Professor Richard Langlois on Innovation

I stumbled upon this quotation from Professor Richard Langlois of the University of Connecticut. He was one of the principle sources of primary research that we used in development of the Preliminary Specification. His work focuses on innovation, transaction cost economics, the choice between firms or markets, modularity and capabilities. Aspects of the Preliminary Specification that provide real value for the dynamic, innovative, accountable and profitable oil and gas producers. His quote was made during a recent podcast, is in the area of innovation and captures a need that everyone must adopt for the 21st century.

I was talking about trying to think about how innovation works. That’s what a lot of my work has been, looking at the history of the various, especially high technology industries and thinking about what are the causes of innovation and how does the process of innovation work and I talked about that in this talk today and I talked about how it’s very important when you think about innovation, to realise that innovation doesn’t occur in isolation, that once you change one part of a system, when you innovate in one part of the system, that’s going to have effects that ramify throughout the system and if you can’t adjust the other parts of the system to go along with what you’re changing in your part of the system, then the innovation may not work.

The first two items that come to mind are that innovation is hard which maybe why our good friends the bureaucrats are mute about any aspect of their current business failures. Secondly the role that People, Ideas & Objects user community, service providers, and Oracle as our contracted software developers provide in terms of a dynamic change capability to the producer firm and industry. We noted recently that we’re reorganizing the oil and gas industry by establishing the service providers as a sub-industry and populating these independent organizations with the administrative and accounting resources of the producers. Once we have that structure in place we have the beginnings of what is necessary for innovation. Reading the Preliminary Specification shows the dynamic nature of how the producer and industry will be able to develop the sciences of geology and applied sciences of engineering in terms of the these capabilities for their producer firm. There will never be and could never be any superstar producer firms coming out of an industry that is desolate of any capability or capacity to innovate. In contrast to today, these structures, foundations and capabilities are all dynamically facilitated in the modules of the Preliminary Specification.

Where the producer firm is constrained in today’s marketplace is through concepts such as “operator,” and the collaboration of detailed proprietary technical information. A renewed focus on the producers competitive advantages of their earth science and engineering capabilities, and their land and asset base are what’s required. If they desire to lock themselves in a room with all the textbooks regarding engineering and geology and develop their own capabilities to be deployed only by themselves then they are certainly welcome to do so. It is a commercial marketplace in a free market system. Just as everyone realizes the reliance on a small handful of individuals limited understanding does not an innovative producer make. An innovative producer will only be attained when the industry is providing the resources and capabilities to facilitate innovation in every producer within that industry. Therefore the need to expand the producers earth science and engineering capabilities is the source of greatest value that the producer can attain in terms of maximizing the profitability of their land and asset base. Participation, and that means full, unconstrained participation in the industry to push the sciences forward will be the only way that the producers will be able to move their innovations forward. This can only be done by expanding and exploiting their earth science and engineering capabilities.

What Professor Langlois captures in his quotation is of course that innovation and its necessary mindset is never fixed. However in addition, the deployment of innovations are not as easy as they sound. They may not work or function in the market if there is no supporting cast to provide for the innovation. Working intimately with the service industry is part of the Preliminary Specifications Resource Marketplace and Research & Capabilities Modules for that reason. A key point of the Research & Capabilities and Knowledge & Learning Modules is that innovation is not a free-for-all either. Having the ability to experiment and develop the innovations away from the mainstream operations of the producer are critical until such time as they are proven and as such can then be deployed efficiently and effectively to the larger population of properties. Otherwise you’ll have uncontrolled chaos and nothing happens in terms of the innovations development. All of these are processes that are managed within the Preliminary Specification.

As I’ve mentioned before the process of innovations development and deployment are not happenstance. Currently the service industry develops significant product and service innovations that the producer firms ignore for a decade or more. These timelines will be inadequate for the future consumers of energy. If today’s bureaucrats feel, as we mentioned before, that they’ll stumble upon the appropriate methods of innovation throughout their producer firms and industry, as well as become spontaneously highly profitable in this the third quarter of 2018. Then they’re kidding themselves as much as they’ve been kidding themselves about their profitability these past four decades. In this technically sophisticated environment, with the complexity of the work that needs to be done in this the second most difficult and complex industry. Hoping that the millions of people that work in oil and gas and related industries will suddenly and spontaneously understand what is expected of them is obviously what are friends the bureaucrats are waiting for. I just don’t think I’ve ever seen the sense of hope and change.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

The Rain in Spain...

Bureaucrats will be unhappy that I’ve decided to rain on their parade in another area of their business. Just as the method of treating all of their costs as capital assets, this area shows an inability to discern the difference between assets and costs. But it also highlights the inability to assess what a business is and what it’s purpose is. This of course is in the area of asset purchases or the acquisition and divestitures area of the oil and gas industry. In business it’s important to not pay too much for the assets that you acquire. You need to sharpen your pencils and make sure that the asset or business that you’re acquiring is fundamentally sound. In oil and gas they have a number of people with the expertise, education and experience that conduct these evaluations on behalf of the producers. Where I think they go wrong is they go about the exercise in an inappropriate way. I think the best way to describe the process that is carried out consistently through oil and gas is by way of an analogy. If we used their method to purchase a pizza restaurant and then describe why I think their method is fundamentally flawed.

You’re considering the purchase of a pizza restaurant and have been able to determine that the previous owner has over 100,000 pizza boxes and his ovens have a remaining capacity to cook 100,000 pizzas over the next seven years. The prices charged for pizzas are on average $9.99 and the cost of cheese, tomato sauce, dough and pepperoni average $4.15 leaving $5.84 profit per pizza. Therefore if you sold 14,250 pizzas per year, which is the volume of sales in the past three years. Your profit would be $83,220 per year for the next seven years. Therefore you offer the present value of that stream of earnings, based on a 5% discount rate or $481,500 to the previous owner.

This is the extent of the analysis of the acquisitions that are made in oil and gas. What about the rent that has to be paid, what about the salaries of the cooks and waitresses or the lights and cleaning etc. It’s simple, if you’ve been paying attention those are all capitalized and will form part of the asset balances under property, plant and equipment. The fact that the oil and gas producers through the process of making an acquisition are buying a “business” is not understood. What they’re buying is the asset. In our example the pizza oven which is the real value and money maker, and I can’t refute that argument. If they were to look at the financial statements of the pizza restaurant they would find that it doesn’t make money at all but provides a subsistence living for the owner who’s family eats a lot of pizza.

Looking at the financial statements of the producers today and understanding the adjustment that People, Ideas & Objects recommend should be made to property, plant and equipment to account for the unrecognized capital costs of past production. This adjustment at 60% of property, plant and equipment  wipes out all of the shareholders equity of our sample of 23 producers. What oil and gas property would you be interested in as an acquisition? Certainly there are reserves for sale in the industry. My argument is that no one understands that the entire point of the exercise, the exercise being a business, is to earn a profit on those reserves. And we can state unequivocally, based on the financial statements of our sample of 23 producers, that none of the reserves in North America are, have ever or will be profitable under the current management. Therefore why would anyone pay more than nothing for an asset that doesn’t perform?

That an oil and gas property or a pizza oven have a set number of units remaining in its assets useful life is irrelevant to the monetary value of that asset. Can that asset in a business environment provide for a real kind of profitability? This method of evaluating properties has been in effect in the oil and gas industry for decades now. And the amounts that were paid by purchasers were in most cases far in excess of what the book value was on the sellers financial statements. Understanding however that those book value numbers, were as we say here at People, Ideas & Objects bloated beyond all reason, then the amounts that were being paid were far in excess of what the real value of the property was on the basis of its business performance. However, just as with the pizza analogy the ability to capitalize overhead enhances the profitability and increasing the assets book value of the restaurant. So things have been able to be carried on for decades in the case of oil and gas.

As we’ve documented here before and the reason the Preliminary Specification is required in oil and gas is the accounting information that is prepared is unusable. The Statement of Expenditures and Statement of Operations are prepared on each property for the members of the Joint Operating Committee. These statements use estimates of the overhead incurred to operate the property and these are simple statements to communicate monthly billing information to support the working interest partners share. The accounting information that would be needed in the case of determining the value of a property from a business point of view is not available and can’t be created due to the operators overhead being mostly capitalized and not allocated to each property. Therefore no one knows which properties are producing a profit and which ones are losing money. When the quarterly report shows that the whole operation was profitable, in the sense that everything is capitalized and that capitals recognition is deferred for decades, all the bureaucrats get big bonuses.

With the Preliminary Specification detailed accounting reports for each property will be provided to the producers. With our service providers conducting the administrative and accounting process management on behalf of the industry. They will be billing each individual Joint Operating Committee for their fees for the overhead costs they incur. That way each property will be incurring its exact overhead amounts. These accounting reports will be based on the format of financial statements including balance sheet, income statement and statement of changes. That way each property will be known to be profitable or not and form the basis of the independently formed decisions to shut-in the property due to the lack of profitability. Which is not collusion but business.

The only problem that arose is the investors in these business, after decades of abuse, realized the situation was only being kept afloat by their constant involvement. Now that the writing is on the wall, what can be done to rectify the issue. Make a stand as the oil and gas bureaucrats have and insist that their businesses are healthy and prosperous with a bright future. Make the changes needed to implement People, Ideas & Objects Preliminary Specification. Or just use the exit that has been planned for when this day would come and the bureaucrats could seek greener pastures in other industries. The first option looks truly delusional. The second is going to take a lot of work and effort. The third seems to be the optimal strategy for the oil and gas bureaucrat. Besides it’s raining, and it’s always best to get out of the rain.

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.

See No Evil, Speak No Evil, Smell No Evil

People are going to want to cover their nose and mouth, the smell is going to get really bad in here. The third quarter reports of 2018 may be one of the more interesting to be coming out of the oil and gas industry. There is only one week left before the end of the third quarter and who knows maybe, just maybe... For those that don’t subscribe to fairy tales I think we’re beginning to see some serious signs of distress. One of its names is the Canadian producer Strategic Oil and Gas which is just a small producer with $34 million in annual revenue in 2017. It provides us with a window on the choices and options for the oil and gas producer. That choice appears to me to be, and as always it’s a highly conflicted recommendation, to implement People, Ideas & Objects Preliminary Specification. There are a few lessons to be learned by all producers despite the small size of Strategic. The most important lesson to be learned is that tragedy is in the hands of the bureaucrats and it can strike quickly and ferociously.

I mentioned this company in a previous post noting that their second quarter stated they were proceeding with their strategy of pursuing debt and equity offerings to continue with their plans. That was August 16, 2018, and on August 29, 2018 had formed a committee from members of the board of directors to evaluate strategic alternatives. Much has happened since then, particularly to the stock, which has fallen from $0.42 to as low as $0.06. Then on September 10, 2018 they announced a share offering consisting of a private placement of New Convertible Notes. This would provide the company with $4.2 million and the dilution of 25.5 million shares, increasing the company's total issued and outstanding shares to 70.4 million. After all dilution of shareholders is not an issue in oil and gas! This private placement was in lieu of a previous interest payment that is due on similar notes whose owners are subscribed to this private placement in exchange for the cash that is due for that interest payment. The $4.2 million will be used to conduct the review of strategic alternatives. Note this company being owned predominantly by Jim Riddell who is the son of the late Clay Riddell who was the wealthiest Canadian oil man and 15th wealthiest individual in Canada. Issuing stock totaling ⅓ of the company in order to indirectly pay interest. Use the cash from this transaction to find out what to do because, as you’ve announced, you don’t have a clue. This is just a sheer lack of business understanding which I think is now the key and only qualification to be an oil and gas producer. Please note I am not of the belief that the participants in this private placement can be classified as bottom feeders. Usually bottom feeders have a ruthlessness about them and have an exit strategy where they end up with the booty.

The one good thing that Strategic has going for it is that it has property, plant and equipment of $158 million as of June 30, 2018. That is still plenty of assets to strut around town with. All the money ever raised which totaled almost $390 million has been lost with only $11 million in shareholder equity remaining as of the second quarter of 2018. The questionability of the $158 million would be what I would focus on in this company. But everyone who reads this blog would know that by now. The reader of these statements don’t have to look too far to see the anomaly. For the 2015 year they lost $110 million on $32 million in revenues. For 2016 they had a profit of $33.4 million on revenues of $20.5 million. And 2017 they had a loss of $89.5 million on revenues of $35.6 million. Kind of just leaps off the page and shouts at you doesn’t it. $33 million in profit on $20.5 million in revenues. Miracle workers! Or upon further investigation the asset impairments (reversal) saw $58.4 million added to one of their properties. Why would you do this other than to bloat the assets? In the notes to the 2016 financial statements they have an elaborate justification for increasing the assets based on net cash flows, based on futures prices and drilling that is expected to be done in the “future.” To repeat once again accounting is about performance not about determining the value of the company. And certainly never on the basis of what might happen, if, maybe or cross our fingers such and such will occur in the “future.” Strategic is looking into its crystal ball and saying they think their assets may perform on the basis of a net present value if all of these possible scenarios come together. So in summary and to draw an apt analogy what the 2016 impairment reversal means and does is as follows. “Walmart has adjusted their net asset value upward by $1 trillion based on the anticipated increase in the consumer price index.” Whatever happened to historical cost accounting? The answer in oil and gas is that the name of the game is the biggest balance sheet on the block.

Using dubious and specious accounting in oil and gas is not enough. Adding the Post-it-Notes, telephone service and receptionists salary to property plant and equipment is done everywhere. Realizing these costs over the life of the reserves, which in some cases, as in the case of Cenovus, have reached as much as 27 years. “Reversing prior amounts of depletion and impairments is particularly lucrative in terms of bloating the balance sheet and increasing profitability.” There are many more tricks done in the industry and nothing here should surprize anyone based on a thorough reading of this blog. This game has been going on since the time the SEC implemented their ceiling test requirement in 1977. The game has become a science onto itself and is deceiving the people in the industry more than anyone else. It is understandable that after 40 years the culture of the industry makes these efforts what the business has come to be. Which is what oil and gas has become. The focus is on assets, the biggest possible. The rest of the business is irrelevant and could evaporate as far as anyone is concerned. As long as there is growth in the assets then all is well. I am not, as I repeat, surprised with anything whatsoever here. It is what I have fought to rectify for many decades now.

What should be particularly disconcerting though. And what is highly consistent with the way things have developed in other industries that have collapsed. Is that Deloitte & Touche, and its cohort, who conducted the annual audit of Strategic have expressed a non-qualified opinion on Strategic Oil and Gas for 2016 and prior. They did qualify their opinion based on a going concern basis in the 2017 report. Isn’t it always the accountants, the regulators and those that are charged with ensuring the barn gate is closed and locked so that the horses don’t escape. Are then subsequently found to be the ones that were sitting on the fence posts picking their noses when the smell becomes too much to ignore. There should have been qualified opinions being issued throughout the oil and gas industry decades ago. When asset values are determined on any cost being an asset. Where the value of the asset can be massaged and manipulated through crystal balls and sessions with the faith healers or gypsies, but note never by both within the same fiscal year. Where the sky is nowhere the limit. And all of the accountants have signed off on these theatrics. We know those investors who were lined up and made to believe they were investing were really only being sent off to slaughter. Despicable, sickening and no one does anything to correct this for 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.

Third Friday

Innovation and the Production Profile

A few days ago we discussed how the Preliminary Specification provides the foundation of an innovative oil and gas industry and producer firm. The role that innovation will take in the oil and gas industry will define the percentage level at which a producer will be able to produce their production profile. A highly profitable producer who has 50% of their production profile shut-in may not appear as attractive as the one that is able to produce at 100% of their production profile. The difference between the two firms will be the earth science and engineering capabilities that are being deployed on each of their assets and the level of innovations being developed and implemented. If both of these producers have the capacity to produce 100,000 boe / day, then the profitability of the producer at 100% capacity will be more than double of what the producer at 50% would be. The question that many people have is why doesn’t the producer who is producing at 50% capacity just increase to full production? The answer is that their profitability would be eliminated and they would be incurring a substantial loss as a result of that 50% of their capacity costs more than the commodity prices the market provides. In this environment it would be easy to discern who were the leaders in the industry which contrasts today’s industry where it is difficult, if not impossible, to determine who is the genius and who is making it up as they go.

With the Preliminary Specifications decentralized production models price maker strategy all of the producers costs become variable. With the service providers charging the fees for their services directly to the Joint Operating Committee based on the activity at the property. If there is no production none of the data that triggers the service providers to conduct their processes are generated and hence no work is conducted and no billing is issued. No revenues, royalties, operating costs or overhead are incurred as a result at the property which therefore incurs a null operation. No profit but also no loss. We’ll get to the depletion of the specific property in a minute. While in the producers inventory of shut-in properties these unprofitable properties will become the innovative focus and priority of the earth science and engineering capabilities of the producers. Enabling the property to either increase its throughput, reduce its costs or expand its reserves which will return it to profitable operation. These innovations will coincidentally reduce the marginal cost of the commodities that are produced by the industry providing the lowest, profitable prices possible to the consumer.

Throughout our discussion, People, Ideas & Objects have suggested that the Preliminary Specification will employ an accelerated depletion schedule. Retiring the capital costs incurred by the property within the subsequent 30 month period. Therefore each month there would be an equal charge for the retirement of that capital on each property to account for. Note this would be a unique calculation for each producer, and the depletion of the capital costs is not a charge to the Joint Operating Committee. Taking 1/30 of the initial capital costs as depletion would be made each month that there was production. During those months that there was no production, as a result of being shut-in, there has been no depletion of the reserves, therefore it is reasonable for the producer to account for no depletion that month either. Making all of the producers cost at that Joint Operating Committee variable. Subject to the producer firm fitting their total of property, plant and equipment under their ceiling test. Which in theory would not become an issue due to the fact that none of the unprofitable reserves were produced and are still supporting their capital costs in terms of qualification under the ceiling test. Note too, that the most competitive producers would have eliminated the majority of their property, plant and equipment account due to producing at the higher percentage of their production profile.

Therefore the focus on the key competitive advantages of the dynamic, innovative, accountable and profitable producer are what will make them the most profitable and prosperous. Those competitive advantages are simply their earth science and engineering capabilities, and their land and asset base. Nothing more and nothing less. Administration and accounting are not the competitive advantage of any of the producers and by moving these resources out of the producers into the independent service providers provides the conversion of all of the costs of the producers properties into variable costs based on production. Making it profitable for the producer to shut-in those properties that are not profitable as a result of too low of commodity prices. Enabling them to save those shut-in reserves for a time when they can be produced profitably. Not subsequently having those unprofitable properties having to perform higher in order to offset the losses that would have been incurred if they were produced unprofitably. Increasing the producers overall profitability as a result of the losses that would have otherwise been incurred no longer diluting their profitable properties. And lastly, enabling the commodity markets to find the marginal costs each month based on the market response of each producer making the independent decisions to produce or not based on each individual properties accounting information of its profitability.

This is an important role for innovation to take in the profitability of the producer firm and the properties that are owned. It is also an important role for which the consumer will realize the lowest possible commodity prices that will sustain and allow the oil and gas industry to prosper. If the demands for capital range in the $20 to $40 trillion for the next 25 years the question has to be asked who will provide those resources? It is this methodology of the Preliminary Specification that ensures the capital costs are appropriately retrieved from the consumers and the industry remains profitable everywhere and always as a means to secure the long term supply of oil and gas. What right do we have to produce oil and gas unprofitably today? How will we justify this current excessive unprofitable consumption to the future consumers of oil and gas? Innovation in oil and gas is an important role in the industry, the producer, the consumer and society in general. An industry and producer that continues to dump more and more oil and gas production on to the markets with little to no understanding of the impact on the commodity prices, will not be justified or accepted much longer in my opinion.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

The Commercialization of Shale

What is the assumption that has led our good friends the bureaucrats to continue to produce these unproductive and unprofitable assets? Faith, fairy tales or do they just believe! Note I’m using the term unproductive in the sense that it builds no value. Why does a producer, and to the larger question an industry, consistently produce at a loss without any action being taken on behalf of the firm or industry to correct the situation and stem those losses? To repeat, it has been a decade for natural gas and well over three years for oil and nothing has happened anywhere by anyone to remedy this situation. Reading quarterly reports shows the deterioration and damage that the industry has sustained is tragic, comprehensive and now complete. There is little time left before we’ll be unable to take back control of this on our terms. The point of this is to show that each of the producers will continue to overproduce and the prices realized by all the properties will be inadequate for anyone anywhere to earn a “real” profit. This is the future of the industry. It’s what I’ve said for a while now. The solution is the Preliminary Specification. It defies faith, fairy tales and just believing as much as you possibly can.

The time necessary to remedy this issue is well beyond the next quarter. What has been generated over the course of 40 years will not be remedied with a few accounting adjustments here and there. It will be hard work to convert the industry from the systemic culture that exists today. A culture that believes the value of the business is reflected in the property, plant and equipment account of the producer firms. If a producer was highly profitable with no assets other than a healthy amount of working capital they would be highly competitive and worth substantially more. An accounting configuration such as that would show that they’re profitable even after recognizing all of their costs. A complete contrast to the situation that we see today where there is no working capital and assets bloated beyond all reason.

Reading what the media and analysts have to say about the producers places me in the Twilight Zone. Their focus on cash flow is the traditional way to analyze an oil and gas producer and one of the primary distractions as to why we’ve been able to get into this pickle. Yes the cash flows of the producers are impressive when compared to the paychecks of the media and analysts personnel. However when compared to the level of investment made by the investors and bankers, and understanding the accounting sleight of hand with overstated assets, earnings and cash flow that we’ve documented here many times before. These levels of cash flow in the producers are inadequate to impress those that matter. Oil and gas is not a business it’s a function of spending money to find oil and gas reserves at any cost. There is nothing that comes after this statement. It just stops, there is nothing more that is ever done in the industry. That one sentence is the summation of the entire producers scope of activity.

We’ve also heard of the predictions from media and analysts that commodity prices will spring to life in 2019. They never go into any detail as to why or how, if they do provide any reason it is usually refuted by the market the following day. We noted last week the Canadian differentials in both oil and gas were quite handsome. Making the bureaucrats at the Canadian producers qualify for the participation ribbons that I’ve somehow run out of. I won’t be buying anymore even though these producers have certainly earned them. These differentials have also been systemic in the natural gas prices for the Marcellus area for years. In the Permian for both oil and gas for the better part of the last year. In each of these cases they’re reflecting the lack of pipeline capacity to remove the excess supply from each of those regions. Eventually those pipeline constraints will be lifted and those differentials eliminated so that those properties will receive the higher global and continental prices. Yet, no one is asking what happens then. When these pipeline constrained markets release their excess production onto the global and continental markets; will those prices then be depressed as a result of the increased supply.

What if producers were to shut-in the excess production today and ensured that only truly profitable production was produced? And profitable on the basis of a different methodology of accounting. Shale is expensive from a capital cost point of view with its multilateral, multi-frac operations being conducted on a much higher frequency than what conventional wells require. So if a producer re-enters a shale well to drill more laterals and conduct additional frac’s does that mean all of the capital costs that were incurred in the initial drilling and completion have been depleted? I can assure you that such foolishness would never occur. “Never has and never will,” the bureaucrat would argue. “There are many trillions of cubic feet of gas and billions of barrels of oil that those capital costs were allocated too remaining in the shale formations. It would be ludicrous to diminish the size of the balance sheet on that basis.” The methodology of capturing these capital costs needs to be better understood in the industry today. What’s been done for 40 years has been woefully inadequate, unacceptable and created the issues we have today. To continue in this vein with high cost, high throughput and the high decline rates of shale cannot be managed on that old basis of doing business either. Shale may even need to have its own methodology that has the capital costs captured in each phase of the wells operations. Only then will shale become commercial.

It comes down to the differing perspectives of the amounts held in property, plant and equipment. Are they assets or costs? The Preliminary Specification takes the accounting point of view that they’re costs that should flow to the income statement on a relatively quick basis. The SEC allows the assets to bloat as high as the commodity prices times the reserves of the producer. This is an accounting treatment that is inconsistent with good business practices. Yet each and every producer seeks to reach that SEC prescribed level each year. This SEC requirement is nothing more than the maximum amount allowable. The effect of this policy on producers is that it consumes cash at ferocious rate and because these capital costs are then depleted over decades, in most instances, withholds that cash from reuse for the life of the business. Producers need to recognize the capital costs of past production by releasing these amounts of property, plant and equipment into the income statement as depletion on a rapid basis. Then the cash that has been tied up in the firm will be released for use once again. And the producer can redeploy that capital over and over again without having to dilute their investors each year. Of course this all assumes that the producer is charging the consumer enough for their product that the increase in capital costs are covered by the commodity prices that are realized. My assumption of course is that the Preliminary Specifications decentralized production models price maker strategy is deployed throughout the industry in order to realize those profitable commodity prices.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

The Role of Innovation

One of the key attributes of the Preliminary Specification is that it places the producer and entire oil and gas industry on a strong foundation to enable innovation. What People, Ideas & Objects know from our research is that innovation is a defined and replicable process within organizations. Producers and the industry need to be structured to enable and facilitate innovation and that is what the Preliminary Specification does. Whereas Apple is structured to facilitate innovation, other firms such as Kmart wouldn’t know how to spell the word. Oil and gas claims to be innovative. And to a certain extent that is true, it is an industry operated by engineers who are inherently innovative as a result of the engineering discipline being a process of innovation. However innovation requires a different mindset than the one that’s employed in oil and gas today. There is a well worn path of those people who have come from the service industry with ideas and products that would be useful to the industry and producers to employ. Companies such as Packers Plus and the coil tubing providers who were able to bring about their innovative products and services. Only to have the door slammed in their faces repeatedly by the producers and industry for well over a decade in most cases. Therefore the capacity to innovate remains in the Jurassic period in terms of the uptake in oil and gas.

If the standard today is that it takes a single idea to produce a barrel of oil. The standard in the industry may soon rise to ten ideas to produce that same barrel of oil. And then in an equally short period of time it will require one hundred ideas. To imagine what those ideas are and where they’ll be needed are unknown and unknowable at this time. We now live in a world of ideas and it’s time that oil and gas producers continue to move the industry forward with innovations as part of the 21st century. Ideas are what brought us to this point in terms of our standard of living, it will be ideas that takes us to the next level from here. It will also be, as a nation, the largest consumer of oil and gas that will be the most prosperous. Therefore the demand for ideas from the producers will need to expand significantly in order to keep North America the home of the most prosperous of nations. When we discuss oil and gas it’s always just the little issues and tiny aspects of our lives that are involved.

This vision of an industry based on ideas is not far from the basis of how the industry operates today. It is reputed to be second only to the space industry in terms of its complexity and difficulty. Nonetheless it is wholly incapable of operating in an environment where there are orders of magnitude more ideas being generated, refuted, proven and used. The producer organizations are nowhere near the structure necessary to enable and facilitate innovation. The service industry, where most of the innovations have always come from, will also need to be a major participant in the innovativeness of the producers. Therefore, once People, Ideas & Objects learned that innovation were organizationally dependent in August 2003, and that the Joint Operating Committee was the ideal organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer and industry. We undertook ten years of research necessary to determine what the industry and producer would need to look like to facilitate the profitability and innovation necessary for the 21st century. This work was published in December 2013 as the Preliminary Specification.

The specific modules within the Preliminary Specification that facilitate and enable the majority of the producers innovativeness are the Resource Marketplace, Research & Capabilities and Knowledge & Learning modules. These are deeply embedded within the producer organization and Joint Operating Committees to enable the generation, testing and deployment of the ideas necessary for the producer to thrive in this new oil and gas industry that we’ve described. There are also other elements such as the Work Order that facilitates collaboration across the industry in ways that are necessary to expand the scope and scale of understanding in the earth science and engineering disciplines of oil and gas exploration and production.

But maybe the current producers have it right today. They’ll eventually stumble upon the best ways to expand their profitability and innovativeness through their current strategy of “muddling along” and operating procedure of “doing nothing.” Given that natural gas prices have only been depressed for a decade and oil for almost four years. Where still no resolution is discussed or considered anywhere within the industry itself. It will only take hope and prayers that soon these difficult questions of innovativeness and profitability will all come together on their own.

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.

Bureaucratic Persistence is Remarkable

Then there’s the scenario where I’m proven wrong and the industry doesn’t melt down. And oil and gas prices stay where they are. If oil and gas exploration and production were a drain on cash when oil prices were $74, is this as good as it’s ever going to get? Here in Calgary, which is an oil and gas town built on the 1870’s model of a one industry town / soon to be ghost town. Downtown office space is alleged to have a vacancy rate as high as 25 to 30%. Which has shifted the cities tax burden from those lucrative downtown office structures and tossed it on top of all the other businesses in the city. You can follow on with the decline in employment, wages and retail sales in the city on the basis of 30% of the jobs being axed. Times are not that healthy and yet no one’s expecting anything from the oil and gas industry in terms of opportunities or upturn. The bureaucrats have achieved a balance in terms of harmony in their daily lives where they’re never harassed by expectations or demands to perform.

The media have taken a different perspective on the world since the 2016 election. This perspective seems to have involved the oil and gas industry too as there is nothing so rosy and optimistic than what’s occurring today. Producers are not direct advertisers in their media businesses however they are a primary industry that generate activity in many sub industries. It’s probably not wise to criticise the producers in case they have the service and other industry advertisements put in jeopardy. The media wouldn’t want to end up like any blogger that we know.

Who’ll rescue the industry from this self inflicted malais. When oil prices collapsed in 1986 this type of depression era economic thinking continued well into 2004. This being our third year I guess we have fifteen more to go. The differences today are two fold. One is the natural gas prices have been completely destroyed by overproduction. Both sides of the business are now unable to carry the freight. Usually at least one had been doing well enough to get along fine. The second difference in today’s market is that the investors and bankers have discovered that they were the fool’s with the money that were being suckered into believing the financial statements of the producers. This enabled the producers to issue stock offerings annually that ensured the bureaucrats were handsomely compensated for the work they didn’t do.

What is surprising to almost everyone is the frantic level of activity coming out of the producers to address this malaise. Nothing, it’s the dead zone in terms of even addressing the issue. “Everything is just grand and we discovered another 8 tcf of gas last quarter.” As I stated yesterday, it’s probably necessary to have this crisis in the third quarter of 2018. Then we’ll be able to clear out the problem when the bureaucrats do slip out the back door. The question remains who will fund the development of the Preliminary Specification. Ours seems to be the only idea in the industry that addresses the specific oversupply and overproduction issue with any kind of resolution. Sure, it's expensive and it will take a while to develop. I don’t see too many people arguing about the time and cost that is being incurred by the bureaucrats doing nothing. At least we provide an upside with a value proposition of $25.7 to $45.7 trillion in incremental revenues for the North American producers in the next 25 years. We know that the bureaucrats have no plans, based on prior behavior, for the next fifteen years. What do you have to lose by building the Preliminary Specification?

We can continue on in the mode of the bureaucrats. Oil and gas does generate substantial cash flow due to it being a capital intensive industry. Those cash flows will always be rich enough to fuel the needs of the bureaucrats. And that is why this downturn is almost a decade since the collapse of natural gas prices. There is no sense of urgency, there is no issue evident to those in power, their fine. Their only concern is the transition between robust personal cash flow and the need to exit to get to greener pastures.

There really is no need for anyone to have any concern whatsoever for the millions of people who are directly and indirectly affected by the financial health of the oil and gas industry. These millions of people who include the employees of the producers who have been laid off, and those that have to fill the void at the producers today. They may have a job but for how long and working in fear is not what they went to university, have 2 kids and a mortgage in jeopardy for. The service industries are being bled to death through accounts payable hell. Not being paid for up to 18 months, and being employed only half the time is not what they spent their life savings on. Those that benefit from the royalties paid by producers don’t receive their fair share and “they” being mostly governments have to either scale back on other services or increase taxes. And the taxes that the producers, employees, service industry and others who are either not working, working part-time or having to settle for smaller royalty or business income and as a result not paying as much tax as if the oil and gas industry was a little more constructive. But we hear from them that their primary concern is for the health, welfare and of course the financial benefit of the bureaucrat who sit on the top of the food chain.

After all there have been 5 good years in oil and gas out of the last 32. What do people expect? That’s the way the business is operated. All the money that is ever spent sits in property, plant and equipment for decades at a time. Allowing the bureaucrats to pass on what little costs are incurred in terms of electricity for the pump jacks on to the oil and gas consumer. “Investors and banks always makeup the cash shortfall in the business and although they're not around today, they’ll see the wisdom of our drilling technologies.” This unfortunately is the culture of the oil and gas industry. It has slowly evolved into this over the past four decades. There is no sense of purpose but to drill wells. Financial people are there to pay the bills. It’s a culture that hasn’t grasped the issue that the industry is in, and after all that happened it is fair to conclude that we have not grasped how perfect the bureaucrats personal business model is. I honestly don’t know how this could continue. Cash is the same as the gasoline that you put in your car. The persistence in ignoring reality is quite remarkable.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

The Great Migration Begins

The value of the reserves that have been discovered by the producer firms. The pristine nature of the assets that are unquestionably state of the art in terms of the applied science of engineering. These are the focus and attention of the bureaucrats today. They’re feigning not understanding the argument that People, Ideas & Objects are asserting. By drilling more wells, more reserves are being exposed to enhance the producers deliverability. Why doesn’t that blogger get that? Well I do and I’ve fought that logic since the late 1970’s. That and the logic it's all about cash flow. Spend money, find reserves, produce, generate cash flow. Rinse and repeat. That is the oil and gas business and anything outside of these activities are unnecessary and not of any interest. If a firm was filled with village idiots there financial statements would not be much different than the firm that was stocked full of the best oil men and women available. Big bloated balances of property, plant and equipment. And whatever revenue that was generated was pure profit. Genius’ all of them.

There used to be another step or process in the oil and gas business but that seems to have faded from memory as a result of disuse. That process was raise capital from the markets. No one is buying what these producers are selling anymore and the producers have had to live off of their “cash flow.” Hence the producers cash will run out by the end of this year. There are a number of mergers being undertaken at this time but those are all being done on the basis of stock, no cash. Just have to convince the shareholders that hanging on to that other drowning swimmer we’re merging with is a good long term strategy. Those fortunate producers who have mid-stream operations are trying to sell those businesses. There seems to be some takers enabling those producers to live off of that cash for a quarter or two. The only solution to the lack of cash. The only source of cash that is large enough to solve this problem on a long term, sustained basis, i.e. trillions of dollars, is to start charging the consumer for the cost of oil and gas exploration and production. The way to do that is to implement the Preliminary Specifications decentralized production models price maker strategy. There are not enough investors, bankers, governments or mythic creatures large enough and with enough cash to solve this problem.

If investors gave up years ago. And if as I mentioned yesterday, John Q Public doesn’t listen to bureaucrats anymore because they don’t believe them now, just like they didn’t believe them last year, etc. This warm summer of peaceful bliss maybe about to end, violently for our very good friends the bureaucrats. The only attention producers may be able to garner is the spectacle of a big bad crash of faith in their industry. It seems September and October are the times in which crashes, 1987 and 2008, happen. Look at that, if we add the .com meltdown of 2000 it seems an industry crashes every decade. 1987 was Wall Street, 2000 IT, 2008 Real Estate and Auto, 2018… I can’t think of another industry who fits this timeframe that is in such desperate financial condition. Retail is certainly bad now but when they fail they go out of business. They don’t issue financial statements that keep investors investing for several more decades so that they can keep paying the bureaucrats. They just go out of business. Usually you can get some good deals then too. Maybe what retail should do is learn from the oil and gas bureaucrats and just start capitalizing all of the merchandise that flows through the store. Think of the profitability!

The Trump economy is booming like no other. And in my opinion this is only the start. Which is a very good thing for our friends the bureaucrats. When the fan does get clogged they’ll quietly slip out the back door with all the other bureaucrats. That way no one will notice and no one will remember their names. On to new frontiers in new industries in the new Trump economy. Finally some fresh excitement they’ll think. And I would agree with them on the point about the excitement, that is until they get back into control and power and stifle any initiative there too. What is that saying you can’t teach old dogs new tricks. It applies to oil and gas today as well. These bureaucrats are hopeless. They’ve never considered anything other than themselves in this entire process. I don’t receive the treatment with the baseball bats out back by the dumpster anymore. They don’t laugh or spit at me either. In fact we seem to be at a complete stand still. Not that it was a dynamic relationship at any point along this journey. Not one producer has ever called me to ask about the Preliminary Specification and what they could do. It’s not that they don’t know what’s been going on, they know what’s going on and just wanted to protect their franchise for as long as possible.

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.

That's What You Said Two Years Ago

I’m finding that people’s memories have been etched with the chronic behaviors of the producers. The endless cycle of better times by this time next year, only to be replaced by the same promise the following year. Has created a cynical attitude in the public towards the producers. Most people understand, somewhat intuitively, that if you stopped overproducing then higher commodity prices would provide for a healthier industry. This apparently seems difficult to comprehend when drilling wells is the full scope of the business. Maybe the bureaucrats have it right and we’re being the fools as no one is expecting anything from them. They can just carry on in obscurity with no one the wiser or caring much what happens. The question that people should ask is why are we short changing our future by producing unprofitable oil and gas today? Producers expand their reserves, because that’s where the value is, except they’re never able to produce them profitably. So although they discover a resource that has monetary value it does not provide for a commercial operation. Given an abundance of investment and banker dollars any fool will stumble across something of value, eventually. Making it a profitable venture is a fundamentally different exercise that requires effort and skill. This has not been the case for four decades, rehabilitation can only come about through implementation of the Preliminary Specification.

I’m seeing discussion regarding the phenomenal cost control being exercised in the industry. The overall innovation throughout the industry and specific application of Artificial Intelligence that’s leading the industry forward onto a new frontier! I didn’t believe it either. In addition to the chronic unprofitability that has plagued the industry for four decades. That until recently was backfilled by an investor and banker who now realize they were duped through highly questionable accounting. That situation triggering the investor and banker strike that has been ongoing for three years. Which has created the cash crisis that now exists in the industry. What you have now, as represented by our sample of 23 producers, are bloated balance sheets totalling $489 billion in property, plant and equipment and working capital consisting of $7 billion. It seems like one of those numbers is disproportionate to the other. But I checked they’re correct. Maybe the theory that a business needs cash is not valid anymore in the 21st century. When a company ran out of cash it was usually a disaster, but that won’t happen to the oil and gas producers, they’re special.

In terms of oil prices hope springs eternal. But the fly in the ointment has to be the Saudi’s again. Having rehabilitated the market as constructively as they did in the past few years. The purposes of which were twofold, to prepare for the IPO of Saudi Aramco which demanded higher prices and to educate North American producers regarding the economic principles of price makers. As we see with the critical low balance of working capital, obtained in an environment of $74 oil I might add. There is no educating these producers. Just check how long this blog has been consistently publishing. The key point here is that the Saudis have now somewhat permanently pulled the IPO of Saudi Aramco. What is it that they’ll do next? If you think that they will continue to support the price, you haven’t been paying attention, they’ve already cancelled their production sharing agreement and there are two ways to educate the North American producers. By increasing oil prices and decreasing oil prices. Maybe North American producers will learn their lessons through the bankruptcy process.

This not so rosy situation is in contrast to the potential good news in the natural gas side of the business. It's been a decade since the collapse of those prices. The opportunity is showing itself through the inability to refill the storage volumes. They have now broken through the five year average and are expected to be around 3.2 tcf as opposed to almost 4.0 tcf last year. Might I suggest that the natural gas inventories are now moot. When gas deliverability was constrained by conventional reserves, high levels of inventory were necessary to meet winter demand. The same situation exists today however the natural gas deliverability is constrained by pipelines that don’t currently exist. Not the reserves necessary to provide the market. A different and temporary situation. One I don’t think is going to make any difference in the natural gas market. Particularly when the natural gas producers were saying in late 2016 that shale gas was reaching its maximum deliverability at approximately 43 bcf / day. And indeed did decline over the next few months to as low as 41.5 bcf / day. Heralding a new market for natural gas prices. Except for the chronic drilling and overproduction that we all know and love from these bureaucrats who have now attained daily production of shale gas of just over 55 bcf.

The one fact that we can be certain of in natural gas is that none of the conventional or shale gas is produced profitably. And that’s based on the specious accounting that the bureaucrats have used for the past four decades to scam the investors. Using a constructive accounting methodology we also know that none of the oil that’s been produced has been profitable either. The fact is all oil and gas production in North America is consuming cash. I don’t see how that would qualify as profitable, but the bureaucrats have reported that our sample of 23 producers were profitable to the tune of $9.2 billion for the first half of 2018. I guess the good news for 2018 was those $9.2 billion in profits only consumed $11.5 billion in cash and $11.9 billion in working capital. With $7 billion in working capital as of June 30, 2018 how much time do you have?

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 https://twitter.com/piobiz anyone can contact me at 403-200-2302 or email here.