Your Ticket to Ride

With oil prices as handsome as they are producers will be rolling in cash and profits in this the second quarter of 2018. Last Friday not only represents the end of the quarter but for all intents and purposes the end of OPEC’s production sharing agreement. They were able to stick to the agreement and achieve compliance rates of up to 250% of the quotas they established. Now with Venezuela in economic meltdown and Iran being subject to renewed sanctions OPEC is being asked to produce at their full production profile. This has been positive for the commodity market as oil prices have been stronger as a result of this news than they were prior to it. Overall OPEC were able to achieve significant price increases during the term of their production sharing agreement. In the beginning oil prices were $38.56 for November 2016. On Friday’s close they were $74.25, a 92% increase. Who says oil and gas are not subject to the principles of price makers.

American producers can also look to the fact that their production volumes during this time have, for lack of a better word, exploded. Moving from approximately 8.6 million barrels per day to what is believed to be 11 million barrels per day. A 28% increase in volumes. Give me any business that has experienced these types of increases in not only price but also volume and I’d be sure to be making money by the barrel. The fact is the oil and gas industry has experienced maybe the best period ever in its history. But this is where the wheels fall off the bus. Natural gas prices over the course of the OPEC production sharing agreement were down almost 4% since November 2016. Production volumes in that side of the business also “exploded” during this period from 87.67 bcf to 98.5 bcf in April 2018, an increase of 12.3%. Oil and gas bureaucrats seem to be maintaining their policy of not resuscitating the natural gas side of the business. Therefore any upside profitability, cash flow, working capital, cash balances and for the oil and gas investor, market capitalization would be mostly attributable to the oil side of the business.

Yet that is not what we’re seeing. Certainly the market capitalization of the producers have had a good quarter. However over the period of time when prices doubled and volumes were up 27% on oil and 12.3% on natural gas the average market capitalization of the sample of 23 producers that we follow was up 6.6%! My only question is why keep the bureaucrats around if they’re that expensive? After a resurgence of almost 100% in the price of oil, a 27% increase in oil production and a 12.3% in natural gas volumes investors get essentially nothing? Over the course of 20 months they are provided with 6.6% which is an annual return of 3.96%. About the same as if they put their money in a savings account. What I guess the investors can be assured of is the future will be filled with this magnitude of volumetric and price increases over the same short periods of time for the rest of time that consumers use oil and gas. The bureaucrats guarantee it.

Is there a problem in oil and gas? The effect of the financial crisis was detrimental to all businesses and the natural gas business does not appear to have recovered at all. Oil prices are up 38% since 2009 so it is arguable if that side of the business has recovered. The cash and working capital situation of the industry and the individual producers are abysmal. In our sample of 23 producers which represent all types of North American producers. Cash balances eroded from $31.6 billion as of October 2016 to $24.7 billion in the first quarter of 2018. Working capital was $20.4 billion as of October 2016 and $14.2 billion in the first quarter of 2018. It's been a decade since the instability brought about by the financial crisis was in full force. Every other industry has recovered and is moving forward with the issues from that era behind them. Therefore I think it is reasonable to state unequivocally that the issue that the oil and gas industry is suffering from are not associated with the financial crisis in any way. There must be something that is causing the difficulties that is unidentified in the producer firms that is endemic, chronic and unresolved.

For discussion of that issue, and most importantly the solution that is recommended by People, Ideas & Objects, our user community and service providers, please review our Preliminary Specification which addresses and resolves the issues and opportunities of the oil and gas industry. Issues that have been prevalent since at least 1986 and who’s origins lay in the accounting changes made by the SEC in the late 1970’s. Simply the accounting for capital permits producers to capitalize everything for decades. Never recognizing the costs in a capital intensive industry creates a number of issues. First it causes the over reporting of assets, profits and cash flow attracting investors to the industry. Then over investment in the industry leads to overproduction that collapses the price of the commodities. Creating a situation where no one is making any real money other than the false profits created as a result of not recognizing any of the capital costs of past production. The cash shortfall from these activities are tremendous and tragic, and have traditionally been backfilled by the annual shareholder fleecing, or as the bureaucrats call it, share issuance. Investors are now wise to this situation and have bowed out and cancelled their involvement in these fleecing’s and dilutions, and expect producers to live off their own cash resources. As we see the industries cash shortfall is critical and represents the fact that the investors had in essence been subsidizing the consumers for their energy consumption by financing a discount in the energy price. Even at $74 oil prices producers are not covering their costs. The second point is that oil and gas commodities are subject to the economic principles of price makers. Where small changes in the production volumes will have large impacts on the prices. This has been confirmed by OPEC’s activities in the marketplace these past few years. The chronic unprofitable overproduction by North American producers will continue until such time as these producers adopt some method of production allocation that is reasonable and fair. The Preliminary Specifications decentralized production model’s price maker strategy implements a production allocation methodology based on profitability at each individual property. If the property is capable of producing a profit based on a reasonable, standardized accounting then it produces. Otherwise it is shut-in where the reserves are saved for a time when they can be produced profitably, where those reserves will not have to carry the cost of successive years of unprofitable production, where unprofitable production will no longer dilute profitable production and the commodity markets will find the marginal costs when the unprofitable production is removed from the market. In other words run the oil and gas industry as a business.

Today is just the current point in the never ending cycle of up and down where the producers ramp up activity that will lead to future declines in commodity prices. Oil prices are “good enough” to not do anything about these issues we’ve been discussing here. Issues which will only lead to difficulties down the road. Over and over again. The shale phenomenon is underestimated in terms of its deliverability in both oil and gas in each and every quarter since its beginning. The unconstrained fashion in which the oil and gas producers approach their production profile will ensure that overproduction will continue until such time as the Preliminary Specification’s production allocation methodology is implemented industry wide. The current culture of the industry is that it will always perceive the future oil and gas prices opportunistically. Hope is the key to the future in the oil and gas industry. This is the circus that is the oil and gas industry. The ride has its ups and downs but the bureaucrats ask, isn’t that why you bought a ticket?

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.

Independence Day

Canada Day

Third Friday

Specialization and the Division of Labor

Throughout the Preliminary Specification we have applied the principles of specialization and the division of labor to the oil and gas producer and industry. These two tools have been the only reason for any economic development over the past 242 years when Adam Smith wrote the Wealth of Nations. Organizations evolve and expand their capabilities through further divisions of their labor and specialization of the work that is undertaken. For the oil and gas industry to increase its production profile, to expand its deliverables efficiently and effectively with the same resource base requires that they develop their organizations through the application of specialization and the division of labor. This is the only manner in which to evolve and expand, there are no other proven methodologies available.

One of the issues that has been noted and documented in the last few decades is from Professors Anthony Giddens and Wanda Orlikowski. Structuration and the model of structuration essentially states that society, technology and organizations move together or a failure will occur. People, Ideas & Objects documented Structuration in our Preliminary Research Report and believe that our friends the bureaucrats fully understood the implications. If Information Technology defines and supports the organization, then IT and more specifically ERP systems should take a heightened role in the organization. Bureaucrats have since invested nothing in ERP systems and limited their exposure to any IT capabilities on a deliberate basis. The reason for this is to ensure that they would be unchallenged in their franchise. If solutions such as the Preliminary Specification were enabled then they would be out of a job and as a result they ensured that no innovations in the organization or technologies have succeeded in the industry for the past number of decades.

For the industry to increase its oil and gas production profile to the level of profitable energy independence requires an investment in the manner that it will approach that goal. We’re not going to get there by simply applying “more.” As I have been critical of the job that has been done, with its focus on drilling wells, I’ve shown that the industry has to expand the types of work that it’s doing in order to be successful. The industry has identified that there are key constraints building in the earth science and engineering disciplines that will need to be addressed if we are to expand our throughput. And lastly the never ending pursuit of oil and gas demands that each and every barrel of oil and gas is more complex and costly to produce than the previous one. The amount of work that is necessary in the future will be substantially greater than what it is today.

These are some of the considerations that have been made in the Preliminary Specification. The solution we have proposed is contrary to the best interests of the bureaucrats in the sense that it ends their job security and / or would require them to do some hard work for once. The reorganization of both the producer firms and the industry are necessary to deal with the issues that are plaguing the producers today. Moving the administrative and accounting resources of the producers to the service providers where they specialize on one process and use the entire industry as their client base. This specialization will enable these service providers to compete based on a variety of new and dynamic competitive advantages. These include their innovations based on their administrative and accounting expertise. Service providers are owned by the user community providers who define and determine what the People, Ideas & Objects software does. Additional competitive advantages of the service providers will include automation of the process that they manage, constantly expanding their specialization and division of labor in order to increase their value proposition to the producer and industry. Dividing the labor between computers and people in a way that the computers will be able to focus on the tasks that are oriented to computing, tasks such as processing and storage and leave the leadership, problem solving, decision making, creativity, collaboration, research, idea generation, design, planning, thinking, negotiating, compromising, innovating and financing to the humans that do it well.

There is also the pooling concept that is introduced in the Preliminary Specification that seeks to deal with a number of issues that producers face today and will face in the near future. Pooling allows greater specialization of the earth science and engineering capabilities of each producer to be undertaken with the understanding that these will be provided to the Joint Operating Committees that they have an interest in, and in combination with the other working interest participants capabilities and specializations. The pooling of these providing the overall scope and scale of the demands that are needed within each of the Joint Operating Committees in the industry.

People, Ideas & Objects are not proposing the Preliminary Specification as a static solution. We are providing the most profitable means of oil and gas operations for the dynamic, innovative, accountable and profitable oil and gas producers. Our user community will be constantly developing new and better ways in which the software will be able to be used within the industry. The user community participant is also the principle in the service provider and will therefore have a first hand look at the issues and opportunities in their area of expertise. Developments and innovations will constantly be made based on their capabilities and will continue to provide incremental value to the producer firms and industry.

When it comes to evaluating the People, Ideas & Objects value proposition it should be considered what the value of these attributes of specialization and the division of labor are. We have been able to calculate what our price maker strategy provides the industry by defining the quantitative value at $25.7 to $45.7 trillion in the next 25 years. The tools of specialization and the division of labor however will be incremental to this value and will be able to enhance the deliverability of the industry with a lower resource base than what is incurred today. A substantial value proposition on its own. Providing opportunities for the industry to pursue profitable energy independence in North America and possibly even more.

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.

"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.