To Produce, Or Not Produce, That Is the Question

On Sunday the Alberta Premier made the decision to implement a production allocation methodology for Alberta based producers. The purpose of this was to attempt to alleviate the large differentials that are being experienced in both oil and gas in the province. This is on top of the decisions made by the Federal government to purchase Kinder Morgan’s interest in the TransMountain Pipeline and the Alberta Premier's prior announcement to purchase tank cars to ship oil out of the province. Reviewing this blog you’ll find that I’ve been critical of the manner of management in oil and gas, but most particularly I have a strong disdain for the Canadian producers. They have repeatedly used governments as foils in their plans to continue to “muddle along” and do nothing as their strategy and operating procedure. As we’ve noted, investors and bankers are so impressed that they’ve withheld their participation for years at this point and there doesn’t seem to be any compelling reason for them to return. Clearly producers are trapped in a downdraft.

I appreciate Premier Notley’s consideration regarding two important concerns that I have with government mandated production allocations. The profitability of the industry, the distribution of those profits across producer sizes and her comment regarding the free market sorting this out. I want to address the distribution of profitability in the industry and the difference between the existing business model and People, Ideas & Objects Preliminary Specification. Today small producers are at a distinct disadvantage having to carry the overhead burden necessary to operate in today’s oil and gas industry. This burden is several million dollars per year and has to be maintained until enough momentum can be generated in the organization to sustain itself. An incomprehensibly difficult task. In the Preliminary Specification this has been eliminated by creating a variable, industry based administrative and accounting capability to replace the fixed, producer based administrative and accounting capabilities. Capabilities that today are generic, yet unshared and unshareable in the current business model, and replicated within each producer silo. In the Preliminary Specification with the service providers providing the administrative and accounting on a service fee basis all the costs of all the producers become variable based on production. The costs incurred to maintain the competitive advantage of the earth science and engineering capabilities are also developed with the opportunity for these to be provided as a service to a marketplace that is generated in our system. Creating a second source of consulting revenues to assist in offsetting these costs. Setting the competitive advantages of the producers earth science and engineering capabilities, and land and asset base as the foundation of the producers ability to differentiate itself in terms of exploration and production of oil and gas. A stark contrast to today’s competitive sameness that is unable to be differentiated as to who are the capable oil and gas producers and who are making it up as they go along.

The difficulty with this latest government decision is it sets in place the status quo bureaucracy and business model in concrete. There will be no change in the necessary behaviours of the producers now that they have the government to turn too to appeal to their justification as to why they should produce and others shouldn’t. I have worked for 27 years to bring the alternative solution of the Preliminary Specifications production allocation methodology to the marketplace. The most fair and reasonable production allocation methodology based on profitability. If the property is profitable it produces. I have had to fight and wage war with the bureaucrats in order just to survive. Who’s going to be the next fool Canadian to offer some new idea in oil and gas when the government is the one that is turned to and the government is the one that picks up the role of managing the issue for the “do nothing” producers. All at the expense of the entrepreneurial initiative in the marketplace. Seeing these actions I’m sure they’ll inspire the bankers and investors to jump back in as quick as they can. That and the fact that any investor will be hard to convince that their new wells being drilled will be granted production rights from the new production czar in Edmonton. This is going to be a great place to do business now. All I can say is that I thank god for the American’s.

Which is maybe the real issue for the Canadian producers. The U.S. has had Canadian oil and gas imports for decades and these exports have been a substantial part of the Canadian oil and gas industry. With shale the amount of oil and gas production in the U.S. is on the verge of self-sufficiency. The Canadian imports are down substantially from years past. One of the main reasons the differentials are high is the pipelines that have been cancelled and delayed were to take Canadian production to tidewaters. Natural gas is seeping into the Canadian market from the Marcellus formation in Pennsylvania and will eventually eliminate much of the US demand for Canadian imports but also begin to satisfy the Ontario and Quebec markets with less expensive natural gas than what Western Canada can provide. (It’s a little under $2 to ship gas from Alberta to Ontario.) In other words the Canadian producers will only expand their natural gas differentials from here. The government's involvement has only begun with this years activities being documented above. I believe, these government actions eliminate the justification for any entrepreneurial opportunity and desire.

So the scenario is as follows. The demands for Canadian oil and gas will continue to diminish as a result of continued increases in deliver ability from U.S. based shale. Leading to greater demand for more production cuts instituted by the government. Creating a hostile, bureaucratic environment where no one wants to invest. Leading to less activity in the field bringing about a lower production profile in the province. Reducing the motivation for the governments to build their pipelines to tidewater, leading to chronic and expanding differentials. Leading to greater production cuts instituted by the government, creating a hostile, bureaucratic environment where no one will invest… In what we can call an accelerated downdraft. People might want to argue with me. In which they would review the behaviours of the bureaucrats for the past decades and suggest something positive?

If anyone wonders why I’m so angry with the bureaucrats this government action defines it perfectly. Look around, all of this is their fault. The damage done in the past decade is horrendous. I’ve argued for a solution for many years and have had to fight hard with the producers for their own best interests. When the crisis begins to show a hint of what the future will look like they turtle and ask the government to fix their booboo. They are lazy, unthinking and pious bullies who think they don’t have enough support from Canadians. If the Alberta government didn’t institute production cuts it would have been the reason producers laid off 1,000s just before Christmas. With an election soon the bureaucrats know how to shift the blame. I said it would be surprising to see if these producers survived the rest of 2018. I don’t think they will. The Preliminary Specification gets rid of the organizational methodology that creates this issue and inaction. We need to build it.

I remember when producers were claiming they had a break even of $13 in the Permian. Ok, that just shows they have no understanding of the financial terminology or their business. I’ll take this situation as it will exist under the Preliminary Specification. Where the reorganization that we undertake of the producer and industry makes all costs variable. Based on our sample of 23 producers we estimate the actual gross overhead incurred, would be about $10.80 / boe across North America. Royalties would take up a large portion of the remaining calculation of what producers claim is their $13 break even. I think that what they’re imputing is that the operating costs in the Permian are $13 which may be in the ballpark. Royalties at $50 price would be $6.25 therefore our variable costs, not including capital which we’ll get to, are $30.50 and you have to understand I squeezed these numbers as much as I could. Giving the benefit of the doubt to the producers at every turn. An issue we may have to look at is the retirement of capital for the Permian and other shale formations under the Preliminary Specification may not adequately capture all of the capital costs incurred within the 2.5 years we propose as a minimum depletion schedule. The need to rework the well due to the steep decline curve may occur before the 2.5 years. If the producers are spending additional capital to re-complete the wells, then the initial drilling and completion costs, we believe, should have been recaptured by the revenues of the oil and gas produced and provided the shareholders with a real return based on real profitability. Otherwise we’re still just in the spending business. It would therefore be correct in this instance for the producers to state that their break-even was $30.50 with no contribution margin.

Our estimates of the costs from the financial statements of the 23 producers we follow would total $140. The difference between the $140 and $30.50 is known as the contribution margin. That would be $109.50 / boe in this case. Let’s assume the well cost $13 million to drill, complete and equip. Therefore to breakeven the well would have to produce 118,721 boe in order to achieve break even. Everything after that would be profit as all of the costs would have been retired. If more capital was subsequently spent to maintain the wells deliverability then these calculations would need to be revisited. The Preliminary Specification provides oil and gas producers with the most profitable means of oil and gas operations. Profits are earned and determined on a monthly basis. The breakeven analysis is used to determine if the project will payout and provide a return after all of the costs are considered. If we are looking at the property on a month to month basis and determining if the property should continue to produce based on its profitability / unprofitability then we will have to deplete its capital on a monthly basis. If the contribution margin is constant at $109.50, using the amount of capital that was required to be depleted, the $13 million cost to drill, complete and equip and reducing that into a time frame that fits within the 2.5 years, which is a competitive and reasonable amount of time for a producer to provide the investment community in terms of returning that cash. Now if the monthly production from the property is 118,721 / 30 months or 3,957 boe / month or more then the 2.5 years will be all that is required to retire all of the capital. Whereas if production is lower than 3,957 boe / month, the 2.5 years will not be enough and the property is not going to be profitable at the current price as represented in the contribution margin. Therefore it will need to be shut-in until such time as it can be enhanced in some way to reduce the costs, increase the deliverability or reserves.

Using these financial criteria we have implemented an entire new discipline into the industry. Much higher commodity prices will be needed to maintain production. The point of this exercise is to have the cash that is invested in the property by the producer returned to the producer as quickly as possible. And to have that activity attract the profits associated with the business returned to it consistently throughout the period that the property is producing. Many may think this will make it difficult to produce anything in terms of the costs of oil and gas operations. It is a different dynamic that’s for certain. If there is risk that the property will not return the money then it shouldn’t be invested. The mindless drilling of more wells in an effort to achieve “more” is not inconsistent with the vernacular of the junkie. They manage their lives about as profitably. A little more thought and and a lot more analysis will need to be done in terms of what actions should be taken by the producer. The oil and gas industry is a business and the Preliminary Specification recognizes that and begins to operate it in that manner. On the other hand, once the property has returned all of its invested capital its production will continue uninterrupted as its contribution margin will be more or less profit. This will be the other aspect of the dynamic of the business, the new production will always define what the price of the commodity needs to be. If new production is required by the market then the costs will drive those prices through this process. New production will be expensive on a boe basis because the costs of oil and gas exploration and production are expensive on a boe basis. This is called business. The reason your cellular phone bill is so high is that you’re definitely going to want to have 5G service as soon as possible.

Two items that I want to point out from a few weeks ago. There was some excellent analysis done here and here on the role that Wall Street had in fueling the spendaholics in oil and gas. Comparing the banks to casino operators. Banks didn’t care if the producers were viable or capable, they just wanted to make money on managing the deal. That was their business, much as it was in their dealings of Mortgage Backed Securities (MBS) and Credit Default Obligations (CDO’s) in 2008. Casino’s don’t care if you win or lose, the house gets paid no matter what. Not just a similar business, the same business.

The second item is Anadarko’s reorganization with their CFO taking over the CEO’s role. Here, here as the British would say. I should ask if this is the beginning of the mass exit of bureaucrats we’ve always noted would be their last act? More financial orientation in the CEO role is what we need more of, only I think it might be too late for the industry. Much of the damage is beyond any miracle worker at this point. I do not condone the focus of the new CEO on building systems, which as we’ve discussed is all the rage in oil and gas today. Producers destroyed all of the money ever given to them. Even on the basis of their specious accounting. The losses they’re now realizing are those we’ve discussed and quantified in our $25.7 to 45.7 trillion value proposition over the past number of years and as such producers now see that Information Technology is where the value is. They approach these software developments with no new ideas other than that’s where the money might be. They are not software developers. Their expectations of results in the short term are going to bite them when they’re held to account in the next couple of quarters for their costs not being that much different than our budget. What will be their vision of the industry? How will they convert all of their costs to variable costs as the Preliminary Specification does. How will they convert the spendaholic culture that exists today into the dynamic, innovative, accountable and profitable organization that we’re building in the Preliminary Specification? What organization will they use to align all of the frameworks in the industry? If they’re not interested in People, Ideas & Objects then we understand that, we only hope that they find that father time, their investors and bankers are so understanding.

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.

Odd's and Ends, Bits and Bytes

Hope springs eternal with the natural gas prices leaping off the floor from their comatose state. I’m tempted to say call me when they hit double digits. With the $140 / boe cost that we calculate is their average cost for the third quarter of 2018. This based on our sample of 23 producers third quarter financial statements. That dictates a natural gas price of $23.33 on an equivalent heating value basis. With those prices people would then see how shale gas becomes commercial. We can also say that the price has attained some volatility. Volatility is always a precursor to any significant move. Whether that is up or down is unknown at this time however we can probably be assured that natural gas prices will be changing here in the coming months. There would be no end of the optimism in the industry that these prices will be heading higher in that time. I think that may be the wrong way to read the market. It was alleged there was a change in the weather forecast in the U.S., stating that very cold weather was on its way. Hey look it’s November! If that was what was responsible for a 60% hike in the price then the optimists may have it right. Natural gas storage volumes are also well below their five year average. Maybe there’s something to this!

The trouble is, you knew I would chime in here, shale gas is completely out of control. That is the understatement of the century. The belief from those who don’t know the business well was that the natural decline curve would kick in and the total deliverables would top out. These people’s thinking were rewarded with the topping out of shale gas deliverables at about 45 bcf / day in early 2016, and only resumed its upward trajectory in the spring of 2017. Since then it has formed the hockey stick trajectory to what is today around 62 bcf / day. Only 25 bcf short of the total U.S. supply of 87 bcf / day, up from last years supply of 78 bcf / day. One U.S. supply source that is down substantially at this point is Canadian imports. Instead of the 6.3 bcf / day from last year the U.S. only imported 4.2 bcf / day this year. I don’t know if that’s due to the lack of need as a result of the increase from domestic shale production, or if it is to do with the pipeline reversals where Canadian gas imports are being converted to Marcellus exports to Ontario and Quebec. Nonetheless there is a surplus capacity of Canadian gas as evidenced by the handsome differentials in that market.
https://www.eia.gov/naturalgas/weekly/

Natural gas inventories are low however I don’t see a situation where producers would run into difficulties in supplying the market in 2018/2019. What to me is frightening and disconcerting is the hockey stick trajectory of shales deliverability. It is now supplying 71% of the U.S. market. In addition we know that no one is making any profits and certainly no cash in natural gas since 2008. The subsidy from the oil side of the business ceased in late 2014 when both sides of the business began to fail. Then the investors backed out a few years ago, yet the trajectory is absolutely astonishing. And that’s not all, the amount of gas in the Marcellus and Permian that is constrained by pipeline access is significant and has created differentials in those markets. Or in other words, constrained natural gas surpluses in regional markets will soon be released into the larger U.S. market.

Canadians can flirt with communism and the government's control of the commanding heights of the oil and gas industry. That seems to be their choice and government mandated production allocation is all I’m sure that it’s made out to be. What they don't seem to appreciate is there's no government in the world large enough to solve their trillion dollar issues. However, the Preliminary Specification thinks that methodology stinks and the preferred method for a dynamic, innovative, accountable and profitable oil and gas industry is to use profitability as the measure of production allocation. If the property can produce a profit based on a reasonable accounting of all of its costs then it should produce. Otherwise it should be shut-in so that it can be worked on to increase the reserves, reduce the cost or expand the deliverability and return it to profitable operation. Which provides the oil and gas producers with the most profitable means of oil and gas operations due to the fact that no property losses will be incurred that would dilute their profitability. The commodity markets would find the marginal costs when the marginal production is removed from the market. The reserves would be saved for a time when they could be produced profitably and those reserves would not have to carry the incremental costs of additional monthly losses being incurred by unprofitable production.

In the bits and bytes area. Back in 2004 bureaucrats distorted our finding of software supports and defines the organization. That was a finding that we had in the Preliminary Research Report. Based on Sir Anthony Giddons Structuration Theory and Professor Wanda Orlikowski’s Model of Structuration. If you want to change an organization then change the software first. The bureaucratic distortion came about when the bureaucrats realized if they never changed their software they never had to lose their lofty positions. Software can unfortunately be used as cement to permanently set the organization. And therefore we have the situation today made worse by producers with software from past generations that are woefully inadequate to deal with the issues they face today. We’ve also noted bureaucrats are now spending their efforts to build value in their organizations by making themselves into software developers. Believing that the results of their software development efforts will be timely enough to offset their lack of cash in the bank to meet payroll either today or mid December. Soon everyone will understand that $13 oil prices don’t leave anything for anyone after the bureaucrats. It’s why they have to ask for your love and support.

Are bureaucrats now distorting the “thunder” that we’re creating in the market regarding the value quantified in our value proposition? Attempting to replicate those values in their own software development efforts? Or are they just trying to divert attention away from People, Ideas & Objects in order to say that they are pursuing the software value generating capabilities in an attempt to keep themselves at the trough as long as possible. Knowing what we know today, and all of the past history, will these bureaucrats be left in command? Am I the only one who saw this issue, who understood the trillions of dollars that were at stake? Hardly, the conflict that the Preliminary Specification places the bureaucrats in is evident. Their toast, finished, unnecessary and unwanted. They chose to fill their pockets instead of doing the right thing. They are responsible for this damage. They knew what was happening, chose to silence me and were deliberate in their destructive actions. Are they still the best option for the industry? Or has their capitulation of responsibility and accountability gone to far? Has the invitations to the government pushed them into unwanted territory?

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 We See IT Developing

Within People, Ideas & Objects Preliminary Specification we have a technical vision that contains four Information Technologies in which we feel capture the next level of value that Information Technology offers. We see these as being revolutionary in the manner in which people will do their work and provide the opportunities that producers will be able to capture a greater understanding of their business. This vision is technological in nature and bring about what is commonly understood to be, and is now classified as the Internet of Things (IOT). They are, in no particular order Java, wireless, IPv6 and what we call Asynchronous Process Management. By implementing these technologies through our Preliminary Specification, based on our vision of how these are able to be used, we feel that oil and gas can leverage the next generation of Information Technologies for their benefit.

The implementation of these Information Technologies are currently underway. Much discussion about them is being carried out in the marketplace and the belief is that the producers will capture and implement them as easily as they breathe the air. Continuation of the hodge podge approach to IT will fail if left to serendipity. Worst of all the costs for the producer will be excessive making the costs incurred across the industry, as each producer incurs the same developmental overhead costs that are not shared or shareable, tragic. Possibly the worst aspect of the methods being discussed in today’s marketplace is leaving the outcome of the implementation of these technologies to fate and having no one in the industry benefit whatsoever.

Just as the bureaucrats have demonstrated a propensity to cling to their domain and way of life by precluding the consideration of People, Ideas & Objects Preliminary Specification. The CIO’s and IT Managers within oil and gas are hesitant to release the power and control they have over any domain of their IT playgrounds. This is to be expected and is one of the reasons that our budget funding is necessary on an upfront basis. We risk too much being beholden to those who do not share our vision of providing the oil and gas producers with the most profitable means of oil and gas operations. We won’t become “blind sleepwalking agents of whomever will feed us” Habermas. Theirs is a structure that we have criticized repeatedly on the basis of its commercial failure. It is a cultural and systemic failure that has to be rooted out and asphyxiated. Otherwise the industry will fall back to its cultural failing ways. Fortunately we have the situation where software defines and supports the organization. Once we have been able to build the software that provides the oil and gas industry with the most profitable means of oil and gas operations there will be no regression back to its current cultural failing state.

Our vision implements these four cornerstones in the following manner. Java due to it being a statically typed language has the capacity and capability for unlimited addressing. This in combination with IPv6, which provides the ability for essentially unlimited Internet addressing, will enable the capability and capacity to manage infinite variables and their processes in a safe, secure and reliable manner. Wireless capability has already shown its strength in all areas of our economy. However with 5G cellular technologies set to be released in as early as 2019, but certainly in 2020, the dynamic nature of communication between devices as well as the broadband speeds will be revolutionary. Asynchronous Process Management is the term we use for the ability for a process to be completed in a myriad of methods. Or as is available. There may be times in which the process is inactive and other times when only partially active. This opens a new paradigm as to how the work can be done within the scope of an ERP system.

This makes for an exponentially more complex world than the one that we have today. The conclusion that has been made by some of what I think are the smarter vendors is that the ability to control and monitor this environment with today’s tools doesn’t exist. Certainly we’ll use computers in much of the same way as we do today. However the operation of them will have to be done through our voices. Today Apple's Siri is fully programmable and quite functional as a result. Instead of treating her repeatedly as a dumb mute I’m now finding that she is very useful and I’m saying please and thank you. Oracle is also taking the Chatbot technologies they developed and released last year to the next level in a product they call Oracle Digital Assistant. It works just as the programmable Siri does in that you can invoke it to complete tasks in somewhat of a natural language methodology. And that is the next step. Even with only thirty Siri programs it becomes difficult to remember the actual label name of the Siri program that your interested in. This is the current constraint of these technologies. Artificial Intelligence is being applied to this issue in the form of Natural Language Processing to aid in the delivery of these services in a more conversational manner in the near future.

This forms a brief overview of our view of the Information Technological landscape that will be implemented through the Preliminary Specification. This is a North American oil and gas industry based vision that is shared across all producers. One that is focused on leveraging the benefits of these technologies to ensure that we provide the oil and gas producer with the most profitable means of oil and gas operations. A vision that is criticised by the producers CIO’s and IT Managers as being too broad in terms of scope and scale. Yet something that they willingly undertake with their far smaller budgets and limited resources. I would suggest our vision stands in stark contrast to today’s vision provided to us by the bureaucrats in charge of the producers today. One in which they scale back their drilling operations in the face of declining commodity prices. A tool that we have called a dull, blunt instrument that has been used repeatedly in the industry. A tool that has proven its ineffectiveness time and again as the issues and opportunities that are faced by these producers remain unaddressed and unrealized.

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 Cottage Industry Approach

Over the years I’ve been critical, imagine that, of the method in which the oil and gas producers have approached software developers. Someone might put together a widget in their basement or garage that provides some interest to the industry and the producers would put that individual on a nutritious, albeit still classified as a starvation diet. As opposed to the strictly starvation diet incurred to build the widget. We’ve called this the cottage industry approach to software development in oil and gas. Then the staff at the producer firm would cobble together and maintain forever their collection of software widgets and ensure they have a smooth running, however losing enterprise. People, Ideas & Objects Preliminary Specification is a different approach. With the reorganization of the industry to establish the sub-industry of our user community and service providers. The reorganization of the producer firm to focus on their key competitive advantages of their earth science and engineering capabilities, and land and asset base. And third, with the focus on the Joint Operating Committee, there brings about a collaborative model of interaction throughout the industry. Therefore, if the producers were to approach the issues and opportunities that they face in the marketplace today they would need to abandon the cottage industry approach to software development and adopt the structural reorganization and software development methodology prescribed in the Preliminary Specification. After all they can’t lose much more money can they?

Producers have attained a herd mentality that is quite exceptional for anyone outside of the industry to observe. The “thing to do” or the “thing to be” is the driving force of the message coming out of the producers. Anyone remember SAGD which led to Heavy Oil then to unconventional gas and now shale. It would appear that the place to be today, the area where the most value can be generated is in the development of software to aid in the management of the producer firm. If you missed this trend don’t worry, apparently so did I. There is little doubt in my mind as I write this that the established producers days are numbered. Trust me when I tell you, they won’t be around when they finish writing their new wiz bang software. It’s not my opinion that their writing of their own software is going to encourage investors to run back into the industry with bags of cash to position themselves for the next upswing. What will be the vision of such an initiative, what will be the method in which the issues are solved and the opportunities brought about. Producers need to understand and remember that the copyright on the Preliminary Specification is well established. It took decades of hard work and a full decade of dedicated research in order to finish. Again what will be the new, alternate vision that the producers have been working on these past decades for their new software?

Then again what do I know, they’re producers, they have wallets the size of… Well they used to. Maybe software development isn’t as difficult for them as it has been for me. They could move some engineers off the drilling of wells and start them on software development and have a product in no time. Think of it, each and every producer hammering away at the keyboard in an effort to fix what ails their business before the ceiling falls in. Kind of reminds you of the joke about the auditorium full of monkeys with typewriters producing great literature. The fact that this cottage industry approach, which has been the method used in oil and gas for at least 40 years, hasn’t worked, as evidenced by the fact the issues exist today, will have no bearing on that outcome.

I’m curt and generally disgusted with the state of affairs in oil and gas. I’ve worked hard to avoid this meltdown that we are well into the latter stages of. If I appear disrespectful to the producers it does no harm to me whatsoever. They are not my customers and these producers won’t be around much longer. Disintermediation is the name of the game these days. IT is railroading through every industry on the planet. If bureaucrats control the software development, then they’ll control their destiny is what their devious minds have come up with. No industry will avoid the conversion from whatever they are today to the software industry. A culturally, systemic and chronically unprofitable oil and gas industry has no future. The Preliminary Specification provides oil and gas producers with the most profitable means of oil and gas operations. It’s therefore not enough to own the oil and gas asset anymore. It is also necessary to have access to the software that makes the oil and gas asset profitable. Without that you have today’s fiasco. This is reality, and it will be brought to you by the cottage industry approach just as soon as those monkeys finish their first legible page of text.

The one issue we have not been able to solve, and if we can’t solve it we may be forced to walk away from it. The only value that the current producers provide their investors is the amount of property, plant and equipment sitting on their big, bloated, beautiful balance sheets. These amount to what we believe are $1.7 trillion. These are also the amounts of money that the investors have provided the consumers in the form of discounts on their energy consumption. The investors have graciously paid the capital costs of the consumers energy consumption and these costs are sitting on the industries balance sheets as the unrecognized capital costs of past production that the investors could use in future pricing calculations. If they were to somehow acquire these companies and be able to use these amounts then they would be able to retrieve these amounts from the future pricing through the fact that the Preliminary Specification provides the most profitable means of oil and gas operations. However, if all of these costs are now supported with debts as many companies have wiped out all of the shareholder equity and working capital, then walking away may be the best alternative.

For the past number of years I’ve been working to reduce our development timelines in an effort to mitigate the amount of loss that the oil and gas industry incurs. Each year we are unable to deliver our product to the industry is another half trillion dollars or more. Time is money and the need to ensure that we deliver our product in a timely manner is a concern to us, as we believe it will eventually be to others. With the realization that money is being lost, something that we’ve been saying for over a decade. Therefore I undertook to look at what we could do to ensure that the time we needed for development was limited to just what was required. As soon as the Preliminary Specification was published in final form we began the development of our user community. That has been the priority of our efforts since that time which was December 2013. The development of the user community is the major impediment to our delivery schedules. Without our user community in place we will not be developing any code. Software that is not based on a broad and diverse user community is useless software. We therefore have eliminated many years from our delivery dates and increased our product quality substantially due to our focus and efforts in this area. Oracle has been our chosen vendor for the base of our offering. Oracle has a broad and diverse market offering that is coordinated and comprehensive. This includes their consulting services in the area of software development. For People, Ideas & Objects to recruit the 600 or more software developers, have them singing from the same hymn sheet and then belt out the most capable and competitive team we need for this undertaking is possibly a half decade at the absolute minimum. It has therefore been decided to reorganize our firm into what we are able to provide in terms of value to the industry. We are a user community and Intellectual Property offering that will be using Oracle as our sole contracted technology provider and software developer. This will allow our user community to hit the ground running with the Oracle developers soon after our budget is secured. These are the major initiatives we have undertaken to reduce our time requirements, there have been many smaller ones that are not relevant to this conversation. IT continues to mature and provide ways in which we can a) increase our quality, b) reduce our timelines and / or c) reduce our costs. In each instance we’ll pick the two of those qualities that we find most pertinent to our demands and proceed from there. The rule in software is that you never get to pick all three.

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.

Trim Your Hedges

I’ve never been a fan of hedging a producers production. Even though today it would be a good thing to have done. With differentials as high as they are you could still realize a decent price on your production if you had actively hedged that production. Not many producers are that aggressive anymore. Some used to hedge everything but the royalty share of production. Now it’s on a more limited basis that hedging takes place. The issue that I take with producers hedging their production is that it’s financial engineering. If they focused on the business of the business of the dynamic, innovative, accountable and profitable oil and gas producer, what purpose would hedging provide the industry? As it is the overproduction that is causing the large differentials is only encouraged by hedging as those that are overproducing are not realizing the differentiated price but the hedged price. Bringing more production onto the market in an artificial manner.

This reflects the fundamental lack of belief that oil and gas producers have in markets. If markets only provide pricing information why are the producers not listening to that information and governing their actions based on these prices. If the price can earn a “real” profit then the property should continue to produce. Otherwise shut the property in. Disconnecting the production from the marketplace when producers hedge their production only makes this situation that all producers are in much worse. Although you may win in the very short term… It is the chronic, systemic, long term overproduction that has eroded the prices of the commodities to the point where even hedging is inadequate to cover the costs of oil and gas exploration and production. Natural gas used to trade at 6 to 1 of the oil prices. Now it trades at 21.47 to 1. Natural gas being a continental price was subject to the shale gas volumes overwhelming a smaller market. Therefore they fell quicker, however the effect of the overproduction eventually leaked out of North America to every other region in the world. Oil being a global price will take longer for the overproduction to fundamentally destroy that commodity market as its global size is much larger and hence take longer. Given time however you can be assured that the fundamental destruction of that market will occur at some point in our very near future. Bureaucrats might suggest the upside of this would be that natural gas would resume trading at 6 to 1.

Until we begin to focus on the actual costs of oil and gas exploration and production in the market we will not be able to maintain this industry. This to me sounds like the role that accounting should take. Determining what the actual costs are which consists of capital, royalty, operating and overhead to see if that’s profitable based on the market price. (Note this has nothing to do with building big balance sheets.) This accounting has to be conducted without respect to the influence of any hedging. If the producer chooses to hedge any production then they have to keep it separate from the business of the producer. Just as the purchase of any lottery tickets or trips to Las Vegas shouldn’t influence the outcome of the producers operations.

In the future there is not much question that the productive capacity and capability of the producers will far exceed the market demand for these commodities. The chronic nature of today’s overproduction has, and in the case of oil is fundamentally breaking down the markets price. The need for a methodology of production allocation across the industry has to be adopted. The oil and gas bureaucrats might prefer their fellow bureaucrats in the government regulate them on how much they should produce. That of course would never fly. There are other means of production allocation that would be reasonable. Such as OPEC’s use of reserves. Then the inflation of each producers reserves would be spectacular just as they were when OPEC implemented that methodology. People, Ideas & Objects believe that the most effective, fairest and most equitable production allocation methodology is one that considers the value of oil and gas in today’s market and its non renewable nature. The Preliminary Specifications production allocation methodology is that all production is produced profitably everywhere and always. And profitably based on a reasonable accounting that considers the full cost of the barrel of oil and gas based on a reasonable accounting. Alternatively we can continue on in this cashless society that I think producers have misinterpreted the meaning of.

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

That's a Cost, Not an Asset

Everything that's been done by the producers in these past ten years, which is nothing, has amounted to nothing. More and more people are catching on to the parlour tricks involved in oil and gas. Drill wells, build balance sheets and report profits that always have a rapidly decreasing cash and working capital balance associated with them. Producers will say “look at all the value we’ve released” and investors state “show me the money.” I’m reading more and more about the failure that is the shale oil and gas revolution. Shale is an exaggeration of the difficulties experienced everywhere in the industry. Capital costs are incurred to drill, complete and equip the well. A well that costs substantially more than anything experienced before. Producers then put these “assets” on their well built balance sheets for at least a decade or more, with a depletion schedule allocating these costs across each molecule of P&NG rights they’ve revealed. Therefore as the well produces in its first year, the results of all of these costs are realized when these molecules are produced, and are contrast to the inevitable, natural decline curve that kicks in. Spending is how the producer builds the balance sheet, depletion over decades as most reserves will last that long, only accelerates the producers balance sheet building.

The natural decline curve is a bit of a red herring to those that are not fully familiar to the oil and gas industry. It exists and oil and gas everywhere is subject to it. It is also forward looking, not historical. Engineers are employed at the producers and what they understand is that the natural decline curve doesn’t have to be natural. They’ll keep the production volumes up through their constant innovations and enginuity. I don’t know what the average pay is for a shale formation, however with the aerial extent of the shale formations spanning states in many cases the opportunity to work these formations and maintain deliverability is easily achieved. They can extend the laterals, increase the number of fracs in each lateral, they can run multi-laterals around the wellbore. They can also conduct completions lower within the pay zone to stimulate further production. There are many things that have been learned over the past decades and although the ones that I’ve mentioned here are considered radical surgery, they also show that these formations have many decades of productive life left in them.

The problem is this additional work has incremental capital involved. Nothing is ever free is it. The costs of these additional fracs is the difficulty with the costs associated with shale. The drilling costs are otherwise the same. Drilling laterally for miles, completing at upwards of 70 intervals on each lateral easily costs at least 70 times as much in terms of completion costs of a what a conventional vertical well would cost to complete. Doing these major operations multiple times during the life of the well will add substantial costs to the reserves of the property. Almost as much as the initial drilling, completion and equipping did. What happens is that these operations also expose more reserves to be produced. These newly exposed reserves are added to the reserves base and the incremental costs are allocated equally across the total reserves. This is the ponzi scheme that is being mentioned repeatedly as criticism of the way in which oil and gas is accounted for. We here at People, Ideas & Objects have used the ponzi scheme allegation as a means to describe the methods used in oil and gas. We however have adopted a more civil and sophisticated argument to describe this situation. Suggesting these results come from the accounting firm of Madoff, Madoff, & Madoff.

As long as money is spent the balance sheet continues to grow bigger and more beautiful each quarter. This worked for many decades. Until the question was asked when was oil and gas going to be classified as a mature industry. One that doesn’t need to be “built” continuously from outside investment. That threw the cat amongst the pigeons and the investors began to see the nature of Madoff, Madoff, & Madoff’s accounting wizardry. Positive cash flow was only achieved as result of drawdowns of bank debt or further investment by investors. Capital budgets never stopped growing. Money goes in and nothing ever comes out. Sure dividends are paid, usually out of the bank debts that had been incurred. Just as the ponzi scheme has to keep those who might get wise to the game quiet, producers have had to make some dividend distributions to keep their machinery operating.

The SEC guidelines enable a producer to conduct themselves in this manner until such time as the commodity prices decline sharply, or the fact that the people at the producer are not that smart or that good at oil and gas. The issue comes about as result of the SEC’s ceiling test where the “assets” as the producers call these costs, are subject to the comparison of the valuation of the total reserves times their commodity prices. If the reserves are valued more than the “assets” then the producer can slide for at least one more year before any critical situation arises. Otherwise they need to go to their shareholders and explain to them how their “assets” suddenly became costs. Which is dangerous and unhealthy for the producer.

Now what we propose in the Preliminary Specification is to rectify this situation by accounting for the costs of oil and gas at the Joint Operating Committee. The capital, royalty, operating, and overhead costs need to be accurate in order to determine the profitability of the property in the current environment. If the property is unprofitable then it will be shut-in until such time as it can reduce its costs, increase its throughput or reserves. While it is unprofitable it will incur a null operation, no profit but also no loss. The Preliminary Specification turns all of the producers costs into variable costs based on production. No production no costs. Therefore if the property is shut-in the producer maximizes their profitability by not diluting it with unprofitable operations. The commodity markets find the marginal costs by removing the marginal production from the market. The reserves are held for a time in which they can be produced profitably and they don’t have to realize the additional monthly losses that otherwise would have been incurred if the property continued to produce unprofitably.

A means in which to allocate the capital costs to what is referred to as flush production needs to be determined by our user community. The allocation of capital to all of the reserves is unreasonable and distorts the costs of the initial phase of production, and for that matter, all subsequent phases. Leaving the property with eventually few reserves and large balances of unrecognized capital costs of past production, as we call them. Madoff, Madoff & Madoff don’t see an issue with this. However it is highly inappropriate and needs to change in the shale era. Where the capital costs of each phase of development need to be captured by the production that arises from that effort. The deferral of these capital costs, in a capital intensive industry, that supports the activity of “building balance sheets” is most inappropriate and will cease with the implementation of the Preliminary Specification.

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

Third Friday

American Thanksgiving

I'll Trade You 5,000 Economists For One Barrel of Oil

Assigning responsibility for the greater economy that’s involved in the exploration and production of oil and gas seems unfair to the bureaucrat. They’re just doing their job after all. The Preliminary Specification looks beyond the edge of the desk of these bureaucrats and takes a broader look at the situation at hand. Society in general is the net benefactor of the oil and gas commodities that are produced. Consumers in particular benefit at the convenience of these commodities to provide power, heat and mechanical leverage. Without these we would be back in the dark ages in terms of our capabilities. On a heat value basis it is understood that each barrel of oil is the equivalent of 23,200 man hours of labor. At today’s global liquids production of approximately 100 million barrels / day that benefits mankind in the order of 1.189 Billion man years each and every day. That’s billion man years every day. Therefore we know that the economy that consumes the most energy is also going to be the most productive. This is the role of the North American oil and gas industry to profitably provide North America with the most productive economy. And to do that in a dynamic, innovative, accountable, and profitably manner through the implementation of the Preliminary Specification.

What we are learning from the Trump economy is that trade is an important part of any nations benefit. Economists call this comparative advantage. Essentially specialization and the division of labor on a national scale. What we are now learning is that true fair trade is subject to others taking advantage of their trading partners. The hollowing out of the United States has been at the encouragement of the economists who suggest we look to all of the very low cost “stuff” we get in return. What the President is doing is not listening to the economists anymore when it has become so obvious to everyone but the economists that it’s good to have low cost goods, but it's better to have jobs for people. What we need to do is to stop listening to economists in general. Since 2008 when only Nouriel Roubini had predicted the financial crisis and the other economists believed everything was smooth sailing. That fact, in my mind, disqualifies all of the other economists and their profession from any further discussion. They are too busy looking at the dials on their dashboards to see what’s occurring in front of them. Their numbers may be better for them one way than the other, that doesn’t mean it's the right way to go. The same principle applies here in oil and gas. Everyone complains about the cost of oil and gas. Well maybe consumers should go without! That would be what the economists would suggest. Or they could pay the piper for the real cost of oil and gas exploration and production, and have a job to pay for their energy. A job in either the oil and gas industry, or the most productive economy. Energy being a small component of the individual’s budget and will continue to be so even after the Preliminary Specification is implemented.

What we see today is the producer searching for the nearest and easiest forms of cash. No investors remain, the bank is not lending, the service industry can’t extend their receivables any further. Producers can’t even attract the bottom feeders. The only cash available to them for the past year is new flush production. It is incremental cash over last months and can be used in discretionary ways, such as their paychecks. Therefore as we see in Canada, this is the ultimate end of the road for the industry. The search for cash has now estinguished the last viable source when the differentials are greater than 50% everywhere and always. We’ve discussed the differentials before, prices on natural gas have been as low as $0.19.  We should thank the Canadians for showing us the future in such stark terms. They’ve done a good job in educating us what the net effect of decades of their cultural madness brings. The next step is the inevitable exit of those that are primarily responsible for this mess. Which I think we’ll see as soon as the number of paychecks that are fully processed through the bank diminish each pay period. I do not see how we get through the remainder of 2018.

Without profitable production everywhere and always the North American producers have no future. The investors are unhappy with the treatment they’ve received over the past four decades. The consumers are uneducated about the value they’re provided with each and every day. Our economies are suffering as a result of the protracted and unnecessary downturn in oil and gas since 2008. And it seems the oil and gas bureaucrats want to extend their destructive reach beyond oil and gas to the greater economy. Enough time has passed that we’ve witnessed enough of this destruction and need to get on with the job of building for the future. How this is resolved is through the implementation of the Preliminary Specification. The level of destruction that is ongoing to me is remarkable. The rational, logical conclusion is that this has to be resolved before much more damage is done. Yet I’m not sure that will happen. If producers chose to implement the Preliminary Specification they would then have a plan to deal with this situation. I believe investors would see the industry opportunities and want to position themselves for the future through new investments in the industry. I naturally believe that’s the industries only hope.

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.

Ouch! That's a Big Boo Boo

Since September 30, 2018 the market capitalization of the 23 producers that we follow has declined by 18.5% from $551.3 billion to $449.6 billion. Just over $101 billion lost in the course of 45 days. $2 billion / day in financial losses sounds so much more impressive than 100,000 boe / day doesn’t it. Keep up the good work! More gold stars for this excellent participation are on their way. In fact the market cap of these producers at the end of the third quarter of 2016 was $523.8 billion. Just doesn’t seem to have much performance in this sector of the economy, not that that’s an issue or anything. Take into consideration the loss of $100 billion per year that Canadian producers are now realizing on their oil production due to differentials. Add that to the differentials that have been preeminent in the Marcellus for years and in the Permian for the recent short term. All these losses being incurred makes you wonder who’s running the show? Especially since I’ve been screaming for so long about these points, highlighting our value proposition which is $25.7 and $45.7 trillion over the next 25 years, being laughed at for that, and all that producers need to do is fund our budget to resolve these issues, become profitable in the real sense of the word and as a result would have a plan on how to deal with the future.

But that’s the point isn’t. Funding People, Ideas & Objects budget is the equivalent of bureaucratic suicide. We have no room, tolerance or understanding for bureaucrats in the environment we’re creating with the Preliminary Specification. If you look at the losses detailed above those are just the current losses being incurred by the producers. If we look at the societal costs over the past decade of this downturn we see the people who have either lost their employment in oil and gas. Have had their careers stalled in a mind numbing nothingness decayed (or decade) that only bureaucrats have thrived in. Governments have forgone their taxes on all these losses and royalty holders are having to share their meals with the dog. Or is it the other way around? But worst of all is the service industry who’ve had their activity levels slashed, producers knowing that the situation they created was particularly dire for the service industry began to pressure these vendors for large discounts. And then, if they were ever granted any work, would have to sit on the accounts receivable for upto 18 months before the bureaucrat decided to pay them. I’m just trying to remember the times when, and if, the love and support of the bureaucrats was sent to those noted above when they were suffering. Can’t remember at the moment, maybe it didn’t happen that way. Bureaucrats haven’t been known to give a damn about anyone else. Don’t get me wrong we all love and support the oil and gas bureaucrats. We just don’t understand the reason why the chronic, systemic and cultural overproduction has to continue when the People, Ideas & Objects Preliminary Specification resolves all of the issues that we’ve noted here. To put a positive spin on it, we also provide a permanent tropical vacation for the bureaucrats! Maybe that will express the love and support that they feel is missing.

We’ve had many reasons and excuses from the producers this past decade. Prayers for a cold winter, waiting for markets to rebalance, building strong balance sheets or is that bigger, but how many remember those days when innovation was all the rampage in the industry. Where costs were collapsing at tremendous speeds due to the “producers” innovations. Yes we had a good laugh then too. Producers don’t innovate, its the service industry. The cost reductions were a result of beating up the service industry on price, and the accounting wizardry of Madoff, Madoff & Madoff. Extending the depletion from ten years to fifteen years has the effect of miraculous cost reductions in a capital intensive industry, as one could understand. Maybe the best tale told by the producers is that their profitable. Unfortunately the investors learned that profitable doesn’t mean profits in the traditional sense. Then the banks learned the new classification of that term. That didn’t stop the producers though, they told everyone that $40 was all they needed for “profitable” operations. Heck even the President of the United States believed them. I’m not suggesting that all these excuses or stories that’ve been told over the past decade aren’t true. It’s just that no one believes these bureaucrats about anything anymore. So crying that they have no love or support is probably the last humiliating act they’ll have to face before they exit out the back door in shame. And I say that with all the love and support I can muster.

Now not only are governments taking over sectors of the oil and gas industry as Canada’s Federal government is buying the TransMountain pipeline expansion. They are actively being asked to take the responsibility for the big boo boo that bureaucrats made in terms of overproduction. Don’t worry kids the government fixes everything. Investors are thinking to themselves “thank god we didn’t put anymore money in the industry for the past three years. Too bad we still hold stock!” Seems to be a bit of a run on Canadian oil and gas producers since the government was asked to clean up the boo boo. The motto for Canadian oil and gas is “invest in oil and gas we need your love and support.” I’ve been consistently critical of the manner in which the industry has been operated for the past decade. Filling one’s pockets at the expense of others is not how you run an industry. My sarcasm is mostly a result of the best I can do in terms of restraining my disrespect for these bureaucrats. My frustration is conflicted with what can only be the heydays of all heydays and the last few minutes of these bureaucrats administration. They’ve now proven incapable of seeing the issues and acting in the interests of their business. There’s no one left to cry too about their boo boo's. Move along.

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.