A Mexican Standoff

With commodity prices as low as they are. With producers experiencing systemic and chronic cash shortfalls. The one thing that producers would be wise to avoid in these difficult times. Would be to take any additional capital from investors or bankers. It's not that anyone is offering any new capital to the industry. At the current valuations of the producers they’re certainly expensive. The investors have realized the difficulties in the industry will not be remedied by putting more capital into the industry. On the other hand, if a producer was offered some cash infusion, they may want to think twice about taking it. The expectations of performance will be front and center. How would they satisfy those needs for performance?

Let’s back the bus up seven weeks. The beginning of earnings season had the producers giddy with anticipation that the market would respond to their “profitable” first quarter reports. Therefore the good times were only minutes away. These quarterly profits were based on the producers magical ability during 2016 to reduce their historical capital costs of production. We all heard the declining numbers from $65 to now $40 / barrel is what is required in terms of the oil prices that are needed for them to be profitable. Foolish me, I didn’t think that this was possible, when you spend a million dollars it costs a million dollars. How does it subsequently change to a few hundred thousand? The first quarter reports showed us the methodology of the producers innovative ways was to reduce the amount of capital costs that they depleted for each barrel of oil produced. Therefore moving the firm from an overall loss to a profit. I can now say that I’ve been educated.

Seven weeks ago the prospect that oil prices would sail onwards and upwards was also possible as a result of OPEC and Russia potentially agreeing to extend their production sharing agreement. Times couldn’t have been better for the oil and gas bureaucrat. Now here in mid June we find ourselves staring down a big black hole that is our future. What happened? The brokerage firms continue to promote these producer firms. Most of them are on their recommended buy lists. Maybe they're just trying to rotate out of the positions they hold in the producers and dump those on to John Q. Public. Other than these anonymous voices in the woods everyone else seems to be staring at the producers. Wondering what they’re going to do.

Bureaucrats have never had to act. Bureaucrats have never had to be responsible for anything, it was always someone else’s fault. Capital costs are too high, the service industry is greedy and lazy. OPEC needs to cut their production of natural gas. Sorry OPEC isn’t responsible for the overproduction in natural gas, that must be someone else's fault. It doesn’t end. Everyone has been blamed for everything. Everyone has also paid substantially as a result of the bureaucrats unwillingness to act. The service industry is cannibalizing itself to operate and is now finding difficulties staffing up. People who work in the industry have either been slashed or threatened to be slashed and can all see the writing on the wall. Investors and bankers have clued in to the producers shell game with profits and those well defended balance sheets. They’ll only be in greater jeopardy if they invest more. Besides, they own more than they desire now anyway. The only people that have skated through this downturn unscathed have been the bureaucrats. The only people who have never been accused of being the issue, outside of here of course, are the bureaucrats.

Here is where the bureaucrats implement the old standby “muddle along” strategy and “do nothing” operating procedure. “Have you seen the expectations of what kind of effort is required to build the Preliminary Specification!,” the bureaucrat will say. Yes it breaks their habit of doing nothing and they would be the ones that would have to do something. Disappear. Which may be the real issue we all face. But I’m optimistic, otherwise I wouldn’t be doing this. This dead silence we’re now hearing has the bureaucrats concerned. What do they do! The expectation of action and performance to break this Mexican standoff is in there court. Wikipedia defines it as. 

A Mexican standoff is a confrontation between two or more parties in which no participant can proceed or retreat without being exposed to danger. As a result, all participants need to maintain the strategic tension, which remains unresolved until some outside event makes it possible to resolve it. 

I think I know what that “outside event” is and I’ll be writing about that tomorrow. To give fair warning it’s not good for the bureaucrats.

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. 

The Consequences

The consequences of producers not recognizing the real costs of oil and gas exploration and production, and producing everything possible, when combined together, create massive, broad and long lasting damage to all concerned. It is the ultimate one-two combination that quietly erodes any and all value from the industry as a result of systemic overproduction that appears profitable. Eventually the industry is hollowed out of any and all value except for the useless, large balances of property, plant and equipment that represent the capital costs of past production that no one can do anything about. These balances are so extreme and unmanageable that they are the albatross that will be carried by the producers for decades. What can producers do about them? The consequences to the producer is that no one will participate in their firm from a financial point of view. There is nothing there for them. Producers are the walking dead.

I’m sure, like me, everyone has shed many tears for the demise of the prosperous oil and gas producer. These firms will exist for decades off the cash flow from previous investments. Muddling along and doing nothing. It really is too bad about anyone else outside the bureaucrat who is responsible for this situation and continues on in uninterrupted fashion. Who is going to challenge them? A blogger? This is without doubt the biggest issue that the industry has ever faced. Usually the industry would roll over with new participants taking over from these failed carcasses. Startups have never been as unsuccessful as they are today. It truly is a difficult situation that we find ourselves in.

We have established September 25, 2017 as the start date for our software developments. What if we don’t receive the support that we need from whomever and have to cancel those plans? I have been at this for a long time. I am very concerned about this situation. What will September 26, 2017 hold if there are no developments? I know I’ve done everything that I could in order to correct this issue. It’s the same issue that I saw in the late 1980’s and 1990’s that lasted at least 15 years. All that was needed was for producers to curtail a small portion of their production and the prices would have responded. They didn’t, inaction and griping were the constant themes throughout those years. If anything looked like it was gaining traction to remedy the situation, the oil or gas price would rally for four consecutive days and the bureaucrats party would start again. As today, producers had the attention spans of five week old puppy’s.

The industries financial issues are ever present and there is no consideration that they exist. Many believe that we’re at the beginning of an upswing and look forward to brighter days. The optimistic point of view is necessary to exist in the oil and gas industry. Without it you couldn’t survive. But the reality of the financial difficulties are beginning to now be felt on the operational side. Frac crews are unavailable for up to one year at this time. What other capabilities have we lost? And will those turn out to be permanent or temporary? This is why it’s important for accountants to do their jobs correctly. To ensure that the costs per barrel of oil equivalent are being measured effectively. And that unprofitable production is not diluting profitable production, therefore shutting in unprofitable properties. To sit there and say that as an officer of the company that you can’t get your point across is an absolute failure of your sworn duty.

An interesting dilemma that we’ve never discussed here is the natural phenomenon inherent in the oil and gas industry. As time passes the reserves costs to deliver energy to the market increase due to the level of technology necessary to extract each incremental barrel. This has always been a given. The difficulty that shale provides is that the flush production will always overwhelm the commodity market even as the costs of exploration and production increase. The need for the Preliminary Specification is not just a solution to the current issues that the industry face. But also a means in which to deal with a rapidly increasing cost structure that can only be effectively recovered by managing the supply of the oil and gas commodity. In other words, if you like your oil and gas industry today, enjoy it for all its worth, tomorrow is going to be much worse. The Preliminary Specification is currently the only viable, commercial solution. And we begin, with the industries support, to develop that software solution September 25, 2017. This is getting interesting.

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. 

The Issue in a Nutshell, Part 2 of 2

The second aspect of the issue the industry currently faces is that no one knows what property is profitable and which property is not. I can hear the howling and screaming of the bureaucrats now. They’ll say this is not the case and that they can discern the difference. Ask them then, what is the difference in terms of actual overhead costs between natural gas and oil administration? No one knows the answer to that question. All overhead is dumped into G&A and most of that is moved into property, plant and equipment. None of the actual overhead of the producer firm has ever hit the property. G&A for 2016 was only 9% of revenues for the 23 producers we follow. The range of percentages for these producers was minimal with the lowest being 1.48% and 20.86% for the highest. I’m of course being sarcastic, the 20% number is from an intermediate producer. The problem is we just don’t know how much overhead was moved to property, plant and equipment. Is overhead 20% or 25% of revenues. No one in the industry knows.

Since no property is charged with the overhead that they incur how do the producers know if the property is profitable? They don’t and they never will. The industry employs the high throughput production model that seeks to cover off the high costs of its overheads through full production. Every producer in the industry is producing every producible property. Nothing that can be produced is shut-in. This is how the industry is in the chronic state of overproduction. The producer only knows one operating strategy, full production at all times. Otherwise they would be unable to most effectively cover off the high overheads of their producer firms. The overheads being fixed in nature are incurred at whatever level of their production profile they produce at. Therefore to offset these overheads most effectively, full production is necessary at all times. This was reasonable during the era of scarcity. Now with shales abundance...

This created a number of operating assumptions within the industry. Investors believed producers production profile must grow year over year, every year. Or, alternatively they would be punished by the markets for not keeping ahead of the ever growing overhead burden. Growth in the production profile was therefore necessary at any and all costs. Overhead at the property is based on the Petroleum Accountants Society overhead allowances. No actual overhead is realized by any property in the industry. It is generally considered that these overhead allowances are unable to capture the true costs of the actual overheads of managing a property. Revenues of the corporation need to be their highest from full production. If the property is marginal, or a poor performing asset, it doesn’t matter. Your costs are fixed therefore everything must be produced to maximize the revenues of the corporation.

When oil and gas is scarce this operating model may have provided some long term value. When combined with the over reporting of profits we discussed yesterday. I would argue that there was never a point in time which oil and gas producers generated any value. Of the 23 producers in our sample, as of the end of 2016, they had $467.2 billion in property, plant and equipment. Based on shareholder equity of $258.9 billion. They earned over the life of these firms, almost all of which are in excess of 20 years of age, $59.5 billion. If we accept my argument yesterday that the property, plant & equipment balance of $467.2 billion should be written off in the next three years these producers will have lost $407.7 billion. Wiped out the shareholders equity and another $208.3 billion, which exceeds their outstanding debt of $163.3 billion. They have essentially destroyed every dollar ever given to them. Which is consistent with what the industry is worth today. Nothing, it loses money and demands large volumes of cash to operate. As I said this history was during the era when oil and gas was scarce. Now in the era of shale, or abundance, where the characteristics of higher deliverability and substantially higher costs, we can only imagine what these firms can do?

The high throughput production model is unable to generate value for the oil and gas industry. The assumptions that the industry operates under are no longer, if ever, providing any value. The need for change is evident in the strike that the investment community have taken these past few years. What is motivating them to return? Is it the $20 to $40 trillion in capital expenditures that they’ll have to fund under the current business model. Is it the chronic losses and demands for capital that inspires them? Or is it the behavior of the bureaucrats who in self serving fashion have benefited from the “good times” and only keep these carcases operating for their own needs. As bad as all this sounds there are technically $467.2 billion in assets left to deplete, or cash flow to be realized from these assets. Enough for a handful of bureaucrats to live quite handsomely.

I don’t know why anyone listens to economists anymore. They seem to me to have destroyed any credibility during the 2008 financial crisis. Only one of them was able to see the developing storm and describe what was about to happen. The rest were oblivious. People, Ideas & Objects have also documented how the economic principle of “spontaneous order” has been erased by the software that we use today. Software defining and supporting the organization demands that the changes we need to make for the economy to grow spontaneously, as it did for centuries before, is diminished. We need to change the software first in order for the organizations to change and then build value. Our friends the oil and gas bureaucrats have effectively employed this knowledge by adopting the policy of never changing the software. We should now maybe add the economic principle of “creative destruction” to the ash heap of history as well. With bureaucrats living as well as they do off the past capital investments in the oil and gas industry. This wonderful world that we live in will continue for decades. Instead of the garbage being wiped away, these producers will plod along providing their bureaucratic masters with enough to make it worth their while for as long as they need. After almost a decade of abysmal performance in natural gas. And coming on four years in oil. Nothing is said or done about the situation. Just wait till the markets rebalance, they say. Bureaucrats doing the hard work.

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. 

The Issue in a Nutshell, Part I of 2

The Preliminary Specification solves the issue inherent in the industry today. What that issue is and how it’s created may not be clear to most people. It is complex and arises from a number of dynamics that are present in the North American oil and gas industry. They are present today in the shale era, just as they were present in the late 1980’s and 1990’s when the issue first presented itself. Shale makes them far more prevalent today with the implications being far more significant. These issues center around accounting and the methods that are used throughout the North American industry. Primarily as a result of the Securities and Exchange Commission making the changes in the late 1970’s to full cost accounting. There is however, a secondary attribute that magnifies this issue. It is that accounting is considered by the engineers and geologists that run the industry to consist of paying the bills in a timely manner. The strength of the accounting that is done in the industry is extremely poor. It is not considered a value adding process by the people who run the business and as such it is an unnecessary cost that can be cut annually. The attitude towards accountants by those that run the industry is also extremely poor where accountants and accounting will not be listened to or understood.

Capitalizing everything that the producer firm does is the methodology that is used in the industry. These capital costs are then depleted based on the reserves that are discovered. If twenty five years of production is discovered, then the capital costs will be depleted over those twenty five years. At no time can the reserves costs exceed the net projected revenues, based on the price at the end of the year. If the reserves costs do exceed revenues then the assets will be subject to a ceiling test write down. Industry has become expert at their ability to capitalize any and all costs that they incur. The majority of their overhead is capitalized under the assumption that it is incurred in the process of building the assets. The same logic supports the capitalization of interest expense. This methodology of capitalization has the majority of a producer's costs being deferred for significant periods of time. Over the life of the firm these balances of property, plant and equipment grow to outsized proportions in terms of their revenue base, cash flow and profitability. As the producer matures the current year capital expenditures are larger than the amount of depletion recorded and these property, plant and equipment balances continue to only grow larger.

It is our contention that this provides no value for the dynamic, innovative, accountable and profitable oil and gas producer. This is capturing the investment that has been made in the organization, through either equity or debt, and is stagnating. Alternatively we believe that producers should move all of their property, plant and equipment balances to the income statement, as depletion, no later than three years after they’ve been incurred. This will begin to recognize the capital costs that the processes of oil and gas exploration and production cost. And release that investment back in the form of cash for the firm to reuse as capital for further investments. This of course would only occur on the basis that these capital costs per barrel do not exceed the prices that the producer is receiving.

If you recognize your capital costs in a timely manner and you continue to be profitable that means you have been charging adequate prices for the products that you produce. In oil and gas producers have been deferring the recognition of their capital costs for decades and are profitable in the narrowest of terms. Doing so has left the capital investments that have been made by the shareholders stagnate in the firm's past investments. Leaving minimal amounts of capital being recognized in each barrel of oil equivalent produced. Demanding that producers hold out their hand to their investors each year for more capital, to sink that investment into the business to stagnate along with all the other investments. Only to do so again the following year and so on. Investors appear to have caught onto the endless sinkholes these producers have become. And shut off the taps. Creating the cash crisis that exists today.

How serious is this problem? We have 23 companies that we monitor closely that represent a  sample of the industry. These producers collectively produce over 7.6 million barrels of oil equivalent per day. In 2016 they reported that their depletion per barrel of oil produced was on average $26.58. However, if we assumed People, Ideas & Objects point of view, that these capital assets do not provide any value to the producer. And the quicker they were written down the more cash the producers would generate, assuming they would realize commodity prices that were high enough to cover the capital costs. Our proposed solution would be that the outstanding balances of property, plant and equipment of $467 billion for these 23 producers would be realized in three years. That would increase the capital costs per barrel of oil from the $26.58 to an amount of $81.32 for 2016.

Now we know why accountants don’t have anyone listening to them. It would seem ridiculous to suggest that the capital costs of production total $81.32 for the next three fiscal years across the industry. And I would agree that it seems outsized. Now the accountant may have suggested a number towards the $81.32 but the engineers know that they don’t have to, under the SEC, recognize their capital in that fashion. Therefore you have each and every producer being subject to the ceiling test each fiscal year. By recording the $81.32 / barrel of depletion we have to assume that the amount of capital costs recognized are compensating for the number of decades in which the capital costs were too low. And that is the first part of the nutshell in terms of defining this issue. By not recognizing the true costs of each barrel of oil equivalent for these past decades producers have overreported their profits by the same amount. Which has made them attractive to shareholders and drawn their investment into oil and gas, and away from other, allegedly less well performing industries. Therefore it is safe to assume that there has been an overinvestment in the North American oil and gas industry. And this overinvestment has led to overproduction and oversupply.

This is a sticky issue. The producers have outsized balances that will continue to haunt them in this fashion for the next few decades on a status quo basis. As much as underreporting the costs in the past decades has helped, now producers need to compensate for that. “Now all of this is just accounting! And it deals with the sunk costs of the past!” These are the two excuses that have been used in industry to avoid dealing with this issue in the past. Accounting is about performance. Investors have determined that the industry is not performing, and has no means in which to perform in the foreseeable future. Limping along reporting substantial losses is not going to attract anything but flies. Investors believed the engineers and geologists stories of how great their firms were. Then they invested. The problem is the accountants are telling them it’s a disaster. What is also clear to the investors is that producers will not account for their past spending. Calling the investors money a sunk cost and that it’s all in the past is not motivating them to return.

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.

Third Friday Off

No Posting Today

Something for Everyone, Part VII

Premature declarations of victory over OPEC by the North American producers are all the rage in the media these days. It will be the media that fuels the North American producers capital needs in the decades to come. Who needs investors or bankers when you have the media on your side. The one thing that the media are unable to make any impact on is the commodity markets. Markets only look to supply and demand and provide information to the market participants in the form of price. Oil and gas prices are unable to generate any profit in North America. That would indicate to the producers that they should not participate in the market until prices rise and they can earn a profit. That, as they say, would be a business.

In natural gas it’s generally agreed by the producers that $6.00 to $7.00 / mcf is necessary to cover the costs of natural gas exploration and production. Natural gas prices have dipped below $3.00 recently and shale production continues to increase. As does the rig count. Mostly due to the fact that oil and gas is not a business but an exercise in unconstrained spending. Shale was introduced to natural gas well before it began in oil. For the first few years the natural gas prices were depressed and everyone believed that they would rebalance. They never did. Eventually the natural gas prices fundamentally broke down to the levels they are today. Natural gas is as a result the dead zone. You could put your money in, which is what North American producers do, but you won’t see it again. Ever. Only through long term, systemic, industry wide rehabilitation through use of the Preliminary Specifications decentralized production model and price maker strategy is the price of natural gas going to come back. The producers fundamentally destroyed it.

It took the North American natural gas producers about the length of time that the oil prices have been depressed today to begin to destroy the natural gas market. What then is the prospect for oil prices? Overproduction and oversupply are systemic and chronic the world over. Inventories are at record levels and storage is at a premium. A chronic situation. OPEC has done what it could be expected to do to remedy the situation and it’s ineffective in the face of increased North American unconstrained and unprofitable production. As the media says the market will rebalance. Why would we doubt them? The only question that comes to my mind is when will oil prices fundamentally break down? I say it's imminent. Certainly before our September 25, 2017 software developments start date.

In the scenario that we laid out yesterday, if the oil price broke down, the oil and gas producer would then be outside of their survivable “walking dead” scenario. Today’s market where the prior capital investments are returning enough cash to keep the overhead paid. If the oil price broke down producers would be extinguished quickly as their financial situation has been on life support for many years. The cash crisis is several years old and they have no support from investors or bankers. Their ability to buy time is measured in seconds. I’m sure that’ll be the time when we’re asked “what have you got.”

The logic of all of this is best expressed in the donut shop analogy of a few days ago. The donut shop manager, flush with banker and investor money, has filled all the neighbors parking lots with the excess donuts. Therefore he undertakes to buy some adjoining land and road paving machines to build more parking lots to increase his excess donut storage capacity. The logic of oil and gas producers has escaped me. They will have no one to blame for their demise but themselves. It will be abrupt and it will be violent. In the theme of Something for Everybody, if you don’t see the opportunities here, then you're in the frightened camp, not the exhilarated camp.

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. 

Something for Everyone, Part VI

As we noted yesterday, the North American based producer is locked in a fight for its survival. One that they appear to be winning. They believe they’ve won the battle with OPEC over who’s right it is to produce. I believe this thinking would be a mistake. Some consider Saudi Arabia is only playing along until such time as the IPO of Saudi Aramco is complete. Then they’ll produce whatever they want, at whatever price. Being the lowest cost producer that is their prerogative. The North American producer has accepted that they are now the swing producer, which means they must be the first to curtail production to support the commodity prices. If the marketplace until 2050 is as the Chief Economist of BP has suggested, that there is enough oil to supply the world twice over, then his conclusion that the low cost producers will produce at whatever price is offered, to generate at least some cash, as opposed to leaving it in the ground, will be OPEC’s strategy. In that scenario the North American producer must establish their operation in a commercial enterprise. Something that they’re not doing today, and would therefore not be able to compete in a market where deliverability was as abundant as the BP Chief Economist suggests may be one scenario.

The North American producer has therefore as little as a year to get their house in order before the IPO of Saudi Aramco. If North American producers can establish to the markets satisfaction that they’ve caught that old time religion of real profitability, then OPEC may not see the need to flood the market with deliverability post IPO. North American producers would be able to provide the market with this information by developing the Preliminary Specification. This would ensure that all North American production would be profitable. And, as the highest cost producers, would define the global commodity prices realized in the oil and gas marketplace. This would also bring back their investors and bankers who are unable to support the industry in its current, unprofitable configuration.

This does not preclude North America from becoming energy independent. It only precludes North America from becoming unprofitably energy independent. The false hope that drives the market bravado today. It should be clear to any independent thinker that the investors are unwilling to pay the additional capital costs of increased deliverability in North America with no expectation of any return. They have subsidized the consumers of energy for four decades. With the amount of the subsidy being clearly advertised as property, plant and equipment on the producers balance sheets. These actual capital costs of past production are never realized and therefore are stored there to represent the subsidy the producers have granted to the energy consumer. Never recognizing the costs of capital in a capital intensive business is ludicrous. Producers today report that their profitable only after they deduct overhead and oilfield operations such as pump jacks etc. The costs of drilling, completion and equipping are stored on the balance sheet for decades at a time. Demanding that each producer issue more stock each year to stem the chronic cash shortfall. Diluting existing shareholders holdings, only to do the same in each subsequent year. What the Soviets did in their economy in the 1960’s was more productive then this economic system.

Establishing the oil and gas producer as a spender, like a drunken sailor, is how the oil and gas industry is currently configured. Can they become profitable? Traditionally the power of creative destruction steps in and wipes the garbage away. That’s not happening. The producers are being supported due to the high intensity of capital requirements in the industry. The prior investments are returning enough cash to the organizations to pay the overhead and keep the operation performing at the bare minimum. Probably for a few more decades. Therefore how do People, Ideas & Objects, the user community and service providers obtain the financial resources to institute the necessary changes in the industry to enable profitability? Certainly the producers are able to survive in today's environment. The question we need to ask is, will they be able to survive in the environment where the post Saudi Aramco IPO, low cost producers will accept any price?

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. 

Something for Everyone, Part V

Success is imminent! At least as far as People, Ideas & Objects, our user community and service providers are concerned. If only that was enough. We need producers to jump on the bus and start pulling their weight too. And not just funding our budget, although that is a critical element of all of our future success. The need for the direct participation of the producers is also necessary. They cannot pay the bill and sit back and expect us to solve this without their active involvement. Ideally they would like to attach their check to a service level agreement, sit back with their feet on their desk and hold us to the literal interpretation of the service level agreement. Any failure in that scenario would be our collective failure and we would be dispatched to the sidelines. It needs to be asked if the producers can afford to do this? What options would they have in the event of our collective failure? Does the scope and scale of this issue demand that they take a different posture and different tact? There’s no doubt that People, Ideas & Objects, our user community and service providers are on the right path in terms of the solution, if there is a failure in these developments it will unquestionably be the producers who realize the greatest cost of that failure. What would the producers do then? What should the producer do? What happens if developments don’t begin September 25, 2017?

People, Ideas & Objects determined that we would not play the service level agreement game with the producers. It has been an interesting game that has had our competitors occupied meeting the detailed terms and conditions set out in those agreements. We feel the producers should ask themselves what have they’ve truly gained? And in a dynamic marketplace where the unknowns are as substantial as what we collectively face, do they want to stick to the static definition in a service level agreement, one that is unchanging and may have no bearing on the success of the initiative? Our software developments will most certainly require some skin in the game by each and every producer firm that endeavours to be successful in the future.

Shale is not a commercial operation. Oil and gas is not a commercial business. As a result investors have left until the industry can prove otherwise. Reporting profits, as the producers are today, are hollow, transparent and false when the capital costs of these operations are left on the balance sheet of the producers for a decade or more. Never recognizing the capital costs of past production. In what world would you want your capital returned over a ten year time line? Only a fool would invest in such a ludicrous proposition. Particularly with the flush production of shale on a steeper decline curve than conventional reservoirs. Producers need to turn their capital over quickly, repeatedly and efficiently if they expect to call themselves businesses. Watching it glow as property, plant and equipment on their “well defended” balance sheets has been the key financial criteria that producers want to be evaluated on. This represents the very low level of business understanding currently resident in the industry. Investors see oil and gas as non-commercial as a result and will sit on their hands until producers can prove a viable commercial business model exists in the industry.

Continuation of the ongoing argument with People, Ideas & Objects et al is also a foolish proposition. Disintermediation is extracting bureaucrats from every industry and putting them out to pasture. However, for bureaucrats to continue to hang on to this failed business model is a viable opportunity. This is due to the fact that oil and gas is a capital intensive industry. The return of capital from the prior investments is adequate to cover the overhead of the producers for the next decade or more. The bureaucrats are safe. Which they have been throughout this downturn. It's everyone else that sees the difficulties as a result of living them. The industry is therefore the walking dead. How this deadlock is broken is unknown. People, Ideas & Objects needs the financial resources of the producers to be provided to us prior to our start date of September 25, 2017. The point being bureaucrats sign the checks.

Our value proposition has $25.7 to $45.7 trillion in incremental revenues to the producer firms over the next 25 years. That hasn’t been enough for the bureaucrats to fall on their sword, yet. Who can make the decision to proceed in the industry? It’s no longer just a handful of people who see the industry in the dire scenarios that I paint on this blog. It's becoming common knowledge that there is more to the downturn in prices than what the current producers business model can handle. That shale is not commercial. Many are rallying around the Preliminary Specification as the solution. It’s coming down to the point in time when individual decisions need to be made. The kind of decisions I’m referring too that make the big difference in your life and those around you. The ones that benefit society and move us all forward in ways that we don’t fully understand at this point. We stand at a crucial point right now. You’re either frightened or exhilarated. What’s your decision going to be? How will you be successful?

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.

Something for Everyone, Part IV

A quick update on the status of our fund raising for our first year's budget of $100 million. The total number of cold calls that I've made stands at zero. I therefore have doubled my quota for the entire fund raising period. As I've mentioned the producers will be waiting a long time for this one individual to do all this work. Producers need to move quickly and organise themselves to raise these funds collectively. No one else can do it in the short time frame that we have. Who’s issue is the lack of profitability and cash in the industry? Producers need to act to resolve their problems. I don’t think anyone else is going to rush to save them!

I would think the dynamic, innovative, accountable and profitable oil and gas producer would be appreciative of not having the burden of developing the accounting and administrative expertise necessary in the industry. The Preliminary Specification moves away from the fixed producer based accounting and administrative capability to the variable industry based accounting and administrative capability. Where the producer accesses the industry based capabilities that they need to operate. This eliminates the redundant duplication of administrative and accounting capabilities that are currently resident in each producer firm. These capabilities are essentially the same in each producer firm except that they’re a fixed cost and unshareable between producers. The costs of duplicating this overhead burden in each and every producer firm is one of the reasons the industry is not profitable.

Therefore we have chosen not to replicate this redundancy in the Preliminary Specification with the user community and service providers. The service providers will be provided with an exclusive license to operate their process for the entire oil and gas industry. (Some exceptions may apply.) These licenses will be granted through the Intellectual Property that is what holds this community together. Service providers will know that they will not have another service provider set up shop in the adjacent office space and begin undercutting the service providers price or service offerings. That is not the basis of competitive advantage that will be used in this sub-industry and we’ve detailed the basis of competition between the service providers two days ago.

Earning a service provider license will be based on the processes that People, Ideas & Objects software manages and the performance of the user community members during our initial development. If you’ve been an active participant in the area of the lease rental payment process, developed some innovative solutions to the issues in that area, and provided overall leadership qualities that make you stand out in that area, then our assessment would consider those and determine who was the appropriate candidate(s). Note we are looking ultimately for 3,000 members of our user community. These are the leaders in their areas of expertise. We will be managing, we believe, approximately 3,000 processes and will be issuing 3,000 service provider licenses. It is these elements that should also stand out in your application for user community participation.

One of the benefits of the service providers configuration is that they provide the industry with an objective and independent resource dedicated to the quality of the information in the Joint Operating Committee. Under the Preliminary Specification the concept of operator is somewhat expired. Participation by all of the producers in the Joint Operating Committee is required due to the reasons documented in the various modules of the Preliminary Specification. Having this objective and independent accounting and administrative resource provide these processes management will assure the industry that no favorites are being provided for. There will be some processes that are producer specific however the majority of the processes will be charged directly to the Joint Operating Committee.

The key attribute of the service providers is that they make the producers administrative and accounting overhead costs variable, based on production. With shale being as prolific as it is, and the costs being as high as they are, not all of the well bores can be exposed to the commodity markets at once. That is a losing proposition. Therefore People, Ideas & Objects Preliminary Specification, our user community and service providers turn all of the producers costs into variable costs. That way they can always achieve the most profitable means of oil and gas operations no matter what level of their production profile they produce at. This is how businesses and industries are operated. No one who owns a donut shop continues to produce donuts until the parking lot is full of donuts. And then, the only remedial action taken by the management of the donut shop is to buy more advanced, faster donut making equipment. Filling the neighbors parking lot. That wouldn’t work would it. And it certainly doesn’t work in oil and gas. Producers, like the donut manager, will lose all their money waiting for the “market to rebalance.” And shy away from the alleged manipulation of the market the Preliminary Specification recommends in our decentralized production model. Shale requires that supply be managed to stop overwhelming demand. That’s not collusion, it's operating a profitable business. The Preliminary Specification does this by providing the actual, factual accounting of the property to determine if it's profitable. If it’s unprofitable then it is shut-in. No collusion, no market manipulation just business decisions being made independently based on actual factual data. Why is this not common sense in oil and gas, as it is in every other 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. 

Something for Everyone, Part III

As a service provider you will be the key to the oil and gas producers profitability. While the Preliminary Specification is operational in the industry, as it is today, it will no longer be enough to just own the oil and gas assets. It will also be necessary to have access to the software and services that make those assets profitable. People, Ideas & Objects, through our user community vision have no direct contact with the producer firms other than to collect the fees for their use of our software. We look only to the principles of the service providers who are our user community members that direct what software we develop. It is here where the producers will engage the user community to have their issues and opportunities addressed in terms of their needs from the software and services that producers need to be provided.

In our user community vision we clearly define that the user community is funded by the financial resources that People, Ideas & Objects source from the producers. These part-time user community participation revenues will be a small percentage of the funds that are necessary to drive this new sub-industry. Review of the methods of how and why those funds are expended are detailed in that vision. Where do the service providers revenues come from? We’ve indicated that the service providers are replacements to the current accounting and administrative resources of the producers. The resources funds that are being incurred today at each of the producers would also shift to support the service provider sub-industry. This would include all of the costs of these resources. The salary and benefits, office space, support personnel, power etc.  Each of the service providers will have a service level agreement with each of the producer firms in the industry. These service level agreements may seem onerous and unnecessarily administratively inefficient, however, standardization and other tools could make this administratively efficient for both service providers and producers. Understand that much of the work that industry does with the user community is what would be captured in a service level agreement, although much more detailed, and that Microsoft has end user license agreements with any and all Microsoft product users and the simplicity of this comes into focus.

Making these changes to the industry structure and the structure of the dynamic, innovative, accountable and profitable oil and gas producers enables their overhead, and therefore all of their cost structures, to become variable. I believe that once producers fully understand this implication they will hold to the strictest interpretation of this model and turn over all of their accounting and administrative processes to the service providers for management. These tasks are not key competitive advantages of a producer firm and to turn a fixed cost into a variable cost brings about significant structural flexibility and profitability. Producers that understand this will move quickly to exploit this advantage.

The advantage to the producers is that it will relieve them of their overhead cost concerns. If they produce 100,000 boe / day this month, and as a result of some phenomenon, the oil price declines precipitously the next month to where they can only profitably produce 50,000 boe / day. They will immediately shut-in the unprofitable 50,000 boe / day in order to maintain their maximum profitability. The overhead costs of the 50,000 boe / day of shut-in production under the Preliminary Specification are not charged by the individual service providers as no work comes through to the service providers through our task and transfer network and hence no billings from the service providers will be issued to those Joint Operating Committees. However, that does not eliminate the service providers overhead costs associated with the 50,000 boe / day of shut-in production. These costs remain fixed for the service providers. And the cost control of the overhead costs of the oil and gas industry have indeed been shifted from the oil and gas industry on to the sub-industry of the service providers.

As a service provider you will understand that at anytime during the year you may be faced with up to 15% of your revenues declining as a result of industry shutting-in production. Or whatever percentage of the industries deliverability is shut-in at that time. I believe, this can be managed within the scope of a service provider operation with revenues of $6.67 to $10 million per year through the budgeting process. Enabling for the first time true overhead cost control capabilities for the oil and gas industries overhead costs.

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.