My Argument, Part XXXIV

I think we’ve seen this movie before haven’t we? Natural gas prices are down to just below $3 from their recent high’s of almost $4. Oil is looking shaky, dropping as much as 6% on Wednesday due to inventories at record levels and the recent production surge from shale producers. This in the beginning of the third month of the OPEC production sharing agreement. Most tragic of all is the financial statements of the North American producers reflect the damage that overproduction and oversupply has done and that none of them, anywhere, are making any money. Why are producers so hesitant to deal on price? Why do they always look to make up any revenue shortfall with volume? Why are producers so hesitant to accept their business model has failed? And why are producers so hesitant to accept People, Ideas & Objects Preliminary Specification, with our decentralized production model and its price maker strategy?

The U.S. Energy Information Administration (EIA) projected U.S. oil production would rise to an average of 9.2 million bpd in 2017 and 9.7 million bpd in 2018, which, if correct, would top the current record high of 9.6 million bpd set in 1970.

The inability of the oil and gas industry to consider any alternative to this scenario is what people should be most concerned about. It is a closed mind, incapable of considering the facts regarding the disaster that they’ve created and are suffering through. The cost to society in the various forms that we’ve detailed here is tragic. Yet, what we do hear is a confident producer preaching to OPEC and other non-OPEC members that they better get in line. From World Oil.

The Permian basin of West Texas and New Mexico, which emerged as the hottest region for drilling during the 2 1/2 year downturn, would see a major curtailment of rigs at $40/bbl, while other shale plays in the U.S. would become uneconomic, he said. If all goes well, though, production at the field will surge to a range of 8 to 10 MMbpd over the next decade, from 2.3 million now, he said.

Vicki Hollub, CEO of Occidental Petroleum Corp., said later in the day that she sees output from the Permian eventually growing to about 4 to 5 MMbpd.

Sheffield said he hadn’t expected supply and demand in the global oil market to rebalance until next year. Only full compliance on production cuts from OPEC and non-OPEC members might speed that up to the middle of this year, he said. That hasn’t happened yet: Although 90% of OPEC’s 1.2 MMbpd of agreed-upon cuts have been accomplished, another 600,000 bpd of reductions promised from non-OPEC producers are at 50 percent compliance, he said. "The rest of the non-OPEC countries have to get onboard, especially Russia."

OPEC and non-OPEC member compliance to the production sharing agreement has been significant. This has enabled the North American producers to fill the void with U.S. shale production. It is obvious based on that previous comment that the basic assumption that these North American producers are operating under is that the rest of the world should stay clear of the U.S. and do as they’re told. From Fox News.

Kuwait Oil Minister Essam Al-Marzouq said on Wednesday that OPEC's compliance with an oil output cut stood at 140 percent in February, while non-OPEC members compliance was 50-60 percent.

If we go back a month or so to what was said by BP’s Chief Economist regarding double the reserve supply for the next 33 years. That this over abundance may lead the low cost producers in OPEC to reconsider their strategy of keeping their product in the ground. And just produce at whatever price they can get. A global free-for-all. North American producers are in financial difficulty and are heading into terminal financial conditions at this time. If OPEC adopts the strategy of production at whatever price there will never be an opportunity to produce profitably in North America again. The sum total of all that has ever happened in North American oil and gas up to this point would be subsequently destroyed and wasted. In light of this we hear at the CERA conference, from the Oil and Gas Journal.

During a meeting on the sidelines of the conference with chief executives of major US shale producers, Barkindo said he “congratulated them for pioneering this new frontier” of shale, praising their combination of technology and operational skills, managerial ingenuity, and a financial system that supports creativity.

“We only wish that it was done in an orderly fashion without creating this severe cycle that we are still battling to come out of,” Barkindo added. 

The title of that article is “CERAweek: OPEC done bearing ‘burden of free riders.’” With all due respect, North American producers have not bought into the religion of profitable operations. Producers need to do more than ride the commodity prices up and down. They need to build value all the time. I have been screaming about this for over a decade, providing our solution, the Preliminary Specification, and they only refute that profits are irrelevant and resume their baseball bat beatings of me. “Remember, never propose a new idea in oil and gas” they always say as they pound away. North American producers threats to OPEC are being taken seriously and in turn OPEC say they want to work with North American producers. The threats from OPEC, however, are not being heard. This is dangerous, particularly in an industry that has the financial position that oil and gas is in. Producers have left little bargaining room for themselves and they chose to threaten suicide as the tactic to get what they want. I would suggest that they adopt Opec’s suggestion of “an orderly fashion” and begin developments of the Preliminary Specification.

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. 

My Argument, Part XXXIII

The power of shale reserves to overwhelm the commodity markets is impressive. We’ve experienced this phenomenon many times in natural gas and a few times in oil. We will continue to see this until such time as the industry and most specifically the producers adopt some form of production discipline. The only discipline that can save the industry at this point is the production allocation methodology People, Ideas & Objects Preliminary Specifications decentralized production model and price maker strategy provide. Without that we will continue in this free-for-all, everyone loses scenario that has been the case throughout this first phase of shales existence. The commercialization of shale is the question. Can it be done? The technology now exists and is prolific, its power grows with each iteration of the boom and bust. Production discipline based on our production allocation methodology is necessary, but how is it implemented within the industry?

We use two simple tools in which to ensure that the industry implements production discipline through adoption of the Preliminary Specification. The first is greed and the second one is greed. People, Ideas & Objects provide oil and gas producers with the most profitable means of oil and gas operations. Maybe you’ve heard of our value proposition. If a producer is faced with full production at 100,000 barrels which generates a loss of $2 per barrel, or producing 80,000 barrels which produces a profit of $5 per barrel, what is in their best interest? With the decentralized production model the producer is able to scale up and down their production profile based on the price of the commodities and the cost of each individual property. If the property can’t make a profit at the current price it is shut-in until such time it can be reworked and put back into profitable production. The costs of the producer at 100,000 boe / day are different than what the costs are at 80,000 barrels per day. What the Preliminary Specifications decentralized production model has done is turned all of the producers costs into variable costs. Including actual overhead.

If the price of the commodity should drop precipitously to the point where only 10,000 boe / day is profitable then the producer changes their production profile on that basis. Yet they remain profitable due to the fact that their royalties, operations and overhead costs have all dropped to zero on the shut-in production and only incur those costs on 10,000 boe / day.

The second simple tool that we use in motivating the producer to shut-in their unprofitable production and obtain the production discipline that is necessary in the North American marketplace is as follows. Earnings are what drive the value of the shares of the producers. The better the earnings, the better the stock’s performance and the happier the investors. Happy investors means they would issue new capital and raise the money to expand their profitable operations. If a producer today were to begin offering profitable operations to their shareholders. In a marketplace riddled with financial carcasses from overproduction and oversupply do you think they would have a future?

There certainly will be violators of the production discipline of only producing profitable production. The motivation to cheat is well documented through the difficulties that OPEC experienced in the 1980’s and 1990’s. However, those producers may have higher revenue streams as a result of cheating, their actual profits will be lower than if they shut-in their unprofitable production. There profitable properties are being diluted by their unprofitable properties. As producers operations are today. Leading them to perform poorly in front of their shareholders and the market in general. These types of producers will be clearly evident in the marketplace. Their financial statements will be inconsistent with those of the rest of the industry. Whereas an industry that has attained production discipline will have each and every producer producing profitable production. The difficulty or the challenge in the industry, as it is today, is to increase your production profile over last year. In the future it will be necessary to increase it profitably. That won’t be a feature of spending money like a drunken sailor, and as a result, the pretenders will be weeded out by the contenders.

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. 

My Argument, Part XXXII

If we were to start to build the software defined as the Preliminary Specification today. What would be our priority and why would we develop our software in that manner. People, Ideas & Objects priority in developing software today, and always, is that it be user community driven. Throughout the history of the oil and gas industry users have been subjected to technical and accounting driven solutions that are top down approaches in terms of their design. It would not be difficult to develop a consensus that these solutions are inadequate for the 21st century, have failed the users needs and do not serve the business interests of the producer. I would also assert that the software defines and supports the organizations that we work within. Our producer organizations are failing financially and operationally. This is what I call a 21st century software bug.

I think we have a good foundation of understanding of the oil and gas industry captured in the Preliminary Specification. Building on that through the user community would bring about untold value to the producer firms, the oil and gas industry, the service industry and society in general. The key to realizing this value and quality of life issue will therefore come about due to the quality and capabilities of the user community that develops the Preliminary Specification. Understanding that we are currently in a software driven, organizationally constrained 21st century software bug, demands that we maintain this software development capability as a distinct attribute of the oil and gas industry for the rest of its existence. Locking ourselves into the strict definition of the Preliminary Specification for the long term will only lead to similar business issues whose scope and scale might be as significant as what we are experiencing today. Therefore the evolution of the business must be continually and directly mapped into the software by the user community.

Contrast this role for the People, Ideas & Objects user community with the historical use of user communities in oil and gas ERP developments. Most of the user communities that I’ve seen usually have their budget cut entirely by the time they’ve had their first meeting. It has been a tragedy in terms of implementing the software. Here’s a manual, learn the software overnight, we’re going live in the morning, this being known as user buy-in. User community budgets clearly interfere with the drilling of more wells.

Why is People, Ideas & Objects different when it comes to user community involvement? The fact of the matter is user based software is usable. It’s that simple. We see that today in other industries and other software types as the user community based software developments are the only serious approach to software development. I don’t believe the oil and gas industry has been well served in the ERP marketplace which is why I went into this business. Our budget dedicates ⅓ of our costs to user community participation and development. Throwing money around has also been a great exercise in failure in many serious software development projects. To leave the situation with only these guidelines for the users at this point, would therefore lead to our demise with only a number of wealthy former user community participants. There needs to be an organization where the members of the user community can affect the necessary type of change in the oil and gas industry. With the Preliminary Specification, change is the remedy to what ails the industry today. Without the user community having the power necessary to drive that change it will fail.

I have stated many times that organizations are defined and supported by the software that they use. If we accept that thinking and take it to its ultimate application in oil and gas we come to the following conclusion. It’s not enough to own the oil and gas asset, it's also necessary to have access to the software that makes the oil and gas asset profitable. Not a statement that bureaucrats like to hear. Conversely if you want a bureaucratic state hire bureaucrats for your user community. Nonetheless our user communities role in ensuring that oil and gas assets are profitable is the critical point. And through our user community vision they are endowed with the necessary power to generate the software that will define and support profitable oil and gas operations.

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. 

My Argument, Part XXXI

What the oil and gas industry, and its producers need is a methodology of production allocation. In the world of shale, where production has shown itself to continually overwhelm the marketplace and destroy the oil and gas commodity prices. The old business model of controlling capital expenditures is incapable, inefficient and failing outright. The only reasonable, fair and equitable means in which to allocate production is to do so on the basis of profitability. If a property can show, with detailed financial statements that include the royalties, operating and actual overhead costs can the determination of profitability be made. Once a property achieves profitability it is assessed monthly based on its revenues and costs. If it ceases to be profitable it will be moved to the producers shut-in inventory. Where they can innovatively work the property to enhance its reserves, revenues or reduce its costs. This is how People, Ideas & Objects Preliminary Specifications decentralized production model operates.

Today we see shale producers adopting a more “disciplined” approach to the business. At least that is what they tell us. They understand that they need to be disciplined in order to ensure they don’t flood the market with shale production, again. Yet two months into the OPEC production sharing agreement and the U.S. is already over the 9 million barrel per day threshold. Although I haven’t a clue where the investment capital will be coming from to fund the announced 2017 budgets of the producers. They are ramping up as we speak to spend like drunken sailors once again. As we indicated yesterday that is their business model. There’s a new name for this in the industry, it’s now being called a manufacturing process. That’s what’s being used to attract the new investment I guess.

So everyone drills and everyone produces and everyone dumps the product on the market. Oil or gas it doesn’t matter, these reserves are worth sixteen trillion dollars, the startup producer claims. The party bus just pulled up. It’s a little worn since the last time I saw it, but it’ll do. Oil and gas is back! On the basis of the fourth quarter reports that I reviewed this may be the shortest boom in business history. Spending money like a drunken sailor, when you have none, is a recipe for people getting hurt. Further leveraging balance sheets that have been destroyed by systemic losses, have outsized balances of property, plant and equipment that are really just unrealized costs of past production, and shareholder equity that shows that the firm's lifetime activities amount to nothing but a losing cause are one thing. The lack of cash, working capital and generation of cash flow being the other “current crisis” in the industry. So yeah lets all get on the bus.

So instead of constructively looking at the business and fixing the industries issues we see the mad dash once more. I think we all could certainly be doing more productive things like developing software. But I’m biased because I want to build value. What is the purpose of drilling more wells and increasing the deliverability of the industry if its in excess of what the market can handle. Does anyone doubt that the commodity prices will go down?

The industry is filled with bureaucrats who are concerned with the environmental impact of energy production, the communities they operate in and their activities that they’re involved in and any other sort of distraction that pulls them away from their primary purpose of building value. If they build value in the form of real profits, not the fake type they’ve been reporting for decades, then society will profit as well. The people who are currently able to profit from producers concerns about the environment will be able to take care of those things. It’s not the producers, or should I say bureaucrats job. Theirs is to profitably produce oil and gas. Not on a scorched earth basis, but profitably and as a benefit to society. What benefit to society is the industry providing today? Losses in the industry, losses in the service industry, losses in investment, losses in tax revenue, losses in royalty income and losses most particularly to those that are employed in the industry. Has any producer thought how they’ll get the universities to reestablish their curriculum in petroleum engineering and geology?

Round and round and round and round we go. That’s how the tub drains. It would seem to me to be the way in which value is leaving oil and gas. Just enough damage that no one does anything, then the turnaround arrives. One step forward two steps back, and repeat.

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. 

My Argument, Part XXX

Producers love to declare the value that they hold in oil and gas reserves. These numbers are what cause everyone to lose their minds, put their money down and watch it glow for decades on the balance sheet. Recently we saw Exxon having to take the value of their heavy oil investments off their reserves estimates. The cumulative $20 billion investment has added nothing of value to the firm and will be removed. To counter that disappointment we have two announcements from Exxon to mitigate the impact in the market. The first is the switch in their focus towards shale.

CHICAGO (Bloomberg) -- Exxon Mobil Corp. is trading in long-term projects that pump oil over decades for U.S. shale drilling that can be switched on or off as crude prices change.

To augment this new focus Exxon went out and purchased a shale producer that provides them with greater shale exposure. It has been described as the following.

When the transaction closes, Exxon’s Permian asset base will hold the equivalent of 6 Bbbl of crude, an asset that’s worth $324 billion at current oil prices. Wells drilled in the acquired area will generate “attractive returns” even if crude drops back down to $40/bbl, Exxon said when the deal was announced on Jan. 17.

Here we have evidence of the fact that producers hold out the ridiculous value proposition of determining barrels of reserves times the current price. Some might suggest that this is no different than People, Ideas & Objects publication of its value proposition of $25.7 to $45.7 trillion. I would assert that our value proposition is incremental value and is realized on top of the current cost structure of the industry. The statement of $324 billion assumes no costs and therefore is a distortion of the facts. A distortion due to the fact that the producer is unable to produce any oil and gas profitably at this time. Therefore this $324 billion will simply slip through Exxon’s fingers with no value being realized by the shareholders, etc. Note however, the bureaucrats will be fine.

It is the last part of the first Exxon quotation in this blog post that I also want to address. Their comment that “shale drilling that can be switched on or off as crude prices change.” Is there a belief in the marketplace that the producers will move to drill dynamically based on the prices realized? This has been the business model that has been in place for decades. It is a blunt and ineffective instrument. Scaling up capital expenditures in the good times, and scaling them down in troubled times. The difficulty with the current business model is that we only ever seem to be in difficult times. And that in no way is good enough.

Last week we saw the producers participate in the annual CERA conference. In contrast to last years mood producers were boasting their recovery and asserting that the Saudi’s and OPEC were in retreat from the shale producers. Based on the fourth quarter reports I certainly don’t see any recovery in the producers, the oil price might be marginally higher but still unable to cover the costs of production. And no one anywhere is profitable. Shale’s dynamics are pushing U.S. deliverability over 9 million barrels with the inevitable flood of oil on the horizon. North American producers believe they can compete with Saudi costs that include the societal costs of the Kingdom. I see that as an unfair comparison. Saudi production costs are negligible in comparison to shale. If the producers want to assert the costs of the Kingdom then they should adopt the cost of the U.S. debt and deficit as part of their cost structure to make it directly comparable.

I see a lot of deception in the marketplace. Producers are convincing themselves that they can compete and that they are financially capable. Neither are the case. Overproduction is increasing at a time when inventories are at record volumes. Positions in the futures market for further increases in the price of oil are also at records. These are all pointing to another steep decline in the price of oil as a result of the North American shale producers overproduction. This is not a tragic event, the bureaucrats will continue to get paid and that’s all that really matters. I’ve lost count of the number of times we’ve been through this cycle but it does seem to have a good rhythm.

Producers should be careful not to fall into the trap that has been laid for them by the Saudi’s. If they are seen as destroying the oil market in just a few months after a production sharing agreement is implemented. People won’t have difficulty in seeing who’s truly responsible for the poor oil and gas prices.

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. 

Short Break

No posting today or tomorrow, returning Monday.

My Argument, Part XXIX

Through the Preliminary Specification we fundamentally transform the way in which oil and gas is operated. Shifting to identify and support the Joint Operating Committee as the key organizational construct we introduce new dynamics into the industry. The compliance and governance frameworks of the hierarchy are moved from what we call the existing corporate model to align with the Joint Operating Committees legal, financial, operational decision making, cultural, communication, strategic and innovation frameworks. This alignment achieves a speed, innovativeness, accountability and profitability in the oil and gas producers that use the People, Ideas & Objects Preliminary Specification.

Moving away from the corporate model will allow the producer to focus on the business of the property. Today the corporate model is constrained by the compliance and governance of regulatory, tax and accounting requirements as opposed to the business of the business. Drilling wells for the sake of drilling wells is the old business model. Each property must be evaluated each month to ensure that it is profitable in the current commodity price environment and cost structure. If it is not, then the property needs to be shut-in and looked at from the point of view of how its profitability can be enhanced by increasing its throughput, lowering its costs or expanding its reserves and returning it to profitable production. It will be through these individual decisions being made independently at each property based on actual accounting information, each month that will remove the overproduction and oversupply from the commodity markets. And allow the commodity prices to find their marginal cost.

In People, Ideas & Objects system the producers are reorganized to focus on their key competitive advantages of their earth science and engineering capabilities, and their land and asset base. The producers C class executives, the earth science and engineering resources, some land and legal, and support staff remain at the producer on a full time basis. The remainder of the accounting and administrative resources are reorganized into service providers who focus on one process or subprocess and apply it across their client base which consists of all the producers in the industry. It is in this way that they can specialize and divide the labor within the industry in order to expand the capacities and capabilities of the administrative and accounting of the industry.

The industry itself takes on unique organizational changes as a result of implementing the Preliminary Specification. These changes begin with the software development capabilities of People, Ideas & Objects. Software is a critical competitive enabler in all industries. By using software, organizations seal their structures in cement. Disabling them from making any change to accommodate any inevitable business change. Therefore, a permanent software development capability is a key competitive advantage that the oil and gas industry will inherit from People, Ideas & Objects by using the Preliminary Specification. Software today also needs to be user driven in order to ensure that it addresses the needs of the people using the software. The Preliminary Specification is user community based software developments. Our approach to this element of software quality is reflected in our user community vision. A vision that spells out that our users have the power and capabilities to drive the changes that are necessary in the industry.

The service providers mentioned before are a critical aspect of enabling the producers to achieve the most profitable means of oil and gas operations. If a property is shut-in due to it being uneconomic, no data is generated that month and therefore no triggering event will occur in our task and transfer network of the Preliminary Specification. And none of the service providers will therefore have any work to do with that property for the month that it’s shut-in. As a result the producer records a null event. No profit, but also no loss. There will be no revenue, royalties, operations or any overhead costs for that month. No production accounting people, no office space, or printer paper, etc. And therefore the producers profitable properties will no longer be diluted by unprofitable operations. The overhead burden of the oil and gas industry will have shifted from the industry itself to the service providers. Who understand that at anytime they may be subject to a 15% decline in their revenues. Assuming a 15% decline in the industries production profile. Something that they can budget for on an annual basis.

In a world where overproduction and oversupply in North America are the key issues in oil and gas. And the abundance brought about by shale will continue these trends for the long term. This thinking of People, Ideas & Objects is considered by producers to be unreasonable and crazy. You don’t have to be crazy to do my job, but I’ve found it to be a strategic competitive advantage. The damage that has been done in oil and gas is complete. I can’t see how the industry can continue without the changes that have been mentioned here. There is a challenging and opportune future ahead of us and the first thing we need to do is to organize ourselves to ensure that the value to society is realized by all concerned. The producers, investors, governments, royalty holders, employees and service industry representatives. These groups capture the scope of those stakeholders in society. They’ve gone on long enough without benefiting from oil and gas. Its time the bureaucrats stopped gorging only themselves at the trough and let the value flow to these stakeholders.

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.

My Argument, Part XXVIII

There has been a dramatic deterioration in the cash flow of each of the producers during this past year. That would seem to be the natural case with the very low commodity prices at the early part of 2016. However the fourth quarter did not seem to remedy the situation at any of the producers I reviewed. $4 natural gas and $53 oil were some of the healthiest prices that were realized in the past number of years. I think our proposed solution to the industries ailes is the correct remedy. A three fold revenue increase is the only thing that will solve the financial difficulties of any of the producers that I’ve seen. The only way in which to do that is to implement People, Ideas & Objects Preliminary Specifications decentralized production model and price maker strategy. Then producers will only produce profitable oil and gas and generate the cash flow to fund their operations.

We see continued resistance to this position in the industry. Bureaucrats do not believe that they have any impact on the prices of the commodities that they produce. Their actions are not part of the problem and therefore can’t be part of the solution. This is just a capitulation of responsibility and avoidance of the difficult task of implementing the Preliminary Specification. Bureaucrats know that they can’t fight the situation forever and they have no plans to do so. They’re involved in a limited engagement with People, Ideas & Objects to ensure that they maximize their personal revenues from the industry before they begin their mass migration out.

So whether it is the “jarring gong of self preservation” that everyone hears that precipitates the necessary actions to fix the industry. The bureaucrats migrate out. Or the investors express their frustration with their investments poor performance by acting to correct these issues. It will be one of these three scenarios that will be the manner in which the necessary changes are made in the industry. Oil and gas has carried on for far too long with its “muddle along” strategy. Things have changed fundamentally with the development of shale. The business model of the current producers is incapable of dealing with the abundance of the resources that are available through shale reservoirs. The commodity markets are overwhelmed by the volumes of reserves of oil and natural gas. They are overwhelmed by the volumes in inventory and the production that is presented each and every day. Producers don’t discuss these points, they just continue to overproduce and drill for more.

There is now mention in the markets that the Saudi’s will be changing their production strategy once they’ve completed the IPO of Saudi Aramco. Moving back to full production for the long term. This flooding of the markets is consistent with the thinking of BP’s Chief economist who said that only mid-east producers would be profitable in the abundant, oversupplied oil markets. And this would be the case until 2050. If North American producers were smart they would circumvent the Saudi’s motivation to do this while they still have the ability to materially impact prices in both oil and natural gas. If mid-east producers just flood the market until 2050, will there be any opportunity to implement the price maker strategy? Producers should ask their investors if they want to take that path with them. There will come a time when all solutions fail to solve this problem for the North American producer.

The bureaucrats will have moved on by then so you should be careful who you ask. Is it wise to have North America unprofitably produce oil and gas for the next generation? I don’t think so and that is why I think it’s very important that we implement the Preliminary Specification in the industry as soon as possible. The past generation produced oil and gas unprofitably and look at the disaster that is.

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. 

My Argument, Part XXVII

If it is that we are to hobble along paying one screaming, nasty creditor after another. Spend our time on the phone trying to convince people to give us another chance, to support the firm in its hour of need. Ask employees to do a bit more each week. Camping out at the bank. Selling the next in an never ending parade of crown jewel properties to keep afloat. Then oil and gas is doing all that we could ever have expected of it. When the operational problems arise or the pipelines leak, then those unfortunate producers can show the world those skills and capabilities that’ve been so well honed over the past years and troubleshoot the problem with a package of Band Aid brand bandages. We all know they’re that good. But lets look at the bigger picture.

The opportunities and issues that we face in the next 25 years will be the greatest this industry has ever faced. Hobbling along with our muddle along strategy is the vision that the industry has put forward to meet these challenges. That’s not good enough. The investors and bankers who have seen their investments in the producers themselves perform very poorly will no doubt reconsider their investments. This reconsideration is different than looking up the price of the stock on the exchange. That is not how you evaluate the investment in the producer. In most cases the book value of the producers interest is nothing. Their investments have been eroded away by the chronic losses and the apathy of the bureaucrats. Bank and bond holders have taken the hit in terms of settling at less than face value on their investments.

Expecting these people to then step up and fund the next round of $20 to $40 trillion in investment over the next 25 years will be laughed at. The industry doesn’t have the performance necessary, or the integrity to ask for that. Besides the expectation that that volume of money would be available is ridiculous on its face. What the industry needs to do is to change its business model to the Preliminary Specification and begin the self funding that most businesses do. A business model that also recognizes that shale has changed the industry from one based on scarcity of the resource to one in which there is an abundance of the resource. The reliance on investment capital to provide consumers with a subsidy on their energy consumption is over. The producers are broke. Bureaucrats have fundamentally run the business into the ground. This being the beginning of what should be the industry's golden years.

As with every industry the forces of creative destruction are at work. Eventually all industries fail to produce any value from the business model that they employ. During the downturn in 2008 GM was clearly failing in the marketplace. Something that it had been doing since the Japanese began introducing vehicles in the 1970’s. Until the investors saw the whole in their portfolios did anyone do anything about it. And I’m not holding GM out as an example of productive creative destruction, clearly the firm needs more work. However the signalling event then, as it was with the banking crisis, was when the banks and investors were feeling the pain from their investments. Pain that was in excess of what their financial statements could handle.

As much as the oil and gas bureaucrats like to point to the reserves in the ground as the intrinsic value of the firm. They are worthless to anyone if they can’t be produced profitably. Currently the book value of the industry, based on all the financial statements of the producers is $0.00. The industry chronically loses money and demands cash in large quantities just to produce. This is in sharp contrast to the values represented on the exchanges for each individual producer. This variance will be corrected in the short term. And when the investors are presented with the fact that these bureaucrats have destroyed the industry, have no plans to undertake these golden years of opportunity and are demanding more money just to produce, then we may see the final act of the industry as it stands today.

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. 

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