two million barrels per day to match Iran’s increases. I guess Mr. Pickens has some insight that the Saudi’s aren’t aware of. The point I would make is this is just a case of he said, he said. And what Mr. Pickens wants us to do is to wait it out the few years to determine who’s right. It will be during those years that we’ll see continued destruction of the North American industry as a result of $0.55 gas. Think of all of the time, money and energy that will have been wasted picking sides in who might be telling us the truth.

The second thing that Mr. Pickens stated was that he had drilled a well last year that reached payout in nine months. That he was not going to drill an adjacent well there until the price of oil reaches $60.00. This is so typical of an oil man, it sounds just as they did in the 1950’s. Payout is the term used for the time in which the capital costs of the wells drilling, completion, and equipping costs have been recaptured from net revenues. A period of time that is a very high cost operation that lasts as little as 10 days. We should also include in that calculation the costs of the organization that exists to administer and account for that well. Which was purposely built at significant cost, and was paid for during the entire nine months, and is still incurring costs day after day. We should note too that not all wells are as successful and there are other capital costs involved in gathering, processing and marketing of oil and gas. And we should also include all of the engineering and geological costs that went into the development of the drilling of that location. These costs didn’t seem to resonate with him that they needed to be paid as well. And if this well had these costs allocated to it I doubt it would have reached payout in a three to four year time frame.

It's time to stop thinking of this business from the 1950’s version of a wildcatter’s eye. Unless Boone Pickens is willing to go on Bloomberg with the classic 1950’s tin hard hat and be smeared with mud and oil. That image, and that way of managing the industry has died. The fact that the industry hasn’t realized that and is still slow walking itself into oblivion is the issue that we see today. There are more costs involved in this business than what are being reported by these producers. These costs are all capitalized on the balance sheets, including capital, interest and overhead, and left to balloon to unreasonable size and never, ever hit the income statement. The costs go in, but never come out and are never talked about. If the SEC didn’t state that this was the prescribed method you would need much bigger prisons.

The Preliminary Specifications decentralized production model corrects this behaviour by considering all of the producers costs at each and every Joint Operating Committee. We use the Joint Operating Committee as it is the legal, financial, operational decision making, cultural, communication, strategic and innovation framework of the industry. By moving the compliance and governance framework from the hierarchy into alignment with the seven frameworks of the Joint Operating Committee we achieve a speed, innovativeness, accountability and profitability in our oil and gas producers. We also say so long to the bureaucrats.

When we use the service providers for the administrative and accounting capabilities of the industry. Those service providers charge for their services directly to the Joint Operating Committee. Giving an accurate accounting of the costs of the operation of that Joint Operating Committee. And if the property is shut-in for the month, then the service providers will receive no information from our task and transfer network that will trigger any of their work, and hence no billings for any administration or accounting services will be sent to that Joint Operating Committee that month. A property that is shut-in is effectively a null operation, no profit but also no loss. Enabling the price maker strategy of our decentralized production model to take effect based on the individual decisions of the producers at each and every Joint Operating Committee.

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. 

Did You Hear the Story About...

What should be clear to everyone is that the bureaucrats are fine with the situation as it stands today in oil and gas. Biding their time only becomes a challenge when they have to face the shareholders in the Annual General Meeting. They’ve published their first quarter reports. Most of the Annuals for 2015 and the meetings themselves have been put away, only the majors and a few independents are left, and then they’ll all be home free. Such are the stresses and strains on the bureaucracy in oil and gas. It’s summer, and other than that blogger, who cares about the business. It's time to relax and enjoy ourselves. That’ll be the operating strategy for the next eight months for our good friends the bureaucrats. The logistics of managing the cash balances will be left to those that are still grateful they have a job.

I have to say that I was disappointed in the quality of the accounting for the first quarter of 2016. To me it reflected two distinct trends. 1) By publishing the accounting information only created problems for the bureaucrats. 2) Therefore there was a narrative that was otherwise not told. What I saw that led me to these conclusions were the volumes of MD&A that were provided. And to contrast that, the brevity of the actual financial statements. In one case I was unable to secure the Statement of Changes in Financial Position for a senior Intermediate. MD&A are not standardized reporting that are subject to audit. They are a story that management are attempting to tell the investors. In times such as these there are stories that can be told. Much time and effort was spent in preparing the MD&A and shrinking the financial statements to irrelevance. What we need are the full financial statements that qualified investors can compare and contrast between producers and between other industries. That is the purpose behind standardized accounting that is audited or will be audited. Not to tell a story but to make the information comparable.

The interesting news that will be out today is PennWest’s first quarter 2016 earnings. If you want to know what is going to happen to the industry in six months, just watch PennWest. They have been trading around a $1 for the better part of a year. When a producer runs out of cash. When the have no capacity in their working capital. When they have no investors buying the story, when the banks say so long. Your stock drops to around 5 - 10% of what it was. Expect to see this happen to many of the producers more often in the next year. The issue with PennWest is they have $88 million in debt payments to be made in May 2016. No money and no capacity to pay. They are trying to sell their crown jewels in terms of properties. However, I would bet that as soon as that money hits the bank account, the bank itself will seize those funds. Leaving PennWest with less revenue from those properties to live off of next month and defaulting on those May debt payments. Trouble with a capital T.

But then “market rebalancing” could turn the industry around and I might be wrong about the level of destruction that has occurred in the industry. Maybe the investors will realize the bureaucrats are such great guys and give them the money they need to weather this storm. I’ve been wrong before. The fact of the matter is that this will not end. Whether we continue down this road at the speed that we have been these past six months. Which has been pretty fast. Or we take a longer road to armageddon, armageddon is where we are headed with these bureaucrats.

In retrospect it's been a great time to be an oil and gas investor. Companies such as Chesapeake are up over 400% this year. Which is symptomatic of the entire industry. Some may herald this as a sign that things are improving, which would be understandable. I see this as the ultimate opportunity for anyone still around to get out. There is nothing here for anyone but the bureaucrats. This is a classic dead cat bounce and I can’t see anything that has changed in the marketplace. No one is discussing the fact that natural gas storage is going to breach the storage facilities in July or August. Which is bearish on the prices in the short and long term. And no one is discussing the new Saudi strategy that matches Iran’s increase in deliverability in their head to head battle over new customers. “Market rebalancing” will need to continue, therefore, until the North American producers lose another 4 million barrels of deliverability before it works. It’s good to be a bureaucrat, clearly the issues are too big to deal with, best to just sit back and enjoy the summer.

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. 

A Producers Plan of Action

The oil and gas industry needs to redeem itself in the eyes of those that have lost faith in it. Not an easy thing to do, and not an easy thing to do when we consider the current situation. We will need to trash the strategy that is in play, commonly known as “market rebalancing” as it is an irresponsible and foolhardy strategy to be pursuing. Destroying capabilities until the productive capacity of the industry matches demand will be a never ending pursuit with Iran and Saudi Arabia both increasing their capacities by 2 million barrels per day. It's not only the lost productivity that’s at issue, there are the investors losing their investments in all of the oil and gas assets as nothing else is profitable in the industry. The banks are never going to loan money to oil and gas producers again. And people will be seeking employment in other industries that have more security than a fly by night operation.

You do reap what you sow and now is the time to start thinking about the long term and how the industry will meet the consumers needs for energy. You’ll need to win back all of these people, the investors, bankers, service industry and employees. And they’ll need solid proof that you’ve found that old time religion. Profits, because an industry can’t live off of cash flow as a measure of its health. It needs profits. And we’re talking about the real, bankable profits that I’ve never seen earned in the industry in these past few decades. You’ll need, therefore, to base your accounting on something that is more reasonable than what has been done in the past. For as much criticism and blame that I have laid at the feet of the SEC for this current situation, they define the outer limit of what a producer can record as their asset balances. That doesn’t mean that each and every producer hits that limit each and every year.

Beg, borrow or steal the budget needed for the Preliminary Specification. The only way that production discipline is going to be implemented across the industry is through the decentralized production model of the Preliminary Specification. This will also institute the new accounting basis that enables the price maker strategy to be the foundation of each and every producer. It will be in that way a producer can temporarily shut-in any unprofitable production, save the reserves for a time when they can be produced profitably, cease to dilute their profitable properties by producing unprofitable properties, reduce the costs that the remaining reserves have to recover and allow the commodity markets to find the marginal cost. This will be the strategy of the industry as opposed to today’s destruction of the asset and ruining themselves financially in the process of “market rebalancing.”

Participate in the user community. People, Ideas & Objects Preliminary Specification is user based software developments. Active involvement will ensure that the unique needs of your assets are captured in the software and your company will be able to function with the software when it’s built. Bureaucrats have become adept at finding scapegoats to blame for their current demise. Blaming me for not building the software you need is not going to be my fault. It’ll be yours. And to the larger issue, the industry as a whole needs to start taking responsibility for the things that it does do. Those big boy pants are still hanging in the closet.

This situation will be many years of hard work in order to turn around the industry. Don’t expect any help from the investors or bankers that you may have had a relationship with in the past. They have memories. You’ll need to earn their trust back before they start answering the phone again. That’ll be by establishing a record of operating a profitable industry. The amount of damage that has been caused is so significant you can only begin to imagine. You will be alone in this and will need to suffer and sacrifice in order to rebuild this industry. But you know what they say, the struggle is the prize.

I’m sure people don’t like me talking to the bureaucrats like I do. What respect have they earned? Most of them will be leaving in the next year anyway, seeking newer pastures. This plan of action will be implemented by the new oil and gas leadership. One that is going to rise out of the ashes of what is left of the mess that exists today. We have a job to do, let's get it 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. 

We Make Shale Profitable

Looking at the first quarter financial statements of the producers is a dismal affair. The destruction has been comprehensive in this the first quarter of 2016. Bureaucrats should be proud. These producers have become comprehensive cash sinkholes extinguishing every dollar bill in sight. It’s systemic, particularly in the large intermediates, blowing any and all cash that was available. The sad situation is these producers are now sitting with no working capital and have nothing but their dismal revenues to keep the lights on. The amount of cash that is being generated by the business, if there is any, is so small as to meet only a small portion of the organization's needs. It appears that these large intermediates are consuming a quarter billion dollars each, each quarter. We didn’t have to go here, I was offering an alternative in the form of the Preliminary Specification for quite a while now. There is no one to blame but the bureaucrats for this comprehensive industry wide failure.

The dynamic of shale has changed the business from one of resource scarcity to one of resource abundance. The prolific nature of shale reservoirs will forever be unprofitable in the hands of these bureaucrats. Many have doubted me about these claims, however I think the evidence is in now. The SEC methodology of accounting created a bias toward overinvestment and overproduction in the industry. Adding shale to bad accounting is the same toxic mix of matches and gasoline.

Once these Annual General Meetings are over, the producers will have to turtle their operations. Hiding in their shells is about the only thing that is going to help them pass the days away. And there are many days ahead in which to get through. How they make each nickel scream blue bloody murder will be an art unto itself. You have to remember however, they will be doing this on top of the destruction that has already taken place. Some producers have been able to sell assets, however I think that season will be short and too painful to face. The banks take the money anyways. The fact of the matter is these next six months will be the point in time when they have indeed run out of options.

I think we have gone through the phase of the investor class known as the bottom feeders. Some companies were able to raise some money in the market these past three months at fire sale stock prices. I think even the bottom feeders have seen enough, it is however difficult to understand the bottom feeders mentality. Conventional investors in oil and gas gave up a while ago. Banks summarily gave up a month ago. Accounts payable are now extended into the annual instead of monthly time frames. Making life in the service industry impossible. These producers appear to be generating enough to make payroll but that’s about it. The choice will come down to do we support the field operations or make payroll? Either way their finished.

Bankruptcy assumes that you have a viable operation. That the organization just overspent and threw itself into too much debt and can’t meet its creditors demands. But the businesses in bankruptcy still generate enough cash in order to keep the lights on. Oil and gas producers may be rejected by the courts for bankruptcy protection. Their not a viable going concern that has a future, what will the bankruptcy trustees do with an oil and gas producer?

People, Ideas & Objects Preliminary Specifications decentralized production model makes shale profitable. By implementing an industry wide price maker strategy, producers are able to produce only profitable properties. Profitable based on a detailed actual accounting. A fundamentally different business model. A business model that assumes the oil and gas industry is a viable going concern. We need to proceed in the developments of this software as this mess that the bureaucrats have brought us shows that theirs isn’t working.

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. 

What Now?

In yesterday’s post we documented that the damage and devastation brought about by the bureaucrats strategy of“market rebalancing” has been achieved. And the bureaucrats should be congratulated on achieving their destructive objectives. The facts remain that the Saudi’s and Iran will increase their production by up to 2 million barrels per day each in the coming years. Pursuing new customers, and their customers growth will be the terms of the competition between these two oil giants. What we’ve determined is that this “market rebalancing” will need to be carried on for up to 20 more years in order to accommodate these facts based on the current decline of only 400,000 barrels in the U.S.

The question therefore that needs to be asked is, what now? The issue is the world’s highest cost producers will produce anything and everything irrespective of the cost. Damaging themselves mostly, their investors, their staff, the service industry and those that might chose to work in oil and gas. The world’s producers, and most specifically the Saudi’s see this behavior, and have formulated strategies to deal with a group that are acting irrationally. I may be biased about the following hypothesis but what would happen if? The Preliminary Specification was under development, or even the funds for the development of the Preliminary Specification were secured. Would this be enough for the Saudi’s to change their strategy. Affecting a change based on the understanding that those that were acting unreasonable were taking steps to deal with their most destructive ways?

Additionally if we look at the next 25 years in the North American oil and gas industry. We know that it is not going to be an easy time. Our capabilities, particularly in the area of our financial strength and ability to provide our investors with a return on their investment will need to be proven if we are going to be able to deal constructively with this future. Is what we have today, consisting of a hollowed out, borderline bankrupt, angry disenchanted investors and fleeing bankers going to buy into the 20 year plan of “market rebalancing?” This context of how difficult the situation will be to rectify will become more and more obvious in the next six months. This is not a plan, it's a capitulation, laziness and stupidity.

The proven track record of the oil and gas industry has been established. It is of significant losses, willful destruction as a strategy and damage to the long term health of all those involved. How can I invest and participate? What is the plan to deal with these issues that still exist today. Mid $40 per barrel oil and $2 natural gas is not going to provide anyone with any profits. It will continue to draw cash into the organization in order to produce. The problem is for producers to cut production would only increase the cash drain. This issue is resolved directly in the Preliminary Specifications decentralized production model.

People, Ideas & Objects provides the oil and gas producer with the most profitable means of oil and gas operations. People used to laugh when I started saying that. They don’t laugh anymore. Our plan deals with the issues that are systemic in the industry today. As much as the bureaucracy has fought me and denied the industry the opportunity to move forward, we have been stuck in this miserable situation called the oil and gas industry. Does anyone look around and think that this is acceptable? Can we trust the leadership that is providing us with “market rebalancing” with the keys any longer? I don’t think so either. It's time to commit to the development of the Preliminary Specification. The Saudi’s have been the only rational player in the room up to this point. If they saw the North American producers acting responsibly and developing the systems and structures necessary to deal responsibly they might change their tactics in the short term as well. What do you have to gain?

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. 

Deliverability Declines!

There is a material decline in the deliverability of the United States production of oil. There is no denying that. The bureaucrats can take pride of ownership in this accomplishment that they have so feverishly pursued. Their dogged approach to “market rebalancing” is having the destructive effect that is desired. Whether this is the reason that oil prices are up almost 70% in the last two months is the question. As I have stated I think its Annual General Meeting season and the capability of the producer to influence prices in the short term. We saw a similar situation in last run up to the AGM and if you look at the futures prices for oil, they have not moved at all in this recent runup. Bureaucrats need a narrative in these meetings and “market rebalancing” is all that they have. I think that what we have learned from the Saudi’s from their last meeting is that they will continue to hold on to their customers as their key strategy. That they will increase their production by up to 2 million boe / day. And I think it is reasonable to impute that they will do this to gain new customers in direct competition with Iran. Rebalance that market.

Why spend the time, effort and money to change the industry to People, Ideas & Objects Preliminary Specification? Acceptance of “market rebalancing” is just a mental process that needs to be processed by those in the industry, and particularly the investors. The wholesale destruction and damage that is done in the process is largely irrelevant to the bureaucracy that exists today, and tomorrow. This acceptance, whether as an investor, an employee who has been laid off, a service industry provider or a student who has so foolishly pursued the engineering and earth sciences as a course of study, only hurts if you focus on it. Forget about it. Move on. It is what it is, and always will be. Party on dude! That narrative is the bureaucrats message to all those that might still be listening.

The quarterly reports that are coming in are as bad as I thought they would be. No one is making any money. And that is based on the SEC’s creative accounting methodologies. Most of the producers are consuming cash. All are projecting that their deliverability will be increasing by the usual annual increment. In light of all that has been stated here what is the future for oil prices in the next couple of years?. More of the same? Where do I invest? Is there any other business that would get away with this? Yet an entire industry is able to muddle along in a fog of “oh whoa is me” in which action to solve their problems isn’t a point of discussion. Any alternatives are actively punished and ignored. I hear from many people that they are unable to read this blog on their work computer. That is because we are on the industry blacklist of websites that are not permitted through a producers firewall.

And so market rebalancing will continue. We’re down about three to four hundred thousand barrels per day in the United States. With the Saudi’s and Iran going at the “new” business with their 2 million a day each, we’ll need to be rebalancing the market for about a decade. The U.S. will clearly have to decline from 8.8 to 4.8 million barrels to just keep the prices where they’re at. To “rebalance” they will also have to reduce the current daily production surplus of about 1.5 million per day, and then also reduce the well over half billion barrels of inventory just in the U.S. That’s a lot of rebalancing. So let's add another decade on top of that first decade that we’re idly sitting by and losing money, to total 20 years before the industry can start to make any money. Sounds reasonable to me.

Rebalancing of the natural gas marketplace is not discussed. At least I have not read anything anywhere that deals with that topic. Again the Saudi’s are the ones that are conspiring to make those prices fall to the levels that they are at today. Natural gas being a continental commodity. Natural gas storage in North America is filling at a remarkable rate as the Saudi’s continue to overproduce the commodity. It’s never the bureaucrats fault, “oh whoa is me” the Saudi’s are this or the Saudi’s are that. Even the Saudi’s in their plans to deal with their country's energy future have identified the bureaucracy as something that they need to eliminate. The big boy pants are still in the closet, pressed and cleaned waiting for the oil and gas producers to take responsibility for the mess they’ve created. Implementing the Preliminary Specification is suicide for the bureaucrats, but I think this alternative of “market rebalancing” is, as far as everyone else is concerned, not such a good choice.

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.