You Can't Get There From Here

We noted a few weeks ago that Canadian producers were making application to the National Energy Board for LNG facilities across Canada. These facilities would increase the export capacity of Canada by 36.6 bcf / day. A substantial change to the industry considering the current production of natural gas is just under 16 bcf / day. It is reasonable to assume that the Gulf Coast is / will be going through a similar phase of development in terms of LNG exports. Based on the approved Shell project which has a capacity of 1.8 bcf / day and is projected to cost $40 billion CDN. The total cost of the 36.6 bcf / day capacity might range in the ballpark of $800 billion. These are estimates based on the remainder of the 12 out of 30 LNG projects also being approved. Nonetheless if the country were to maintain its current markets and expand its deliverability by these new exports the total deliverability of Canada would exceed 50 bcf / day. In terms of throughput capacity that is a different industry than the one that is in operation today.

The financial support to build these projects are a critical part of their definition. In Shells case, I assume that they, and their partners who are the end users of the gas, will be funding the capital program. Not everyone that will be participating in the development of these projects will have the wherewithal of Shell or the National Oil Companies represented in that ownership group. China, Japan, South Korea and Malaysia are each seeking to find and source long term sources of low cost natural gas. This investment provides them with that gas which is the objective, not necessarily that the project provides a financial return. Therefore we could assume that much of the LNG facilities that are being built will have some of this dynamic from this style of ownership group. I doubt that these four NOC’s would be satisfied with just the 1.8 bcf / day from the Shell project.

The remainder of these facilities do have to find the financing for these deliveries. What we see in today’s marketplace is when the producers leave the development of the takeaway capacity to the utilities, the needs of the producers aren't necessarily met. Differentials throughout the continent are wholly attributable to the lack of pipeline space. If they start drilling to fill this potential export market and leave the LNG facilities to others then we know what the result will be. Therefore the need to have the financing in place to build these facilities needs to be available fairly soon. I wonder where that money will come from? Has anyone seen an investor wanting to volunteer more money into the oil and gas incinerator lately? I haven’t either and I don’t think we’ll be able to find one in the current environment. As I write this the natural gas price at AECO/Spot is $0.26 for Canadian gas. The point is this natural gas differential now balances off the disparity that existed when the differential on oil was high, now they’re both very high, and therefore according to the oil and gas bureaucrat, “in balance.”

The established culture of the industry is one of accounting deception. Big balances of assets, huge cash flow and spectacular earnings everywhere and always. Just like Bernie Madoff. The assets are high because everything is capitalized, except for royalties, the SEC stopped that when they began their lawsuit of PennWest. Cash Flow From Operations is distorted upward when the Earnings number doesn’t consider any of these capitalized costs and instead defers their recognition under Capital Expenditures. The Net Income is essentially Revenue less electricity for the pump jack. And when it comes time to account for the performance for all of this spending? The story is told throughout the industry that those are sunk costs and are irrelevant to the situation today. The story that the investors now know and understand intuitively regarding oil and gas is producers don’t want to report about their activities truthfully, they don’t want to account for their past spending and don’t anyone ever mention the concept of performance. A trillion here, a trillion there, it makes no difference to the investors, that’s what they’re there for.

If this doesn’t scream disintermediation I don’t know what does. The approach to the industry is a failure. The future is a non starter as a result of the past history of the most recent four decades. And visions of sugarplums and LNG facilities everywhere are what will make people interested? The first thing they need to do is to start with a plan on how this will change. I suggest they implement the Preliminary Specification. The second thing they do is organize themselves in away that can approach this possible future. By using the Preliminary Specification. Then they would be running a profitable organization from stem to stern. Do that for a few years and they should be able to generate some cash that can allow them to take baby steps towards these lofty goals. There is ample enough capital sitting in property, plant and equipment that if they began recovering it by recognizing it as depletion on the Income Statement. And assuming they’re charging enough for their commodities to ensure profitable operations. This cash would be able to be cycled through the companies many times to generate many trillions of dollars in capital investment. People, Ideas & Objects always ask if property, plant and equipment is an asset or is it a cost. People, Ideas & Objects also ask if the future is financed by the investor or the consumer. I highly suggest the producer try the consumer for once by implementing 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.

Time Slips Away...

These are difficult times for the oil and gas industry. What can only be the most difficult era of its entire history is being played out right now. Billions of dollars in revenue are being lost each and every month due to chronic overproduction. It just doesn’t stop does it. This is the remarkable aspect of this issue, its chronic nature. No one individual producer is responsible and therefore no action is taken by any one individual producer. It’s everyone else’s fault. Nothing but time slips away as the value of the industry erodes to the point where we are today. An industry that is worthless. Or even worse, an industry that destroys value continually at a remarkable rate and demands further resources just to operate. A black hole that eventually will take everyone in and leave nothing. We’re not far from that now, it’s been a long time since the shale era began to take hold and accelerate this phenomenon. Not since 2008 have we seen a “good” year. And as we’ve noted before there have only been 5 “good” years in oil and gas out of the past 32. What we’ve heard from the producers for the 27 other years is “oh whoa is me,” as they brace for bad times and do absolutely nothing about it. When we talk about cultural and systemic issues, a 32 year history is a good sample of the situation. We believe that oil and gas should be produced profitably everywhere and always. We owe it to future generations to ensure that these resources are used appropriately. That can only be done if they’re produced profitably.

Digging through this blogs archives People, Ideas & Objects published our budget on this blog through a series of posts that ended in October of 2010. And then posted the budget in its entirety with the publication of the Preliminary Specification in December 2013. Therefore it has been five to eight years that we’ve had our budget known within the industry. Although initially we took some giggles and flak for the size of the budget. The real issue was the fact that producers didn’t pay Intellectual Property royalties. We’ll see about that. The point I want to make today is that the scope and scale of the budget, indeed the accuracy in which the Preliminary Specification addresses these material issues in oil and gas, make it evident in my mind that we understand this issue. We have a lot of work yet to do, however we can say that we’re on the right track at this time.

I would suggest that a very large percentage of the people in industry do not understand the issue as it stands today. What else could explain the chronic and continuous overproduction into markets that provide commodity prices that only produce financial losses? Producers believe, somehow, that production has nothing to do with price. That the “market” will clear whatever is produced. That “markets” are magical and wonderful things that act in the best interest of the producers is the fairy tale that you have to believe in order to continue on in the manner that is done today. Markets are wonderful things however they do one thing, and only one thing. And that is communicate a price for the good or service that is being marketed. What producers need to do is to organize themselves in the manner defined in the Preliminary Specification so that they can adjust themselves to the messages from the market and if that price is adequate to produce a profit, then produce. Otherwise shut-in the production and save their reserves for the day in which they can be produced profitably. Ensuring all of their properties were profitable would maximize their profits, as no unprofitable properties would be produced and therefore dilute their profits, and allow markets to find the marginal price.

The third quarter reports of all of our sample of 23 producers will all be available on November 13, 2018. We will begin our analysis soon after. A small number have already been published. I would suggest everyone review these as we continue through these next few weeks. Remember to take 70% of property, plant and equipment and move it to depletion in order to make up for the accounting scam that is prevalent in the industry. This will adjust the producer for the unrecognized capital costs of past production. Allocating every cost to capital and leaving it on the balance sheet for decades is a great way to “build your balance sheet” whatever that means, and always report profits. But it is a massive distortion of reality. By making this 70% pro-forma adjustment we see that the producers are nothing but hollowed out carcasses that have done nothing but spend money in order to destroy an industry.

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.

How is it That Nothing's Ever Done

I’m sure I’m not the only one that wonders why producers never do anything regarding the difficulties in the industry. Natural gas was last priced in a profitable region, based on People, Ideas & Objects estimates, in mid 2008. Nonetheless the producer still had high enough oil prices to carry them through those difficult natural gas times. However, oil declined in 2014 which ended that support. It was the first time that the industry ever faced the fact that both sides, oil and gas, were depressed. It was always the case that you could bank on at least one side of the business being able to hold its head above water. Then the bankers and investors began to evaluate the producer firms on the basis of a different understanding. One which assumed that shale may never achieve commercial operations. All of the signs were there and investors were not able to get any answers from producers that made any sense. In the face of continued overproduction, additional drilling was not the solution to depressed commodity prices. Therefore the investors and bankers withdrew their support of the industry in wholesale fashion. As we’ve documented here many times the industries accounting is distorted toward underreporting of the capital costs of each barrel of oil equivalent produced. Producers continued to report healthy profits and cash flow yet the cash in the industry was escaping into the black hole we know as property, plant and equipment of the producers “well built” balance sheets. Cash became an issue when the investors ceased to provide the financial support that the industry had come to depend on. Further deterioration of the cash and working capital occurred as time continued to pass and the investors didn’t return. Soon it was realized that flush production was a prosperous source of cash when the costs of these field operations weren’t paid for upto 18 months. Now we see the final realization of all of this madness manifest itself in the high differentials being realized in various basins around North America.

This third quarter of 2018 will be interesting to see how the producers make out financially. The only thing that I’ve heard from any of the producers is from those that maintain a monthly dividend. And the news is that they’ll maintain that in the current month. Even though their cash positions at the end of the second quarter make the payment detrimental to the firm. Must keep the facade of an actual business operation in the minds of those that once believed such nonsense. Throughout the decline of the producers viability and financial destruction we’ve documented the oncoming difficulties and stood firm that nothing would resolve the issues that are present in the industry other than implementing the Preliminary Specification. That day is soon to be realized by more than just me. There is a systemic cultural incapacity for the industry to understand what it’s doing wrong. Back in the early 1980’s I could generally argue the point and gain a consensus that the methods used then, which are the same methods that are used today, would lead to the demise of the industry. Those days are gone. The culture of the industry has been developed with the issue imbedded in the DNA of the industry and the understanding in the industry is that that is the way that things are done. No one questions it. 

The Preliminary Specification relies on the reduction of unprofitable production from the marketplace. The accusations that this is collusion, or that shutting-in production can’t be done for this or that reason has been stated since the early days on this blog. (2007). Which is nothing more than the fact that the Preliminary Specification eliminates the bureaucrats and is hard work for them to do before they’re rendered redundant. The excuse also falls flat on its face when we learn recently that the industry has a speed and capability to shut-in 40% of the production from the Gulf of Mexico due to Hurricane Michael. So much for the lame excuses why they can’t do that onshore. It’s only the excuse of an entitled, lazy and well fed bureaucracy that doesn’t want to do anything. If they did would they have watched the industry be subjected to the history of these past few years. Their responsible, how do they justify their chronic inaction and continued stoic posture in the face of such absolute destruction?

The one other aspect of this situation with the oil and gas industry that People, Ideas & Objects have discussed repeatedly here and in the Preliminary Specification. Is the action that we do anticipate from the bureaucrats which will be their exit from the scene when they’ve determined there’s nothing left for them. How soon this will be is unknown, however just as we noted about the full support these bureaucrats have received from their boards, the exit will be including board members as well. Leaving the industry in pristine shape for the future of the consumer to source their energy needs. What we know regarding these capitulations and exits is that they have their historic origins. Back in the 1920’s when management failed they just moved onto greener pastures while governments intervened heavily into the private economy. We saw this intervention by governments again after the 2008 financial crisis, however not the capitulation of management. I believe this was due to the meltdown being a failed public policy issue. The government wanting everyone to own a home. The question will be, will we see the government come to the aid of the oil and gas industry? And if so, in what form? This is untenable politically and consideration of such aspects of government involvement to support oil and gas is not probable. Therefore when the industry reports its third quarter. And it becomes evident of the difficulties, the management subsequently pursues greener pastures in silicon valley or manufacturing, who will support the industry and turn this situation around?

I documented that I was the crazy one by providing a plan to deal with these issues and establish the industry on a “real” basis of profitability, innovation and cost control. So the previous comments can be put into the proper perspective. The problem is that I’ve been jumping up and down, screaming and yelling about all of these for many years. Other than the managements capitulation it all seems to have worked out in a way in which the Preliminary Specification is the solution to the issue. I’ll probably be wrong about this capitulation though, it just seems so ridiculous. After all who reads history?

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.

A Plan, For a Price

Back in 1991 when I started working in the software business trying to resolve the oil and gas producers dilemma that is so prevalent today. There were in the neighbourhood of a dozen software vendors providing software to the industry. The choices were down to a handful of firms and those were mostly subsequently bought out by Coopers & Lybrand or Ernst & Young, or built by Price Waterhouse. It was a violently competitive time in which the producers were able to pick and choose and pay next to nothing for their software. The attached service contract was what would keep the lights on and the bills paid at the software vendor. As far as the producers were concerned it was too bad about the investors who paid for the software development. In 1992 Oracle threw the cat amongst the pigeons when they joined my firm in a joint development effort. Later in the decade it was determined that accounting firms owning accounting software was not a good business and the beginning of these firms software divestments. Notably the market leader, “Qbyte” which was owned by Coopers & Lybrand was combined with Price Waterhouse “PW/SQL” when they merged as PriceWaterhouseCoopers and all of this was subsequently purchased by IBM. Late in the 20th century, Oracle who were unable to secure any producers to fund their specific developments for Oracle Energy, left in frustration at the persistence of the producers inaction. In 2005 IBM sold their market leading Qbyte application to P2 as a result of their frustration in securing any producer participation in specific new developments.

What we therefore have today is three specific attributes of the oil and gas ERP software marketplace. The investors were used and abused to the point where no one made any money. These memories are still prevalent in the marketplace. I would be hard pressed to find any support anywhere in the investment community for the work that we are doing here at People, Ideas & Objects. I choose not to spend any time in that arena as there is nothing that I can do to provide any potential investors with a return on their investment in oil and gas ERP software. Therefore I avoid these investors that oddly, don’t exist anyway. The second attribute is that no activity in the marketplace is being done in oil and gas ERP systems development. There are little bits here and there but the scope and scale of the issues that exist in the industry demand a much more substantial product. And nothing is being done anywhere other than some upgrades or regulatory changes etc. The third attribute is that the only lunatic offering these specific software developments is People, Ideas & Objects with the Preliminary Specification. This is good news for me, for some reason I’m sure, and not good news for the bureaucrats in the industry.

The net result of all of these shenanigans by the producers is that no one is going to do anything for them until producers pay the way. And People, Ideas & Objects fully understands that the financial resources we require will impact and diminish the producers drilling budgets. But maybe that’s a good thing at this point. This is an oil and gas issue as well, no one other than producers are harmed by differentials. If producers can’t see their way clear to resolving this themselves, why would others do it for them, there is no upside for anyone other than producers. The investment in the software provides a value proposition that is substantially higher than the costs. This is due to the fact that the industry has been currently run into the ground. Sorry to be so blunt, I thought about sending flowers but realized it wouldn’t do much better. Another issue that People, Ideas & Objects has is that the industry has displayed the attention span of a mosquito. As soon as there is a rebound in the price of oil or gas, no matter the size, it's full speed once again into the field to begin drilling as much as possible as quickly as possible. Therefore if we went on a pay as you go basis we would have our funding cut off at some critical point before we were able to complete development. And therefore we can’t run that risk with the people who are needed to commit to this development. They need to know that the resources are there to ensure that they’re not going to be looking for work somewhere else due to the failure of this project and to then be ostracised from the industry by the producers. 

If it isn’t clear yet, if producers want their investors back participating in their organizations they have to offer them a compelling business proposition. A plan for the future that deals with the issues and the opportunities they currently face and a way to deal with them down the road. The Preliminary Specification provides that. However, it costs producers money, and a lot of money up front before they can say to the investors that they have that plan. The only way that they’re going to make it real is to put up our full budget in advance and commit to this in the long run. Alternatively we can clearly see the consequences of further inaction. Just look to Canada and their differentials if you have difficulty seeing the future. It may not be that way everywhere, but trust me, without the Preliminary Specification it will be soon. And we may have to go through a number of attitudinal adjustments as a result of further temporary upward changes in direction of the prices of the commodities. But what we should have all realized at this point is that this train only travels downhill.

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.

Where do we go from here?

If we operated oil and gas as a business there would be none of the devastation that we see going on around it today. The Preliminary Specification would be providing detailed accounting information on the revenues, royalties, capital, operations and most importantly the actual overhead incurred at each and every property. If that property continued to report profitability then it would continue to produce. Otherwise it would be shut-in and placed in the producers inventory of innovative projects that were to determine how to expand the reserves, revenues or reduce the costs of operations and return the property back to profitable operations. Making these simple changes would eliminate the marginal production from the commodity markets allowing these markets to find the marginal price. Producers would be able to report their most profitable operations as there would be no further dilution of their profitable operations as a result of incurring losses on some properties. Reserves would be held for a time in which they could be produced profitably and they would no longer have to carry the additional costs of the incremental monthly losses incurred as a result of continued unprofitable operations. This isn’t done in oil and gas because it can’t be done. No one can say which property is actually profitable and which isn’t. All of the overhead is allocated to the corporation and most of that is capitalized. The accounting is deficient in providing the necessary information to run oil and gas as a business. It needs to change through the implementation of the Preliminary Specification in order to achieve the most profitable means of oil and gas operations.

With today’s depressed commodity prices. With producers unable to know what the real cost of production is at any point in time and at any location. They’ll use information contained in the reserve estimates before they use the accounting information. In an industry where each barrel of oil produced is incrementally more difficult and costly from a scientific point of view. Where the costs of energy will always increase due to the increased effort necessary to bring about the commercial volumes needed by our advanced economies, and over time. Where the most advanced and powerful economies will be the ones that are the largest consumers of oil and gas. Oil and gas has a role that is unique and quite important to our way of life. The need for an accurate accounting therefore is going to be necessary when the industry claims a $20 to 40 trillion capital expenditure program is necessary to meet these demands.

Is there any doubt in anyone's mind, after the decade that we’ve been through, that oil and gas commodities are subject to the economic principles of price makers? The operational concern of a producer today is to produce everything you have and figure out if the producer made any money in the end. Producers are deaf, dumb and blind to the existence of anything outside of their own four walls and refuse to recognize the damage they continue to cause as a result of theirs and other producers chronic and systemic overproduction. Differentials on the North American continent are how the overproduction is being represented now. Continental overproduction doesn’t have too dramatic an effect on the global oil price. The only people being hurt are the North American producers and all those that are associated with the oil and gas industry. There is a significant problem here that only the Preliminary Specification deals with. The principles in oil and gas are unable to understand or appreciate that solution or the problem itself. And the damage that has been done, throughout the associated industries, has been tragic and we are now ill prepared to deal with our future.

Where do we go from here? The decline in the financial, political and operational capabilities of the industry have been noted here before. Oil prices are not that handsome yet the consumers everywhere are screaming for relief. Even with these prices producers are reporting continued deterioration in their cash positions to where in the third quarter of 2018, People, Ideas & Objects believe this will be a difficult situation to overcome. Therefore the political framework, starting with the President of the United States is counter to the best interests of the producers, in these their darkest days, ever. If this, if that, If only. If the Canadian producers were to have had Keystone XL built they, or if they had TransMountain built they wouldn’t be facing $63 CDN differentials on their prices. What they did do is sit back and wait for a utility to drive the bus for the expansion of their future deliverability. When you hand over a critical capability such as your deliverability to utilities don’t cry to me as to why your differentials are $63. Throughout this blog you will note our discussion of “if” the financial situation weakens, the operational capabilities will deteriorate too. The question therefore becomes what’s next? Do the investors come forward with $20 trillion in investment and all will be fine with all of this forever? Producers don’t see the damage that’s been caused as a result of this “muddling along.” They’re just waiting for the investors return.

The solution of course is the Preliminary Specification that deals with these issues. Other options might arise in a decade or so, but I wouldn’t bank on it. There are investors that are interested in this industry and like me are greatly concerned about the situation at hand. Without an understanding and acceptance of the situation, without a plan to deal with the problems, they’re sitting out of this disaster. They’ll join back in and participate as soon as they see the industry moving forward on dealing with these issues and opportunities. Oil and gas in North America does provide for a compelling business opportunity if it was operated as a business. Investors would join in and participate fairly quickly to ensure they capture the upside down the road. But it has to be a business, not a science experiment that has lost control of itself. Tomorrow we’ll discuss what actions need to be taken by the producers to prove to the investors they mean business and communicate to them that they, the producers, have also had enough.

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 IV

Let’s shift our focus away from the madness occuring in oil and gas for a moment. It is a remarkable issue the producers resistance to rational thinking, if that is what I have and am doing with the Preliminary Specification. Producers will willingly slaughter themselves before they’ll consider taking any corrective action. They don’t even identify they have a problem. The price of oil and gas is the price of oil and gas. There’s nothing they can do about it. I suggest they stop financially destroying themselves by shutting in any unprofitable production and only produce profitable production. However People, Ideas & Objects are the odd man out and sit in absolute amazement at today’s actions. We continue with the next section of the paper “Sources, Procedures, and Microeconomic Effects of Innovation” by Professor Giovanni Dosi. In today’s post he defines the elements necessary for an industry and producer to achieve innovativeness.

Typically, the search, development, and adoption of new processes and products in non centrally planned economies are the outcome of the interaction between (a) capabilities and stimuli generated within each firm and within industries and (b) broader causes external to the individual industries, such as the state of science in different branches; the facilities for the communication of knowledge; the supply of technical capabilities, skills, engineers, and so on; the conditions controlling occupational geographical mobility and / or consumer promptness / resistance to change; market conditions, particularly in the bearing of interfirm competition and on demand growth; financial facilities and patterns and criteria of allocation of funds to the industrial firms; macroeconomic trends, especially in their effects on changes in relative prices of inputs and outputs; public policies (e.g., tax codes, patent laws, industrial policies, public procurement). It is impossible to consider here each of these factors in detail and the survey will focus upon the procedures, determinants, and effects of the innovative efforts of business firms; however, at each step of analysis, I will try to show how those broader factors affect the opportunities, incentives, and capabilities of innovating in different firms and industries.

With this quote I think we can see the structure that is necessary for the oil and gas industry and each of its producers to enhance their innovativeness. I would suggest that these are the areas of competitive differentiation in the future of all industries but most particularly within the oil and gas industry with its earth science and engineering competitive advantages being at the forefront of the producers success. There is no question in my mind that this structure will be necessary to both facilitate and enhance the innovativeness of the producer and industry. What we know today is that organizational structures are both defined and supported by the software that is in use by that organization. If oil and gas wants to enhance their future competitiveness to be innovative then they’ll need to make the changes to the structure of their organizations. Making the changes however is not enough. They must first establish the software that defines and supports the organization on the basis of what Professor Dosi establishes here. And that is what we have done in the defintion of the Preliminary Specification.

How do we continue on in oil and gas without an innovative framework driving our competitiveness? How do the consumers know they’re receiving value from the energy they consume? How do we undertake the significant tasks that are ahead of us? Where the proposed LNG exports by Canada will require so much capital, as well as in other areas. A better business proposition needs to be adopted by industry in order for the investors to return. With a $20 to 40 trillion capital expenditure program, the business proposition needs to be more than just the spending of this money. We certainly cannot continue to just spend money as the basis of competitiveness of today’s industry. The financial devastation of the industry is comprehensive and complete. Yet so much will be needed from it in such a short period of time. The reserves are there and they exist. None of which can be produced profitably and the business has no coherent direction. We have a resistant, abstinent and self serving bureaucracy that believes in magic and myths which will resolve everything on its own. With software taking such a defined role in our lives we have to understand its key implication to business. The producers muddling along and do nothing strategy is doomed. Active management is necessary to proactively deal with these issues and opportunities. Figure out how to deal with them, write the solution into the software in order to enable the changes in the organization to capture them. Spontaneous order can’t occur in a world where software seals the organization in metaphorical cement. When I first published this thinking in August 2003 the bureaucrats knew they’d discovered their gold at the end of the rainbow. If they never changed their software, they’d never be challenged in their franchise. Which is exactly how things have developed.

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'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.