Best Business Opportunity, Ever, Part XXXIII

As I write this it is unknown what the outcome of the Opec meetings will be. The push to have the deal in place by the deadline of November 30, 2016 started last week. It seems everyone in oil and gas are convinced the deal is imminent and it will be sunshine and rainbows once again. We’ve come a long way since the oil price declined. The industries destruction as I’ve described it here has taken on its own momentum and will fuel the necessary creative destruction. I have also suggested that Opec was never attempting to put any production limits in place. Their new strategy is to provide a stable supply to their customers. Talk of limiting production, I believe, is to allow the North American producers to understand that moving barrels of oil on and off the market have a dramatic effect on the price. That the commodities behave with the characteristics of price makers. Something these producers refuse to believe and, as we’ve stated, don’t have the moral or ethical means in which to do so.

It is therefore a given in my mind that Opec won’t come up with an agreement on November 30, 2016. Taking this off of the table will have a devastating effect on the price of oil and will do two things. It will kill the hope that is building in North America for a return to normalcy in oil and gas. And it will be the trigger that investors and bankers use to liquidate their investments in the industry. If the only thing that producers have is hope that Opec will do something, then there are better places to put one's investments. As it stands today, producers can’t pay their electrical bills or their freehold royalties. Now is not the time that Opec is going to let them off the hook. All of the discussions coming out of Opec have been about how earnest they’ve been in working to make the deal. If they announce that there is no deal, then the world will know that they gave it their best shot and that it will be years before another attempt at another deal will be possible. Therefore it will be time for the investors to clean house at the North American oil and gas producers. What else could these investors be waiting for?

Natural gas future prices top out at $3.32 in January 2018. I would say that market is optimistic about the natural gas business. We need to understand that shale has changed the business from scarcity to abundance. It also changes the cost profile of the production. Multilateral fracing and horizontal drilling are very expensive. None of the shale producers are making any money at the current prices. Oil or gas. None of the producers are making any money based on their third quarter financial statements and that is the same situation for at least the past two years. The cash crisis in the industry is epic. Producers are stuck in a downward spiral of destruction. They have to produce everything, to pay the bills, to produce the oil and gas etc. If they stop producing anything their costs will soar and they’ll be out of business in a week.

Opec can certainly read the third quarter financial statements as well as anyone. And they’ve certainly lost money in the past years too. But if they put a deal in place and the price responds these shale producers have already committed to increasing their production substantially. The rig count is up for the last 15 weeks. The North American producer is down but not out. If they let up the pressure now the resurgent North American producer will be back and as much of a problem to oil prices as they were at the beginning of this process. Until the threat of a resurgent oil and gas overproduction and oversupply is ceased, Opec will not take their foot off the throat of the North American producer.

The best way that I know that the North American producer could convince Opec that it had seen the light and would implement a method of production allocation to deal with the overproduction and oversupply. Would be to fund People, Ideas & Objects Preliminary Specifications budget. That way Opec would see a solution to the overproduction and oversupply in the long term and the commitment of the producers to its resolution. Otherwise it's the trash heap of history for these North American producers and the best business opportunity, ever, for the startup oil and gas producers.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Best Business Opportunity, Ever, Part XXXII

That this destruction of the industry is acceptable, or is part of a normal process, is the standard of thinking in the industry. We see nothing in the way of steps to remediate the issues other than blaming the situation on the Saudi’s. Action by the producers has never been part of the “muddle along” strategy that has been the status quo of the industry for these past decades. Accepting that the industry will be generating losses, based on a contrived, faulty accounting, is just part of the game. I have pointed out in this series of posts that the situation has gone beyond what the producers have within their control to manage. The momentum of the destruction is against their efforts and the forces of creative destruction are in play. Creating the best time ever to begin a new oil and gas producer.

This muddle along strategy brings along with it other attributes that show a dark side to the human psyche. There is an attitude that the oil and gas producer is the one that is building the value in the business and everyone else, the people who work in the business, the service industry and others are leeches. This became evident when oil and gas prices were their highest and producers were calling out service industry representatives as lazy and greedy. Reflecting, in my opinion, a type of entitlement that the oil and gas producers were able to preach to their lesser classes.

This attitude took a decidedly dark turn here in Calgary over the past week. The cash situation in the producers has become quite difficult and many producers are going out of business. Even Canadian Natural Resources were mentioned in the article as part of this trend. The situation is that freehold royalties were not being paid by the producers. And now apparently electricity to the well sites are not being paid in some instances. Therefore the electricity provider is turning to the rancher / farmer to have the oil and gas producers electrical bills paid. Who would have thought things could get so difficult?

So here we have a lawyer by the name of Keith Wilson impart the despicable opinion of what the rest of the province should do in light of the difficulties in oil and gas. Quotation is from the cbc.ca

Lawyer Keith Wilson said that he also has represented clients who have had liens filed against their land for unpaid work done by oil company contractors.

"There's a need to rethink the system," said Wilson. "It wasn't designed for what's happening now [with the economic downturn]. And as it becomes more endemic, it underscores how Albertans have expected this one sector of our society to bear all these risks and hassles."

Here’s my argument for Mr. Wilson to consider. Oil and gas is a primary industry. It collects the revenues that are earned by the sale of oil and gas. Inherent in the sale of oil and gas are the efforts of the service industry and the people who work within the oil and gas industry. They are not leeches. They assist in the development of that revenue. It is a responsibility of the oil and gas producer to manage their business appropriately. Something that I’ve been arguing for the past number of decades that they haven’t been doing.

In addition, Mr. Wilson may want to take into consideration the involvement of the rancher and farmer. In Canada they have no choice but to let the oil and gas company operate on their land. They give up use of that land while the oil and gas companies are operating there. They should receive compensation for that. But for you to suggest that these farmers and ranchers undertake to pay the oil and gas companies electrical bills because of the greatness of the oil and gas industry is a bit of a stretch. Apparently it's the Saudi’s, the ranchers and the farmers that are the issues to the oil and gas producers.

Within the Preliminary Specification there is a heightened role of the societal responsibilities that the oil and gas producers and industry needs to take. Just because they are the ones that collect 100% of the proceeds of the oil and gas revenues doesn’t mean that they can demean the rest of the people who are involved in the process of earning that money. Greater understanding of this principle is an inherent part of the Preliminary Specification. One that looks to achieve what is in the best interests of providing society with abundant affordable energy and how that is efficiently and effectively done. Establishing a new startup oil and gas producer on this basis will set in place the kind of environment that will help to rebuild the industry that the existing producers and Mr. Wilson seem hell bent on destroying.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Best Business Opportunity, Ever, Part XXXI

Producers would have us believe that the state of affairs in the industry today is the preferable situation over the methodology in the Preliminary Specification. Their destruction of the industry is the more ethical and moral choice. They will never involve themselves, in essence, in limiting their output to influence pricing. An argument directed at People, Ideas & Objects Preliminary Specifications price maker strategy. I agree that the effect of the price maker strategy is designed to find the marginal cost in the commodity marketplace. I would argue however, that the purpose in implementing the price maker strategy is to ensure that all oil and gas production is profitable. Profit is the old time religion that producers never understood and have ignored for these past decades. I suggest that producers have a serious look at their situation and determine if it isn't that they’re upholding a moral and ethical code that is inconsistent with good business practices in the western world.

Shale is the variable that needs to be considered for the future. The important number to remember is that the U.S. holds all of 17% of global shale based formations. Everyone today it seems is walking around with 5 - 6 tcf of natural gas in their pocket. Trying to get that gas to market as quickly as possible. The situation in oil is a few years behind the developments in natural gas but maybe we’ll see similar developments there. What is there in this moral and ethical world of the existing oil and gas producer that enables them to produce this oil and gas? There are no restraints. Its beg, borrow or steal to get the reserves into production so that the producer can realize the revenues. Anything for that cash. This is the fact of life in the business today. The industry is now based on abundance and not on scarcity. In this race to put all of the oil and natural gas reserves onto the market as quickly as possible the destruction of the industry is a given. And that is what and where we are today.

Welcome to the moral and ethical world of the North American producer. It’s just too bad if you happened to choose geology or engineering for a career. Or decided to work for an oil and gas producer or service industry provider. Your sacrifice and suffering in order that the producers meet their moral obligations and ethical standards are what you signed up for, live with it. They won't control themselves and impose any production discipline as it’s inconsistent with their ethics. Misguided as they may be. Well it doesn’t have to be like that. Producers need to think about the business that they’re in. The way they are operating it, they are certain to erode the infrastructure even further. It's time to consider the facts.

Overproduction and oversupply are now a constant in the marketplace given the characteristics of shale reservoirs. Production allocation across the industry is necessary to ensure that the markets are not overwhelmed by the overproduction and oversupply. If production allocation were implemented it would qualify oil and gas as a business. People, Ideas & Objects Preliminary Specification price maker strategy operates on the basis of two simple principles. If the property shows that it is profitable, based on an actual detailed accounting, than the property produces. If it is not profitable then it is shut-in. Contrary to today’s morally and ethically superior oil and gas producers determination that this is collusion, it is not. Individual decisions, based on accounting facts, at the property level are not collusion. Its business. What business produces everything that loses money, other than oil and gas that is.

With today's administration the industry will be destroyed but these people can at least say they were moral and ethical in their own minds. Others will say they were misguided. Which opens the best business opportunity, ever for the startup oil and gas producer. You can assure your shareholders and bankers that nothing will be produced that isn’t profitable. That you are focused on providing them with the most profitable means of oil and gas operations. And do that with strong business practices and higher morals and ethics. Higher because you won’t be deliberately causing so much misery.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Best Business Opportunity, Ever, Part XXX

We saw last week the news that all producers should’ve anticipated for the past decade. Higher interest rates are around the corner. Maybe not high interest rates but certainly moderate interest rates, or a return to normalcy will be probable under a Trump administration. In times such as what we are experiencing in the oil and gas industry, higher interest rates on the level of indebtedness of the producers will be the last thing that is needed.

The counterbalance to the bloated balance sheets is of course either debt or equity. In most cases the balance between debt and equity is within the region of what could be considered a well leveraged operation. The issue is that the amount of the assets are bloated due to the accounting policies of the SEC. By recording everything and anything as an asset on the balance sheet. And by limiting the amount of those capital assets recorded on the balance sheet to the known reserves of the producer times the current commodity prices. You have established the upper limit of what the assets could be recorded at as the total future revenues of the firm. Therefore the balance of the debts of the firm would also have the upper limit of approximately half of the total future revenues of the producer. An impossible number, particularly for an industry that doesn't have that old time religion of profits.

Even in a “reasonably” indebted producer these would be excess levels of debt due to the fact that the assets are so bloated out of proportion. In the third quarter of 2016 there were significant interest costs being incurred by many of the producers. The amounts of interest paid may have been distorted as a result of the high rates that were incurred during the junk bond boom of a few years ago. Nonetheless, I think with the scenario that we have put forward here, it is reasonable to assume that the oil and gas industry is heavily indebted due to the outsized bloated balance sheets. As producers continue down the road of continued losses. The amounts of these losses eliminate the equity in the company. Turning the leverage that they may have been able to enjoy during the good times, against them and pulling them into a debt spiral.

Organizational survival would assume that the producer could find debt or equity available in the market. Producers found these facilities were closed in the early part of 2016. I believe they will need to deal with the industry's issues before they’re able to source any more funds. What this debt spiral will involve is the further reduction in their asset balances and the erosion of their equity position. Leaving them with far fewer assets and all of them secured by debtor's.

Which leaves a heavily indebted producer subject to the increases in market rates of interest. Producers can’t afford to see these costs become more material to their operations. But that is what is going to happen. They have left the overproduction and oversupply issues to “market rebalancing,” which we now see as a completely ineffective tool. And frittered away the time that they should have been working on those problems. Now these issues remain with no resolution and the destruction of the industry well underway with the next big issue, interest rates, staring straight at them.

As I’ve suggested before, all of this assumes that the current administration in oil and gas cared about the situation. That is cared about it outside of the effect that it had on their own personal situation. After twelve years of trying to convince producers of these issues and the resolution of it, the Preliminary Specification, they’ve laughed at it and refused to consider it. A time when it was able to save the shareholders, service industry and the people who work within the industry. On several occasions during this time they’ve attempted to take our underlying Intellectual Property for themselves. Thinking that they could just take it, fail an attempt at it and prove that it couldn’t work. Each time I was successful in stopping them. What will their next step be? Or will it just be a continuation of that blank stare.

The fact of the matter is the foundation for the demise of the industry is well in place and in play. No value had been generated for decades, then value had been eroded in an unchecked manner, now the wholesale destruction of the industry is well on the way and the time provided to fix it passed long ago. This is creative destruction and the best time in the history of mankind, literally, to start an oil and gas producer to replace these destroyed organizations.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Best Business Opportunity, Ever, Part XXIX

I have argued that the accounting magic of the SEC has made the oil and gas industry appear profitable for the past four decades in which these policies have been in place. A time when bloated balance sheets were the only game in town. Whereas, these costs should have been moved to the income statement in a much more timely manner in order to better represent the actual costs being incurred in the producer firm. This would have created losses and reflected a lack of cash generating capabilities in the industry. Instead annual share issuances made up for the deficiencies in the producer's cash balances. Suggesting that these investors had in essence been subsidizing the consumers of the commodities.

Eventually, as can be easily predicted, this game with the accounting came back to bite the producers. You can only grow your balance sheets to such a size where the depletion of those assets becomes material to your income. On an industry wide basis we hit that point, then we discovered the means to produce shale. Some may feel now with the significant write downs that this accounting situation has passed and is behind us. Nothing could be further from the truth. The end of the beginning may have started, but we have a long distance yet to travel down this road.

In many cases, even with the large writedowns of assets over the past two years, the producers are still sitting with large asset balances. Although I suggested the other day that these balances represent the amount that the investors have subsidized the consumers in their consumption of energy. Which is the best way to look at it. It also represents the amounts of the future losses that the producer will be incurring. Or to put it another way, the industry will be in a state of consistent financial losses due to finally recognizing the capital costs they incurred in the past, in a capital intensive business. As an investor where do I sign up?

Many people will say these are not real losses that affect the cash situation of the producer. And I understand that argument. It is the same argument that has been used now for decades. The fact of the matter is the cash in the industry today is critically tight due to the bankers and investors seeing that the industry as a lost cause. Unable to generate a profit. If it continues to report that it’s unprofitable, will that change the bankers and investors mindset? I feel this strikes the point of why the industry has never achieved the religion of profitability. As long as there was cash no one cared what was happening to the business. Now that the business is caput, there are no earnings and no cash, with no foreseeable future of either turning around. Accounting is about reporting the performance of the management of the producer. For four decades the producers in the industry chose to defer accounting for their capital costs of a capital intensive industry. Now the importance of the role of accounting in oil and gas may be learned.

The past forty years was a heck of a good party though wasn’t it. From a physical point of view the production and infrastructure of the North American industry is impressive. However, functionally, literally and financially it is worthless because it depends on hundreds of billions of dollars per year in investment to operate. And that will continue for the foreseeable future. The next 25 years could be the most interesting and dynamic time in the industry. Do you see a way through that period with the assets and organizations that are in place? The culture of the industry is contrary to commercial, productive interests. Where will the money come from to fuel this future of the existing oil and gas industry.

As a startup oil and gas producer the opportunity to purchase this production and infrastructure of the North American industry is about to be put on sale. At firesale prices. Just last week Conoco put $8 billion of properties on the market. Expect to see much more of this happening in the very near term. Rehabilitating these assets as a startup producer. To make them always profitable is the first order of business for the startup. They can do this by implementing the Preliminary Specification. Which will ensure that they obtain that old time religion of profitability. Secondly they can organize themselves to approach the opportunity of expanding their deliverability to achieve profitable energy independence in North America. A worthwhile and attainable goal.

Remediating what exists in the industry and in the hands of the producers today, particularly after the battle that I have had in selling them the Preliminary Specification, isn’t possible. They didn’t think the issue was material to their operations. They were more concerned with the impact the Preliminary Specification had to their job security and did not want to work that hard. Building the Preliminary Specification will be difficult and it will eliminate the redundant elements from the existing industry. That is my assessment of the past twelve years that I’ve tried to solve this problem. But then I’m biased.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Best Business Opportunity, Ever, Part XXVIII

One of the surprises of the third quarter was not only the loss of value of the producers but the cash situation they’re dealing with. In some cases a few fortunate producers were able to raise some substantial amounts of funds from either equity or debt issues. In those cases the cash was incinerated by the time it hit the bank account. The rest of the producers were struggling with no working capital whatsoever. The statement of changes showing in some cases that capital expenditures were slashed in order to deal with the lack of cash or working capital. Yet all that we heard through the third quarter was that producers were profitable at the prices that the commodity markets were providing. Seems that there is a difference in how profits are calculated to issue a press release and to prepare financial statements.

If a producer is struggling as mightily as these producers were to manage the few quarters they found in the couch. Why would they state that they were profitable? It’s my understanding that profitable operations would generate cash. It is this cash crisis that will cause the focus of the producers to begin to pay attention to the issues that they have chosen, so far, to ignore. The crisis in the oil and gas industry. I’m sure every investor and banker have the producers lined up ten deep in their waiting room, with some of them pitching tents. Making life for an investor or banker that much easier. When there is this much demand for your money, then there’s a problem. Those fortunate few producers that were able to raise some cash in the third quarter sold their souls in order to get the money. So we know that the bottom feeders have had their fill now too. That leaves the couch cushions.

Oil and gas production consumes cash. That is what unprofitable operations and this cash crisis means. To continue operations requires cash. In today’s environment the producer has no choice but to produce. If they stop producing the cash consumption increases. Under the Preliminary Specification this doesn’t occur. If the property is unprofitable, shutting it in does not create a cash drain. It creates a null operation due to the fact that we have reorganized the producer and industry to enable the null operation to occur. With the abundance and prolific nature of shale, overproduction will always overwhelm the commodity markets. Therefore the producers are going to have to allocate production on some basis. People, Ideas & Objects Preliminary Specification have chosen the fairest and most equitable basis of production allocation. That being on the basis of profits. If the property is profitable at the current price it produces. If not, it’s shut-in.

What do you do now? When you never had that old time religion of profitable operations. When no one, and I mean no one, will invest in you. Your company consumes cash at a voracious rate and you have nothing in the kitty. Well we’re about to find out. What I suggest is you start an oil and gas producer. Never has there been a better time than now to start an oil and gas producer. We have detailed what the upside consists of. The next 25 years will be, by far, the most prosperous time ever for those that are positioned to capture the value that is available. The approach that the startup pursues is going to have to be different than what has been done in the industry before. We’ll need to be smarter about what it is that we’re doing and more strategic and tactical in the business approach. Mindlessly drilling wells until your out of business is the old way of participating in the oil and gas business.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Remembrance Day

Best Business Opportunity, Ever, Part XXVII

Rarely does an industry, and most particularly the oil and gas industry, find common cause with the U.S. administration. That is the position that we find ourselves in this morning with the resounding election of President elect Donald J. Trump. He has made it a foundation of his policy platform to have the U.S. achieve energy independence. Not just a worthwhile goal, but one that is possible and probable with the discovery of the means to produce shale reservoirs. Other energy policies look to the removal of regulations and opening of federal lands. There is work that needs to be done before we can approach the objective of energy independence. Building the Preliminary Specification, making the industry profitable, expanding the throughput capabilities of the industry and then expanding its output so that North America is energy independent and profitable. That is the plan we are taking here at People, Ideas & Objects. No other plan exists. Any other plan is going to have to address the state of affairs in the industry today. The systemic overproduction leading to the losses and our current cash crisis.

We will also be moving forward with the objective of building value in the economy. These past eight years have had the current administration focused on any and all objectives other than building value. Is it a wonder that the economy is not moving forward? The Keystone Pipeline should be reviewed once again on its commercial basis. The point being that we will now be focusing on the real objectives and opportunities of building value, jobs and the economy for the betterment of society. It's in the best interest of the oil and gas industry to ensure that these developments are done in environmental ways. Climate science will fade from people’s memory now that the National Science Foundation is no longer directed by a president that funds any and all proposals that provide support for the effect of climate change. Maybe, President Trump will fund only proposals that support that climate science was always a myth. That is how science is subject to the political influence of those in power and has been so severely distorted.

Whether it’s four years or eight years that President Trump is in power I don’t think it matters to us. What we need is this alignment of the political and business interests and objectives over the next decades. That is what has been provided as a result of his election and what we are working towards. For me that was the loud clap of the starter’s pistol on Tuesday night. The startup producers will have the flexibility and speed in which to maximize this opportunity throughout their lifetime. The existing producers will at best be retiring debt through the sale of properties. Creative destruction on steroids is now happening in the oil and gas industry and everyone who is willing to participate in this new frontier is able to do so. If you don’t have the screaming desire to get out there, then there’s nothing that I can do for you.

Those that can structure an oil and gas producer to optimize this opportunity may not be large in number. There are however opportunities to invest in these startup producers. There are opportunities for those in the administrative and accounting disciplines to participate in the development of the Preliminary Specification as members of our user community and establish their own service provider. These are substantial business opportunities.

We’ve got a lot of work to do. These opportunities are on top of providing society with abundant, affordable energy. A responsibility that I feel the current producers have put in jeopardy and we’ll have to safeguard. These next 25 years are going to be challenging and exciting like none other. What are you going to be doing?

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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.

Best Business Opportunity, Ever, Part XXVI

The future of the oil and gas industry had been left in the hands of the producers and those in power decided to use it for their own personal benefit. This has opened what we consider to be the best business opportunity ever, for the startup oil and gas producer in North America. The epic destruction of the industry is occurring at a pace that has never been seen before. Not one producer is immune to the effects of this downturn. The analogy of producers as swimmers, with the stronger ones being taken down by the weaker ones is apt. Everyone in the industry today will eventually fail. This is creative destructions finest hour. For many years the destruction was hidden by the accounting magic that the SEC dictates the industry use. For decades the accounting showed profits when in reality the industry wasn’t sustaining itself. Over time the industry began to lose value, but the accounting still showed profitability. This began the slow erosion of value from the industry. Value that would have otherwise sustained an industry during a recession. And now during these commodity price declines we find that the cupboards are bare and the industry is a hollowed out carcass on life support.

The producers are still carrying vast sums of asset balances. Chevron has almost one quarter trillion dollars of them! Why! These are the costs of exploration and production and should have flowed to the income statement long ago. All they do now is represent the amount that the investment community has subsidized the consumers of energy. By not recognizing these costs, the consumers never had to pay for them. The investors did. What kind of industry accounts for their costs on the basis of the customer never paying the costs?

The secondary result of never recognizing the costs of exploration and production are that the industry looks good to the investors. The producers become spendaholics which makes their assets grow, and should they happen to find any oil or gas, it will be profitable because there are no costs recognized against those revenues. Making for the investment boom that we have seen these past few decades. Which in reality was based on some accounting magic, not on the basis of building any value. If we look out the window now, is there any value in the oil and gas industry? This decades long investment boom led to overinvestment which has led to overproduction which has led to collapsed commodity prices. Who would have thought?

It truly is the Saudi’s fault however. The question now is what do we do. There is no value left in the industry. What people thought the asset balances on producer financial statements represented, the value of the organization, are really only past costs that have not been recognized by the prior production. Which gives you a sense of the scope and scale of the destruction. I don’t see much purpose in trying to remediate this. It’s also not my decision. I can point out that the best way to look at the oil and gas industry is as a sunk cost and we begin the process of rebuilding it for the future. A future that holds the promise of building significant value. A future that doesn’t assume the accounting deception that has become the culture of the industry today. One that looks to real profits and the generation of value as the guiding principles and strategies. Not just to muddle along.

I expect to see the existing producers begin the wholesale, firesale, dumping of their properties over the next decade. The need for cash will be critical until the organization is terminated. Startups can purchase these assets and rehabilitate them and the value that they should have held today. This value would be in the trillions of dollars. These trillions won’t be sitting on the balance sheets, it will be reflected in the market value of the startup producers. Accounting is about performance, it should never attempt to reflect the market value of oil and gas properties. Secondly the startup will realize the value proposition of People, Ideas & Objects which is estimated between $25.7 and $45.7 trillion. These will be reported on the financial statements as revenues. Then finally they can move the industries production profile forward to achieve North American energy independence, which will also show up as incremental revenues on the financial statements. People, ideas & Objects are focused on providing the most profitable means of oil and gas operations. Building value for the industry. That is how I propose we deal with this situation.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Best Business Opportunity, Ever, Part XXV

Changing the dynamic of the industry to focus on profits, as opposed to cash flow. is one of the key differentiators of People, Ideas & Objects Preliminary Specification. Why is this change necessary, and is a focus on profits the appropriate position for the industry to be based upon?

I read something from a blog called “Master Resource, A Free Market Energy Blog” regarding the thinking of energy supply and pricing. Reflecting what the thinking was of the oil and gas producer in North America. It was written by Richard Sigman. “Cutting production ultimately decreases your own market share and subsidizes your competitor.” Which is what passes for logic in the industry today. Therefore keep producing, despite the implications of shale, the collapse of commodity prices and the destruction to the financial and capital structure of the industry.

There never seems to be any consideration for the losses that are incurred by the producers. Losses are just unfortunate events, that once they’re incurred, evaporate and have no further implications anywhere in the producer's life. Nothing could be further from the truth. The capital structure of the North American industry has been eroded away by these producers losses and is in rapid deterioration. This has implications to the cost structures of each producer. The cumulative losses are represented in higher capital costs, those being the inclusion of the losses themselves, that need to be recovered from future revenues. That is to say that if a property had a reserve life index of ten years and $1 million unrecovered capital cost. If losses of an additional $1 million were incurred the reserves would need to earn the $2 million in order to be deemed profitable. You can’t say that a $1 million property that loses $1 million is profitable after the recovery of $1 million. Higher costs are also represented in higher distributions to the additional shareholders or issuance of debt that the producer has had to carry to offset the effect of the losses in the organization. Losses are not free, and just because the SEC dictates an accounting methodology that is difficult to incur losses under, doesn’t mean the producer hasn’t been incurring losses for many more years than 2015 and 2016. Losses destroy value.

If all you did was lose money as a producer there would be consequences. And the costs would be that you would lose control to the debtors or shareholders as your cost structures became uncompetitive. Acceptance of losses is acceptance of loss of control of the organization and eventual loss of the competitiveness of the producer and ultimately the industry. This is where the industry stands today. At the very end of this road. It may not seem that way, I have consistently asserted that there has been an accounting anomaly that has hidden the losses and these effects for the past four decades.

When I first suggested that we provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. People laughed at us and said that the industry doesn’t operate on profits, just cash flow. I understood that then, and I think everyone understands that now. Profits are what make the world go round. With a profitable oil and gas industry producers pay royalties and taxes, hire people to do the work that is needed, establish appropriate sized service industries to support the producers and enable them to look forward to resolving the issues and opportunities that they face. Issues such as the difficulties in securing long term supplies of engineers and geologists and to approach the opportunity of energy independence in North America. If anyone thinks that the current producers can approach either of those two objectives in the condition that it’s in today, I think you’d be mistaken. A profitable industry is the only way that we can approach the challenges that we face in the next quarter century. Continuing to rely on the abuse of the investment community, which has failed, will lead to disappointment and dependence on others for our energy.

I’m surprised by the fact that we’re not hearing anything regarding the “market rebalancing” during this quarter. I don’t think I can point to a specific talking point that has come out of my review of the third quarter reports. Producers have run out of excuses it would seem. All of this may seem dire in its outlook. However the contrast to this dark message is that it paints an opportunity for the start up oil and gas producer that is the best business opportunity, ever.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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.