"No One Ever Needs Profits"

What we see in this downturn in oil and gas is the societal cost has been nothing short of tragic. People have been displaced throughout the economy as a result of the low oil and gas prices. Small towns that rely on servicing the service industry activity are hurting desperately. The service industry are having difficulties in all aspects of their business and are now expected to extend further credit to the producers in order to work for them. Governments are missing out on their tax revenues from all of these activities. Which may not sound like an issue if you feel they should live within their means. What they’ve proven though is that they never do and the expansion of budget deficits and debt at all levels of government are growing as result of this downturn. The royalty holders are also suffering as a result, they are the rightful owners of the product that the producers pay in order to obtain title to the product. With oil prices in what I would call a barely comfortable position we hear the benefactors of all of this pain and suffering, the energy consumer, unhappy about the subsidy that they’ve been afforded for their consumption of energy these past four decades. The investors and bankers have also suffered and they are the ones who’ve made the most direct contribution to the consumers discounted energy prices. With all this pain and suffering you would think that the consumer would have been grateful! I dare ask our friends on the left in the Democratic party, what’s wrong with a few profits?

Bureaucrats within the producers, firstly have not suffered, but secondly always believed that they needed to stay out of the discussion of energy prices with the public. Hiding under the desk regarding pricing of the commodities to ensure that the costs of the industry are deferred as long as possible. This has been their only response to the alleged pressure they would find if they lifted their heads up and addressed the actual costs of oil and gas exploration and production. These bureaucrats are also the ones who have been absent from the business when it came to anything but drilling wells. Pipelines and the service industry who have constructively approached the industry have been verbally abused and now financially abused through extending accounts payable out to 18 months. At no time did the producers realize the importance of these providers to their business and ignored them and their needs. Now pipeline constraints are everywhere you look and the industry is having difficulty sourcing any kind of field resource, even in the globes most prolific field in the middle of Texas. How could things have become so bad?

My job since 2003 has been, as it has been the role of so many others many times in the service industry before, to suffer and sacrifice to do the right thing for the oil and gas industry. All of this is unnecessary if we would shift to build the Preliminary Specification then these issues would subside. Imagine if we had shifted in a timely manner and were able to avoid all of these societal costs. I guess it is as they say, you can’t get anything done until everything falls apart first. I would think that we are fairly close to that period in time. I don’t see much upside from here and the ability for the industry to last much longer is becoming quite short. We seem to have been able to survive much longer than what most other industries would have been able to survive. The fact that oil and gas is a capital intensive industry provides that prior investments will continue to spin off cash flow that at least keeps the bureaucrats in power. Unfortunately not much of anything else that’s considered positive has or is happening now.

That a deliberate destruction of the industry is being undertaken by a self interested group of people is beyond what I thought was possible. Take a look around and tell me what else is going on. Everyone knows what the problems are and everyone knows, at least those who’ve read the Preliminary Specification, that it’s the solution. Yet nothing happens. It’s not that we’re going to flip a switch and the software rolls out when the decision is made to proceed. We have many years of very hard work ahead of us. The first aspect of that is our budget needs to be raised in full. I’m not going to start this project on a pay-as-you go basis with the short attention spans of these producers. Only to find when we need a cash infusion that oil prices have risen to $80 and bureaucrats decide they don’t need the software. Picking this initiative up a second time after everyone sees the first failure will not happen. Therefore the financial resources have to be in place for this project to start and continue until completed. The most important point of all is the people who are interested in committing to this need to be sure that they can complete their work. They don’t want or need to be cut short half way through and have to do other work and potentially be ostracized by the industry for participating. Follow through is a necessary attribute for the industry to display in order to resolve these issues.

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.

Overhead in a Nutshell

One look at the downtown core of any city in which the oil and gas industry resides and one sees the breadth and depth of the overhead that is incurred. Oil and gas is an industry that incurs a moderate level of overhead due to its complexity. This is not apparent from the financial statements as most of the overhead that is incurred in the industry is capitalized to property, plant and equipment. The shifting of overhead from itemizing it as a cost of oil and gas exploration and production for pricing purposes of the commodities, to property, plant and equipment is part of the desire to subsidize the consumer by deferring as much of the cost of oil and gas exploration and production away from the consumer. The Preliminary Specification sees overhead differently than what is the current practice in the industry. There are several distinct ways in which we deal with these costs to ensure that the commodity is fully costed, these costs are also turned over quickly in working capital from the sale to the consumer and the producer itself is able to limit the amount of overhead that they incur to the absolute minimum.

The first reduction in overhead is of course the reallocation of the administrative and accounting resources to the service providers. Moving the fixed overhead of the producer to become the variable overhead of the industry. Variable on the basis of production at the Joint Operating Committee. If there is production then the overhead will be incurred as a result of the activities necessary to manage that production. These overhead costs are incurred by the Joint Operating Committee with each working interest participant responsible for their share of these costs. Therefore overhead will fall under the classification of operations on the income statement, or possibly it will be segregated on its own line. The point is the use of the service providers will only be incurred on production and be a standard cost across the industry. The standardization comes from the fact that the service provider responsible for lease rental payments, or revenue accounting will be charging the same rate for their services in each jurisdiction. The only overhead that the producer will be incurring on their own account will be associated with the management of that producer which would include the C class executives and senior management.

There is a second source of revenue that is established in the Preliminary Specification for each and every producer in the industry. These revenues will be as a result of the time that will be charged to the Joint Operating Committee in applying the producers earth science and engineering capabilities that make up their unique competitive advantage. These resources will at all times have their time charged through our Work Order system to either a Joint Operating Committee that they are working on, or an overhead account that would be the responsibility of the producer. The costing and billing of the time for these resources would be part of the system and is included in the Preliminary Specification. These revenues are anticipated to be large enough to offset the entirety of the producers overhead costs when we consider the prior elimination of the administrative and accounting resources to the service providers.

An important aspect of this second revenue stream is the concept of pooling that is introduced in the Preliminary Specification. Due to the demands of geology and engineering it is believed that it will be difficult, and not commercially viable for a producer to undertake the full scope of the specialization and division of labor in those professions. Therefore the pooling of capabilities from the working interest participants in the Joint Operating Committee will become a necessity in order to ensure that the full scope of specialization and division of labor is achieved. This pooling will therefore require each producer to have the capabilities to cost and capture their time and effort incurred in each Joint Operating Committee in order to adequately account for their enhanced contribution under the Preliminary Specification environment.

Additional demand for the pooling concept is realized when we see that much of the resource base of the industry will enter retirement in the coming decades. The current downturn has also been detrimental in terms of the volume of new recruits in these two professions that will aggravate this issue further. Lastly the industry is incurring what we believe within the industry to be an unused and unusable surplus capacity of these resources that would be eliminated under the pooling concept. The broad scope of specialization and the division of labor necessary today, and the demands that the producer have the capabilities necessary to approach their properties demands for them as operator see that the capabilities within the producer firm be overbuilt to accommodate the contingencies that they will ultimately face. This creates at any point in time in the industry a surplus capacity of these resources that are unused and unusable. A luxury that I would suggest the industry can no longer afford to incur as a cost and can no longer rely on due to pending resource restrictions.

What these changes will do is divide the overhead that is incurred by the producer and the Joint Operating Committee. In aggregate the overhead in the industry is going to increase substantially as none of it will be capitalized. It is necessary that all of the overhead be incurred in the current period to ensure that the cash that is consumed in these processes is returned to the producer in the current period. The consumer will have to pay for the full cost of the products they consume and that will include the overhead that is incurred in the processes of exploration and production of oil and gas. The practice of deferring these costs to property, plant and equipment for decades is misdirected and needs to stop in the most effective and efficient means. These changes will enhance the producers current financial structure by ensuring their working capital is turned over quickly.

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.

What do Bureuacrats do?

I think the producers need to stand up to the consumers demands for lower energy prices. They always seem to turtle at the slightest criticism and leave the myths and fallacies to linger and manifest themselves into greater difficulties down the road. Instead of attempting to control the “demand level” or the “volume of investment in alternative energy” they need to focus on what their organizations need. Higher energy prices are the only way in which the North American producers are going to be able survive. The news recently had a press scrum of the new Conservative Premier in Ontario, Doug Ford. He was vehemently unhappy with the costs of consumers energy in the province and wanted to know why. He stated that he thought it was as a result of the monopoly in the oil and gas industry of which he was going to sit them down and explain a few things to them. Noting that the price of gas in litres in Ontario would be over $5 per U.S. gallon in the United States and that high of price would never be accepted there. This is where the oil and gas industry needs to aggressively push back. Mr. Ford is new in the job and it was a media scrum of which he’ll begin to get more used to as time passes. The fact is that the high prices for the gasoline in Ontario have far more to do with the Ontario and Canadian governments taxing regimes. Maybe he’ll better understand the situation and since he is the biggest cost associated with the consumers energy, be able to provide a decrease in his consumers energy costs.

The fact of the matter is you can’t buy a half litre of bottled water for the price of a litre of gasoline. Which of these two provide more economic value? If a barrel of oil offsets 5,000 man hours of labor what exists in terms of replacement for this. There is none. Try to lubricate your engine with solar power or use the hydraulic fluid derived from wind energy. Replace the thousands of chemicals that are derived from oil and gas production into the everyday items that we use with hydro or nuclear. There is no replacement for the oil and gas products that are produced. This is a key characteristic of a price maker. Another key characteristic is that small changes in the volumes of supply or demand will have dramatic effects on prices. This has been proven in the oil market over the past two years by OPEC’s production sharing agreement. They have taken a small percentage, probably averaging 2% of all the oil production off of the market during the past two years and as a result the prices have increased in excess of 50%. An attribute that would clearly place oil and gas commodities in the category of price makers.

The continued uncontrolled increases of oil and gas production by producers in North America have displayed two common characteristics in these past four decades. First that none of this production has been truly profitable. This can be stated unequivocally when the assets recorded in property, plant and equipment of the industry are as bloated as they are. These assets represent the unrecognized capital costs of past production, in a capital intensive industry. Secondly the overproduction that has occurred has been as a result of reporting profitability that was not “real” and therefore attracted too much investment leading to the chronic overproduction. This chronic overproduction has been systemic throughout these past four decades and is evident in both oil and gas. For quantitative and qualitative evidence of these facts we need to look only to the natural gas prices that are constrained within the North American region.

People, Ideas & Objects are not proponents of high energy prices. We believe a healthy, profitable industry is critical to the betterment of society. Today’s depressed oil and gas industry provides no one with any value. We owe it to our future to ensure that all oil and gas is produced profitably to ensure that none of this resource is wasted. As we proceed further into the future what we can be assured of is that the oil and gas commodities costs will increase. As the easy oil and gas is produced the more costly, geographically difficult and technically complex our energy supplies will become. Therefore the ability to evaluate the costs of oil and gas and ensure that we are producing only profitable production everywhere and always is a necessity for that healthy and profitable industry that we seek.

This is the message that should be explained to the consumers. That would be considered part of the producers business in my opinion. Running around stating that demand may drop if prices rise or investments in alternative energy will increase are attempts to control the uncontrollable which are not part of the producers business. Profitability needs to be the focus and how to ensure they remain profitable at all times. The industry from a natural gas point of view has been in a desperate situation for over a decade now. The oil side of the business will only continue to perform in the same manner that it has for the past four decades. Without any change, without any discussion from the producers we’re all just sitting here wasting our time. Action is what is needed and I am at a loss to determine what it is that they’re waiting for? Is muddling along so ingrained in the culture that they’re paralyzed to do anything? It’s an inherent part of the Preliminary Specification that the industry must change and that these changes are too dramatic to undertake in the normal course of business. We believe creative destruction will be the mechanism that will bring about the desired changes that are needed in oil and gas. We believe the status quo’s days are numbered.

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.

What Are Producers Thinking?

We detailed in yesterday’s post how the industry in classic scam fashion has overstated the assets, earnings and cash flow of the producers. Bureaucrats have done so in order to present the easiest and least involved management of the industry possible. Since the producers were willing to call the service industry representatives greedy and lazy when producers were celebrating the “good times,” I feel the shoe fits. To ensure the industry was incurring “real” profitability and the assets and cash flow were accurately recorded would require a reasonable accounting. Which would have shown that commodity prices for North American production would need to have been much higher than what they’ve charged in the past four decades. Subsidizing consumers with their investors dollars has ceased as a functioning business model as the investors no longer want to play that game. Review of any producers financial statements shows the systemic lack of revenues in the industry. Prices need to be substantially higher for the industry to be viable, prosperous but most importantly profitable from a real sense of the term. Higher revenues from higher production volumes will not satisfy that requirement. I thought I would just state that for any bureaucrats that might still be reading.

Producers believe that investors and bankers will soon return and continue to backfill their chronic cash shortages. There is no amount of money that investors have that they’ll backfill a business with the size of the financial difficulties of the oil and gas industry. The only source of cash that the producer can rely on is the consumer who will need to begin to pay for the energy that they consume. In fact the producers will need to be overcharging the consumers for the first 2.5 years in order recapture the discounts that were provided to the consumers in the past. Recapture the amount of unrecognized capital costs of past production which is approximately equivalent to the $1.6 trillion sitting in property, plant and equipment throughout the industry. It's the only way they’re going to be able to rehabilitate their organizations and be able to encourage the investors to return. And most importantly begin to be a responsible contributor to society. The only way in which producers can do this is through the Preliminary Specifications decentralized production models price maker strategy. People, Ideas & Objects believe that we owe it to our future to ensure that each barrel of oil equivalent is produced profitably. Otherwise we will be wasting the resource endowment we’ve been granted with. Producers need to adopt this more responsible point of view. With all that has happened in the industry we are still able to source from World Oil the real thinking of the producers.

If OPEC and its allies don’t increase production, oil prices could rise above $100/bbl, said Pioneer Natural Resources Co. Chairman Scott Sheffield. It’s better for the producers to act so crude stays in a range of $60 to $80, he said.

“OPEC needs to come out with something -- that they are going to phase in supply as they see supply from Iran, Venezuela and Libya come off the market,” Sheffield told reporters. Production from those three countries could fall by as much as 1.4 MMbpd in the coming months, he said.

Sheffield had a warning for any proponents of higher oil prices. “One hundred dollars isn’t going to help OPEC, it’s not going to help us in West Texas. It will hurt demand, it will move investment to alternative energy around the world,” he said.

I’m not a proponent of higher oil prices but I am a proponent of profitable organizations. They are a fundamental requirement of a capitalist society. If Pioneers Chairman’s concern is to ensure that prices don’t get to high, which might precipitate “investments” in energy alternatives and reduce demand, then that reflects where his thinking is at. He would prefer to take capital from investors in order to backfill the shortfall in cash that is created as a result of discounting the consumers energy consumption and control the uncontrollable level of consumer demand and investments in alternatives. This is how we got in this mess, however he is obviously wishing for the good old days to return. With the recent buyers alliance that was announced, North American producers will be expanding this energy discount to include the Chinese, Indian, Japanese and South Korean consumers which is obviously a key part of Pioneer’s ”growth” strategy. I would suggest he look at the societal devastation that his and other producers have created from their policies over the last four decades. Producers focus should remain on how they could ensure that all production from now on is profitable. That would be within the domain of their control. The amount of money that is needed to rehabilitate the industry won’t be coming from $60 to $80 oil prices, nor do I think $100 will do, $141 as a minimum is the price that we’ve calculated is necessary in order to fix these issues and the only source of that money is the sales of the commodities. Or in other words the consumer will have to pay. There is no other source of financial resource large enough to undertake the restoration this industry needs. It first needs to stop its foolish ways and then reverse its thinking and attitudes towards what a dynamic, innovative, accountable and profitable oil and gas producer needs. The first aspect of that is the development of the Preliminary Specification.

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.

Overstated Cashflow?

A few comments were made regarding how is it that cash flow could be overstated in the current oil and gas environment. I made the comment last week that assets, earnings and cash flow were all overstated as a result of the accounting methodology that’s currently in place. That methodology seeks to defer the recognition of most of the costs of exploration and production for as long as possible. A strategy that we disagree with fundamentally and have configured the Preliminary Specification to correct. By capitalizing as much of the cost as possible the producer is overstating their property, plant and equipment and then by not recognizing much of these costs when production occurs the property, plant and equipment account of the producers has ballooned to disproportionate sizes. These two processes also have the effect of exaggerating earnings when the costs of exploration and production are not recognized in the current period, but capitalized. Costs such as overhead and the capital costs which we consider to be operations as opposed to the capital treatment they currently receive.

It’s difficult to know definitively but my guess would be that 80% of the overhead that the industry incurs is capitalized to property, plant and equipment. Leaving a small amount of overhead remaining on the income statement. Recall in our sample of 23 producers, overhead ranged from 1.17% to 18.09% of revenues for the 2017 fiscal year. Representing the more aggressive producers capitalization policies as opposed to the administrative inefficiencies of some producers. Under the Preliminary Specification the overhead will be fundamentally changed in its composition as a result of the reorganization of the industry and producers, the establishment of the service providers and the need to recognize the overhead of the industry as a current cost are material. These affect the working capital situation of the producer and these overhead costs are currently deferred for decades as property, plant and equipment before their recognized. As we’ve noted this contributes to the very large discount that the oil and gas investors have had to fund for the energy consumer, and the pending discount the investors will need to finance for those soon to be Chinese consumers as well. Establishing overhead as a current cost of the oil and gas commodities will ensure that these costs are recovered as part of the price that the consumers pay for their energy in the current period.

Therefore we’ve established that a sizeable amount of overhead is deferred from current operations to the balance sheets property, plant and equipment account. In the statement of changes the operations are reduced by the capitalization of these overhead costs and therefore will have an equal measure reduction in the producers cash flow from operations. The particularly harsh aspect of this treatment is that producers have generally always been valued in terms of market capitalization on the basis of six times cash flow. Therefore just the adjustment of overhead, which may be as much 80% of 18.09% or 14.4% of revenues as noted above, could be reduced from the producers cash flow from operations. Making an 86.4% of revenues reduction in valuation of the market capitalization of the producer.

The other area that is different in the Preliminary Specification in comparison to today’s methodology is the capitalization policy in general. The SEC defines that producers assets do not exceed the oil and gas reserves that are booked times the price of the commodity. A stratospheric number at all times. Even though these numbers are stratospheric some producers have been able to capitalize everything to the point where they’ve exceeded that valuation and have had to invoke the ceiling test and write down these assets to that requirement. Just because the SEC says that this is the limit doesn’t mean that each producer should reach that valuation every year. The effect of this policy is a continual drainage of the cash of the producer. Our belief that the producers reliance on annual shareholder offerings to offset this chronic cash shortfall has enabled the producers deferral of the recognition of their costs over the past four decades. It has also distorted the determination of the price they should charge the consumer for the commodities they produce. Essentially using the investors money to finance the energy consumers discount. The amount of this discount is approximately equivalent to the aggregate property, plant and equipment value held in the industries property, plant and equipment accounts. A number we believe to be in the range of $1.6 trillion.

We believe this needs to change to also include a variety of the costs that are currently capitalized to classify them as operations instead. This has a direct effect on cash flow as well. Although we are unaware of what the impact would be to cash flow we believe it would be material. The materiality in our opinion shows the level of the producers desire to expand property, plant and equipment at the fastest rate and to the highest value possible at all times. The overstatement of assets, earnings and cash flow in our opinion is as we’ve stated many times here to be a scam.

The two ways in which we change the recording of capital assets are as follows. First is the analysis of the producers production profile over the course of the fiscal year. What part of the capital expenditures were incurred to maintain the production profile and how much of the capital expenditures were incurred to expand the production profile. Those capital expenditures incurred in the process of maintaining the production profile should be reclassified as operations. Secondly the capitalization of all aspects of the exploration and production of oil and gas, no matter what its purpose, should not be capitalized at all. The issue I’m pointing to is the high level of intangibles regarding the capital costs incurred by oil and gas producers. These include drilling day work fees, casing, cementing the casing and any downhole completion work. This would reduce the capital asset account to those assets that are recoverable and are material enough that they would have a serial number.

These changes are highly detrimental to the cash flow of the producer as they will then be required to deal with these much higher costs of operations. The valuation of the producers would be affected substantially and negatively unless the Preliminary Specifications decentralized production models price maker strategy was implemented. However the pricing that is determined from our price maker strategy eliminates the consumers discount and the commodities prices will be fully valued based on a reasonable accounting of the costs of exploration and production. Astute readers will note that the volume of property, plant and equipment already on the balance sheets will also be costed for pricing purposes. Which is correct and that is how the investors will have the prior discount they provided to the energy consumers for their energy consumption returned to them. Having both the past and the current costs valued in the price is necessary in order to provide the investors with a reason to return to the oil and gas industry and is the primary reason our cost estimate of the industry is $141 / barrel. We are depleting that $1.6 trillion balance over the course of 2.5 years. After that prices would be fairly valued.

Lastly recognizing these costs in a timely way will replace the capital that the producers currently hold with a commensurate increase in working capital. These resources can rehabilitate the industry by financing the proposed $20 to $40 trillion in capital expenditures in the next 25 years without shareholders issuances, pay down the debts of the producers and issue dividends to the shareholders. And that isn’t a choice of one or the other. That is they will need to do all three, and at all times in order to call themselves a business, which is not what they’ve been doing for the past four decades.

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 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.