Third Friday Off

No posting today.

Our Developments in Sight

In as little as four and one half months from now we begin the developments of the Preliminary Specification. Not a lot of time to complete the things we need to do. People interested in our implementation or our plan can follow those links. If you’re interested in being one of the one hundred or so members of the user community that we’re starting with in our first year then you should complete your application as soon as possible. Remember these are part time positions that we are looking to fill approximately 33 full time positions with. We are looking for our user community to provide us with a broad scope of understanding of the industry. To fill out a detailed outline of the Preliminary Specifications deliverables for September 2018. Therefore we need a reasonably large number of user community applications to select from. Selection for the first year does not preclude those that are not selected from joining the user community in subsequent years. We will be looking for a total of 3,000 user community members making up 600 man years of effort per year when we are in full development.

Our software developers are a different story as they are full time hires and employees of People, Ideas & Objects. We are therefore looking to fill this requirement somewhat dynamically in the first year, if that makes any sense. These will be critical team members for the long term of the project. Therefore user community members may see rapid turnover in some of the developer positions in the initial phase of this development. This is one of the reasons that we need to start this development now. Our products and services are needed in the marketplace today, but nothing like what they’ll be needed in the next few years. As long as everyone understands that I’m sure we’ll be able to work through it.

Another aspect of what our developers will be working on is having the Oracle Fusion Middleware and Oracle Fusion Applications operational in a cloud computing environment. That way the user community will be able to see the base of the applications that they’re building upon. And they will be able to see their iterative developments as the developers code is committed and run on that environment for the users to see and use. It will be this facility that will enable us to move much quicker and the user community increase the quality of their offerings. Our only constraint is the speed of the user communities ability to think. Oracle also has one third of the costs of our initial budget made available to them to begin the technology transfer from their organization over to People, Ideas & Objects. We’ll need to learn many things and Oracle will be able to bring us up to speed in the shortest possible time. They will also be able to support their applications and our developments at a much higher level than what we would otherwise be able to do. We have a large technically challenging task ahead of us. Oracle has fully one third of all of the costs of our entire budget to ensure that these objectives are achieved in the long run. I have worked closely with Oracle in this capacity during our 1992 - 1997 joint development efforts. It is the superior methodology to ensure that we mitigate the technical risk we face and achieve the success that the oil and gas industry requires.

I have been abusive towards the oil and gas producers throughout the history of this blog. We have a MAAA (Mutually Assured Abuse Agreement) in place and I adhere to the spirit of that agreement. If they want to stop abusing the group that is providing the most profitable means of oil and gas operations. Who are conducting the only issue identification and resolution in the industry. Then I’m game. We are unquestionably the personification of evil but producers could easily overcome this by funding our first year's $100 million budget in a timely manner. Producers need to think and ask themselves critically, do they have the situation under control, and are their investors convinced that they have a plan for the future? Or do they need to address the business model in which the industry is operated and implement one that provides the oil and gas producer with a dynamic, innovative, accountable and profitable footing? As I said the other day, the writing's on the wall and my focus in on getting this software and the user communities services operational in a successful manner in the oil and gas industry. They are certainly welcome to join us here at anytime before our start date of September 25, 2017.

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. 

Onward and Forward

The one thing we should be grateful to the producers for is that we now have tangible proof. Proof that spending money like drunken sailors never made anyone rich. We’re doing something about the issues in oil and gas so we don’t look like the bureaucrats, developing our software beginning September 25, 2017, otherwise we are no better than the bureaucrats who do nothing. And therefore we are at the very beginning of the delivery of the Preliminary Specification to the oil and gas industry. Key to this delivery is our user community that we see as the source for the quality of our software and the services that these user community participants will provide through their service provider organizations.

Almost three and one half years of user community development is the investment that has been made by People, Ideas & Objects. It had to be made. The user community is the critical point of success and quality of our offering. It is now the only major impediment to our speed in delivering our solutions. For the industry to move and implement the necessary changes the user community can be deployed in rapid fashion and deliver on the vision of the Preliminary Specification. It is the speed in which the user community can think that will be the constraint that we are now limited by. That multi-year investment has been made and now it's time for us to act on that investment and the vision of the Preliminary Specification.

I published the Preliminary Specification in December 2013. It provides the overall vision of how and what the industry and producer needs in order to to become dynamic, innovative, accountable and profitable. Since then we’ve worked to develop the user community. There is a saying that I think is appropriate for everyone to consider at this time.

‘Vision without action is merely a dream. action without vision just passes the time. Vision with action can change the world!’

With the participation of the user community in the development of the Preliminary Specification we can change the oil and gas industry to one that is dynamic, innovative, accountable and profitable. With no bureaucrats allowed! It comes down to the individual decisions of the people within the user community who have and will decide that enough is enough. What the producers believe today is that everything will soon return to normal. Shale is here for the very long term. Outsized balances of property, plant and equipment will be here for a long time. The debts will be here for a long time, and most probably, growing. The overproduction and oversupply issues are systemic and chronic and prompted me to seek a solution in 1991 to the overproduction in the mid 1980’s that caused the oil price collapse. Producers then just continued to lose money and increased production until the day they died. Sounds familiar doesn’t it. These problems are not going to disappear under these current administrations. These issues appear to me to be a feature of the business model that’s in use. Continued inaction, without any vision of the future, has us wasting time that is too expensive for all concerned. Which is exactly what the bureaucrats want.

I would argue that these problems will only become more protracted and difficult for the producers to deal with. The lack of cash is the current symptom that is plaguing the industry. And there are many ways to remediate that cash shortfall, none of which the producers are finding that they would consider affordable. And so they will muddle along and do nothing. It is now clear to those within the industry that shale production volumes increase at much lower price levels than first believed. Of course they would, it’s the producers only source of cash. Even in natural gas it was believed that shale production volumes stopped increasing last year. Now we find that to be untrue. Natural gas prices began their precipitous shale induced decline in the summer of 2008. Other than lose vast amounts of money and time since then nothing has been done. This business model is truly flawed. Our changes need to be made in the oil and gas marketplace and now is that time. Otherwise we’ll be stuck here forever.

It is the user community that is the source of the quality of the ERP systems that we’ll use in the future. People, Ideas & Objects have invested heavily in the development of our user community and now is the time for you to begin your participation. The issues in the industry are not being actively discussed and there is no vision and no plan to deal with them. More time will be wasted as a result and based on the financial performance of the industry a lot more money too. We can remedy this with the vision of the Preliminary Specification and the individual actions of the user community participants.

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. 

We Are The Standard

Yesterday we detailed the issue that oil and gas producers face as a result of their inaction and covering up the difficulties they’re experiencing. Chronic and systemic overproduction and oversupply are now a permanent feature of shale based reservoirs. And commercial financial performance has never been attained anywhere in the industry over the past four decades. This has set the investment community on strike, creating a cash crisis that deepens with each successive quarter. Continued avoidance of the issues by the producers can only continue for so long. At some point they will need to regain the trust and confidence of the investment community, and banks, in order to function as viable going concerns operating commercial businesses. How can that trust and confidence, the integrity that they have things in hand, be earned by the industry?

People, Ideas & Objects, our user community and the service provider organizations that they’re developing will be the means in which the industry regains the trust and confidence of the investment community. Primarily by providing the oil and gas producers with the most profitable means of oil and gas operations. Something that we’re dedicated too and have developed as key elements of the Preliminary Specification. Everything that is done in the Preliminary Specification is to generate the profitability that a commercial industry needs. This is done so that society can prosper as a result of a healthy oil and gas industry. People will continue to be gainfully employed. People will be able to look to the industry as an area of interest to pursue through their university education. People in the service industry will be able to develop businesses that continue as going concerns and not risk everything on the “cyclical” nature of oil and gas. These people will pay taxes, as will the oil and gas producers. Who will also pay royalties. And lastly the investors who have made this all happen will be able to see the day when their investments have actually paid off. That is how an industry contributes to society. Other than the bureaucrats, whose benefited in the past four decades? No one.

People, Ideas & Objects, our user community and the service providers are the standard of expectation and the standard of performance that the industry will attain. Our Revenue Model specifies how we are able to source the resources that we need to achieve this. We are not blind sleepwalking agents of whomever will feed us. We are delivering the systems, accounting and administration that is necessary to achieve the most profitable means of oil and gas operations. By running the industry as a business we will be able to achieve much more than what’s been done to date. What will be expected of us in the next 25 years will be the most demanding period that the industry has ever faced. Where is the current discussion of this future? Muddling along through the next 25 years will only bring more of the poor performance we’ve seen throughout the past four decades. Muddling along and doing nothing are abject failures as the strategy of every producer. It was an inane strategy, ridiculous to consider and foolish to pursue. Now the evidence shows that it’s been a financial disaster.

We commence developments with our user community of our software on September 25, 2017. Producers need to realize the situation that exists today and take steps to remediate these problems. Otherwise the end is clearly in focus. Their participation is a necessary element of this development in a number of ways. They hold the financial resources that we need to build our product and services. We need the $100 million for our first years development costs in place by our start date. We then will need our full budget in place by September 2018. Producers should ask themselves if the act of funding our budget will satisfy the investors to the point where they’ll call off their strike? Another aspect of our need for producers participation is in terms of software quality. They need to work with our user community to ensure that they are receiving the software that they need to function. If you put nothing into this development I can assure you’ll get nothing out of it. There are fundamental and significant changes being made to the producer firms and industry. Being unaware and unknowing of these would be terminal to your operation. There would also be, in my opinion, no opportunity for you to catch up once the software is operational. The speed of the producers on our system will overwhelm your performance in the marketplace.

The writing's on the wall. What will you do? Try the junk bond market again? Muddling along will certainly be the operative strategy. However the difficulties will be about as high or higher as they have been these past two years. A constant chronic and regressive struggle throughout your future. Or you can choose to make the change that will end this destructive cycle that began long before most of the people began working in the industry. The culture is flawed and needs to be shelved. We need to adopt the dynamic, innovative, accountable and profitable culture that is the by-product 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.

ROFLOL

Earnings of the producers for the first quarter of 2017 have all been published for the most part. I have been critical of the earnings and accounting of the producers on this blog. On many occasions I’ve stated that they did not have any real profits for the past four decades and that they were not innovative. They’ve certainly proved me wrong with this first quarter's performance. In most cases the producers did report somewhat healthy profits in comparison to the past two dismal years. The problem for the producers is that there continues to be no cash. Although there were profits, no real cash was generated. Which seems odd doesn’t it? What they’ve done is increased the number of years in which their depleting their property plant and equipment. Extending it out to 15 years in some cases. Which dropped the amount of depletion recognized in the current quarter by, you guessed it, the differential in this quarter's profits. When a producer says their innovative don’t forget to include the innovations that occur in accounting as a key part of that. For the last year we’ve heard the producers claim that they reduced their costs to ensure that they were only producing profitable operations. I guess that’s true when you reduce the amount of depletion per barrel of oil, that is a reduction in the cost of oil and gas. Bernie Madoff is proud of this bunch.

This farcical and comical act reflects the bureaucracy doubling down on their positions. It reflects the position that they will stick their head in the sand and avoid the problems in the industry, at whatever cost. The quarter generated no cash, producers have no cash, no working capital and no access to any capital markets. They’ve been cutoff now for the better part of a year from the serious money that traditionally invested in the producer's annual stock offerings. I saw no money being raised by any of these firms in the first quarter. Banks have stopped all material lending of any money. Those that were fortunate enough to have raised any cash from banks spent that cash on dividends. Otherwise they would’ve had to cease the distribution of those dividends. Profitable yes, in an obscure accounting sense, but cashless.

My analysis of the quarter determined a new factor that I think effectively reflects the distorted nature of what I’ve been talking about here. That bloated balance sheets of property, plant and equipment exist everywhere in the industry. And as a result none of the producers recognize the capital costs of past production and as such have never been profitable. It does no one any good to have these capital costs, in a capital intensive industry, sit for 15 years. If the industry would have recognized them in an appropriate manner, as a business, these costs would have flowed to the income statement. Where, if they were receiving commercial prices for their products they would have been able to report real profits and return those capital investments in property, plant and equipment back into cash for further investment. This would be a commercial operation. But why would you do that when you can just hold an annual share offering.

This factor that I am speaking of reflects this distortion but also shows that the fake profits that they’ve reported over their lifetime don’t amount to a hill of beans. I reviewed 23 companies and compiled a summation of those companies into a representative sample of the industry. These are North American based producers that have 7.688 million barrels of oil equivalent per day output. Their undepleted property, plant and equipment currently stands at $459.2 billion while their cumulative lifetime earnings as represented in retained earnings sits at $61.9 billion. Most if not all of these producers are in excess of 20 years old. The return of dividends in 2016 was $8.5 billion or 1.85%. We’ll assume that has been the case for each of the prior years. Nonetheless, returning only 13.5% of that investment over the life of those assets, above the possibly 37% in dividends over that period. Is abysmal. And that is on the basis of an accounting that is highly questionable. On a reasonable accounting basis this producer sample would have reported $397.3 billion in losses.

This is the issue that the bureaucrats need to focus on. Chronic, systemic overproduction, oversupply and unprofitability. If they don’t see that problem I’d be surprised. They certainly went to great lengths to try to hide these facts in the first quarter 2017 reports. The issue is performance, and clearly there is none, and never has been. I have detailed the number of reasons that this issue exists. The remedy is the Preliminary Specification, its decentralized production model and price maker strategy which we are undertaking to begin developments on September 25, 2017. Please note the change in the date. I have moved it back three weeks.

I doubt that I am the first to look at these numbers from the point of view of an investor. I’m sure that’s why there is no further investment being made in the industry. And these first quarter 2017 accounting shenanigans will not have changed any minds. Clearly there is a problem and the investors were only adding to it by participating in the annual stock offerings. Why would that continue? I see no reason for that until the producers deal with the issues at hand. I think they’re fooling themselves into believing that this is fixed.

This is the history of the industry. And we all know that accounting doesn’t matter in oil and gas. But accounting is about performance. Clearly the industry in the past four decades has not performed. It is reasonable to state that it never attained a level of commercial operations. Investors had expressed their concerns that shale may not be a viable commercial operation. We are nowhere near answering that question. Is a continuation of these non-commercial operations for the next 25 years in the industry's future? What’s the plan? It's one thing to avoid the problem, it's another to publish quarterly reports that represent the wholesale dishonesty of what has been said in the past year. “We are profitable at $40.” etc. Integrity is a hard attribute to reclaim once its lost.

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. 

2 millionth word

I estimate that we are now in excess of two million words on this subject.

Third Friday Off

No Posting Today

Earnings Season, Once Again

First quarter reports of the producers began being published yesterday. This will provide us with our first look at what 2017 has to bring in terms of losses for the producers. If there are any earnings I’ll be more than surprised. I have been writing in preparation for this time since late September 2016. Beginning with our series on the “Best Business Opportunity, Ever” which details the opportunity to invest in oil and gas has never been better, that is when the Preliminary Specification is operational. Our next series detailed why it is we should have the Preliminary Specification in the marketplace. This series was entitled “My Argument.” And finally in addition to proposing a product in the form of the Preliminary Specification we submitted our plan of how it will be developed beginning September 4, 2017 in our series entitled “Our Plan.” Not giant steps but certainly more than what our friends the bureaucrats accomplished.

I believe these first quarter reports will stand in direct contrast to the optimism that has been spewed over the past six months by the producers. The Saudi’s and OPEC’s agreement put the North American producer in the position where they had no one left to blame for their poor financial performance. Therefore they have been out leading the parade of promoters that all is well and banging the big bass drums as loud as possible. The increase in oil prices to $55 was all that was required for them to return to their heydays. Rigs have been put back to work at a record rate and the increase in U.S. production is breaking records too. This behavior is in the cultural DNA of the bureaucrats. They can’t, won’t and will not ever change. With no one to blame for their continued poor performance, who will believe them that “next time” they’ll get it right. That all they need is a bit more “time.” With the aggravating factor of the prolific nature of shale, you can be sure I won’t be buying it.

In the next two weeks we’ll know the truth. Is $55 oil all that is required to make producers profitable. Not even close. There is however one key component that is now irrefutable and should be common knowledge for every person that works in oil and gas. I could even see the bureaucrats agreeing to this point. The OPEC agreement has shown the industry that the oil and gas commodities are price makers. Anyone who doubts that is being foolish. Just as the Preliminary Specification enables the producers to manage these commodities. What is needed now is the implementation of the Preliminary Specification and our recommended tripling of the oil and gas prices to put the industry back on a (real) profitable footing.

Our point of view, our solution and our plan can now be critiqued against the performance of the producers. 2015 and 2016 were the two worst years in oil and gas. Nothing has changed other than a production sharing agreement between OPEC members. There is a choice that needs to be made. Which direction will the oil and gas industry proceed. One in which it continues to “muddle along” and “do nothing” or proceed with the development of the Preliminary Specification on September 4, 2017.

Our budget captures the scope and scale of the issue at hand. It’s publication in early 2014 shows that we understand that issue and what is required to deal with it. To begin our developments we are seeking $100 million for our first years developments costs. That will enable us to start developing our software effective September 4, 2017 and continue with our fund raising until September 2018 when the remainder of our budget is secured. Then proceed until we finish our product. As I’ve pointed out elsewhere I’m no longer in the business of herding cats. If the industry wants this solution they can raise the money amongst the producer firms quite quickly. For the industry to rely on me to herd cats and try to cobble together the money will only cost them many years of unnecessary and very costly time which they have none of.

I’ll be taking two weeks off from writing returning May 15, 2017. I think the world has heard enough from me on this topic. Please review the three series of blog posts that have been written in the past year. They will provide an understanding of where I think we need to go. Also look in detail at the producer's financial reports being published in the next two weeks, and ask yourself, what is it that these people are offering?

P.S. Cenovus reported their earnings on Wednesday. They have the misfortune of trying to finance the $13 billion acquisition of Conoco’s heavy oil assets. This would effectively double the size of the company. Cenovus has no capability to finance a deal of this magnitude at this time. I would suggest it's questionable whether they could finance it in the most lenient of financial times in the industry. Therefore desperate people do desperate things. The quarterly report, note I said quarterly, not pro forma, has recorded a transaction where $2.5 billion of assets that were listed for sale on March 31, 2017 have been moved from Property, Plant and Equipment to Current Assets. These assets were noted in an April 25, 2017 Motley Fool report that quoted the company as saying "Cenovus indicated that it had received “several” inquiries from CEOs of other energy companies interested in purchasing some of the non-core assets Cenovus now owns." It will be interesting, in my opinion, to see who, the CEO or CFO, goes to prison for this. My thinking is that they'll be cell buddies. This is a material misstatement of the facts. It is not an error or a mistake. It is willful and designed to deceive those that would provide the $13 billion in financing. And is therefore accounting fraud. This is what has become of our industry.

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. 

Risks

When we consider the damage that has been inflicted on society from the downturn in oil and gas. Where governments are sending out tax refunds to producers instead of collecting corporate taxes. Royalty holders incomes are stripped to the bone. The service industry, which is the backbone of oil and gas, continues to somehow survive. Investors and bankers look at the giant money pits they’ve been duped into. And the people who work in oil and gas realize maybe working in this industry was a critical mistake. The resolution of these issues, even the identification of them, is something that our friends the bureaucrats don’t have the time or energy to consider. Therefore the risk that we run by not having the Preliminary Specification implemented in a timely manner is that this situation will continue. And I would suggest that the period of time that this current state would remain would be about the same amount of time that shale based reserves will be with us. We’re humans, we have the capacity to see the risk of inaction and take the appropriate steps to mitigate the losses. That is except for in oil and gas. Where “muddle along” and “do nothing” are the strategy and operating procedure that the industry has been built upon and religiously adheres too.

Natural gas has been depressed since 2010. It was 2014 when oil prices took their downward turn. What steps have been taken to mitigate the risk of any further losses being incurred in the industry? I am unaware of any. There has been significant blame tossed around that the Saudi’s this and OPEC that and prayers for cold winters. But outside of this there’s been nothing. There is no leadership in the industry whatsoever. It is sit on your hands until things turn around. Shale has fundamentally changed the industry from scarcity to abundance. Demanding that we recognize the need for a new business model in which to operate the business. If we don’t recognize this change and solve it by implementing the Preliminary Specification with its decentralized production model and price maker strategy. Then we run the risk that we will lose the capabilities that we’ve developed within the industry, regress and begin to lose our capacities.

There are no guarantees that the Preliminary Specification is viable. At this point it is little more than a functional business model that deals with today’s issues. It needs to be built. And that requires the participation of the industry to make it work. Will that happen? Does it need to happen? The risk is that the industry never realizes productive operations again. Producers are proving that they are incapable of identifying or dealing with this issue. In the 1980’s and 1990’s it was “oh whoa is me, we had another bad year financially with record oil and gas production.” Sound familiar? The industry is not financially viable anymore. The oil and gas prices that it receives have destroyed the financial strength of all of the producers. It now doesn’t receive the prices nor have the financial strength to carry it through any more difficulties. Therefore there is no more resilience in the industry. What we do know with all of this devastation is that nothing is said or done about it. This level of risk is unnecessary and very dangerous. I feel we will have real trouble in the very near future.

I should be the one that is the happiest of all about this state of affairs. I’ve always known that the Preliminary Specification could not be implemented within the industry during “normal” times. It needs to be done during times of duress when the status quo has failed completely. That seems to be where we’re headed. Yet I and many others affiliated with this project are the only ones that are concerned. We know it's politically incorrect to care, yet feel somebody should.

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. 

Profitable Operations

One of the issues that People, Ideas & Objects haven’t been very clear on is the producers and their properties determination of profitability. We all understand what profitable means but in oil and gas there are a number of points that the Preliminary Specification resolves regarding industries current methodology. The first of course is the depletion of capital costs in the current period. The second major issue is that the method of accounting for overhead in the industry does not lend itself to determining what the actual overhead costs are of any property. Therefore the determination of profitability of the property is almost always overstated as the depletion is stretched out to decades and the overhead estimates are a small fraction of what the actual overhead is. This is why producers continue to produce everything that they have, because everything that they have qualifies as a profitable property.

Dealing with the first issue, it is in the best interest of the producer to deplete their capital balances as quickly as possible. This would therefore represent that the property has returned the investment back to the company in the form of cash for further reinvestment elsewhere. By allowing the depletion to run into the decades permits an overstatement of earning and an overstatement of the book value of the property. Note the book value of the property being fundamentally different than the market value. By depleting their properties as quickly as possible producers will have their capital assets converted back into the cash that was invested in the property returned to them quickly and effectively. This is what the producers should be aspiring too. Not storing their capital costs on the balance sheet and leaving them there for decades on end. Storing them on their “well defended balance sheets” is counter to good business practices. Balance sheets of overstuffed capital assets would then be replaced with balance sheets of highly liquid assets.

The issue of overhead is unique. A moderate sized oil and gas company may have thousands of properties. To have each of their staff allocate their time and overhead costs to each specific property would substantially increase the producers overhead. Therefore all of the costs of overhead are charged to the corporate accounts and subsequently allocated between current corporate operations and capital. The majority of these actual overhead costs are allocated to capital during the preparation of quarterly and annual reports. In place of the actual overhead costs being charged to the property, the Petroleum Accountant Societies enable the producer to charge overhead allowances on a number of different basis. These overhead allowances are a small percentage of the actual costs to operate a property.

It is a result of the extended length of time that the capital is depleted and the very small percentage of overhead that is captured by the overhead allowances that the producing property is able to report a profitable operation. In reality however that may not be the case. If we consider that the buildings in the downtown cores of Calgary, Houston, Dallas and Oklahoma, as well as many other locations, are filled with the accountants and administrators used in oil and gas. The office space that they occupy and the costs that they incur we can rightly assume that the overhead costs in oil and gas are significant. Estimates vary for a number of reasons but it may be as high as $11 / barrel of oil equivalent. Since most of these costs are allocated to capital and the amount that is allocated to capital is unknown we can only estimate the true size of these costs.

The producers are using the high throughput production model in order to deal with the high overhead costs of their operations. The producer produces everything they have in order to allocate the costs of their overhead across the largest volume of production. This will enable them to be the most profitable as a corporate entity even though many of the individual properties are not profitable. The unprofitable properties are contributing to the overall corporate profitability of the producer by reducing an equal share of the somewhat fixed overhead costs.

This is all changed with the Preliminary Specification. First we will deplete the capital of the property as quickly as the properties net profits allow. Enabling the firm to realize the return of the capital from the property. In terms of overhead we use the decentralized production model as opposed to the high throughput production model. It seeks to match costs with revenues at whatever level of production the producer produces. The decentralized production model turns everyone of the producers costs into variable costs. So when the price of oil or gas drops below the properties profitability threshold the property can be shut-in and the royalties, operating costs and overhead costs will all be reduced to zero in line with the revenues. Incurring what we call a null operation, no profit, but also no loss. This allows the producer to scale their operation up and down their production profile based on the commodities prices. If prices are high they can produce at full capacity due to the fact that everything would be profitable. If prices drop, and 15% of their production is unprofitable, they can shut-in their unprofitable properties and continue to earn their maximum amount of profit from only 85% of their profitable properties.

The decentralized production model works by reducing the dynamic, innovative, accountable and profitable oil and gas producer down to the C class executives, the earth science and engineering resources, some land and legal, and some support staff. The remaining accounting and administrative resources have been reallocated to industry wide service providers that focus on one process and have the entire industry as their client base for that process. Each month they will receive information from producing properties that they will process and generate a bill that the producer will pay as overhead for the property and their company. If the property is shut-in there will be no information generated from the property, no work will be done by any of the service providers, no billings will therefore be generated and the property will incur a null operation and the producers overall overhead will be reduced.

It is in this way that each property can be evaluated based on a detailed accounting of the actual costs of the property. If it is unprofitable then it is shut-in. Removing the marginal production from the commodity markets. Fulfilling our price maker strategy. Saving the reserves for a time when they can be produced profitably. Keeping the costs of the reserves down by not having to add the costs of the additional incremental losses to the reserves. And recording a null operation, no profit but also no loss, which maximizes the producer's profits anywhere along the producer's production profile. The service providers will be assessing the producers for the actual costs of the overhead process that they manage. Therefore oil will be much less expensive to operate in comparison to gas. And other nuances that are present in the industry will be reflected in the costs of overhead of the properties. Not every property incurs the same amount of overhead as the current overhead allowances estimate. No two would be the same, it is safe to say.

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.