Profitability Everywhere and Always

What is it that the oil and gas producers are responsible for? What is their primary role in the economy and what is it that the bureaucrats have been doing to meet these responsibilities. Reviewing what it is that the producers are doing and have done is they’ve drilled many wells, and appeared to me to stand on the top rung of the ladder and belittle those below. Outside of these two activities I don’t see any strategy, planning or desire for anything else. It seems to be a good life for the chosen few, both professionally and financially. Critical review is not their forte and I feel they’ve built their own cocoon from the attitude that oil and gas is a very complex and difficult business, which it is, that most people don’t understand it, which is true and therefore they’ve shut off any input from the outside world. It is a self congratulating, groupthink mindset that will continue on in its own world, despite the financial consequences for all concerned and no matter what. How else could the past 28 of 33 years be considered bad years? How else would there be an understanding that there are good years and there are bad years in the industry? Seemingly the only industry in the world, outside of the occasional recession that has continual, chronic bad years. Not once have they asked if this is self inflicted. Their depth of analysis is to blame the most politically expedient individual or group that is standing in front of them at that moment. Whether it’s OPEC+, pipeline companies or governments you only need to look at which month it is to determine the candidate to blame.

The point in fact is that the stated policies of the producers is to destroy the business. First, continued overproduction in the market of lower prices is beneficial because… I’ve noted this point to them since overproduction became a chronic issue in natural gas. Many trillions of dollars have escaped the atmosphere in the process. The second point in their solution to the current situation is to reduce their capital expenditures. To actively sit back and let their assets and production profile atrophy until demand catches up. This also goes by the official slogan / strategy / operating procedure / bureaucratic vacation enabler of “muddle along” and “do nothing.” Here we begin to see the brilliance of their plan.

If we take the recommended exercise of People, Ideas & Objects of moving 65% of property, plant and equipment off the balance sheet and move it to depletion on the income statement. Reclassifying these alleged assets of the producers into the unrealized capital costs of past production. This exercise restating the situation as I feel it stands in the industry. A wasteland like no other before. The only reason that producers are able to continue is that bureaucrats are able to be personally sustained through the cash flows of prior investments in a capital intensive industry. Otherwise this would have ended long ago. The implications of this “downturn” and all of its predecessors on the service industry is tragic. I have not reviewed the financial statements of the service industry as I am not interested in viewing the results of tragedies. When the primary industry you depend upon cuts your volume to one third the activity, then halves your billing rate, it creates some difficulties down the line. No one says anything about this because there have been 28 bad years out of the past 33. The tertiary industries are well oriented to what we should begin to call the “28 year rule.” When the Premier of Alberta, in the one industry province, says the primary industry is in crisis then these words are heard throughout the province in a heartbeat. The effect has been to put your wallet in your pocket and sit on your hands. Who knows it might be another 28 years before things get better. There certainly is no expectation of any actions other than hunker down in the bunker and start living off the stores that you’ve been prepping for.

In contrast a recession in other industries is painful because the growth may drop precipitously, and temporarily sometimes into negative territory. Imagine for a moment if the oil and gas reorganized around the Preliminary Specification and we had profitable production everywhere and always on the North American continent. Is that the role of the oil and gas industry? Should it be the exception to all other industries and always be profitable? Oil and gas is such a critical and valuable resource its profitable production implies so many things. A viable and healthy industry will be able to source abundant, affordable energy everywhere and always through its research, development and innovation. The costs of exploration and production will continue to rise as we proceed through the natural endowment of oil and gas. The Preliminary Specifications ability to better match all of the actual costs of exploration and production will ensure the costs are captured and the profits are “real,” not the ones we’ve experienced these past four decades. The consumer will face higher energy costs, to that there is no doubt. The investors have ceased to subsidize the capital costs of the consumers consumption. Leaving few options for producers other than to charge consumers for the full cost of the products they consume. I think this is how they do it in profitable industries. Any subsequent conservation by the consumers will be the contribution that producers can state they’ve made to the alleged global warming issue.

Budgeting for the industries capital demands of exploration and production is a well developed science. These numbers range between $20 and $40 trillion in the next 25 years. They also form the foundation of our value proposition of $25.7 to $45.7 trillion. Once these numbers are budgeted the producers bureaucrats job is done. The investors are then on notice that they’ll need to come up with that money? Not a hope of that ever happening. The only source for this funding is the consumers. Which implies the producers are going to have to compete for capital by turning theirs over in a competitive manner. Recycling it quickly and repeatedly. Deploying the capital efficiently, charging the right price to cover all of their costs, capturing that price from the consumer and then efficiently redeploying that capital. This is what the Preliminary Specification will do for the dynamic, innovative, accountable and profitable oil and gas producer. They would be dependent on a prosperous and healthy service and tertiary industries in the process of achieving what I see as positive outcomes. This is also known as the capitalist system. Whether that is moral, immoral or amoral is something that Bono can debate with his concert attendees. I’m at a loss to find anyone for the producers to blame.

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.

Our Plan vs. Their Plan

People, Ideas & Objects provide oil and gas producers with the most profitable means of oil and gas operations. We do this through user community driven software developments that are defined in the Preliminary Specification. This specification has a reorganization of the producer firms and the industry itself in order to achieve profitability everywhere and always in North America. We’ve noted that the capability for North America to be energy independent is a reality as a result of shale. This however demands the oil and gas industry be profitable everywhere and always. How else will we be able to sustain this production profile if we continue to abuse the oil and gas investor by having them subsidize the consumers consumption. Clearly the investors and bankers are telling us that we can’t. In frustration they’ve ceased active participation in the industry. This has created the slow and difficult decline in the health and general well being of the oil and gas industry but also the secondary and tertiary industries.

We believe the industry needs a plan in which to deal with the next 25 years. A future that appears today to be the most difficult in its history. A plan that provides the details of how the industry will approach the demands for capital that range in the $20 to $40 trillion. That will challenge the technical capabilities of oil and gas, the service industry and all the support industries. A future that demands we fuel the continent with the energy that our economy needs. Understanding that the most powerful economy is also the greatest energy consumer. A plan that mitigates the business issues that are creating the chronic and systemic overproduction that plagues the industry. And encourages the return and full participation of the financial community.

We believe the Preliminary Specification is the plan that industry needs to approach the next 25 years. What would be the result if producers adopted the Preliminary Specification? Would the investors who are forward thinking, begin to see the implications of this plan and therefore begin to make their positions in those producers that appealed to them? Would the adoption of the Preliminary Specification enable producers to buy the time necessary to complete their reorganization and begin the pursuit of profitable energy independence on the continent? And do so with their investors support? All of the evidence to the validity of the Preliminary Specification is in. The Alberta government's mandate to reduce Alberta production by 325 thousand barrels completely eliminated the differentials which were in the range of 90%, even before the actual implementation of the policy, and almost immediately upon the announcement. Oil and gas commodities are subject to the economic principles of price makers. Therefore our plan which involves producers using detailed, actual accounting information to determine the profitability of a Joint Operating Committee, to support the independent business decision of whether or not to continue to produce, is a sound and appropriate business principle. It’s not collusion.

The choices for the producers are unfortunately very limited. There are the Preliminary Specification and the status quo. Unfortunately the industry has chosen the status quo as their choice since the publication of the Preliminary Specification in December 2013. It would appear to me that the choice of the status quo has been fully explored at this time and has been found wanting. That’s just my opinion, but the industry may not appreciate me pointing out that they have no choices. The fact of the matter is that they have very little time in which to continue without the support of some kind. The incineration of cash each month to pay the overhead goes on without any relief. The recognition of any of the capital, in a capital intensive industry, never happens. Whatever, the time to make the choice for an alternative to the status quo is necessary and upon us.

I don’t think I would want to be a CFO in oil and gas this coming annual general meeting. What benefit would there be? And what exactly are the boards of these producers doing? I can not reconcile the situation that exists on the ground today and the demands that arise from the future of the industry. They are polar opposites as are there demands for action. The future of the industry can not be left to a strategy where people just collectively shrug and say they’ll muddle through. At what point in our past did that ever work? It didn’t, and I know that to be the case. I had the fortunate situation of reviewing the operations of Imperial Oil in my audit days. After that time I was so impressed with the vision and persistence that was expressed in the assets of that firm. Someone, in fact many decades of people were putting together pieces here and there that finally came together as a whole. And it was brilliant. Then the rationalization craze came into being and the pieces were sold off bit by bit to the highest bidder. This industry wide rationalization phase later became the “just drill wells” phase that everyone seems to have been stuck in now for many decades. A collective rush into this or that, one day it’s SAGD, “royalty trusts” in Canada, the next it’s heavy oil, unconventional gas and then into shale oil. Leaving nothing but disaster in each of these areas as a result of massive overinvestment and little planning on how to deal with the subsequent overproduction. Also known as no pipeline capacity. Maybe there’s a zig and a couple of zag’s left in industry to run before it collapses but there’s no doubt where it's headed. It just doesn’t have to be.

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

Profitable, Everywhere and Always, as a Standard

Why would any oil and gas ever be produced unprofitably? I believe we need to adopt a standard policy throughout the North American industry that states: every molecule of oil and gas will be produced profitably to ensure we can responsibly justify our current consumption to future generations. If we continue to produce unprofitably, as it appears all oil and gas production in North America is, would that be considered reasonable by our children and grandchildren? In terms of conservation of unquestionably the most valuable resource, there are 23,000 man hours in each barrel of oil equivalent. And therefore it will be the largest consumer of oil and gas that is the most powerful economy. We can only fuel the most powerful economy if it is profitable to do so. In terms of the environment, the issue of carbon is less justified if we consumed the energy irresponsibly. And financially, with the Preliminary Specification all production can be produced profitably. Whether that is from Exxon or yesterday’s startup. The competitive landscape is equal when all costs are variable. If it was known in 2013 that the Preliminary Specification provided this capability, what justification will industry use to continue in the manner that they have for the prior four decades?

This is all logical and justifiable so someone is going to have to sit down with the bureaucrats and explain it to them. The need for the Preliminary Specification to be operational in the industry is as follows. The accounting that is conducted by the producers is inadequate to determine each individual Joint Operating Committees actual profitability or loss. The use of standardized overhead allowances that approximate the overhead burden involved in operating the property were initially determined in the 1960’s and adjusted annually for inflation. They are not poor representatives of the costs of overhead in the industry. They are ridiculous. The need for these was the administrative cost to allocate the time of the production, revenue, and royalty accounting etc. costs to each property was not possible due to the organizational methodology, the high throughput production model, and the computers capabilities present in that era. These overheads were also from a different regulatory time period when the SEC and governments were in their infancy. The need to address the much higher costs of overhead in the industry, the need to have the cash that is consumed each month by these expenses being recycled each month (see yesterday’s post) and the capability to have the actual costs recorded at each property are now available with the Preliminary Specification.

Once this is available then each property will be known to have produced either a profit or loss based on the actual, detailed accounting. Those that did not produce a profit will provide the evidence to the ownership that they do not qualify in terms of continuing production. They will then be shut-in for at least the next production month or until such time as they can be produced profitably. The profitability could come about as a result of an increase in the commodity price, the increase in production or some innovation that the producers determined would either reduce the costs or achieve any other criteria necessary to return it to production. Ensuring all of the production is produced profitably everywhere and always is the first criteria of the Preliminary Specification. If the producer has an inventory of properties that are not producing then that will be the focus of their innovation initiatives in order to return them to profitable production as soon as possible. What we learned in the development of the Preliminary Specification is that the process of innovation is defined and supported within the organization that produces it. This is why Apple continues to innovate, it is the culture. This culture is understood by the academic community and we have captured that understanding in our research and placed those elements within the Preliminary Specification. On the one hand the producing properties will be profitable, and on the other hand the producers will be reconfigured, defined and supported by the Preliminary Specification to ensure that innovation is the product of their efforts.

The purpose of establishing innovation within the oil and gas industry is clear. Producers claims that they are highly innovative today is specious. It’s the service industry that is innovative. Examples such as the coil tubing providers and Packers Plus who developed the ability to conduct shale operations. It was many years before the producers even tried these technologies after the service industry providers begged for them to do so. Are producers the ones that conduct the innovation on drill bits? Their competitive advantages are their earth science and engineering capabilities, and their land and asset base. It is within these disciplines that they have not prepared or provided any of the necessary foundation technologies, structures or organizations in which to innovative from. They’ll need to focus on the areas of innovation that fall within their competitive domain in order to expand their innovativeness and competitiveness. Drill bits is the wrong direction. The second reason for establishing innovation within the industry is to ensure that the costs of oil and gas are as low as can possibly be for the consumer. As the easy oil and gas continues to be consumed we are left with the more challenging fields such as shale and offshore. Which are far more difficult and expensive. We can expect that the trend of higher costs of oil and gas exploration and production to continue for the remainder of its useful life. We therefore need to first of all account for that much more accurately. We need to ensure that it is produced profitably and we need to ensure that it’s affordable for the consumers. After all it is the most powerful economy that is also the largest consumer of oil and gas and that is the role we aspire to keep.

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.

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.