Hard Work To Do

I feel the overproduction and oversupply issue in oil and gas is the largest issue that the industry has ever had to face. Why is this controversial thinking? I feel we’re at a turning point now where we either address it through the development of the Preliminary Specification. Or we decline quickly in our capabilities and capacities creating even more damage to all concerned. This is certainly well beyond the scope of the corporate oil and gas producers responsibilities. That is, it’s beyond their accepted responsibilities. But I wonder who is responsible for this issue and what’s their number? I believe we have a responsibility to provide the consumer with affordable energy products. That implies we’re in business which means we need profits to survive. Without real profits people are displaced, investors lose money, governments lose tax revenues, royalty holders do not receive fair value for the royalties on their products. The only group that has consistently been winning in oil and gas lately are the bureaucrats and they’re not doing anything.

The industry has the opportunity now to undertake the hard work that is necessary to remedy this situation. That is by developing the Preliminary Specification starting September 25, 2017. It will take a greater concern for the industries health than what I am seeing being portrayed in the media. I don’t have the direct contact with the industry so I don’t know if that is the true assessment of the situation. Sitting back and waiting for this issue to resolve itself on its own has done nothing but create more damage. It will take some people with foresight and fortitude to know that the current trajectory of the industry is not one that is healthy or prosperous. They will also need to take the remedial action of moving forward with the Preliminary Specification.

Some of the hardest work will need to be undertaken by the user community and service providers. They will be the point of contact with the producers and will need to determine the “what and how” that is necessary to implement the needs of those producers. The hard part is they’ll be doing this in the environment where we’re creating the future, based on the Preliminary Specification, not remaking the past. It will be the user community that will have to exercise the hard break with this past that we’re currently living with. Determine that that element is no longer needed and that it's part of the problem, and we will be doing this instead. It’s not that we are turning our backs on the producer. We clearly need them and our user community will be working directly with them. Producers need to understand that the user community will have creative license to ensure that hard break with the past occurs.

These decisions and creative solutions will be on top of the difficult work that the user community needs to do anyway. Bringing their years of experience and understanding in oil and gas administration and accounting, on top of their overall understanding of oil and gas. They need to create and implement the appropriate software and services to ensure that the producers achieve the overall success that we’re looking for. Many ERP systems have had user involvement before. Usually when the implementation was going over budget, user involvement was the first cost that was cut from the budget. That is not what we’re doing here. Today user community developed software systems are the only systems that are effective and used in the market today. Developing anything without high levels of user involvement today would be a waste of money, particularly with the scope and scale of the Preliminary Specification.

In addition to the overall success of our initiative. Our user community will have to do this, and other hard work, to ensure that the oil and gas industry and producers are dynamic, innovative, accountable and profitable. The Preliminary Specification is different and provides a good base in which the user community can achieve these outcomes. However it will be up to the user community to be the difference. Yes, it will be very 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. 

Desiged to Succeed

Few software developments have had the scope, scale or budget of the Preliminary Specification. We are definitely outsized as I like to say. In ten years time the Preliminary Specification, I think, will be part of a number of such initiatives. Each industry will undertake a similar process of reestablishing the software and services that it uses. If we think of how people will need to be working in the future. Remote, allways on, from multiple devices and dynamically. Where collaboration, thinking and ideas are the main focus of the day. This type of environment is not going to be generated from the current software offerings or the minds of the existing bureaucrats. Our future has to be purpose built from this point forward. One based on the users definition, the Information Technologies that exist today and most importantly the Internet. An environment that effectively eliminates the structured hierarchy. Which had its glory days in the late nineteenth century.

People, Ideas & Objects, our user community and service providers are building the future oil and gas industry. It has to be purpose built. We’ve proven that spontaneous order and creative destruction have ceased to operate in our modern economy. Software sets the organization in cement which makes it unchangeable without a defined software development capability and user community available to make the effective and required changes. What we have today is economic staleness as a result of the bureaucracies satisfaction with software sealing their franchise in an unchanging environment. The status quo will remain until such time as it is rendered irrelevant. We need to prepare the alternative software and services, and remove the bureaucracy from the scene. That is how we’ll make the future of the oil and gas industry dynamic, innovative, accountable and profitable.

Complacency and numbness are the attributes that are rewarded by today’s bureaucrats. Leadership, solving problems, decision making, creativity, collaborating, research, idea generation, design, planning, thinking, financing, innovating, compromising and negotiating are elements of the work that people will do in the future oil and gas industry. They’re also the last things the bureaucrats will accept. Shuffling data and information about is the bureaucratic domain. We believe these are best left to the computers to handle and we need to begin doing the work that we’re better oriented to do. This is how we break out of the routine that we’re in. This is how we stop the ongoing destruction in oil and gas.

Considering the time that this issue has been present in the oil and gas marketplace, and the destruction that has occurred it is remarkable the attitude of the producers. They don’t seem to think anything’s the matter. They’re profitable and the ship is sailing in the right direction. Is this sticking one's head in the sand? Or are they thinking that they have control of the situation and that no one, certainly not a blogger, is going to take it away? Could there be a more dangerous attitude for them to take? If they don’t see that each of the North American based producers are overproducing unprofitable production then they truly are headed to the scrap heap.

The Preliminary Specification, our user community and service providers are focused on the dynamic, innovative, accountable and profitable oil and gas producer. Providing the most profitable means of oil and gas operations. Establishing the means in which the industry can attain these attributes across the industry and develop in ways that are productive. We are focused on bringing about that new environment in which the industry is organized. Replacing the bureaucratic status quo. Bringing about a dynamic that is focused on the success of the industry. Which is why we attract so much controversy from the bureaucrats. When did you ever hear them talk about profitable success?

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. 

Leadership, Period

Leadership is how this software and the services that the oil and gas producers will need are going to be developed. Through the leadership that is expressed by this user community. Sitting around waiting for the market to rebalance. Muddling along and doing nothing have generated massive destruction of value for society. People, Ideas & Objects user community participants will be the active agents that lead the oil and gas industry through the business that is the oil and gas business. Why in the world would anyone continue to produce oil and gas that is unprofitable? In North America some production would qualify as profitable but a large percentage is unprofitable which dilutes the profitable production. However we don’t know which property is profitable and which property is not. Its issues such as this that need to be corrected more effectively if we’re to build the value that is necessary to support the people that depend on this industry. The only way that is going to happen is that the business leaders step up and take control of the business of the oil and gas business. The user community.

Waiting for the direction to come percolating down from the CEO or board of directors has been a long and costly wait. They evidently have no clue as to what’s going on in their business or the industry. Action by the user community participant is what’s going to make all of this happen. First by building the Preliminary Specification. Then by developing their service provider organizations that will provide for the administrative and accounting services to the producers. Then these service providers will be capable of dealing with the issues and opportunities of the domain of the process that they manage. Thousands of service providers acting in the best interests of what the producers business interests are is “what and how” the oil and gas industry needs to move forward towards the future.

Will oil and gas figure out technology before technology figures out oil and gas? This is an argument being asked in industries everywhere. In oil and gas the point is moot. Both have to work together which is what People, Ideas & Objects are doing. I frequently state that it’s not enough to own the oil and gas asset anymore. It’s also necessary to have access to the software that makes the oil and gas asset profitable. That’s the Preliminary Specification. Bureaucrats don’t like to hear that they’re no longer involved or necessary in their organizations. It’s not just oil and gas that this is the case. Every industry is affected in this manner. What is necessary is that we make this change before too much more destruction is done.

The destruction has been limited to otherwise innocent people’s lives and the financial arena up to this point. We may now find that with the length of time that the financial difficulties have been unaddressed will begin to see detrimental effects on the capabilities and capacities of the industry. It will take a significant effort to not only turn that trend around but to return it to where it was before. Why do we even have to go there? But that is the exact strategy of the bureaucrats. Market rebalancing is nothing more than the willful destruction of deliverability to the point where it meets market demand. A foolish strategy and one the bureaucrats should be called on.

The leadership in the industry needs to ensure that every drop of oil or gas is produced profitably from this point forward. We owe that to ourselves. We can’t look back and realize how wasteful we’ve been with such a valuable resource. By ensuring that we’re producing every drop profitably our future will be more secure. We owe that to ourselves as much as we owe it to all the people who are involved in the industry today. They should be provided with a predictable and prosperous future. These cyclic downturns are unnecessary and are relics of the absent and unmotivated management by the bureaucrats. They’re not interested in managing this resource effectively, then it’s up to us to lead the way.

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. 

Project Update

I’ve received a number of calls and emails from people who’ve had a variety of things to say about this project. I’ll categorize them in the various memes that I feel they fall under and provide you with an understanding of the concerns. Many just want to know what the status of the project is. What’s its viability and the probability that industry will undertake to develop the application? The other major question centers around the broad scope of the Preliminary Specification. Is it really necessary to have all of these components operational? Why not just start small and build from there? I’ll answer these two general questions in this post and would encourage people to call or write me with their concerns and opinions. This project will only succeed with the community fully engaged. Many people are actively evaluating the user community participation application process. If you want to have user community based ERP systems developed and used in oil and gas, it will only occur with your direct participation. You are the determinate factor. No one is going to ask you if you want them, you have to make it real by proceeding with your user community application.

Where is the project at and how are we doing regarding our September 25, 2017 development start date. This is a difficult question for me to answer because of the current lack of contact that I have with the industry. I’ve been shut out for so long that it’s difficult for me to get a reading from the ground floor. We certainly are timely with a solution to the issue of the day, however, I’m unable to read how the producers are truly feeling. Are they even concerned? Or are they as they’re represented in the media to be thinking this is someone else’s problem. I’m not cold calling the CEO’s or anyone at the producer firms. This is futile. There is no time left to invest the months necessary to get past all of the executive assistants. Then the ability to convince the CEO may be possible, and as a result, I’m passed on down to someone within the organization to evaluate further. When you call them it’s several months to get past their executive assistant. Producers need to be organizing themselves to participate. For me to find the 100 decision makers and have them write the check is a multi year process. Producers don’t have that time. If there is some initiative being undertaken to adopt the Preliminary Specification, I’ll be the last one to know about it. Our blog and wiki are being reviewed by a large audience. We have significant mindshare in the industry. The one thing I can relate about our readership is it’s predominantly American. In fact Canada is a disappointment to me. Canadian producers have very little uptake on the entire initiative. If all they contribute to the North American energy mix is heavy oil then we may be able to preclude them from our developments. Yes, it is that bad.

In addition to this promotion done for the Preliminary Specification I have been involved in two other promotions of software developments in oil and gas ERP systems. The first was in 1992 in which we were able to convince Oracle to jointly develop a system to meet the needs of the industry. The second initiative was in 1997 when we were looking to replace Oracle’s financial systems with another vendor's product. Which we did with what was then called Price Waterhouse’s PW/SQL. I credit the wild west nature of the technology marketplace at that time for my inability to ultimately deliver any products. Software is a difficult business where you incur all of the costs before your product is complete. What I do know is that today the Internet has enabled us to reach a much larger audience.

I hear a lot of commentary that we could chop this feature off or change that one. Its an understandable solution to the monstrous scope and scale that we have in the Preliminary Specification. The problem is that it has been conceived of as a system. Secondly using the Joint Operating Committee demands that we change everything that we do within the dynamic, innovative, accountable and profitable oil and gas producer and industry. Reducing the producer down to its competitive advantages and enabling the service providers to focus on their distinct competitive advantages is all necessary in order to ensure the issues that today’s producers are facing can be resolved. Taking this or that off of the specification will only cause the rest of the Preliminary Specification to fail when that sub-system is no longer available to provide that functionality or process management. Unfortunately this is the reality that we have to deal with. A good analogy would be building the San Francisco Golden Gate bridge. You have to build that for what will ultimately be required. You can’t start small and build it out or leave some elements for later.

On the other hand the systems that are in use in the industry today are incapable of meeting the needs of the producers. This is a valid argument when we consider the issues the producers are facing. Therefore the wholesale changing of the systems and reconfiguration of the producer and industry are what are necessary in order to resolve the problems. Making these changes by tinkering at the margins are not going to give us the solutions that we need. It’s my opinion that the producers do not have too many years left in which they can survive in the current environment. Some people may consider we are the equivalent of cliff diving into a thimble full of water. It is risky. The time to act is limited, what you need to do is jump in, the water is fine.

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 Financial Crisis Has Now Ended

I’m not pointing to any economic indicator or prediction by a prominent economist. It should be clear to my readers that I don’t think economists have a role, a purpose, or any value in the world anymore. They are at best bookkeepers for statisticians. Only one of them was able to foresee the 2008 financial crisis and none of them will therefore see the end of it. It was clear to me what was happening back in 2007 and what needed to be done. What I was unaware of then was the level of intervention that governments would undertake. These interventions kept the economy alive but comatose for the past nine years. Now the patient has healed and is ready to check out of the hospital. That’s how I see the situation today. It may be considered good news by most, I would argue otherwise.

Much of the pain of the financial disaster did not necessarily have its full impact as a result of the government's interventions. With a healthy economy those interventions will be withdrawn and the market will take over once again. This will cause any of the pain that was not felt in the past decade to be clearly present once more. Mostly in the form of higher interest rates. What those rates will be is unknown at this time, I would suggest anywhere from 7.5 to 10.0% which is the historical middle of the road. This sets up an interesting dynamic for those in western based economies. The government interventions were providing everyone with the time in which to clean house and get your finances in order. Personal and corporate alike. Here in Canada that’s not what I saw happen with most people. We’ve kind of created our own future housing crisis here. In oil and gas, they’re muddling through the most severe downturn ever. One that is of their own doing and one in which they’ve done nothing about.

For producers to face higher finance costs at this point will be difficult. North America may have to come to grips with the fact that much of their deliverability in oil and gas will be severely diminished in the next decade. Muddling along has enabled the producers to have about five minutes of resilience against any financial headwinds. Our sample of the 23 producer firms that we follow recorded the following performance during 2016. The total debt that they carry is $161.3 billion. Note this is just bank debt. Their total debts are $335.9 billion. On the bank debt they paid $8.8 billion in interest for an average interest rate of 7%. Interest rates paid by these producers varied from 3.46% to 25.79%. This interest expense represented 5.5% of revenues. The only conclusion that I would come to from this is that these companies are perfectly leveraged. It would seem the exact amount of debt is being used to offset the equity in order to earn a greater return on that equity. However, as I’ve noted regarding the recording of property, plant and equipment, these companies are not necessarily profitable.

Prime interest rates have been in the three to four percent range for the majority of the last few years in which these funds would have been borrowed. That producers are paying an effective interest rate of 5% shows they are paying somewhat of a premium. We also don’t know how much interest was capitalized to property, plant and equipment. Moving from 3 to 4% to 7.5% would be a doubling of interest costs for these producers. Doubling their interest expense. Affecting their cash flow by $8.8 billion and bringing it down to $27.4 billion for 2016. Maybe not as severe a hit as it would seem, however this would just be the pain felt from the operational side.

In terms of raising additional capital it would only become more difficult for the producers. The reduced cash flow would encumber their cash flow multiple knocking down their valuations by $50 billion to $165 billion. These producers stocks would also have to perform against the opportunity that investors may be purchasing bonds etc that provide returns on a guaranteed basis of up to 7.5 percent.

“The future belongs for those who prepare for it,” Ralph Waldo Emerson. After this weeks developments in oil and gas it should be evident to everyone that the producers remain in severe jeopardy. They have done nothing whatsoever to prepare, or to deal with any alternate reality in the development of their firms. It is their right to produce as much oil and gas as they feel they can at whatever time they feel they can do it. The accounting for capital costs over the past four decades has enabled them to see their business in the context of a profitable operation, which in reality these businesses are not commercial enterprises. Their view of the industry is distorted as a result. It is important to point out that People, Ideas & Objects Preliminary Specification, our user community and service providers provide the most profitable means of oil and gas operations. Why would that not be considered? Government support of the economy is about to cease and the survivors will be separated from those that are ill prepared. Adding another issue to an unprepared industry that is in the state that oil and gas is in will be difficult. Interest rates may not move too quickly but the investors will be taking them into consideration right away.

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. 

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.

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