Our Oil and Gas White Paper, Part II

Yesterday we began discussing our position paper. We pick up where we were discussing the results of 1970’s era SEC designated accounting changes that began a cultural change in the management of the producer, and the beginnings of the dependence on annual investor infusions and cash flow. Profitability became a foreign concept that was deemed of no value to the producer.

Why are these such issues today? The culture of the oil and gas industry is an issue due to the fact that the belief that value is generated in drilling is not backed up by the financial performance of these businesses. And when I say the financial performance I limit that to just include the cash. The industry became a massive call on investor funds each and every year. There never was or is any understanding that “business” should be self supporting. It was necessary that you “build the business” and this was represented by “building the balance sheet” which is the unanimous calling of the producers even today. Spending is the only capability and is the decided competitive advantage of oil and gas. As proof you can look at all of those reserves. The problem the producers don’t see is that you can’t and you never have produced any “real” profits from the reserves. The value that has been invested in the industry is sitting in the ground with those reserves as represented by the bloated balance sheets of property, plant and equipment. Reporting only the operating and royalties as costs, more or less, that's all the costs left after the majority of costs are capitalized, making the producer look profitable. The fact is everyone believed those bloated assets and profits. The profits were not just over reported as a result of not recognizing much of the cost of oil and gas exploration and production. Producers only deplete the property, plant and equipment account on the basis of taking all of the capital costs that were spent. Allocating these costs to the entire reserves base, and only recognizing the capital costs that would have been apportioned to the reserves that were produced that year. Leaving the capital on the balance sheet for decades at a time.

What we had in essence was a massively profitable industry based on the chronic spending of investors money. The amounts of recorded capital in property, plant and equipment weren’t assets, as represented in the specious financial statements of the producers, and rubber stamped by the public accountants who should have known better and done something about it. They were and are the unrecognized capital costs of past production. We believe any and all producers should be subject to a pro-forma accounting adjustment to consider the reality of this situation by moving at least 65% of property, plant and equipment to depletion. What we then find is that all of shareholders equity is eliminated in the industry and the banks are in financial jeopardy too. Oil and gas is a capital intensive industry implying that the majority of its costs are capital in nature. Just because the SEC defines the outer limit of what a producers property, plant and equipment account can be, that does not mean that each and every producer reaches that limit each and every year. The most competitive producer would strive to recognize their costs as quickly as they could and hold the smallest balance of property, plant and equipment.

When investors are told profits are as healthy as they’re reported in the industry over these past four decades. They rush in with their money in order to capture some of those profits. More investors lead to overinvestment in the industry which leads to the chronic, systemic overproduction that we see. The chronic problem that has existed in oil and gas since 1986 when OPEC first dropped the price of oil. $10 was their price and all the North American producers had to do was to pull back production 15% in order to rectify the price decline. What they did was nothing. Except for bring about the beginnings of the second cultural phenomenon that is systemic throughout the industry. Looking under each and every rock for the responsible scapegoat and crying “oh whoa is me” in the process. In seeing this it became clear to me that the configuration and structure of both the producers and industry could not reduce production. They’re not configured for that. It would only leave large portions of overhead uncovered and profitability would suffer. I therefore set out to build the software that was necessary to enable the industry to deal with the chronic overproduction that was occurring as a result of the chronic overinvestment created by the specious accounting and financial statements that were produced. That is the Preliminary Specification that provides the oil and gas producers with the most profitable means of oil and gas operations. Everywhere and always. We believe this chronic overproduction situation has created 28 poorly performing years out of the last 33. With shale it will be terminal.

Without real profitability. Without anyone searching for value outside of the reserves that were being discovered. Without any half decent reporting being undertaken anywhere. The value that was the oil and gas industry and the investment dollars put in has been frittered and wasted while the bureaucrats whistled by the tombstones. The industry is now worthless as it demands capital in order just to operate. The cash crisis created as a result of investor and banker withdrawal is slowly progressing towards it final demise. Cash was consumed, lines of credit were drawn, more cash was consumed, properties were sold for half of their recorded value, working capital is now diminishing at a remarkable rate. This has taken three years to become a serious problem throughout the industry. Now the tough part begins. Debts are slowly becoming due and the bankers are generally satisfied to this point to roll the debt over. Even to the poorest performers. As time passes and no plans, no strategy other than “muddle along and do nothing” become obvious as to its unanimous adoption throughout the industry. The bankers will become spooked and with the lack of action and diminishing cash, will bankers begin to want to see more cash? How long before this becomes material to the banking sector and rolling the debt over can’t continue? Then what, is that the day my phone rings off the hook?

People, Ideas & Objects have assessed that the beatings that we’ve been subject to since 2003 have been enough. That we are also unable to take on the task of saving those that have shown no propensity to save themselves, and have traveled down the wrong road for too long for us to retrieve them. Creative destruction is the tool we’re using to exercise the necessary changes in the industry. The scope and scale of changes that the Preliminary Specification necessitates demand an inertia that I no longer maintain, or may never have had. Therefore we have adopted other plans in which we will prepare the Preliminary Specification and the rebuilding of the oil and gas industry based on providing them with the most profitable means of oil and gas operations.

There is a long history of failures in the oil and gas ERP software market. It is a small market with possibly 150 producers able to purchase a system that meets their needs. Producers have used this fact to abuse the vendors by playing one off against the other and gaining the software product for just the service contract. Keeping the ERP vendor on a starvation diet was consistent with their thinking that accounting systems interfere with the drilling budget. People, Ideas & Objects, IBM and Oracle have all used the method of having the producers pay the upfront costs of development. In the late 1990’s Oracle left as a result of the frustration of trying to deal with the producers who had no appreciation or budget for the type of solutions that were needed. IBM owned the market leading application in Qbyte. There inability to raise any money for new software development, finding the same frustrations, led them to sell out of the oil and gas ERP marketspace in 2005. People, Ideas & Objects are committed to the oil and gas ERP marketspace. We have developed significant and necessary value the producers need. We however have had the same difficulties of IBM and Oracle. We are unable to deal with the producers who are incapable of saving themselves and are therefore working on what will be the systems, the Preliminary Specification, for the regenerated oil and gas producers from the ashes of these producers creative destruction.

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.

Our Oil and Gas White Paper, Part I

Background

The following series of blog posts represent People, Ideas & Objects Position Paper with respect to the overall achievements the oil and gas industry must strive for in the next three decades. These are what we seek to provide the North American producer through the development of the software and services defined in the Preliminary Specification. Enhanced capabilities that enable producers and the industry to undertake a strategic and tactical business approach that provide a dynamic, innovative, accountable and profitable footing. Software is the enabling technology of the 21st century. When organizations are supported and defined by the software that is consistent with the industry and producers objectives, strategy and tactics, then success and profitability will be the outcome. When organizations are not supported or defined by the software that they use they’re limited and constrained in achieving any results that are competitive in the marketplace for capital, labor and the support of the public. People, Ideas & Objects Preliminary Specification is the result of our research based on what we’ve determined is necessary in order to make the change from using the corporation as the key organizational construct of the producer, to use the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. It is a fundamental reorganization of the industry and the producer firm in order to deal with the issues that are prevalent today. Enabling a dynamic change based organizational capability throughout the producer and industry. Positioning the producer and industry for the challenging and difficult future that we all agree will be the most dramatic and exciting the industry has ever experienced.

To execute the necessary changes to build, implement and operate the Preliminary Specification doesn’t exist in the oil and gas industry. Based on the work that we’ve done in this market we also believe that it will never exist in the current configuration of producers. This is due to the response we’ve received from the industry in our attempts to market our product. Their response has led us to the conclusion that they can’t, won’t and will not ever change from the status quo. And that now creative destruction is a necessary and valuable tool to eliminate the unproductive and most particularly unprofitable elements of a poorly performing industry. People, Ideas & Objects are therefore now taking an active role in the preparation of what we see as the new oil and gas industry, based on the vision of the Preliminary Specification, where profitability is achieved throughout the industry everywhere and always. We believe the nature and characteristics of these resources can not currently justify our use of oil or gas to future generations if it is not used in a manner where it was at least produced profitably. We therefore can ensure that because it wasn’t produced unprofitably it wasn’t used wastefully and provided its full value to society. In summary then, we are focused on rebuilding the industry on the vision of the Preliminary Specification. We are unable to provide any value to the current producers as the forces of creative destruction have been put in play through bureaucratic neglect. The time in which they should have acted was many years ago. There is nothing that People, Ideas & Objects are able to do for them in the short term, and we are of the belief that the long term is beyond the grasp of the current producers as their situation is terminal.

The common sense approach of the Preliminary Specification is in dispute by the producer bureaucrats who are challenged by the Information Technologies disintermediation that we represent. They know instinctively this would be the end of their reign of control and power over the commanding heights of the oil and gas industry and are unwilling to give up what has provided them with untold riches at the expense of the shareholders, employees of the producer, the service, secondary and tertiary industries that depend and support the oil and gas industry. It is this conflict and the constraint of the ways and means in which they approach the industry that has created the ongoing tragedy that is playing out over this past decade. Shale has been an exceptional endowment of value across North America. Due to the chronic mismanagement by the bureaucrats the only benefactor of the shale reserves is the energy consumer who realizes a substantial discount on their energy consumption as a result of the specious accounting that has been used in the industry over the past four decades. Outside of this, shale has been an absolute failure from a business point of view. The commercialization of shale is not a topic of concern of the oil and gas bureaucrats, yet is the primary concern of the oil and gas investors who have now withheld their capital from the industry in excess of three years. There are no plans or strategies in place to deal with these difficulties or how to approach the future demands. The financial capabilities of the producers are close to collapsing as a result of the investor and banker strike that began over three years ago.

It is People, Ideas & Objects belief that through a fundamental accounting change that occurred in the late 1970’s. When producers were forced to change to Full Cost accounting and the associated ceiling test regulated by the SEC. A methodology that determines what the capital assets recorded in property, plant and equipment are. This enabled producers to record “assets” that equalled, with some adjustments, the total of their reserves times the current commodity prices as the upper limit of their property, plant and equipment account. If these assets exceeded the reserves “value” then they would be subject to the dreaded ceiling test write down that corrected any asset overvaluation. What was quickly discovered in the high interest rate environment of the 1980’s was that interest was a key attribute of the asset value and therefore interest expenses were capitalized. Someone then asked about overhead with the resulting policies today that see approximately 85% of all overhead in the industry capitalized to property, plant and equipment. Slowly the culture of the industry became a spending frenzy fueled by what came to be the annual share offering. This culture has grown over the past four decades to know no difference in terms of what and how the industry generates value and what destroys value. The belief is that drilling wells releases the oil and gas reserves that are tremendously valuable and that is how the game is played. Until People, Ideas & Objects began arguing that profitability was necessary, the industry did not care whatsoever about profits, it was about cash flow, not profits. We believe these reserves are of no value if they can’t be produced profitably and profitably considering an appropriate accounting of all of the costs, including capital, in a capital intensive industry.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North 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 Can't Offer Investors Anything of Value

I can certainly be critical of the situation occurring in oil and gas today. The situation in People, Ideas & Objects is subject to the same critical review. We would not be able to provide any investor with any return on their investment in People, Ideas & Objects. This is due primarily to our high costs and very small market. Producers have all of the bargaining power and the investors would end up subsidizing the producers use of their ERP systems. Making our software incapable of functioning as a standalone enterprise. That is not only today but everyday of our existence. We could never attain the levels necessary to make People, Ideas & Objects a viable commercial success at any time and therefore have configured our offering based on a project methodology. This approach being similar to building a bridge, you don’t build the company to build a bridge, you just start with the resources necessary to build the bridge to completion and then operate it from there. The question might be asked do we need a bridge? What’s wrong with the ERP systems that are available in the marketplace today? Just as the producers are failing we believe that software and most specifically ERP software defines and supports the organization. If the oil and gas producers are failing, then the ERP software marketplace has failed to provide these producers with the appropriate systems they need to succeed. That is the nature of software in the 21st century. It’s not enough to own the oil and gas assets, it's also necessary to have access to the software that makes the oil and gas assets profitable. Our competitors are not oriented to change and they were built using old technologies which have more or less expired. Not that the technologies are that important, ours is an organizational point of view. One which brings about significant additional value to the industry.

My point is that I’m not taking anyone’s money if I can’t provide them with the opportunity to make something of their investment. I can’t see that happening and therefore we need alternative means in order to acquire the necessary capital to build the Preliminary Specification, our user community, and the service providers. Our Revenue Model initially considered that the producers would pay for the development of the Preliminary Specification. This has proven to be undoable and an abject failure. I believe this failure had to be proven in the marketplace so that all concerned knew the producers would never invest the money, time and energy into ERP systems. Making the necessary changes to return to profitability are seen as too radical by the bureaucrats in the producer firms and that creative destruction is therefore the necessary solution and now the optimal path. And that is where we stand today. Many might argue that the alleged profitability of today’s producers shows a viable path forward. There is actually a very strong consensus that this is the case today. The media, most of the industry and many independent investors insist its the case. We are somewhat alone in our belief, but certainly alone in our actions at this point. That does not make our time and effort fruitless. We have built significant value for the industry by proposing a solution to the issues that plague the industry, and preparing a plan for the future with the necessary community to make it so. Time will be on our side.

The solution we’ve taken to resolve our large capital requirements and the difficulties in funding the Preliminary Specification is the Initial Coin Offering (ICO) marketplace. It has had a remarkable impact in the financial community with its capacity to attract large investments and attention within a short period of time. However with all new technologies there is a cycle that is passed through in order to become commonplace. That cycle is intact with ICO’s only commanding $118 million in the first quarter of 2019. Compared to our budget that is a non-starter. However, just as many companies survived the .com bubble in 2000 and have thrived since, the same may be the case for the ICO marketplace overall. One of the issues I think that may have contaminated the ICO funding opportunities is the misunderstanding of the role this new financial mechanism can play in society.

The SEC has argued that too many of the coin offerings represent equity investments and therefore should be regulated. Many don’t believe that ICO’s need to be regulated if they maintain their non equity positions in their proposed marketplaces. ICO’s need to be about the rights that are granted to them through some structure where they control access or other rights and opportunities. People, Ideas & Objects coin offering does not include any equity as part of our ICO. The only grant that we make is the perpetual license for the coin holders to access the Preliminary Specification when it’s operational. Therefore any producer that wants to use the system will have to negotiate with the coin holder. With the producer knowing they can maximize their revenues by using the Preliminary Specification, and therefore to ensure their shareholders are provided with the highest possible returns, they will negotiate with the coin holders for a share of the extrinsic value that is generated by the system. That is what People, Ideas & Objects are calling our free money strategy. The producer does nothing, no time, money or effort goes into the development of the Preliminary Specification and yet they acquire all the value. These monthly access fees due to the coin holders will be passed on to the energy consumers as a part of the oil and gas operations. If the producers choose not to participate with the coin holders, this missed opportunity would raise curiosity in the oil and gas producers investor group as to why their producer firm was not participating in the value increases by using People, Ideas & Objects free money strategy.

Compared to the volume of activity in the ICO market this year it is reasonable to assume that the ICO may be a dead end for People, Ideas & Objects. I’m not of that opinion for a number of reasons. It is a substantial financial innovation that is necessary in the marketplace. It resolves the high level of concentration of IT firms, or monopoly that we are currently witnessing with Google, FaceBook et al. And excludes, for now, the regulatory burden that defers many ideas and opportunities from being realized. Our objective was to issue our coin offering in 3.5 years. A time frame that may be consistent with today’s ICO market timelines. A time frame that is wholly inconsistent in terms of any assistance that we can provide the current producers. We believe they will be unable to remove themselves from their situation and will be creatively destroyed in that 3.5 years time for our ICO and then the time that we will need to develop the Preliminary Specification. As always we do wish them the best.

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.

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.