Marginal Costs

There is a disparity between the term “marginal costs” when used on this blog and that which is used by the producers. For our purposes here we use the economic definition that states in the long run all costs are marginal. Whereas the producers are dealing only with the costs that are not capital in nature. I continue to state that oil and gas is a capital intensive industry and therefore needs to account for its capital in a more appropriate manner than what it has in the past four decades. What we have today is a distortion of significant proportions that is recorded on the well “built” balance sheets of the producers. If I gross up the third quarter 2018 capital expenditures to the full year, then the past three years average capital expenditures of our sample of 23 producers has been $57.2 billion. When we compare this amount to that which is recorded in property, plant and equipment in the third quarter of 2018 which totals $474.7 billion. That amount in property, plant and equipment represents 8.3 years of capital expenditures. An endorsement of the fact that oil and gas is a capital intensive industry, there certainly has been some “building” going on in the industry, and it’s reasonable to assume that the industry does not share People, Ideas & Objects definition of marginal costs.

There are some that might argue that those costs will be subject to depletion in the coming years. To which I say exactly. The balance of property, plant and equipment has also been subject to depletion for the past 8.3 years and more. The residual balance is a balance that never goes down in oil and gas. It’s a number that only rises. Which is reasonable in any business as it grows, what I’m suggesting is the growth in property, plant and equipment has been an aberration due to the method of recognizing the capital costs of each barrel of oil equivalent is inaccurate and is inadequate to capture the real costs of exploration and production. It is our assertion that the consumers have paid for the operating costs of the oil and gas that they’ve consumed and the investors were the ones who paid for the capital costs of that consumption.

The one thing that I’m certain of from my experience in oil and gas. Is the amounts recorded in property, plant and equipment are accurate and have the full integrity of the management. They would be hard pressed to find an error or anomaly in any of the producers recording of any of the capital costs that they’ve recognized. The point that I’m suggesting is, try to have them justify the amounts being so stratospherically high. No one ever could. It’s an attempt by the producer to represent the market value of the underlying properties. The feeling is, that is what you’re worth and hence the desire to “build” the number ever higher. It is an asset and never a capital cost that would be recognized in the course of the business. The accounting of oil and gas has become culturally distorted to attempt to reflect the value of the producer as opposed to reflect the performance of the producer. If it was about performance, the producer would proudly display $0.00 in property, plant and equipment, massive cash and working capital, and retained earnings far exceeding the amount of capital that was raised. Instead what we have are “assets” of the capital cost nature, negative working capital and to a large extent no retained earnings on average throughout the industry, and many producers with no shareholders equity whatsoever. Who cares about performance when you’ve “built” a balance sheet!

If we take People, Ideas & Objects recommended exercise of removing 65% of these producers assets and recognize them as the unrecognized capital costs of prior production in the current period to better understand their performance. When we do this we end up with a reflection of the catastrophe that has been created. We only recommend this as an ad-hoc presentation of the financial statements to put across to these bureaucrats how badly they’ve mismanaged these organizations. They may have spit polished facilities that are wonders of the engineering world but they are worthless when they take additional cash just to produce them. This ad-hoc exercise also shows that the extent of the damage and worthlessness that these bureaucrats have been consumed in, is truly financially devastating. The calculation for our sample of 23 producers, based on third quarter 2018 values, is we end up taking 65% of $474.7 billion in assets or $308.5 billion off of $281.3 billion in total shareholders equity leaving nothing left of what the investors provided other than negative $27.2 billion in shareholders equity. (Tax implications are held constant here.) This deficits implied meaning is that the bankers, too, have been punching well above their weight in terms of their contribution to the oil and gas industry for a significant period of time for this to have occurred.

People, Ideas & Objects do recommend that producers begin to amortize these “assets” on a permanent 30 month schedule, or faster, to ensure that the capital costs in the industry are recognized in a more timely manner ($15.8 billion in depletion / month, or $190 billion / year for our sample of 23 producers vs. the average of the last three years of $57.2 billion / year.) and the amount of invested cash that these “assets” represent is returned to the industry in the form of cash for further redeployment. Assuming of course the Preliminary Specifications price maker strategy is in place and the producers are receiving adequate compensation for their product. If the industry needs $20 to $40 trillion over the next 25 years they’re going to have to recycle some “assets” quickly and repeatedly. In addition the policies of capitalizing everything that is spent by the producer has to stop. This is ludicrous, and when added to the fact that the “assets” represent 8.3 years of capital expenditures! The Preliminary Specifications stops this in two critical ways. The first is to capitalize only tangibles. The intangibles should be expensed. Secondly apply a different perspective to the production profile. If the production profile grows by 5% then how much of the capital expenditures were to expand the production profile and how much of the capital expenditures were expended to maintain the production profile. Those expenditures that maintain the production profile should be expensed.

Another point to be made that is different in the Preliminary Specification is the manner in which overhead is dealt with. Overhead costs in the industry are unknown due to the producers capitalizing the majority of these expenses. Leaving them on the balance sheet as assets for the ridiculous time they are. The Preliminary Specification reorganizes the administrative and accounting resources of the industry into service providers who manage one process and have the entire industry as their clients. The service providers charge each individual Joint Operating Committee in the current period for the overhead expenses that are incurred by the property, not the corporation as is done today. These expenses are then recaptured by the property in the process of normal operations from the price of the commodity. This is in contrast to the capitalization policies in place today which consumes the cash in the producer for at least 8.3 years on average. What we do know is that the cash that is spent this month to pay the receptionist, the Post-it-Notes and the telephone service costs incurred at Cenovus will not be fully returned to the company for 27 years, which is what their depletion schedule dictated in the second quarter of 2017. Therefore instead of having essentially the same cash recycled each month through a working capital component to pay for the overhead, each producer has to find new cash each month to pay the overhead because they archived last months cash as “assets” on their well “built” balance sheets for a few decades. And then the producers wonder why the investors have been withholding their cash.

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.

Overproduction is Not Going Away

People, Ideas & Objects provide the oil and gas industry with the opportunity to build software based on the Preliminary Specification. This will provide a reorganization of the producer firm and industry to deal with the issues and opportunities that are present in the marketplace today. This software will set in place an innovative framework throughout the industry, to ensure the profitability necessary to approach the difficult and challenging future the industry faces is generated. The key issue we face today is overproduction throughout the North American oil and gas marketplace. Commodity prices have collapsed for the past four years in oil, and the past decade in natural gas. To review the landscape the discussion of this issue doesn’t occur. Nowhere in the industry is there recognition of the overproduction or the acceptance of the Preliminary Specification. The financial difficulties being experienced by producers are as a result of OPEC+, or the Canadian and B.C. Governments or pipeline providers. Any straw man will do as long as no one mentions the fact that overproduction is systemic, chronic and has been a feature of the industry since the collapse of the oil price in 1986.

If the takeaway capacity of a region is 3.5 mmboe / day you can be certain the producers will be producing 4 mmboe / day. And if OPEC+ doesn’t curtail their production to accommodate the increase in North American production there will be further oil price pressure. It is the role of the producer to produce everything they have no matter the consequences. Due to the accounting treatment of capital costs, in a capital intensive industry, no matter how low the commodity price drops they’ll always be able to reduce depletion to the point where profitability reemerges. Therefore proving, mostly to themselves, that they are not the ones responsible for the overproduction in the industry, if there should ever be recognition of such an issue. Although this overproduction is experienced everywhere in North America the problem has manifest itself into a full blown crisis North of the Canadian border. There are fundamental differences in the way that business is conducted in Canada and the U.S. Canada is a very large country with close to no people. 9.5 people / square mile vs. 92.2 people / square mile in the U.S. Therefore we are well to do from a resource base that is distributed across those few individuals. The Americans have to work a bit harder for their benefits. This has them paying closer attention and with sharper pencils than Canadians. What I suggest is that what is happening in Canada is the precursor to what will happen throughout North America.

Overproduction became a crisis in December 2018 in Canada. As a result producers asked the government to intervene and implement a mandatory production allocation scheme across the industry. The consequences of the government mandate were effective in eliminating the deep differentials, however, it now shows the producers the difficulties with government mandated production quotas. Due to the structure of the industry the producers losses will increase as the overhead of the producers is fixed as opposed to variable under the Preliminary Specification. Less production will now be available to cover their overhead costs. This may not be evident to them in the financial statements since their profit and loss are such an accounting sludgefest, it will have a detrimental effect on their cash. Investors have expressed their opinion of the industries turn toward government control, and pipeline companies are far less certain of the producers deliverables in the future. As would be expected the government mandates have had a chilling effect on the upside of the industry when the regular market incentives are circumvented.

Running the industry as a business such as what is proposed in the Preliminary Specification has been wholesale rejected. Which inspires those who depend on market signals for their decisions, such as investors, bankers and service industry representatives. The Preliminary Specifications decentralized production models price maker strategy changes all of the producers costs to variable as a result of the reorganization that is conducted. It also enhances the quality of the accounting substantially so that each individual property will know the precise profitability or loss on the operations of that property. Therefore determining that the unprofitable production should be the production that is shut-in to satisfy the need to reduce the unnecessary overproduction. This quality of accounting can not be achieved due to overhead allowances at the property level skewing the actual costs, actual overheads at the properties are unknown and unknowable in the current systems. The Preliminary Specification will enable producers to use the detailed, factual accounting data generated to make independent business decisions to enhance their profits by eliminating their losing propositions and turning them into null operations. Oil and gas bureaucrats of course will have nothing of this “business logic.” They claim making independent business decisions based on detailed, factual accounting data is collusion. And therefore will just sit back and demand the government tell them what to produce. Despite the detrimental consequences.

Fourth quarter financial reports for 2018 will begin being reported tomorrow with Hess starting the season as usual. As always the decline in the quality of the financial condition of the producers will be on clear display for those who just can’t believe that nothing is ever done about any of this. After all “these are just numbers that have no bearing on the outcome of any wells that are drilled! They’re all just sunk costs and should be forgotten about.” In prior era’s these comments would be followed by “how many shares are you buying of our new offering?” The bureaucrat never connecting that on the one hand they were slapping the investor in the face by never accounting for the capital they raised from the investors each of the last ten years, and on the other hand begging for more cash. Investors can be slapped in the face for a period of time but will begin to change their attitude if they see that nothing is done to make the alleged business a business. So once again producers will parrot their operating earnings, or EBITDA and expect that the media will follow their lead once again. The capital costs, in a capital intensive business, building ever so much higher on the big, beautiful balance sheets.

The best measure of a producer these days is the amount of cash and working capital they have. They’ve eroded these resources so extensively in the past three years that I’m sure we’ll be seeing new methods of deferring payment to those that are owed. I anticipate this will also precipitate the layoffs that everyone has been concerned about. The need to lay the people off being necessary as opposed to have the payroll bounce. Taking the lesser of two evils rule. The point of all of this is to never admit that there’s a problem and make sure nothing is done to change that.

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 Devastated Landscape

The producers have so destroyed their business they’ll need more than three consecutive weeks of oil price increases to solve the problems that they’ve created for themselves. First, the investors, after what I suggest has been four decades of being told they were running profitable operations, find that the cupboards are bare and the producers had only deceived themselves by their own financial statements into a cultural, state of the art, spending machine. Realizing the implications of what had occurred the investors are wise to withhold any further investments, which was the rocket fuel for capital expenditures. Since then they’ve relied heavily on dividends from those producers that could participate in order to get out what they can. Expectations that the commercialization of shale may one day occur have ceased. The fact that the conventional business was never commercial is becoming evident to these investors and it was they who were the dupes who enabled the fraud to become culturally ingrained. We don’t hear any indication of hope that investment will be returned to the industry anymore. The industry is the dead zone, maybe for a generation. Possibly if producers could rehabilitate themselves, based on the Preliminary Specification, and prove they could provide “real” earnings for five years or more, then investors would learn to trust them again. Bankers are somewhat in the same boat. Always enamoured with the latest reserve report they too jumped in and secured those new reserves with expansions of the producers lines of credit and other debt instruments. As a result of the 2008 financial crisis, banks better understand what financial risk and exposure mean. They too are active in ensuring that the money they’re owed is recaptured from the dregs of the industry. This too might be a generational issue in terms of their return as well.

Consider the service industry. The number of wells drilled are approximately one third of what was conducted in prior years, which was the capacity for the North American marketplace. This drilling capacity has a commensurate decrease in the demand of what the rest of the service industry is capable of providing the oil and gas industry. During normal operations the service industries revenues would be 100% but would now have been sliced to one third. In addition, the demand from the producers for them to achieve “significant innovations” demands large discounts on the amount of fees the service industry charges during these “bad times.” These discounts are up to half the regular invoice price. Therefore the service industry continues to get away like bandits with as much as 16.5% of their prior, expected and necessary revenues. The producers were right to call these people greedy and lazy. I’m sure these service industry representatives can maintain a full payroll even though they’re only at one third capacity. If not then there might be some unemployment that had been experienced since the downturn. As we’re aware these people have left the business seeking more pleasant climates where the business cycles are constant and the employer appreciates their efforts. It may not be anymore than 85% of the money that is being offered in oil and gas but the mortgage gets paid and with the twins on their way... The point is they’ll need more than the promise of six months work in terms of what is promised to return to oil and gas. And that goes for the experienced hands. There are however those with no experience available. Nonetheless let's chalk this up to a generational issue as well. With the one caveat again that, if the producers displayed the ability to earn real profitability for five years, others might begin to rethink what are now entrenched positions.

It’s never been easier to get into oil and gas engineering and geology. This of course assumes that any of those courses will be taught next September. Not much demand has been experienced in those faculties over the past couple of years for engineers. And geologists are even worse. Kids these days eh! We heard nothing but the difficulties that producers were going to have with the “big shift change” as a result of the retirement of the braintrust in the industry. It’s not that this might be a generational issue like the others, it is. The industry will certainly pay the price in the long run for this and of course that is not something that needs to be worried about today. The bureaucrats have their bank accounts full, stocks in other industries in hand and their exit strategy from oil and gas ready to be deployed. It’s not going to be their problem.

I know I should send some much needed love and support to the producers one day. It just never comes up as a topic of urgency. Doing nothing in the face of such destruction is all part of the plan. It’s called muddling along and doing nothing. We need to contrast this dire situation with the position the industries should be in order to address the next 25 years. One that is unquestionably the most challenging and difficult in the history of oil and gas exploration and production. What’s the plan, what’s the strategy and how will we make this happen? Will investors and bankers be expected to come up with the $20 to $40 trillion in capital the producers say they need? Where will that money come from?

It seems to me that the one group that has chronically complained about the oil and gas industry is its consumers. They’re unhappy with the costs of energy and are quick to accuse the industry of anything regarding the prices charged. It has been People, Ideas & Objects suggestion that the amount of property, plant and equipment that is recorded on the producers balance sheets. The approximate $1.5 trillion, in what we call unrecognized capital costs of past production, is also the amount of the consumers discount that they’ve received for their oil and gas consumption over the past decades. They have paid the operating costs, the consumers now need to pay for the capital costs too. When we look for the financial resources for the industry to operate, it is the consumer that is going to have to be that source. Of course that implies that oil and gas would be operated as a business from this point forward. Which would require some changes.

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.

Some Clarifications, Part II

The development structure of the People, Ideas & Objects user community is designed to take the input from those with the understanding and knowledge of how the industry operates and implement that within the Preliminary Specifications frameworks and modules. In doing so, as user community members, they earn valuable consideration in exchange for their Intellectual Property and efforts. User community members also earn an exclusive license to own and operate a service provider that will manage an individual process within the Preliminary Specification for the benefit of the oil and gas producers. Service providers are the reallocation of the administrative and accounting resources of the producers in order to obtain a shared and shareable industry wide administrative and accounting capability that is variable based on the producers production. Enabling the most profitable means of oil and gas operations. These structural changes shift the producers corporate G&A to the Joint Operating Committees actual, detailed overhead under the Preliminary Specification. This reorganization needs to be done in a timely and organized manner. We are concerned that producers may jettison these administrative and accounting resources immediately upon paying their share of our budget and expect People, Ideas & Objects service providers to handle their load before the software is available. That is not what we are doing and we would caution producers to think carefully about the transition and the compliance needs of their organization. Producers will have significant involvement in the development of these systems through the user community. Handing off an SLA to People, Ideas & Objects and a pay-as-you-go structure is not going to be adequate or successful, and therefore is not being done. The fact that producers will have their money on the line should form the motivation and commitment necessary for them to ensure their success in terms of these developments, but also in terms of the implementation of the technologies in their own organization. People, Ideas & Objects, our user community and service providers will be a successful development, that does not guarantee each producer will share in that success automatically, particularly if that producers expectations of us are unreasonable.

I have spent the better part of the past 18 months working to reduce our software delivery times. The key change that we made in our product delivery was that we reorganized People, Ideas & Objects into a user community, Intellectual Property and research based firm. It is not that we don’t own and operate the software any more, those will fall under the Intellectual Property category of our offering. What we can not do is waste time in terms of delivering our product to the industry. With hundreds of billions of dollars in question each and every year, the time we take for delivery is expensive and wasteful for the industry. Therefore reducing our timelines would be a significant competitive advantage and increase in our value proposition to the producers. A key change that we made is that we have moved the software development from an in-house activity to one that will be undertaken by Oracle at the direction of our user community. This will save many, many years. Preparing an organization of 600 developers, having them coordinate their effort and then achieve the state of the art capabilities that we know are necessary will take us in excess of at least 5 years and maybe as much as a decade. We believe, Oracle can undertake these developments much quicker and will be able to deliver our product in a timely manner with the quality that we expect. This allowing us to focus almost exclusively on the further development of our user community, the key to our quality. Using Oracle Fusion Middleware and the Oracle stack of technologies that we’ve budgeted, our user community will be able to form, and interact with the Oracle team in a seamless process without the difficulties of putting together the necessary software development capabilities in house. Other significant time saving initiatives such as this have been done during the past 18 months and are continuing with People, Ideas & Objects. Our focus is on providing the most profitable means of oil and gas operations. That is our focus and that is our drive.

These outsourced developments can be made when we consider the fact that the following has only been discussed here once before. Once the People, Ideas & Objects Preliminary Specification is operational in the North American industry it will be for sale to the highest bidder. By having Oracle participate in these developments expands the number of bidders that we could sell the operating company, the Intellectual Property and my royalty to. Everything will be for sale upon completion. My motivation and drive in wanting to build the Preliminary Specification is unknown and unknowable. In May 2019 it will be 28 years that I’ve worked on this and the last half is clearly on display in this blog. This has been difficult and it has been challenging. I would not have traded a minute of it for anything.

A sale of the company essentially makes this a dual payday event. Which is fine as far as I’m concerned. Looking at the history and the attitude of the producers it is the method that one must have in order to avoid the same demise of my previous competitors. It is also what is necessary to ensure the completion and success of the initiative against what I see as the behaviours of the producers. That I get two paydays is irrelevant in the scheme of things. Having a prosperous and profitable oil and gas, secondary and tertiary industries is the point of the exercise. An industry that is positioned profitably and innovatively to deal with the difficult future ahead. The alternative is the producers will do nothing which leaves the status quo in place and from how I understand this issue, will continue with their chronic, downward spiral. I can guarantee that nothing will change otherwise. As an alternative we have our ICO being proposed in the next 5 years as the much more probable funding alternative to this process.

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.

Some Clarifications, Part I

Recently we noted that People, Ideas & Objects budget was required in full and the amounts allocated to earnings and Intellectual Property royalties would then be paid immediately. These will be the first tasks completed before the commencement of any software developments are undertaken. There are many other conditions in place to ensure that the success of this initiative is achieved. They’re in place to deal with the history of the ERP software developments in oil and gas since the 1980’s. A history that has precluded the oil and gas ERP software vendor from providing a return to their shareholders or managing a business on a normal course basis. It is these two constraints that have led People, Ideas & Objects to set these conditions on the development of the Preliminary Specification. Our value proposition benefits the oil and gas producer exclusively. It is valued in the tens of trillions of dollars over the next 25 years. A critical time in which the operational, political and financial frameworks of the industry have been put in serious jeopardy by bureaucratic mismanagement, and conversely, the most critical time in the history of the industry. It is on the basis of our value proposition that People, Ideas & Objects provides the oil and gas industry through our Preliminary Specification that we define our value. After 27 years of hard work we are entitled to exercise the value that we provide the industry, to strike while the iron is hot. The other conditions are as follows.

The history over the past three decades that I’ve been involved in ERP software developments has been interesting. In the early 1990’s there were more vendors involved in the business than you could count on all your fingers and toes. Probably close to thirty in total. What happened and why did this industry atrophy to essentially P2P and SAP? Investors in the 1990’s were keenly interested in the development of software and were active in most of these vendors. The difficulty was there just isn’t that large of a market in terms of oil and gas producers. Advantage oil and gas producers. Which they played to their advantage, as they do with all the secondary and tertiary industries, as both an art and a science. Playing one vendor off with the other in terms of pricing and ensuring that little to no money was ever expended on the licensing of these products was the end result. The software vendor was usually awarded an annual service contract as a percentage of the original sales price. Which of course cut the funding from the ERP investors leading them to eventually permanently leave. Since then it has been a slow and painful atrophy of the industry. Even Oracle who started out with a large commitment of developing software in early 1997 was unable to negotiate reasonably with the industry and left in frustration with the full understanding of the small size and hence, limited upside from the market. Their exit was at some point in the 1999 / 2000. At the sametime Qbyte shifted hands from PriceWaterhouseCoopers to IBM who were attempting to source redevelopment dollars from the industry. This approach also failed to raise the funds from industry and in 2005 IBM sold Qbyte to P2P. Leaving no new developments being undertaken in the industry other than People, Ideas & Objects. If the oil and gas industry had followed Oracle or IBMs lead earlier this century they may not be in the pickle that they find themselves in today.

Nonetheless what’s done is done and the only comprehensive research towards solving the overproduction issue and preparation for an innovative industry was undertaken by People, Ideas & Objects. This took from August of 2003 to December 2013 and can be reviewed on this blogs entries throughout that time, and the Preliminary Specification itself as the result. Software development has to have an overall vision or roadmap in order for people to focus and prepare the solution in a cohesive and functional manner. These are the difficult, preliminary work that leads to a much higher success rate in any software development project. This preliminary work doesn’t take much money but it certainly takes a serious amount of time and effort pursuing false promises, blind bunny trails until the right solution is found. This is the alternative that oil and gas producers have to pursue today if they find the conditions that I am stating here unpalatable. The only question they’ll need to ask is do they have that ten years or more to spend now that their probably collectively losing the value of our budget several times a month?

When your competitor or customer paints themselves into a corner such as oil and gas has today, it’s not the time in which you should be gracious and forgiving. This is a business and there is no one that will support People, Ideas & Objects from an investment point of view. Producers made that impossible. At the same time the publication of our draft Preliminary Research Reports received such a violent response from the industry, one that has continued to this day, that we’ve received no financial support from producers either. If we should continue without the financial resources necessary to develop the Preliminary Specification what difference would that make to us? Nothing, business as usual. We would also be foolish to expect that industry will suddenly become friendly towards us and be hospitable. Our software developments would be a necessity for the industry and the bureaucrats wouldn’t necessarily all line up to give us their best. We expect the adversarial relationship to continue and survive throughout our developments.

What we have done therefore, in my opinion, is provide the oil and gas producers with the opportunity to structure themselves with the software defining organization necessary for the next 25 years. If we were to take the position of the producers, that position they have traditionally put forward in their standard operating procedures, then the success of this initiative we feel would be in jeopardy. After all how is their business functioning today? For us to ensure the rebuilding of the industry successfully requires that we set the following conditions in a manner that will ensure the worst, self defeating, cultural propensities of the producers are eliminated in the development of the Preliminary Specification. The producers would like nothing better than to control the development by paying the costs as we went along. Providing a commensurate fee to People, Ideas & Objects for our efforts. Our concern is that their short attention spans would preclude the completion of the project if the price of oil should achieve three consecutive weeks of increases. The question of why they were developing expensive software would be asked and the determination that the project would be cancelled as a result. The project could never survive being temporarily shut-down nor achieve any manner of successful developments if the producers were controlling our revenues. We can not be “blind sleepwalking agents of whomever will feeds us.” The producers would sit back and blame or accuse us for any situation that was not to their specific liking. This would become an untenable and unmanageable situation where it may only be proven that the bureaucratic management process is the only viable choice. With the financial resources in hand we would be able to proceed at the direction of our user community as to what is required in the software. There is only one successful way in which to provide successful software and that is to base it in the user community, a community that we have been developing since the first quarter of 2014. This is an uncompromising methodology. There will be no decisions necessary as to which priority drives the development, we have no investors looking to cut costs, and producers will have input into the user community as their means to ensure their needs are met. There will be no Service Level Agreements executed between People, Ideas & Objects and the producers. We only recognize the user community. Our budget funding will be documented for the producers by People, Ideas & Objects simply issuing an invoice in the full amount of our budget to each of the producers for their share of the costs when paid.

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 I See Things

I am unaware of anything that I can point to in 2019 that would indicate a sense that oil and gas producers realized they were in an existential crisis. Some may think it’s a pretty good deal that they’ve so eroded the expectations that they perform. That when their performance is this abysmal, they can resume the “do nothing” operating procedure that has led them into all of these difficulties. When you’ve done nothing for this long very little will be expected of you. Although the stock market has a different perspective of the industry it does reflect general trends. We have noted the market capitalization of our sample of 23 producers at the end of each quarter for the past number of years. Starting in the third quarter of 2016 these producers had a market cap of $523 billion. Since that time they have remained in a range of $419 billion in the second quarter of 2017 and $559 billion in the second quarter of 2018. Now I understand in the last quarter of 2018 there was substantial tax loss selling throughout the indexes. More than likely as a result of all the profits that were being made in other industries. Therefore investors were actively selling oil and gas in order to reduce their tax burden. The market capitalization of our 23 producers as of December 31, 2018 recorded a lowly $379 billion. A loss of $171 billion, or about one third, for the three month period. There has been a small recovery in the price of each of the producers since. However the amount of the recovery is not material in determining any direction that the market believes oil and gas is headed.

Expectations that some action coming out of the producers in response to what even they describe is a crisis situation should be imminent. Commodity prices do not look as rosy as they did before the end of last year. Natural gas has resumed its pricing model, subject to a snow storm or two. And oil is undecided as to which direction it will be headed until it obtains a better grasp on the inventory, consumption and production numbers now that there is a new OPEC+ agreement in place. It does not appear that the prices necessary to provide truly profitable operations are going to be provided when we review the estimates of either the IEA or the EIA for the next few years. That is far too long for the secondary and tertiary industries to continue the cannibalization of their businesses for their survival. It has been a very difficult three years on top of a difficult decade. They are all but expended and any further attrition will lead to permanent damages to the capabilities of these industries. Maybe the media should go into these areas and do some of their ra ra ra reporting and see how that goes.

I’m certain that Santa brought each of the bureaucrats the cash that their producer firms needed in order to function and rectify all of the difficulties they face. We’ll see when they report the fourth quarter of 2018. I’m expecting a further deterioration of the cash and working capital of the industry. I have no doubt that the consumption of cash in the process of production continues everywhere and always. So distorted is the accounting, so perverted is the culture of the industry that has developed around these distortions that the seepage of cash will continue. After all it’s a feature, not a bug. The issue as far as the bureaucrats are concerned is the unwillingness of investors and bankers to resume their traditional role of reloading the spending machine. But make sure that no one asks the questions that no one has the answers for. Those questions being that unconventional / shale oil and gas has been around in material volumes for a decade now. How is the business doing? What’s the plan? Or, just exactly what is it that you’re doing, or think you’re doing?

The Preliminary Specification provides a means to mitigate all of the pain and suffering that we’re all experiencing. Providing the industry and its sub-industries with the resources necessary to prosper. With a plan on how the industry will face the next 25 years in what can only be described as its most difficult operational period to date. A time when the bureaucrats feel that their approach is “ok” and quite obviously not at issue. One in which the support of investors and bankers have been suspended. One in which the cash and working capital of the industry evaporates daily with further production. One in which the capabilities necessary to undertake those operations hits the critical point where they begin to atrophy. One in which the goodwill of the industry has been eroded by a pious, self indulgent bureaucracy that whines they have no support and just want to be loved. My favorite quotation from 2018 has to be the following. It provides me with a sense that I’ve actually accomplished something, that I’ve built some value. It summarizes the point that we’re at today and provides us with an understanding of how things will develop from here. But then again, maybe just muddling along a while longer is all that the producers really need to do.

Only a crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.

― Milton Friedman

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.

An Accelerating Frustration Level

The strategic considerations in oil and gas are very broad and highly diverse. They consist of the traditional muddle through and do nothing approach to the business. For Canadian oil and gas producers the strategy is to extend this strategic vision beyond the 2019 fiscal year and into the 2021 and 2022 fiscal years. That way pipeline capacity might be built and the continuation of normal operations, whatever that means, will resume. This is so exciting. And I’m certain that everyone else who is concerned about the health and welfare of the industry is as excited as I am. I don’t know why anyone would continue to support this, what would be the purpose? The level of comfort being expressed by the bureaucrats in these strategic positions shows they are not concerned about their bureaucratic empires in any way. They feel they’re as safe and secure as they could possibly be. With the higher oil prices that were provided by the efforts of the OPEC+ production sharing agreement, the North American producers promised that 2018 was going to be the year in which shale would be proven to be a viable business.

What we do know is at the end of the third quarter of 2018 the oil price was $73.56 which supported higher valuations of reserves on their big, beautiful balance sheets. Therefore, their reserves being more valuable, the amount of depletion that needed to be recorded would be far less than what was recorded at the end of the third quarter of 2017 when the price of oil was $51.67. Which is possibly why the third quarter of 2018’s recorded depletion of our sample of 23 producers was $39.1 billion vs. $52.3 billion for the same period in 2017. So yes there is no question that based on these lower depletion numbers in 2018 the higher profitability necessary to ensure the commercialization of shale was achieved. My frustration with this situation is the source of my sarcasm.

Throughout 2018 many producers were able to sell properties in order to raise some much needed cash. There almost seems to be a cash crisis raging in the industry. A majority of those properties ended up selling well below what they were recorded at on their big, beautiful balance sheets of the seller. Therefore creating large losses on these transactions. My question would be should this prompt the public accountants to begin a serious discussion of reducing the asset values of the producers to the traditional accounting requirement of the lower of cost or market value? After all how is it that all these producers, who are in a self proclaimed crisis, with assets ballooned to the stratosphere, justifying these numbers? Keeping with the theme of the obscenely high values of property, plant and equipment on the producers balance sheets, or as we like to call them at People, Ideas & Objects, the unrecognized capital costs of past production. With the decline in prices to $45.81 at the end of 2018, which is $15 below the price that was realized at December 31, 2017, the amount of depletion for 2018 is going to have to catch up and far exceed that which was recorded in 2017. To summarize for the public accountants then, even though the industry is in crisis producers big, beautiful balance sheets stick out like a sore thumb. The amount of sales of properties sold at values that are well below what the recorded cost are, seems to indicate that maybe they’ve been chronically and systemically recorded at too high of value. Or, you could keep this bloated asset value deception humming until the year 2021, 2022 fiscal period when the producers decide to change their strategic vision to that of muddling along and doing nothing. I certainly don’t want to tell them how to manage their business however it does appear that the overreporting of assets, earnings and cash flow has destroyed the credibility of the oil and gas producers in the eyes of the investors. The last time this happened was on a limited basis which saw Enron and WorldCom destroyed by a lack of faith. But then I guess there was also Arthur Anderson that was vaporized in that situation.

As an alternative People, Ideas & Objects recommend the industry implement the Preliminary Specification. With its decentralized production model’s price maker strategy producers will use profitability as the determinant as to whether a property produces or not. This ensures the highest level of profitability attainable by their organization when no losses on operations dilute their profitable operations, will hold their reserves for a time when they can be produced profitably, keeps their capital base lower when the monthly losses on unprofitable properties are not added to the amount of capital that the property needs to recover and ensures that the commodity markets find the marginal price. Once producers behavior is influenced in this way there will be no uncertainty in the commodity market as to the validity of that producers discipline in this production allocation methodology. There would be no incentive for any producer to break away from the profits only production allocation methodology in the Preliminary Specification. Any production of unprofitable properties only reduces their overall profitability. There will be no doubt in the market that the commodity prices will hold at the industries marginal costs and the investors can be assured of consistent returns throughout the business cycle, the commodity markets will know that the sources of oil and gas are more reliable, stable financially and politically when profitable North American producers are providing their supply and that is managed as an effective profitable business.

Producers are more interested in pushing out the period of time in which they’ll need to act or account for this mess. If action should ever be required. This is the manner in which the industry is operated. A constant, chronic malaise is just part of the scenery and should be expected by anyone who wants to be associated with the industry. It just doesn’t have to be that way. And it's time to make the change that the bureaucrats can’t, won’t and will not ever do on their own.

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

Martin Luther King Jr. Day

How This is Resolved

We can all generally agree that the economy is not what it should be. Whether the Preliminary Specifications definition of the issue and its resolution is correct is for others to determine. The funding for this project has to come from somewhere and that is beyond me as to where that’ll be. What we do know is that the Preliminary Research Report of May 2004 stated that organizations are defined and supported by the software that is in use by the organization. Therefore to make a change in an organization it is necessary to change its software first. This knowledge was subsequently used by the oil and gas bureaucrats to secure their position in the organization. Securing it by not making any change to the ERP software that they use. The result is that the bureaucrats compensation and control has continued as has the decline of the industries financial health and welfare. Today we need to make the change to the Preliminary Specification as part of the process of creative destruction. The trouble is that industries are no longer subject to what they’ve relied on in order to make these transitions before. Spontaneous order is constrained by the same principles as our current organizations. Without the software necessary to manage the new industry for today’s marketplace no changes can or will occur, the software needs to be built in order to define and support any organization to operate in this the 21st century. Until then there will be no changes made. What we are experiencing is a new phenomenon that eliminates the effect of spontaneous order in the process of renewal of industries. Unless the software vendor has deep pockets and large markets, the financial resources will be unknown and unknowable to provide for the software development. So how do we resolve this?

A quick tour through the history of the oil and gas industry we see the behaviour the producers have when it comes to two aspects of their industry. As they have control over the primary industry, they have control over the discretionary funding of the secondary and tertiary industries. Tell me if anyone who works in oil and gas has ever heard of this kind of behavior before. You have a product or service that is valuable to the oil and gas industry and the producers are interested. The next step is, as far as the oil and gas bureaucrats are concerned, is for the product or service provider to raise their own capital to develop the product or service, and then the producers will wash any Intellectual Property that is developed across the greater marketplace before they buy it. That way once you’ve built your proprietary product or service the producers will have any number of “me-too” competitors established, ready and willing to undercut your price. The ability to establish Intellectual Property in the secondary and tertiary industries doesn’t exist as far as the oil and gas bureaucrats are concerned. If you have any, they will not respect it and just pass it to on to your competitors. This has not in any way been detrimental to the producers for the past number of decades. Intellectual Property was not the key to value generation in the economy in the past. Though today it certainly is. Therefore the ability to establish your own competitive Intellectual Property is now your only real safeguard to having some longevity and value generation for your efforts. Otherwise you will enter the never ending price spiral at the hands of me-too competitors that are cheered on and supported by oil and gas bureaucrats. 

Expectations that funding this project will be done by outsiders who are unknown and unknowable to People, Ideas & Objects is the height of insanity. There is nothing that I can provide outside investors in terms of return due to the small market of producers. The phenomenon that I noted above about the elimination of spontaneous order is beyond me and the current resources that I have. There are more people than I who are affected by the difficulties in oil and gas with the power to resolve this. Who they are and what their location’s are is unknown to me. I am faced with a multitude of difficulties in trying to bring a resolution to the issues that I see. I’m simply calling out for the help that is needed to deal with a situation that I don’t think has been faced before. Disintermediation has been exercised in other industries. There is always something that those who are conducting the disintermediation are bringing about for their own benefit. Such as Apple’s reorganization of the music industry through iTunes. iTunes establishing a significant business for Apple. The persistence in the oil and gas industry to let trillions of their dollars evaporate and many hundreds of thousands of people suffer in the process of their inactivity is surprising to say the least. Almost as surprising as their propensity to resist and pound away at People, Ideas & Objects for daring to suggest a solution to their foolishness. This is not quite what I expected but the only thing I can offer any investors of mine. 

The one thing I am certain of is the solution to these oil and gas issues are going to involve user community developed software. We have been involved in developing People, Ideas & Objects user community since the publication of the Preliminary Specification in December 2013. Throughout the first quarter of 2014 we published our budget and the user community vision that are what are necessary to resolve this issue. It would appear to me that the Preliminary Specification is the right solution for the industry to undertake at this time. I believe we accurately estimated the scope and scale of the issue in our budget. No one in their right mind would approach a task such as this without full user involvement. It is the only method to ensure the validity and accuracy of the software that is developed. Our commitment to this is accurately represented in our user community vision that established People, Ideas & Objects user community with the power, control and tools necessary for them to achieve this ever so difficult task. As I mentioned in December of 2018 we have exhausted our resources now and will be conducting minimal operations until our budget is funded. The user communities development has also had to be put on hold. Hence for the first time since the beginning of working on this project in 1991 we are now at a standstill with no progress being made on any front. Frustration at the scope and scale of the loss of financial value within oil and gas and the number of people unnecessarily affected by all of this, can not be quantified. 

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.

Why's This Happening?

“This” being what appears to be an economic armageddon that we’re experiencing here in Calgary, a one industry town of 1.5 million people who are in tune with the health and welfare of the oil and gas industry. When everyone in leadership positions runs around saying things are in crisis the effect has been remarkable. I have never seen or heard of anything economically remotely similar to this in my working life. So why is this happening? “This” also being the chronic and systemic overproduction that has continued to be experienced in oil and gas throughout North America. When I first noticed this overproduction phenomenon in 1986 the price of oil had collapsed to $10. My thinking was since no one was making any money, why not just scale back the producers production and the price would respond positively to the point that the remaining production would attract profitable commodity prices. Thinking through the problem at that time leads one to the same conclusions that are present in today’s marketplace. It’s impossible for producers to do so in their current configuration. Therefore I set out in 1991 to see what changes would be needed in order to make it possible for the industry to be more dynamic, innovative, accountable and profitable. I finished this work with the final edited version of the Preliminary Specification in December 2013.

The chronic and systemic overproduction is a result of overinvestment of capital in the productive capabilities of the industry. Too much capital has been invested and therefore too much capacity has been developed. The reason that there has been too much investment is that everyone, but most certainly the investors and bankers, were duped by specious accounting that showed high levels of profitability in the industry. When profits are reported, they then attract the attention of investors to invest more. But the profits were never there. The industry wide accounting has never allocated an appropriate amount of the capital costs of oil and gas exploration and production to that which was produced. Today each of the producers pride and joy in terms of their financial accounting statements is the balance sheets they’ve “built” over the past decades. Who builds balance sheets? And what exactly does building a balance sheet involve? Spending money to have it show up as an asset on the balance sheet for up to 27 years is uncompetitive and unrealistic in terms of competing for capital. It also reflects a performance of that firm that is more oriented to deception than anything that would be considered commercial. Spending money like drunken sailors for decades does not make an industry prosperous. It is high time for producers to rectify this fraud by moving their “assets” that are recorded in property, plant and equipment to depletion in order to accurately reflect the poor nature of their performance these past decades. These are no longer assets and are unquestionably the unrealized capital costs of past production. This deceptive accounting made the profitability look spectacular leading to a rush of investors over the past decades, leading to chronic and systemic overproduction.

Outside of the raging competition to build the biggest balance sheet, why can’t producers make some changes to their production profile to shut-in the properties that are losing money as a result of low commodity prices? That would be the common sense, business oriented thing to do. When inventories swell in any business they stop production of their product to ensure they don’t erode the pricing power that they have. Even Ford with their hugely popular F-150 line of trucks occasionally shuts down their plants. It’s common sense business not to continue to lose money or dilute your profitable operations with unprofitable ones. There are three key reasons that the current producers have not been capable of doing this simple common sense task. The only solution producers do apply is what I call the dull, blunt instrument of reducing capital expenditures. In the shale era we see the ineffectiveness of this method of dealing with overproduction.

The first reason is the quality of the accounting is too poor. Not to say this is the accountants fault overall, it is however an accounting related issue. I worked as an accountant for almost ten years in oil and gas, then almost ten years in audit so I understand the issue and the difficulties in making the necessary changes. The accounting information at the property level is incomplete. It details the capital costs and operating costs with great integrity and accuracy. However not one property in the industry knows its real costs or the resulting profitability. To do so they would need to know the specific overhead incurred at that property. Some might suggest that overhead can be as little as 1% of a producers revenues! That’s after allocating the majority of the costs to capital. Actual overhead of the producers can be estimated by looking at the downtown cores of all those “oil” towns and imagining the numbers of people, office space, lighting and other costs that are incurred to make the industry run. I estimate the costs to be approximately $10 to $12 per barrel of oil. And within those ranges you would see a variance that is wildly different. Natural gas is far more difficult to administer and account for. Some properties are relatively simple to operate, others are monsters. Some producers are non-operators and others operate on behalf of others. Therefore the variance in overhead costs would really be quite large. All of these overhead costs are currently charged directly to the corporate entity that incurs these costs. And then at the end of the quarter or year end, an allocation of a certain percentage of these overhead costs will go to property, plant and equipment on the balance sheet. The remainder will show up as G&A on the income statement. In the Preliminary Specification we use our service providers who bill directly for their administrative or accounting service to the specific Joint Operating Committee. That way producers will know the precise amount of overhead that is incurred at each and every property. And therefore be able to accurately determine the profitability / unprofitability of the property leading to the decision to shut-in or maintain operations.

The second reason is the high throughput production model that is used throughout the oil and gas industry. It is described by Professor Richard Langlois as follows:

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p.58

With this current high throughput production model the more production that is achieved the more overhead that’s offset. And therefore the race to offset as much overhead as possible is the focus of the producer. This is the indirect motivation that puts all of the production everywhere on the market always. In the Preliminary Specification we use the decentralized production model which turns all of the producers costs variable. Therefore any property that is shut-in will incur a null operation, no profit, but also no loss.

The third reason that the overproduction continues and is unaddressed by the producers is that at any point in time each producer can point to their financial statements and show that they recorded a profit through their specious accounting methods of recording everything as an asset. Declaring therefore that it’s not their fault, their production is profitable.

The key to the Preliminary Specifications ability to make this change is the reorganization of the industries administrative and accounting resources. Turning all of the producers costs to variable costs based on production. Taking these resources from the individual producers where their capabilities are not shared or shareable, yet replicated within each producer firm. And establishing an industry based, variable, administrative and accounting capability. A capability that is variable based on production. The costs of each producer maintaining their own administrative and accounting capability, which is precisely the same as each of the other producers administrative and accounting capability, is another one of the reasons for the lack of real profitability in the 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.