The Right to Criticize

It would be one thing to be so critical of the oil and gas industry and not have any ideas on how to solve the issues that it faces. People, Ideas & Objects have the Preliminary Specification that deals specifically with today’s issues and provides a foundation for the industry to prosper well into the future. The scope and scale of the changes in the Preliminary Specification are substantial, just as the difficulties the producers face today. Continued inaction leads to further erosion of the control that the industry has over the various frameworks that it has an interest in. The financial, operational and political frameworks are all deprecated and in need of rehabilitation. The only means in which to do so is for the industry to reorganize itself through the Preliminary Specification and begin producing only profitable oil and gas production. Real profits based on a reasonable accounting that reestablishes the financial foundation of the producers.

As it stands today cash has to be the most difficult problem for the producers. Since the investors have ceased their annual participation in funding the producers, the cash within the industry has continually eroded. Banks quickly followed the investors and stopped the flow of loans to producers, whereas today they’re actively seeking funds to pay those loans down. The lack of cash is wholly attributable to what we call the subsidy that producers have provided the energy consumer. The subsidy represented in the form of the unrecognized capital costs of past production. At $141 in costs, based on our determination, producers cash flows outwards when their production doesn’t receive even half that price. Investors were used in the past to backfill the cash shortfall and they now see the effect of their investment dollars and have suspended any further participation.

In order to return to a profitable industry the changes in the Preliminary Specification need to be implemented. These include a reorganization of the producer where the administrative and accounting resources are reallocated to service providers who focus on one process and use the entire industry as their client base. This turns the fixed overhead of the producer into the variable overhead of the industry. Variable based on production at the Joint Operating Committee. Where if the property, considering the capital being depleted on a reasonable basis, operating and overhead costs are able to produce a profit it will continue to produce. Otherwise it is shut-in where it will incur a null operation. No profit, but also no loss, all of the costs of the producer are variable under the Preliminary Specification. This allows the producer to move their production profile up and down based on the profitability of their properties. At any point on their production profile they will be profitable as the unprofitable properties will no longer be diluting the profitable properties, their reserves on their shut-in properties are being saved for a time when they can be produced profitably, those reserves are also not having to carry the incremental costs of subsequent losses from unprofitable operations and the commodity markets find the marginal costs when the unprofitable production is removed from the market. North American producers are now the global swing producers and their role is to accommodate the changes in energy demand of the consumers. This demands that the production profile of North American producers be variable and they be profitable at any level of that production profile. The Preliminary Specification provides the means for this.

I mentioned that there needed to be a determination of profitability based on a reasonable accounting. Today the determination of the capital cost of each barrel of oil produced is unreasonable in the 21st century. A time when capital is turned over at a far more rapid rate in other industries. Oil and gas being a capital intensive industry demands that it turn over its capital at a far more rapid pace than today’s producers in order to compete for those investment dollars. Today depletion of a producers capital assets has extended for up to 27 years in some instances. There are quarterly reports that show producers recording negative depletion. From a capital point of view this is inconsistent with a competitive oil and gas industry. People, Ideas & Objects suggest that producers seek to retire their capital within a period no longer than two and one half years. In order to do this however it will require that the decentralized production models price maker strategy enable the producer to produce only profitable production. Which will bring the commodity prices in line with the actual costs of oil and gas exploration and production.

The primary effect of this change will be the amount of property, plant and equipment that is stored on producers balance sheets. An amount that we believe to be approximately $1.6 trillion would be cycled into cash for further reinvestment, payment of bank loans and the issuance of dividends. This is the source of cash that the producers desire and quite desperately need. The added benefit of this process is that their investors are not diluted any further by subsequent share issuances.

The current policy of allocating the properties capital costs equally to each barrel of oil or gas that is booked as a reserve assumes that the costs of those reserves will be consistent. That, I believe is inconsistent with the reality of the situation. The phenomenon of flush production needs to be considered and the actions of the producer once flush production has been achieved. Either the property will be left with a much lower production profile demanding that the capital be returned over centuries and not decades, which is an unreasonable expectation in the 21st century capital markets. Or, that there will be no further capital expenditures to rehabilitate the property to maintain the higher production profile. Accounting is concerned with performance based on the cost associated with the business. This also has to be taken into consideration in the competitive environment and capital markets that the firm operates in. Extending the recognition of capital costs beyond 2.5 years is unreasonable and is an attempt for the accounting to emulate the valuation of the firm. This is contrary to the purpose of accounting and this misperception has led to the disastrous difficulties the industry is in today. These include the chronic, systemic and lavish overstatement of assets, earnings and cash flow over the past four decades and the implications of those overstatements. Leading to a cultural belief that this is the way it is done.

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 profitable 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 Visionaries Are Missing

I’ve been critical of the oil and gas bureaucrat and their focus on drilling wells and only drilling wells as the sole aspect of their business. When it came time for the Permian basin to increase their activity level producers just showed up and began drilling wells. That the service industry and pipelines were unaware of the demands of what the producers needed was a failure on behalf of these service industry representatives, alleged the producers. After all it's the producers with the checkbooks and they need the wells drilled. Although the Permian basin is the current area where the labor and infrastructure shortages are costing the producers large differentials. Those producers should look to the leadership that the Canadian producers have provided in this area over the past few decades. They have completely capitulated any responsibility for anything other than drilling wells and therefore have established their price differentials to be one of the best business opportunities that exist in the U.S. oil and gas industry.

It doesn’t have to be that way and that’s not how the industry was built. People of vision and fortitude were able to build the industry on the basis of making money, taking risk and putting in some effort. One interesting business development that very few people new or understood was what Dome Petroleum’s “Smilin” Jack Gallagher was able to build in Canada. Canada at the time was not a big oil or gas producer in comparison to what it is today. The NGL’s that were produced in the province could not be shipped out by pipeline due to the damage they would do to the gas meters. Therefore they were mostly shipped out to markets by rail. An inefficient and expensive process that was inadequate to deal with the volumes. Much as our current Canadian producers are once again discovering when they ship their oil out by rail because they never thought to have any pipelines built. What Dome figured out was that if they bought up some key facilities in the province and built some pipeline and other infrastructure here and there, they could gather all of the NGL in the province and ship it through the Inter-Provincial Pipeline, now Enbridge. Dome did this and were able to have these assets deemed a private facility. With 100% ownership there was no other choice for the regulator to do. Therefore only Dome could ship NGL’s across this infrastructure.

For whatever reason Dome made an agreement called the Transportation and Fractionation Agreement with Exxon’s subsidiary Imperial Oil that they too could use this facility for the cost of $20 / barrel. Imperial then could buy their product from the producers in the province of Alberta and ship it to Ontario for use in their facilities in Sarnia. Sarnia is where Imperial had substantial NGL storage, chemical and refinery capacity as well as access to the Chicago market. Therefore Dome and Imperial were the only two producers that were able to move any NGL’s out of the province to markets by efficient handling facilities and pipelines. As a result they were able to purchase the propane and butane in the province of Alberta from all of the other producers at essentially what the royalty costs that those producers would incur as a result of producing these byproducts. Moving these products to market would then allow them to realize substantial upside by delivering the base commodity to the chemical plants and other facilities that needed them.

Now the liberals will scream and shout that this was a monopoly and Dome took advantage of the other producers. I would think people could see this for what it was, smart business. And in a lot of ways this smart business thinking is what is missing from today’s market. I hear from people that “making” prices as in People, Ideas & Objects Preliminary Specifications decentralized production models price maker strategy is “wrong” for the industry to be doing. And this is coming from people who should know better. People who apparently have chosen to let the industry collapse instead. Dome saw an opportunity and took it. Smart, efficient and effective. It made them a lot of money and although they were enchanted by the then Trudeau government to go and spend that money drilling what are now useless wells that have sat idle in the Arctic for four decades. Enchanted by the tax provision that gave them a “super depletion allowance” of 500% of their costs. The old tax tail began waving the business dog and the business dog had to be sold to Amoco to save it from its creditors. You win some, you lose some. In oil and gas today bureaucrats only lose. It doesn’t matter because everyone is in the same boat and it will sink just as fast if they do something or not. A defeatist and uncaring attitude prevails in the industry. Why bother when the pay is so good? No one stopping to think that the pay is good because it comes with some responsibility.

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 profitable 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.

Real Costs, and Cash of the Producers

Lately I’ve been full of cheery news regarding the oil and gas industry. This post will assure you that I fully expect to continue that trend. Nothing is being done about the difficulties in the industry and I don’t see how the producers think they’re moving forward. My arguments stand in direct contrast to the happy, smiley faces that are being representing as the good times. What I see are two possibilities as to how we proceed from here. Either the producers put the money up to proceed with the development of the Preliminary Specification or they let things fall as they will while they pack their bags and get out of town. I think the latter scenario is their chosen one and we’ll be faced with that prospect this summer. Leaving the industry in shambles will help everyone forget the names of those who were responsible.

We’ve noted that producers costs are in the range of $141 per barrel. How is it that our numbers are so different than those being represented by the producers? People, Ideas & Objects see the capital costs of exploration and production as a cost that should not reside on the balance sheet for more than two and one half years. Moving these costs from property, plant and equipment to the Income Statement recognizes the real costs of oil and gas exploration and production and therefore returns, with the assumption that the producers are charging enough for their product, the previously invested cash back to the business for further reinvestment, paying bank loans and issuing dividends. The cash flow from recognizing the assets as costs has traditionally been believed to be a result of the bureaucrats brilliant business management. This cash flow in reality is just the return of prior investment dollars and should be treated as such. It should never have been considered the management’s to do with as they please.

Nonetheless what had happened in the past was producers were not receiving the $141 or whatever their costs were in terms of the prices they received for the sales of oil and gas. The shortfall was substantial as it is in today’s market with prices being $66 and therefore today’s cash shortfall of $75 / barrel is what producers are experiencing. Now most of those costs are never recognized, let's say the $100 in capital will continue to be reported as an asset for decades as property, plant and equipment. Therefore the company can report that they were profitable as a result of $66 prices minus the $41 in remaining costs. A $25 profit sounds fantastic and has traditionally attracted the investors and bankers with the belief that it was all real. What the producers were doing however was playing the shell game where the actual cash shortfall of $75 was made up from the producers annual investor and banker fleecing. For four decades this was the game that was played.

Each year oil and gas producers would raise their capital program from the capital markets. Diluting prior investors shareholdings and keeping the value of their stock down. No one seemed to think this was strange as the industry was being “built.” Whether the industry was being “built,” was mature or investors were being “hoodwinked” is what my readers can decide for themselves. What in essence has happened through these past four decades is the effect of the annual shareholder fleecing has provided the funding to allow the producer to sell oil and gas to the consumer at a substantial discount to the actual cost. No amount of me screaming and yelling these points over the last 13 years seems to have sunk into the minds of the bureaucrats. It did begin to resonate with the investors and bankers in 2015 and 2016 and as a result they’ve withheld their cash from any further abuse by our good friends the bureaucrats.

Since that time the subsidy to the consumer has continued and in a fashion that can only be classified as a full and complete scam. At times producers recorded negative depletion for the quarter. That enabled profits to continue to be reported. Extension of the depletion of assets to exceed 27 years was also a favorite. No one thought these had any impact on the credibility or integrity of the reporting producers. What was hard to see through the advanced accounting shenanigans that were done to hide the cash difficulties and report profits was the amount of cash that was being consumed by the business. There was no source of readily available cash other than new production which became the key to survival. Extending accounts payable to the service industry for up to 18 months didn’t seem to be an issue. Now the cash has continued to erode and is very tight, the working capital is critical and all we hear and see are smiley, happy faces.

“It’s just the nature of the oil and gas business that there are some bad years.” 27 of the last 32 have been miserable with no sign of a good year for decades now. Each of the 5 good years were brought about by escalating commodity prices that the bureaucrats had nothing to do with. Therefore bureaucrats have only brought misery and nothing of value, no wonder I dislike them! Now investors are nowhere to be found and banks continue to reel in the producers outstanding debt balances. Poaching the dimes, nickels and quarters of the producers as they deposit them in the bank account. Well who cares, the bureaucrats will say, its only cash. The fact of the matter is that the smart money has been saying that something is fundamentally wrong with the business for a number of years and the bureaucrats have done nothing about it. They are determined to put their point across that the business is a science and very complicated, non oil and gas people don’t understand. Well bureaucrats clearly don’t understand the business part of the business and are too thick to hear the people who are screaming at them to do something about that. I’m not looking forward to the next 32 years with these bureaucrats, I don’t think they’ve got another 32 days.

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 profitable 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.

Industries Political Foundations Erode Further

President Trump has been convinced of the producers profitability. Being a businessman he understand that public companies need to report based on standardized accounting. The earnings of Apple Inc. are conceptually and theoretically the same earnings that Suncor and Walmart report. Standardized accounting that is audited by the public accounting firms to ensure they reflect SEC requirements. The issue is the SEC’s anomaly that allows oil and gas producers to record anything as an asset as long as it doesn’t breach the producers total reserves times the current commodity prices. This anomaly skews the reporting for oil and gas in North America to overstate assets, profits and cash flow. Few in the oil and gas industry would agree with me on that statement and that is why we are in a decades long downward spiral to oblivion. Expecting sophisticated investors outside of the industry to appreciate or be knowledgeable about this anomaly is difficult to assume. Only recently did the current oil and gas investors realize the effect of this was to pay for the discount on the consumers consumption of energy. As a result we’ve heard the president repeatedly comment on Twitter that the oil prices are too high and OPEC should increase their production. If he knew that the profits that were reported by the producers these past four decades were nothing more than air then maybe he would have better understood the need for higher domestic prices.

OPEC is an interesting case study these past few years regarding the price of oil. Until November 2016 they were actively overproducing trying to put the North American producers out of business. Allegedly or whatever. Then they reversed their policies and began withholding production to support prices in the face of continued North American shale production increases. As OPEC removed up to 2 million bbls per day off of the market, the American producers alone have increased their production since November 2016 from 8.6 mmbl / day to now 10.9 mmbl / day. OPEC doing the heavy lifting for all of the producers to realize oil price increases from $38.56 / bbl to now $67.02. I think the message that North American producers should have learned from this case study is that oil and gas commodities are subject to the principles of price makers. Price maker is an economic term to reflect the characteristics of a product. Not a strategy for producers to deviously collude to increase prices, which is what North American producers believe, and will run the industry into the ground rather than adopt the Preliminary Specifications decentralized production models price maker strategy. What price makers characteristic are is they have large price changes from small production changes. OPEC removed a small percent of global production from the market and prices increased by 73%. I believe this was the message that was being sent from OPEC and for the North American producers to understand that message and begin to govern themselves in a similar manner. With our price maker strategy that would involve only producing profitable production that considered all of the costs on a reasonable depletion schedule. Or in other words run the industry as a business.

It’s important to remember that the North American producers are the most costly form of oil production on the planet. Saudi Arabia can produce oil for as little as $10 considering the full cost of exploration and production. North American producers therefore need to adopt the swing producer role in the world oil market. Meaning their production profile will vary to accommodate the changes in global demand and keep oil prices at a level high enough that the swing producers remain profitable. After all the oil and gas industry is a business and not just an activity one involves themselves in. So in summary we have a situation where the U.S. is pressuring OPEC to increase production to drop prices. After almost two years of OPEC showing the North American producers how to effect the prices of the oil and gas commodities. At $10 / bbl in terms of the cost of exploration and production does Saudi Arabia need to concern itself with the profitability of their production when prices were $38.56 in November 2016? I don’t think so. I’m not taking their point of view, I’m only trying to express what I see in the market and how the “politics” of this situation is completely out of hand from the point of view of the North American producers. Particularly when I read the following. From World Oil.

Two of Asia’s largest crude buyers are considering teaming up to buy U.S. supplies and counter OPEC’s dominance in the world’s biggest oil market. India and China are discussing ways to boost imports of U.S. crude to Asia, a move aimed at reducing their dependence on cargoes from members of the Organization of Petroleum Exporting Countries, according to an Indian government official. The two nations want to put pressure on OPEC producers to keep prices under control, he said in New Delhi on Wednesday, asking not to be identified because of internal policy.

And

The oil-buying alliance may initially be made up of India and China, with South Korea and Japan -- also major buyers -- joining the club later, the Indian government official said on Wednesday. While OPEC countries are still the dominant suppliers to Asia, almost all big importers in the region have increasingly turned to U.S. crude after a four-decade ban on American exports was lifted in late 2015.

If I were OPEC I would listen to the President and flood the market with so much crude that the North American producers would be out of business likety split. Crash the price down to the low $20 range and ensure that China and India, as well as anyone else knows that their best interest lies with OPEC as their primary supplier. Let anyone know who happened to believe the North American producers were profitable, like the President of the United States when he was led to believe the oil and gas industry was, learn that that was a myth. Let the oil and gas investor who is tired of subsidizing the energy consumer through their investments in North American producers. That they will now be taking on the discount for the Chinese energy consumer as well. That their total investments will be worthless in short order too. After almost two years of OPEC working to support prices for everyone’s benefit. The only effective contribution by the North American producers was to establish a “buying alliance” to poach OPEC’s key customers. Expect to see OPEC take this one laying down and accepting the role the North American producers desire, or assess who it is that really has control of the political foundations of the industry.

Whether the North American producers see this as an issue or not wouldn’t surprise me. We disagree on so many things. I would suggest they see it as an issue and the remedy would be to begin building the Preliminary Specification. It would be in that way they could offset some of these future political ill winds.

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 profitable 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.

A Critique of "Muddle Along"

I’ll continue to chip away at the foundation of the industry with my arguments. We’re headed somewhere that I think no one has considered and have made no plans for, maybe for our own special kind of hell. The equivalent of being driven off the cliff. Read on, it doesn’t get better. “Muddling along” is and has always been the thing to do. Shutting in production to ensure only profitable production requires mental and physical effort from the bureaucrats and is therefore disregarded. We are expected to believe that this chronic malaise is the situation in oil and gas and that acceptance of the bad years is part of being in the business. This of course is ridiculous and has created the environment where we now see that the investors are gone, the banks are gone, real profits never existed at anytime in the past four decades, cash has eroded to the point where working capital across the industry is unable to service its needs. And now the political situation that’s being orchestrated against the North American producers by OPEC and Russia, where commodity prices will only ever rise to their most recent highs, has removed any upside from ever materializing. I frequently read and hear John Q. Public beaking off about the high prices for gasoline, the excess profits that the industry are making and how the consumers would love to get ahold of an oil and gas bureaucrat. I always suggest they buy some bottled water, sit down, drink it and really think about the situation. Muddling along has been such a disaster that it will take a concerted effort by everyone to correct this mess.

If you do provoke one of these bureaucrats you will find that they’re particularly edgy these days. Mostly defensive about their profession and the “excellent work” they’ve done. My criticism travels far and wide over the Internet and the cumulative body of work from my efforts have not gone unnoticed. People do ask me why it is that I am so hard on my potential “clients” and I reply the oil and gas producers are not my clients. They’ll pay the bills and use the software that we produce but People, Ideas & Objects are focused exclusively on our user community as our “clients.” They are for all intents and purposes our customers. If oil and gas producers want to have a feature included in the Preliminary Specification, they must deal exclusively with the user community. People, Ideas & Objects will be unable to do anything for them. It will be the user community itself that has the oil and gas producers as their direct clients. Therefore our criticism is not detrimental to our success or failure. What is critical to our success is that we continue to always provide the oil and gas producers with the most profitable means of oil and gas operations. By ensuring that we provide them with the greatest value that can only be achieved through the structure of our software development team, our user community and their service provider organizations. That is how we compete and generate our value.

The culture of the oil and gas producers is to grind out the bad times by keeping costs down. Since oil and gas has had 27 bad years out of the last 32, how have the producers done in terms of cost control? We’ve calculated the costs of our sample of 23 producers is $141 / barrel. In 2000 the price of oil was $27.39 and in 1970 oil was $3.39. What we see is the cost control that the industry has exercised has paid big dividends. The fact is, that as we progress, the easier and less expensive to find and produce oil and gas is produced leaving only the more difficult, geographically challenging and costly reserves remaining. What bureaucrats want us to believe over these past four decades is that the cost of oil and gas exploration and production has never gone up. Only their corporate asset values have risen. In ten years time their “muddle along” strategy will bring them profits based on each of their trillion dollar balance sheets. Cost control is really the shell game that they play with the investors. If they can sell the investors on how prudent they are in spending investors money as in “look at our assets,” the investors will come back next year and give them even more money. Welcome to the oil and gas business, open your wallet and keep your mouth shut because “its science and it's really complicated.”

As we’ve noted before you can fool some of the people some of the time. At some point the business model ceases to function when no money is ever made. Taking money from investors, spending it lavishly on whatever qualified as cost control, never recognizing those expenditures as a cost of the business and hence reporting good profitability was a great business while it lasted. This scam is well known now by everyone including the marks, those being the investors and bankers. The only thing now is to “muddle along” as it were and ensure that you have your own personal “exit” strategy to get out of the industry when things become untenable. Whether that is retirement or the exodus to other industries it doesn’t matter. When everyone leaves at the same time no one remembers who they were.

If the bureaucrats take offense to being accused of running a scam then I’d be surprised because they’ve never displayed any such concerns before. The innocent always scream and yell about how innocent they really are. If we go back to 2005 when the price of oil leaped to $50.44 the industry was having a good time of it. Maybe the heyday of all heyday’s. What is obvious today, was obvious in 2005, as it was in 1986 when oil prices averaged $14.44 and I saw this problem in the industry. If they can’t make any money at $14.44 then shut-in their unprofitable production. The way oil and gas producers are structured makes that impossible and it just doesn’t work that way. And therefore I started this software adventure in 1991 to develop the systems needed to resolve the issues as I saw them. Our solution to that is the Preliminary Specification. Today the bureaucrats have stopped the beatings and abuse that I became so familiar with. The opportunity for them to have done something may have passed now. Any action on their behalf will now only appear like they should have acted decades ago. It’ll be far better for them to just retire or leave and no one will remember their name. After all what could any one of them have done?

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 profitable 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 12th Module, Part XIX

The concerns that we’ve expressed in the development of the Preliminary Specification and the implementation of the blockchain technologies are the same concerns being expressed by PriceWaterhouseCoopers in their PwC Blockchain Validation Solution. These concerns are being addressed in our budget where we allocate $114 million to the public accounting firms for their work in assuring the oil and gas producers that the developments made under the Preliminary Specification are consistent with Generally Accepted Accounting Principles and the appropriate business practices. These public accounting firm reviews of People, Ideas & Objects developments, and our user community, will be part of the continuous developments that are undertaken as part of our permanent software development capability we provide the oil and gas industry. Our second concern is that there is a consistent belief building that blockchain can somehow eliminate the need for audits. Nothing, as we mentioned yesterday, could be further from the truth.

It is with this mindset that PriceWaterhouse is now offering software and services based on the blockchain that will aid in their audit processes of their client firms. Entirely consistent with People, Ideas & Objects thinking of what is required in terms of the Compliance & Governance module of the Preliminary Specification and the needs of the dynamic, innovative, accountable and profitable oil and gas producer. It would be a simple decision to specify PwC’s software within the Preliminary Specifications Blockchain module. I would however make one suggestion that I think is important to People, Ideas & Objects. Our budget of $114 million was to be distributed to all of the participants in the public accounting industry. Having them pool their resources in order that all of the oil and gas producers that they represent are included in their work with us and our user community. I would also prefer to see all of the public accounting firms pool their blockchain software and services into one offering. There are too many conflicts when one firm chooses KPMG to conduct the audit of a firm that has implemented PwC’s Blockchain Validation Solution.

The reason that I see this pooling of these accounting firms resources as necessary is that the future is different. PwC rightly is approaching all industries and all companies with this blockchain software. Attempting to create a substantial competitive advantage for their firm. Which is not incorrect and should be commended. However they are also locking in those clients to their other services in order to get the full meal deal and the best of breed solution. If the blockchain software was pooled with the other accounting firms then their clients shareholders would be free to select any audit firm they want.

We had in the late 1990’s a difficulty with the audit firms owning the ERP software that were being used by the producers in the industry. It wasn’t working and the divestments of those assets came about. I think the reasoning for those divestments is stronger today than it ever has been. Conversely the type of software and service that PwC is offering in its Blockchain Validation Solution is an extension of their statutory requirements to the producer firms. This could be argued is the future of the public accounting firm and there is no way that I can see that we can put the genie back in the bottle now that the idea has been presented. Therefore the pooling of the public accounting firms in order to offer a generic solution in the audit capabilities of blockchain technologies is in my opinion a necessity. The software and services associated with these products are in there infancy and will develop to include more and more of the compliance frameworks. Creating a demand for the product to grow in terms of its function and process capabilities to the point where it becomes, I would suggest, too large for one of the large audit firms to undertake and manage on their own. Secondly it would be too much of a burden for the producer firms and firms in other industries to carry the costs of up to ten of these same software development initiatives being undertaken by public accounting firms.

People, Ideas & Objects have developed our pooling concept in a number of ways for the oil and gas industry. First in the sense that all of the producers are pooling their IT budgets into one ERP system development. Avoiding the demands of each producer developing the inhouse capabilities to build and support an ERP system that does not present them with any competitive advantage whatsoever. By pooling the producers budgets we are able to save substantial sums for each individual producer and focus on the needed developments of the industry with the larger aggregated budget to do so. The pooling of the earth science and engineering resources in the Joint Operating Committee is also provided as the solution to the expansion of the division of labor and specialization of those professions. An expansion that would soon move the scope and scale of those producers capabilities, and key competitive advantages, outside of what a commercial operations budget can sustain. And will provide a means in which to deal with the prospective shortfall in those technical resources as a result of the pending retirements and lack of new intakes.

By pooling the public accounting firms resources on one software solution they will be able to access the budget that will be necessary to build the kind of solution that this will eventually come to be. An ominous and comprehensive solution for the audit profession. To avoid lock-in, which is something that I would suggest is necessary. If an accounting firm used their blockchain and auditing software to lead their sales effort and lock-in their services then that would be contrary to everyone's best interest. However if they were able to share in the revenues of the blockchain and audit software and compete based on the quality of the audit services that they’re able to provide above and beyond their competitors, then that would be the best solution for everyone concerned. The choice for the shareholders will then be based on the best auditors available for the job and not the firms software that they implemented a decade ago.

People, Ideas & Objects Blockchain module is provided as a significant enhancement to the other eleven modules of the Preliminary Specification. Including this technology eases much of our needs to resolve some of the difficult technical questions we raise as a result of the complexity of our solutions. That is where I see the technology being most valuable to the oil and gas businesses and will continue to update and develop the Blockchain module, as with all of the modules in the Preliminary Specification, as the situations arise.

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 profitable 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 12th Module, Part XVIII

Compliance & Governance

It’s difficult for me to see a substantial role for the Blockchain module in the Preliminary Specifications Compliance & Governance module. In the Partnership Accounting and Accounting Voucher section of this Blockchain modules discussion we noted what role that the blockchain technologies could be used. This lack of vision in terms of its use in Compliance & Governance doesn’t preclude the user community from developing unique and innovative ways to ensure compliance and governance is attained through blockchain technologies. What I am finding is that the extension that blockchain will provide everything to everyone gets to the silly stage when we’re talking about compliance and governance issues and opportunities. Articles such as this one from Oxford Academic which are stating that blockchain will eliminate the need for public accounting firms and the annual audits are not fully understanding the role of these audits in business.

3.7.a. Accountants and financial intermediaries

In a world with real-time accounting, consumers of financial statement information would not need to rely on the judgment of auditors and the integrity of managers. Instead, they could trust with certainty the data on the blockchain and impose their own accounting judgment to make their own non-cash adjustments such as depreciation or inventory revaluation. The potential US savings equals the total revenue of the accounting industry, which exceeds $50 billion per year. This sum represents the social cost for third-party validation of the accuracy of company accounts, or more simply, the social cost of mistrust of corporate managers. Instead of relying on the auditing industry, which itself has been subject to moral hazard and agency problems (Cunningham, 2006; Ronen, 2010), each user could costlessly create their own financial statements from the blockchain’s data, for whatever time period they wished. Users could access the firm’s raw data and make their own decisions about depreciation schedules, marking assets to fair market value, and recognizing non-cash accruals to earnings. To survive, accountants would need to reinvent themselves as interpreters of raw financial data, and given the large size and complexity of many companies, market demand for their services would probably continue in some form.

As a former auditor, prior to my days in the software business, these are ridiculous assertions. Just because a transaction has been recorded within a blockchain does not reflect that the transactions integrity is beyond question. The role of auditors is not to verify that transactions have been recorded in the system appropriately as much as the transactions that are reported are the legitimate revenues and expenses of the business. Misappropriation of corporate assets can and will take place no matter what technologies are used. Those people who are bent in that manner will always find a way to circumvent the systems that are put in place. That is the same for blockchain technologies. Elimination of the audit function from the role of the public accountants is never going to happen. Not with blockchain or with any technology.

It is the business that drives the needs of the Preliminary Specifications twelve modules. We are not technologically focused on providing solutions to the oil and gas industry. People, Ideas & Objects are solving business issues and exploiting opportunities for the oil and gas producer with the understanding that we provide the most profitable means of oil and gas operations, always. No amount of declarative referential integrity in a database is going to solve the business issues that oil and gas producers face. Holding up blockchain as the be all and end all solution to what ails business is a part of the myth that has been built up around this technology. We’ll remain focused on the business issues and opportunities of the North American oil and gas producers and solve those through innovative means by working on the businesses solutions and implementing them appropriately in our software. That is our business offering and we’ll continue to differentiate ourselves to those that are selling the latest technological widget for oil and gas.

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 profitable 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.

Range Bound

Oil and gas producers need to come up with a business model that deals specifically with the commodity prices that are now range bound. The highs are defined by the actions of OPEC and their unwillingness to inflict pain on the international energy consumer. And the lower end is probably in the $40 region where OPEC will invoke their proven discipline to hold back production. Natural gas prices will continue to be defined by their chronic low prices for the foreseeable decades. These range bound prices put the North American oil and gas producer in a situation where they’ll never earn profits. Therefore the ability to raise capital will forever be a pipe dream. No one is going to see the oil and gas industry as a viable choice for their investment dollars.

Even at the relatively high prices of $64.94 for oil at the end of the first quarter of 2018. Cash in our sample of 23 producers that we follow had an apparent tendency to disappear. Contributing to the further erosion of the cash and working capital situation in the industry. No one is investing in the business and no bank is loaning any money. And now with the cash and working capital depleted as they are no one will touch them. Sophisticated investors and bankers don’t fund working capital deficiencies. To be clear, bottom feeders are no doubt circling about in the industry. Desperate producers should take a spin with those people if they feel the need to get out from their difficulties. That I’m sure will be the answer. To reiterate no investors, no bankers, no profits, no cash, no working capital and now with the commodity prices being range bound, no upside.

We heard this past weekend that Russia had joined Saudi Arabia in breaching their agreed production sharing agreement quota’s. They are the friends of the energy consumer. They are the ones that are fighting to keep the prices at the pump down. It is my suggestion that the only viable choice for the North American oil and gas producer is to implement People, Ideas & Objects Preliminary Specifications decentralized production model’s price maker strategy. This can be done by producing only profitable production and shutting in any unprofitable production. They can only do this with the Preliminary Specification in place for a variety of reasons. In summary these reasons are the accounting in the industry is incapable of identifying which properties are profitable. This is due to the overhead being corporate and most of it allocated to capital. In the Preliminary Specification overhead is charged directly to the Joint Operating Committee. Current organizational structures are incapable of making the changes to shut-in production. Shutting in production will only enhance the losses of the current producers. In the Preliminary Specification our reorganization ensures that only profitable production is produced and is never diluted by unprofitably production, reserves are saved for the time in which they’ll be produced profitably, and those reserves will not have to carry the years upon years of chronic losses as additional costs and finally by removing the unprofitable production from the commodity markets we enable those markets to find the marginal cost.

The added benefit of implementing the Preliminary Specification is the enhanced cash flow that the producer will realize. For the past four decades the industries producers have deferred the recognition of capital costs in this capital intensive industry for up to 27 years in some situations. This is the root of their current issues. By not recognizing their capital costs they have been able to bloat their balance sheets of property, plant and equipment beyond anything reasonable. And inflate their profitability by not recognizing the capital costs of exploration and production. Augmenting the cash deficiencies of this tactic with annual investor injections. What they need to do now is to ask themselves are their bloated balances sheets of property, plant and equipment an asset or a capital cost of prior periods production? If there answer is the right one, that it is a capital cost of prior periods of production, then they’ll soon find that this is also the source of their cash requirements.

By using the Preliminary Specifications decentralized production models price maker strategy the producer will be able to raise the commodities prices to the point necessary to cover the current costs and the past costs that their investors incurred to subsidize the consumers energy costs. Or the amount of property, plant and equipment that wasn’t appropriately recognized in prior periods. Then with our price maker strategy they’ll be able to raise the commodity prices by shutting in the unprofitable production and realize the higher prices to offset those capital costs they should have recognized decades ago. Generating, dare I say, the appropriate cash flow to fund their capital expenditures, pay down their debt and pay dividends. Doing all three at the same time is what a business does.

This was considered heresy when we first proposed this methodology. Now with the North American producers losing financial, operational and political control of the industry they will be seen as the only ones responsible for the higher prices. Inaction does have its costs. Producers face the end of their existence in the manner that they’re being managed today. A few more quarters, or maybe a full year from now they will lose control of the organizations themselves. Then what? The slow slide into oblivion has been consistent since I began writing this blog in late 2005. Almost a generation ago. Plenty of time to have done something to have saved the situation and carried on as a viable industry. Instead the producers have chosen to be seen as the greedy ones as far as the consumers are concerned and ran the industry into the ground. The societal costs have been tragic. The Alberta government has incurred $43 billion in debt in the last four years. Millions of people have been displaced in the industry and service industry. Taxes and royalties have been unpaid from the producers that should have been profitable. And lets not forget the investors and banks. Now that their money was used to subsidize the consumers for their energy needs, the consumers will no doubt have forgotten about those gifts they were sent and begin to identify and deal with the greedy and lazy North American producers themselves. They’ll know OPEC were the ones that moved to keep commodity prices low, and to add insult to injury, be thankful they’re at full production at all times, unlike their North American counterparts. Brilliant.

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 profitable 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.

Third Friday Off

Our 12th Module, Part XVII

The Research & Capabilities module documents the capabilities that the producer is able to conduct. Those procedures that they’re able to replicate on a consistent basis. Capabilities that are made commercially available to the various Joint Operating Committees they have an interest in. There is a second business model and hence revenue stream of the dynamic, innovative, accountable and profitable oil and gas producer. That is the sale of these capabilities to the Joint Operating Committees under the pooling concept discussed earlier in this module. There is also the opportunity that these capabilities will be sold to other producers on a direct sale basis. The documentation of these capabilities forms a foundation of the Intellectual Property of the producer firm. Having these capabilities documented and subsequently published across the larger population of producers represented in their Joint Operating Committees through the Knowledge & Learning module secures their copyright. Having these captured within the blockchain will provide documentation of the time and place that these capabilities were developed and ensure that the producer would be able to defend them against claims that they violated other producers ideas.

Knowledge & Learning

Access to the various capabilities of the participating producers in the Joint Operating Committee is made through the Knowledge & Learnings Planning & Deployment Interface. Blockchain makes this access secure. Using the private / public key encryption of the blockchain only those producers who are members of the specific Joint Operating Committee will have access to those details. It will be necessary that each Joint Operating Committee has a unique key that is also shared by the users who have an interest. Then the data and information can be encrypted by the public key and reviewed by the shared private keys held by each of the producers. What we see with these two modules of the Preliminary Specification is the development, deployment and controlled access to the research and capabilities of the producers involved in the Joint Operating Committee. The implementation of the blockchain technologies provides us with an enhanced ability to deliver this solution to the producers for their needs in this area.

There are many other elements of these two modules that will benefit as a result of the blockchain. The need to include a discussion at this point would be moot and understanding these two features that we’ve highlighted here will help in determining how the blockchain is ultimately implemented. It is these two modules that provide a distinct advantage by the use of blockchain technologies. The one advantage that I’m particularly pleased with is the clear vision of how these features can now be developed. Before, without the blockchain these processes and functionality were not necessarily the easiest parts of the Preliminary Specification to build.

I would like to take a moment to highlight the reason that the Research & Capabilities and Knowledge & Learning modules are structured this way. It’s an important point that needs to be understood why we’re doing so and the reason for this is captured in the Research & Capabilities module. The quotation below is from Professor Richard Langlois, then I discussed how it is I’ve interpreted this understanding and applied it in oil and gas.

The question then becomes: why are capabilities sometimes organized within firms, sometimes decentralized in markets, and sometimes coordinated by a myriad contractual and ownership arrangements like joint ventures, franchisees, and networks? Explicitly echoing Hayek, Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 9

To be specific, what we’re doing in the Research & Capabilities module is “moving the knowledge to those with the decision rights.” And this is where the alignment under People, Ideas & Objects begins. What the bureaucracy is trying to do is to “move the decision rights to those with the knowledge.” And that is where the conflict is being created. The Joint Operating Committee has the operational decision making framework and there is little that can be done to change that. The knowledge is held within the participating producer firms. It is therefore necessary to create a process that sees the knowledge flow from the producer firms to the Joint Operating Committee and that is what the Research & Capabilities modules Dynamic Capabilities Interface does. 

Analytics & Statistics and Performance Evaluation

Another dual use set of modules as the Analytics & Statistics module deals with the producer firm and the Performance Evaluation is concerned with the Joint Operating Committee. Due to the fact that these are modules that are designed to contain algorithms of analysis that will determine specific performance criteria. And then also provide the user with the ability to prepare ad-hoc analytical reporting there is not much that I am aware of in terms of what the blockchain technologies can provide here. Blockchain is concerned with the recording, securing and reporting of data in distributed ledgers. The Analytics & Statistics and Performance Evaluation modules are not involved in the generation of data only the manipulation of data that has been acquired through other modules and outside of industry.

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 profitable 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.