Investors Backfilling the Producers Cash Demands?

With the reserves of oil and gas that we discussed in yesterday’s post “The Era of Abundance.” We made it clear that operating a producer based on the short term goal of full production in order to generate as much cash as possible will never be a successful strategy. With the oil and gas reserves that the North American producers have the only rational, successful approach to the industry is to ensure that all of their production is produced profitably everywhere and all the time. Otherwise it will continue to be a spending exercise with no upside for anyone in society other than the handful of bureaucrats at each producer firm. The accounting that generates these false profits must change from what it is today and be determined on a reasonable basis from now on. As we’ve discussed repeatedly here at People, Ideas & Objects the methodologies that are used in the industry of recording capital assets are designed to reflect the value of the firm. This is the not the purpose of accounting, performance should be what the producers accounting is focused on. The dynamic, innovative, accountable and profitable oil and gas producer will seek to reduce their account balances of property, plant and equipment to zero as much as possible.

What has happened that has caused the situation in the market today is that there has been a chronic overinvestment that has led to the overproduction that we’re seeing. By not recognizing the capital costs of past production, producers have inflated their earnings attracting a higher level of interest from investors. The investors had invested their resources in good faith believing that the companies were earning those profits. Meanwhile the producers themselves, due to the fact that they were not recognizing their capital costs in a timely manner, were spending more cash than what they were generating. This cash shortfall was backfilled consistently through the annual shareholder issuance for the subsequent years capital expenditure program. Investors are never happy when they’re consistently diluted by subsequent share offerings. When the firm continues to grow and increase its profits they can handle a little dilution. What they can’t handle is finding out that through bad accounting and mismanagement the financial statements they were provided with in the past, which reflected growth and profitability, have now turned out to be misstatements. Hence we see the investors and bankers strike for the past three years and a chronic cash shortfall in the industry.

Accounting as a department has been effectively dealt with in oil and gas over the past few decades by providing them with the office floor space under the stairs. That way the bills that need to be paid can be shoved in there and they’ll get paid. No one needs to see or hear from them otherwise. On the other hand the accountants have been treated with such disrespect for several generations now that they don’t know any difference. They’re ability to assert themselves no longer exists and they have not filled their critical role in the organization. It is expected of them to pay the bills and ensure that everything that is spent is recorded as a capital asset because that is what the “ceiling test” allows. So they did what they were told instead of asserting a more appropriate performance related, active role in the management of the producer firm.

Bureaucrats caught onto the art of capitalizing costs in the mid 1980’s when the oil price collapsed to $10 and interest rates were high. This art and science began with the capitalization of interest and has only become as creative as those producers who today report 1.3% in annual G&A costs. The point of the exercise is to defer the recognition of any cost against the revenue so that your assets and profits are bigger than your neighbors and never stop growing. Allocating an equal amount of capital cost to each barrel of known reserves has some inherent accounting theory behind it. It however fails the reasonable test when the majority of those reserves will continue to expand over time and never be produced, or recognized, for decades. Meanwhile the production decline curve comes into play so that the need to recognize even less of the capital costs occurs in each successive year. People, Ideas & Objects approach is to recognize as much of these capital costs with the flush production and have all of the capital costs recognized as quickly as possible. That way the investment that was made in the property is recovered and returned in the form of cash to be reinvested again. Today the capital cost of past production, which is also the investors cash, sits for decades as the bureaucrats compare the size of their “well defended” and bloated balance sheets as if they’re something to admire.

Meanwhile, back in New York, the CEO is presenting to investors that for 5% more equity he could increase production by 20% and earnings would double. Who could lose? This “game” has been played since the late 1970’s when the SEC enabled the accounting for capital costs on this inflated asset and profit basis. Has now been figured out by those who have lost the most. The banks and investors. The reserve value of the firm is impressive when you take a TCF of gas times today’s price. The problem is that TCF of gas can’t be produced profitably. It doesn’t even generate as much cash as it consumes. This “game” has depleted the residual value throughout the industry. Nothing is worth anything as it requires capital to produce. It has a management that doesn’t understand this. And this lack of understanding is culturally ingrained across the industry.

I certainly could be wrong about the future intentions of the investors. Maybe they’re banging on the producers door looking to invest right now. Wanting to dilute themselves further and help out with the producers critical cash shortage to make the bureaucrats life that much more comfortable and prosperous. After all, I’ve been told that no one reads or understands financial statements.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry 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 our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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 Era of Abundance

As I write this natural gas prices are soaring by almost 10% for the day. No doubt this trajectory will continue indefinitely and as we noted the other day, the bureaucrats have already started the party. Their inaction regarding the decline in the oil and gas business over the past decade must be rewarded financially and handsomely. It’s days like these in which we can all rest assured that the bureaucrats will sleep well tonight. I had a discussion the other day with someone who had immigrated from Ethiopia. When I was growing up Ethiopia was subject to mass starvation which he noted was due to the King hoarding $6 billion and too proud to seek outside help. I mentioned that it sounded like the political mismanagement that Ethiopia was subject too was the same mismanagement that people are experiencing in oil and gas. The important thing is the King and the bureaucrats are doing fine.

One does not have to look very far to find substantial oil and gas reserves these days. Having a TCF of gas or more was the domain of the large integrated producers in the prior era of scarcity. Now it's common to see many TCF and a billion barrels of oil booked by producers that were startups a few decades ago. This is the real value of the producer. Valuing the reserves at the current price is what that producer is worth. Whether they paid this amount or that for the reserves, and if they have that value listed on the balance sheet is totally irrelevant. Accounting has nothing to do with the value of the firm. Accounting has everything to do with the management's performance of the money that the producer received from investors and bankers. Attempting to match the producers accounting to the valuation of the reserves is a foolish game that has presented the oil and gas producer with bloated balance sheets that now reflect they’ve never performed. They have always overstated their assets and overstated their profits by not recognizing the costs of capital in a capital intensive industry. Now they’re living with the consequences of doing this for the past four decades and they’re unable to make the issue disappear overnight. The capital costs of past production have to be accounted for in order to recognize the misstatements that they were profitable operations in the past. That will take a substantial amount of time and reflect that the bureaucrats were not as handsome as they originally appeared. Investors and bankers have caught on to the bureaucrats game and it would be foolish to think that they’ll forget it now.

The second issue producers have to deal with is that every other producer, other than themselves, are racing to put all of their reserves onto the commodity markets today. The chronic overproduction has been on the basis of a profitability that never materialized because it never recognized the capital costs of that production. These two issues create an interesting dilemma. Any attempt to curtail their production to increase the commodity price to the level necessary to earn a profit only allows the producer to lose when the industry has no production discipline. Everyone knows they can increase the price if everyone has production discipline, it's just not going to happen at my firm, the bureaucrat will say. The aggravating factor is the amount of reserves that exist now as a result of the shale boom and other technologies. The oil reserves are noted here.

Another recent development is that the U.S. is now estimated to hold more oil reserves than any other nation. Estimates in 2016 by Rystad Energy indicate the U.S. tops Saudi Arabia and Russia. More than half of U.S. oil is in unconventional shales, which rely on fracking to produce. Although the cost to produce such oil can be higher than conventional wells, when the economics are right it will be tapped. Rystad Energy also estimated that total global recoverable oil reserves were about 2.1 trillion barrels, about 70 times the current production rate and far in excess of cumulative production up to 2015 of 1.3 trillion barrels.

The situation with natural gas reserves is even much more difficult.

The U.S. Energy Information Administration estimates that as of January 1, 2015, there were about 2,355 trillion cubic feet (Tcf) of technically recoverable resources of dry natural gas in the United States. At the rate of U.S. dry natural gas consumption in 2015 of about 27.3 Tcf per year, the United States has enough natural gas to last about 86 years. The actual number of years will depend on the amount of natural gas consumed each year, natural gas imports and exports, and additions to natural gas reserves.

Technically recoverable reserves consist of proved reserves and unproved resources. Proved reserves of crude oil and natural gas are the estimated volumes expected to be produced, with reasonable certainty, under existing economic and operating conditions. Unproved resources of crude oil and natural gas are additional volumes estimated to be technically recoverable without consideration of economics or operating conditions, based on the application of current technology. 

Having production discipline in an era of such abundance requires the current mismanagement to be replaced with the appropriate business model and organization of the producer and industry. We propose the Preliminary Specification which provides for the most profitable means of oil and gas operations. Ensuring that all production produced everywhere in North America is always profitable. However, before that it would be appropriate for the bureaucrats to compensate themselves for the days 10% increase in natural gas prices. Based on these reserves, it may be a long time before they get another chance to compensate themselves for their inaction. They better make their take as good as they can.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry 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 our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

No Action Here!

Word on the street is that the increase in shale oil production that may occur in 2018 is going to be “explosive.” With the deferral of the recognition of the capital costs of these operations we know they’ll all be profitable too. How “explosive” can shale based reservoirs be? One look at the performance of the deliverability of shale based natural gas and we can get a sense of what “explosive” means. In 2016 there was believed to be a downturn beginning in shale gas production. Deliverability declined for whatever reason, but most probably due to the lack of capital in all shale basins. Monthly average dry gas production declined from over 75 bcf / day to a low of a little over 70 bcf / day. During late 2016 and 2017 deliverability “exploded” to about 77 bcf / day with this trajectory continuing for the foreseeable future. It is now very clear to everyone that the bureaucrats have complete control over this resource when the natural gas prices being earned on this production are around $3.20.

We see a very similar trend in oil production with an upward trend starting in late 2011 at 5.8 million barrels per day, continuing that trajectory until June 2015 with 9.6 million barrels per day, then declining to 8.5 million barrels per day in September 2016 and then resuming its prior trajectory to where it stands now at 9.8 million barrels per day. What both of these commodities “explosive” production growth in the 2017 period reflects is that the oil and gas industry is nothing but a spending machine. Without control or consideration of anything other than “more” which is what you’ll find in common with the average junkie. This is the business of the oil and gas business, if you still consider the oil and gas business a business. I haven’t for a while. I recall at the beginning of these uptrends Bloomberg interviewing Mr. Harold Hamm CEO of Continental Resources who said that this time it was going to be different, “we have discipline now.” Does anyone know what these trajectories and the unconstrained production “explosiveness” reflects for the future of the industry?

Speculation is also forming that the increase in North America’s shale oil production will lead to difficulties in OPEC maintaining their production sharing agreement. Nothing will be said by any of its participants regarding the agreement, however it may be found to be too difficult to continue with any extensions of the time beyond 2018. The speculation also suggests that what we may see is a breakdown in the excellent discipline that has been displayed to this point. That cheating on the individual country quotas will begin in a small way and then begin to accelerate. In the face of such continued pressure on the market by new U.S. production, that has no discipline or business attributes, what alternatives are available to the OPEC producers? The only way in which the North American producer can approach the easily attainable goal of energy independence is through the application of sound business practices which involves profitable production everywhere and all the time. What is clear is that we do not have those behaviors in the industry today, nor have we had them for the last four decades. A revision of the behaviours and culture of the industry is necessary. The only way in which that would happen will be by implementing the decentralized production model of the Preliminary Specification. Until then get used to the rhythm.

What North American producers are not talking about today is as telling as their one true and unforgiving behavior. If the value of their stock only increased by 50% in comparison to the percentage increase in the price of oil, what would happen now if there was a decline in the price of oil? What actions are they taking to ensure that the business is sustainable in the long run? What changes are being made to ensure that they become and continue profitable operations everywhere and always? I would think that these topics would be the ones that are the primary concerns of the North American based producers. I see no evidence of that. Nothing has been done to address any of these issues whatsoever. They just need a quick fix of new production and fresh cash. To let the issue of their investors and bankers strike continue for a third year without addressing those needs is particularly disconcerting. What is it that the investors are telling the producers? It’s that they’re not enamoured with the oil and gas business. That they want to see changes before they’ll get involved any further. The are the facts and the common knowledge of the people on the street.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry 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 our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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 Party is Just Getting Started!

Investors are thrilled with the knowledge that higher commodity prices are currently being realized by their producer firms. And yet, at the same time they know they’ll never see any of that money. Bureaucrats are the new dominant power in corporate america. They’re holding on to the promise that the current trajectory of commodity prices will continue. And it will be the bureaucrats themselves who will realize whatever the value proposition that is realized from the higher commodity prices. It will be the bureaucrats who reap that reward. After all they did everything that could possibly have been done, since the beginning of the natural gas price downturn, to earn what they will now begin to take from the industry.

That is certainly one probable outcome of the current situation. I give it a 50/50 chance as to what the future holds. The other scenario is that a continuation of the overproduction and oversupply is established by the current producers. It would be regrettable to go down the path of lower commodity prices once again, however, I think that is what the bureaucrats current business model guarantees. Production of everything, everywhere and all the time will continue as always. There are allegedly 7,600 ducks that need to be completed. This may take some time to complete however, investments in horsepower at the fracing companies is frantic. Does anyone remember how this movie ends?
I am suggesting that this may be the last hurrah for the oil price for the foreseeable future. When natural gas prices collapsed there were a number of rallies that were precipitated by the belief in the oncoming cold winter. Eventually the story became lame and tiring and no one was listening to the natural gas producers anymore. What happened then, in my opinion, was a capitulation of that market by all concerned. Instead of trading at its long term historical 6 to 1 in comparison to oil, natural gas now trades at 19.96 to 1 to oil. A commodity market that has been fundamentally destroyed by overproduction and oversupply. Initially only in North America, however, now globally. Which is where we maybe heading in the oil market. Back when the natural gas prices did collapse “the real deal was the oil market,” didn’t everyone know. I wonder where the real deal is today? In January 2014 natural gas prices did spike to over $6.00 for a very brief period before collapsing once again into the high $1.00 range.

What parallels can we draw from the natural gas market that might be applicable to the oil market today? I think we’ll soon find out. What the Saudi’s strategy is in terms of their production portfolio is unknown and probably unknowable. The IPO of Saudi Aramco is a once in lifetime chance for them to realize some substantial cash inflow to the kingdom. Propping that up with higher oil prices seems logical to me and may be the motivation behind the current production sharing agreement within OPEC and Russia. That IPO is scheduled for some time in 2018. Was the Saudi strategy previous to that to eliminate the high cost shale production that precipitated the decline in oil prices? There are people who suggest that once the IPO is completed the Saudi’s, as the lowest cost producer, will once again resume that strategy and produce at their maximum deliverable to ensure they achieve some value from their resource. In a market where the highest cost producer continues to overproduce that is the only strategy available to them. Continuing to cede market share to the highest cost shale producers is the most illogical business strategy being employed on the planet. If the Saudi’s just focus on delivering product to their customers, the high cost producers will eventually blow themselves up.

Therefore the behaviors of the North American producers, the history of these producers in the natural gas side of the business and its commodity markets, and whatever strategy the Saudis are employing make the oil and gas industry a difficult sell. Alternatively if the bureaucrats are having all of their Christmas’ arrive at once and the price upswing continues and is permanent. Then the party will begin in earnest and should truly never stop. I personally don’t believe that there has ever been a better time for People, Ideas & Objects, our user community and the service providers. No one anywhere believes the bureaucrats have this under control. No one believes they’re making any money. No one believes the prices won’t revisit their lows, and to eliminate that belief may take many years of very high prices to prove otherwise. People, Ideas & Objects have convinced the market that we have the solution to low oil and gas prices. And now we have the added feature that if prices do go up, the only upside is for the bureaucrats who have always taken all of the money for themselves and done absolutely nothing for it. That is, they’ve done nothing for the oil and gas business.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry 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 our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

Could've, Would've, Should've

Yesterday we calculated the approximate annual cost of maintaining the bureaucracy and their failed business model. It is this failed business model that concerns the oil and gas investor. It is this failed business model that everyone in society sees as the reason for their difficulties. And they know and understand that it’s not necessary. They know that a solution that could’ve, should’ve and would have provided the answer to these difficulties was available. The bureaucrats think that our value proposition calculations are ludicrous and unreasonable. Bureaucrats believe they are profitable today and the changes brought about by the Preliminary Specification would generate public distaste for the industry. Therefore they will continue with the status quo and the remaining people within the industry, those within the service industry, the investors, the royalty holders and the governments who collect taxes on the profits of the producers and the otherwise prosperous companies and people will all have to live without. The important thing to remember is the bureaucrats are fine.

Is it reasonable to assume that the 2017 value proposition of $673 billion would be a windfall for the producers? If we could make the assumption that no additional resources from this incremental money would go to the bureaucrats, what additional costs would these revenues generate. First there would be the royalties that would be due on the incremental revenues. These have been calculated at 25% to take a reasonable average understanding that all of the gas cost allowances have been depleted already. That would reduce the revenues to $505 billion. In addition there would be incremental taxes that had to be paid. Just the Federal income tax of 21%, understanding again that all costs have already been deducted, brings the net proceeds down to $399 billion.

Now we deduct the costs associated with our Initial Coin Offering that is associated with the development of the Preliminary Specification. We are funding our budget through the issuance of a coin based on the blockchain. Included with this coin are the Permission Rights that are granted to the coin holders which enable them to hold the exclusive access rights to the People, Ideas & Objects software that is developed. If producers/investors/individuals or whoever want to participate and earn the value proposition in the oil and gas industry. They will need to fund the costs and then they can control the access to the software in order to achieve that value proposition. Bureaucrats who don’t want to participate in this manner should start considering what reason they’ll be providing their shareholders as to why they’re not participating in the value proposition.

The value that is determined to be the compensation for the coin holders, in exchange for them building the Preliminary Specification, is one third of the value proposition. Therefore another $133 billion would be paid to them for that purpose and the remaining $266 billion would be left for those who hold the title on the producing oil and gas leases. I have stated for many years it’s no longer enough to own the oil and gas asset. It’s also necessary to have access to the oil and gas software that makes the asset profitable. This is the reflection of that principle and a reflection of the way things are changing in the marketplace.

With a $267 billion annuity on hand and the existing bureaucrats that we have today. The smartest investment would be to invest in real estate on the island of Hawaii. Which might be a clear indication that we not only don’t need the bureaucrats, we really don’t want them. This $267 billion needs to be used to retire the bloated balances of property, plant and equipment that exist on the oil and gas producers balance sheets across the industry. I have calculated these balances, on an approximate basis, to total $1,620 billion. Therefore on the basis of the 2017 information that will take 5.89 years in order to exhaust the balances of property, plant and equipment across the industry. The difference between the 5.89 years and the 30 months that we used in calculating the prices is the extra burden of the societal costs, which we discussed on Tuesday. Reflecting the cost that the industry is responsible for. I’ll leave it to others to determine if we should determine a faster amortization of the outstanding property, plant and equipment bloat, or if even higher prices are required than the $126.55 which was used in this example. Remember I am not talking about tax policy here. I am not talking about the valuation of the company, that is for stock markets. We are talking about the performance of the producers and converting them from the investment dead zone to ones that perform.

With the retirement of the bloated balances of property, plant and equipment this will leave the industry with a commensurate amount of cash. Over the course of 5.89 years that would total $1,620 billion. An opportunity to pay the shareholders for the work they’ve done in the past number of decades. In addition, with the bloating of the asset value of the producer there has also been a bloating of the debt. With interest rates on the upswing the industry doesn’t need to enter a phase of renewed jeopardy as a result of being too heavily indebted. These balances need to be paid down with the cash resources obtained by these policies.

Lastly, looking at the 25 year horizon and the objective of energy independence in North America’s oil and gas industry. How will that be done with the current bunch? No earnings, no cash, no support from investors or bankers. Energy independence is not a dream its bullshit. With the value proposition policies being discussed here. Where the consumers are paying for the full costs of energy. Current and past. Society can depend on a profitable and productive oil and gas industry. Investors are rewarded for the risks they take and people can plan their careers and lives around the high probability that they will be able to remain consistently and gainfully employed in oil and gas for their entire working lives. Then the industry will be able to look at the future horizon and plan on energy independence and deal with the many difficulties that objective would present. Only then would it be possible to do so.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry 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 our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

Our Value Proposition, Defined

During the Christmas break I was able to review our 2017 calculations for the value proposition of implementing the Preliminary Specification in North America. The incremental value proposition of the producers would have been $673 billion for 2017 if they had implemented the Preliminary Specification on a timely basis. Even with $3.00 natural gas, and $60.00 oil these prices remain woefully inadequate to cover the costs of oil and gas exploration and production on the basis of a reasonable accounting. The prices that we calculated that were necessary in order to generate this value were $126.55 / boe for 2017. These prices are what are required to recognize the current cost of exploration and production but also deal with the bloated balance sheets of the producers. Depleting the producers existing balances in thirty months. Which would subsequently leave a thirty month balance of property, plant and equipment at the end of the thirty month period in which the asset bloat is being retired. Thirty months being the outside limit of what I feel would be acceptable for any firm in the 21st century.

The Saudi’s announced recently that their revenues for 2017 were higher than in 2016. Even though production volumes were lower than in 2016, 2017 prices were so much higher as to make a material difference in revenue. What’s that saying, you can either make it up on volume or price. A lesson the oil and gas bureaucrats should learn. This pricing behaviour is also consistent with the oil commodity being a price maker. A feature of the Preliminary Specification. However, bureaucrats accuse us of collusion, which is about the most ridiculous thing I think I’ve ever heard. Continuing to produce unprofitable production that dilutes profitable production is proof that the oil and gas producers are not colluding? Our price maker strategy is not collusion, its business, why would anyone continue to lose money in any part of their business?

What purpose would there be in retiring these bloated balances of property, plant and equipment? These balances reflect the capital costs of past production. The costs that were not recognized when they should have been, and as a result made the bureaucrats performance look much better than it was and is. Any wonder that they’ve chosen not to implement the Preliminary Specification? By recognizing these costs in the thirty months, after the Preliminary Specifications price maker strategy is implemented, will enable the producers to capture these prior investments back in the form of cash. Then, with the appropriate management, the producer will be able to fund their own capital expenditures, pay down debt and return these funds to the shareholders in the form of dividends. Producers have had their hand out for capital investment each and every year for decades saying they had to build the industry. It was then, as it is now, a mature industry and should be managed as such.

By implementing the Preliminary Specification it would change much of the culture of the industry. Production discipline would be enabled that would ensure that all production everywhere and all the time was profitable. Producers would learn that producing properties that lose money diminish their profitable properties and that is the reason they’re consuming cash. Exploration and production would become economically more dynamic. The criteria used to spend money today is loose and I would say undisciplined. This would tighten up as the probability that a producer would spend capital resources on a shut-in property becomes highly probable. The ceiling test is the greatest excuse known to mankind. As long as the producer is within the ceiling test they will continue to spend like drunken sailors and capitalize everything including their postage stamps and Post-it-Notes. Deferring the recognition of the capital costs in a capital intensive industry for decades. The ceiling test defines the outer limit of what is acceptable. That does not mean that each and every producer must reach that point each and every year. The dynamic, innovative, accountable and profitable producer will seek to recognize their capital costs as quickly as they are capable of. In doing so they will have cash balances that exceed the gold reserves of the United States. And it is here therefore that there will have to be a significant cultural change. Cash balances do not mean that they’re to be spent immediately and can be used for other purposes. Certainly not for rewarding the bureaucrats who have contributed nothing to the success and profitability of the industry.

The logic proposed in the Preliminary Specification is the logic necessary to run a successful and profitable oil and gas industry. Bureaucrats have implemented a business model that has failed fundamentally and has created deep and difficult issues for society at large. It is no wonder that oil and gas bureaucrats are against this initiative. Does anyone believe that the current commodity prices will survive the next upturn in drilling and completions. Last week we saw 15 new rigs deployed in the United States. Christmas vacations are officially over. New production is the only source of cash for the producer. If they don’t pay the driller for 18 months thats a cash windfall that can’t be ignored. All that new production ensures the bureaucrats get paid for that much longer before they slip out the back door.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry 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 our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

An Alternative is Proposed

Late last week I came across this article in WorldOil. It proposes a solution to the issues being experienced in the oil and gas industry across North America today. This is being proposed by Mr. Ben Dell, a managing partner at Kimmeridge Energy Management, a private equity firm in Houston. He suggests the costs of overhead are too high and could be handled in a different manner. Even suggesting that “The reality is if you weren’t motivated in preserving your job, you would run these companies completely differently.” Here, here as the British would say. Mr. Dell suggests that consolidation of the existing producers will provide the means in which to offset many of the issues that the industry is facing. Consolidation into what are subsequently referred to in the article as “Super E&P’s.”

I naturally want to spend some time evaluating this alternative and compare it to People, Ideas & Objects Preliminary Specification. First I want to clarify the point regarding Mr. Dell’s comment about overhead and administrative costs. In oil and gas these costs are high. In most of the producers overhead, administration and interest are capitalized to property, plant and equipment to make it appear as if these costs are low in terms of their percentage of revenue. I am not aware of Occidental’s policies on overhead capitalization, however, in 2016 their total G&A was 20.86% of revenues. With this high percentage of G&A it may be assumed that they’re not capitalizing anything and this amount would therefore be representative of the amount of actual costs incurred to administer the industry. Anadarko who are a pure upstream operation also have G&A of 18.3% for 2016. Others have 1.48%. The second point I would make is to reiterate what I said yesterday regarding the capitalization policies of producers. There has been an accounting deception which has been perpetrated on the investors which has distorted the industries performance and created the overinvestment, and hence the overproduction that is the issue of the day. I believe this would be the case even without shale based reservoirs, however, shale has certainly aggravated the point.

A third issue I would raise with Mr. Dell is the systemic and cultural manner in which the oil and gas industry is operated. It is a technical industry and those without the requisite knowledge and understanding of engineering and geology, just don’t understand. This attitude is systemic as I suggested and is the reason that the CFO’s are so quiet in the industry today. No one within the producer firm listens to them. This is also the attitude that is present in the dealings with investors and bankers. And as the article later states by Buddy Clark, an oilfield transactions attorney at Haynes & Boone in Houston “Each management team thinks they have the secret sauce.” One of my son’s is an engineer and he has adopted this attitude too. By consolidating the producers into Super E&P’s, I believe, you’ll only concentrate the cultural forces aligned against investors and administrators, enabling these issues that have caused the overproduction to be more entrenched. Investors will have smaller interests in larger producers where it will be more difficult for them to influence. And bureaucrats will be empowered to a greater extent than they are now.

What we learned through our research phase was that organizations were defined and supported by the software that the organization uses. The behaviors that are present in the industry will continue until such time as the software in the industry is changed. Whether that is with the current producers or with the Super E&P I see the software change as the most effective first step in dealing with these issues. People, Ideas & Objects provide the Preliminary Specification to deal with these issues specifically and a dedicated software development capability in which the industry will be able to ensure that future issues are not metastasized to cause similar value loss. Without the Preliminary Specification and the software development capability of People, Ideas & Objects providing industry with the solution, any other solution will be temporary as the industry will ultimately regress back to the cultural norm defined in its existing software.

It has been ten years that the natural gas prices have been depressed and three for oil. Ample time for the producers to have acted in their investors and everyone’s best interest. Review of this blog and our research shows that our publications began in 2003 and this blog in late 2005. Our solution has been available for them to have acted in a timely manner to resolve these issues. This complacency and inaction are the result of a bureaucratic overhang that I believe will only become more protracted with the Super E&P’s.

Saving the best arguments for last, it is also an accounting issue. None of the producers know with any accuracy whatsoever what the performance on any specific property is. None. The accounting is not detailed enough to provide an understanding of what properties are bringing home the bacon and which ones are dragging them under. They therefore produce everything in the hopes that the net will provide enough to pay for the overhead. The current cash crisis reflects that the current business model has failed. Until the accounting is structured on the Joint Operating Committee as the Preliminary Specification does, the granularity necessary to determine the actual profitability of each property will continue to evade producers.

Lastly the Super E&P’s do not implement the Preliminary Specifications decentralized production model’s price maker strategy. Our software defines and supports a reorganization of the producer and industry on the following basis. By extracting the accounting and administrative resources out of each producer and reorganizing them into service providers, focused on a single process and using the entire industry as their client base. We are able to convert the fixed overhead costs of the producer into the variable overhead costs of the industry. Each service provider will work through our task and transfer network to conduct their work for each property. Each month a billing will be presented based on the work conducted by the service provider. Therefore, If a Joint Operating Committee shows that it is unprofitable it is shut-in until such time innovations can be brought about to increase revenues, decrease costs or expand the reserves and return the property to profitability. While the property is shut-in no information is generated and none will be transferred to the service providers in the task and transfer network. Creating in the producer firm a null operation for that property. No profit, but also no loss. By shutting in unprofitable production, producers will no longer have their profitable production diluted by their unprofitable production. Reserves will be saved for a time when they can be produced profitably, those reserves will also not have to carry the incremental costs of each years subsequent losses. And finally the marginal production is removed from the commodity markets. Enabling them to find the marginal price. Service providers are undertaking the risks associated with the overhead costs of the oil and gas industry. Yet they can budget and plan for contingencies that may impair their revenues by upto 15% or more, depending on the volume of oil and gas that is shut-in, at any time. Providing an effective control for the oil and gas industry over its overhead costs.

Our price maker strategy is not part of the Super E&P producers. We have asserted our business model to the industry for over a decade. Their resistance is a classic case of disintermediation in which the bureaucrats have the power to avoid their elimination. Their power will only be further entrenched in the Super E&P. Therefore I believe that the first step the industry needs to take is the implementation of the Preliminary Specification. Then the appropriate corporate structure can be supported and ensured that they will be provided with the most profitable means of oil and gas operations. In the article Mr. Dell is quoted as saying.

When oil prices go up, these guys spend like drunken sailors, he said. When oil prices go down, they turn around and say, Look, it’s not my fault the oil price went down. I can’t be expected to manage this commodity.

We need to change the culture and reorganize the industry on the basis of profitability. It has been four decades that the industry has been operated in the manner that it is today. Generations of oil and gas workers know no difference. To break this cultural inertia we need to build the software that will define and support the organization and culture that we desire. That is the Preliminary Specification. Changing deck chairs on the Titanic will not save anyone.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry 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 our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

Societies Cost

During the Christmas Holidays it became quite evident the extent of the costs that people are paying as a result of the downturn in oil and gas. Calgary may be unique in that we are a one industry town with a population of 1.26 million people. Dallas, Houston and Oklahoma City may have other industries that help to mitigate the effect of the downturn in oil and gas. The cash crisis that oil and gas producers choose to continue to operate under is being felt throughout the city and the province. Extending payment of a firm's accounts payable to unreasonable periods seems to have been a lesson that everyone has learned. Companies of all types are closing their doors and everyone is at a standstill. Companies such as Cenovus Energy, who are reporting those oil and gas styled “record profits,” are slashing their staff by 15% once again.

Throughout the Preliminary Specification, and specifically in the Resource Marketplace and Revenue Model, we discuss the impact of oil and gas on the economy as a whole and address who it is that we are developing systems for. Noting that oil and gas is a primary industry that uses the service industry to conduct most of their field operations. As a primary industry oil and gas producers generate their revenues from the sale of oil and gas commodities. The attitude of the producers is that this is their money and the service industry is a leach on that resource. Encana repeatedly stated that the service industry were greedy and lazy during the times when oil and gas prices were at their peak. Now not paying them for a year or eighteen months is the reasonable thing to do.

Society as a whole benefits as a result of the exploration and development of oil and gas. Not much argument there. Producers have considered what falls within their four walls as their only concern and assume everyone else is involved in a primary industry where their revenues are generated through the initial sale of some commodity. The service industry is not so lucky. They are wholly dependent on a healthy and profitable oil and gas industry and it is incumbent on the producers to ensure that they attain that. If they don’t attain a profitable or healthy outcome, then too bad so sad say the oil and gas bureaucrats, at least they have cash and will get paid. The results of this attitude is having serious consequences on the service industry for the past two years, which is now beginning to affect the general economy where the service industry and oil and gas producers rely on to support their activities. When producers do decide to get their act together, what capabilities will be available to them from the general economy? Or will they just shell out double or triple the amount of money necessary to get the people to migrate back to work in the remaining prehistoric conditions and live through the abundance of shortages in their lives. Which would be ok because the bureaucrats will still be paid their cash and they’ll be ok. Bureaucrats never lose.

Our focus here at People, Ideas & Objects has been to point the finger at the bureaucrats as the responsible party for these difficulties, the continuation of this downturn and the associated pain and suffering. They are not motivated to make the changes through adoption of the Preliminary Specification as we eliminate them from the scene through disintermediation. Another area of our focus is on the oil and gas investor as part of the solution to how this downturn and the People, Ideas & Objects Preliminary Specification ultimately gets built. Investors are key in the health and prosperity of any society. They’re the ones who can and will act to make the changes to avoid these kinds of conditions. No one else has the authority, responsibility or tools in which to do so. So how come this downturn has happened in oil and gas?

Investors, as has everybody, have been deceived by the accounting mythology that the oil and gas producers have been spinning for the last four decades. Capitalizing every cost possible, including most of the overheads, to the point where the only costs that are recognized are the costs to run the pump jack and the royalties. In a capital intensive industry this leads to distortions where the assets bloat to ridiculous sizes, and hence why producers are so enamoured with them. What producers need to learn is that accounting is not about reflecting the value of the company, accounting is about how the firm is performing. And oil and gas profits have been spectacular because the real cost, the capital consumed by the company, is never recognized. The capital is raised from an investor, spent and will then sit for decades in property, plant and equipment before it’s returned to the producer for reinvestment, retirement of debt or redistribution to shareholders. Oil and gas is the place where money goes to die and it has been that way for four decades. Investors were deceived by the accounting during this period, being told that their producer firms were smart and successful. When in reality the industry has been hollowed out of any value and is worthless from the point of view that it requires tens of billions in new cash each year to sustain itself.

In May 2004 we published our Preliminary Research report in which we hypothesised that if industry didn’t change their ways, conditions would deteriorate. Equating the situation to the fall of the Former Soviet Union where the economy ceased to function, when everyone was lined up at the bakery waiting for bread. Asserting that the oil and gas bureaucracy would become too slow and too cumbersome to deal with the speed and changes within the industry. Unable to keep up with the needs of those that depended upon it. We have that situation today with the added feature of a complacent and satisfied bureaucracy. The costs of that are now beginning to be evident to everyone. It’s time for action.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry 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 our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

Martin Luther King Jr. Day

No posting today.

Holiday Schedule

I've decided to move forward by one week the time that I take off for Christmas. I'll be returning on January 15, 2018. Merry Christmas everyone.