Trillions and Trillions, By Me

The scope and scale of the tragedy that is the oil and gas industry can’t be quantified. Let’s satisfy ourselves, and at the same time somewhat pacify ourselves into believing it would only be a few trillion dollars to rectify. The investors used to pay for this freight but soon found three critical aspects of their investment. Their investments were made on the basis of financial statements that don’t represent the truth. As a result they determined that they were the ones who were the “mark.” And profitability is inherently unknown and uncared for in the industry. The search for a replacement to the investors cash, and to a lesser extent the banks, continues. No one seems willing to raise their hand for the purpose of backfilling the bureaucratic bloat. This multi-trillion dollar deficit needs to be made up and the producers bureaucrats I’m sure will find someone to step in to incinerate their hard earned money to the cause. After all in exchange the oil and gas producers have so much to offer to whomever steps up for the cause. Just exactly what that is, beyond spectacular financial statements is unknown. So goes the future of the oil and gas industry. If you use your watch or your computer’s clock you can see that its future can be played out in its entirety in less than one minute. Then just repeat. Will no one come to the aid of the oil and gas bureaucrat?

The Preliminary Specification provides for the most profitable means of oil and gas operations. Real profits, ones that have actual cash attached to them that can build a business. We realized the difficulty that the producers are facing today would eventually come about. You can’t fool investors forever. Therefore they would need a replacement source of funds in order to be operational. But where? We determined that since the investors were used to pay for the capital costs of the consumers consumption of oil and gas, why not instead, get the consumer to pay for the full freight of their energy consumption. Seemed logical to us and as a result we developed the Preliminary Specification with its decentralized production models price maker strategy. To suggest that this was welcome relief in oil and gas would be a bit of a stretch of the truth. Almost as far as the producers profitability. We’ve never received any support, but like most people who move the industry forward, are vilified, ostracised and abused for decades by the producers who don’t want to be called out for their malfeasance. I don’t like using these words but after the hours I spend in my thesaurus I have to resign myself to the clarity and accuracy that these words provide. And then again what do I have to lose?

Reviewing the producers fourth quarter reports, those that have been published at this point, it’s refreshing to see the profitability that is rampant in the industry. Just too bad about the cash. The cash crisis continues to rage and the obstacles to its resolution only become more acute. Natural gas prices were as high as the mid $4.50’s a few months ago, now they languish again in the mid $2.50’s. And it’s not that anyone received those anyways. Differentials are all the rage these days too. New production is the only source of cash that is incremental to last months so the race to bring on new production continues at a handsome rate. Which should remind anyone with a pet hamster that they need to be fed.

I sure wish there was a blog or somewhere that I could go to tell me what I need to do to fix my business. The persistence of the bureaucracy is the most fascinating thing to me. Ten years of destruction and nothing, not even the slightest recognition that they have an issue. How is it that they do this, and then get away with it? If they hide the big hole they’ve dug, the hole that will have to be filled with someone’s money in order for the industry to have a future, the many trillions of dollars in terms of the size of the whole only scares people away. Therefore if they don’t say anything, nothing will be wrong. They think no one has noticed I guess.

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.

Page 545 of the Bureaucrats Handbook

I think we’ve summarized the state of affairs in the natural gas side of the business in these last number of posts. They are historical in that they look at the past ten years and document what chronic and systemic overproduction has done to the price of natural gas, the impact on the financial condition of the industry and now its devastated landscape. To look forward in this business today we only need to look to the prolific nature of shale and the endowment that these resources have provided. Oil and gas producers love to take the credit for everything. Innovation that is derived from the service industry. Reaching energy independence in North America. These were only attained through the development of shale based technologies that the service industry developed, were vilified for, then starved to death before the producers would even try them. Maybe I’m too harsh on the producers but when shale’s endowment of natural gas is as grand as it is, and we’ve seen that 145.8 tcf has already been produced unprofitably and at great expense to everyone associated with oil and gas, except for the bureaucrats. It’s difficult for me to get up out of my chair. What’s worse is that today there is no plan, no strategy or any identification that there’s an issue. All the producers are profitable don’t you know. Which they are, and in a significantly distorted manner. As for the future of the natural gas business, what exactly is the issue?

Oil is following the same master script that resides on page 545 of the bureaucrats handbook. Entitled how to ensure you’re seen as the master of the universe. Bureaucrats only started applying this to oil after natural gas was well advanced down the road to ruin. It is also a global market and therefore will take much more effort to effectively cause the damage that has been seen in the natural gas side of the business. But trust me we are well on our way and we will get there. I for one am pleased that we have advanced beyond the ridiculous excuse phase. The “pray for a cold winter,” “market rebalancing,” or any of the other unjustifiable bs that was pushed out from our very good friends the bureaucrats. They don’t say much of anything anymore. Which implies a capitulation of responsibility to try and resolve this and a heavy hand in terms of the guilt of why it was caused. It does not imply any motivation however. Which over the last number of decades has led to the generational cultural that feins they know nothing. But that’s just my opinion. If you are not as furious with this situation as I am then maybe count yourself as part of the problem.

Without the efforts of OPEC+ where would we be? I believe their purpose in removing production from the market was to teach the American based producers that oil and gas commodities are subject to the principles of price makers. A principle that is set out in the Economics faculties and is a well established principle. One in which we’ve adopted in the Preliminary Specifications decentralized production models price maker strategy. Any discussion that has ever taken place between People, Ideas & Objects regarding this element of our specification with a decision maker in oil and gas has devolved into the rapid and rash conclusion on their behalf that its collusion. No more discussion. The effective business principle “price maker” is used in every business that qualifies and no one continues to overproduce their product at the expense of their pricing power in the market. Except for oil and gas producers. OPEC+ has shown that oil prices respond well to small decreases in supply. The point is to stop producing unprofitably. And if producers that make independent business decisions based on actual, factual accounting data, that determines profitability / unprofitability and hence production or not, is collusion then we’re well down the road to socialism.

Based on the behaviours in the natural gas business we can assume that without OPEC+ efforts oil prices would be in the mid $20. And all the North American producers would still be profitable and break even at $10. Such is their manipulation of reality. There is no application of rational thinking conducted in the industry. The declared strategy and operating procedure, the culture of the producers is to “muddle along,” and “do nothing.” Because it's been so successful? Bureaucrats will only see good news in what I’ve written today, when they can point to the fact that if OPEC+ didn’t remove the production “things could have been worse.” And there you have it, the logic, the planning, strategy and tactics that ensured things didn’t get worse then they are. All brought to you by the unseen hand of the brilliant oil and gas bureaucrats.

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.

President's Day / Alberta Family Day

Creative Destruction, Defined

Imagine for a moment if every industry was operated as oil and gas is. There are only two operating modes in which to exist. Throttle on full, throttle off completely. Nothing in between and no concept of what could be achieved if the industry hummed along at a steady speed. Not having to rebuild itself after each and every misadventure from those throttle junkies that overdid it, one way or the other. By analogy imagine that cars only had the same two operating modes. How would anyone get to work? How many unnecessary tragedies would occur each and every day due to the fact that no one thought of modulating their speed? If someone were to propose that we produce only profitable production everywhere and always they would be vilified for the idea of a state of calm and normalcy. That is where we’re at today and I’m the idiot who thought that a steady pace, one in which we achieved a constant and a legitimate profitability would be a good idea to pursue in 21st century. However, the bureaucrats remain with their heads firmly lodged in the fifth century, and as the monarchy chose to do then, they will choose to make their world as comfortable as could be while the remainder of the serf’s suffer for their amusement. Much as a demolition derby in the morning rush hour would provide them with comic relief.

The point of the exercise is to drill wells and put production on the market. It will then “rebalance,” whatever that means, and they’ll just continue drilling wells because the investors have more money. This is the logic of the industry. Except it’s illogical and anyone can see that it doesn’t make sense. But based on some specious accounting that allows everyone in the morning to open their eyes and start capitalizing everything they see and do until they close their eyes that evening. Therefore, any kind of activity makes profitable sense doesn’t it? Even buying Post-it-Notes. And if one day the investors figured out this charade then they’d stop participating. But that doesn’t instill any change and so the drilling and production continues despite the cash drain on the organization. Until the day when everyone runs out of all of the cash, we’ll just have to wait and be patient because no one knows if there truly is an issue or if there is the will to fix it? Until we know for sure it’s best just to continue drilling more wells.

Besides people’s expectations are completely out of left field. They’ve been spoiled by stories from other industries that certainly have their recessions when the economy drops a bit here and there. There’s no sense of adventure in these people when they’re tossed out of a job they’ve been doing for 15 years because there’s no cash and they can’t be paid anymore. Where they foolishly thought to depend on that paycheck for as long as they were contributing good value to their producer firm. It was also foolish of them to purchase that house ten years ago and to start that family, what exactly were they thinking! From what I here of the bureaucrats they’ve had to give up their annual bonus, their stock options, an extra week of their vacations and the company car. So who’s really suffering? They now only make hundreds of thousands when they used to make millions!

This is more or less the state of the oil and gas industry. If you’d be so out of touch with reality that you’d proceed for decades without really earning any money. Just turn to investors, and at the same time dilute them again, when cash balances began to get a bit skinny. Why wouldn’t you see the world of the serf’s as the monarchy did in the fifth century?

Clearly it's never a specific producers fault for the overproduction. It’s always the other producers responsibility. How do we instill that production discipline in the “other producers” responsibility? By implementing the Preliminary Specification. But the ruling class have no idea of the concerns of anyone. Why, because they’re still profitable. No need to address anything if nothing’s wrong, but please just send cash. If the natural gas business is as bad as the EIA and the IEA have suggested. And as we calculated yesterday the need for not profitable operations, but just covering the costs of exploration and production is such a great distance away from where we are. What do we do?

What we have is a persistent bureaucracy that is uncaring, unaware, self-satisfied, indifferent and unaccountable. The issue is therefore them. So what do we do with “them?” The Preliminary Specification has always considered the only solution is creative destruction. After ten years in natural gas the chance of anyone making a change internally is very unlikely. Nonetheless after ten years, it forms part of the proof that it has to be done. What is it that we’re waiting for? The Preliminary Specifications budget is for 5,000 man years of effort. That won’t be completed tomorrow. Therefore we need to act quickly.

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.

Billions and Billions, By Carl Sagan

What is surprising in all of this, is that I’m not the only one who is seeing this from my perspective. Both the EIA and more particular the IEA are expressing some serious concerns about the natural gas business. A somewhat contrasting point of view to what comes out of the media and the producers themselves. It just doesn’t make any sense why the producers continue to produce everything from everywhere, unprofitably. No one has bought the claims published in the financial statements. The majority of which, we suggest, is ⅔’s of those “assets” in property, plant and equipment are the unrecognized capital costs of past production. Performance from a financial point of view is not in existence anywhere in the industry. Competition to perform better than your peers doesn’t exist anywhere in the industry. It’s an industry that is based on activity that is claimed to be profitable no matter how smart and prudent you are, or reckless that you are and that you wear a size 2 hat. “Just drill wells, because that’s where the money’s at.” Except it isn’t and it hasn’t been for many, many decades. The dependence on fresh capital from investors each and every year fueled a generational culture that knows no difference.

The graphs from the EIA that we published the other day also come with the ability to download the data that underlie them. I took the 2010 to current data for the shale gas production volumes and the average prices for each year. If we make the assumption that natural gas cost $6 for exploration and production, then we can determine the amount that was lost on shale production in the United States during these past nine years. I believe $6 is a reasonable price when we consider that none of the differentials are included in these annual average prices. This amount would also have been the amount of our value proposition if they had implemented the Preliminary Specification. Although it was not published in final form until December 2013 the majority of its elements existed well before 2010. Shale gas production volumes for this period totalled 124.98 tcf of gas. These shale volumes in the U.S., based on these assumptions, since 2010 have generated revenues of approximately $405.5 billion U.S. and at $6 People, Ideas & Objects value proposition would have been $344.4 billion which is the amount that is also lost by those producers.

Those are big numbers to be throwing around so let's look at them a little closer. In January 2010 shale gas production was 13.79 bcf / day and rose to a phenomenal 64.79 bcf / day in December 2018. If we made the assumption that the Preliminary Specification was in place then producers would have shut-in their highest cost production. Therefore we assume 10% of these volumes were shut-in in order for the market to achieve the $6 price that covers all of the costs of the other 90% of production. The volumes would then be 12.4 bcf / day in January 2010, and 58.3 bcf / day in December 2018. Historical average yearly prices were in the range of $2.52 and $4.37, or underwater at all times. Adjusted total production during this period was 112.48 tcf. The question that arises as a result of this calculation is, if the adjusted for shut-in properties value proposition is $269.4 billion as a result of the implementation of the Preliminary Specification, what would this money have been used for? First let's note that we have only reduced production to the point where the prices covered the costs of natural gas exploration and production. None of the incremental $269.4 billion in revenue is going to earn any of the natural gas producers any profits.

There would have been the traditional royalties that would have been paid on those incremental revenues. Whether that was governments such as the Alberta government here in Canada or elsewhere. The Alberta government have lost control of their budget in the past five years and are running sizable deficits in the range of $10 billion / year. These are mostly attributable to the loss of revenues from oil and gas royalties. In the same sense governments where the oil and gas industry operates in North America have all experienced declines in their tax revenues due to the drop in activity and the losses that are being experienced in areas such as the service industry. In addition the costs of unemployment insurance to compensate those that have been laid-off in the industry has increased these governments costs, as opposed to those people paying taxes. Who cares about the governments, well everyone has to pay their share and when governments are not collecting what they budgeted for, and received before then they’ll make those dollars up somewhere else. If oil and gas isn’t smart enough to manage itself appropriately then governments will just have to tax other jurisdictions to make up the difference.

The cannibalization of the service industry is what usually happens when the industry hits a downturn in activity. Laying down rigs is expensive and costly for the owners of those rigs. Losing the people who were operationally efficient on those rigs will be a task to attempt to get back and redeploy if the industry ever turns around again. Until then the service industry is suffering the worst of everyone as a result of the slashing of activity and then the slashing of their day-rates by the producers who use the fact that there are so many idle rigs to pressure the rig operator to drop their day-rates. Producers applying the principle of supply and demand if you can imagine. This and the decline in depletion per barrel have made up most of the producers claimed cost innovations. Maintaining the capabilities of the service industry are key to the innovative stance that will be necessary for the future. Nothing new will be coming out of a cannibalized sub-industry until they either adjust to the new reality or revenues are restored. This loss of capabilities will be at significant costs to the producers and they would of been able to avoid this unfortunate situation with the implementation of the Preliminary Specification.

Those that are employed in the oil and gas industry directly are taking their cue from the field hands. They’ve decided to leave the industry and never return. There are better places to earn a living. And so it is with those that are and have been laid off by the producers. They can find work elsewhere, raise a family and take on a mortgage without concern of whether or not the bureaucrats will run the industry into the ground or completely destroy it this time. We heard the complaints from the bureaucrats in those few good days before 2008 that the demand for more engineering and geological people was going to be increased to replace the people that would be retiring in the near term. I guess that’s not an issue of concern at the moment as there seems to be a surplus and the question remains how many do you lay off now. They’ll deal with the shortfall when and if it occurs. And just as the field hands, producers will be able to pay handsomely when they get a plan, and that plan is put in place. The thought of a plan will come about some day I’m certain.

The most important point of all of this is to recognize that the bureaucrats are fine. They are the first and the last to be paid in this cash crisis they’ve created. Just as they are the first to be paid at any time it would seem. There’s is the perfect balance between separation from the shareholders and accountability. Just as long as no one screws with the software they use, that ERP stuff, then there should be no change in the status quo. Just as the media continues to report, all is good, which indicates to me one thing, is that the media is the next in line after the bureaucrats to get paid. I guess it beats working.

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.

Wasting Away

It would seem that all is not lining up in the manner that it was expected to, just a month ago news of an OPEC+ agreement similar to the one that led to $70+ oil prices, and natural gas prices in the mid $4 region, who wouldn’t anticipate the good times. Well there’s always me isn’t there. We’ve seen this scenario play out repeatedly in which we go from manic periods where the world is our oyster to “oh whoa is me.” Things are changing though. The only people that are believing the story that is coming out of the producers are the ones that are writing the stories at the producer firms themselves. It seems like the investors have completely checked out except for the time when they show up for their dividend checks. It is as Hess CEO John Hess said the other day, oil and gas now is only 5% of the S&P Index vs the 16.5% they occupied ten years ago. It must be great fun to attend those board meetings as the CEO or CFO of the company. We have a new article to review, this time from the IEA which has published an article entitled “Commentary: Signposts for the Gas Outlook.” Like the EIA they don’t have many positive things to say about natural gas in the coming decades. Their review looked at the market from the global point of view and started with…

Global gas markets, business models and pricing arrangements are all in a state of flux. There is great dynamism, both on demand and supply, but still plenty of questions on what the future might hold and what a new international gas market order might look like. The World Energy Outlook doesn’t have a forecast for what gas markets will look like in 2030 or 2040, but the scenarios and analysis provide some insight into the factors that will shape where things go from here.

The IEA report has an extensive focus on LNG demand in China and Europe as the two major growth areas. Although the demand in Europe of 380 BCM is currently being met by Russia this could easily be displaced by LNG deliveries from the U.S. and other NATO countries such as Canada. Both China and Europe are each expected to demand one third or 380 BCM of the LNG market by the year 2040. They see Japan and Korea being constant at around 175 BCM, or today’s level of demand, and the rest of asia beginning to pick up demand in early 2020 and be in the range of 250 BCM by 2040. As we indicated yesterday, the future is shale and there is little question of its capabilities. The demand increases from domestic use and LNG will provide for a robust natural gas business, if and only if, there is some form of production discipline instilled in the market to manage the escalating costs of exploration and production, and the cyclical demand.

What we currently have is a gradual meltdown being orchestrated by our good friends the bureaucrats in oil and gas. It has been ten years in which they’ve watched the natural gas business melt away in their hands. Ten years is a significant amount of time in which to produce up to 80 bcf / day on a massively and chronically, unprofitable basis. This is the question that both I and the IEA are asking “the World Energy Outlook doesn’t have a forecast for what gas markets will look like in 2030 or 2040” because it is not a managed business. It is a money generator for the bureaucrats to build their pocketbooks ever larger. Outside of themselves no one has made any money in the past generation of “activity” in the North American oil and gas industry. It has become the most disgusting display of selfish, pious and deliberate mismanagement in the history of business.

The ability to get control of the oil and gas business resides in the Preliminary Specification. One of the key attributes of our Preliminary Specification is that it disintermediates the bureaucracy from their position in the industry. That is also why they’ve so fiercely fought the ideas contained within it. The natural gas business has been destroyed for the better part of a decade as a result of the issues identified here by People, Ideas & Objects. The oil business hasn’t been completely destroyed at this time however. It is a global commodity and has been able to resist the bureaucrats with the scope and scale of that market for a longer period of time. Natural gas being a continental commodity had little hope of resisting the foolishness for long. This has been the situation, and as soon as the natural gas business was ruined, it was only then that the focus went from shale gas to shale oil.

There are many vested interests aligned against People, Ideas & Objects initiatives. The producers are the ones with the money and therefore most sane people go where the money is. Making this a protracted and difficult battle in which little to no support has been provided to us from any corner. Clearly the time has come for the industry to do something about the dire situation it has put itself in. Nothing is going to fix the problem other than to do it themselves by funding the Preliminary Specification. No one has the money necessary to solve the industries problem other than for the consumers to begin to pay the full fare of their energy consumption, and no one is going to come up with an idea that can compete with the Preliminary Specification at this point. It would take a decade for someone to figure out how to do it and the industry hasn’t the time. What happens next and where we go from here can be very positive with the development of the Preliminary Specification. It could also be more of the same of what we’ve experienced over this past decade. Or it could be that it continues to deteriorate, however at an accelerating pace that no one can deal with the consequences of. That is if we’re not there yet.

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.

Life in 2050

The EIA have published projections for the natural gas market in their Natural Gas Weekly Update. The report of January 31, 2019 was particularly interesting for its projections regarding the markets to the year 2050. They’ve projected what the production, consumption, imports and exports will be throughout that time and an estimate of the low and high resource and technologies impact on prices. The following is a summary of their conclusions.

This growth in production, consumption, and exports comes as U.S. natural gas prices are expected to remain relatively low and stable through 2050. The annual average Henry Hub spot price is expected to remain lower than $4.00 per million British thermal units (MMBtu) in real 2018 dollars through 2034 in the Reference case, and not to exceed $5.00/MMBtu by 2050. The range of Henry Hub natural gas spot prices in the AEO2019 is defined by the resource and technology side cases, indicating that assumptions about technically recoverable resources and costs drive the projections. The High Oil and Gas Resource and Technology side case projects lower prices that remain lower than $4.00/MMBtu through the projection period. The Low Oil and Gas Resource and Technology case projects steeper growth, with prices reaching $4.00/MMBtu by 2023 and exceeding $8.00/MMBtu by 2050.

U.S. natural gas pipeline exports to Mexico and Canada are also expected to increase through 2050. Exports to Mexico will grow from 5 Bcf/d in 2017 to 8 Bcf/d in 2050. Net imports from Canada will decrease as the United States exports more natural gas to Canada while importing less, particularly from western Canada. The net flow of natural gas between the United States and Canada is expected to change to net exports toward the end of the projection period as U.S. export volumes exceed import volumes from Canada.

And before we go any further I want to present a chart that the EIA updates each week in there report. The volume of natural gas that is produced from shale formations in the United States is one of the more fascinating charts. Shale is the future and there is no question about that. However there is the issue of overproduction which today has destroyed all of the value that existed in the natural gas business. Even without an economic case to continue operations, and scaling back on capital expenditures, the value of shale in terms of its endowment as a natural resource is impressive and reflected in these production volumes.

Since 2010 the natural gas business has been in a massive depression. Yet U.S. production of shale has increased from approximately 12.5 bcf / day to 65 bcf / day. There was widespread speculation that shale fields had reached their limit when in 2015 production moved sideways for about two years. Even at that the chart shows that shale averaged around 45 bcf / day during that time. Then, suddenly, in the past couple of years its trajectory exploded. At 65 bcf / day shale is now almost 75% of all natural gas production in the United States. The EIA expects production will reach 120 bcf / day by 2050, based on the assumption that the consumption of natural gas and LNG exports will be what drive the demand. Shales production capacity appears capable of delivering that supply during these next 31 years, and based on the past ten year history, certain to chronically and systemically exceed that demand.

Looking at the landscape of the oil and gas producers that are in the North American market today. One in which the natural gas business has been a disaster for over a decade. Where nothing has been done to mitigate the effects of the chronic and systemic overproduction. Without the recognition that overproduction is even occurring. These projections outward for the next 31 years will seal the deal for everyone who was on the fence as to what their future holds in the industry. Investors will continue to take as much capital out of these companies as they possibly can. Careers become something you pursue outside of the industry. You certainly would not study to participate in an industry with these kind of dismal prospects. And as a service industry representative, you’ll wait to be paid for the amounts outstanding in accounts receivable before you volunteer your time and money on behalf of any producer firm. This in no way represents a business, it’s the dead zone. Where not only money, but now everything goes to die.

No production discipline is being applied anywhere in the business today. Why would there, what’s the issue? Where will this desperately needed production discipline come from in 2030, 2040, or 2050? The issue is ever present today, no one is recognizing it or addressing it, now the projections appear to be for more of the same until 2050! The EIA’s low and high price projections assume a continuation of the accounting wizardry we’ve known in the industry. Make sure the investor pays for the capital costs and the consumer only pays for the operational costs. Yet I see outside of the Preliminary Specification no consideration of any change or the understanding that there are other opportunities for everyone concerned in oil and gas in other industries of the economy. Producers believe that eventually the production profile of the industry will drop below the level of demand and prices will bring about the “good times” once again. That worked for 5 of the last 33 years of the pre-shale era. Will this model still function in the shale era? I guess we’ll know in 2050.

Who knows what will happen in the future. We can only look to the past to determine the behaviours that occurred before. None of these behaviours have changed and the issues producers face today are spectacular. The only means of attaining a viable form of production discipline is through the adoption of the Preliminary Specifications decentralized production models price maker strategy. Alberta has shown the way that government mandates come with too much baggage. I’ve been saying these things for a while now and there doesn’t seem to be any concern being expressed by the oil and gas bureaucrats. We don’t know what their plans are and they aren’t sharing.

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.

No One Seem's Immune

Shell is not one of the companies that we include in our sample of 23 producers. They recently published their fourth quarter report and I have a few comments to make regarding their performance. The one thing that is evident, which is the result of their reporting the past five years in comparison to the current year, is the effect that the decline in oil prices have had in the industry. The effect that we’ve documented in our sample of 23 producers has not been limited to the juniors and intermediates, and what appears to be the demise of the start-up, but has had tremendous impact on the integrated companies as well. Nonetheless, the culture that has caused the overproduction in our sample of 23 producers is evident in Shell as well. It is a systemic culture throughout the industry as a result of distortions that the SEC’s accounting requirements have created. Those being the current culture of building balance sheets by expanding property, plant and equipment as the objective, and not recognizing an appropriate amount of these assets as the capital cost of exploration and production, therefore distorting the profits of the producers, these high profits attracting overinvestment, leading to chronic and systemic overproduction.

With that in mind let's take a look at Shells property, plant and equipment account dynamics. They have property, plant and equipment of $223 billion at the end of 2018, depletion of $22.1 billion and capital expenditures of $23.0 billion. In terms of building balance sheets they score an A+ as the amount of cash locked up in property, plant and equipment, due to the increase of $0.9 billion in 2018, will last to eternity. There is no sense anywhere in the industry to free these resources and reuse or redeploy them, dividend the subsequent resources to investors or pay off debt. The question we continually ask is, are these assets or are they the unrecognized capital costs of past production? As with all producers there is a desire to build the balance sheet in the property, plant and equipment account. Which is admirable that they seek to build the asset side of the balance sheet. There are those that seek to build the liabilities. There are however a myriad of different asset accounts other than property, plant and equipment. Some are even classified as current assets like cash and other short term assets used in the calculation of working capital. Why not realize the capital costs of exploration and production, pass those costs on to the end user of the product and in turn boost the balance of those current asset accounts that contribute to increases in working capital? The only thing that big balances of property, plant and equipment provides is the ability for the CEO to strut around town in a vain attempt to prove they have the biggest and best balance sheet, when in reality these balances only reflect the amount that the investors have had to subsidize the consumers for their consumption of oil and gas, and how much Shell has invested in excess of the cash flow that has been generated.

In order to generate value, real tangible value producers will need to stop swapping investors cash around and begin generating value from the activities they perform. No one is buying what these financial statements are selling throughout the industry anymore. Investors stopped participating in the annual petroleum beggars banquet many years ago. Creating the producers cash shortage that exists throughout the industry. Providing further proof that there was never any value being generated from producers activities. Investors had the opportunity to have invested into the oil and gas companies, which they did, or Apple, FaceBook, Google or many others. Companies that have generated value for their investors. As a result they are now demanding the producers begin the process of paying back a more than reasonable return in order to compensate for the oil and gas investments they made, the dilution that occurred and the value that should have been gained. If the investors weren’t able to earn it in the past then they’ll take it out of the producers today and tomorrow. Dividends, buybacks and payments to the banks have been substantially increased throughout oil and gas in 2018. Even Shell has not been immune to these demands. In 2018 they paid out $15.5 billion in debt reductions and $20.2 billion to shareholders for a total of $35.7 billion. These payments were made on operational cash flow of $53.0 billion or 67% of that cash flow. In contrast, during 2013 Shell had cash flow of $40.4 billion, debt increases of $5.4 billion and $12.45 billion in payments to shareholders in one form or another, for a total of $7.0 billion or 17.3% of cash flow. No one is immune from these demands of shareholders and banks in the oil and gas industry. The trend isn’t going to stop either. Investors will continue to demand the value that will far exceed what producers feel they should have earned. With that in mind, Shell’s 2018 shareholder equity was $202.5 billion generating a 17.6% return vs. 2013’s shareholders equity of $181.1 billion providing a 3.87% return. A 454% differential between these two eras and proof as to who’s upset with who’s performance. Shell is one of the best managed companies. If they are being forced into this situation then I can’t imagine what kind of pressure is being put on bureaucrats throughout the industry.

In comparison the investors alternative investment would have created a disastrous tax liability due to the capital gains earned by the shareholders who invested in Apple Inc. Nonetheless, during 2015 - 2018 Shell issued dividends of $46.9 billion on $202.5 billion in shareholders equity or 23%. Whereas apple has paid $50.2 billion in dividends for 2015 - 2018 on shareholders equity of $117.8 billion or 43%. The point of this exercise is to prove that the average investor is not that enamoured with oil and gas performance. Shell’s most recent dividend performance is being boosted as a result of strong investor influences and therefore appear much better than they otherwise would be. It is necessary to consider that there are other, better performing industries in which to put one’s money. It's time for oil and gas to compete beyond the mindset of they’re better than a bank.

Oil and gas producers performances are not better than a bank which is what the bureaucrats believe they are. Invest your money and we’ll return a handsome 4% coupon each and every year, the oil and gas bureaucrat will state. Banks don’t invest their money to make a return. They take deposits. If I deposit $1,000 in Canada the bank will provide me with $20 each year that I do so, and the U.S. is no different, the bank can then take that money as part of their reserves and loan out $10,000 at 6% for a revenue stream of $600. This is on the back of zero investor dollars. If the oil and gas producers want to compete with the performance of a bank then understand that under the banks charter they are authorized to create money. I’d like to see producers earn a net $580 / year on investments of nothing. Time to start dealing with the oil and gas business as a business that competes against all other industries, including banks, and not some fairytale of what other industries are providing their shareholders.

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.

Differentiating Cash Flow

It used to be that cash flow was everything in oil and gas. Profitability was irrelevant. This was some of the thinking that led to the difficulties the producers face today. Profitability is required and a firm or industry that is not concerned about its earnings is bound to be in financial jeopardy in a short period of time. Oil and gas investors have shifted the attention of the producers to profitability and cash flow has waned as a measure of performance. After all what is cash flow when the oil and gas producers have touted the numbers their firms produced. Oil and gas has never been about building value, it has never been about profitability, it has been about spending investor money on an annual basis. Spend, raise, spend, raise. The only reasonable assumption that can be made is that oil and gas is involved in the activity of drilling wells. That’s where the money is, for the bureaucrats at least. No one else seems to have prospered from the industry.

The measurement of cash flow as a means to determine the value of the firm and its performance is a specious argument in oil and gas. That has been my opinion for many decades now. If you spend a thousand dollars, which then generates a thousand dollars in cash flow what is it that you’re doing? It appears to me to be the act of swapping money from one pocket to the other. Investor money goes in, cash flow comes out. The issue is that there has been sizeably larger volumes of money going in then has come out. This is recorded accurately on the big, beautiful and well built balance sheets of the producers. In property, plant and equipment we can assume the value that is represented there is the amount that the investors have subsidized the consumers, check, but also the amount of excess investment over the cash flow that’s been realized, check. The cash flow numbers are nothing but a return of the capital that had been previously invested in the business in prior years by the firm. There is no incremental value being represented in those numbers above and beyond the capital being returned. If there was incremental value being represented in the cash flow numbers it would be shown in the profitability of the producer. However, until recently it didn’t matter that the firm didn’t produce any profits. Unprofitability was considered the nature of the business.

In terms of spending the investors money there has never been any question regarding the accuracy and integrity of the spending of those dollars. Oil and gas has a premier reputation in terms of how it spends the money from its investors. Bureaucrats know not to divert any of those funds to anything but the drilling of wells and bringing them online. It's the cash flow from that spending which is discretionary as far as bureaucrats are concerned. As long as it is justifiable as business of some form then they’ll spend it. The many forms of bureaucratic compensation flow from these considerations.

I have argued that the profits that had been reported by the producers were of the lowest possible quality imaginable. Taking everything the producer does as a capital expenditure adds up to a significant amount of capital expenditures after a decade or so. It also has the effect of making the income statement look not as bad as it really is. Recognizing a small percentage of capital costs has been enabled through the SEC’s unreasonable method of recognizing a negligible amount of capital costs in a capital intensive business. Allocating all of the costs to the reserves discovered, and then recognizing the small number for each volume of production that year is a poor measure of performance. Properties in oil and gas have been known to produce for 50 years. This does not enable the producer to compete in the current capital markets. Waiting decades for the cash resources to be returned from prior investments is uncompetitive when other industries are turning over capital at much higher rates. We recommend for accounting purposes that producers adopt the 30 month requirement of a straight amortization of the capital costs. This will more accurately match the flush production, which subsequently requires extensive capital to rework the well, it will return the cash in a timely manner in which the producer will be able to redeploy it as incremental capital costs, assuming they are charging the consumers appropriately and producing only profitable production, and will better reflect the risks involved in a highly technical business. Oil and gas is not banking and is not intended to take deposits which are paid out over 10 to 20 year periods.

These changes will separate the leaders from the laggards. Today it is difficult if not impossible to differentiate the producers based on the financial statements that are provided. They’re always profitable! In a very convoluted way. Under the Preliminary Specification the competitive differentiation is based on the earth science and engineering capabilities and their land and asset base. The financial statements of the leaders will be evident in comparison to the laggards. The laggards financial statements would look quite consistent with today’s presentations. Whereas the leaders would be profitable on very high revenues. Have substantial cash and working capital, a smallish capital structure with moderate to high leverage employed in a low interest rate environment. In the stand out producers they would have extinguished their property, plant and equipment consistently and show little to no values in that account. The only requirement that the SEC dictates is that the value of property, plant and equipment doesn’t exceed essentially the market value of the reserves. Otherwise the dreaded ceiling test, which we’ve seen far too often, is invoked. A high performing producer would have consumed their property, plant and equipment due to their competitiveness and performance above the others.

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 Study in Contrasts

The Preliminary Specification offers the only alternative to the status quo. Instead of chronic, systemic overproduction and specious profitability. We prepare software that defines and supports a reorganization of the industry and producer firms. A reorganization that focuses on specialization and the division of labor by converting all of the producers costs to variable costs, based on production. First by establishing service providers to provide the producers with the administrative and accounting functions. These service providers will focus on one process and have the entire producer population as their client base. By reallocating the administrative and accounting resources of the producers to service providers oil and gas production becomes the triggering event for the service provider to invoke their service. They will then invoice the individual Joint Operating Committee the fee for their service. That way the overhead of the Joint Operating Committee is recorded in a timely and accurate fashion. The cash used to pay the service providers, because all production under the Preliminary Specification is produced profitably everywhere and always, is captured in the commodity price charged to the consumer. Those cash resources are then returned to the Joint Operating Committee (working interest owners) to be used to pay the next months overheads, etc. Contrast this to the current overhead process which capitalizes on average 80% of all overhead across the industry and realizes the return of that cash over the course of several decades in some instances. A.K.A. a cash sinkhole. We believe the overhead costs to be material, in the range of 20% of revenues. No one can refute our claim of the amount that overheads consume because the numbers are jumbled on financial statements.

When the service providers are established they provide an industry based administrative and accounting capability that is a variable cost, variable based on production. This replaces the producer based administrative and accounting capability that is fixed. The producers fixed overhead costs are currently replicated in each producer firm, yet unshared and unshareable. This transition will enable producers to be more profitable when the industry wide capability is shared. Also enabling producers to evaluate properties on their actual costs in all areas of capital, revenue, royalties, operations and actual overheads. If the property then produces a profit it will produce, if not it will be shut-in for at least the next production month. Shut-in properties are not profitable, however they also do not incur losses as all the producers costs are variable in the Preliminary Specification. Therefore they incur a null operation. No profit, but also no loss. Providing the oil and gas producers with the most profitable means of oil and gas operations when the properties losses no longer dilute their profitable properties operations. Those shut-in reserves can be saved for a time when they can be produced profitably. They also will not have to carry the incremental burden of subsequent losses on operations as additional costs to be recovered. And the commodity markets will find their marginal cost when the unprofitable production is removed from the market. Production discipline is attained through this process when the producer realizes that the maximum profitability of their organization is obtained through producing only profitable production everywhere and always. Therefore producers are incentivized to adhere to the principles of the Preliminary Specifications decentralized production models price maker strategy. Just as all businesses that follows these principles in the capitalist system are.

This is the key process that provides the majority of the quantified value in our value proposition. Other areas, such as specialization and the division of labor can not be quantified at this time. Yet since the late 1700’s the application of specialization and the division of labor is the only method of generating economic advantage. It enables societies to do more with less. And therefore what the industry could do with the systemic application of specialization and the division of labor throughout the 12 modules of the Preliminary Specification is unknown and unquantifiable. There are many other process changes that provide value in different ways for the industry. And these are all specified there. What is important to note at this point is that this forms a plan for the North American based oil and gas producer to approach the next 25 years. A means in which to deal with the issues that are plaguing the profitability and the cash drainage that is being experienced. A structure to establish the necessary elements to ensure innovation is enabled in a decidedly difficult scientific business. And a way to ensure the secondary and tertiary industries that are dedicated to and support the oil and gas industry are aligned with the needs of the producers, and in turn are able to rely on a healthy and profitable oil and gas industry.

This all starts with an accounting that is shifted from the focus around the “corporate model” as we refer to it. To one that is focused on the Joint Operating Committee, the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. By moving the compliance and governance framework of the corporate model into alignment with the Joint Operating Committees seven frameworks we achieve a speed, innovativeness, accountability and profitability over today’s status quo. We also attain the capability to deal with the operational difficulties that plague the industry, issues such as chronic overproduction. And instead are able to focus on the opportunities presented to us through what is unquestionably the most difficult and challenging next 25 years. We certainly can not continue to produce oil and gas unprofitably as we have for the past four decades. We need to change in order to be able to plan and realize for our future in these next 25 years. If production continues to consume cash as it does today, no investor will ever resume their participation. The industry must be profitable based on a reasonable accounting in order to ensure that energy self sufficiency on the continent is not only real but sustainable.

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.