Accounting for Destruction

What happens when a producer has an annual loss that exceeds their revenue for the year. In other words costs were twice the revenue they generated. And that producers working capital deficiency is fully ⅔ of its annual revenue. Short term liabilities are 104% of annual revenues. Who’s shares trade at 1.16% of its 2005 all time high. Is this the firm that will carry our hopes and expectations forward into the challenging future this industry faces. This producer once considered itself a well established intermediate and its difficulties are reflective of the creeping nature of the self inflicted disease that's killing the industry. There are no startups. The juniors that exist are a small percentage of the total they once occupied. Intermediates are being eaten away vociferously and even the majors have now been drawn into the vortex since they published their fourth quarter reports. No one is immune now.

“A rising tide lifts all boats” except for oil and gas. The overall markets have been doing remarkably well yet the oil and gas producers as represented in the SPDR Oil and Gas E & P Index (SPSIOP) seem to have missed the boat. It is not the purpose of a corporation to concern itself with its share price. Here we have the bureaucrats strictly complying with that thinking. The SPSIOP is a comprehensive, 57 producer oriented index. And it is down 76.47% since July 2014 while the S&P is up 72.8% during the same period. One has to ask if all these producers share buyback programs of the past number of years were a good investment? Then again what would have been the state of affairs if they hadn’t purchased their shares? Any critical review of the situation would conclude the scope of the problem is existential. The financial landscape is devastated with producers absolutely gutted of any value other than stratospheric levels of property, plant and equipment. Paper assets that demand cash to produce. Only cash flow being generated from prior investments maintains the steady flow of feed to the bureaucrats trough. New investment was severed many years ago. What is being realized today is that existing shareholders have had enough too, their footsteps were not heard over the extensive number of excuses the bureaucrats developed to make them feel better. Graph is sourced from @SoberLook.

But yes now that natural gas volumes have saturated the global market, and oil has regained its oversupplied nature, the same as it was before OPEC+ began removing production from the market. That’s the time to get back in? I think these investors are happy that they’re out and will take a long time to reconsider moving any investment from their successful investments back into oil and gas. Maybe they’ll come back after three to four years of solid returns in the form of real profitability? Which assumes that this mess gets cleaned up first. In other words “call me next decade” the investors will say.

They say when the tide goes out you can see who’s been swimming naked. Everyone in the industry is now affected by this issue of systemic, long term overproduction. From the startups to the super majors. The service industry and those who work in these industries. Everything has been exhausted of the good will and faith that was earned over many generations of profitable oil and gas development. Any future development will have to be paid for in cash, upfront with the explosion of short term liabilities being reported in the fourth quarter. There is no cash to pay anyone therefore no one is being paid. Except the bureaucrats of course. They’re fine and they thank you for asking. They won't declare bankruptcy because they know the Judge will cut off their cash flow.

To discuss the destruction in the industry is important and valuable for the purpose of keeping score. The amount that has been destroyed by the bureaucrats is significant and complete. They need to be held to account for what they’ve done and ensure that they’re not able to continue. They have not earned that right. Conversely People, Ideas & Objects have a value proposition that is defined by our price maker strategy, and other attributes, that build value and mitigate the destruction which has occured in the industry. As time has passed if there were other solutions to remedy these issues in the industry, they have become scarce, the time, money and difficulties more complex and the solutions more limited in terms of their number. Their choices are the Preliminary Specification as far as I can tell. But they say I’m biased.

In order to accomplish what needs to be done the bureaucrats have to be removed from the landscape. People, Ideas & Objects, our user community and others dependence on them can not exist. We must be independent and not become “blind sleepwalking agents of whomever will feed us.” (Habermas) We have to break the culture that has led to the destruction of the industry. Our solution can therefore not be dependent upon the culture that created the problem. It will only lead to unnecessary conflict and delay, compromise and garbage out.

I used to believe that if a stock had been hit by some serious threat and the reaction of the investors was represented in its dropping to 50% of the point where the event occurred. Then that company was sent on an endless ride of circling the drain. Years would pass before the end but nothing would ever come out of the situation other than the elimination from the landscape in some form. Optimism would abound but the end was inevitable. The only firm that ever escaped this was Apple with the return of Steve Jobs. Here we have the majority of the industry represented in the SPSIOP Index reflecting a drop of 76.47%. Granted the only integrated included in the index are Occidental, Conoco and Marathon. Conoco may no longer be an integrated but it still is substantial in terms of its position. None of the super majors are included and it's reasonable that they’ll be damaged to a point but not terminally and of course will survive. The remainder of producers in the index having achieved greater than the 75% decline on average don’t look promising on the basis of this rule I’ve put forward.

One can almost conclude as the bureaucrats have, the defeatist attitude that all in the industry is unredeemable. Therefore why not just ride it out for personal gain and leave it to someone else to fix. Except the product produced is oil and gas which is a critical component of our standard of living. I feel bureaucrats are acting irresponsibly and should have worked to resolve these problems proactively and skipped this disaster. Unfortunately that’s too late.

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.

It Just Isn't Working, Is It?

...except for the bureaucrats. They just seem to be able to “earn” their money somehow. Of the few producers that have reported their fourth quarter financial statements, none appear to have solved the working capital crisis that is raging through the industry. In fact the dynamics that make up the determination of working capital are all pushing this critical factor further negative. Cash balances continue to fall, short term assets are generally increasing which I believe is a reflection of producers not paying their joint interest billings to other producers and conversely short term liabilities are up substantially when you add other producers to the long list of people who do not get paid. The contrast between cash balances when placed against property, plant and equipment appear to be from other industries, or different strata of industry. In the case of Cenovus their cash balance is $183 million and property, plant and equipment is $28.621 billion. Cash being 0.6% of property, plant and equipment. Which kind of proves my point that producers have spent their entire history taking other people’s money and sinking it in the ground. If only there was a way in which producers could reclaim that cash that’s been invested in the ground? As we all know that would never happen. The three criteria necessary to do that would involve the implementation of People, Ideas & Objects Preliminary Specification, for producers to begin thinking that oil and gas is a business and actual, certified bureaucratic action. Neither of these will ever happen while in the hands of the current bureaucrats. We’ll have to continue to wait them out, until their cupboards are bare and they saunter on down to their next gig. On the other hand it must be an absolute joy working for a company with $16.5 billion in debts and $183 million in cash. Which is 1.11% cash on hand, not even enough to pay the minimum payment on the credit card.

We seem to be ratcheting down another step in terms of commodity prices. Funny thing is that these markets just don’t “rebalance” on their own do they? I think that North American producers are close to the point where the OPEC+ countries have had enough and will give up trying to show them the way on oil prices and just start producing everything they have and always. Taking a lesson from the North American producers instead of trying to teach them about markets. As low cost producers OPEC will always make money and North American producers won’t. It therefore wouldn’t be too much longer that these companies can continue to exist. They have few resources in hand when we understand the cash and working capital balances. And the residual value that remains in the industry is negative due to the chronic overproduction over the past four decades. In other words without outside bankers and investors supporting these producers they’ll never be viable enterprises. It has only been four years since the investors abandoned the industry and most of the producers have fallen off the cliff.

Outside of promoting the Preliminary Specification it’s difficult to write a cheery blog post these days. Between the rah rah! that continues in the press and the silence from the producers there is no news or action to speak of. It is the pure drudgery of muddling along and doing nothing for another year. Until things turn around they’ll say. At some point others, not myself or the investors, will also take a critical look at the industry and move on to greener pastures. Those oil and gas investors that moved their money out on a timely basis and have been handsomely rewarded, twice. First by avoiding the tragedy that is oil and gas today. And by reaping the upside of the technologically based Trump economy. It’s like they could almost thank the bureaucrats for essentially kicking them out.

I think we’re at the end of this standoff between the bureaucrats and reality. Reality is about to make it known the facts of the case and many will not like what they see. I thought natural gas went through this process earlier when the price fundamentally broke down and began trading at multiples of 20+ times the price of oil. However it would seem that this was just the destruction of the North American natural gas market. Since that time bureaucratic efforts have been under way to do the same to the international natural gas markets and those are starting to show the same symptoms of overproduction. Remediating these natural gas markets will take a significant effort by some smart people over a long period of time. Oil is starting to waver again too. Just as it had prior to the interventions of OPEC+. They’ve pulled almost one and a half billion barrels of oil off the market over the past three years and the only thing that happened was the North American producers replaced their production. You can’t reason with someone who doesn’t listen and doesn’t do anything, blames everyone else for their trouble and expects others to come to their aid when they need more money. Therefore I think OPEC will just ignore the consequences of any overproduction by themselves and flood the market. Making this nightmare end by quickly extinguishing the existing North American producers and putting everyone else back on an upward trajectory by participating in the rebuilding of the industry brick by brick and stick by stick through the implementation of the Preliminary Specification.

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.

Exploding Myths, Part XIV

The final installment of this series attempts to answer the question of how this destruction in the industry is occurring. It is my best attempt to be diplomatic to describe these as “myths.” However with what I believe to be the appropriate solution in the Preliminary Specification, a solution that was developed with the chronic overproduction and other issues in mind, a depressed natural gas industry since 2009, oil since 2014 and investors exiting the field soon after. How is it that these issues have gone on to manifest themselves in the liquidation of value? What is it, and why has it gone on for so long? Is it dishonesty, an inability to grasp the issues or just common everyday self-serving bureaucrats who don’t care? The culture of the oil and gas industry is that value is increased through drilling additional wells. Accountants are there to pay the bills and any other contribution is not welcome, necessary or invited. “It is a difficult and complex business that most people can’t understand.” Which is true, however it is for that reason all other ideas and discussion is unwelcome and ignored. They can honestly sit and say that they’re SEC compliant and profitable as they had always been. Until recently investors were lined up around the block. What critical analysis would they accept? Now they just have no understanding or appreciation why their shares are trading at 5% of their highs. Why the investors and banks have ceased to provide them with any support and why it is that the service industry is so upset for not being paid. It’s only money the bureaucrat would say. So what is it that’s causing all of these difficulties, I’ll leave it to the reader to determine which of the three options mentioned it is for themselves. Most will understand what my position is and who’s responsible. I truly question what it is that the CFO’s have been doing in these firms for at least the past decade.

To help the reader form their own point of view it may be helpful for them to understand some of the detailed history between People, Ideas & Objects and these bureaucrats over the past almost two decades now. Since September 2003 when I published my proposal to the industry. A proposal to research the use of the Joint Operating Committee as the key organizational construct of the oil and gas industry.

Research Proposal:

Organizational and Technical change in Canadian oil and gas. Critical case research on innovation, a method of prediction and competitive analysis of corporations to effectively position themselves for innovation.

Bureaucrats laughed at me and said “we don’t hire small research firms.” I therefore undertook the research myself and published that in May 2004. What I found then was surprising. The absolute anger at what I had done was expressed by all those that I had contacted in late 2003. The common question that everyone was asking was “who paid for the research.” I innocently stated that I had myself. Then subsequently in the month of June 2004 I was shown a Decision Brief from Cambridge Energy Research that was dated April 2004 that emulated everything that I had done except the one missing element was the conclusion that the Joint Operating Committee was the key organizational construct of the producer and industry. I had beat them to it, and these bureaucrats have never forgiven me. I have not worked in oil and gas since that time, persona non grata, is the term. Which ironically gave me the opportunity to complete the research which at that point only scratched the surface. What I didn’t know was it would then take me until December 2013 before it was complete and the Preliminary Specification was published.

There were four other occasions that this research and the Preliminary Specifications copyright were violated through major research organizations hired by these oil and gas bureaucrats. None of these were successful in establishing any foothold as they were all derivative and as a result went nowhere. It has been a knockout brawl between People, Ideas & Objects and the bureaucrats all throughout this time and as I’ve indicated I’ve enjoyed it more than I think they have. It is clear to me that these people are formidable. Comfortable in their station in life. And will fight to keep it that way to anyone who thinks otherwise. They are very smart people who I give a wide berth too. You can conclude from these facts and the actions, myths and arguments put out since September 2003 what you think the producer bureaucrats are, the state of the oil and gas industry as it stands today is the best indicator, I know I have my opinions. The question is where is this dogged fight they’ve displayed when it comes to managing their businesses?

It’s not that they were unaware of what I was doing. The key innovation in the 20th century was the Internet in my opinion. An innovation that is only in its infancy in terms of the impact its implementation will eventually have. The innovation in oil and gas blog is fourteen years old. There has not been any deviation from its focus since the first posts were made in December 2005. It documents the ten years of research that was undertaken to determine what the industry and producer firms needed to look like in order to fully exploit the use of the Joint Operating Committee and the Internet. This research was consistent with the producer bureaucrats intuition that they would be the odd man out in such a dynamic, innovative, accountable and profitable world. They therefore needed to make sure they did what they could to “make hay while the sun shines.” Which if you think that natural gas prices collapsed over ten years ago, they’ve been effective and efficient in that endeavour.

People, Ideas & Objects are fully committed to raising our full budget prior to having any development undertaken. We do not expect any of our user community and service providers to take any career risk on behalf of solving producers problems. The bureaucrats approach has always been to identify those that work against their best interests and remove them from employment in the industry. Our development will not be a process for which the producers can identify candidates for that. We will have the financial resources to ensure we can work through the development process to complete our task. Secondly bureaucrats wouldn’t therefore be able to stop the funding in the middle of our developments and have everything fall apart due to their well established lack of attention spans and focus. I have also demanded that I am paid up front as I’ve worked for the better part of 30 years and will not be the sole individual that is capable of making this a success or failure. I’ll have my money, which for me will make this project a success. There is only one way in which these developments will achieve the success that the industry needs and that is through the hard work that producers need to do with our user community to figure out the fine details of the Preliminary Specification. If I have my share of the proceeds of this development then the industry will finally have some skin in the game. Lastly with little to no cash in the industry. With no financial capacity available anywhere to any of the producers People, Ideas & Objects and our user community are not going to be one of the future candidates in which producers will be able to stiff through the process of defaulting on their obligations. This is no one but the producers' fault. And producers should get used to the lesson being taught here of having to pay all their vendors up front before any work is done.

People need to understand the scope and scale of the damage that’s been done. This is an existential issue. It’s not something that can be muddled through as has been done many times before. Producers are at the top of the food chain. Yet all they can do is blame others for the fact that their revenues are not fully realized. Meanwhile they don’t even care about the devastation in the service industry which is the only means in which they can carry out their field operations. It is their capabilities and their capacities and they just ignore the fact that they’re deteriorating. It’s been 10 years in the natural gas market that things have fallen apart catastrophically and nothing has ever been mentioned or done about that. If someone raises a point, no one wants to talk about it. Run away and stick your head in the sand. Investors are watching and they see nothing redeemable in the industry that compels them to return. Yet the investors imminent return is the only expectation of the producer bureaucrats. What we can conclude for certain is that bureaucrats will not do anything now.

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.

Exploding Myths, Part XIII

As of last Friday there were five LNG tankers which were refused to be offloaded by the Chinese LNG facility operators due to their inability to appropriately staff them. Force Majeure was invoked, however Shell and Total were questioning the validity of the operators argument. Nonetheless the anticipated buildup of LNG this spring has arrived and there are still 40 days until the first day of spring. Both commodity prices continue to collapse across the globe as a result of chronic overproduction. Mostly due to shale in North America. Yet, of the few producers that have reported their fourth quarter most of them continue to report profitable operations as a result of the accounting methodology we noted last Wednesday. Such is the extent of the accounting magic that is employed in the oil and gas industry that commodity prices are woefully inadequate to cover the known costs, yet producers are profitable. When it comes time to suggest that producers should shut-in unprofitable production, these producers state it’s not them that are causing the issues, they’re profitable! And year after year we watch as the deterioration of value continues while people’s careers and hopes fade from this truly mythic belief system. If you want to know what the future of the oil business will be just review the history of the natural gas business.

The Issue I want to discuss today is the one that was discussed in that post that saw Chevron belittle the majority of their assets by focusing on their “pristine assets” and implying their other assets would be left to continue as second class citizens? As we’ve described these second class assets would, they assume, continue providing a contribution to the overall overhead, however we suspect they’re probably the profitable properties of the firm and the so called pristine assets being the losing propositions. We don’t know because no one knows due to the accounting being inadequate to tell what is and isn’t profitable. This is not a Chevron specific issue. This is the manner in which all producers manage their properties. There are those properties that are of interest to the bureaucrats, such as shale is today, and those that are not of interest to the bureaucrats, such as conventional assets.

Being able to determine the actual, detailed and real profitability of each property is one of the objectives of the Preliminary Specification in order that the independent business decisions, based on that profitability can be made as to whether the property produces or is shut-in for lack of performance. Don’t let Chevron or any producer explain it to you any other way, I can assure you they don’t know. Ask them what the actual cost of a properties royalty accounting costs for a specific month were if you need evidence. Therefore the profitable assets are not pursued due to their alleged non-pristine nature, as no one can determine that, pristine assets are pursued for the engineering challenges that must be resolved, despite their chronic unprofitability. Any other property has otherwise been optimized based on the work that was done before or is not as exciting as the prospect of what is deemed pristine. Therefore these properties are tossed in the bin and expected to do their duty of contributing to reducing the overall overhead burden of the firm.

People, Ideas & Objects are not of the belief that any oil or gas should be produced unprofitably from this day forward. Why would it? We owe it to future generations to ensure that we are not wasting these critical resources unnecessarily. The destruction of the industry as it stands today is complete and therefore the resources represented in those produced reserves which were consumed have been largely wasted, in our opinion. The Preliminary Specification provides oil and gas producers with the most profitable means of oil and gas operations. That implies that every property that is producing is profitable everywhere and always. If they’re not profitable then they’ve been shut-in and moved to the producers inventory of shut-in properties where they can apply their innovative thinking to bring those properties back on to profitable production. This after all is what businesses do. They make money and they make money off of all their assets. If something is not profitable then they’re dealt with effectively by management.

It is this process of identifying the profitable properties and shutting in the unprofitable ones that provides some of the Preliminary Specifications value proposition of $25.7 to $45.7 trillion over the next 25 years. It should be clear to everyone that these numbers are not overstated with the depressed nature of the financial posture of the oil and gas industry today. People, Ideas & Objects methodology ensures that the reserves of the shut-in properties are saved for a time when they can be produced profitably, these reserves don’t have to carry the incremental costs of subsequent losses if they continued to produce unprofitably, these unprofitable properties will no longer dilute the producers profitable operations ensuring they attain the most profitable means of oil and gas operations, and this will remove the marginal production from the commodity markets enabling them to find the marginal cost. Our approach hasn’t been criticized by the producer bureaucrats. I don’t think they can when it's just plain common business sense not to lose so much money. Yet here we stand in the advanced stages of a collapse of the industry with no action taken since we first published the Preliminary Specification in December 2013, or even when natural gas prices collapsed in 2009. Although I’m biased, I’m not of the belief that our solution is a luxury, but a complete and total necessity for the survival of the industry.

I originally thought there would be a second phase of this series in which I would discuss how the Preliminary Specification addressed the individual myths that were discussed in the first phase. In reviewing the content of what has been published I am now of the belief that will be unnecessary and therefore will not be reviewing each of the myths on that basis.

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.

Exploding Myths, Part XII

To begin the next phase of this series I want to put some points out regarding how I see things in the market and how they would be handled in the Preliminary Specification and user community. We will then go into a detailed description of each of the points we made in the prior eleven posts of this series. What the industry is experiencing is the result of bad accounting policies that they’ve employed for the past four decades. Recognizing almost every cost incurred by the firm as a capital cost has created a culture where the size of the balance sheets property, plant and equipment seeks only to emulate the value of the firm. In the process of capitalizing these costs, they have never been passed on to the consumer. They were cherished and polished on the balance sheets as the objective of the firm. Then when producers only record a sliver of those costs as depletion over the long term, causing the assets to bloat in property, plant and equipment even further. And conversely profits of the producer firms, in a capital intensive industry, to be substantially over reported. As any accounting student can tell you that over reported profits will attract too many investors, which sounds somewhat familiar in this case, leading to over investment, therefore leading to overproduction of the commodities which inevitably leads to a loss of pricing power in those commodities. With the global glut of oil and gas it’s obvious that shale producers don’t, can’t, won’t or will not ever head the logic of our argument. It is predicted at this time that LNG will become uneconomic in terms of just paying the shipping costs this spring as the overwhelming supply of global natural gas just doesn’t stop. People, Ideas & Objects have stated the fact that markets only provide one thing. And that is information in the form of price. If the price that’s offered can be produced profitably, then produce, otherwise don’t lose money. Since 2010 what we’ve heard from bureaucrats is that markets will rebalance themselves. The myths of these producers as documented in this series stand in contrast to the logic of basic accounting and economics.

The accounting methodology adopted by the current producers is in compliance with the SEC’s policies for recording property, plant and equipment. These policies essentially state that producers assets will not exceed the value of their oil and gas reserves. It does not say that each producer has to reach that limit each and every year. Yet that is the interpretation of the policy in oil and gas with no consideration for any other aspect of the business. Big assets are good, the CEO thinks. However, by capitalizing everything in order to reach that ultimate expression of value, investors are needed to help the producers inflate those values of property, plant and equipment and replenish the cash of the chronic spending machine. Each month all of the cash that is generated by the producer and its new investor monies were sunk into the ground in the form of its capital assets. What was the decades long exercise of storing cash in the ground has become the cash crisis that is raging in the industry and as soon as producers realize; that it would be the most competitive producer that carried a $0.00 balance in property, plant and equipment, reflecting that they are the most efficient and that they’ve consumed all of their costs in the generation of their “real” profits on all of their properties. Essentially a process where the consumer pays for the full and actual costs of exploration and production, so the cash that has been invested in the ground is returned to the producer to pay for future capital expenditures, dividends and pay down debt. It is the consumer who has the resources needed for the future capital requirements of the industry, the investors have had enough. Only the consumer has the scope and scale of financial resources necessary to meet the needs of the future oil and gas industry. Until these facts are understood and accepted you’ll have this useless exercise of building balance sheets being carried out in the industry by people who should know better. The good old days of annually diluting investors' interests so that bureaucrats can bury the cash in the ground are over.

Producers can’t, won’t and will not ever make the changes to deal with the issues that have manifest themselves from this simple accounting issue. Many initiatives around machine learning and Artificial Intelligence are being talked about but little is planned in terms of these technologies addressing anything of value in the industry. But hey they sound good. To address the issue without a renewed specialization and division of labor of the administration and accounting, and to do so on a industry wide basis, as is necessary, will cause nothing more than the deck chairs to be reconfigured. The producers themselves are constrained by the status quo and it is the status quo that’s killing the industry. Reorganizing the internal resources will be incapable of generating any of the lost value and certainly unable to provide a foundation on which to build any value. Use of the Intellectual Property that is the Preliminary Specification, our White Paper and others is for the exclusive use of People, Ideas & Objects et al and not available for producers to be used in any form by them, constraining them to the status quo. Unless they have other ideas!

There are two technology integrations that I wanted to raise with respect to the manner in which we would handle them within our user community. The first is the integration of Apple Pay, in almost all vendors, is well advanced. As a user of Apple Pay I find the convenience and speed to be a substantial value for all concerned. I don’t have to wait as long in line and the vendor can process more people with less resources. A win / win for the small cost of the fee that Apple assesses on top of the credit card fee to the vendor. WalMart decided it would not implement the technology due to the fees that Apple charges for the use of Apple Pay. They determined they would build their own service and use it in their stores. This was years ago and there is no sign of these capabilities in the WalMarts. Going to WalMart has become difficult due to what seems to be the archaic and now slow means of payment processing. Obviously their capabilities in terms of software development are not as they expected for such a critical point of sale feature. Apple has a vested interest in making sure that Apple Pay remains state of the art and as a business it will have a substantially lucrative business model. Why wouldn’t someone defer to a technology with the characteristics that are shown in this example. And it was always People, Ideas & Objects intent to implement those technologies that were provided in a way that ensured that we wouldn’t be having to make changes down the road. If the technology has an established business model that supports the future of the product and service then we would certainly defer to it if it meets our technological architecture and users needs. Recreating what has already been achieved successfully in the marketplace is of course not our plan, I just thought that I would state this here explicitly and frame it with some criteria, the individual decisions however will always be with the user community.

What we can learn from the Iowa Democrat debacle is that operating on untested applications is unwise. Unfortunately for the oil and gas industry and producers they don’t have that luxury with the People, Ideas & Objects software developments. When I say the oil and gas industry and producers for these purposes I mean in whichever configuration they’re in when the meltdown of the status quo is complete. I can assure everyone that I will personally work to deliver the Preliminary Specifications deliverables to industry. Whether that is successful or a failure has nothing to do with my efforts. With 5,000 direct man years involved in this initiative, my remaining years won’t be able to secure success or failure. The only way that we’re going to obtain the success that the oil and gas industry needs is through our user community. Secondly the industry and producers, in whatever form, will require detailed involvement with our user community ensuring that their needs are met in the software that is configured. If this initiative fails it will be as a result of the lack of contribution by the industry and producers involvement with our user community members. Current industry bureaucrats who would consider issuing the standard form Service Level Agreement, and monitoring compliance at the end of that contract would ensure the failure of this initiative. A new dynamic in the economy is in play, it involves Information Technology, organization and capital. These are the means in which control of the producer will be obtained and exercised in the future. Leaving it to the terms of a specified contract, in someone else's hands, won’t cut it. To ignore People, Ideas & Objects is to further preclude oneself of future employment and corporate success, in my opinion.

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.

Exploding Myths, Part XI

Not long ago North American producers were recognized as and accepted the role of swing producer in the oil market. Taking this from its former designate Saudi Arabia. A swing producer fills two major roles for the supply of oil in the market. The first is that any variance in demand will require an adjustment, either up or down, in terms of deliverability being undertaken by the swing producer. And secondly the swing producers handle the increase in demand of the market. Other lower cost producers produce everything they have and always. Although Saudi Arabia undertook this role prior to a few years ago, the swing producer is traditionally the high cost producer. Therefore swing producers are the last ones to be profitable in the marketplace, therefore they demand higher prices in order to raise their production volumes to ensure their costs are covered. At least that is the theory.

One of the myths that never seems to be challenged is the North American producers claim that the Saudis need $83.60 to balance their budgets. Which is true when you add in all of the costs that their Kingdom pays on behalf of their society. With oil being such a significant part of their economy this is reasonable. To therefore make this a reasonable comparison to the Saudi calculation one would have to include the costs of the United States Federal debt and deficit as part of the American producers costs.

If we were to compare production costs from a marginal cost basis $83.60 is not what the Saudi production costs are. Recall that marginal costs are defined as all costs are marginal over the long term. The chart listing the marginal costs of production indicates the Saudi marginal costs are only $3. Whereas the marginal cost of United States production is $73 for shale and $57 for deepwater. With oil prices around $50 per barrel, is it any surprise that cash and profits are such an issue in the industry? People, Ideas & Objects argument is that these United States costs misrepresent the situation in North America. By allocating all of the capital, including overhead and interest, to every molecule of reserves whether it produces this century or decade doesn’t do anything for anyone. This process enables producers to effectively store cash in the ground for decades at a time while investors are expected to continually fund their current capital demands. We call this cash storage issue the bloating of balance sheets in property, plant and equipment which may also be understood as the unrecognized capital costs of past production. Therefore the real cost of capital in the above quoted prices do not capture all of the cash that has been stored by these producers on their balance sheets. And are therefore materially understated in the $73 and $57 calculations. Saudi Arabia on the other hand has their major field Ghawar which has been producing since 1948 and implies that most if not all of that capital has been recognized and therefore this invested capital has been returned in the form of cash.

The second myth we want to discuss today is the collusion myth that producers have accused People, Ideas & Objects of throughout the past few years. When we first published the final edited version of the Preliminary Specification in December 2013 the knee jerk reaction from producers was that it was collusion and unacceptable. Recall that our decentralized production model’s price maker strategy ensures that all production is profitable everywhere and always. Achieving this by moving the accounting to the Joint Operating Committee and providing detailed financial statements at each property. Then if a property is unprofitable, the producers can shut-in that property in order to save their reserves for a time when they’ll be produced profitably, ensure that these reserves don’t have to carry the additional burden of any future financial losses being added to the reserves if production were to have continued, which also provides the producers with the most profitable means of oil and gas operations by only producing profitable production and not being diluted by losses on other properties, and removing the unprofitable production from the commodity markets to ensure they find their marginal price. The first mention of the decentralized production model in this blog was in 2008 therefore it may be considered reasonable to ask what’s been going on?

By publishing our Preliminary Specifications decentralized production models price maker strategy it was as if People, Ideas & Objects had committed murder on a mass scale. Producer bureaucrats shrieked and writhed with the news. Remember oil and gas is not a business. Therefore making effective, independent business decisions based on objective accounting data that determines profitability and acting in their own best interests, as all other industries do, was beyond their comprehension and deemed unacceptable by the producer bureaucrats who live handsomely at the expense of their investors. To have your CEO strut about town with the largest balance sheet is the only game in town. This is what accounting is all about in oil and gas. It’s just that accounting has nothing to do with the valuation of a company and everything to do with performance. It has therefore been an astute sleight of hand to focus on valuation from accounting in order to draw one's attention away from the rampant destruction going on throughout the industry. If they focused on what accounting was designed to provide people would have seen the chronic destruction that has been played out for the past four decades. But hey, lets not forget as we stand today the plan is to muddle through and do nothing.

Since Christmas, Santa has fallen out of favor as the culprit responsible for the destruction in oil and gas. But don’t worry, as with all of the excuses bureaucrats have used each has a cycle that is rotated in and out when the time is right. We seem to be getting back to the pipeline culprits again. Which to me is the most comical of all the excuses used by the producers. Pipelines can be deemed common carriers or private facilities. Common carriers are regulated businesses that operate on the basis of cost plus. They are utilities. And therefore are quasi bureaucracies. They are not the ones we should look to for leadership regarding the future of the oil and gas industry. Pipelines operate on the basis of commitments from producers who will use their line if its built. Once adequate commitments are secured then the pipeline will be built and it will be profitable for the pipeline company, on a guaranteed basis. If they don’t get the commitments the pipeline company will be profitable, on a guaranteed basis. So yes these are the people we want to blame for the fact that North American producers have not been able to attain the full value of their oil and gas revenue streams.

We noted too that producers are not recognizing that if they had all the pipeline capacity that they could ever want or dream of. That would enable them to shift their inventories from one pipeline constrained region in North America to somewhere else in the global glut of oil and gas commodities. Producer bureaucrats have also been found to be the most willing hostages of the green and environmental movements. Cutting checks to these groups to ensure that they’re never brought to the attention of anyone by demonstrating at their head office. These funds are then used by these groups to legislate, litigate and harass the pipeline companies development processes and make the time and money necessary to build the pipelines increase. With these additional costs the pipeline companies are therefore able to increase their profits in their cost plus profitable business model that the utility regulates them under. The fact remains producer bureaucrats have always found someone to blame for their lack of revenue upside.

We’re entering the fourth quarter reporting season and it appears producers are really hitting it out of the park. As one can see my disgust at the events in this industry are becoming more colorful. Therefore in order to finish with this series in time to resume our review of earnings I’ll be shifting to phase II of this theme. That being how the Preliminary Specification deals with the specific myths and returns the industry to prosperity and profitability.

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.

Exploding Myths, Part X

Your credibility only becomes a major issue when you don’t have any. When I started these developments the industry was doing very well and what I was telling people was the Joint Operating Committee was the answer. Most people just kindly walked away. Some asked what was the issue? Being called a fool, a nut or just downright crazy shows that you have a credibility problem. No one is listening and no one is buying. Two things that I’ve learned through this experience is that you don’t argue when people say you’re crazy. And that it’s a very liberating process, and indeed I now find it a distinct competitive advantage. The point in today’s post about credibility is that the oil and gas industry in North America has none. It started with the investors not believing the financial statements, the banks are coming around to the same understanding, the service industry has been financially betrayed and the people that are needed to operate the industry in the future don’t find the engineering and geology faculties to be of any interest. Those that were shown the door may have been able to move to another producer, but many have also decided the boom and mostly bust cycle of oil and gas isn’t where you want to carry a mortgage or raise a family. Producers and the industry believe they’re credible however most people now think their fools, nuts and crazy for having these things carry on for so long in this manner. Especially when there was a solution available in the Preliminary Specification.

The muddle along and do nothing strategy is currently operating on the understanding that once they start paying everyone again they’ll be able to bark out the orders and everyone will jump just as high as they did before. It may cost them a bit more than when they barked last time, but not as much as what they would have had to pay if they maintained a steady state of operations. Progress such as this is sometimes difficult to measure. This therefore being considered a positive attribute that the producers will realize when whatever it is they’re so diligently waiting for comes to be. Since the EIA issued their report noting that it’ll be the same old, same old until 2050, interest in the industry has waned even further. Credibility such as the EIA’s is difficult to come by. This time it seems to be taking the super majors with it. Something that we’ve not seen in the downturn up until this point. Exxon, Chevron and Shell all received strongly negative responses to their fourth quarter earnings. Which is difficult to understand considering the number of alternatives that people could be invested in or interested in moving to other industries.

Who’ll be the first to stand up and say that they find the oil and gas industry is where they’ll make their fortune. Or that they’re committed to providing the most advanced drilling rigs to the industry at no cost. What compels people to enmass say that oil and gas is where they want to risk their careers, irrespective of the intermittent financial disasters it causes them. Where the dynamic nature of the industry, its vision of the future and history of profitability show that change is the culture and nature of all the producers. “It is, trust me” the producers will say, “you just have to be patient.”

The old business model of oil and gas, the one they’re still operating under, was from a scientifically difficult business to be in. Scarcity of the oil and gas commodities made the industry a challenge for all concerned. It was the strength of the minds of the engineers and geologists that could make the key difference between success and failure. There were other business models employed in the industry too. Some producers were headed up by lawyers who better understood the law, and some were headed up by Wall Street veterans. It is all of these business models that have failed. To be successful in oil and gas does not require real profitability as all of your cash can be consumed by capital assets that will be replenished by gullible investors each and every year. It would seem that the world has run out of gullible investors and those that are remaining see no credible reason to invest in oil and gas. The underlying business has changed through the development of shale based reservoirs making oil and gas abundant. However the business model has not changed to accommodate this new era. Technically shale operations are far more complex than conventional operations however the ability to deliver product to market is substantially easier. Shale makes oil and gas easy, and just as the prior business model didn’t, shale with the old business models do not make oil and gas commercial.

“Buddy can you spare some change to drill a longer lateral?” We haven’t reached the point of begging for financial resources. There needs to be two parties in the room. The question becomes who is going to jump when the producers say they’re ready to resume normalcy. Right now they believe they are all powerful as they’ve been for many decades. How much of that is a myth? Does anyone stand up to these people and say they don’t like what it is that they’re doing? Where would any bureaucrat have heard the negative response to their inaction outside of People, Ideas & Objects? I don’t think anyone will make the argument because they know the message won’t be received and most importantly, won’t be received without retribution in some form. What we have is a culture that defined their success by the volume of investors they had lined up out and around the block. Letting only a select few in each year. Where that was the business, and if it wasn’t, which was often, the patient and disciplined were rewarded for inaction. If anyone sees these carcasses leaping up off the floor to address the opportunities and issues that this industry faces, they have a far more optimistic point of view in life than I do. The concept of creative destruction is where People, Ideas & Objects are hanging our hat. The building of the Preliminary Specification to remake the industry to address these is the way that I see the dynamic, innovative, accountable and profitable oil and gas future the rest of us know is there.

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 Telegram @piobiz or Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Exploding Myths, Part IX

The news yesterday from the Energy Information Agency (EIA) was a sober look for anyone thinking about oil and gas as a place to bet their future. What they say is very clear to me and that is forget about getting involved in any way with this industry, and if you’re already there get out. My interpretation I know, strong words but here are the facts according to the EIA. Both quotations are using their reference case.

Petroleum and Other Liquids

In the AEO2020 Reference case, net exports of U.S. petroleum and other liquids peak at more than 3.8 million barrels per day (b/d) in the early 2030s before gradually declining as domestic consumption rises. The United States continues to export more petroleum and other liquids than it imports. Net exports of petroleum and other liquids reach 0.2 million b/d in 2050 as domestic consumption slowly increases but remains 1.2 million b/d below the peak levels recorded in 2004. 

Natural Gas

The United States continues to export more natural gas than it imports in the AEO2020 Reference case because near-term growth in liquefied natural gas export capacity delivers domestic production to global markets. In the AEO2020 Reference case, pipeline exports to Mexico and liquefied natural gas (LNG) exports to world markets increase moderately until 2025, after which pipeline export growth to Mexico slows. LNG exports continue to rise through 2030 before remaining relatively flat for the remainder of the projection period.

What the EIA appears to have included in their understanding is the same bias that I developed many decades ago. Although neither they or I have expressly stated this bias, it is the natural and consistent behavior of all of the oil and gas producers. Overproduction at whatever level of demand will always occur. This overproduction is irrespective of the price that the commodity receives. There is no inherent understanding that oil and gas, in its current business model, is a business, it’s rather an engineering exercise where any and all production will be accommodated by the market. The EIA has projected this non-business based methodology out towards 2050 with no inherent change. Or in other words continued chronic overproduction for another three decades. Why would they project otherwise? After 40 years the culture of the industry knows no difference and is incapable of even addressing the subject. This is culturally ingrained in the industry with people believing that this is how business is done. The EIA have made the following quotation one of their key takeaways from the Reference case.

The United States continues to produce historically high levels of crude oil and natural gas. Slow growth in domestic consumption of these fuels leads to increasing exports of crude oil, petroleum products, and liquefied natural gas.

My assumptions are that the global markets for both commodities remain constant to 2050. Possibly an unreasonable assumption. However the history of the industry shows that nothing has changed in the past four decades that I am personally aware of. Nothing has changed as a result of the fundamental collapse of natural gas prices. Initially on a continental basis, however now globally. Nothing has changed as a result of the decline in oil prices in 2014. And nothing has changed as a result of the investors withholding their support. Other than of course the cash crisis which is now in it’s full stride.

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 Telegram @piobiz or Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Exploding Myths, Part VIII

Given more time the producer bureaucrats will have this situation resolved. “Muddling along and doing nothing” is a long term strategy and operating procedure after all. It’s not that the decade or more in natural gas, or the half decade in oil weren’t appreciated, it's just that they need more time. Nothing could be further from the truth. Their difficulty is they have no time and their cash consumption continues at a horrendous pace. Industries only hope is that it will be addressed by implementing the Preliminary Specification. In order to do so would require them to bite the bullet and admit that it is their fault and start developing our solution. This would also require that they stop blaming others for the difficulties that they’re facing and take responsibility for the industry as they’re the ones that sit on top of everything. It is producer revenues which they’ve gladly accepted however those revenues come with responsibilities. Arguing that others have not done what was required to safeguard the upside in the producers revenues is the dumbest argument known to mankind. If there were all the pipelines that could have ever been conceived. If these were built and operational, the impact on the current global oil and gas supply glut would be absolutely nothing. Overproduction and oversupply are the issues and have been since 1986. Shale just makes the issue terminal in terms of its scope and scale.

We are beginning to see an increase in the discussion about the policies and behaviors of the North American producers. Such as commentary by Chevron that only some of their production will ever be profitable in the era of abundant, overabundance. We believe this discussion to be reflective of the culture of the industry not knowing better and incapable of grasping basic business concepts of how to run a business. I’m granting them the benefit of the doubt here and not accusing them of running a scam. For today. A discussion regarding an industry that provides a highly valuable commodity that is in limited supply when taken from a long term perspective. Taking investor money and spending it on a sustainable business model with the ability to manage a profitable business is evidently beyond even the super majors' understanding.

The myth we wish to destroy today is the narrative that we’ve seen over the past month that some of the producers' production is shut-in due to a lack of financial performance. This I can assure you is not valid and can clearly be proven otherwise. First the producer is unaware which property is providing them with profitable operations, if any of their properties are. Detailed financial statements at the property level, such as those we’ve proposed in the Preliminary Specification, are necessary as they are not currently prepared by any producer in the industry. If there is a producer that is preparing financial statements at a property level I can assure you that they are garbage and not worth the paper they’re written on. Under no circumstances, anywhere in the industry can any producer provide accurate information regarding the actual overhead costs of operating the property or the allocation of their specific depletion. What are the scale of overhead costs in oil and gas, no one knows, but we suspect it may be as high as 20% of revenues. Producers are certainly welcome to prove me wrong with the actual numbers. But they won’t because they can’t. Most overhead costs are recorded at the corporate level. Then at year end, with one entry involving up to 85% of the total corporate overhead is capitalized to property, plant and equipment. Only overhead allowances are recorded at the property level. Find a producer anywhere that thinks there making out like bandits on the fees they generate from overhead allowances.

Therefore to determine which property is producing profitably will be a guess that doesn’t include much actual knowledge. Properties are like people, and there are a lot of different people. Some properties are oil and some are gas. Gas is substantially more difficult to administer and account for. Some properties are owned outright by a single producer, some are large diverse unitized properties with many different owners with interests in different producing zones, adjoining properties and facilities. I’m stating no one knows which properties are profitable. Producers use the high throughput production model where high production volumes are used to offset their high overheads. That is their business model, it would be ludicrous for them to spend time and energy in determining the detailed profitability of any property when the business model is to throw as much spaghetti at the wall as possible. Bad analogy maybe.

Shale gas is the most costly gas due to the multilateral and multi-fracing that occurs to expose as much of the productive shale to the well bore. Therefore in theory it would be the most costly, least profitable, and more than anything unprofitable, therefore these properties would be placed within the producers alleged inventory of shut-in properties, if they were managing their business. Looking at this EIA graph of the shale deliverability shows that not much of the industry’s shale gas has been suspended. Or alternatively, if they’ve been shutting-in unprofitable shale gas throughout these past 15 years then they certainly won’t be needing any more investor capital for drilling will they?

The same issue is occuring in oil. With almost a doubling of the U.S. production in the past few years, it’s obvious producers have been holding back the majority of their production there too? What we can conclude therefore is that we have absolute proof that none of the producers are suspending any of their productive capacity. They are all producing everything and always at full bore and will continue to do so under the high throughput production model that is used. If on the other hand producers are just focusing on refuting the points contained within People, Ideas & Objects Preliminary Specification it will be for one reason only. They’ve run out of excuses otherwise. Remember the litany of useless commentary from the past that included such classics as “waiting for a cold winter, market rebalancing, reducing costs through innovations, Artificial Intelligence, capital discipline, natural gas is a by-product, it’s the Saudi’s or the pipeline companies fault or having to ensure that alternatives don’t become viable” up to today where the old standby of capital discipline is repeated but just doesn’t have that old time ring to it anymore. Whether it was overused or just pure abuse it just doesn’t seem to sway the investors to return. If we look at the following graph of natural gas drilling rigs, and contrast that to the deliverability of shale we see one more interesting myth of the shale era. In the hands of the producers engineers, deliverability always increases.

People, Ideas & Objects claim that we provide the most profitable means of oil and gas operations resonates with oil and gas investors and bankers. What more could they ask for? People throughout the greater energy economy can now see the value that real profitability provides an industry beyond just the investors. Profitable industries are prosperous for all involved. Refuting our claim of the most profitable means of oil and gas operations is difficult to achieve in the environment the producers find themselves in. Therefore to claim that they have indeed shut-in the unprofitable production is the myth that enables the producers to circumvent the support that People, Ideas & Objects Preliminary Specification achieves. Or in other words if they’re already shutting in production then what would the purpose be of developing the Preliminary Specification?

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 Telegram @piobiz or Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Exploding Myths, Part VII

With the declining operational field capacity and overall general destruction that producers have caused the general oil and gas economy. Many are now seeing the potential for a decline in the overall deliverability of oil and gas in North America. We have stated in these past few years that the industry has lost control of the financial, operational and political frameworks of the industry. Someone should inform President Trump of this potential decline in North American deliverability. Our assertion throughout the Preliminary Specification is that the term producers had used in times like these of “market rebalancing” or even “capital discipline” are nothing more than the deliberate destruction of oil and gas productive deliverability. Allowing excess productive capacity to diminish and eventually match demand. Although they don’t seem to be taking credit for these “do nothing” actions at this time, the bureaucrats should be congratulated on what can only be described as their most significant achievement this century!

No one can predict the future, but I can state unequivocally that the bureaucrats can’t, won’t and will not ever make the changes to remedy this situation. The Preliminary Specification disintermediates them and they have it too comfortable at this time. They have the revenues of a primary industry flowing directly into their pockets! Why would anyone give that up? This logic also applies to them undertaking any changes themselves. At any point in these past decades they knew what had to be done, then why didn’t they do something? It just hasn’t been in their best interests. Hence my chronic discontent with the situation that is occurring today in the industry. I see serious issues being played out with the damages and their consequences taking many decades to resolve. Challenging our advanced way of living. A way of living that we may not have a full understanding or appreciation of the substantial role that oil and gas provides. Does anyone still believe the bureaucrats will be the ones that show the way to a prosperous energy future?

I would argue the cultural inertia of the bureaucracy can not be overcome. Creative destruction is the only method to establish a culture that will focus on the most profitable means of oil and gas operations everywhere and always. The industry believes that reducing its costs, an engineering based business model, is the only way to fame and fortune. Overproduction, oversupply and oil and gas commodities as price makers are not relevant to the situation at hand. They won’t accept that there is no magic cost reduction on the horizon that will make these commodities profitable in today’s price environment. Squeezing people and suppliers a bit more, as has been done for the past four decades, will continue to be the modus operandi of the bureaucrats. It’s all that they know and all that they do. What we do know is that each incremental barrel of oil is more difficult than the one before. The costs of exploration and production will not be going down as we continue to produce the technically easiest barrels to produce. The Preliminary Specification ensures that all of the costs of exploration and production are recognized in a timely manner to ensure that the industry is profitable and prosperous. What is today’s plan?

The next shoe to drop may be the fourth quarter financial statements. We anticipate on the basis of what has been published that Chevron and others are recognizing large asset write downs of natural gas, particularly in shale based reservoirs. These natural gas write downs will be precipitated by two aspects that are outside of the control of the producer. The natural gas prices are in a state of collapse, rendering a lesser value to the reserves. And the amount of shale based reserves that qualify as commercial will therefore be reassessed using these prices, reducing the actual reserves of the producers. Therefore the amount of remaining reserves that the independent engineers report provides will be incapable of carrying the hefty natural gas costs recorded in property, plant and equipment. We have argued that these capital costs are really the unrecognized capital costs of past production and should have been recognized many decades ago, but that’s just our opinion.

Which brings us to the myth that we wish to explode today. That being the costs of depletion and impairments recorded on the income statement, as far as the producer bureaucrats are concerned, is irrelevant. “That’s history, the money was spent years ago and it’s irrelevant today, no one concerns themselves with these ‘accounting’ numbers.” These write downs will not preclude the producers from saying that they’ve been profitable and will continue to claim that they’re generating free cash flow. I turn to what is now my favorite graph that accurately reflects the attitude of the producers. Their attitude is they’ll consume capital that the investors and bankers have graciously provided. When accounting capitalizes everything and hence everything that is reported is profitable, you have a scam. When that sliver of capital that is recorded as depletion on the income statement, and it is of no concern to the bureaucrats, you have an advanced scam whose culture is the scam. This chart shows their alleged break even point and the price in which they would shut-in production. Note that their understanding of break even is flawed towards their cultural scam. In the Preliminary Specification we would shut-in production at the point where they note that costs breakeven. That breakeven point would include the capital, royalty, operating and overhead. Or the marginal cost. Not the operating cost which is what the bureaucrats represent in this graph, and the point where they would shut-in production. Which as far as I know no oil or gas production has ever been shut-in due to the financial performance of the property.

Let’s not kid ourselves you can goose your earnings by capitalizing everything like the receptionists time, telephone service and Post-it-Notes, and get away with it for a long time. The fact is however those over reported earnings will have to be offset by losses at some point during the firms lifetime. Pursuit of the biggest balance sheet is a contest that can’t survive forever. Eventually those bloated balances of property, plant and equipment become disproportionate to the rest of the organization and demand recognition at a faster pace than what would otherwise be the case. This alone may be the reason for the high number of write downs that we’ve seen over the past decade. There is also this graph that shows this trend may be well entrenched at this point. Making the bureaucrats business model all the more untenable.

Of course bureaucrats will take offense to being called scammers. They have now established a record of performance that is reflected poorly in the chart below. Recall during these periods that producers did not at any time recognize the appropriate amount of capital in the costs of the commodity to the consumer. Accumulating capital in property, plant and equipment as if it is a cherished commodity. Having investors therefore subsidize the consumers consumption of energy by never including the appropriate amount of capital into the price of the commodity in a capital intensive industry. The game is almost up now. The trickle of exits from the C-Suite started in late 2019 and it has become policy, it would seem, not to pay any of your “unsecured creditors.” When everyone isn’t paying it's hard to be identified. The producer organizations have limited lives remaining. Companies such as Chesapeake who’ve declared they’re not a going concern, who’ve had their bonds downgraded to a Probability of Default rating and whose $0.57 stock is trading below the $1.00 threshold necessary to maintain its listing on the NYSE. It’s their belief that these carcasses that will rise up to make the future of the industry what it has to be?

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 Telegram @piobiz or Twitter @piobiz anyone can contact me at 403-200-2302 or email here.