The Absolute, Unquestionable Proof that I'm Crazy

Seeking profitability by controlling costs, systemically reducing structural costs and ensuring that all operations are profitable, and not diluted by unprofitable operations, would all generally be required to run a successful business. Any business would be hard pressed to argue the common sense held within these basic principles. I have been promoting the Preliminary Specification and these principles in oil and gas for over a decade. It is this lack of common sense that has the industry in the financial jeopardy that it’s in. Drilling wells is perceived to be where the value is for the producer firm. Unleashing the full value of the reserves that are exposed to the marketplace are what makes a producer valuable in today’s marketplace. People, Ideas & Objects understands this principle and certainly appreciates the point. Our argument is that in the current environment the industry is unsustainable financially. This has been the case for many decades. Without massive investor support each and every year the industry is unable to continue operations on its own. It’s current business model consumes cash at a remarkable rate, stores it on the balance sheet and releases it slowly across subsequent decades. Without “real” profitable operations, as we’ve defined in the Preliminary Specification, the reserves of the producers are not worth anything when they consume investors cash and are fundamentally unprofitable as a result of the capital costs, in a capital intensive industry, are never recognized appropriately. This is not a business, it is a spending competition designed to acquire stuff so that you can confidently strut down main street after you’ve “built” the biggest, baddest balance sheet in the land. Whatever “build” exactly means.

With respect to profitable operations the Preliminary Specifications decentralized production models price maker strategy enables producers to only produce profitable production. We have discussed this principle at length these past few years as it is the premier issue in today’s industry. Overproduction of both commodities continues to the point where they’ve overwhelmed the global commodity prices and held them down for a decade in the case of natural gas. Understanding that there is more destruction that can be done to those markets, producers have continued to increase their production profiles to the point where we are now seeing significant collapse of regional market prices in North America. These differentials are in excess of half of the price of oil on some grades of Canadian production. What we can be certain of is this will continue. As much as I have argued that using detailed accounting information from the Preliminary Specification about the properties profitability to make independent business decision to shut-in a property if it is operating at a loss or continue to produce if its profitable. I have received nothing but a united and unsubstantiated counterargument from industry that this is collusion. What more do I need in order to learn to appreciate that oil and gas is not a business?

Within the Preliminary Specification we structurally reorganize the industry and producer firms to enable this profitability. This reorganization involves taking the administrative and accounting resources of the producers and reallocating them into service providers who will focus on one specific process and have the entire industry as their client base. It is in that way that the service providers billings will be direct to the Joint Operating Committee that the service was provided to. Moving overhead costs from the producers corporate configuration to the Joint Operating Committee. Or, taking the producers fixed overhead capability and making it an industry based overhead capability that is variable. Under the Preliminary Specification all of the producers costs become variable based on production. Therefore any shut-in production will incur a null operation, no profit but also no loss.

This reorganization has two dynamic effects on the overhead costs of the industry. First each producer ceases to build the administrative and accounting capabilities that are unshared and unshareable, and replicated within each producer firm. Reducing the administrative and accounting footprint and costs as a result of the possible redundancies from this change. Secondly, the service providers will know that at anytime the industry may shut-in up to 15% of their production profile in order to deal with downward pressure on commodity prices. Service providers will know this and be able to budget and manage the possible reduction in their revenues. What we have in essence done is change the industry from one that is fundamentally incapable of controlling its overhead costs. To one in which the service providers will be on the front lines controlling the overhead costs of the oil and gas industry.

Recently we documented how the Preliminary Specification reduced the anticipated cost escalation of the earth science and engineering capabilities that are part of the key competitive advantages of the dynamic, innovative, accountable and profitable oil and gas producer. The other competitive advantages are the land and asset base of the firm. These capabilities future specialization is speculated to continue to pressure producers to expand their demands for these individuals to the point where it will not be commercial for a producer to cover off the full scope of their scientific capabilities. In addition with the retirement in the future of the brain trust, and this downturns effect on university attendance these resources may become highly constrained. Therefore a reorganization through the Preliminary Specification is completed where the unused and unusable capabilities that are built up within the producer firm, in order to meet the “just in time” requirements of their properties, are released to the marketplace. The creation of the Preliminary Specifications pooling concept amongst the members of the Joint Operating Committee will be used to cover off the needed capabilities as opposed to the operator concept that’s in use today. These changes will substantially reduce the demand on these resources in order to meet the commercial requirements of a producer and the availability of these resources.

People, Ideas & Objects budget contemplates the value proposition that the Preliminary Specification provides the North American oil and gas industry. My rough estimate of our value proposition for the 2018 fiscal year is around $300 billion, with a b, in incremental profit. Which seems like a lot but I will remind you that investors have in excess of $1.7 trillion in property, plant and equipment costs. Or as we like to call them, unrecognized capital costs of past production. That will take 5.63 years for that dedicated incremental value to retire that balance. At $6 billion our budgets costs are $2 billion, there are $2 billion in Intellectual Property royalties paid to this lunatic and I like to think I’m running a business that will generate $2 billion in profit. Nonetheless these are overall industry costs that are part of the capabilities that must be established on a go forward basis by the industry. Therefore I consider our costs are an overall reduction in the IT costs that would otherwise have been incurred if each producer were to attempt to build the type of software necessary to operate in the manner of the Preliminary Specification. Each producer sharing in these previously unshareable costs. People, Ideas & Objects incur these costs once and only once.

What lunatic would suggest such things. To implement such common sense within oil and gas is not just stupid, it's fundamentally insane. To that there is not much question. You can call me crazy all you want I find it to be a distinct competitive advantage. In today’s Information Technology based disintermediated / industrial revolution. When oil and gas producers are facing what I believe to be an existential threat as a result of the business model that is currently employed, what used to be common sense in business is today’s lunacy. I’d rather be nuts than to be involved in the oil and gas industry today. Actively working to destroy that was built by so many smart, and sane people before us would be too depressing and counter to what I chose to do with my life.

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.

Watch the Director's on the Boards

The media are hailing the return of $100 oil due to “record” tightness in the market. Venezuela is falling apart and sanctions are being put in place in Iran for November. The IEA and President Trump are demanding that producers produce more in order to put downward pressure on oil prices. Russia and Saudi Arabia are acting on President Trump's request. With Saudi’s Prince claiming that they’ve increased production by two barrels for each barrel that the market has lost. So what is it? Will prices move up or will they collapse, will the North American prices, which are heavily discounted by differentials in various regions, realize any higher prices if that is the direction they head? Canada has now established the bureaucrats objective of greater deliverability than pipeline capacity. I think that’s what their objective has been, it certainly hasn’t been profitability. Differentials in Canada are spectacular. The surplus capacity in North America that leads to these differentials, in both oil and gas, are epidemic across the continent and should be evidence to all producers that these commodities are subject to the economic principles of price makers.

Husky being owned by Li Ka-Shing of Hong Kong paid the full price of $2.6 U.S. billion for their acquisition of MEG Energy. In other news we hear of Shell et al’s LNG facilities proceeding in Canada. At $40 CDN billion it is the largest private project ever in the countries history. This is much needed news for the natural gas market. I wonder what conditions will be like in 2025 when these facilities become operational. Shell’s four partners in the LNG project are also national oil companies for China, Malaysia, Japan and South Korea. I wonder where they’ll be buying their gas from? This news stands in contrast to the differentials in Canada and the financial capacity of the producers. Holding on for another seven years will be difficult when I find it highly unlikely that most of the producers will be able to finish out this year. In a nutshell it’s great to have plans for the long term as Shell and Li Ka-Shing do for their oil and gas businesses. The majority of the industry has been involved in drilling operations exclusively for decades and have now run into the issue of limited takeaway capacity and regional markets in the case of Canada. The time to have considered these investments was unquestionably ten years ago or earlier. I don’t believe that the producers can bridge this gap between the short term and the long term when the short term and the midterm are financially untenable.

Over the past decade I’ve had some surprising discussions with individual members of boards of directors. That they’ve always shared the opinions and directions of their bureaucrats is probably not necessary for me to mention. How else would these producers have ended up in the situation that they’re in. The fish stinks from the head down. With such disjointed and irreconcilable differences between each of the short, mid and long terms you can tell that there was a strong hand at the helm. Shareholders vote for these people based on the recommendations and nominations of the firm. We have seen much dissatisfaction in the markets regarding the performance of boards of directors and officers of corporations. Resistance from these individuals has been strong in some industries. Although we have not seen much of this resistance in oil and gas, there was a heightened level of it in the annual general meetings of 2017. The question that needs to be asked by an individual board director, is do you let your nomination go forward for 2019 or announce your retirement? Being the fourth quarter, I think the self-centred, irresponsible and at risk directors will find a reason to bail within the next two months. The only question that will be asked is, will they be missed?

Insurance companies that provide directors with coverage for them to sit on the boards will be recommending to these people that the time to leave is now. And what better excuse than a recommendation from your insurer. The timing is probably not going to get any better. The price of oil is as high as its been in four years. I am not of the opinion that the third quarter reports are going to be good. I thought the second quarter reports were going to be a disaster and I was shocked at how bad they really were. Even if a miraculous quarter was to occur, the fourth quarter of 2018 is shaping up to be the tragedy that I’ve been talking about here for many years. Differentials will do that. Chronic over reporting of profitability due to ridiculous accounting, led to overinvestment in the industry, leading to over capacity in the form of overproduction for far too long to even remember now. A classic matching and timing issue that the accountants have wrong.

The problem is that there are no solutions other than the Preliminary Specification which prescribes radical surgery where all of the patients organs are reoriented in the body alphabetically. Take a moment to think about this problem and the fact that the accounting for overhead and properties is not detailed enough to determine the profitability of any property, anywhere with any accuracy. The importance of obtaining this accuracy is in order to shut-in the properties that are unprofitable. Which would ensure that the producers profitability was maximized due to any losses on properties would be shut-in and stop the dilution of their profitable operations. Ensuring that the commodity markets found the marginal price when the unprofitable production was removed from the market. Saving the reserves for a time when they could be produced profitably, but also not having to makeup for the monthly losses that they’re incurring by producing now. This remedy is only available through the radical surgery of the Preliminary Specification. If it could be done in today’s environment we wouldn’t be here. I’d have money and probably be happy. But then again who knows. The investors and bankers might come back and make some new donations to the lost cause that is oil and gas, and the directors can declare another Christmas bonus to help pay for their Hawaiian Christmas vacations.

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

Sources, Procedures, and Microeconomic Effects of Innovation, Part III

One of the outcomes of the Preliminary Specification was the understanding that innovation can / is a defined and replicable process within organizations and industries. With that understanding we can see that Apple is not that lucky, but that skilled. A purpose built organization with high standards of quality and innovation in the consumer electronics marketplace could be a really valuable firm. It seems so easy when it’s set out as the goal and objective of an organization to undertake the possible and viable task that Apple has achieved. It does eliminate much of the magic and mystery to the story though. It was through Professor Giovanni Dosi paper Sources, Procedures, and Microeconomic Effects of Innovation that we learned this and what is required of an organization and industry in order to enable innovation. In today’s post we’ll begin to get into the detail of those specific requirements of an innovative oil and gas producer. With that we turn to the next quote from Professor Dosi’s paper.

It is not my purpose to review the whole body of innovation-related literature. Rather I limit my discussion to a selected group of (mostly empirical) contributions and focus on the microeconomic nature of innovation upon techniques of production, product characteristics, and patterns of change of industrial structures. The discussion will aim to identify

• The main characteristics of the innovative process, 

• The factors that are conducive to or hinder the development of new processes of production and new products, and

• The processes that determine the selection of particular innovations and their efforts on industrial structures. 

There are two major set of issues here: first, the characterization, in general, of the innovative process, and, second, the interpretation of the factors that for observed differences in the modes of innovative search and in the rates of innovation between different sectors and firms and over time. 

Oil and gas are well known for their claim to be highly innovative. With the recent developments in shale, the deliverability and reserves of oil and gas in North America have been substantially increased. Is this due to the innovations of the producers? Or is it a result of the developments made by the service industry in the areas of coiled tubing and companies such as Packers Plus? When we look critically at the success in the shale era was it as a result of the service industries perseverance in driving their ideas forward through decades in which the producers refused to consider their “new” technologies. Or was it as a result of the producers determined effort to solve the future shortages of oil and gas commodities? Knowing what I know about the difficulties in having the Preliminary Specification discussed and considered. Knowing what I know of the coil tubing providers begging producers for years to try their products. The difficulties that Packers Plus had. The developments made by the service industry are wholly responsible for the innovations that we’ve seen in oil and gas.

Harsh words that will most certainly put more noses out of joint. The fact is the industry refuses to accept anything from a “small” company. It refuses to accept anything from a company that has a technology that they don’t fully understand. And they refuse to accept the Intellectual Property rights of the service industry representative that provided the product or process. They prefer to call the service industry greedy and lazy when the activity level is high and the only field equipment available is scheduled for two years from now. And they expect that payment to the service industry will be made in 18 months when the producer has a difficult time with their cash flow. This is the true “innovative” environment of the oil and gas producer and as we have stated in the Resource Marketplace, Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification if this behavior is not corrected it will lead to the financial destruction of the industry, on top of all the other reasons, and it will ensure that only the bureaucrats are truly benefiting as a result of oil and gas exploration and production.

There is nothing further from the current oil and gas industry configuration and culture in terms of what is required from an innovation point of view. Based on the research of Professor Giovanni Dosi significant changes will be required. What I have described here is an ad-hoc approach in which producers cherry-pick the value add from the service industry and wash that Intellectual Property amongst the innovators competitors. All diplomacy aside the producers do not have much time in which to make the changes described in the Preliminary Specification. From an innovation point of view, and from the point of view of profitability. They believe they can continue in an industry where their costs are in the range of $150 and receive barely half of that value in sales on a pre-differential basis. The difference is made up by not recognizing the substantial capital costs involved in a capital intensive industry. Storing those capital costs for decades at a time on the balance sheet as property, plant and equipment. And then adding to those capital costs all of the overhead that they feel they can justify as “capital” in order to “build their balance sheet” that much larger. Meanwhile during the entire process the cash only goes out and rests on the balance sheet as property, plant and equipment where it will be recognized and consequently returned to the producer some decade from now. It is a ludicrous way to run an enterprise, and one that has failed spectacularly. It just doesn’t seem to ever be realized by those that are running the show.

Recently President Trump was promoting the oil and gas industry as the largest producer of energy in the world. He also took the OPEC cartel to task with accusations of stealing money from americans as a result of the high oil prices. Throughout the life of the oil and gas industry. It has only been a handful of years where they’ve received the political support of the american administration. This usually being expressed through a quiet, arms length approach. Having President Trump so supportive of the industry is an anomaly and a treasure that the industry needs to better manage than they are today. Should the industry be found to be unprofitable and incapable of supporting its own operations as a result of not charging enough for their products. It may be seen by President Trump and the american people as a fundamental betrayal of the rosy stories and positions that have been promoted in the past decades by these producers. Making it very difficult for any future administration to believe the industry but also to take anything but the safer and more secure confrontational and adversarial positions against the industry that we’re all familiar with. Then again, I am talking about credibility and what do oil and gas bureaucrats know about credibility and integrity?

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.

Sources, Procedures, and Microeconomic Effects of Innovation, Part II

Readers should strap themselves in we’ll be travelling at a much faster pace than we did on our first post of this series. Today we’ll be reviewing two paragraphs of Professor Giovanni Dosi’s paper Sources, Procedures, and Microeconomic Effects of Innovation. Bringing the sum total of our review so far to three paragraphs! The richness of the content of this paper is astounding. It was also very hard work to get through. Which is probably why I went through the entire document a number of times. Each iteration building on the knowledge gained in the previous pass. As with yesterday we have a broad scope of understanding captured in a small number of words.

It is the purpose of this essay to analyze the processes leading from notional technological opportunities to actual innovative efforts and, finally, to changes in the structures and performance of industries. 

Thus, I shall discuss the source of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search and the nature of the incentives driving private agents to commit themselves to innovation. pp 1120 - 1121

I wonder why it is that Professor Dosi raises the point about the “changes in the structure and performance of industries.” Just as the oil and gas industry and producer firm must reorganize themselves to enable profitability they also need to structure themselves to facilitate and enable the innovations in the sciences and technologies that make up the industry. Both profitability and innovation can be achieved through the decentralized production models price maker strategy. Where the service providers are created from the producers current administrative and accounting resources. I think this is intuitive, or it should be. Yet the battle rages between the producers vs. People, Ideas & Objects. Is it truly worth the destruction that is being realized in oil and gas to remain opposed to the changes required in the Preliminary Specification?

It is at this point that we meet the ultimate academic argument between Hayek’s Spontaneous Order, Schumpeter’s Creative Destruction and Giddens Structuration Theory. And we have chosen the best features of each one to fit our arguments throughout the Preliminary Specification. I consider that creative license. The weight of our argument however would go to Giddens Structuration Theory and most specifically to Professor Wanda Orlikowski’s Structuration Model of Technology.

Structurational studies of technology and organizations have been highly influenced by the social studies of technology. Initially arguing for a view of the "duality of technology," Orlikowski went on to argue for a practice-based understanding of the recursive interaction between people and technologies over time. Orlikowski (2000) argues that emergent structures offer a more generative view of technology use, suggesting that users do not so much appropriate technologies as they enact particular technologies-in-practice with them. The ongoing enactment of technologies-in-practice either reproduce existing structural conditions or they produce changes that may lead to structural transformation.

People, Ideas & Objects believes based on our understanding of all of these theories that software defines and supports the organization. It not only enables the “structure and performance of industries” as Dosi suggests, but in the case of oil and gas today, is a constraint on those structures and diminishes the performance of the industry and producer due to the inability to change the software as the industry and producer changes. This is why People, Ideas & Objects offer the user community, our service providers and the software development capabilities that are provided through Oracle developers as the means to not only accommodate the necessary changes but in certain instances to drive the changes to increase the profitable and innovative performances of the producer and industry.

With respect to that third paragraph that we quote from Professor Dosi’s paper. The oil and gas industry is currently configured in such a way that the oil and gas producer does everything for itself other than the field operations. Having a geographically diverse operating theater makes it impractical to maintain their own service industry operations, although some still do. In terms of control, all aspects of the producers operations, governance and administration are under the producers direction. In the 1950’s this was not only possible but probably ideal. There is probably no one from that era to check with regarding the validity of that statement. In the 21st century it is ludicrous to think that a firm can concentrate their entire domain of operations under one roof. It was through the research that we conducted of Professor Richard Langlois that we were able to determine that in the battle between firms and markets, markets would be the preferred choice in the 21st century. In yesterday’s post we mentioned the performance measurement in the Preliminary Specification of Revenue Per Employee. It is through a greater involvement of the market that a profitable and innovative producer will be able to positively increase their Revenue Per Employee trajectory.

The impetus of the Preliminary Specification is for the producer to produce all of their production profitably. Rarely would that involve their entire production profile. To attain the highest level of profitability the producer will seek to produce profitability throughout their production profile in order to maximize their profitability. That requires and demands that the producer innovate on the earth science and engineering capabilities that they’ve developed and deployed on their properties. To expand the sciences of geology and engineering is the frontier where they can expand their organization further with higher production volumes and profitability due to the innovations they deploy. At the same time striking an equally equitable balance between the consumers current consumption of the lowest cost, yet profitable oil and gas production, and the commercial conservation of energy for future generations.

I want to take a moment to comment on my concern for the financial health of the producers. In the second quarter I was surprised at the difficulties being experienced by our sample of 23 producers. I was expecting a very difficult second quarter to be reported and ended up thinking that there is a serious degradation of the financial foundation of the industry undergoing at that time. One based on the fact that, as we’ve stated here many times before, the only source of cash is production and most particularly new production. This was creating what I saw as enormous pressure on producers to increase production at all costs in order to increase their available cash. As we discussed in the second quarter the deterioration of cash and working capital was epic. In the third quarter I think it will have accelerated further as a result of this chronic overproduction creating differentials, particularly in Canada and to a lesser extent in Texas, that are higher than the commodity prices being realized. When over half of your revenue is going to be gone from the late third quarter and better part of the fourth quarter, this industry will have its day of reckoning before this year ends. The only choice is for the hamster to run faster…

People, Ideas & Objects puts forward our Preliminary Specification as the solution to the issues in the industry. It is designed to deal with the problems that are causing the producers so much financial distress. We believe that if the industry would adopt the Preliminary Specification investors and bankers could see a profitable and innovative future that would be of interest to them from an investment point of view. And may be motivated to carry the producers across to the point in time where the decentralized production models price maker strategy enables all production in North America to always be produced profitably.

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.

Sources, Procedures, and Microeconomic Effects of Innovation, Part I

Lately we’ve noted some of the research that we reviewed of Professor Richard Langlois from the University of Connecticut. Research that we conducted during the writing of the Preliminary Specification. He was a rich resource in terms of determining the needs of the dynamic, innovative, accountable and profitable oil and gas producer. In terms of innovation we also had the work of Professor Giovanni Dosi, who at the time of this particular paper was with the University of Sussex and the University of Rome, and provides one of the key documents on the topic of innovation. This paper was published in September 1988 and is entitled “Sources, Procedures, and Microeconomic Effects of Innovation.” If you have access to a resource for the download of papers I highly recommend adding this paper to your library. You can download it here from JSTOR for $10 as well. I will caution my readers that I went through a lot of papers during the research for the Preliminary Specification. This paper generated significant volumes of this blogs text, contribution to the Preliminary Specification and is very rich in content. It is also unquestionably one of the most difficult papers that I’ve had to review in a comprehensive manner. Reading it briefly or skimming it may not be worthwhile as a result. What I think will be worthwhile is that we include a review of Professor Giovanni Dosi and Professor Richard Langlois on this blog to update everyone on some of the basis of innovation and other aspects of the Preliminary Specification that we’ve learned through these two researchers.

The first paragraph of this paper frames the purpose of innovation in oil and gas in a constructive manner. I immediately am flooded with ideas regarding the impact to the industry, the producer firm and supporting service and other industries and sub-industries.

This essay concerns the determinants and effects of innovative activities in contemporary market economies. In the most general terms, private profit seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities, if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations. In turn, the success of some agents in introducing or imitating new products and production processes changes their production costs, their market competitiveness and, ultimately, is part of the evolution of the industries affected by the innovations. p 1120 

The Preliminary Specification was published in its final edited form in December 2013. In it we speak of imitation and the distribution of laggards and leaders within the oil and gas industry. We’ve even created a factor for comparison purposes and to determine the position that a producer would find itself within the industry. This factor is Revenue Per Employee that we generate within the Preliminary Specification. What we found is there is a large disparity between the values of a laggard and a leader in terms of Revenue Per Employee, and how the laggard firm would find it difficult to make the changes necessary to affect an upward trajectory of Revenue Per Employee. It is with this understanding of the Preliminary Specification that I find this first paragraph of the Dosi paper to generate the most thought around the idea of “imitation.”

A lot has happened in the industry since the publication of the Preliminary Specification. Yet nothing has changed other than the addition of the Blockchain Module. I think it will remain as timely throughout its intended 25 year usable life. When we look at imitation in oil and gas we have to ask ourselves what role it’ll take in the future? And although there were laggards present in the industry in 2013, will there be room for them in the future? Will they be able to rely on the capabilities that have been developed by others and “make it up as they go?” To be candid I don’t think so. The reliance on the leaders abilities and capabilities to be innovative and to move the science and technologies of oil and gas forward will be one in the same with that producers production profile. Most particularly I think is the heart of that quotation of Professor Dosi’s that puts into context that the role of laggards will be very difficult.

In the most general terms, private profit seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities, if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

What is it that a laggard will be imitating, or be able to imitate in the future? When the development and deployment of ideas to the various Joint Operating Committees is done through the Research & Capabilities and Knowledge & Learning modules as we recently noted. At a velocity and throughput of an exponential volume. These will be the basis of the producers competitive advantage. The application and development of their distinct competitive advantages in the earth science and engineering capabilities upon their land and asset base. I see this as a far different producer than the one that exists today, as it has become a far different oil and gas industry. I wonder how the dynamic, innovative, accountable and profitable producer will come about? Muddling through as the strategy, and doing nothing as the operating procedure, which are the producers current position which has brought us to this state of financial crisis. Will the producers current strategic and operating position stumble upon this means to develop and deploy its capabilities on its own? Just as they’ll stumble upon the methodology for becoming the profitable firm society needs them to be. I think we should bank on it happening, just based on luck, what about you? As a matter of fact, right now I can see the software for this necessary industry infrastructure being written by itself with no human involvement and no producer cash! It’s a miracle!

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.

Canadian Thanksgiving

No posting today.

Why It's Not Their Fault

We may have identified what the problem in oil and gas in a recent post. The overproduction causing prices to collapse, creating a financial catastrophe, which no one seems to recognize. When we look to see who is responsible for the overproduction we should be able to quickly see that any overproduction would have been brought about by financial losses in the specific producers operations. And there’s the problem, everyone is wildly profitable in oil and gas don’t you know. So the individual producer can prove to the rest of the industry that it’s not their fault that the unprofitable overproduction has occurred. They weren't part of it. The accounting is so messed up that it’s reasonable to say that no one knows anything about anything. The purpose in oil and gas is to “build the balance sheet” a concept that I’m not aware of. Why would someone “build a balance sheet?” Is there some particular skill involved? Does it require imagination, vision and the deployment of real oil and gas related talent in the pursuit of oil and gas exploration and production? We can assume that spending money is a part of “building the balance sheet.” Which imputes that it could be borrowed money or it could be share equity. For it to be share equity it would require that producer to be profitable, check, and / or participate in the stock market on a frequent basis to increase the volume of shares outstanding, check. That’s it, all the numbers on the balance sheet are “building.” I think I have the concept now.

“The one with the most toys in the end wins.” That is the motto of the big spender who’s life is defined by the material possessions they can touch and feel. Why would it not apply to oil and gas too. Especially when clearly it does! Assets are the best thing ever, who wouldn’t want more assets, they make you worth more, a literal paper giant among the other reams of paper. The more assets the better and the only limitation is the amount of the producers reserves times the price of the commodity. Therefore everything can be an asset! The gas in the president’s car, the Post-it-Notes of his executive assistant, both of their phone services and all of their time. Those are definitely assets too! Why not go through the entire company and apply the same thing to everyone and everything. Start in the stationary department. Don’t worry, no one's going to go through and review their operation on that basis. That was completed by all of the producers by the late 1980’s.

From my point of view I would not want to have any assets under the property, plant and equipment account. That may not be possible however, I would strive to have the lowest possible amount I could possibly achieve. From my point of view it isn’t worth having anything in property, plant and equipment and I certainly would never leave it there for the better part of a few decades. These are not assets these are costs. And in this instance for oil and gas, the capital costs of past production. The quicker that I can recognize them and have them flow to the income statement the more efficient I am as a producer overall. It would show that I’m still profitable, assuming I was getting fair market value for my product, and as a result the cash that was used to build those assets was coming back into the organization and was readily available to be used again in future capital expenditures, paying dividends or reducing debt. When everyone is running around building big balance sheets as the purpose of the business, and as the only purpose in the business, things don’t work.

It’s not that it's any one producers fault specifically. It’s that every producer is at fault and there is only the misguided objectives being pursued as a result of a culture that has developed that knows no different and no one dares to stand up to. Makes one think that the purpose of oil and gas is to lose the money of the investors and bankers. Laying people off must be the most fun, I guess. And never paying a service industry representative is just good old sport. The point of it all, as a producer, is you can stand up and say “that it’s not my fault, look at my balance sheet.”

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.

Stickiness and Leakiness

Within the Preliminary Specification we have an interesting dichotomy. On the one hand the capabilities of the producer firm are proprietary to the firm that develops them. Yet they are deployed to the Joint Operating Committee that the producer shares an interest in with many other producers. In today’s marketplace the operator acts on behalf of the members of the Joint Operating Committee. In the Preliminary Specification we have flipped the direction of the flow of knowledge to where the capability is generated in the Research & Capabilities Module and flows to the Knowledge & Learning Module for deployment. The concept of operator has been eliminated in the Preliminary Specification and replaced by the concept of pooling. The purpose of this is critical to the producer and Joint Operating Committee. Professor Richard Langlois provides us with the following.

The question then becomes: why are capabilities sometimes organized within firms, sometimes decentralized in markets, and sometimes coordinated by a myriad contractual and ownership arrangements like joint ventures, franchisees, and networks? Explicitly echoing Hayek, Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 9

We have therefore reversed the flow of knowledge or capabilities within the Preliminary Specification by moving the producers capabilities to where the decision rights are held. We have done this as the Joint Operating Committee is the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer and industry. By identifying and supporting the legal, financial, operational decision making, cultural, communication, strategic and innovation frameworks of the Joint Operating Committee and then moving the compliance and governance frameworks of the hierarchy into alignment with the Joint Operating Committee we achieve a speed, accountability and profitability in our organizations. The decision rights are held by the Joint Operating Committee within the operational decision making framework. Whereas today having the decision rights moved to the producer firm creates a conflict between these two organizations that is inconsistent, we believe, with performance, accountability and profitability.

We need to recall the situation that oil and gas will be in a short period of time. Where today it takes one idea to generate a dollar, it will take ten ideas to generate a dollar in the not too distant future and one hundred ideas in no time after that. The volume of knowledge is going to have to be managed in a more effective way than it is today. The need to have the right knowledge to the right people at the right time and the right place will become more difficult if there are unnecessary conflicts and obstructions to the flow of that knowledge. On the other hand we are focusing the producer firm on their distinct competitive advantages which are their earth science and engineering capabilities and their land and asset base. The key here should be having these capabilities applied in a timely manner to their land and asset base. For what other purpose would the producer be creating these capabilities. In the Preliminary Research Report we learned an interesting point about the producers proprietary earth science and engineering knowledge, understanding and capabilities. It is here that we note once again from Professor Langlois paper entitled “Chandler in a Larger Frame: Markets, Transaction Costs, and Organization Form in History.”

In Brown & Duguid (1998) they make the following observations: “The leakiness of knowledge out of and into organizations, however, presents an interesting contrast to internal stickiness. Knowledge often travels more easily between organizations than it does within them. For while the division of labor erects boundaries within firms, it also produces extended communities that lie across the external boundaries of the firms. Moving knowledge among groups with similar practices and overlapping membership can thus sometimes be relatively easy compared to the difficulty in moving it among heterogeneous groups within the firm. Similar practice in a common field can allow ideas to flow. Indeed, it’s often harder to stop ideas spreading then to spread them.” (p. 102) p. 32

And from a common sense point of view we have this quotation from Winston Churchill “A lie gets halfway around the world before the truth has a chance to put its pants on.” We all know this leakage of knowledge to be inherently true. When someone discovers something that is “news” within the industry, it is generally well known within industry associations for the geologists or engineers as soon as it is known in the firm. It is either imputed through what is known, or the leakiness is as porous as it is. What is a producer firm to do to ensure that the knowledge they have does not leak? I think that the point lies in the meaning of “capabilities”; which is “an aptitude that can be developed” or “knowledge begets capabilities, and capabilities begets action.” Simply it is not possible to stop the leakage. The question therefore becomes, is it best to develop your aptitude by curling up with a text book or to participate in a marketplace. People, Ideas & Objects believes that innovative and profitable producers, instead of hoarding knowledge, will deploy the right knowledge to the right people at the right time through their use of the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification.

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

Survival of the Fittest

Readers know me to be dedicated to resolving the issues that I see in oil and gas. Issues that are addressed in the Preliminary Specification, which is a codification of my concerns and their resolution since I began this project. These issues have now manifest themselves into what I consider to be the complete financial destruction of the oil and gas industry. There is little monetary value left in the industry and the value represented by the producers on their financial statements are nothing more than fairy tales. Yet as we enter the fourth quarter of 2018 we find the discussion in the industry and in the media reflects that the times have rarely been better. Am I missing something here or do the producers know something that I am fully unaware of.

Looking at the situation today from the point of view of an investor or a bank, what’s in it for them? I’m probably the last person to ask this question as I was concerned at the best of times that the industry was not providing a reasonable accounting of the situation and no one ever made any money. However today I think it’s pretty clear that the financial condition of each and every producer is in desperate, and in most situations critical condition. Well beyond what I would approach as an investor. And as you can imagine I like risk. To critically evaluate any producer you’ll need to allocate 60 to 70% of their property, plant and equipment to depletion as an overall adjustment. That will correct for the accounting anomaly of bloated balance sheets and the unrecognized capital costs of past production that we all know and love in the industry. (Note that doing this at 60% for our sample of 23 producers wipes out Total Share Equity and leaves a deficit of $12.3 billion.) The past hasn’t been so bright after this adjustment has been made. In addition the liquidity in the industry is critical. No one has any cash or working capital. Properties are for sale but no one has the financial resources to complete the purchase of anything. Producers believed they could replenish cash by selling properties but that doesn’t appear to be the case anymore. No one from an equity or a debt point of view is going to touch a firm with a working capital deficiency and a history of monumental losses. It’s the underperforming and failing organization that is represented when those factors are the critical issue. The organization has not made any money and they have no money. Nothing in the world but an endless supply of money will make that pig fly. Why would an investor or bank put more capital into it?

I expect the price of oil to follow along the same trajectory of the natural gas prices. Oil being a far more complex, international market than the continental based natural gas markets. Oil has also been affected by shale, but at a much later date than natural gas was. Nonetheless the propensity to overproduce by producers continues with their deceptive accounting providing them with the belief that they remain profitable and prosperous. Overproduction continues unabated in both commodities since I noted this behavior in 1986. Now with shale the situation is wholly untenable. What is there to stop producers from continually overproducing? We recently learned of the collapse of the natural gas prices in the Permian. The differentials that exist there due to the pipeline constraints are having a material effect on the prices that are received by those producers. Granted the Permian is associated gas however the pipeline constraints also exist on the oil side of the business. It was a decade ago when natural gas prices collapsed. The natural gas futures price for September 2028 is $3.01. Such an exciting business. And in oil the current price is the highest price quoted up to 2027. Clearly nothing is expected to be resolved about the walking dead oil and gas business in the next decade either.

This therefore reflects the complete nature of the failure of the oil and gas industry. No one expects anything is going to happen. Producers are actively drilling more wells and buying land cheered on by a media that is as enamoured with the process of drilling as the producers are. The industry is a financial wasteland where nothing of value exists and nothing is profitable. Survival is attributable to the fact that it’s a capital intensive industry that continues to produce cash flow from those previous investments that allow the lights to stay on and rent to be paid, for now. Yet nowhere does anyone see the problem that there is no problem. There is only a problem if you consider that oil and gas would be classified as a business. And that’s where I’m wrong. It’s a study in how best to drill a well. There never has been any intent for it to be a commercial operation.

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.