Science, Innovation and Capabilities, Part III

Removal of the excess cost attributable to the surplus earth science and engineering capacity that is unused and unusable is similar to the removal of the excess overhead costs that the producer and industry incur. By reorganizing the administrative and accounting resources into service providers the costs to each of the producers in developing their own administrative and accounting capabilities, capabilities that are wholly similar to each and every other producer in the industry, capabilities that are currently unshared and unshareable, just as the earth science and engineering surplus capacity is unused and unusable. These excess costs are major contributors to the current lack of real profitability in the industry and without the Preliminary Specification in place, will be unacceptable costs in which the industry can incur. We have now identified three new classifications of excessive costs being incurred by the producer firms, the third being the burden of providing the full scope and scale of the specialized oil and gas related sciences. With People, Ideas & Objects Preliminary Specification in place the energy consumer will know that they are being provided with the lowest possible energy prices that consider a fair distribution of the value needed for the industry and all of those dependent on it to thrive and profit.

This therefore briefly defines the focus of the producers role of moving the science within the industry forward, innovating based on that science and deploying their capabilities through a defined process of development within the producer firm, and deployment to the producers Joint Operating Committees. It is within the Research & Capabilities module that we learn from McKinsey & Co in their article entitled The 21st Century Organization, what it is that will be required of organizations in the 21st century.

1) Streamlining and simplifying vertical and line management structures by discarding failed matrix and ad hoc approaches and narrowing the scope of the line manager's role to the creation of current earnings.

The process of using People, Ideas & Objects software will achieve these objectives. By aligning all of the Joint Operating Committees seven frameworks and the hierarchies compliance and governance frameworks, and having the financial interests of the producers drive the management of the Joint Operating Committee, we are “narrowing the scope of the line manager’s role to the creation of current earnings.” These are the focus of the Partnership Accounting, Accounting Voucher, Petroleum Lease Marketplace, Resource Marketplace, Financial Marketplace and Performance Evaluation modules.

2) Deploying off-line teams to discover new wealth-creating opportunities while using a dynamic management process to resolve short and long term trade offs.

These are the critical new roles that are being discussed in these “new” modules which include “Research & Capabilities” and “Knowledge & Learning.” Providing valuable insight to their users about the business that is above the day to day noise. Where the long term vision of the organization can be set, executed and realized through these two advanced software modules.

3) Developing knowledge marketplaces, talent marketplaces, and formal networks to stimulate the creation and exchange of intangibles.

Within the Preliminary Specification, if we include the Research & Capabilities and Knowledge & Learning Modules marketplace definitions, we have five marketplace modules. Participation in marketplaces are things that people will be doing more of in terms of their work in the future. Computers can assist, but again are generally very poor at making decisions, bargaining, knowing what to do, etc. The three primary marketplace modules in the Preliminary Specification include the Petroleum Lease, Resource and Financial Marketplaces Modules.

4) Relying on measurements of performance rather than supervision to get the most from self directed professionals.

The Preliminary Specification has the Performance Evaluation Module for the Joint Operating Committee, and the Analytics & Statistics Module to provide these capabilities to the producer firm. Handing the Performance Evaluation module to the team that is running the Joint Operating Committee will enable them to manage the property in the best possible fashion, profitably. They are going to be able to figure out what it is that makes the most sense in terms of value, and begin to generate more of it.

People, Ideas & Objects have presented our value proposition of providing the oil and gas producer with the most profitable means of oil and gas operations. There is more contained within the Preliminary Specification. Innovation is one of our key areas of focus. Adding value on an incremental basis throughout the industry, the producer firm and Joint Operating Committee. These are wholly dependent on the organizational structure of the producer firm and the industry. A role that is purpose built for an ERP solutions provider.

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.

Science, Innovation and Capabilities, Part II

Knowledge that we can source from the Internet and from books is explicit knowledge. Therefore the ability to use this knowledge, to access and verbalize it is easily done. It can be thought of as expressive knowledge or text book knowledge. Tacit knowledge is more difficult since it can’t be captured and communicated to others. It is the knowledge that is acquired through learning by doing etc. Tacit knowledge most importantly is the knowledge about production. From Professor Richard Langlois paper entitled “Chandler in a Larger Frame: Markets, Transaction Costs, and Organization Form in History.”

Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. p. 359

Therefore both tacit and explicit knowledge make up the knowledge of the organization, or producer firm in this instance. Now that we’ve defined what knowledge is we can state that capabilities are the skills, knowledge, experience and ideas of the producer organization. And not to diminish the role of direction and command, I would point out the technical infrastructure included in the Preliminary Specification that we call the Military Command & Control Metaphor. The need for this command and control to span multiple organizations is necessary when the Joint Operating Committee becomes the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. We also have the definition of capabilities provided by Professor Carliss Baldwin’s giving us an understanding of why capabilities are important to producers and the industry, and that is “Knowledge begets Capabilities, and Capabilities beget Action.” Starting this discussion of capabilities with a clear definition of what they are. These are some of the definitions that were published in the Research & Capabilities module and are noted here for clarity purposes. Another is from Professor Richard Langlois paper entitled “Chandler in a Larger Frame: Markets, Transaction Costs, and Organization Form in History.”

Although one can find versions of the idea in Smith, Marshall, and elsewhere, the modern discussion of the capabilities of organization probably begins with Edith Penrose (1959), who suggested viewing the firm as a 'pool of resources'. Among the writers who have used and developed this idea are G.B. Richardson (1972), Richard Nelson and Sidney Winter (1982), and David Teece (1980, 1982). To all these authors, the firm is a pool not of tangible but of intangible resources. Capabilities, in the end, are a matter of knowledge. Because of the nature of specialization and the limits to cognition, organizations as well as individuals are limited in what they know how to do effectively. Put the other way, organizations possess a pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities. pp. 105 - 106.

Therefore to capture, document and deploy these capabilities of the producer firm to their interests within their Joint Operating Committees. Access and deploy the capabilities of their partners within the Joint Operating Committee and access and deploy those capabilities that are acquired through contract to ensure that the full scope of the earth science and engineering capabilities that are necessary are acquired and deployed efficiently and effectively. This incremental coordination at first seems like a complex and unnecessary process to be undertaken. The need to cover off the full scope of the earth sciences and engineering capabilities needed will be beyond the commercial reach of each and every producer. The convenience of having all of these in-house will soon be, we believe, well beyond the financial capacity of all producers.

Within the Preliminary Specification we speculate that specialization and division of labor are needed in order to expand the sciences from the point they’re at today. Therefore this will require additional skills and therefore resources to be required by producer firms. Currently producers are acquiring all of their capabilities they need to cover off all possible contingencies that are presented by the properties that they operate. These contingencies need to be on hand and are not necessarily highly utilized. Therefore they are creating an overall earth science and engineering surplus capacity of capabilities within the producer firm, and to the greater issue, of the oil and gas industry as a whole, that is unused and unusable. Creating an uncontrollable cost that currently diminishes the profitability of the producer and industry. An additional cost above the demand for the broad scope and scale of earth science and engineering capabilities. Which we believe these two costs when combined will explode in the near future. The Preliminary Specifications Research & Capabilities module and Knowledge & Learning module seek to eliminate the surplus capacity of earth science and engineering capabilities by fully deploying them through specializations within the producer, the Joint Operating Committee and also in markets. Using the capabilities of the industry at much higher rates of utilization and therefore reducing these otherwise high and unnecessary costs as a result of the unused and unusable surplus capacity that is maintained today. And ensuring that the cost burden of maintaining the full breadth of earth science and engineering capabilities do not expand further on each individual producer as a result of a further specialization and division of labor of the sciences.

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.

Science, Innovation, and Capabilities, Part I

We now begin a series on the interactions between the science, innovation and capabilities that exist within the oil and gas industry and the dynamic, innovative, accountable and profitable oil and gas producer. With an overall assumption that the Preliminary Specification is implemented, and therefore all production is produced profitably, which will provide for a prosperous industry and all those associated with it. Whereas today the investors, bankers, employees, service industry representatives, royalty holders and government tax jurisdictions are all having to settle for far less than what is equitable. Which describes the current situation the industry is in, and society needs to begin to question the rationale of producing oil and gas unprofitably and how we’ll be able to justify that to future generations. Today the consumer constantly complains about the cost of energy. Even with the massive discount in the form of the producers unrecognized capital costs of past production the consumers have received over the past decades. The issue therefore becomes how will the producers ensure they’re providing consumers with the lowest cost energy production that is also profitable and equitable to those involved in the industry? The simple answer is science, innovation and capabilities.

The dynamic, innovative, accountable and profitable oil and gas producer will be actively participating in moving the sciences of geology and applied sciences of engineering forward within the oil and gas industry. As we discussed yesterday these are elements of the Preliminary Specification that establish the foundation and organizational structure necessary for innovation to become a focus of the industry and producer firm. As these sciences expand they spin off new innovations that bring about new insights which in turn further develop the sciences. With the depth and breadth of these sciences as they stand today. With the diverse demand of a producers interests in their properties. The ability and capability for each and every oil and gas producer to have developed their organization to the point where they can handle the full scope and scale of these specialized professions within their domain, and to do so commercially, is believed to be slipping away from each and every producer as we speak. The need for each producer to use specialization and the division of labor to cover off all aspects of their organizations needs will incur too heavy of a cost burden on each one of the producers if they attempt to cover off the full scope of an oil and gas producers scientific, innovation and capability needs. Therefore the need to have the capabilities provided by the producer firm in terms of its unique specialization, then acquire the other available earth science and engineering capabilities from their partners within a Joint Operating Committee and then on a contractual basis from a market that doesn’t currently exist, however is created in the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification.

The Research & Capabilities and Knowledge & Learning modules create the market for geological and engineering capabilities that fill what we call the bread and butter tasks of the producer firms. Freeing up much of the basic capabilities of the industry to be provided on a sub-industry basis similar to the service providers are a sub-industry for the administrative and accounting of the industry. This will enable the producer firms to focus on the higher, more technical capabilities that are the critical value add elements of the earth science and engineering capabilities that form the key competitive advantages of their producer firm. This is how the Preliminary Specification has resolved the critical shortage of these resources that are expected in the next decades. Shortages as a result of the anticipated retirement of the braintrust in these professions and the current lack of new recruits choosing oil and gas for their university studies. The demand for greater effort and science is evident in each successive barrel of oil that is produced. How are the current producers dealing with this situation?

We’ve discussed innovation in two blog posts recently, and we can all certainly understand the scientific aspects of the industry. With the interaction between science and innovation being codependent on each other. What are producers capabilities and how are they expanded. In the Preliminary Specification, capabilities are managed in the Research & Capabilities Module for the producer firm and then the deployment of the capability is carried out in the Knowledge & Learning Module to the specific Joint Operating Committees that producer has an interest in. In tomorrow’s post we’ll begin a more detailed discussion of capabilities.

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.

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.