Our Oil and Gas White Paper, Part XXV

Abstract

People, Ideas & Objects Preliminary Specification is a twelve module ERP system specifically designed for the issues and opportunities that exist in today’s oil and gas marketplace. Built upon the Oracle ERP Cloud, it is a comprehensive offering that sees structural changes in the producer firms as well as the industry itself. The key organizational construct of the Preliminary Specification is the Joint Operating Committee. When we move the compliance and governance frameworks of the hierarchy into alignment with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee we achieve a speed, accountability and profitability within our producer firms. It is our competitive advantage that we provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations.

It is necessary that we place the North American oil and gas industry on a profitable footing in order that we can then begin the process of making North America energy independent. Continuing to expand North America’s production profile without setting a foundation of “real” profitability, without the support of the investors and bankers, will be a temporary and politically dangerous road to travel. Only an industry where all oil and gas that is produced profitably is sustainable for the mid to long term. Occasionally hitting the high watermark will not be satisfactory. We believe that the past four decades have seen the industries profitability overstated due to the SEC rulings in the late 1970’s. This ruling regarding the method in which capital assets are recorded by oil and gas producers has now distorted the culture of the industry away from commercial operations, to an industry who’s competitive advantage is spending money where the objective is to “build balance sheets,” mostly by spending money and capitalizing almost everything for decades at a time. Leaving the producers overall dismal revenues responsible for large reported profits due to the fact that few costs are attached to those revenues. This has been the case for most of the history of each of the producers. Now with bloated balance sheets, well beyond their revenue structures, we are seeing a transition taking place where the previously unrecognized capital costs of past production need to be recognized at a greater pace. Leaving the producers to account for the profitability that they reported in their earlier lives to be offset with today’s more mature assets creating large losses.

Shale has made a fundamental difference to the oil and gas industry. It is an endowment of untold riches that will be what is necessary to ensure energy independence in North America. Shale has been with us for a decade and a half in natural gas and less in oil. What we can say unequivocally about this time is that shale has not obtained commercial operations. Shale also appears to be unable to. It has been a financial disaster that has laid waste to any and all value that had been built within the industry. There is an insidious side to the over reporting of profits that is, or should be, known in most businesses. Profits attract investments. The higher the profits the greater investments it will attract. Investors have been attracted to the industry for many decades and the producers themselves participated in annual shareholder issuances to “build their balance sheets.” This overinvestment has led to an unconstrained, chronic and systemic overproduction that has been with the industry since the mid 1980’s. This overproduction continues today and has become uncontrolled. Investors have starved the producers of capital for at least three years creating a severe cash and working capital shortage. To the point where producers are only able to look to new production as their only source of new cash. We are in a true death spiral that will not stop until such time as the Preliminary Specification is implemented and the decentralized production models price maker strategy ensures that all production is produced profitably everywhere and always.

The Preliminary Specification demands change. After all, as you will see, we are not talking about minor changes to the floor plan for accounting. We are exercising wholesale changes to the oil and gas industry by adopting the Preliminary Specification, and fully utilizing the Joint Operating Committee. Change that is as significant as that which is represented by the changes in energy prices, the global energy demand structure and shale reserves.

It was during August of 2003 when I determined the Joint Operating Committee was the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. In May 2004 I published our Preliminary Research Report that verified that innovation was a quantifiable and replicable process. I then undertook the research necessary to determine what a producer and industry would need to look like and how it would function if the Joint Operating Committee was used to structure innovation in oil and gas. In December 2013 the final version of the Preliminary Specification was published and we have continued to build the organization necessary to provide for this solution. Noting that our user community is the primary focus of People, Ideas & Objects. Review of the 2.8 million words that have been published in this weblog will provide you with an understanding of our research. The 200,000 words contained within the Preliminary Specification provides a viable, workable business model for the oil and gas industry. What was relevant in the Preliminary Specification in 2013 are now the critical issues within the oil and gas industry. These are existential issues that have eroded the financial foundation of the producers to the point where cash and working capital are disappearing and creating a desperate need to act. Our solution is not what the bureaucrats suggest is necessary. Though it is true we are disintermediating them from the scene. Their issue now is that the only solution that exists in the market is the Preliminary Specification and any others haven’t even been conceived of yet. Indicating that it’ll be at least 2035 before any other possibilities are where People, Ideas & Objects are today.

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 XXIV

Preamble - Part II

As I indicated earlier in this white paper, the issue we are resolving comes down to essentially bad accounting that has influenced the culture of the industry since the late 1970’s when the SEC prescribed its full cost methodology for capital assets. The action that most producers now publicly promote is that they’re “building their balance sheets.” I am not familiar with this “business” concept and am unaware if you build a balance sheet with cement or wood, if it needs a basement or you can build it all above ground. It is “building balance sheets” and “balancing markets,” I would guess on the head of a pin, that are two of the many “business” concepts that do not exist anywhere else in the business world! “Building balance sheets” has morphed from a foolish idea, that no one in their right mind would adopt, to a culture of spending as the key competitive advantage (capital discipline) that oil and gas has become. Any attempt to differentiate the financial statements of any existing producers to determine which one is the superstar and which is run by the village idiot is something that I can not discern the difference. If all you do is spend investors money that will be replenished again next year because they can’t tell if your doing a good job either, all of this spending is capitalized as an asset in property, plant and equipment and depleted over the course of several decades. Any revenue earned as a result of this spending orgy will naturally be profitable as all the costs of the producers are capitalized. Yes, even the Post-it-Notes of the receptionist, their time and the phone service they use. Big balance sheets with big earnings. Leading to big investors thinking their making big profits only to find that commodity prices are somehow collapsing as a result of chronic overproduction as a result of overinvestment by investors fooled by specious accounting.

On the other hand we have the concerns of the consumer and the need to ensure that they’re being provided with the lowest costs of oil and gas for their consumption. This should not be as a result of the investors subsidy that has occurred over the past four decades. The gross amount of this consumer subsidy is the aggregate amount of property, plant and equipment that exists on all of the producers balance sheets today. We believe these amounts are best described as the unrecognized capital costs of past production. They are unrecognized capital costs and not assets. Consumers have paid for the operating costs and the investors have paid for the capital costs of all past production. The industry as a whole is now worthless as a result, as it consumes large volumes of cash in order to have it operate and function. Speaking of cash, since the investor strike three years ago the producers only source of cash is new production. They’ve extended accounts payable to 18 months and have done everything they could in an attempt to increase production. Now in addition to having little to no working capital they are experiencing severe cash issues as the business does not return adequate performance without annual shareholder infusions. The producers current approach to their situation is to wait out the disgruntled shareholders until they learn to see the value the producers have generated. Also known as the producers “muddle along and do nothing” strategy.

In order to obtain the value consumers are entitled to. Producers will need to adopt an innovative footing. We’ve learned that an innovative footing is not a happenstance occurrence and is well within the domain of what management can implement within their organizations. That is if their software also supports innovation which is what the Preliminary Specification was designed for and provides. People, Ideas & Objects also believe that it should be incumbent upon the current producers to adopt a policy that no production is produced unprofitably. How is it that we will justify the consumption of unprofitable oil and gas production to the future users of this resource?

We are hopeful that none of the producers are pursuing their competitive advantages of being the most efficient and effective administrative and accounting providers in the industry. The Preliminary Specification leaves that to the service providers and the producers would be hard pressed to compete with the structural advantages that we’ve built into those organizations. Earth science and engineering capabilities, and their land and asset base are the only competitive advantages that the producers need to concern themselves with. Throughout the Preliminary Specification we have included enhancements to the producers capacities and capabilities in terms of these competitive advantages. We have provided solutions to many of the issues that are plaguing that part of the business. Using specialization and the division of labor to resolve the looming shortage of geologists and engineers due to the current downturn affecting the intake of new graduates and pending retirements, the increasing demands of these resources in each incremental barrel of oil and gas produced, and the expansion of the underlying science demanding a scope and scale of internal operation that we believe will soon outstrip every producers commercial capacity to develop.

It is the price maker strategy of the Preliminary Specification that makes up the core of our value proposition. One that we’ve calculated in the range of $25.7 to $45.7 trillion over the next 25 years. Such is the state of affairs in the industry and the capacity to deal with these issues has been proven to be non-existent due to the conflict of interest that is raised between our solution and the current producer bureaucrats. The Preliminary Specification, like so many other applications in today’s business world, is disintermediating these bureaucrats and they are clinging to their last possible days before they can no longer justify remaining, even to themselves. Leaving the industry in desperate condition. We believe the prices for oil and gas commodities need to be in excess of 250% of what are being realized in the marketplace today in order to be truly profitable. Profitable on the basis of a reasonable accounting of capital, operations and overhead. It is a capital intensive industry and the capacity to avoid the recognition of the industries capital costs by these bureaucrats will ultimately end in some fashion. My point in all of this is that you can argue the validity of our value proposition, what is the producers existing plan to deal with their difficulties. In addition to the price maker strategy building value for our value proposition, we have the fact that the principles of specialization and the division of labor have provided incremental value in all industries since Adam Smith’s publication of the Wealth of Nations in 1776. These principles are used throughout the Preliminary Specification to aid in the performance trajectory of the producer and industry, and there are many more areas in which value is generated in comparison to the status quo.

It is on the basis of our value proposition, the scope and scale of the Preliminary Specification, its integrated and comprehensive nature that shifts the focus to the Joint Operating Committee that demands this approach, and the value that this Intellectual Property generates for the industry that we’ve submitted our budget to be raised by our Initial Coin Holders. Originally we believed the producers would be the source of this funding however their conflicts are far too serious for them to overcome. Therefore effective January 2019 we’ve determined that we’re seeking funding from the issuance of a coin or token based on blockchain technology, an Initial Coin Offering. This we believe will be completed mid way through the 2022 calendar year and are working to put together the necessary components to do so now. We do not believe the producers will do anything as they’ve displayed no initiative or desire other than to fill their own personal pockets full of cash. We have therefore determined, due to the advanced decline in the oil and gas industry, we are unable to assist those producers in reclaiming their future prosperity. We have always believed fundamentally in creative destruction and knew that that was the method that we would have to use. We are therefore setting out the rebuilding of the oil and gas industry in the vision of the Preliminary Specification, complete with our user community, their service provider organizations and our coin holders.

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 XXIII

Preamble - Part I

People, Ideas & Objects competitive advantage and value proposition is that we provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for the industry to obtain the objective of profitable energy independence on the North American continent. It’s not enough to own the oil and gas assets in the 21st century. It’s also necessary to have access to the software and services that make the oil and gas assets profitable. We do this by providing the Preliminary Specification, an oil and gas ERP software solution that supports a business model that defines the following characteristics.

Throughout the Preliminary Specification we have used specialization and the division of labor to create new organizational structures for producers, and an industry configuration that provides producers with the opportunity to change the direction of their performance trajectory. We have stripped down the producer firm to the C suite executives, the earth science and engineering resources, some land and legal support. The remaining administrative and accounting resources are reallocated to service providers that are affiliated with People, Ideas & Objects and provide the accounting and administrative services in combination with our software across the entire oil and gas industry as their client base. Focusing on one process, or part of one process, the service provider specializes in the processing of that information. Billing the individual Joint Operating Committees for the services that they render. This industry and producer configuration enables the producer firms to focus on their key competitive advantages of their earth science and engineering capabilities, and land and asset base. Whereas the service providers will be able to focus on their competitive advantages of their accounting or administrative skills, automation, specialization and the division of labor, problem solving, issue identification, leadership, creativity, collaboration, research, ideas, thinking, design, innovation, negotiation, compromise and planning to name just the highlights.

This revised industry configuration, in addition to recognizing and supporting the Joint Operating Committee as the key organizational structure of the dynamic, innovative, accountable and profitable oil and gas producer provides us with an opportunity to do many things differently. The most significant, at this time, is the implementation of the decentralized production model with its price maker strategy. Since all of the operational, and most of the overhead costs, will be shifted from the producer to the Joint Operating Committee we will be producing detailed, complete financial statements for each property. It is in this transition to the Joint Operating Committee that all of the producers costs become variable based on production. If the property is unprofitable then it can be shut-in and incur what we call a null operation, no profit but also no loss, and at which time the reserves will be saved for a time when the can be produced profitably, those reserves will not have to carry the incremental monthly losses as additional costs to be recovered in the future, the producer maximizes their profitability as their unprofitable properties will no longer be diluting their corporate profits and the commodity markets will find the marginal costs when the unprofitable production is removed from the commodity marketplace. Markets provide one thing and only one thing. That is the price of the oil and gas commodities in this case. If natural gas or oil prices are too low to make a profit than the logical, business and sensible thing to do is to not produce until such time as the price provides for profitable operations. That is how the producer will operate with the Preliminary Specifications decentralized production models price maker strategy. “This is collusion and the wrong approach” according to today’s producers who choose to produce, largely unprofitably, at 100% of their production profile everywhere and always. They do not accept this basic business understanding of how to run an organization. If making independent business decisions based on detailed, factual accounting that determines profitability is collusion then I suggest they hire Robert Mueller. We have based our understanding that oil and natural gas are price makers not price takers. Losing the once abundant investors money had become a right, a privilege and an honor for the producers bureaucrats and they will justify their operations of that with whatever logic, or illogic they can muster. Please review the Preamble, the Resource Marketplace module or Partnership Accounting module of the Preliminary Specification for further information on the price maker strategy.

This lighter, leaner configuration of an oil and gas producer provides for greater flexibility in terms of the operations that are undertaken. Specialization and the division of labor are the two primary sources of every increase in our standard of living and organizational performance. These two tools have stagnated in the past twenty years as a result of the role that software is now taking in society and our organizations. It has the effect of cementing the organization permanently to the software configuration and no changes can be made without the corresponding change in the software being made first. As a result of this we are experiencing no increased performance trajectory as a result of the lack of any specialization or division of labor. Other economic concepts such as creative destruction and spontaneous order have also been stifled as the ability to act outside of the defined software methodology is impossible. Therefore it is proposed by People, Ideas & Objects, and adopted within our Revenue Model, that we are change based software developers. We are compensated for the changes that are made in the software based on the desired changes of our user community who are empowered through our user community vision. It is in this way that the oil and gas industry acquires a software development capability that will enable the Preliminary Specification to accommodate any changes, approach any issues and opportunities as they arise and will never disable the dynamic nature of the industry for many decades again.

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 XXII

Blockchain

We were able to write our twelfth module into the Preliminary Specification in 2018. It is the first module that is technologically focused. All of the other modules, including the Security & Access Control are focused on the business of the oil and gas industry and producer, as viewed through the Joint Operating Committee. Therefore the Blockchain module provides the blockchain technology to all the other modules of the Preliminary Specification. Included within the Blockchain module itself there is detailed discussion of how each of the other modules is affected by this technology and how I expect it will be implemented. This will be in its initial implementation and it would be expected to become more robust as the years pass. I see blockchain as a must have Information Technology that will need to be the base of the ERP systems that industries will require. I also expect and anticipate throughout the development of the Preliminary Specification our user community will be able to define the use of the technology in a more effective and efficient way. This is due to the relatively “new” aspects of the technology and its current rapid developments and adoption.

In terms of understanding this new Information Technology Don Tapscott, who has been a leader in the field of businesses adoption of Information Technology. Has taken a leading role in the understanding and implementation of blockchain technology. He is a co-founder of the Blockchain Research Institute who’s participation includes most of the companies that are involved in business and Information Technology and has robust support from all industries. Here’s an introductory video that we used in the Preliminary Specifications Blockchain module.

The key takeaway from this video is the concept of a “shared network state.” Which accurately describes the perspective and point of view that People, Ideas & Objects have created with the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas industry and producer. As a result everything within the industry becomes a shared network state based on the glue that holds it all together, the Preliminary Specification. The producers themselves are stripped down versions of what they are today. Their earth science and engineering capabilities, and land and asset base are highlighted and focused upon as their key competitive advantages. Their working interests in the Joint Operating Committees are supported through the service industry through our three marketplace modules and have a far more involved and appropriate relationship with the producers and Joint Operating Committees. Bringing the service industry in as partners in terms of the development of how the field operations will develop from here. The administrative and accounting resources are reallocated to service providers that are established by the People, Ideas & Objects user community members, who have the power and control over how the Preliminary Specification software is developed, and are therefore also involved in the day-to-day of the service providers who provide our software and their services to the producers and Joint Operating Committees. Trust, transactions, agreements, vision and direction are understood and implemented throughout this “shared network state” and the industry is therefore able to move forward into what is unquestionably the most difficult future in a dynamic, innovative, accountable and profitable manner.

What we are finding is that the People, Ideas & Objects approach to the oil and gas marketplace is becoming the more common sense approach as each day passes. Our approach being that we provide the software and indirectly the administrative and accounting services to the entire industry with one solution. Our approach was to mitigate the software development costs that are incurred today by each and every producer to conduct the same accounting and administrative tasks as the producer across the street. These costs being replicated across the industry to develop the same capabilities at each and every producer. Costs and capabilities that are not shared and are unshareable. These software development costs, in addition to the overhead incurred in accounting and administration, are a major detriment to the industries ability to be profitable and maintain their costs.

The difficulties that the Information Technologies and their infrastructures are presenting are new challenges that each producer has to face. There are now business challenges, that the Preliminary Specification addresses, that are also presenting issues where the administrative, accounting and Information Technology costs are escalating further for each and every producer. Don Tapscott calls the “shared network state,” which is appropriate, that a producer as an island unto itself is no longer functional in a world where the future oil and gas industry needs to be. We had always argued that the costs of the Preliminary Specification would be lower than what the industry would incur collectively as individual producers. What we have to undertake from an industry point of view will increase our costs, however the base functionality of our applications would need to be put together and maintained by each and every producer. The push back from industry on our thinking here has been that the scope and scale was to large to be successful. If that were the case, then how do they propose to build the same functionality within their organization with the budgets that a profitable producer can allocate? Administration, accounting and Information Technology may be claimed to be a competitive advantage of a few producers, but it shouldn’t.

Once again we are able to turn to our key Information Technology provider, Oracle Corporation. Their involvement in blockchain at this time is substantial. Providing the Oracle Blockchain Platform and Oracle Blockchain Applications. These are added to the many applications of Oracles that are detailed throughout the Preliminary Specification modules which include the Oracle Database, Java, Oracle Fusion Middleware and Oracle Fusion Applications.

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.

Victoria Day

Third Friday

Our Oil and Gas White Paper, Part XXI

Compliance & Governance

Compliance & Governance, the module everyone loves to hate. It is my hypothesis that it’s here, at compliance and governance, that everything went wrong. What I mean by that is in the 1960’s when the first computers were being introduced into oil and gas companies. The question was asked what will we do with them. And of course the answer was accounting. Then as they became ever more powerful and more capable they began to add more tasks to their duties and added the natural follow on concerns of tax, royalty and compliance. Soon the culture became focused on those “compliance” requirements of the “firm” and the Joint Operating Committee became something that was used over there. Soon after this engineers and geologists began speaking a different language to the “business” types. Divisions grew and the business of the business was focused on the corporation and its need to file the appropriate paperwork to the appropriate agency in the appropriate time frame on the appropriate colored form.

Anyway, the real business of the business, the Joint Operating Committee somehow survived and if we align its legal, financial, operational decision making, cultural, communication, strategic and innovation frameworks to the compliance and governance frameworks of the hierarchy everyone can start speaking the same language as the engineers and geologists and start to get some real business done. And as People, Ideas & Objects research has shown this would provide the oil and gas producer with greater speed, innovation, accountability and profitability.

Compliance & Governance is the eleventh module in our twelve module Preliminary Specification. The question that should be asked is, how are we going to ensure compliance to all the regulations for all the module specifications that we’ve discussed so far? And I would assert that is why these are user based developments. But seriously, one thing governments seem to be fond of today is regulations on oil and gas companies. With Information Technology enabling various governments to issue technical business rules, technical specifications, XBRL syntax’s and other technological frameworks for these regulations. The ability to write these “frameworks” only seems to have encouraged them to write even more regulations. The larger point is that these frameworks do provide software developers with distinct advantages in enabling the regulations within the software.

The People, Ideas & Objects applications determination of scope will include which regulations it will need to be in compliance. With so many jurisdictions requiring compliance, each transaction may need to be assured to be in compliance with multiple jurisdictions. Add to that the transaction may be generated through a Joint Operating Committee owned by a variety of producers. And those producers may be composed of an international background and the Compliance & Governance module takes on an enhanced importance.

From the point of view of each producer maintaining their own database and applications for all of the compliance frameworks that they need to be concerned with can be a difficult task. The number of people that are needed just to keep a producers applications up to date is significant. However, People, Ideas & Objects, as one software developer acting on behalf of the industry as a whole, the job of building and maintaining the software that provides for the producers compliance requirements becomes much more specialized, automated and therefore manageable with the service providers. Then again if we were building these applications with the purpose of serving an industry we can access and use the division of labor and specialization to manage these tasks in a way that would significantly lower the costs, however, substantially increase the quality of the producers compliance.

I foresee just the royalty compliance requirements of these applications potentially including many dozens of different jurisdictions. To approach this from a software engineering point of view as a sole producer is not cost effective in the least. To consider these costs are replicated across each producer firm, then we begin to see the costs of compliance escalating to the levels that they are today. There is another way, and that is what is being proposed here in People, Ideas & Objects, along with the many other innovative ways we are proposing to deal with the issues of the oil and gas industry.

Here we have the beginnings of compliance and governance for the innovative oil and gas producer and Joint Operating Committee. What we need to do is to deal with the compliance of an innovative oil and gas producer with the tools of the 21st century. Those include automation, specialization and the division of labor. And in terms of governance, we can begin to provide the producer firm with the appropriate operational governance that is consistent with the demands of innovation. For we have learned that innovation does not arise from sloppy compliance and governance.

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.

These Are Not the Earnings We're Looking For, Part XXXIV

We noted yesterday the difficult situation in oil and gas in terms of its cash and working capital crisis. What we have is a unique situation that is overlooked by the producers when their focus is on the development of reserves and not on financial performance. Accountants are in the industry to pay the bills, not to speak unless spoken too and that is the extent of their purpose. Simple cash management would show that what the industry does is not a viable method of managing an enterprise. Unless, that is, there was a reliable stream of investor dollars available to continually shore up any of the producers cash shortfall. That this investor support has been missing for more than three years hasn’t caused the thinking within the industry to change or to focus on simple cash management to deal with their cash crisis. Or alternatively they’re fully aware of the cash crisis and are also aware that the only solution is the Preliminary Specification with the decentralized production model’s price maker strategy. Nonetheless how does this chronic cash shortfall occur?

Oil and gas is a capital intensive industry. Where most costs are capital in nature to begin with. What makes it particularly difficult is that the industry is operated in such a way that “building the balance sheet” is the objective. Therefore capitalization is done everywhere and always. Particularly in the overhead accounts where each year large percentages of the overhead costs are capitalized to property, plant and equipment. In addition interest is capitalized to a certain extent and at one point PennWest even capitalized their royalties. As we know all of these capital costs escalate each year and property, plant and equipment builds ever larger, quite rapidly. This is also due to the minimal amount of depletion that the producer recognizes. Enabling them to report higher profits than what they should, attract more investment and overproduce more of their “profitable” oil and gas. They are therefore through this process passing an indirect discount to the consumer when these capital costs that should have been recognized stay dormant on the producers balance sheet in property, plant and equipment for decades at a time. The amount of this discount is the amount of property, plant and equipment sitting on all of the producers balance sheets today. An amount believed to be $1.5 trillion. This is also the amount that investors should have received in the form of dividends over these past 40 years.

The point in my stating this once again is that the capital costs are purchased with cash. When you have a willing investor supporting your organization the cash consumption might not be an issue. That doesn’t make the activity right, it just doesn’t become a crisis. When producers needed more cash they just issued more stock. When you don’t have a willing investor or banking group supporting your organization then you’re paying out the monthly bills each and every month, with cash, and only retrieving those cash resources in small bits over the next few decades. What cash does come in as a result of the producer recognizing some of their capital costs has an immediate call on it to maintain the production profile of the producer. This is the way that oil and gas is operated which is not a business. It is a spending machine that was consistently reloaded as required by investor money. This has become the culture of the industry and is done systematically throughout North America in order to “build the balance sheet.” This process is deemed, I suppose, to add some value in some way.

What needs to change, and what will change in the Preliminary Specification price maker strategy, is the producers will cease “building their balance sheets” and begin recognizing their capital costs in a more timely manner. We believe a 30 month period is adequate to compete in today’s capital markets. Therefore instead of having depletion take 12 years it will be done in 2.5 years. When production only occurs when it’s profitable as it does in the Preliminary Specification. And the producer begins to understand that true profitability only occurs when they are not diluted by any of their unprofitable properties, and therefore only produce profitable properties. That their reserves will be saved for a time when they can be produced profitably. These reserves costs won’t have to carry the incremental costs of each months losses incurred from unprofitable production. And the commodity markets will find the marginal cost when unprofitable production is removed from the marketplace. Producers will need much higher oil and gas prices in order to retire the capital costs that are being recognized at a much faster pace in order to remain producing only profitable production and compete in terms of their returns in the larger capital markets. Consumers have had the benefit of the investors paying the capital costs on their energy consumption now for four decades. That is the net effect of the actions of the producers and industry for the past four decades. Both of these aspects of the producers business are unrecognized, or at least not discussed publicly. Producer bureaucrats are either obtuse or they’re uncaring. Either / or it doesn’t really matter.

Profitability is the fairest and most reasonable means of production allocation. We see in Alberta that none of the producers are satisfied with the government mandated production cuts. They can not be applied in a manner that will be acceptable and controllable other than in a competitive market where profitability and innovation are the two drivers of producibility. If a property is unprofitable, under the Preliminary Specification, it is a priority for the producer to expend their earth science and engineering capabilities upon that property in order to return it to profitable production as soon as possible. Innovation is the source of profitability in the long term for the producer. Innovation and profitability are two of the key capabilities provided in the Preliminary Specification.

This is how the business of the oil and gas business must be operated from this point forward. Confusion about the issues and opportunities are rampant in the industry. Everyone has an opinion as to the source of the problem and that there are no solutions other than to “muddle through like always.” People, Ideas & Objects believe the scope of the damage that has been self inflicted by these producers is terminal. Creative destruction is our method in which we’ll bring our solution to the marketplace. Rebuilding the industry brick by brick and stick by stick on the basis of dynamic, innovative, accountable and profitable oil and gas producers. To continue without any action on these issues is untenable. There are believed to be prospective capital expenditures in the range of $20 to $40 trillion in the next 25 years. It is therefore assumed by today’s inaction of the producers that investors will be picking up this tab. It is also the common knowledge on the street that all that is needed is for the “investors to back up the truck to the producers loading dock and replenish the cash needed to make everyone flush again.” A ludicrous expectation that the damage sustained throughout the industry, the service industry and the general economy can be resolved by investor resources provides an understanding of the level of business in play at these producers. There is not enough investor capital in the universe to make the industry “flush.” It can only be on the basis of the consumers paying the full costs of their energy consumption that the industry will right this ship. Investors currently see no future in oil and gas because there is no future. All that oil and gas has become is a giant sinkhole where money goes to die. The only group discussing otherwise is here on the ugliest websites on the InterWeb. The place where thinking through the industry issues occurs, solutions are provided and has no support from the industry. That’s because oil and gas is not a business.

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.

These Are Not the Earnings We're Looking For, Part XXXIII

What we see in Occidental’s purchase of Anadarko is the acquisition of oil and gas reserves as the key to all oil and gas activity. What else is there? Paying so much for such little performance shows the emphasis is not on financial performance or building value. It’s on building balance sheets and collecting more stuff to put into your collection. The culture of the industry has been so distorted that People, Ideas & Objects focus on real profitability is the outside discussion that the bureaucrats are unwilling to listen, acknowledge or act upon. There is so much distortion in the market that the ability to hold an idea in ones head is limited by the fact that everyone in the industry is an expert and know intuitively that no ideas will work. To reflect on the fact that the behaviors of the producers are what’s at fault never enter the conversation. It’s always someone else that’s responsible. Any subsequent actions by producers would imply that they’re responsible and they couldn’t do that. Besides as far as the bureaucrats are concerned they’re still getting their paychecks, and although that’s not as good as the golden days of creative compensation it’s enough.

What we see in the first quarter of 2019 is a continuing deterioration of the industries and producers financial health. What we also see is a substantial acceleration in the trajectory of that decline. Particularly in the area of cash and most specifically working capital. We’re now in a situation in terms of working capital that I’m having a hard time visualizing what it’s like to manage an oil and gas producer. You have in our sample of 23 producers property, plant and equipment of $487.3 billion, debt of $146.6 billion and current liabilities of $70.5 billion. Working capital is only $4.8 billion down $6.7 billion from December 31, 2018. We have watched these numbers for several years now and they’re deteriorating far more quickly. In 2018 we saw dividends, stock buybacks and debt payments total $45 billion which contributed to the decline we’re seeing in working capital. Much of this was fueled by asset sales that were generating large losses in addition to the cash that was raised. In the first quarter of 2019 stock buybacks, dividends and debt payments totalled only $3.2 billion as it appears this is the area that producers have determined as unsustainable. Cutting dividends and harboring as much cash as possible. Nonetheless the consumption of cash was $3.8 billion vs. $5.2 billion for all of 2018. Some pundits state that the cash balances of the producers are very healthy. Which some are, they’re however the exception to the rule and the healthy balances of cash have all been spent with current liabilities wiping out current assets and leaving minimal working capital. It's great to have large bank balances but if you’ve already spent that money, you can’t spend it again.

Go ask an investor to shore up your working capital. You may never see another potential investor again. No one is going to provide you with working capital. Banks will get spooked and start calling their loans. Working capital deficiencies are a serious warning to anyone that the problems in the business are comprehensive and unresolved. Throwing more money at it is only incinerating it. The business must address the underlying issue and the discussion in the industry isn’t satisfying anyone who sees that the issue consists of chronic, systemic overproduction everywhere and always. Businesses manage their production so that their inventory levels do not bloat to the point where they depress the price of the product they’re selling. It’s common business sense not to do so. Producers believe they have the right to produce whatever they want from whatever area at whatever cost and the “market will rebalance.” Which is the most foolish thing that any business could consider or think is a valid point. Markets produce one thing, and only one thing. That is the price that the market is willing to pay. If a producer can make a profit at that price, then the producer should produce. Otherwise stay out of the market and ensure that only profitable operations are achieved everywhere and always. People, Ideas & Objects have been screaming this logic for over a decade now and the response from the industry continues to be they will not interfere with the markets. And therefore continue to produce at 100% production capacity.

Of course our sample of producers recorded a profit of $6.1 billion for the first quarter of 2019. Which would be some of the highest profitability recorded in the past number of years. So the point of my argument about only producing profitable production is misunderstood. These profits that are recorded by the producers of course contain very little of the actual capital costs incurred to produce them. Deferral of any and all capital costs, which as we know consist of only the royalties and operations being excluded, is the science and art that producers are most proud of. “Building balance sheets” is the name of the game. The business is a spending discipline pure and simple. People, Ideas & Objects believe that a capital intensive industry would recognize their capital costs as quickly as possible in order to retrieve the cash resources that had been invested in the business. By recognizing the capital costs, and assuming they were capturing adequate prices for their product, these capital investments would be returned to them in the form of cash for reinvestment without having to go to the investors for more cash and dilute last years investors. The business would be self funding as it turned over its capital in a competitive fashion with other industries that compete for the investors attention and dollars. In addition to being a self funding operation producers would generate enough cash to pay down debt and provide adequate dividends to their shareholders. Instead, oil and gas is the place where money goes to die.

This argument has been put to the producers by People, Ideas & Objects for many years now. Isn’t it odd that the producers have such large balances of property, plant and equipment. Are "wildly" profitable in their minds but cash starved and becoming more so as each day passes. Analysis of the issue and proposed solution can’t make it past the “muddle along” strategy and “do nothing” operating procedure that are unanimously applied in each producer. They know too much about the business to impart their sophisticated analysis and explain themselves. Even though the “good times” have occurred for a total of 5 of the past 34 years, investors and bankers don’t understand and can’t see the “healthy” lives that the bureaucrats live. So what exactly is the issue. People, Ideas & Objects have determined that this has gone on for too long and has carried on to the point where there is no value in the industry anywhere anymore. We don’t believe we can remediate the problems within the constraints of the current organizations. We therefore have looked to other methods in which to achieve our funding and proceed with our software developments. These are captured in our Initial Coin Offering and we’ll be using creative destruction to rebuild the industry in the vision of a dynamic, innovative, accountable and profitable oil and gas producer and 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.

These Are Not the Earnings We're Looking For, Part XXXII

We have now compiled the first quarter financial statements of 2019 for our sample of 23 producers. As of the second quarter we will have 22 producers as the Occidental acquisition of Anadarko was finalized last Friday. Today we’ll be talking mostly about that transaction with tomorrow’s post focusing on the state of affairs across the industry. I am of two minds regarding the Occidental deal, first the structure of it, the political moves made by Occidental and there ultimate success reminds me of the 1980’s when acquisitions were more difficult, competitive and less friendly. The acquirer had to be very creative and active in order to make the deal a success. We see that here again in Occidental’s moves once Anadarko was put into play by Chevron. The second aspect of the deal that more or less frightens me is why would Occidental pay so much? With the acquisition of the shares at $38 billion and the debt that exists in Anadarko, Occidental is paying $69.46 billion for Anadarko. That is substantially too much for the company from my point of view.

Valuation has always been a difficult issue with the oil and gas industry. It has been a tool that has been used, I believe, to distract attention from the larger issues of the day and more to build empires. Over the years I’ve not seen the effects of any acquisition or merger, particularly when two elephants start to dance, provide any subsequent value. The point when looked at from the bureaucrats perspectives is that they’ll have a firm with a 2018 revenue stream that will be $32.3 billion per year. That provides for the kind of power that would otherwise be considered budgetary intoxication. Paying 6% or $3.2 billion of interest on the combined debt would be incidental. Therefore we can see the motivation behind the pursuit of the deal. The actual value that is generated, has been generated and will be generated is questionable. We’re told it's all in the reserves!

The strategic value of the acquisition is to augment Occidental’s acreage in the shale basins. Occidental makes the claim that their shale wells perform better than any other producers. A claim that would be difficult to verify from my point of view however they wouldn’t say it if it wasn’t true. Expanding that performance across a larger area would be a challenge in order to enhance Occidental’s capacity and capabilities. However, with the price and availability of good shale properties having more or less expired, this may be the only manner in which to expand in those basin’s. Although not directly relatable Chesapeake once traded at the highs of $62.40 in June of 2008. They now trade at $2.61 after their positions in shale gas basins didn’t work out quite as expected. Certainly the financial crisis had something to do with that, but the point is you always get surprised on the downside. Are $60 oil prices here to stay?

The Permian is the jewel in both of these producers inventory. What we saw in natural gas was the expansion of shale capacity far beyond what anyone could have ever imagined. This collapsed the price initially, and the overproduction continued to the point of fundamentally damaging the pricing structure permanently. Instead of holding its heating value equivalent of 6 to 1 to oil it now varies anywhere from 15 to 1 or 25 to 1. Oil being a global price it has withstood the upswing in oil deliverability from shale formations better than natural gas. Nonetheless the global oil prices have had severe pressures since at least 2014. It appears to me that the issue is not so much the North American deliverability overwhelming the global price but the regional production volumes overwhelming their takeaway capacity. Producers outside of North America are not as damaged by overproduction from the North American based producers as the North American producers are. Price differentials due to regional takeaway capacity are the chronic issues that plague the entire continent.

Collectively Anadarko and Occidental will have negative $563 million in working capital once Chevron is paid their breakup fee. This also assumes Warren Buffets and Total’s $18 billion in commitments will go to finance the deal. What is most disconcerting about this deal is that Anadarko has $695 million in retained earnings. The expectation that combined Occidental, which will have $54.6 billion in debt and has a $563 million working capital deficiency, which consumed $2.4 billion in cash in the past five quarters will perform is questionable for me. But maybe I’m not looking at the bigger picture. The fact is that short term liabilities are only $13.26 billion which implies… Lets cease thinking this way throughout the industry. That a firm would be carrying $13 billion in short term liabilities is a frightening concept to the former accountant in me. My god they must have warehouses full of invoices to pay. These numbers reflect that whatever Occidental does it won’t be earth shattering. It will have to be put into lock down and rehabilitated over time. Significant time. At the same time they’ll need to be prudent in order to expand their capacities and capabilities across the larger base of operations without the cash necessary to do so. I’m not of the belief that much cash will be available to them. They may have consumed all the oil and gas industry investment capital that was available in this one deal. They may have also consumed all the capital available to purchase oil and gas properties. This will be a difficult road.

There is an alternative that would be more viable than this dark scenario. That would be funding their contribution of the Preliminary Specification. If so the investors would look at this firm as an opportunity to maximize the properties they just acquired. If everything they produced was profitable all the time they would also be generating the cash flow to deal with the issues noted above. This can be done with the Preliminary Specifications decentralized production models price maker strategy. That won’t happen however and People, Ideas & Objects will be continuing on with the development of our Initial Coin Offering.

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.