Industries State of Affairs

It has been a very good first quarter here in 2019. Oil prices are up handsomely and recorded a 31.3% increase from the December 31, 2018 prices. We have not seen that kind of performance in terms of the commodity price in many years. Natural gas holds itself in its constrained range of $2.67 at the end of March 2019. Natural gas prices have been so fundamentally destroyed they’ll take many years of committed effort to restore them to the level of profitability. Continually trading at its constant low of 20 time’s multiple of oil prices. Rehabilitation of these prices back to the 6 to 1 ratio that was the case for decades will take producers some recognition that there’s an issue. Which may take the current management a few more decades to figure out. Natural gas sales out of the Permian are associated gas, nonetheless there are differentials on oil there as well. These gas “prices” reached negative $1.15 last week and I’m sure “it is what it is” as far as management is concerned.

With the rise in commodity prices there can only be a similar rise in the stock value of the producer firms. I feel the only claims the management of the current oil and gas producers can make is that they’re a proxy to the continually rising prices of energy. They never understood or attempted in any way to build value outside of commodity price increases. And therefore this quarters performance in terms of the market capitalization of our sample of 23 producers increased by 12%. A reasonable return considering producers have to face their shareholders at their AGM’s soon. And which if we recall that is a much better performance all around than in the fourth quarter of 2018 when commodity prices fell 37.7% and the market capitalization of our 23 producers declined 30.7%. It would seem, as it has in the decade of this downturn / depression, that the producers more accurately follow the prices down than they respond to any upward momentum. That may be why companies such as Obsidian are now trading at .64 percent of its all time high. Less than 1%, yet if you look at the message boards for this stock you’ll find that just as many people who own this stock still believe it has a future, as they also apparently still believe that President Trump colluded.

Here’s a surprise to everyone. As much as Obsidian doesn’t have a future, I also believe that the North American oil and gas producers, no matter what their makeup is, will not survive. The situation as it stands for them today is terminal. The destruction of value has been comprehensive to the point where the industry is currently worth substantially negative values. The current cash crisis will not be resolved unless oil prices reach at least $130 and are maintained for a decade to a decade and a half for these albatrosses to be turned around. The assertion that the industry can recognize its operating costs and the royalties it pays each year as its only costs, and that makes them wildly profitable are over. The deferral of the capital, in a capital intensive industry, overhead and the kitchen sink into property, plant and equipment for several decades has been a lucrative scheme to attract the attention of the investors. Capital flowed into the industry to each and every wannabe oil and gas producer who could mouth the appropriate words. It was a tax and spend regime. The generation of value in order to build the organization was not the point, it was spend investors money until you had the biggest, best, baddest, most beautiful balance sheet known to man. That has been the history of the industry since the SEC implemented their ludicrous Full Cost accounting and Ceiling Test provisions in the late 1970’s.

Its difficult to comprehend for some people why this is such an issue. Your history, your legacy and culture as a producer has been developed under the premise that you were doing things of value by building the balance sheet. Spending was the means of success. Now that spending has accumulated to a disproportionate size on their balance sheet in terms of what the producer truly represents. The producer is stuck. They could certainly write it off and reestablish themselves with a more realistic left hand side of the balance sheet. It’s the right side that’s of concern. Then, as the purpose of accounting is to report performance, the performance based on the historical cost would show that you’ve been spending money with no concept of building anything of value. The shareholders have nothing left of their money represented in that performance and you’re forcing the banks to take a bath too. If this was one or two producers then it would be easily resolved. It's the entire North American producer base. The only legitimate method of dealing with this is to now perform. And that means time will need to be spent to earn the real profitability to recognize the property, plant and equipment costs as depletion. Taking more investor money will not solve this for two reasons. Investment is not profits and no one’s letting you incinerate their money anymore. There is also the issue of your history, legacy and culture that needs to turn from a 500 lbs functioning alcoholic to a gold medalist in the next Olympics 100 meters.

What is a good oil man / women these days. What is a good oil and gas producer these days. What is a good oil and gas property these days. What is a good oil and gas formation to drill into these days. I don’t know, and worst of all no one knows the answer to any of these questions. The producers balance sheets have all been homogenized and homologated into the same configuration. Only their capacity to attract capital over the past four decades differentiates them in terms of their overall size. It’s all just sludge and fudge that represents an industry that thinks they’re able to build value by spending money. That they’re the golden ones with the midas touch who make the world go round. What was built in the industry prior to the late 1970’s was impressive to me as it also performed from a financial point of view. Since then it’s been all about cash flow, which is really only the capital that was once invested being returned. And these dollars went to fuel the expansion of overhead, more capital expenditures and the most creative and lucrative forms of bureaucratic compensation.

So yes, Obsidian has a chance. Just as Jim Carrey had a one in a million chance in the movie Dumb and Dumber. That is the only opportunity that you can give producer bureaucrats today. After three years of having the investors pull their funding, they think they’ve still got a shot. That they’ll make shale commercial. Natural gas prices will be rehabilitated. Accept that OPEC isn’t the issue, its us. Determine what profitability is and how to make the changes that are needed to enable it. After all it’s only been a decade that we’ve been in this difficult situation and they can’t identify or discuss any of these issues that they’re facing. To approach a difficult and technically challenging future that they have no preparation or understanding on how to approach commercially! Not to worry, if the price of oil did increase by 200% then Obsidian and all the other producers stock would rise by 76% and wouldn’t that be something!

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 American 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.

I just want to note for my own purposes more than anything else. Reviewing my logs for the past year or two I’ve had a Linux user who uses Chrome as their browser coming in and doing wholesale dumps of this blog. Each week I see them conduct approximately 100 page views which would be almost 1,000 blog posts. A curious situation. I can’t identify the individual or group because they come in through a proxy using a different country each week. However mostly from South Korea. I’m recording this for my purposes here to note this behaviour. 

Third Friday

Discounts and Destruction

By undertaking the approach that we are with moving the industry away from the management by the bureaucrats and establishing the Preliminary Specifications software and services of People, Ideas & Objects, our user community, service providers and coin holders as the means in which the industry is operated. Investors will have a more direct opportunity to affect change and to have their needs met within the industry either through ownership of the coins, after the ICO, or through our user community. What we know in terms of the behaviour of the producers this past decade is they’ll have no fight in them regarding the activities of the producer itself. They’re left to atrophy and degrade as part of the natural bureaucratic process they’ve implemented. What we might find is a continuation of the fight that People, Ideas & Objects have experienced since August 2003 when we first proposed the shift to the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. The threat of new ideas and the issue they cause in terms of challenging bureaucrats financial benefits, as a result of these bureaucrats do nothing approach to the industry. All that I can suggest is be prepared for a good fight in terms of being involved with the implementation of these ideas. These people have developed excellent skills in ensuring nothing ever changes and no new ideas are offered to them.

We discussed in yesterday’s post the escalating capital costs of oil and gas exploration and production. How this escalation is hidden in the treatment of capital by the industry by deferring the recognition of these costs and diluting them with capital costs from prior decades. Or should I say prior era’s. The need to move these costs to the income statement in a timely manner is more relevant today as the cost increases that have been experienced in the industry, and the projected capital costs of the next 25 years are far beyond any capital markets appetite or capability. The ability to cycle through the process of investment, recovery and subsequent investment is the only manner in which the industry will be able to approach a future with this scale of capital demands. Consumers, who the producers bureaucrats have discounted their energy costs by the amount that they were capable to hoodwink investors with their specious accounting, will be faced with much higher commodity prices. They will need to retire those capital costs that sit on producers balance sheets today, or as we call them those unrecognized capital costs of past production, and also pay for the future capital costs of oil and gas, a capital intensive industry.

With the irreplaceable use of oil and gas and its limited supply why at any time, would we produce unprofitably? How can we justify the usage of such a valuable resource to future generations? With 23,200 man hours in each boe why would we not appreciate the value that is represented in a commodity that today may cost $200 / barrel, or $0.0086 per man hour? Instead with the chronic lack of leadership all that we hear in the industry is the parroting of the radical environmentalists that suggest we’ll be all dead in 12 years. The sooner we get rid of these fools the better off we’ll be. The consumer is going to have to pay for the commodities that they ultimately consume. The end user pays in the capitalist system. Fear that we may force consumers into using alternative energy sources is the nightmare that keeps the bureaucrats awake at night, when in reality it should be their financial statements.

We are changing the industry to become the dynamic, innovative, accountable and profitable industry everyone needs. We see absolutely nothing from the current bunch. Our Preliminary Specification, our user community, the service providers and our coin holders are configured to make the necessary changes in the industry and producer firms. By providing the oil and gas producers with the most profitable means of oil and gas operations. With our software and services only profitable production will be produced. If a property is unprofitable, based on a detailed accounting that includes all of the costs, then it is shut-in. This is not collusion as we’re accused of consistently. Robert Mueller found no collusion whatsoever. What we’re doing is using sound business principles used throughout well managed businesses. By producing only profitable production any unprofitable production is shut-in until such time as it can be reworked to the point where it can be returned to profitable production. Therefore the producer no longer has any unprofitable properties diluting the profitable properties and their earnings are the highest that they can be. Their reserves are saved for a time when they can be produced profitably. Those reserves will not have to carry the incremental costs of additional losses as costs to be recovered. And the commodity markets will find the marginal cost when the unprofitable production is removed from the marketplace. That is how businesses operate and if People, Ideas & Objects et al have to be punished for that then we’ll do what we have to.

If we are to approach a future with the oil and gas industries difficulties and expected costs, then we’ll need a means to finance them. The only reasonable conclusion anyone will come to is that these demands are beyond the scope and scale of any market. The consumer is the only source of the financial resources necessary to meet these demands. The past and future capital costs will need to be recognized and recovered quickly in order to have these dollars available to the future producers who will soon be generating from the ashes of the relics we have today. That is how we move forward, and if oil and gas becomes too expensive for the consumer then they’ll have alternatives to meet their demands. Let the market solve these questions, not the bureaucratic management of the producers forcing the investors to discount the consumers consumption of energy.

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 American 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.

Then Came the Capital

In our prior post we covered off the variable operating costs that would be incurred during the day-to-day of the oil and gas producer and Joint Operating Committee. Today we want to discuss the different treatment of capital in the Preliminary Specification and how these new policies would better support securitization. The investor in the securitized oil and gas investment is not that interested in undertaking a substantial capital commitment in terms of their securitized investment. They’re more about the earnings and cash flow that can be generated as a result of the investment. Having to put money in will at times be inevitable, however these capital requirements should be able to be met by the net revenues of the other properties pooled within the securitized investment. Therefore the cash flow generated by the securitized properties is going to have to consider all of the costs of oil and gas exploration and production on a timely basis and include those costs in their pricing charged to the consumer. Selling commodities for the operating costs is a strategy that is used to overcome occasional difficult periods in a business. What is not necessary is to operate in a manner where the operating costs are the only costs that are recovered, such as the oil and gas industry has been doing for the past four decades.

The two differences in the methodology of the Preliminary Specifications management of capital are more in line with the demands for performance in the capital marketplace today. The deployment and recovery of capital in terms of the time these cash resources are resident on the producers or securitized investors balance sheet needs to change. Taking decades to recover the costs that were invested in the current period is inconsistent with the matching principle of accounting. Oil and gas is a capital intensive business and that has to be reflected in the costs to the consumers of their consumption of these resources. It is also anticipated that the next 25 years will demand significantly more capital than at any other time in the history of the industry. Storing these costs in property, plant and equipment to enable the CEO to strut around and boast about the size of their balance sheet is over in terms of a value adding process. Particularly now with the shale reserves being much more costly and having steeper decline curves which invoke additional volumes of capital in order to work over the property and maintain its deliverability. Therefore the two differences we are implementing in our methodology is we’re recording only tangibles as assets in property, plant and equipment. This will move substantial amounts of capital off the balance sheet that will hit the income statement in the current period. Secondly we will be differentiating the capital costs incurred to maintain the production profile and the capital costs incurred to expand the production profile. We will continue to maintain the 30 month period in which any assets are depleted.

Whether these are implemented in terms of the financial statements that are published is not the issue at this point. The point of the whole exercise that People, Ideas & Objects is making here is that these changes are for the pricing of the commodities to determine profitability. Determination of the pricing of the commodities at the property level is not done by the industry today. Producers use the high throughput production model and seek to ensure that full production is achieved at all times in order to defer the costs of their high overheads. People, Ideas & Objects Preliminary Specifications decentralized production models price maker strategy demands that pricing and profitability be determined at each property to assess its performance and assess if it continues to produce. Profitable properties that are retiring large volumes of costs will have an impact on the financial statements.

Discussion regarding the tangible vs intangible nature of the capitalization of a cost is clear. Since the majority of the drilling costs are intangible we believe this will bring about a new discipline within the producer in terms of how they approach the drilling of wells. However with the enhanced cash flow as a result of the price maker strategy they will have the cash readily available to drill. The real difference in terms of the capitalization differences between People, Ideas & Objects and the current producers is the costs to increase the production profile. When we look at these costs and other capital costs that are employed to maintain the production profile we see a huge disparity. Capital costs that are needed to expand the production profile are in the range of $200 to $400 / boe. A substantial difference to those that are listed in the producers current production profile. Why is this and how is this not being recognized in the industry today? Good question. In 2018 our sample of 23 producers exited with a production profile of 9.998 million boe / day. This was an increase in production of 216.8 thousand boe / day or a 2.17% increase from 2017. This was achieved on the basis of both maintenance and expansion capital expenditures, of $63.48 billion. Now you may argue my logic here but I think this proves my point. Taking the $63.48 billion and determining on the basis of that current cost, what would the cost be to replace the 9.998 million boe / day = $2.9 trillion. The current amount sitting in property, plant and equipment of these producers is $468.7 billion. Let’s assume that ⅔ of the capital employed has been depleted in prior periods for a total of $1.4 trillion. Therefore capital costs have generally doubled from prior periods.

My argument is that there is a large differential in cost between the capital costs of the current production profile and the costs to expand production. Although this calculation is very rough it shows that the differential, I believe, needs to be recognized and better understood in terms of how it is managed in the industry. If we avoided the recognition of these ballooning capital costs by deferring them and then diluting them with a long history of other capital costs, then holding all of these costs for decades on the balance sheet, would that hide this anomaly adequately? How can consumers begin to appreciate and pay for these capital costs? By moving the existing capital costs out of property, plant and equipment in the next 30 months will not only return the cash to the producers, assuming they are producing only profitable production and charging the consumer the appropriate prices to cover their costs, we will begin to see the capital costs escalate substantially for new production due to the elimination of the deferral and dilution. What we hear instead is that Exxon expects they will produce from the Permian for $15 / boe considering all of the costs. Which I guess is true when you take the costs of all the capital employed to drill, complete and equip and allocate those costs to the forty or fifty year life of those reserves. We don’t believe that’s a business, more of an exercise.

To the point of our securitization of oil and gas properties. The capital costs are an issue that has plagued the industry for four decades. I have argued this point here consistently and now the industry is finding that they can’t resolve this overnight with a few accounting entries. But it gets worse. The capital costs are opaque in terms of the future and the consumers are as unaware of these costs as the producers themselves. Ensuring that the capital costs are included in the price of oil and gas is a necessity. It is a capital intensive industry therefore the costs are predominantly capital. The ability to recognize and recover these costs needs to be enhanced and managed appropriately if securitization will be able to function appropriately.

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 American 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.

Moving Towards Securitization

The question would therefore be, after the investors purchased some quality properties from the producers at value based pricing. What are the investors to do with the properties that they’re holding? It’s not in their interest, and they have no intention to ever be involved in the day-to-day aspects of the oil and gas properties management. Buying properties at low prices only gets them into a situation that they’ve no interest in being. We believe in the interim the management of the property could remain with the seller in order for the investor to avoid this day-to-day management. This could be on the basis of the Operating and Accounting Procedure that are in place, or alternatively the seller and the investor could sign a management contract to carry this on for a management fee. If the property was operated by the seller then arrangements could be made through the Joint Operating Committee to have operator-ship pass to one of the other producers.

Once the Preliminary Specification software and services are operational then the property can be managed by the investor through the independent and objective service providers that are a critical element of the value proposition that we’re offering. The Preliminary Specification makes a fundamental change in the industry. The administration and accounting for a property no longer requires the large corporate infrastructure necessary to conduct these day-to-day tasks. What is happening is we’re taking the fixed administrative and accounting capabilities of the producer and making them the variable administrative and accounting capabilities of the industry. Whether you’re Exxon or a recent start up, the administrative and accounting costs to administer a property will be similar in terms of cost, as only the costs associated with the individual property will be charged to the property. That is to say that the start up oil and gas producers will no longer require disproportionately large overhead costs that have been necessary for the first years of their operation. Using the service providers they will incur only the costs involved to administer and account for their properties and will do so without having to take on any organizationally based fixed overhead costs. All the service providers will be billing the producer will be for their services on a variable basis, based on production. If the property is shut-in then there would be no charges incurred for administration or accounting.

That is an effective solution for those administrative and accounting responsibilities and costs that are undertaken for every property. There are other overheads incurred by the producer firm and most importantly, the earth science and engineering capabilities that are necessary to develop and manage the property. Within the Preliminary Specification we define two separate and distinct sources of revenue for oil and gas producers. The first of course is oil and gas sales. The second revenue source is the contribution of their earth science and engineering capabilities to their properties during the course of the month. These revenues are intended to directly offset these costs. Through the Work Order system of the Preliminary Specification all of these engineering and geologists time is captured and charged to a specific property or alternatively to an overhead account. Establishment of the producers two sources of revenues was done in order to solve three important issues regarding the future needs of the industry. The first being the geological and engineering disciplines are known to be facing a retirement issue in the next ten years. And now as a result of this downturn we’re seeing few students in the faculties of these disciplines. Shortages are expected throughout the industry. Second the amount of geological and engineering effort in each incremental barrel of oil is always increasing. And third, the capacity, desire and capability of the producers to continue to conduct their operations in the manner that they do today will soon be financially detrimental to their success and profitability. Having all of the geological and engineering capabilities that are necessary for the producer firm on hand and on a contingency basis within the organization for the properties that are owned and operated is the ideal situation for all but the start-up producers. With the expected shortages of these critical resources, with the desire to have all of the capabilities under one roof and with the expansion of the science, will it be commercially viable for any producer to maintain this luxury? We do not believe so.

The earth science and engineering capacity held within the producer firms today are in excess of the producers demands at any one time. This is necessary to manage critical issues and situations that can escalate beyond the normal course of business. These surplus capacities within each producer are not shared or shareable with the oil and gas industry. Therefore People, Ideas & Objects have employed specialization and the division of labor in the Preliminary Specification in order that producers will be able to better manage the demands for geological and engineering capabilities and capacities. This requires that each producer focus on a unique specialization and provide that to their properties in collaboration with the other unique capabilities and capacities of their properties partners. Eliminating the concept of operator-ship. Any capability shortfalls could be made up by contracting other producers to fill in with their particular specializations as required. We suggest these other producers capabilities fill the roles of the bread and butter tasks that need to be done. That way the management of start-up producers can start with profitable operations while building their production profile. Whereas the more established producers would be able to pursue the science in greater detail. Therefore the need to have the functional capability within the Preliminary Specification to capture the time of these resources as they’re incurred, cost them and bill them to the Joint Operating Committee for the partnership to pay their share of these services. And to extend this capability outside of the producers four walls and the Joint Operating Committees property line. That is what the Work Order does.

In the instance of the investors case they have nothing to contribute in terms of geological and engineering resources. And that is an issue how? The partnership represented in the Joint Operating Committee may have those capabilities and will bill them for the month to the property where the investor will pay their share. Or alternatively outside consultants or producers would have to be brought in. All of this brings in the opportunity for the industry to begin to securitize oil and gas assets. Oil and gas assets that have the same cost profile as the working interest share of any other producers in that property. Generating a tradable security representing small interests in many properties. And in turn creating a new source of funding to the industry we are developing here, the replacement to the bureaucrats unprofitable and unsuccessful industry, the one for the dynamic, innovative, accountable and profitable oil and gas producer.

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 American 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 to Spook a Banker

One of the things we need to set in motion within the next three and a half years of lead time that we have before our Initial Coin Offering (ICO). Is to marshal the forces of creative destruction and the rebuilding of the industry in the image of the Preliminary Specification. We’ve talked about how the coin holders from our ICO will earn a percentage share of the extrinsic value generated from the Preliminary Specifications decentralized production models price makers strategy. Yesterday we discussed how the service providers would establish the replacement for the administrative and accounting that is conducted within the producers today. How the efficiency of the service provider sub-industry would be too competitive to be ignored. That these service provider organizations are derivative of the user community participants and a critical aspect of how our communities value proposition is earned through all of these software and service initiatives. Today I want to talk about the parsing out of the P&NG Leases from the existing producers and how those can begin to fall into the appropriate hands in terms of the people who are favorable to the development of the Preliminary Specification, our user community, service providers and coin holders.

We talked about this general plan in thirty nine blog posts back in September to December 2016 and it fell under what we called at the time as the “Best Business Opportunity, Ever.” That is still the case and I’ll summarize the key point here now. Cash is king. Although the market for selling properties has diminished in the past year, I expect that it will resume once again. The reason for the market slowing was the producers were unable to attract the prices they were expecting, or had recorded on their big, beautiful and well built balance sheets. Forcing many producers to make the difficult choice of walking away from the deal and forgo the cash that the organization needed, or report the loss. In most cases the cash was so desperately needed that most if not all chose the loss. The reporting of losses had the effect of shutting down the supply of properties for sale once enough cash was gained. In some cases the choice wasn’t even the producers. Banks hold an outsized role in many areas that an oil and gas producer normally doesn’t see them. Such as in daily cash management, banks are taking what they can get their hands on, on a first priority basis. Any cash realized by the sale of properties was earmarked to retire debt. I wonder what the banks position is today in terms of property sales?

In prior decades banks secured their investment with the properties of the producer. Today most of the debt of the producer is unsecured. Until now it’s been a somewhat orderly payment of those debts as they matured. The maturation of many of these debts are on the horizon. In fact you can hear the deafening roar of the train close by in many cases. Those debts that are coming due have to be keeping some people up late at night. I doubt it’s the producers bureaucrats who know instinctively when the time comes for their exit. Management has a well established history of bailing when things became untenable in prior downturns. In the 1930’s there was such a mass exodus that government had to step in and involve themselves more in the overall economy. Cut and run is in the bureaucrats DNA. As good as things have been in the oil and gas industry these past ten years, and for all the actions that have been undertaken by the bureaucrats to remedy them. To be clear, absolutely nothing. We haven’t seen anything in terms of the scope and scale of this downturn, yet.

Let's go back once more into the issue of bloated balance sheets. Assuming we’re correct and the assets are overstated what is the first implication of that. The other side of the balance sheet would be overstated as well. In an orderly dissolution of a producer the debtors have priority over equity holders. If assets are inflated by what People, Ideas & Objects suggests, which is 65 to 70% of the property, plant and equipment account that is essentially the unrecognized capital costs of past production, then any amounts of shareholder equity would be eliminated in the process of making our recommended pro forma adjustment to consider reality. Now there is the real world and there is the accounting world. I’ve been the one to suggest that the producers bureaucrats have sought to emulate the market value of the producer by building balance sheets. Accounting is not about value but about performance and the pro forma performance reflected here is that the equity of the firm has been extinguished, based on the producers poor performance, and only the debtors are left to pick through the corpses. This seems somewhat consistent with last years property sales prices being far short of their listed value in the property, plant and equipment account of the producers selling the property. And therefore incurring large losses when the values recorded, on the big, beautiful balance sheets, were so high. The balances of cash and working capital just seem to erode each quarter too. These are due to the fundamental, cultural and deluded thinking that the industry has been profitable at any time these past four decades. And lastly, the only market available to the producers to meet their debt obligations in the coming years will be more asset sales. It has become clear to the investors that the producers asset market value is now and will continue to be short of the debts and obligations of the firm and industry. Chronic overvaluation and a lack of buyers will do that. The question is are the banks aware of this yet?

Now back to the point at hand. There is a subtle nuance to my argument. All of the financial value has been stripped out of the industry over the past four decades and it consumes cash in daily operations. The equity necessary to support operations doesn’t exist as it has eroded to nothing, if not substantially negative. The oil and gas investor was pouring their cash into an empty black hole by investing in the producer firm that held up the facade of these financial statements. As much money as investors put in it was immediately offset by the substantial amounts of negative equity as represented by the “real” situation of the producer. And the drainage of cash being realized by each and every producer is symptomatic of the continued decline into further negative value of these producers. Only debt supports the industry. Bankers too will soon realize putting more money in, or even letting existing debt revolve or extend is not in their best interests. Oil and gas investors remain interested in oil and gas. Just not this bunch. Instead of buying these poorly performing albatrosses, they can help us to rebuild the industry by being the ones who purchase the properties from the producers, to help them out with their critical cash situation. Enabling them to buy more time and pay down more debt. Investors issuing bids for quality properties at “value” prices might be highly lucrative in the years to come. However, if the banks remain with their cautious opinion of oil and gas, or, if someone should happen to spook them into a panic…

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 American 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.

Who Want's Money!

We’ve been discussing how People, Ideas & Objects, our user community, service providers and coin holders will be regenerating the oil and gas industry from the ashes of the creative destruction that is now taking place. How the producers bureaucrats are currently using the producers cash flow to buy the allegiances of others to ensure that the motivation and demand for change is muted. We have decided to counter their abuse of the industries cash flow by describing how that cash flow will be allocated once the Preliminary Specification is implemented. In previous posts we documented how it's not enough anymore to own the oil and gas property. It’s also necessary to have access to the software that makes the oil and gas property profitable. That is the Preliminary Specification with its decentralized production models price maker strategy. The first element of how we began parsing the revenues of the industry towards those that are aligned to People, Ideas & Objects was through our coin holders. If a producer wants to have their properties profitable then they’ll have to use the Preliminary Specification. Only the coin holders can provide them with that access. The Permission Rights are granted to the coin holders through our ICO. Then the producers will negotiate with the coin holders for access to the system that makes their properties profitable. With the price maker strategy there is a material difference in the revenues of the producers today and those that will be generated with the Preliminary Specification. The difference or extrinsic value, as we call it, is what the coin holders will assess their fee upon. They are free to assess any percentage that they desire, we have recommended one third of this extrinsic value. That may seem excessive to the producers bureaucrats though they should realize they’ve done nothing to earn these revenues to date, and if they expect to turn down two thirds of the extrinsic value after doing nothing, paying for nothing and putting no effort into the systems development that will be their choice. The coin holders will be undertaking all the risk in developing the Preliminary Specification on their own behalf in order to earn their exclusive access rights.

The Permission Rights were the first element of our parsing of the revenues of the oil and gas industry into more appropriate hands. We believe the bureaucrats that are running the producers for their own benefit, and no one else’s, would continue for many decades until someone takes the keys away from them. Therefore taking the keys away is the process that we’re now undertaking. What I want to discuss next is the diversion of the funds of the industry to support the service providers. Our service providers are headed up by the individuals that make up our user community. The ones who have complete control over the software and methods in which the industry will be operated from an administrative, accounting and business model point of view. User community participants will own and operate a service provider as their key source of revenue and value generation. The service provider will manage a single process on behalf of the entire industry and bill each individual Joint Operating Committee a fee for their service. This therefore replaces the majority of the administrative and accounting that is conducted in the oil and gas industry today. The producer firm is stripped down to focus on its key competitive advantages of its earth science and engineering capabilities, its land and asset base. Building accounting and administrative capabilities that are similar to all the other oil and gas producers, yet can not be shared or shareable is an unsustainable cost that is adversely affecting the producers and industries profitability. The service providers competitive advantages over the existing methodology are significant and include specialization and the division of labor, quality, automation, innovation, leadership, integration, 5G and AI. To name only the highlights. It will be based on these competitive advantages that the services provided by these organizations will enhance the quality of service substantially for the oil and gas industry, but also be more cost effective due to the reduction of the redundancy of each producer having to build the same capabilities, and specialization and the division of labor being the only known method of economic expansion. Or in other words they will be able to do more with less.

How much does the oil and gas industry incur in terms of their administrative and accounting costs. I haven’t a clue and I don’t think anyone in the world knows. I would also seriously doubt anyone who would claim to have a number that represents these costs. I believe the only thing we can do is look at the cities of Dallas, Houston, Oklahoma City, Calgary and others to marvel at the layers of people that occupy all those buildings and wonder what the costs would be. That I think is the most accurate. With producers capitalizing any percentage of overhead that strikes their fancy the amounts are unknowable. Individual producers will certainly know the amount but they’re not sharing that information. Our sample of 23 producers reported G&A of $9.1 billion yet that is the net after capitalization. It also represents the total overheads, we’re only interested in administrative and accounting. Let's take an estimate for these purposes and say it’s $20 billion per year. Assuming a reasonably efficient service provider sub-industry we estimate that the 3,000 service providers would be generating $15 billion in billings as a replacement to that capability. Giving each of the service providers an average annual revenue of approximately $5 million. Which is consistent with what we assumed when we established the scope and scale of the user community. Now $5 billion in savings may not seem that significant to the bureaucrats in today’s oil and gas producers. And I would generally agree with them, they should look at the larger extrinsic value that we generate. What the service providers enable is a higher throughput of industry output. If there would be a doubling of production from this point, and including Canada’s natural gas ambitions that is close to reality, what would the cost of today’s configuration be in order to manage the throughput. I think that it is safe to say that with the service providers competitive advantages the costs incurred to double throughput may be a small increment of the amount that we’re estimating for the service providers here today.

Creating a second industry based administrative and accounting capability that is variable based on production to replace the producer based fixed administrative and accounting capability would be cost redundant. And that would be the point. The choice as to which system to use would fall to the most efficient system that provides the industry with the greatest profitability. If the property, based on a detailed accounting of all of the costs is profitable then it produces. If it’s not profitable, in the Preliminary Specification, it is shut-in until it can be reworked and returned to profitable production. Unprofitable production in our system attracts no costs as the Preliminary Specification has turned all of the producers costs to variable costs through the establishment of the service providers. If the property is profitable and therefore producing, a message from our task and transfer system will prompt the service providers to conduct their process on that properties data and issue an invoice to that property. If no production occurs no message is generated. A null operation, no profit but also no loss is incurred at the property. Therefore the most efficient method of management of the oil and gas industry would be determined by those that make those kind of decisions. The service providers are also the critical enabling technology / resource / organization / sub-industry that enables the value in our $25.7 to $45.7 trillion value proposition real. Building it at the same time as our software will be a critical, difficult and a necessary element of the changeover to the Preliminary Specification.

As I’ve indicated the service providers are owned and operated by our user community members. This way they have an understanding of the needs of the producers with the management of their process and will have the power and means to affect change in both the software and / or service in the future. The question in many people’s mind is where does the money come from to support the development of the service providers? The user community members are part-time and paid out of our budget for their efforts at the rate of $250 U.S. / hour. The service providers are subsequently licensed from the user community license and the allocation of which processes they will manage will be decided based on the contributions to the development of the Preliminary Specification of that user community participant. Recall we are using AI in order to make these determinations for us with the full involvement of the service providers in the development of that algorithm. Nonetheless we expect that these service based organizations can be developed over the period of our software development with little costs if properly managed. Therefore we are expecting that the establishment of the service providers will be undertaken as an investment by the user community participant.

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 American 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.

Is It Naivety?

If I was given the opportunity to “build a balance sheet” with an unending supply of investor money, I don’t think I’d concern myself with building any value either. After all the first step in this “building a balance sheet” BS is you need to dilute the very investors that provided you with the opportunity to “build” in prior periods. They’ve accepted this dilution on an annual basis “what difference, at this point, does it make.” Some formerly famous American politician. The world of an oil and gas producer becomes rather small when the reality of unending supplies of cash are available at no real cost to the bureaucrats who run the producer. Get your head in the field and start growing your production profile as quickly as possible. When the world sees what you can do, suppliers and pipeline companies will backfill any and all aspects of the business that are not directly managed by the producer. Therefore producers become wholly oriented to the sciences of geology and engineering to maximize their pursuit and accountants are retained in order that someone relieve them of the task of paying their bills. Does this mean these accountants are not doing their job? For lack of a better description this is what has become of the oil and gas industry over the past four decades. No one, until People, Ideas & Objects starting talking about profit and was vilified for it, concerned themselves with profits. We clarified what oil and gas profits were, which is nothing and what would account for real profits. Before then it was cash flow, no one cared about anything else.

Generating value as a result of this “activity” was neither the feature or the bug of this process. It just didn’t happen. What did happen was the reverse, the destruction of the industry. As long as the money was coming in, no one was aware of the fact that not only was nothing of value being built, the only prosperity was realized as a result of spending investor money. This false prosperity covered over the real destruction that was taking place with the facade of producers “building balance sheets.” Can anyone please tell me what purpose or value is created as a result of a company “building balance sheets.” I don’t even know what it means. It is a product of the capitalization of any and all costs that the producers spend, no matter how ridiculous it sounds, as property, plant and equipment. The receptionists time, their Post-it-Notes, and the phone service they use are all capitalized by producers by up to 95% in some instances. They then store these costs as if they’re pristine proof of some former capacity to have generated some kind of value. And they leave them in this storage for up to 27 years.

What in effect the producers have been doing is taking money from investors spending it in a manner that did not consider whether they were being productive. Their only critical measure was the velocity of spending as representing how quickly they were “building their balance sheet.” What they never realized, and in many cases still don’t understand about their business today. Is that they spend money and store it in the mattresses thinking that this will “build the balance sheet” the quickest. The cash being replenished yearly by the investors at the end of the year made them prudent with their budgets and were certain not to overspend. None of these cash resources that were spent were ever returned to the producer, other than the absolute minimum recognition of depletion that was possible. All of the overhead that was capitalized by this silly exercise should have been costed to the various properties in order that the costs of oil and gas exploration and production were known and therefore past onto consumers. If only profitable production was produced then the cash resources that were incurred in last months overhead would have been returned in full to fund all of this months overhead. And this “float” that is necessary to fund the overhead of the operation would continue to do so for as long as the business was in business. Who needs to do this when a new investor will pay for next month's costs of rent, salaries, benefits, transportation, etc.

This is what happens when the business is so misguided by dubious policies based on the SEC’s basis of accounting for capital costs in oil and gas. The regulations specify the maximum amount of property, plant and equipment allowed. This essentially being the total reserves times the current commodity prices. A number that is not far off from the maximum revenue of the remaining reserves of the producer. Therefore the mind of the producer has built a culture over the past four decades of “building balance sheets” large enough to reach these values. Never does it enter into anyone's mind that it would be competitively advantageous to have a property, plant and equipment account balance of zero. That would mean you’ve produced your production profitably, retired all of the costs incurred and therefore are building real, tangible value and the cash resources that were consumed in investing in those properties have all been returned to the firm in order for it to be reinvested, provide dividends, or retire bank loans.

This is the culture of the industry. As much as People, Ideas & Objects argue this point the bureaucrats have pushed back on us and done nothing to rectify this glaring obscenity. They believe if they just “muddle through” and “do nothing” the investors will give up their strike and return to business as usual. What these bureaucrats cease to believe and understand is that this issue is not going anywhere. The balances of property, plant and equipment have been built up over decades. All that they represent now is the unrecognized capital costs of past production. This was all legal and conducted based on the policies of the SEC. That however does not make what has gone on here right. The industry should have known better. What has happened, in the eyes of the investors, is a fraud. The recording of excessive costs as capital and recognizing them at an inappropriate time is the best trick scammers can use to deceive their investors. It makes a company look like it has lots of assets and is highly profitable when in reality it has destroyed any value and is wholly uncompetitive. I’m beginning to see the logic in “building balance sheets!”

This bunch doesn’t get the point. You can’t resolve this overnight. This will take decades for them to resolve. Their credibility in the eyes of the investors is lower than the criminals who use this tool to scam people in business. At least they knew what they were doing and I can honestly say that I don’t know if the point is understood today anymore than it has been in the past number of decades that I’ve argued this. Is naivety a better explanation than being a criminal? On top of that the producer bureaucrats did nothing about it. I’ve pointed out these issues, along with the Preliminary Specification as the remedy since December 2013. That’s five years in which you could have acted. Why didn’t they? Your investors want to know.

They can’t, won’t and will not ever change. I don’t understand their motivation but what more do we need to prove that they’re hell bent on deception. We are building the new oil and gas industry on the basis of a high performing industry that will form from the ashes of their creative destruction. A process that is as reliable as the sun rising each day. The old ways just can’t evolve to meet the new demands of them. Through the Preliminary Specification, our user community, service providers and coin holders, we have the motivation to rebuild the industry that is needed, in order to approach the difficult future ahead.

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 American 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.

"Not Gonna Do It" George H. W. Bush

I have consistently argued that producers are able to point to and blame others for the difficulties they’re experiencing in their business. When you’ve reduced the scope and scale of the producer operations to just drilling wells it’s expected that someone else will pick up all of those “other” activities that were done before and should be done by producers today. The key issue here I think is leadership and responsibility, or the chronic lack of it. If we look to today’s producers for their vision and leadership all that we are inspired with is the systemic strategy of “muddle along” and an operating procedure of “doing nothing.” They’ll complain that highly regulated pipeline companies have not done their jobs in getting the appropriate takeaway capacity built in time. They’ll complain that the service industry is too lazy and greedy when times are good and their demand for the services of the service industry far exceed its capacity. All of this complaining is designed for everyone to lose focus on what the producers are doing and to attract their attention with a variety of bright shiny objects.

For example, Canadian Natural Resources was in the news complaining about the new formula for Alberta’s mandatory production allocations. They felt the new formula affected them adversely and they wanted some revisions. It was CNRL along with the other heavy oil producers such as Cenovus that were the ones who were lobbying the Alberta government for the production cuts back in December 2018. Differentials then were providing them with net oil prices in the $10 to $15 range. Now these heavy oil producers seem to be displeased with the way in which the government is going about doing their production allocations. This is the issue with any production allocation methodology, is it fair and reasonable for all concerned? The point comes down to the reason for the success of the capitalist system and the absolute failure of socialism. No method of production allocation, other than People, Ideas & Objects decentralized production models price maker strategy, can be seen as fair and reasonable if it is not based on market economics. The Preliminary Specification determines the properties eligibility to produce based on accountings objective determination of profitability. If it is profitable and can be proven objectively to be so, then it will produce. That is the only manner in which a production allocation methodology will work in the era of shale. It is the method that has been used by profitable businesses for the past two hundred years.

Instead of looking outwards as to why the oil and gas producers are failing. The producers in the future, and I’m referring to the ones that are reconfigured from the current bunch, based on the Preliminary Specification, need to focus on how they can maximize their revenues and profitability. Neither of these two aspects of their business would, at times, involve drilling more wells. For the past four decades producers have been flushing value out of the industry while they pursue the wholly grail of more production, at whatever cost. The more wells they drilled the more money they made, so they thought. The fact is that without the investors subsidizing the consumers capital costs of the oil and gas they consumed, the economic situation we have today, after a three year investor strike, would have occurred at any point in time over the past four decades. Oil and gas has never concerned itself with the business aspects of the business. Even today we here no concern about the profitability of the producers or the revenues not being realized from chronic overproduction. Why is that?

Producers will evidently never realize they have any issue with the way in which they conduct their affairs. (I just could not say “the way in which they manage their business” that would be a falsehood.) Pipeline companies revenues and profitability are regulated and therefore guaranteed if any new pipelines are built or not. There business is not based on growth. Investors buy utilities for the guaranteed return that is second only to U.S. bonds. You do not find dynamic, entrepreneurial activity in regulated companies. Then why is it that the producers expect that the leadership that takes the development of pipelines through the logistical, political and environment processes will come from these utilities? Why can’t it come from the producers? It will be the producers revenues that will be held up in the process, it will be their profits that are held up in the process if there are any delays or difficulties. The fact of the matter is pipeline companies are utilities, which are managed by a bureaucracy who are managing a bureaucratic process through a government bureaucracy. And the producers expect that the leadership, dynamism and entrepreneurial activities will be undertaken by these utilities in order to ensure that the producers revenues are maximized.

In Canada we have the cellfie Prime Minister Justin Trudeau. If you’ve seen him, you’ll understand that Canadians have had enough of him. The producers blame him for dropping the ball on the pipelines development. They might have a point, however I’m at a loss to identify at any time in the past that I could say that there was leadership from the oil and gas producers moving the issue forward. They just sat in their big comfy chairs and decided to “muddle through” I guess. Just as the Former PennWest, now Obsidian is muddling through with a stock that’s at 1% of its former glory. Sitting back and waiting for the fearless leadership of Prime Minister Justin Trudeau to present itself is poor judgement by the producers.

The environmental movement has developed over the past four decades in concert with the “muddle along” theory of business producers have developed and put in play. As a result, two decidedly one sided issues that work against the oil and gas producers have come to be. The first is the effect that the environmental movement is having on the day-to-day of the oil and gas industry. In all aspects of the business. And the second is the parrotting of the environmental movement by the oil and gas industry itself. There are always two sides of any story and the only one being asserted by both sides of the argument is the elementary school theory. You know the one where we scare the kids into believing they have 12 years left before we all burn in a fiery hell brought about by oil and gas. Who is going to inform the consumers of the darker side of the equation regarding the elimination of their oil and gas use. Because elimination is the ultimate purpose of the environmentalists. Who is putting across that a barrel of oil equivalent is 23,500 man hours of equivalent work? That each year oil and gas output generates 76 times what the global population does. And who’s asking where the replacement team will come from to make up for that 76 times 7 billion people. There really is no sense in educating the consumer of the implications and consequences of their actions is there. We’ll just all muddle through. I find these actions by producers unacceptable, especially in light of their refusal to adopt the Preliminary Specification and the chronic abuses they’ve thrown at me for even suggesting it.

People, Ideas & Objects, our user community, service providers and coin holders are rebuilding the industry on the basis of the leadership and responsibility for their oil and gas revenues and profits. Not cowering under the table to the environmentalists. Oil and gas has a critical value proposition that determines the success or failure of our species. That is what needs to be represented to the consumer so that they can make a wise decision based on a full understanding of the consequences of their “environmental” decisions. And our future oil and gas industry will stop blaming others for things that are under the producers control.

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 American 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.

"Can I Hear $14"

“Can I hear $14.00” the auctioneer barks out. Exxon is now claiming it is achieving a cost structure in the Permian that consists of “development, operating and land costs of $15 / boe” Can I Hear $14.50? The modern miracle of oil and gas costs is they defy the fact that they’re recorded historically. What was $100 when it was acquired is now $14. Amazing isn’t it. This is a simple exercise that is not that miraculous when you see how it’s done. Exposing the magicians secrets is not healthy for the future prosperity of the magician however since these are oil and gas companies I don’t think anyone will mind. The first number, the $100, is the actual historical cost that was incurred. There is no doubt to that and no one is refuting it. It is accurately recorded by the accountants and reported to the appropriate regulatory bodies, audited and everyone is otherwise happy. These are also “sunk costs” that are of little concern to anyone who is someone in oil and gas. The $15 is provided based on the question “what can be done today if everything went perfect in the Permian.” They’re based on estimates from vendors who are bidding on work for a project and hope to gain the contract. These costs you should note do not include any of the costs of depletion. How could there be depletion if the money hasn’t been spent? Is this a deceptive practice on behalf of Exxon? That would be difficult to say as it’s a practice that is exercised throughout the industry. And therefore “if everyone is doing it why are you looking at me?”

The light oil that is produced in the Permian is now creating bottlenecks further down the supply chain. Initially all of the production could be handled by the takeaway capacity and facilities in the area. However as producers began drilling more and more, bottlenecks began to show in the takeaway capacity. Differentials are now depressing the value producers are seeing for their production. These differentials are all the rage in North America. Whether it’s gas or oil it doesn’t matter. The highest differentials are showing up in the most prolific shale areas. Marcellus has a particularly tragic history in terms of the prices they recieve. People, Ideas & Objects have asserted that once the takeaway capacity in these regions is enhanced these regional price pressures will be released into the larger continental market in the case of natural gas, and the global market in the case of oil. But that isn’t the worst news. That would be that today shows the amount of light oil in the world is beginning to overwhelm the refining capacity of that grade of crude. Oriented to the heavier crudes the refining capacity would either need to be reworked to accept the lighter grades, or producers change the mix of what is produced. Therefore any release of the higher production volumes out of the light oil areas will also overwhelm the light oil refining capabilities of the refineries. These price differentials would have a negative impact on the global price of oil, and now with refineries unable to process that grade of crude, shortages of refined product. Bad for the intermediate producers and those that are smaller. Good for the integrated operations. What they lose on the upstream side of the business will be more than made up for on the downstream side. Enter the highly motivated refiners who are wanting to spend money so desperately on upgrading their refineries to handle lighter crudes! Of course they are.

It also appears that the momentum of bloated balance sheets is starting to work against the current producers. That is they are now incurring more and more capital costs each quarter as a result of the size of property, plant and equipment. Don’t get me wrong, still nowhere near enough to recognize the cost of exploration and production. Just as a startup is profitable because of the deferral of most of their costs, they appear highly profitable for the first decade, and this carries on into the second and third decade of the producer to the point where the build up of unrecognized capital costs of past production that should have been recognized eventually comes home to roost and takes on a larger than life issue within the financial statements. The excessive profits of prior years eventually meets the excessive costs of future years. This legacy of bloated balance sheets is why I think everyone is running around saying they’re building their balance sheet. The equivalent of putting lipstick on a pig. It’s also why Ms. Kardashian became the world's youngest billionaire with her makeup business. She sells a lot of lipstick online.

The producers legacy of bloated balance sheets is the problem that can’t be fixed with accounting wizardry or bureaucratic denials. These balances represent many different elements of the oil and gas producers difficulties. The balance of property, plant and equipment is equal to the amount of the discount that the producers investors have had to subsidize the consumers for their energy consumption. The subsidy being the fact that the account is not an “asset” but the unrecognized capital costs of prior production. It therefore also represents the opportunity for the current investors to have their investments recaptured by recognizing those costs after the Preliminary Specifications decentralized production models price maker strategy is implemented. That way the commodity prices would be adequate to cover the appropriate past and current capital costs of oil and gas exploration and production. These costs may be lost in the termination of the producers as they stand today. More and more this becomes a reality. Finally the amount recorded in property, plant and equipment also represents the cash resources that have been stuffed in the cupboard and forgotten about. Building balance sheets must of been discussed during one of the accounting classes that I missed. I also can’t find it through google. Primarily because it’s a ridiculous notion. Producers need to recycle their capital in a competitive manner against the standards set in the capital markets.

Lastly I’ll leave the following quotation that accurately reflects the commodities of oil and gas are subject to the price maker principles. If the commodities were price takers the following would not have happened. And to suggest that managing the producer operation in a profitable manner is collusion is more of a reflection, five years after the publication of the Preliminary Specification, of the obstinance and turf-protection by the producers bureaucrats. Either that or they’re completely idiotic. From the March 14, 2019 EIA Natural Gas Weekly Update.

Pacific Northwest sees highest-recorded natural gas spot prices in the United States since 2014

Natural gas spot prices at the Sumas trading point on the Canada-Washington border averaged $161.33 per million British thermal units (MMBtu) on Friday, March 1, the highest daily spot price recorded by Natural Gas Intelligence anywhere in the United States in at least five years. The price spike comes amid supply constraints and unseasonably cold temperatures, which drove up demand.

Limited supply deliverability coincided with unusually high demand when part of the polar vortex moved into the Northwest and Midwest during the beginning of March. Temperatures in Washington averaged 33 degrees Fahrenheit (°F) from March 1–4, 10°F lower than normal. These temperatures led to high heating demand in the Pacific Northwest and in the regions from which the Pacific Northwest imports its natural gas (the Rockies and Western Canada). Combined with supply constraints, the widespread cold weather led to the $161.33/MMBtu spot price going into the weekend.

Last October’s explosion on Westcoast Energy’s BC Pipeline—which transports natural gas through British Columbia, Canada, and into the United States at Sumas—has led to reduced flows and higher prices at Sumas all winter. From November—the beginning of the winter storage season—to the end of February, Genscape data shows daily flows through Sumas onto the BC Pipeline averaged about 610 million cubic feet per day (MMcf/d), compared to 940 MMcf/d during the same period a year ago. Sumas prices averaged $10.56 per million British thermal units (MMBtu) during that time period compared to $2.62/MMBtu a year earlier.

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 American 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.