What's the Answer to Today's Overproduction?

Simple, more production. At least that’s the answer I’m reading from the U.S. Energy Information Agency (EIA). I have to give the Canadian producers credit for the ambitions that are reflected in that report. It states that over 30 LNG export projects have been submitted to the National Energy Board of which they’ve approved 18. Of these 30 projects the LNG export capacity would be 36.6 bcf / day. Which is a phenomenal volume of gas when Canada is currently producing approximately 16 bcf / day. These facilities are designed to be in operation for anywhere from 20 to 40 years. Recently Shell et al announced their $40 billion CDN LNG project would commence operation in 2021. It’s rated capacity is 1.8 bcf / day. Therefore, we see there will need to be significant investment in Canada to increase the productive capacity of the deliverability, but also in the LNG facilities. This should help to bring into focus the $20 to $40 trillion in capital that is necessary for the next 25 years. These values being a critical part of the foundation of People, Ideas & Objects value proposition. I have a tendency to believe all of these numbers as there is nothing more accurate than engineering estimates in oil and gas. I estimate that today’s worldwide consumption of natural gas is 350 bcf / day. It is reputed to be expanding rapidly and would total 560 bcf / day in 2040. If Canada continued to serve all of its current markets, and all of its LNG were incremental production they would be contributing 17% of that increase. A more than reasonable expectation.

I’ve got $25 how much money have you got. With that I don’t think we’re going to make it. It’s important to remember when producers are occupying your attention with their right hand, make sure you focus on what their left hand is doing. It’s all very spectacular in terms of the entertainment value. What you have though is an industry that is wholly committed to spending money. And this is the big spend they always dreamed of. Lets ask the question, how profitable will these be, and when will the industry become profitable? Profitable in the real sense of the word. One in which profits are earned after the recognition of the capital costs are made. What we also know is that once these expenditures are made, which of course is the first aspect of the producers real talent, the second aspect is not far to follow. That second aspect is to say those costs are all sunk costs and irrelevant to the business at hand. Suckers, line up to the left with your wallets open and cash clearly displayed when we come around. We’ll be handing you shares when we take your cash. These big numbers are designed to baffle brains. In MBA school they call it BHAG, Big Harry A$$ Goals.

Right now I could be correctly accused of being hypocritical. I’ve hammered the producers for many years for a lack of providing a long term plan to deal specifically with the takeaway capacity and other issues. I’ve accused the producers of focusing only on drilling wells and leaving the rest of the business to others. Those others are not motivated when there is no monetary value for them to act in an entrepreneurial manner. Oil and gas exploration and production are not their business. Now that they’ve moved forward with plans for 36.6 bcf / day in LNG capacity I give them no credit. Well that’s not completely true they get a gold star. The problem is the industry is in such difficulty it will be lucky to see the end of 2018. For the past number of decades its focused on the next quarter. Now it's focused on the next forty years in what appears to me to be a distraction from the reality of the mess they’ve made.

One of the most costly aspects that a business can incur, one that can cause the business to fail, is idle capacity. Natural gas production volumes in the U.S. have exploded in the past few years. Incremental consumption is predominantly a result of power generation. The natural gas commodity market has not crashed, they have not collapsed but been destroyed, run into the ground and buried. People, Ideas & Objects believe these markets will take many years in order to rehabilitate to their traditional levels. Even at six to one of today’s oil price, natural gas would be $11.67. However we’ve calculated the costs of natural gas exploration and production at $150 boe. Which would impute a natural gas price of exactly $25. I’d be curious to know what kind of production distribution would be needed when natural gas prices were high enough to cover their current costs and therefore be, anyone, profitable. Would Canada still need to provide increased deliverability and LNG facilities of 36.6 bcf / day? Or would we use just a quarter of that capacity and suffer a continuation of the consequences of overproduction and unprofitability?

Profitability is the issue that plagues the industry. It’s an issue that arises as a result of chronic and systemic overproduction, from overinvestment due to bad accounting. Do we deal with that today? Or should we leave it until after we’ve more than tripled the capacity of the country? It feels to me like the producers do not have any cash or working capital, we’ll see soon with the third quarter reports. Differentials at these levels have a tendency to do that. The plan is to hoodwink investors into believing the industry needs to be “built” out in order to earn the “big bucks.” This will be attained through “building the balance sheet.” If anyone buys this crap let me know. If so I’ll have a software company for sale that is a better investment than the “best” land you can buy in Florida. Oil and gas investors will have become their own worst enemy. This issue is embedded so deeply in the culture of the industry that it requires the Preliminary Specification in order to correct it. If producers could understand the point I’m making they would have been able to correct it on their own by now. They can’t, that is why they do nothing. They also feel they can get away with this. They feel the effort to make the necessary changes to the Preliminary Specification is contrary to their own personal best interests and too much work.

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.

It's No Longer the Wild West

People, Ideas & Objects value proposition varies between $25.7 and $45.7 trillion during the next 25 years of oil and gas production. There are three components that make up this value. First their are the $5.7 trillion in incremental revenues / profits that are necessary for “real” profitability to be maintained. Recognition of the return of the $1.7 trillion that we estimate currently sits on producers balance sheets in property, plant and equipment. And $20 to $40 trillion are the various estimates of the necessary capital expenditures in the next 25 years. These capital costs will need to be retired by the future commodity prices in order to make the industry profitable, in the real sense of a profitable industry. Leaving these expenditures out of the calculation imputes that the investors would continue to be fleeced for these amounts to ensure the energy consumers discount would be continued. I understand the optics of what these comments imply. I’m not writing to a consumer based audience. For four decades the existing North American producers have cowered in the corner everytime the consumer raised an issue or their voice. As a result we have producers here in Canada producing with differentials at ⅔ of the price of the commodity. A commodity whose price is only half of what we estimate is necessary to cover the costs of oil and gas exploration and production. Our calculated cost of exploration and production stands at $150 / barrel U.S. as of the second quarter of 2018. With Canadian producers taking less than $35 / barrel CDN for their production, this vision of them cowering becomes rather real.

Our argument is to implement the Preliminary Specification and achieve these results. That would ensure all production is produced profitably everywhere across the industry, and always. This argument has been put forward on this blog for thirteen years. What is the issue that producers have with implementing the Preliminary Specification? What is it that precludes them from profitable operations everywhere and always? Why would they take the risks of destroying the value of both their firm and the industry to ensure… It’s not so much of a risk now but a fact that the industry can’t continue on the basis that is. We noted the cash and working capital would be extinguished by the end of 2018. The difficulties in the service industry with revenues slashed and payments from the producers taking 18 months, there is little wiggle room there as well.

The Internet is a magnificent device for two specific things that People, Ideas & Objects have been able to achieve. First the establishment of the Intellectual Property that makes up the Preliminary Specification. Secondly the distribution of this information as far as we could ever imagine. Back in the paper days we would have spent millions of dollars trying to distribute this information to as broad of an audience in oil and gas. Today it’s almost impossible to count the distribution costs. What we know is that we have gained a great deal of the mind share of the principles in the oil and gas industry. One is through our own efforts to distribute paper to the CEO’s and CFO’s of the producers. Second is the fact that our websites are blocked at many of the producers. Most people are unable to access our information behind a corporate firewall. And third we have had on five separate occasions, each time with different organizations, to intervene on an attempt by the producers to have our Intellectual Property diminished and copied by those organizations. This would have been a successful strategy in the 1990’s. Back then I used to refer to it as the Wild West in terms of Intellectual Property. If you had any, you only needed to watch your back. Now it’s a whole new ball game and that I hope is what producers have learned. It pays no one to disrespect others Intellectual Property. Particularly when those organizations rely on the resale of their own Intellectual Property. Diminishing People, Ideas & Objects Intellectual Property was never any of these five organizations intent. They were wholly unaware and apologetic in some cases. In all cases the breach was ceased, which led to the successive attempts by the producers.

After the first incident in which our Intellectual Property was breached we spoke with the vendor who did not pursue it any further. We also sent an email to the CEO’s of the oil and gas producers. It was our belief that they were upstanding, honest and law abiding citizens who would respect our rights once they were informed of them. They were also heading up organizations that were upstanding, honest and law abiding corporations who would also respect our rights. With all of the subsequent violations being attempted I don’t think they understood the nuance of what we were stating. After all it had nothing to do with drilling a well.

So what’s going on here. Is there something that no one understands that these companies are doing? Do governments pay the bureaucrats handsomely to keep the prices down on behalf of the consumers? Conspiracy theories aside, they do make the most sense don’t they. The best that I can think of, and I think the analogy may be apt. Is that Jabba the Hutt would have had little motivation to make changes in his life, or involve any physical movement for that matter.

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.

Another DIsjointed Conversation

Last week we heard the CEO of Encana complaining about the competitiveness of Canadian oil and gas producers. That it was difficult to compete with American producers who did not have to pay over $100,000.00 in B.C. Carbon Taxes on the diesel used to drill a well in that province and to attract investors. He also noted the potential changes producers faced in the new National Energy Board that was being put in place from our dope smoking Prime Minister. It’s legal in Canada you know. There was also the issue of the deregulated environment under President Donald Trump benefiting the American producers but more than anything the Trump Tax Cuts helping the cash situation in the USA. These tax cuts benefited our sample of 23 producers, who have U.S. based production of 5.9 mmboe / day, to the tune of $9.684 billion for fiscal 2017. Contrasting the two different governments policies shows the cost differentials between the two countries. There is no doubt that Canada has lost its way in terms of its focus and direction. Smoking drugs will do that. We have an election next year and the boy wonder, the cellfie king will be up for re-election. It was the Encana’s CEO’s point to mention the election and the need for change in Canada. Here, here as the British would say.

The point of the article however was the differentials in crude oil on some grades in Canada were now over $73 CDN. The price realized for some grades is just $19. I see his point about fitting in those B.C. Carbon Taxes being difficult. I guess the point of the article was to shift attention away from the topic of differentials in Canada. (Don’t mention the differentials, I did, but I think I got away with it. To paraphrase Faulty Towers.) What difference does it make to the oil and gas investor that you’re having difficulties with the regulatory environment? They’re not interested. What the producers have done for four decades now is spend money to drill wells and expect that the world would align with their needs. It doesn’t work that way. Producers have to be involved in all aspects of their business. You might want to start by working with the pipeline companies. The first rule you should understand about pipeline companies is they’re utilities. They’re therefore not the dynamic, innovative, entrepreneurial organizations that you think they are. If they were they’d be profitable. Just as profitable as they are today by sitting on their thumbs and waiting for the producers to show them the money and commitments they need to build pipelines. Profits are guaranteed to utilities by the government each and every year. 10% or thereabouts on everything they spend. A cost plus business model. The government says there rates needs to be x in order to earn that profit. If they make a mistake, they’ll make it up next year. That is how their business works. They will not provide a service to you in a market economy when they’re a quasi-government agency.

Secondly, focus on your business. Producers are unwilling and incapable of making the changes necessary to deal with their business. Look at the number of years I’ve been writing here. Since December 2005 and I wrote many papers that were published in the industry before then. There is also the Preliminary Specification. All specifically dealing with the need for the changes in the producer firms and industry to avoid the armageddon that we are unquestionably heading toward. What I see consistently through the logs of my blog is that when commodity prices rise the viewership goes down, temporarily. Everything is ok in the industry, prices are going up and we’ll be ok, no need to read anymore about the Preliminary Specification. But they come back. Over and over again. It's the same cycle that’s present in the market. One day you’re as high as crack junkie the next day you struggle to stay upright. Over and over again. So yes when the producers are able to show consistent real profitability, deal with their own issues and do so for a sustained period of time, say eighteen months, the investors will come roaring back. Until then you can cycle through your emotions as many times as you want. The problem is inherent in the industry and will not be exorcised without the Preliminary Specification.

The producers issue right now is ever present in the evidence that’s coming off the printer in draft form at some point this past week. The financial statements for the third quarter. Oil prices were actually down $0.69 from the second quarter. A stark contrast to the prior quarters that were lifted by the OPEC + production sharing agreement. I wonder if those two have any correlation? Bank on it. Global prices will be declining as will the continental prices we discussed yesterday and regional prices as noted above. Differentials being the point of the question in the article. Which maybe is the point that we should all learn from this. That all of these Canadian producers will be wildly profitable in the fourth quarter while earning a net oil price of $36.19. As we have said here many times the accounting is not just suspect, it’s outright fraudulent. To view the third quarter in the proper context take any and all producers that are based in North America and move 60 - 70% of their property, plant and equipment to the income statement as depletion. That is your true accounting situation. For the second quarter of 2018, taking that 70% leaves the amount of shareholder equity of our 23 producers in negative territory, meaning they lost all the earnings and investments they’ve ever received and an extra $61.285 billion. Losing $61 billion above and beyond everything you ever had is a skill, a talent and requires very sharp pencils for the accountants to hide. Note too that our sample of 23 producers only represent about ⅓ of the production profile of North America.

If we make our proforma 70% property, plant and equipment correction to Encana then we have negative equity of $25.8 million. However, we should also include the calculation for Cenovus who were the “oil” half of Encana’s “gas.” Cenovus’ negative equity equals $4.16 billion for a combined negative equity of $4.18 billion. What is interesting about this is the heritage of the original Encana Corporation. It was derived from the firms PanCanadian Petroleum and Alberta Energy. PanCanadian is the company that was established to manage the oil and gas rights that were granted from the Federal Government to build the railroad across Canada. The owners of the railroad were given all of the oil and gas rights for 100 miles on either side of the tracks. What PanCanadian couldn’t fulfill in terms of drilling they farmed out and attached a freehold royalty to any of the other producers production. Alberta Energy was a firm that was established by the Conservative Government in Alberta during a war they were having with the then Prime Minister Trudeau, our current junkies father. It’s interesting to me that the value that has been built up in these firms, based on my opinion and calculation, are not just worthless, but beyond description in terms of how bad off they are.

And this is why a few accounting adjustments and a couple of quarters application of some serious effort will not be anywhere near enough to approach the seriousness of this issue. This has carried on for four decades and was allowed to continue based on an accounting that everyone knows is wrong. The hollowing out of value took place transparently while no one was looking and the investors were being fleeced for successive rounds of next years capital budget. The industry wasn’t just losing value each and every day for four decades, it was a black hole that drew additional capital in and consumed that as well. To the point where today all that there is, and all that can be claimed as valuable in the industry, is the “well built” balance sheets. Whatever that means.

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

What Was That You Just Hit?

We have absolute quantifiable evidence of the primary issue that the Preliminary Specification is designed to resolve. Overproduction continues in both oil and natural gas by North American producers in an unconstrained manner without any recognition of the impact of their actions. The situation has been present in the market since I became aware of it, or noticed it as a result of the decline in oil prices in 1986. Shale makes this overproduction disaster acute at this time, however I think we would have faced it at some point anyway. Leading up to 2014 natural gas markets were fundamentally destroyed and will now need to be rehabilitated through significant efforts over many years. Oil prices began to decline globally as a result of the shale production coming primarily from the United States. Eventually, what is now known as OPEC + acted to remove production from the market. Prices responded to today’s mid $70 / barrel. That is clearly becoming the global price, a price that fewer and fewer North American producers are able to achieve. Differentials on oil may be somewhat limited to the Canadian marketplace at this time. As we mentioned the Canadians appear to have achieved their objective of a greater production profile than their takeaway capacity. We do see many differentials on natural gas throughout Canada, the Marcellus and Permian fields. I suggest this is the future. A continental oil and natural gas price differentiated from global markets by their regional overproduction. This will be the situation across the continent with continued overproduction by producers. It will only deteriorate further from here.

The plans and strategies being discussed by the producers about this issue is… Has anyone heard anything? Maybe it’s best that I don’t mention it, I know how uppity the bureaucrats get when I step on their toes. What I’ve read lately is the innovations and cost savings that have been achieved since the downturn in 2014. In some articles it’s as high as 40, 50 and 60%. And yes, I too believe those articles, that the costs of oil and gas exploration and production are down by those amounts. However it is not as a result of anything that I’ve read that its claimed to be. In one article from the Wall Street Journal that I noted earlier, producers were claiming their costs were down and were able to do more with less people due to the comprehensive application of Artificial Intelligence!

The fact is the industry is as depressed as it is, producers are able to dictate to the field services, such as rig operators, who have an approximate capacity of 2,500 rigs and are employing 1,052 rigs at present, and are told by the producers “that we will pay you 40, 50, or 60% or you can sit this one out.” This was also done throughout the late 1980’s and 1990’s when the producers cut their activity levels due to low commodity prices at that time. I fail to understand why, if their only repeating past behaviors, is that considered an innovation? If that is what the producers Artificial Intelligence is telling them they should ask for their money back.

In 1970 oil sold for $3.39 / barrel and I assume the industry was profitable. Accounting for inflation that is $21.38 at today’s prices. Actual prices are mid $70 range and People, Ideas & Objects have calculated at the end of the second quarter of 2018 that the cost of production in North America of our sample of 23 producers was over $150. It almost seems that as we progress as a society and we use more of the oil and gas, a resource that is limited and nonrenewable it becomes more difficult, costly and takes more effort to find and produce. In a world of escalating costs where the sciences and innovation are the premier value adding process. Where a collaborative environment between the oil and gas, and service industries is the means in which to enhance and enable the development and application of the sciences and innovation. Pounding away at the suppliers who have traditionally provided the real innovation in oil and gas. By first slashing the capacity requirements of their industry by 50%. And then let them bid and beg for the opportunity to work for half of their listed contract rates. Letting them survive on 25% of their former revenues as a result of the producers chronic overproduction. I have to say this is the point of real innovation, far greater than what I believe Artificial Intelligence could ever have provided.

When investors look out upon the landscape of the North American oil and gas industry they too see a vision. I’ll leave it to my reader to determine which one I think that they see. With the financial losses from stem to stern in every corner of every industry associated with oil and gas. With what I can only suggest is a naive management, I’m trying to be kind, who believe they’re phenomenal business people. The real issue we have is that there’s so many investors around Calgary, lining up to invest in oil and gas that I just can’t for the life of me understand how it is we’re not running them over in the car each morning.

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.

Somewhat of a Disjointed Conversation

The cost savings that are documented in our prior post are unique in that they are structural and substantive. People, Ideas & Objects believe as opposed to laying off resources from the industry, that the industry would be able to make do with what they have today but increase their profitable productive throughput. A few of the competitive advantages of the service providers are their use of specialization, the division of labor, and automation to name just 3 of the 10 that we’ve identified. These will increase the throughput capabilities of the administrative and accounting resources of the industry. Enabling the industry to expand their profitable production profile beyond what is possible with today’s resources. With respect to the earth science and engineering resources, oil and gas needs to deal with the ever increasing demand for these resources as a result of the potential and probable but also profitable increase in throughput. There will also be additional demand that arises from the fact that each successive barrel produced requires an incremental level of geology and engineering in order for it to be discovered and produced profitably. Additionally, industry has recognized that it is facing constraints and a probable depreciation of the knowledge held within the industry due to the retirement of the current brain trust. Therefore new methods of organization are necessary in order to meet these challenges. Each of these three incremental demands will lead to potential, excessive cost increases in the very near future.

With the expansion of the industries throughput the approach that is taken today to deal with the industry issues and opportunities is clearly not working. It is reasonable to state that an industry with a balance of property, plant and equipment of $1.7 trillion will find it difficult to retire that balance in the current industry configuration and business model. Even using the Preliminary Specification we noted it would take 5.63 years of dedicated effort to retire that balance. However that balance would be quickly replenished during the 5.63 years of the producers capital expenditures that were ignored during the time these current balances were drawn down. Bloated balances of property, plant and equipment are a difficult issue to resolve. Resolve in the sense of bringing them within reason of what the industry requires and to capture the cash that is represented in these balances, back into the business. By recognizing that $1.7 trillion in capital costs as depletion on the income statement, in a “truly” profitable industry, this action would return the cash that is necessary to compensate the investors and bankers for the abuse they’ve taken and support the industries capital programs for decades to come. Think of it, not having to dilute your investors every year and actually returning “real” money to them that has been actually earned, not cash that was borrowed from the bank!

Or we can continue with the plans and strategies that are currently in place. “The issue of the unrecognized capital costs of past production that is represented in property, plant and equipment is a non issue. In fact its an accounting issue, and that is all. It’s all in the past and is in fact a sunk cost that should not influence the producers current thinking.” States the oil and gas bureaucrat. I have heard this argument, and continue to hear this argument, so often that I just glaze over and walk away. Too much time has been wasted attempting to educate these people that they’re right from a pure business point of view. After all it is something that they learned in MBA school. What producers fail to understand and appreciate is that the money that was spent and represented in the $1.7 trillion balance. Which is the money that is suggested that should be forgotten. Was sourced from the investors you’re trying to source new capital from. What it comes down to is oil and gas producers refuse to account for the performance of their past spending. They would rather ignore it than deal with it. After all wouldn’t you? Instead the issue these investors hear from the producer is that the commodity prices can’t go much higher before the consumer will get angry. What the producer doesn’t realize is that the investor understands that the unrecognized capital costs of past production are in reality also representative of the amount of the discount the consumer has received for their energy consumption. They’ve only paid for the operating costs of the energy they consumed. The capital costs of the energy they consumed is being cherished on the well built balance sheets of the producers. This consumers energy discount financed by the producers investors. “After all, as far as the producer is concerned there really is no particular reason why an oil and gas producer shouldn’t be able to raise capital. Look at the reserves they’ve developed in these shale fields!”

And that is how this conversation continues. The producers failing to appreciate the point of view of the investors and why their withholding funds. The question that I guess should be asked is, are the producers really that unaware of the situation? Consider the difficulties that I’ve had trying to move the industry forward. As I’ve indicated, I’m not subject to the beatings with the baseball bats out by the dumpster anymore. It’s safe to say that, with the Internet, producers are well aware of what’s been discussed on this blog for the past thirteen years and the contents of the Preliminary Specification. Then why the difficulty? What is holding the producers up from moving forward, dealing with these issues and opportunities. Rebuilding the industry and doing constructive, profitable operations on a go forward basis? Just don’t ask me.

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 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.