My Argument, Part XXXVII

Maximum pain will now be distributed throughout the North American oil and gas industry. You may have thought that the situation was turning around. We were told as much by the producers. The need to make changes prescribed by People, Ideas & Objects Preliminary Specification were laughed at and ridiculed again in December 2016. Producers had it under control. Oil prices were higher, natural gas prices were higher. And they don’t need no stinken software. They assured everyone that they wouldn’t be making the same mistake again, this time they had discipline. Yet here we are again with prices of both commodities in freefall. How could this have happened?

Implementing the Preliminary Specification in a normal environment has been understood by me to be a non-starter. You could never muster the energy necessary to make the changes within the producer and industry, and as a result the initiative would have eventually failed. We have always premised the implementation of the Preliminary Specification as a remedial rebuilding of the industry after its complete destruction had been done by the bureaucrats. This being the creative destruction that is the lifeblood of our advanced capitalist systems method of renewal.

I started this project 26 years ago this coming May. Based on what I saw as the difficulties being experienced in the 1980’s and 1990’s with low oil prices in the marketplace. All the producers needed to do was to shut-in some production, prices would rise and the industry would be out of a multi-decade downturn. Simple. However, once you started looking at the reasons why the producers can’t, won’t and will not ever shut-in production, you can see how complex the problem is. That’s why it took until 2013 to publish the Preliminary Specification. Based on the August 2003 realization that the use of the Joint Operating Committee was the solution to all of these problems. The ten years in between those dates was pure research into what and how the solution had to be, and all of that can be read here on this blog.

Now is the time for the Preliminary Specification to commence its developments. If you believe that the industry will last much longer in the hands of the bureaucrats then you’ve made your choice. If, however, on the other hand you believe that they’ve fundamentally destroyed the industry and its only the phase where maximum pain has to be extracted from all of those people, companies and investors in the industry. Then you should be reviewing our project to determine where you fit in. There can be no doubt in anyone's mind that the success of People, Ideas & Objects Preliminary Specification in the marketplace is necessary in order for the eventual success of the oil and gas industry. We can’t go back to the old ways of doing things due to the scope and scale of the failure that is about to be realized.

The way that the oil and gas industry has been run is rotten to the core. What producers say doesn’t relate back to their financial statements. They can’t be trusted to run a profitable operation. They don’t know what profit means. They’ve stored decades of past production costs as property, plant and equipment on the balance sheet and continue to expect investors to believe this means their worth something. They destroy value and have done so for decades. They are completely out of control and exercise no discipline whatsoever. The full realization of all of this is just about to hit those that have the most to lose in terms of monetary value. The investors.

Who is going to stick around and suffer through the rebuilding? We know the bureaucrats will cut and run at the first whisper of real trouble so we don’t need to concern ourselves with them. The opportunity to give the bureaucrats one more chance has clearly evaporated. Article after article in the business papers are now showing that the light is finally shining on this issue. Natural gas is projected to fall below $2 and oil is projected by some to fall into the $20s. And why wouldn’t they? There is nothing stopping these producers from completely overwhelming the markets in such fundamental ways that it’ll take years of disciplined profitable production through the Preliminary Specifications decentralized production model in order to rehabilitate the commodity markets. If maximum pain is what is required to make the changes in the process of creative destruction. Maximum pain is what the producers have created for everyone, and what we are all going to experience.

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 XXXVI

With evaluations of ERP systems being done on behalf of some producers. The question becomes what are the markets offerings. Only People, Ideas & Objects have a detailed specification of a system that deals with the issues that are ever present in the industry. A specification that requires the software to be developed. Others are offering functioning software code. Presenting to the industry, and the producer firms, the inherent issues that software presents to organizations. This post will argue the reasons why producers are better off choosing the developments of People, Ideas & Objects and moving to the Preliminary Specifications development.

Two of the key constraints in the use of ERP software are simply code and customers. As the software developer matures their code base continues to expand. Creating an overall conflict of interest due to code maintenance, which conversely doesn't generate any revenues. Customers also provide a conflict. As the customer base expands, support costs expand as well. Although these costs may be supported by the sale contract. The ability to make changes to the code become progressively more difficult with the increase in the volume of customers. As we’ve discussed here at People, Ideas & Objects software defines, supports and constrains organizations.

What's so different about People, Ideas & Objects Preliminary Specification? We are change oriented software developers. We generate revenues based on the changes that are present in the producer firms, industry and service providers. Our Revenue Model specifies how this monkey gets paid. Driven by the user community and dependent on the changes in the underlying business. If we should happen to need to replace entire modules then that is what will be done. People, Ideas & Objects compete based on the software development capabilities that we bring to the oil and gas producers and industry.

Another key component of our competitive strategy is the development of our Intellectual Property. With the Preliminary Specification we have developed substantial IP based on the 10 years of research that was conducted prior to its development. In order for the necessary changes to take place in the industry. Changes such as the adoption of the decentralized production model and price maker strategy. It is inevitable that the industry and producers will need to develop the Preliminary Specification. Use of the Preliminary Specifications underlying Intellectual Property outside of People, Ideas & Objects and our user community is not possible. Our Intellectual Property is the key to our user communities capabilities and will not be available for use outside of the user community vision.

As a key to our competitive advantage and development of the quality of user community we take our Intellectual Property seriously. Most people think this becomes a legal issue due to the rights inherent in copyright and other forms of Intellectual Property. In a small market such as oil and gas. With only a few hundred producers in the industry. We have put the producers CEO’s on notice, elsewhere and through this posting, that we will not accept any unauthorized use of our Intellectual Property. We know that these producers are good corporate citizens as are all the other participants in the industry, and our competitors. Therefore they wouldn’t spend the time or the substantial amounts of money that would be necessary to duplicate the Preliminary Specification for their own benefit. Their CEO’s would know that they would never be able to use the software from that venture if they did develop something on that basis.

Therefore there will only be one Preliminary Specification and user community. The user community itself will always be independent of the industry and that is its nature. There is however an implicit contract between industry and People, Ideas & Objects regarding the corporate structure and its ownership. The industry has me to build the Preliminary Specification, and then they can purchase that from me when it's complete for their own purposes. It is in that way, eventually, they can satisfy their need to own their ERP software.

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 XXXV

What do you know, pigs do fly. I thought that we were moving into a position where the focus of the issue of low commodity prices from overproduction might land where the culprits lay. Until now the Saudi’s and OPEC have taken the heat for low oil prices. I believed OPEC’s production sharing agreement was designed to change the focus away from them as the culprits and onto the North American producers, and most specifically the shale producers. My thinking being that if the oil prices did decline again, even after the production sharing agreement was in place, it wouldn’t be as a result of OPEC and we would then search for the real culprits. Last Thursday we had that admission from none other than Harold Hamm of Continental Resources. He stated the following in World Oil.

HOUSTON (Bloomberg) -- Harold Hamm, the billionaire shale oilman, said the U.S. industry could "kill" the oil market if it embarks into another spending binge, a rare warning in a business focused on fast growth to compete with OPEC. 

Based on the increased production profile of the United States, and the proposed capital budgets of the U.S. producers they’ve already killed the price of oil. Evidence of this is the fact that oil is trading as low as $48.79 down 11% from $54.45 in late February. Don't believe me, just wait and we'll see a further, precipitous drop in the price of oil. Now I think the issue that People, Ideas & Objects Preliminary Specification identified and resolved many years ago, that being systemic overproduction as a result of the industry standard “muddle along” strategy and business model, could become the consensus understanding in the industry. Then I would suggest the decentralized production model’s price maker strategy would be seen as the common sense solution. If you disagree then now might be good time to read our Preamble.

On a related note, we are finding documentary evidence that ERP systems are under consideration in oil and gas. For example, according to KPMG's Calgary job site people are being recruited to fill positions to meet the increased ERP systems demand from producers. These recruits are being asked to evaluate ERP market offerings on behalf of producers. What are these recruits going to be faced with in terms of offerings? I would suggest their first step would be to read our Revenue Model. Understand the history of how the producers have used and abused the ERP vendors over the last few decades to the point where only People, Ideas & Objects are offering anything new. As a result you’ll be hard pressed to see anything happen in this ERP market space before we see the color of the producers cash. I think the saying is four times bitten, fifth time shy.

Hence with no investment being made on behalf of the producers into ERP systems vendors, no investment has been made on behalf of the ERP systems providers. Pretty simple really. Therefore no vision, no plan, no understanding of the issues or how to solve them. Will any of these ERP systems providers adopt a user community based development and invest the years that People, Ideas & Objects have already dedicated to our communities development? What will their revenue model be and how will they overcome the issues we’ve identified. Hiring KPMG who are hiring people off the street, a.k.a. box tickers of existing software, will certainly answer these questions.

The key to this situation is to understand that OPEC achieved what they set out to do with the production sharing agreement. Shifting the focus of the issue onto the real culprit, the North American shale producer. One can see they've already changed their position in the following quote.

Al-Falih, in a clear message to the U.S. industry, said it would be "wishful thinking" to expect that Saudi Arabia and OPEC "will underwrite the investments of others at our own expense" through production cuts.

Evaluating ERP systems is rearranging deck chairs on the Titanic. What we really need to do is for someone, I would suggest the oil and gas investors, take the keys away from these bureaucrats. They don't deserve the right to continue. And they only have Santa Claus left to blame for their overproduction and oversupply. This is an issue I identified in the late 1980’s and early 1990’s and continues today, and there should be no doubt in anyone's mind, that without the Preliminary Specification, it will continue well into the future. Otherwise, the only thing bureaucrats will prove after their inevitable ERP system failure. A failure that no doubt will be due to the inability to address the overproduction issues. Then bureaucrats will be able to say that they’ve tried ERP, it failed and is not the solution. Establishing themselves in positions of authority and responsibility for another generation.

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 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.