User Community Developments, Part XXIII

Members of the user community have full control of the Intellectual Property that makes up the Preliminary Specification, this blog and its derivative works. This being one of the four cornerstones of their offering that enables them to be oriented to the changes that need to be made in the oil and gas industry. How that Intellectual Property is managed has been discussed on this blog before and is included in the user community vision. We will be condensing the discussion of IP down to this one post here in order that it may become clearer in terms of what we’re setting out. When we’re discussing Intellectual Property (IP) with regard to what the user community will be able to control and amend, it includes all of the detailed specifications, the software code that is written to those specifications and the binary that is compiled from that code. In a nutshell, everything and anything that we develop to provide the oil and gas producers with the most profitable means of oil and gas operations. It is this IP that the user community member will be able to access and prepare derivative works from.

Discussion of IP can not be made without consideration of the flow of money. The costs of these developments are high and it is expected that maintaining and ensuring our subsequent software development and user community members efforts will continue to demand a large budget. These financial resources will come from the oil and gas producers in one form or another and paid directly into People, Ideas & Objects. The one alternative that we’re looking into, our ICO, will be very costly in the long run if the producers continue to do nothing about the issues they face. Nonetheless we can limit the discussion in this blog post to the fact that it is the Intellectual Property that is what is used to raise the budget from the producers and we will assume for the purposes of this blog post that this is the case. People, Ideas & Objects will be the only organization that will be licensed to generate revenues for the purposes of software development. Included in our costs of software development are the entire budget for the user community. This is as a result of the fact that we in turn pay the user community members the part-time hourly fees that they charge for the time they spend working on this project. The user community members will be provided with a license in order to earn these part-time revenues. It is also that license which will be used to limit the participation in our developments to user community members only. Producers, or others who have their needs met, will engage with the user community members on their own dime, we only pay for the time of the user community members.

It is the process of paying the user community member that I am earning the Intellectual Property rights that are generated by that individual. And all of the individuals in the user community. These rights flow back to me personally through a license granted by me to People, Ideas & Objects. I am the owner of the copyright and Intellectual Property that has been developed in the Preliminary Specification and this blog. In turn the user community members license provides unconstrained access to all of the Intellectual Property that is generated throughout the user community. We have done this in this fashion in order to ensure that certain individuals are not establishing their own IP within these developments which would require that other users have a license and possibly pay fees or royalties to these other users if they used that information. That process would be untenable and quickly become a legal disaster. By People, Ideas & Objects paying the user community member they are being compensated for their time and effort in developing the systems where the focus needs to ensure the producers are provided with the most profitable means of oil and gas operations.

The value in this licensing process is the exclusive right that is granted to each of the individual user community members to establish a service provider operation based on their efforts in the development of the software. There will be 3,000 user community members, any 600 of which will be engaged with our developers at any one specific time and there will be approximately 3,000 processes under management by the software. Users may own one or many interests in service provider organizations. This will also provide the user community member and the service providers staff with an End User License Agreement in which they will have the exclusive right to use the People, Ideas & Objects software for the purposes of resale, with their services, to the oil and gas industry. Although there is an EULA attached to the use of the People, Ideas & Objects software at the service provider organization. It is not contemplated, and we have not budgeted, nor ever expect to budget any of People, Ideas & Objects revenues will be generated as a result of a fee or royalty that is attached to this EULA. These are not contemplated as revenues in our business model. It would be essentially a double charge of the producers. Whereas the service providers are offering software and a service, we are offering software developments and both organization types generate revenues based on our unique and mutually exclusive activities. The collective annual revenues of the service providers may range in the tens of billions of dollars, or equal the amount that is paid to the administrative and accounting resources in all of the companies that are currently operational. Consider that the total G&A recorded for the first half of 2018 by our sample of 23 producers was $4.33 billion. These producers produce 9.5 million boe / day or approximately ⅓ of North American production. And the amount of G&A capitalized is estimated from 0% to 95%. Therefore the value of G&A may range for the North American producers at approximately $55.5 billion. How much of that is accounting and administrative is unknown.

This is how we’ve designed the process of how our software developments are conducted. How the IP is generated, who it belongs to and who can use it. How it is used and by whom and the value that each member of the user community can generate as a result. All with an eye to ensure that the oil and gas producers are provided with the most profitable means of oil and gas operations. All the time and everywhere. It is a workable model and one that is demanded as a result of the implementation of the decentralized production model that sees the administrative and accounting resources of the producers reallocated to the service providers.

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.

User Community Developments, Part XXII

People, Ideas & Objects user community is unlike any other user community that I’ve encountered before. To have user based systems at this time is the only method to build quality software. Everyone knows and understands the difference in terms of why the users involvement is critical. Therefore the establishment of our user community, its founding and the manner in which it operates will either enable or constrain the users ability to use the software that they want and need. Our user community has been established with the power and control that they require to ensure that they are the ones that can affect the development of the software they want and need. Establishing the user community in this manner enables them to provide the industry with leadership in terms of the administrative and accounting issues and opportunities on behalf of the oil and gas producers. Undertaking a critical role in the development of the industry over the next 25 years. Possibly the most challenging period in the industries history.

The first cornerstone if you will of our user communities foundation is that they are in control of the Intellectual Property that makes up the Preliminary Specification and its derivative works. Under a license that I provide for the Intellectual Property (IP) that I have developed here and represented in the Preliminary Specification. They will have the full rights to make the changes to that IP as required. The world has changed in the past twenty years. It is an IP driven world and it will be much more so in the future. You will either have developed your own IP, have been granted or earned a license to others IP, or work for someone who has a license themselves. The user community member will fall into the second category having been granted a license upon acceptance into the user community. Once they’re part of the user community they will be able to make the changes and manage the IP under their license as required. It's not enough to own the oil and gas asset anymore, it’s also necessary to have access to the software that makes the oil and gas asset profitable. The user community member will be the one on the front lines of providing the most profitable means of oil and gas operations through their control of this Intellectual Property.

Whether it’s technical, regulatory or user based changes that need to be addressed it will only be the user community member that has the authority, capability and responsibility to make the appropriate changes to the People, Ideas & Objects software systems that will be used in the industry. In the current market environment, if there is a change needed in the software that you use today, who do you call? In People, Ideas & Objects the user community will be the one and only place in which anyone will have their concerns addressed. The second cornerstone of the foundation of the user community is the People, Ideas & Objects software developers only see the user community as the source for their input for their development efforts. Our developers are deaf, dumb and blind to all others. Those from the industry and specifically the producers must deal with the user community in order to have their wants and needs met. Talking to us will not provide them with anything but frustration. Even more so than what they feel today. People, Ideas & Objects are dedicated to the development of oil and gas ERP styled systems and will only see the user community in terms of who they need to deal with.

Under the license provided to the user community member, there will be another provision in which they establish a service provider organization. The service providers are the reorganization of the administrative and accounting resources from the producer firms to these new organizations. Service providers will focus on one process and manage that process on behalf of the entire oil and gas industry. The license will grant them the exclusive right to manage that process. Service providers will not be competing based on price. Once a user community member earns a domain for their service provider organization, then it is their asset. As the principle in the service provider organization, the user community member knows intuitively the issues and opportunities that the process they manage will provide the oil and gas producers. They will have the capacity to act and access to the developers in order to do so. The establishment of the service providers is a key element of how the oil and gas industry obtains their profitability in the decentralized production models price maker strategy. It is also the third cornerstone of the user community that makes it unique. The service providers are significant organizations ranging in size from $2 to $20 million in annual turnover. They are the primary source of revenues for the user community member as the user community has always been considered and budgeted by People, Ideas & Objects as a part time source of revenue.

Our fourth cornerstone is that we are change based software developments. User community members have the service providers as their primary source of revenues and these will be consistent from month to month as a result of the software and services they provide the oil and gas producers. The part time user community revenues we mentioned will be as a result of the work they do to make the changes to the software they’ve developed for the process they manage. People, Ideas & Objects revenues, once the Preliminary Specification is released as commercial software, will depend on the changes being made by the user community to generate the software development revenues that we generate. These are done to ensure that we are oriented to the changes needed in the oil and gas marketplace. If a new business model is necessary, the decentralized production model can be removed and a new model installed to ensure that the oil and gas industry is not constrained for years by their software’s inability to change. Often what we see with ERP system providers is that they are heavily constrained by the code that they develop and the customers that they acquire. As both of these grow the ability to accommodate change becomes progressively more difficult which conversely is not a direct revenue generating activity in those software developers. A situation we will avoid.

These four cornerstones make for a far different user community than has been experienced in oil and gas. It is a permanent fixture and a critical leadership capability to the oil and gas industry and producers. A business opportunity for the approximately 3,000 user community members we estimate will be necessary to provide the quality of service that the oil and gas producers need. Our commitment to user community based developments is I think reflected in how we’ve established this overall framework. And as soon as the Preliminary Specification was published in its final edited version in December 2013, we began development of the user community. We will soon have completed five years towards our development and posted our user community vision and 319 blog posts. I like to think that much of the difficult, time consuming work has been completed. Now just the difficult work remains.

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.

These Are Not the Earnings We're Looking For, Part XXIV

We can be assured that certain principles that have been learned along the way remain in place. The one that I am thinking about is “don’t ask those who created the problem to solve the problem.” Clearly the producers have no problems in which they could resolve. If they can’t see the issue, even assuming they don’t want to address their own skeletons in the closet, can you trust them to put the effort in to make the necessary changes successful? Or will they just fake an implementation failure to further entrench their own method of bureaucratic entitlement for another generation? What’s to say that some political crisis flares the price of oil and natural gas for a period where the justification for the reorganization to ensure profitability wanes long enough for them to justify the cancelation of the project? How do all the King's men and all the King’s horses… when the inevitable overproduction returns and produces the same old results? With the scope and scale of what we’re discussing, with the monetary value that our value proposition provides, this decision to proceed with the development of the Preliminary Specification needs to be made. That of course can be done by funding our budget.

We are offering the oil and gas industry our solution in the form of the Preliminary Specification. Its focus is to provide the most profitable means of oil and gas operations everywhere and always. The question is what if the producers assets can only produce 25% of their deliverability profitably? Do People, Ideas & Objects believe that the producer will shut-in 75% of their production? And the answer is an unequivocal yes. The method that we are using provides the producer with the most profitable means of oil and gas operations by producing only profitable properties. If this producer does shut-in the other 75% of unprofitable properties their profitability would be the highest that can be attained by their organization with that configuration of assets. Any level of deliverability above the 25% level will only dilute their profitability that those 25% of assets earn with the unprofitable properties operations. With the Preliminary Specifications decentralized production models price maker strategy all of the producers costs become variable based on production. If the property produces then the costs are incurred, including the overheads that are incurred and billed from the service providers. If the property is shut-in then the service providers have no data generated to trigger their work, no work is done and no billing for any of the overhead is charged on any of the shut-in properties.

The benefits of this are simple and straightforward. In addition to maximizing profit by producing only profitable properties. The marginal production is removed from the commodity markets allowing for the commodities prices to find the price necessary to sustain a profitable supply and demand balance. It will be a true market. The reserves of the properties that are shut-in will be saved for a time when they can be produced profitability and those reserves will not have to carry the incremental costs of the cumulative losses that would be incurred if the Preliminary Specification were not implemented in the industry.

As can be seen today the changes that are prescribed in the Preliminary Specification are needed in the marketplace. The damage that has been done by overproduction is comprehensive and I think it is now time to call it complete. The profitability that was reported by producers never really existed and indeed was a myth. Any and all value has eroded out of the industry to the point where there is none anywhere. The investors and bankers are gone. The service industry is well beyond the point where it will have to be purposefully remediated by the oil and gas producers. They have been damaged as much and even more than the producers. People have had their careers in oil and gas terminated, and as far as many of them are concerned, after so many down cycles, that’s a positive. There’s nothing like the sense of betrayal when you’ve educated yourself for the oil and gas industry, worked hard for a decade or more, bought a home and started a family to then find that you have the job security of a high school dropout that works as a common laborer. So yes, tell me all the wonderful things you’ll be doing for me in the future with your financial foundation as it is today. The industry will reap what it has sown. This approach is unacceptable in the 21st century.

Our Revenue Model purposely disconnects us from the bureaucratic control in the industry. Our task is not something that can be done with the hovering bureaucracy. We can not be, and will not be blind sleepwalking agents of whomever will feed us. Our user communities vision details how this is ensured but nothing can be done regarding our progress until the budget that we’ve published is fully funded. That way we will not be held to the whims and wishes of the bureaucrats. And yes, People, Ideas & Objects is expensive and the question from the bureaucrats is why can’t we do this for $5. Which is their commitment, understanding and resolution of the issue. Our fee is high because of the cost of making the necessary changes to industry and the producers. The monetary value provided to the industry through our value proposition is not something that will be made available from any half hearted attempt. And there is of course my take of the fee. I am relying heavily on the value of the Intellectual Property that has been and being developed here. That IP sets the foundation of the user community to drive the producers and industry forward. It precludes anyone from undercutting the value of our user community based solely on price. And lastly it establishes the value that I earn based on the establishment of the value it provides industry.

In September of 2017 and the many months prior to that we had presented industry with not only the Preliminary Specification but also our understanding of what we believed to be the best business opportunity, our argument and our plan. Which was to commence software developments in September of 2017. This was rejected by the bureaucrats and we have not and will not be making any such initiatives or offers again. Whomever is going to fund the Preliminary Specification can be accomodated in a variety of ways. For example the one alternative mode of financing that we’re looking into is our Initial Coin Offering however we are not expecting, and this assumes everything will go well, that we will be able to do so in September of 2019. I wonder how the producers will be doing then? Otherwise, people can tell by People, Ideas & Objects maintenance of the ugliest websites on the Internet, we are a very low cost operation. Therefore we can hold out for many more years of this highly enjoyable situation. I wonder how the producers will be doing then?

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.

These Are Not the Earnings We're Looking For, Part XXIII

It was during 1986 that the price of oil collapsed to $10 / barrel. The political issues that caused the decline are not relevant to today’s discussion. What is relevant is that it led to a multi decade period of what I commonly refer to as the “oh whoa is me” era for oil and gas producers. Each year their annual report would show the difficulties that were created as a result of low commodity prices and the “oh whoa is me” discussion of the impact on their organization. I always believed that the decline in prices was a result of overproduction, just Google Sheik Yamani. If producers were to stop overproducing the prices would respond and provide a basis for profitable operations. The issue then as it is today is that the oil and gas producers are not configured to be capable of this seemingly simple task. Therefore I began this journey in 1991 in an attempt to resolve this. And here we are today with the Preliminary Specification that enables a reorganization of the producers and industry to enable the most profitable means of oil and gas operations. Ensuring that all oil and gas production everywhere on the continent is produced profitably at all times.

I didn’t read much of the text that was provided in the second quarter 2018 reports. What I read in the news about the industry is that everything is just fine. No mention of a cash crisis or any difficulties whatsoever. Therefore the producers have no need to come up with any excuses. Over the years we’ve had some great reasons to believe that they’ve got things under control. Remember they were praying for a cold winter when it was just natural gas prices that were low. We never hear about natural gas prices anymore do we. And the last couple of years discussion of “market rebalancing” was about as nauseating as could possibly get. Purposely waiting until their assets deteriorated to the point where they were not as productive as they are today, so that supply would fall back to meet demand. Such a brilliant and well executed plan for how to deal with industries issues.

The aggravating effect of shale has certainly made my life much easier. Without shale it is difficult to see the issue of chronic overproduction that is so plainly obvious today. Shale reserves have expanded substantially for each of the producers. Deliverability follows along in a relatively short period of time and the prices have been directly inverse to the volume of shale reserves and deliverability. I’ve always believed that the idea behind business was to generate value. What we have today is an industry with an abundance of oil and gas reserves that are absolutely worthless. They are incapable of making any money. They consume cash in order to produce and demand that investors and bankers blindly and faithfully invest just to keep the facade running. And after three years of the investors and bankers having said they’d had enough, the producers and media parrot a future so bright and prosperous that no one would want to miss out. Reality doesn’t have much chance of filtering into the producers message.

Speaking of the producers future, the one where they have no plan, no strategy, no organization and no financial capabilities or wherewithal to proceed into what has to be the most difficult 25 year period of the industry. The lack of any understanding or appreciation of profitability or its purpose in providing for an industries health and welfare has investors and bankers stepping over each other in an attempt to get their cash and exit as quickly as possible. Yes this is the future that the oil and gas producers have provided for themselves. Their focus on just drilling wells as their sole purpose, at the expense of any other aspect of the business has left the industry incapable of providing for itself. Pipelines were expected to magically appear where and when they were needed. Now the field resources are constrained in key places because the service industry were not as wise as the oil and gas producers in putting what was needed where and when. The execution of the operational framework of the oil and gas industry has to be assessed at well below substandard. And as for the political framework, producers have the politicians believing they can work miracles and are operational and financial geniuses. The media have told us this in almost every report. My assessment of the industry is therefore as follows. The financial framework is a fail, operational framework is a fail and political framework is a fail. We’ll discuss tomorrow what I think can be done about this and how the hard work can begin to rectify 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.

These Are Not the Earnings We're Looking For, Part XXII

So how bad is the cash crisis in oil and gas? $74 oil should have covered over a lot of sins, according to the bureaucrats. It was all that was needed to produce the handsome profits that they new they had in them. I’m sure these bureaucrats wish it was the old days, just a few short years ago, when they could state unequivocally “that profits don’t matter.” I remember those days well myself. I was saying that profitability should be the reason that properties produce and they would reply with each swing of the bat “that profits don’t matter.” I think they thought if they hit me hard enough I would change my tune. I guess that profits still don’t matter but what we can also conclude is that cash doesn’t really matter either. Let's look at the numbers/

For the second quarter of 2018 our sample of 23 producers cash was reduced by $4.8 billion to $19.8 billion. Working capital was reduced by $7.6 billion to $7.0 billion. Working capital was $18.9 billion at the end of 2017. What is particularly disconcerting is that Conoco, Husky and Hess makeup $10.0 billion of working capital on their own. Meaning the remaining 20 companies have a working capital deficiency of $3.0 billion. The sample of 20 producers have capital assets of $489.6 billion and a working capital deficiency of $3.0. To me that definitely puts the balance in the “well defended” balance sheet. Investors and bankers have only been on strike for three years and the net effect on the liquidity in the industry is this?

There are some interesting changes happening in the industry over the past six months. The investors and bankers have been active in drawing their share of the proceeds from the business. Dividends, share buybacks and bank loan payments have been tremendous. The boards of directors of these producers, it would seem, have been put on very short leashes. The investors and bankers realize that as long as the producers have money to spend then they’ll spend and ignore the business issues that stare directly at them. Cash is being drawn out of the industry at a remarkable rate considering the state of affairs. Dividends paid totaled $5.3 billion, share buybacks totaled $5.9 billion and debt reduction totaled $7.7 billion, all of these for just the three months ending June 30, 2018. In the three months of the first quarter the amount of these were $2.5, $2.5 and $4.2. Reflecting that the industry has paid out $28.2 billion in the last six months. It’s interesting to note that paid in capital totals $195 billion, long term debt is $154.3 which means producers will only have to go through this cash draining scenario for another 6.2 years which by then everyone will have been paid off.

It would seem that the investors have caught on to the claim of the bureaucrats that it’s not about profits, its all about cash flow. And therefore have begun the process of removing the cash of the producers for their own purposes. Implying that the industry is now a “mature” business if you like. Just as we noted that oil prices won’t be moving up anytime soon with the OPEC+ production sharing agreement no longer in place. We can say that the investors and bankers won’t be investing any money either. Neither are interested in filling the gap of any working capital deficiency. Investing good money in a firm should at least be done on a prospective basis. By funding the working capital deficiency investors and bankers are only covering off past sins, buying the management more time in which they don’t have to deal with the issues that are creating the cash shortfall and allowing good money to be flushed down the toilet. Therefore in addition to the oil prices not reaching new heights, investors will continue to suspend their active participation in any future share issuances, continue the return of cash to the investors and bankers and the cash situation in the industry is only going to become much worse.

We know things will only get better because the bureaucrats have been hoping for that to happen for at least a year. At least that is what I hear in the media. I’ve always expected that the oil price will eventually mimic the fundamental collapse that occured in the natural gas market and then the credibility of the industry will have been shot. The only way in which to rehabilitate the natural gas price and mitigate any further loss in the price of oil is through a sustained effort to do so. Meaning the implementation of the Preliminary Specification. Until then bureaucrats will have no measure of believability. 

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.

These Are Not the Earnings We're Looking For, Part XXI

I was re-reading the Preamble to the Preliminary Specification during the time that I was off. What is clear is the severe accounting distortions that are documented there. How those are responsible for the behaviours of the producers over the past decades. And why these are the cause of the difficulties in today oil and gas marketplace. In order to deal with these it’s also clear that the Preliminary Specification is the solution the industry needs and the Preamble details why we need to deal with it, how we need to deal with it and what to do about it.

One could understand the simple process of dramatically increasing commodity prices by just shutting in unprofitable properties. There are four direct benefits of doing so. First is the removal of the marginal production from the commodity marketplace allowing it to find the price necessary to sustain profitable operations. Second the producers profitable operations are no longer diluted by their unprofitable operations which increases their profitability. Third the  reserves are saved for a day when they can be produced profitably. And lastly those reserves will not have to carry the cost of prior losses that would need to be recovered in the future.  Nothing could be easier to do and healthy for the bottom line of the producers and industry. Allowing them to recognize the hoarded capital costs of past production that have been collected on the producers bloated balance sheets as property, plant and equipment. I’ve been discussing these points on this blog for more than a decade. The final edited version of the Preliminary Specification will be five years old this Christmas. I prepared these on the basis that the producers are configured in a way that by slapping this veneer of simple business logic on their organizations is impossible to do. Shutting in unprofitable properties starts with the first question. Which ones are profitable? And not a sole on earth has any idea as to what the answer is.

The issue comes down to the producers accounting is focused on the corporate reporting of accounting, tax and regulatory requirements of the corporation. Reporting of the properties are done with the partners of course, and that is through the Joint Operating Committee, however some ERP systems don’t even recognize the concept of a partner without substantial workarounds. And today’s overhead is where the issues become unmanageable. Overhead at the properties is based on allowances whereas most of the actual corporate overhead is capitalized and although People, Ideas & Objects believes that total overhead would be around 20% of revenues, no one knows the answer to that question either. Without the ability to have the specific overheads allocated to the specific property, how will you know which property is profitable? Natural gas is far more complex to administer than oil. Properties that are core to the producers strategy will be administered more efficiently than others, but what is the difference in terms of the administrative costs per barrel of oil equivalent? There are too many disparities between properties, products, partners and their capabilities to determine what the overhead that is being incurred at a specific property, therefore the overhead allowances were established throughout North America as the best guess.

Without the Preliminary Specification the changes necessary to bring about profitable oil and gas production will never happen. The need for a production allocation methodology to deal with the overproduction that is systemic and chronic will always be the case. Alternatively the government could tell who should and who shouldn’t produce. The fact of the matter is that People, Ideas & Objects Preliminary Specifications decentralized production model and price maker strategy are the most fair, equitable and reasonable means of production allocation available. If the property can produce a profit considering all of the costs, based on a reasonable accounting, then it produces. Otherwise we’ll continue as we are and every producer will continue to produce every barrel of oil they possibly can as they’ve always done. To suggest that producers employ our price maker strategy, which is the shutting in of unprofitable production, invokes the shrill response from the bureaucrats that this would be collusion. It’s not collusion to establish the ability to “make prices” when oil and gas commodities reflect the economic characteristics of price makers. Producers would have to be involved in a conspiracy to commit a crime. Using a system of organization that allows them to maximize profits, which is what the Preliminary Specifications decentralized production models price maker strategy does, is not collusion, a crime or a conspiracy. If making fundamental business decisions to produce or not, based on actual, factual accounting data, done in the best interests of the owners of the property is collusion, a crime or conspiracy then every business for all of time would have been sentenced to serious prison time, except for oil and gas producers of course.

Maybe it needs to be said explicitly. Those producers that have destroyed all of the money that was ever given to them. Please hand the keys over to their investors and turn the lights out. One has to wonder if the industry got together, bought these dead weight producers and shut everything in if that wouldn’t be the best investment ever. Next to funding the Preliminary Specification that is. Of course some of these producers, like Pengrowth are doing so on their own. The company exited 2015 with a production profile of 71,459 boe / day and reported a second quarter 2018 exit rate of 22,600 boe / day. It’s either the manifestation of killing off the dead weight or bureaucratic progress, your choice.

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.

These Are Not the Earnings We're Looking For, Part XX

Before our break I indicated that I thought the amount of depletion that would be recorded in the second quarter would be interesting. One thing about these bureaucrats is that they are predictable and shameless. On cue they took the opportunity to squeeze that extra bit of profitability out of their organizations by reducing the amount of depletion that they would or should have recognized. The point of the exercise is to spend money. But not to spend so much money that you breach the “ceiling test” and are forced to take a write down of your property, plant and equipment as an impairment charge. Spending is the first leg of this highly competitive race. The second leg of the race is to ensure that any and every cost that is incurred by the producer goes into property, plant and equipment. It’s important to note however that the SEC has recently frowned upon the recording of royalties as assets. Everything else in one form or another is fair game. The third leg of this race is to ensure that the minimal amount of depletion is reported at any point in time in the corporations history. It is the use of these three simple principles that govern the oil and gas bureaucrat. That is how we have producers with disproportionate asset values to all other aspects of their organizations.

In 2018 the first half revenues were $122.2 billion for our sample of 23 producers. In 2017 the same number was $104.6 billion. An increase of revenues of 17% year over year. If we used even a reasonable basis of allocating the amount of depletion based on revenues, the amount of depletion reported in the first half of 2017 of $35.9 billion would be $42 billion in 2018 based on that percentage. However it was reported that depletion was only $25.3 billion for the first half of 2018. A direct and material difference in the profitability of the producers in that the amount of profit reported of $9.2 billion would be reduced to a loss of $7.5 billion for the first half of 2018. The more revenues you earn the less depletion you recognize. That’s an interesting theory you have there. And it certainly works for the bureaucrats! Interestingly as well, the amount of capital expenditures for the first half of 2018 totalled $31.8 billion versus $23.8 billion for the same period in 2017. Therefore the more you spend also dictates that you’ll recognize less. People, Ideas & Objects recommends a rapid elimination of the bloated nature of property, plant and equipment. We would have preferred to have seen the balance of property, plant and equipment of $489.6 billion being recognized in a two and one half year time frame. That would dictate that the first half of 2018’s depletion would have totalled $96.6 billion. Fully 78.7% of revenues. Leaving a loss for the first half of 2018 of $87.4 billion. Please note at the end of the two years the balance of property, plant and equipment would be fully depleted, however capital expenditures at the current rate for two and one half years would leave that account with $151.9 billion. A far more reasonable number. It would also be expected that, if the Preliminary Specifications decentralized production model were implemented the cash generated, as the consumers would no longer be subsidized the capital costs of their energy consumption, would increment by the $489.6 billion.

What the bureaucrats don’t seem to appreciate or understand is that oil and gas is a capital intensive business. Implying that the capital costs are the largest part of the business. Property, plant and equipment expenditures are “retired” to the balance sheets through this three legged race to “building our balance sheet” bluster for the term of at least a decade. The mathematical average for our 23 producers increased from 8.18 years at the end of 2017 to sit at 9.35 for the period ending June 30, 2018. Remarkably a 1.17 years increase in the course of six months. That also implies that the cash that was used to spend on these capital costs is lost and not retrievable until such time as these costs are recovered through the process of recognizing the depletion of the $489.8 billion in property, plant and equipment by moving it on to the income statement. This therefore represents how much money the spendaholics have taken from investors and bankers, spent and buried into the ground to be recovered “down the road.” It also represents the total amount of the subsidy that the consumers have realized by the bureaucrats graciously storing the consumers capital costs on the balance sheet for no apparent reason other than to look good in some distorted view of reality. Now I’m not talking about taxes, and I’m not talking about anything other than the performance of the organization. How quickly does it turn over its capital and how does that capital perform. The important aspect of these questions is that the cash goes out and waits almost a decade for it to be returned to the bank account. In most businesses that would be a luxury that would be considered unspeakable. Generally businesses run on cash. However in oil and gas there had always been a willing investor or banker lining up to be fleeced. Cash issues were solved when the bank balance hit a threshold that triggered the stock offering. Except the investors don’t line up anymore do they?

The cash aspect of this “luxury” is hyper critical today. When all the costs of the organization are included in property, plant and equipment. And let’s be realistic, the only issue regarding capitalization is one of accounting creativity. Therefore all of the costs that the producer incurs will sit on that big bloated beautiful balance sheet for the next decade while investors are expected to keep the piggy bank full. And so on. Today the investors can say they’ve survived their strike on the oil and gas producers for a total of three years. They’ve also never felt so liquid or prosperous! They may see, as I do, a critical cash situation that will materialize some time in 2018 for each of the producers in the industry. A hypercritical cash situation that doesn’t appear anyone in the industry is aware of or concerned about. It really is a surreal situation to anyone outside of the industry looking in.

There is an understanding in the media and within the political arenas that there has been a phenomenal job done within the oil and gas industry. The deliverability of the industry has been quite remarkable with production records being established consistently. Or was it shale reservoirs that did that? We have always had this indirect, convoluted cash drainage issue in oil and gas. I started this project back in the early 1990’s. Shale only makes the situation far worse. The prolific nature of shale boosts the political fortunes of those in power and continues the delivery of low cost oil and gas to the consumers. However the industry has never learned that it was overproducing and was never a commercial operation at any time in its past four decades. It has survived on capital infusions of ever greater volumes to backfill the cash shortages created as a result of consumers not paying for the capital costs of the product. How could they pay for those costs when the bureaucrats keep hoarding them on their balance sheets! I guess it satisfies their ego. Now with the very expensive, prolific and steep decline curves of shale the bureaucrats continue to apply the old, unsuccessful business model to this new shale era and presto, in late 2018 the thing finally blows up. Maybe the most important point of this $489.8 billion in capital assets is this number is only what is attributable to the sample of 23 producers that we follow. They represent 9.553 million barrels of oil equivalent production in North America, or 28.73% of the North American production base. With a little rounding here and there, that comes to $1.7 trillion in cash sitting, whittling away in oil and gas that someone funded so bureaucrats could walk down the street with a big old swagger about how big their balance sheet is. That $1.7 trillion is also why this is a cash crisis.

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.

These Are Not the Earnings We're Looking For, Part XIX

Buddy could you spare a dime? I had a feeling that the second quarter 2018 financial statements were not going to be “healthy” for the oil and gas industry. Once again I was very wrong. The situation seems to be spinning out of control very quickly. What producers expected from the $74 oil prices didn’t materialize in any way. The alleged profitability of the producers remained mythical in its origins and validity, depressed and recorded an overall similar performance to the first half of 2017 for our sample of 23 producers. The first half of 2017 was a time when the oil prices were up to $30 lower. To hear the producers talk it’s as if they’ve worked miracles and resolved all the problems they’ve ever had. The issues that the Preliminary Specification addresses and resolves are material to the health and welfare of the oil and gas producers and industry. That bureaucrats don’t see it this way is an interesting phenomenon that I can’t speculate on its origin or motivation. There are serious issues at hand and will need to be addressed in short order. This is not normal or is it in anyway acceptable. There is a crisis that has been developing in the industry, I believe that it will manifest itself in the second half of 2018.

The one thing that we know for certain at this point is that there will be no further oil price upside due to the production sharing agreement being renounced by OPEC and Russia. The situation has also become very fluid and dynamic with China being severely affected economically by the U.S. tariffs and attempting to shift supplies away from the U.S. What was believed to be a spike in prices, to as high as $200 by some analysts, has now settled back to the same old, same old in terms of future prices. Commodity prices will not be moving up substantially from here in the short, medium or long term that I can see. What we know from our review of our sample of 23 producers is that the run up in prices from the $30 range to $74 has not healed what ailed the industry as the bureaucrats claimed it would. People, Ideas & Objects have always asserted that prices would need to be much higher with our calculated necessary oil price of $141 for the last quarter. And with cost escalation in the second quarter, the remaining 2018 prices will be needing to be in the low $150 range in order for the industry to begin profitability.

In a world of economic tightening, where the past decade has seen phenomenal expansion of the money supply. Oil and gas producers are faced with the luxury of a hypercritical cash crisis and bloated balances of property, plant and equipment that are supported by unreasonable and unsupportable levels of debt. Who would have thought? Producers may technically have good debt to equity ratios on their pristine balance sheets however if those balance sheets are bloated, then their debt is bloated as well. Investors, who have recently caught on to the annual dilution of their interests in these producer firms, are electing to pass on any further investment. Maintaining their current percentages of ownership of the firm instead of investing more and ending up, as a result of the dilution, with less. Banks are spooked too for the better part of the next generation or until they recover their money by poaching the bank accounts of any cash that comes in from the producers. So yes as we move into a normal interest rate environment where competition for the investment dollar will be very stiff, spendaholics with no “real” performance, plans or strategy but a stack of unaddressed issues to show for themselves will be having difficulties.

The more that today’s producers hold to the “profitability” and superior performance of their organizations the more fearful the investors become. The delusion that the industry is profitable when the capital asset values continue to bloat completely outside of anything that would be considered reasonable. Where the discussion of profitability at $40, $50, $60 then $70 oil was alleged to be boom times for the producers. With the producer organizations quickly dispelling the myth that they’ll be profitable at those prices as soon as those prices are achieved. Hanging on to these myths and fallacies that the industry is doing well in order to hope to have the investors return with their annual cash infusions into the producers is only frightening to those that would have participated. The industry appears to be the only ones that don’t understand the situation that they’re in. They’ll not be making it to Christmas at the rate they’re going and as I see it, the banks and investors are beginning to demand more cash returned before the ultimate, inevitable collapse.

What to do? The producers could provide the investors and bankers with a plan and strategy on how they would turn the industry around and move forward with profitable operations everywhere and all the time. By adopting the Preliminary Specification the investors and bankers, who are businessman and see the long term future, will accept that this plan will give a new and better future to the industry. One that is viable, profitable in the real sense and prosperous for all within the society that are affected by the industry. They would act in the best interests of the producers and fund their current shortfalls until such time as that future was here. I’m preaching to an uninterested and uncaring bureaucracy, I know, but I’m concerned for what I’m seeing. The reason I’ve been doing this for so long and so hard was to avoid what I think this issue could manifest itself as in very short order.

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.

These Are Not the Earnings We're Looking For, Part XVIII

With the rich endowment of shale technologies and reserves in the past decade. One would have thought that one of the producers would have challenged Apple for that trillion dollar milestone. Shale reserves however have been used in the same way that the traditional oil and gas industry operated. That being they’ve overwhelmed the commodity markets causing them to fundamentally collapse. Some might assert this was mismanagement on the bureaucrats behalf. Others would claim that the industry has not changed to meet the challenges and opportunities brought about as a result of shale. You may have read all of these claims in this blog and I would be honored to make them once again. The level of change introduced by shale can’t be dealt with by the current bunch and we can expect more of the “muddling along” and “do nothing” strategy and operating procedure that the bureaucrats have adopted as their religion. Please note my assertion here is that the reserves of the oil and gas producers are the real assets and value of these firms. And today the sum total of all the reserves of the industry are worthless as they produce nothing of value and indeed require cash infusions in order to function. If they held any commercial value, the possible trillion dollar valuation, they would have needed to be produced profitably. Their trillion dollar value derived from their performance as defined by their (real) profitability. Today the collective reserves of the industry have truly nothing to do with the unrecognized capital costs of prior production sitting on the balance sheets as property, plant and equipment of the producers. To be clear one should be an asset (the reserves) priced based on their performance, and would be emulated on the stock market as the market capitalization and the other are unrecognized capital costs of prior production. Producers today are in a highly competitive race to outspend themselves and “build their balance sheets” in order to represent they are more “valuable.” That is what they believe is the business. Any fool that looks to the accounting for the determination of value is a special kind of fool. Accounting is about performance. For example Apple has a book value of $349 billion of which $288.5 billion happens to be in the form of cash or equivalents. It therefore has only $60.5 billion in long term assets. Roughly the equivalent size of property, plant and equipment of an oil and gas startup.

We need to recall that the purpose behind these accounting shenanigans is to ensure that the capital costs of oil and gas exploration and production are incurred by the investors and not the consumers. By deferring the recognition of the capital costs for decades the producer achieves two key objectives. Their spending looks productive when assets continue to grow, profitability is achieved by any village idiot and cash flows are overstated too. And indirectly the burden for the cost of oil and gas is shifted from the consumer to the investors and bankers who supported the facade for so many decades.

It used to be that if you had a 100 bcf of natural gas reserves you were a force to reckoned with in the industry. Someone who understood the business and could build it. Now a startup could acquire a few tcf of natural gas in reserves in a few short years. The problem is that no one sees any value in that anymore. Primarily because there is no value in that anymore. The producers today have so eroded the value of the commodities prices that they’re incapable of earning a “real” profit, a profit that would be one that includes an increase in overall cash. That no one perceives any value in the oil and gas industry makes it a process of getting out, but before you do, make sure you take whatever you can get. If someone were to grant you their 5 tcf in gas reserves as a gift, you would probably have to throw it back. By accepting this gift you would be jumping in the deep end of the pool with a fresh pair of cement shoes.

One of the issues that I see in this second quarter reporting period is that producers have been telling the world their profitable for years. The fact of the matter is that they’ve been able to report these profitable operations because they hide their costs as assets on the balance sheet. Those costs are now so large as to have distorted every aspect of their financial situation as to permanently render them in a situation of perpetual losses from now on to make up for the fraudulent representation of profits in the past. To simplify the point I would say a corporations lifetime profitability is 100%. Producers today have now reported a grand total of 200% profitability. Therefore the performance of their assets will be bringing the reported performance back in line with actual performance of the organization. This is why accounting is a critical skill in determining the timing of its costs. Producers can solve most problems with the application of effort over a few quarters or years however this issue will take materially more effort than that. We don’t even see the recognition of this problem and the willingness to undertake a review. Note only the Preliminary Specifications decentralized production models price maker strategy can remedy this.

What I can state unequivocally in reviewing the second quarter financial statements of our sample of 23 producers. Is that they don’t know the oil and gas business, they don’t even know their business and don’t understand business in general! Which is probably the worst thing that anyone can say. Consider for a moment however that when oil was at $45 how $50 oil was going to be produced profitably. Then certainly $55 would be better and they stated it would be a windfall at $60. Predictions of these profits never arrive. Oil ended the quarter at $74.25 and the loss of cash, working capital, cash generated and profitability is epic.

I’m sure the industry argument that will be put across is that the amount of cash that is being spent on reducing debt, on dividends and share buybacks is consuming all of the cash the producers generate. And I would ask if they’re a recent university graduate? One that feels that socialism is the preferred method of organization. The fact that producers are paying out the cash to those people is because, anyone, anyone, that’s right it’s a business. And that is what businesses do. The fact that producers are now expected to act somewhat like a business is not a reason to cry about the drainage of cash by the bankers and investors. It’s time to implement the other aspects of “business” and make the industry profitable so that producers can do all of the things that businesses do. Those things that are involved in business that are beyond spending money.

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.

Second Quarter Results

I’ll be taking the next two weeks off returning August 13, 2018. By that time our sample of 23 producers will have reported their second quarter performance and we’ll begin our analysis. There are a few more things to be discussed with respect to the User Community Developments and we’ll finish off that series as soon as we’ve completed our review of the second quarter.

What is known at this time regarding the performance of the producers is unknown. They’ve certainly had their best quarter in terms of oil prices for the past three years. This has put a bounce in their step and led them to present a positive outlook towards the future. I believe this has been in anticipation of a prospective return of the investment community and the annual ritual of the shareholder fleecing to fund their next years capital expenditures. I am of the belief that investors won’t be back for a few years. They’ll need to see a steady performance of profitable operations before they’ll step back in the ring. These profits that they’re looking for will be the ones that they and I consider “real profits” and not the ones in which the bureaucrats report, which seem to always exclude the capital costs. It is therefore easy for me to predict, which is what I’ve done for so many years now, that the profits that are reported by the producers will not be tangible in the sense that they contributed any value to the producer firm. Without a constant cash infusion from the investors and bankers, the cash shortfall that has become hypercritical in the first quarter of 2018 will now surely be beyond what I could describe. Extension of accounts payable to completely unreasonable time periods is the only means in which to mitigate the producers loss of further cash. It will be interesting to see how its been done.

Certainly prices over $70 have helped substantially in terms of dealing with the cash crisis. The problem is that the producer does not generate any cash that is recovered in the current period. Cash in essence only goes one way, out. When most of the overhead is capitalized these costs, not assets, which are incurred each month require payment each month. Usually a firm has a revolving cash cycle that has the cash paid for its overhead returned to it from the products that they sell that month for use in the next month. When producers never recognize the capital costs of past production, which include the overhead costs, these costs sit as dead weight on their cash demands recycling themselves each month with the demand for new cash to pay next months overhead never being responded to by the business returning that cash. When the investors and bankers take a hike, which had provided the cash to fuel the payment of overheads for a year or more, then there is no money to pay for overheads. With $70 plus oil the amount that the producers are making from the sale of their products are generating more cash, however the amount that each barrel of oil costs in terms of cash out the door, based on our estimates from our first quarter 2018 calculations is in the range of $141. It is very stupid business policies such as these that the producers have been involved in for at least three decades, that investors have caught onto and the cash crisis is based.

One of the ways in which producers have learned to deal with the cash shortfall is to generate new flush production. Which is also known as “the business.” When increased volumes of oil or gas are delivered they’ve had in the past a temporary “free money” kind of tonic on the producers financials. This is also one of the reasons that producers continue to overproduce. To understand the phenomenon think of the gerbil in a wheel running in an attempt to reach its lunch. We’ve learned recently from the EIA that the highest rate of drilling in three years is currently underway. This is what accounts for the “discipline” producers acquired after they collapsed the oil prices into the $30 region.

I think the trend line on natural gas prices is disconcerting. Why the downward move at this time? There appears to be no reason for this and I am at a loss to determine the weakness. I had speculated previously that the pipeline constraints in many of the big shale gas fields, where prices had been severely depressed, were being alleviated. This has been the case and those constraints are now being cleared which is providing the overall natural gas market with incremental supply. As these constraints continue to be cured the industries overall natural gas revenues may drop once again as the natural gas prices begin to adjust to the increased supply.

Although I point these issues out it is clear that the bureaucrats couldn't be concerned in any sense. They’re fine thanks. They have a solution that has worked marvellously for the past number of decades. The solution is they’ll adjust the rate of depletion that they recognize. With higher oil prices the value of their reserves times the price of oil is much higher. Leaving them with much more space in which for them to operate before the ceiling test becomes an issue. Therefore, even though they are spending substantial amounts of other people's money on drilling, it will not approach that threshold of the ceiling test. Therefore they can reduce the amount of depletion recorded in the current period substantially. And that’s not all! They can even go back into the first quarter of 2018 and reduce the amount of depletion that they reported there. In fact I’m willing to predict that with the increase in oil prices for the second quarter we may see the recording of negative depletion for the second quarter of 2018 in some producers. That’ll boost earnings and get the investors back.

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.