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

The fourth quarter 2019 financial statements of the producers reflect to me that the overstatement of assets, earnings and cash flow have become severe, culturally ingrained and so distorted as to materially misrepresent the true state of affairs. In these fourth quarter reports producers open their commentary with “We are pleased.” I don’t understand why anyone would or could be pleased with anything from these statements. The Preliminary Specification handles the accounting of producers in a far more disciplined way that would not lead to the economic distortions and destruction that has carried on unchecked. These deceptive financial statements continued to paint that these bureaucrats were the greatest generators of wealth and profit the world had ever known.

In 2020 we have the benefit of knowledge that People, Ideas & Objects have been in this marketplace since 2003 arguing these specific points. That nothing has been done to consider these or any arguments, or take any action to remediate the damage producers were so obviously causing to themselves and the greater oil and gas complex. The only efforts made by the producer bureaucrats was to shoot the messenger in a series of attacks that have rendered our organization a skeleton of what it needs to be. Proving two critical points in our argument. That the issues we’re discussing are well known and understood by the producer bureaucrats, who we identify as the C suite executives and their immediate charges. In addition to knowing the issue and the consequences of further inaction they did nothing whatsoever to mitigate the risks, or avoid the situation. These points are clearly evident to all in the silence and stupefying inaction that we’ve seen today and over the last few years when it has been clear that they needed to institute action. Theirs is an expression of unconcern. They don’t give a damn, they’ve got their pound of flesh and they’re going to do what they’re going to do. What more evidence do we need than the wholesale destruction of the natural gas market over the past decade?

Modern life is comprehensively complex. Issues are the result of many more factors and players than what there used to be in the past. It is the nature of the speed and sophistication of our economies that issues have become this way. People are also disoriented by change and resist it. The ability therefore to make the appropriate changes in the market are difficult to execute with cause and effect seemingly unconnected. Nonetheless People, Ideas & Objects have identified that these producer bureaucrats are the responsible parties and have held them to account from the beginning. Disintermediation is a trend that is affecting all aspects of all industries and oil and gas is not immune. People, Ideas & Objects are disintermediating oil and gas and it is the natural and cultural experience of all industries for the bureaucracies to fight back against what they know to be an existential threat to their existence. This is the source of inaction and chronic identification of scapegoats that we’ve experienced over the past number of years.

People, Ideas & Objects believe we need to step back and ask ourselves why would anyone accept that we would produce a single molecule of oil or gas unprofitably anywhere or ever? The thought of doing so is counter to all of our best interests, yet the majority of all of North American production has been unprofitably produced for the past four decades. Loading up balance sheets with “assets” that are really nothing more than the deferral of every possible cost imaginable. Keeping them on that balance sheet for as long as the reserves they represent exist. Leaves them in a state where they are as we’ve described them to be as the unrecognized capital costs of past production. Conversely the investors were drained and diluted annually for another round of loading the bureaucratic spending machine. The key and only competitive advantage of the oil and gas producer. The consumers were treated to what we call the investors discount by only paying for the operating costs when the investors were paying for the capital in this manner. Yet bureaucrats assume that investors will return once they’ve seen the brilliance of their “muddle along” and “do nothing” strategy and operating procedure continue to perform miracles. The industry currently has no residual value as it takes capital just to keep operating. It didn’t get this way by producing the profits that these producers reported. If those profits were real we would be in a much different environment than the one we find ourselves in today. Our recommendation in order to gain an understanding of the damage that has been caused is to take 65% of the property, plant and equipment account and move it to depletion to gain a sense of the scope and scale of the damage, but also the level of deception these producers have presented. A deception that they’ve been able to personally prosper from and continue to do so today. I am at a loss to determine how and who else could be responsible for this situation. I believe the most damning thing I can say about these people is that they accuse everyone else, pipelines, governments, OPEC+ and others for the lack of upside in their revenues. Which makes me believe that others are responsible for the establishment of the revenues that the producers currently enjoy. They are not responsible for, nor are they willing to take responsibility for their business.

That covers the overstatement of earnings and assets. The issue with a business pursuing the type of overstatement that the producers have conducted is the drainage of cash they experience. Which wasn’t an issue as long as investors were willing to support that business model. As we see they’re no longer doing so. The overstatement of cash flow is much more subtle and complex in terms of how the bureaucrats achieve it. We believe that changes need to be made to the way in which oil and gas is capitalized. A segregation of tangible and intangible assets needs to be clarified as almost all oil and gas assets are intangible in nature. The inherent rapid decline of shale reserves that we see, which is in contrast to the mammoth reserves that are discovered, will always be subject to incremental capital costs that are necessary to drill new laterals and fracs. Operations are also more comprehensive today than what they used to be. The classification of what is a normal operation needs to be revised so that what is treated as capital today can be recognized as operations. And finally the capitalization of interest and overhead are inhibiting the producers from creating a 60 to 90 day float of these costs. Where interest and overhead are costed into the price of the commodity and hence returned within that time frame. Producers are spending money, capitalizing these costs and then, in their normal or past business model, commence the search for new monies. This is the reason for the vaporizing cash and working capital that is occurring at all of today’s producers. And most importantly, all four of these elements have a tendency to over report the cash flow of the producer, which even today is handsomely reported, yet cash and working capital are being consumed at horrendous and untenable rates. Interestingly it is traditionally six times annual cash flow that defines the market capitalization of the oil and gas producer. And I am not implying that this would form the motivation for the bureaucrats in any way to overstate cash flow! I’m stating it clearly.

In Monday’s Wall Street Journal producer bureaucrats raised a new reason that they’re not responsible for their business. This excuse is quite elaborate and reflects to me a level of creativity and thinking we’ve not seen from these people before. The quote from the WSJ is as follows.

The global gas glut will persist through at least 2021,” said Francisco Blanch, an analyst at Bank of America Corp., which in January reduced its 2020 price estimate to $1.99 from $2.35. “In order to escape the current low natural gas price environment, production must decline, or at least stop growing, in order to allow demand to catch up.

Though producers can run into trouble if they don’t drill enough to keep their reserves—and thus their bank financing—stable, some have relented.

Ergo they will continue to drill and produce, unprofitably, to ensure that their banks don’t “destabilize” their bank financing. So it’s now the banks fault, they’re the ones that are forcing the producers to do all the things that are not in their best interests.

The current downdraft that we’ve been looking at in the markets has been mostly attributable to the corona virus which makes for another great excuse for the “do nothing” operating procedure of the producers. Oil and gas has been particularly hard hit and even the major integrateds took their fair share of beating this time. Chevron being one of the first to announce layoffs. No one is immune now from the punishment this industry deserves. Chesapeake who’s low is now $0.20 has been downgraded by many brokerages to $0.00. Not bad for what was a $67.00 stock during its leadership of shale in natural gas. That was the time when shale could do no wrong. When producers were able to execute their operating plans with the assistance of buckets of shareholder money. Now left to their own devices not only Chesapeake but all of the producers are showing the capacity to execute is no longer an attribute in oil and gas. They believe that Chesapeake is headed for bankruptcy which means there’s nothing in it for anyone until they pull that lever. Then the shareholders will be wiped out and eliminated. Setting the example for all those other producers shareholders.

There we have the plans of the bureaucrats spelled out to us in their subtle and sophisticated ways. Shareholders be damned. Employees be damned. The bankruptcy Judges are going to need the bureaucrats more than ever now. Maybe they were right when they said profits don’t matter! Or was it power is nothing without control.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects 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 Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Price Maker vs. Price Taker, Part IV

The search for petroleum reserves has finally met with its ultimate conclusion. If you can’t produce them profitably what good are they? Everyone is now running around with trillions of cubic feet of gas and billions of barrels of oil. Conceptually this was beyond anyone's dreams or understanding as little as a decade ago. Each producer is now attempting to cash in on all of those reserves by the end of this week and are finding that things are not as they were expected to be. The business model was simple, acquire petroleum reserves and control costs. What could be simpler? Producers then realized that self-deception was not real when they concluded “those aren’t costs, they’re assets.” Soon, I would guess around 1981, the race to the bottom began. Are we there yet? If not I’d be surprised. The damage that I see is horrific and will take at least a decade of dedicated remedial efforts to rebuild the industry in the vision of the Preliminary Specification, and gain back at least a foundation of value to further leverage. Hard work involving the sacrificing and suffering of those within the industry. The kind of effort that these bureaucrats have shown absolutely no propensity for.

Spendaholics running around spending money, calling them assets and declaring they’re making money will go down as reinforcing a number of previously well understood and hard earned lessons. Spending money, under the guise of cost control is not a business model and is only a small percentage of the business. Excelling on the spending of money is a valuable skill for any industry however it’s about 10% of what a business does, not 100%. Bringing on these other business skills will need to be done in order to rebuild the industry. The first area has to be in the area of the business called revenues. Not to be sarcastic but revenues are production times price. The bureaucrats maniacal focus on increasing production relates they understand the production half of the formula. Prices are driven by the fundamental economic principle of price makers. Demanding that bureaucrats pull their heads out and think about this last half of the revenue formula for at least five minutes. How has the conclusion that oil and gas commodities are price takers provided them with any value over the past 34 years? Does that amount of time qualify as enough to consider other options? What the bureaucrats have done since December 2005, the time I started writing about this issue and researching our solution, to this industry is truly legendary. Describe to me any other industry that has been deliberately destroyed when the product that is produced is so critical to the consumer? None, maybe coal, however that has been displaced by oil and gas. It wasn’t deliberate stupidity.

Producers don’t know which properties are profitable. Yet they claim that Artificial Intelligence will be providing them with breakthrough thinking for the future. This has now been their claim for at least two years, which doesn’t say much about Artificial Intelligence in the hands of bureaucrats. If they don’t have the basic information such as the properties profitability how is it they’ll determine any future from that?

My therapy continues.

It’s remarkable at this time to hear the revised strategies coming from the major integrated producers. Understanding they too have an issue that is affecting their business.  Source @SoberLook

They need to come up with a means to deal with these issues and a vision for the future, just as much as say Chesapeake does. In a nutshell this class of producer is now pursuing the “low carbon footprint” business model if I could summarize their press releases. BP is even going to the extreme to say they’ll be carbon neutral. I guess that means they’ll be destroying everything including their reserves and production profile. These are the leading lost souls that the remainder of the industry bureaucrats find their inspiration. And I wonder how things have become as they are, maybe it's as I mentioned the other day, the fish stinks from the head down.

Back to the solution at hand. The price maker attribute of the organizational change to service providers is even more valuable in ways that have not been described here, and in ways that have not even been discovered, yet. If a property based on this actual detailed accounting is not performing then the producer can shut-in the production for the production month. Doing so will save the reserves for when they can be produced profitably, ensure that the cost of the reserves are not increased by successive losses from continued production, provide the producer with the most profitable means of oil and gas production by not diluting their profitable operations with unprofitable production and removing the marginal production from the commodity markets. This is enabled when a shut-in property doesn’t produce any data that goes through the People, Ideas & Objects task & transfer network which triggers the service providers to complete their work for the month. With no data there will be no work done and no billing to that Joint Operating Committee from any of the service providers, creating a null operation, no profit but also no loss at the property. Providing the most profitable means of oil and gas operations. The service providers may at any time find that they are facing a drop of 15% of their revenues due to the volume of shut-in properties. Which is something they can plan for and budget. Enabling producers for the first time to have the indirect ability to control their overhead costs.

That is certainly what is known and can be taken to the bank. There are a myriad of undiscovered benefits that this reorganization to the Joint Operating Committee brings. Our user community and their service provider organizations, as independent providers of standardized accounting and administrative processes will be able to innovate based on this new perspective of using the Joint Operating Committee. And they’ll have access to the People, Ideas & Objects developers and therefore be able to implement changes and innovations in their process as they and others within the industry who inform them, see them. Enabling the producers to benefit from a new era of accounting and administrative performance. This will be above their enhanced and evolving specialization and division of labor that forms part of People, Ideas & Objects and our user communities unquantified portion of our value proposition of simply doing more with less. Enabling the industry to expand its productive output from the same resource base.

As an example of one of the other things that will change, and will become a given is as follows; in an asset sale the administration and accounting does not change when legal title changes. When the closing date is effective the time is noted on the purchasing producer and everything is then available under their producer ID and not on the sellers ID. No accounting integration necessary. Instant and full implementation of all the historical data, accounting and administration will continue as it was in its standardized manner. Only the owner has changed. Consuming all of $0.005 worth of electricity in the process. Or another benefit the user community might come up with is that the Preliminary Specification is consistent with the major integrateds revised strategies. The decentralized production models price maker strategy provides only profitable production everywhere and always. Which is consistent with the corporate objective of maximizing shareholder value. And reduces the amount of the commodities on the market, essentially helping these producers to achieve their carbon neutral objectives. Who would have thought? There are many benefits such as this that will be revealed through the process of development and subsequent iterations.

The following graph spells out one thing. Oil and gas commodities are price makers. Source @SoberLook

Any arguments on that point are now moot, 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 can contact me at 403-200-2302 or email here.

Price Maker vs. Price Taker, Part III

In today’s environment where democratic socialism hasn’t ever really been tried before, to focus the energies of the oil and gas industry on the corporate objective of maximizing shareholder value is contrary to the prevailing political minority. The best reflection of democratic socialism is reflected eloquently in this following photo.

Some in oil and gas may consider today as evidence of the failure of capitalism. However I would suggest that it reflects the movement from the third industrial revolution to the fourth. The loss and inability to read market prices and act on that information. And a persistent bureaucracy that has no accountability for what they’ve done or the future of the industry. Creative destruction is a phenomenon that has preceded many changes over the past centuries. Yet the corporate objective of maximizing producers shareholder value stands as People, Ideas & Objects, our user community and service providers focus today, and in the future, as much as it did over the past century. Why do we care about the investor so?

We need to take a look around and ask if this oil and gas industry is the one that we want for the future. Are people satisfied with the current environment and see strong opportunities where they can prosper, make a good living, raise a family, take on a mortgage and retire? Maybe throughout that career process they could also become a shareholder themselves. I don’t see anyone’s hand being raised in confirmation of these thoughts. If the producers themselves are not providing their overall objective of maximizing shareholder value then does that mean their investors money is being redistributed to others within the industry? No, clearly not, as it is today none of the profits, value or prosperous nature of the industry is being generated anywhere. If the producer bureaucrats are not fulfilling their corporate objective then they’ve cut off their desire and drive to compete and win. Whatever is good enough will do, or just muddle through, we’ve been here before and we’ll be again.

The fish stinks from the head down is a saying that fits here. When the architects of the business, the decision makers and those that provide the overall vision of where we’re heading as an industry. When the organization is defined and constrained by the software it uses, the business model doesn’t function or build any value but alternatively destroys it. What can anyone, outside of the entrenched bureaucracy that benefits from this depressed environment, do? Nothing. We all know it takes a long time to turn a supertanker around. But that’s not what we’re attempting to do here. Our supertanker is riddled with damage, is sinking and spilling oil everywhere. What are those members and participants in that industry to do when the management of the shipper doesn’t care that they’re losing and destroying so much value? When the only response anyone gets from that shipper is that they’ve seen this before and they’ll muddle through.

The investors do not desire to be part of the destruction, can see the writing on the wall and exited the situation with the ease of a telephone call or click of a mouse. In essence the stock market sending a price signal to bureaucrats, who’ve obviously ignored it. If only all of the problems could be fixed as easily. The banks also have nothing but risks and are stuck with a portfolio of companies that they’re unable to motivate to act. Therefore we see the service industry in oil and gas enter the worst of their downturns. Even Schlumberger’s CEO’s commentary when they moved 50% of their assets out of North America was indicating they weren’t coming back. The general economy that should be thriving in the areas where oil and gas is operational are all in depression era states. The producer bureaucrats just sit and blink at all that is happening and expect that something will happen to make it all better.

We could all do better than having the alleged leaders of this industry sitting around silently blinking and nodding off. What do we have to lose by ignoring them and acting to correct this mess. Would they even be aware? Nothing has changed since the fundamental collapse of natural gas prices in 2009. Other than the collapse of oil, the investors and bankers are getting out as fast as they can. Nothing has been done to remediate the damage other than generate serial excuses that have all proven to be false, or was it that they were lying all along?

During the research of the Preliminary Specification we spent some time evaluating the future organizational makeup of industries. Would they be comprised of decentralized markets or centralized bureaucracies as the current method of organization may continue. Our conclusion was that markets would come back to dominate industries primarily due to the Internet. Adam Smith introduced the concept of the invisible hand of the marketplace as the “unintended social benefits of an individual's self-interested actions.” This was believed to have been replaced by the hierarchies “visible hand” that was prevalent in large corporations. As Professor Richard N. Langlois noted in his hypothesis of “The Vanishing Hand” which he describes in his paper “The Vanishing Hand: the Changing Dynamics of Industrial Capitalism” as.

The basic argument - the vanishing hand hypothesis - is as follows. Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets, much as Allyn Young (1928) claimed long ago. But the components of that process - technology, organization, and institutions - change at different rates. p. 3

And therefore the “vanishing hand” which is what we see in some of the industries that have been disintermediated, replacing the “visible hand” of management is now becoming the “vanishing hand” or “invisible hand” of markets once again. This is the strong belief of the Preliminary Specification as seen in the three marketplace modules and our price maker strategy. The ability to respond to market signals, the price of the commodities, does not exist. Bureaucrats determined long ago that they know better than what the markets are telling them. Yet the oil and gas industry has carried on for four decades in an accelerated manner of value destruction. Each year reporting specious profits that are earned from their genius, as they know not which property provided the profits. And selling investors on that genius in an industry that is impossible to discern who are the leaders and who are the laggards.

Just as markets take a premier role in the future of industries. It is understood that markets provide one, and only one thing. The price it's willing to pay the producer. If you can produce profitably at the price offered you produce. If you are unable to, you maximize shareholder value by shutting-in those properties that are not providing profitable operations. Only then will the corporation reach its maximum value for its shareholders and as we’ve noted, all those that are associated with the industry will be prosperous too. As they will be able to know that the industry will always be profitable everywhere and always. That their efforts will be rewarded and provide value to all that use their products. Looking around the greater oil and gas industry today, who is happy with the fact that shareholders are not rewarded for their efforts? Adam Smith wrote about these principles in 1759 and in 1776. Market failure is the sole responsibility of the producer bureaucrats.

The following graph spells out one thing. Oil and gas commodities are price makers. Source @SoberLook.

Any arguments on that point are now moot, 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 Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Price Maker vs. Price Taker, Part II

On Monday we mentioned we’d be discussing the concept of production discipline that the Preliminary Specification brings about. The price maker strategy is valid only when the producers adhere to the simple business principles of ensuring that there is an accurate costing of the oil and gas produced. That unprofitable properties are shut-in within the first month or two of their being determined to be unprofitable based on that accurate and detailed accounting information. And some form of production discipline is instituted across the North American industry and this is enforced reliably, consistently and fairly. People, Ideas & Objects have chosen profitability as it is the only fair and reasonable method of production allocation. Government mandates and OPEC allocations based on reserves are unable to be applied fairly when political influence is asserted. These are the three requirements that make the price maker strategy of our decentralized production model operational in the Preliminary Specification. They are sound in theory, however in practice we have seen throughout the industry, and most particularly the history of OPEC in the 1980’s and 1990’s when they had substantial surplus capacity. The ability to maintain quotas, or some form of production discipline in oil and gas is very difficult. The need for cash creates the issue, it therefore motivates cheating and production discipline is easy to overcome when oil and gas commodities are fungible.

It is in that sense that the Preliminary Specification appears to provide the incentive for cheating when the return of the cash incurred as overhead is returned the subsequent month as one of its primary advantages. This is immediately provided to the oil and gas producer as we noted in Monday’s post. The ability to also extract the previously invested cash for reuse as capital expenditures, to pay dividends or reduce debt is the effective way in which the industry will provide a prosperous and profitable operation throughout its next three decades. However, getting the full value of the oil and gas resources as they’re represented in the reserves in place needs to be achieved in order to fulfill the objective of maximizing shareholder value. Let’s have a look at these three requirements in detail and understand how the production discipline of the Preliminary Specification is implemented.

An accurate costing of the properties oil and gas commodity costs needs to be rethought as the principle of unlimited capital provided by banks and investors was only viable when they were deceived. In the real world deferral of all costs to property, plant and equipment, then to deplete these over decades doesn’t make sense in a commercial environment. The SEC dictates the accounting for the costs of capital will not exceed the value of the reserves of the producer. The producers have interpreted that to mean that the objective of the firm is to raise the value of property, plant and equipment to what the value of their reserves are. Which is ludicrous. The competitive producer will seek to turn over their capital costs in order to recover the cash invested for its reuse. If this extinguishes property, plant and equipment then that is an operation that will be hard to outperform from a competitive point of view. As we noted on Monday the direct charges of overhead to the Joint Operating Committee, as opposed to being capitalized in property, plant and equipment, is an attribute of the Preliminary Specifications decentralized production models price maker strategy. When the actual costs of oil and gas exploration and production are being accounted for then we can begin to account for the properties that are providing benefit to the firm, profitable, and those that are not, losses. Currently in oil and gas the ability to discern which property is actually profitable is about as easy as separating the ingredients of fudge. It cannot be done.

There are regulations for the type of accounting that is undertaken by the oil and gas producers. Regulations that are dictated by not only the SEC but also other regulatory bodies such as royalty, tax… The amount of leeway and interpretation of these regulations within the industry is not a feature of the creativity of the accounting staff, more to do with the quality and experience of the staff that the producer employs. The major integrated producers have policies and procedures that are very sophisticated and are fundamentally different than what a small producer may employ in the process of “getting the quarter out.” Nonetheless all are within the requirements of those regulations. The sophistication is the determining factor. The Preliminary Specifications service providers introduce a new level of standardization of oil and gas accounting. Whether a startup or integrated major the need to meet these regulations is necessary and that will continue. However, when the accounting for recording the butane sales of a property is conducted by the appropriate service provider, that will be calculated in the manner in which our user community, the principle of the service providers organization, and the industry representatives determine they want that process managed. And the management of that process will be the same for all producers and the costs of managing that process will be the same for all concerned. The need for startup producers to have hundreds of thousands of dollars of administrative and accounting staff to conduct their accounting and administration will be reduced to the incidental fees that the service providers charge for the actual work that was completed and necessary. If there were no profitable properties producing, the startup oil and gas producer would not be incurring any of these costs. There are also distinct advantages for all the producers in the industry for a standardized methodology of administrative and accounting overhead costs. Particularly when these costs are shared across the producers who are involved in the Joint Operating Committee. Having a standardized accounting of these costs prepared by three thousand independent service provider organizations working on behalf of the entire industry ensures that no one is being treated unfairly.

The following graph has been used in the White Paper and shows exactly how oil and gas has become the financial armageddon that it currently is. Source @SoberLook

Note this graph reflects that Well Break Even and Shut-in prices denote that at any point, and as long as the commodity price covered the operating costs, the property would continue to produce regardless of the impact on capital costs. If a dollar of capital costs was being returned, or one dollar above the shut-in price, that would enable the production of the property to continue. Only at the point in time where the commodity price dropped below the operating costs would the producer allegedly shut-in their production. This is a fundamental misinterpretation of the term break even, it is the reason the industry is in the difficulty that it’s in and why the producers have continued to lose money for the past four decades. Break even is not what is being interpreted here. What in fact the producer is assuming is that as long as there is cash flow above the operating costs then they’re making money and will continue to produce. What they’re stating is acceptable is they may not be breaking even, but they’re generating cash flow.

What People, Ideas & Objects provide in our Preliminary Specification, if we could assume the accuracy of this graphs numbers, is the point at which the property would be shut-in would be at the breakeven point and below. The reason for this being the production discipline gained through knowing that producing any property unprofitably only dilutes the producers corporate profits. Producing below the breakeven point is the point where unprofitability begins. Producing below the breakeven point for one producer, in an industry who’s commodities are price makers, will have the effect where the price of the commodities will be dropped below the breakeven price for all producers. When all producers continue to produce below the breakeven price for four decades you have an exhaustion of the value from the industry on an annual and wholesale basis. Times were only “good” when investors were willing.

You hear investors demand that producers begin to return more of their invested capital. Investors are always the most efficient communicators. If only producers would listen. If a property does not produce a profit, above the breakeven point in this graph, then it has to be shut-in. Which is the production discipline we’re talking about, which leaves nothing to say about the discipline portion of the claim. If a producer continues to produce properties unprofitably then the only ones they’re fooling are themselves. Their profits are being diluted by these unprofitable properties in two material ways. First these losses are offsetting their profitable property profits and therefore reducing the corporate profits earned. Secondly they are reducing the prices of the commodities by continuing to overproduce unprofitable production which as price makers, has a material effect on the price of the commodities their profitable properties receive.

To stand out as a high performing oil and gas producer -- it’ll be interesting to see if that becomes an overall corporate objective in oil and gas. Producers will need to fulfill their corporate objective to their shareholders. Maximize shareholder value. By maximizing profitability they will also maximize the value of their firms. Pretty simple really. But in that we have the inherent, implied discipline that would rule the North American producers in terms of why they’d adhere to the production discipline in the Preliminary Specification. I don’t expect the current bunch to make this transition, I’m on the record as saying they’re terminal, we are using disintermediation and creative destruction to shorten their usable, miserable lives. The corporate objective of profitability has other benefits that we’ll talk about on Friday, and why everyone, not just shareholders should be interested and motivated by this one simple corporate objective.

Throughout this Price Maker vs. Price Taker series I’ll be recreating the following graph which spells out one thing. Oil and gas commodities are price makers. Source @SoberLook

Any arguments on that point are now moot, 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.

Price Maker vs. Price Taker, Part I

The following graph spells out one thing. Oil and gas commodities are price makers. Source @SoberLook

Any arguments on that point are now moot, in my opinion. The definition of price maker and of price taker are provided at the links by Investopedia. Further analysis of why there are no substitutes for oil and gas, please review our White Paper.

The Preliminary Specifications decentralized production models key feature is its price maker strategy. Shifting the current industry belief that oil and gas commodities are price takers to the appropriate footing of price makers. This graph shows that the more oil production that came onto the market the more value eroded from the industry due to the chronic overproduction and oversupply. Fundamentally destroying the prices of oil and gas, and subsequently the producers themselves. If these commodities were price takers, then in this situation the increased production volumes would have had no effect on the price of the product. Whereas one of the characteristics of price makers sees significant price responses to small increases or decreases in production. The bureaucrats misguided belief that oil and gas are price takers is systemic and unanimous in the industry, and is clearly incorrect. The only method to resolve the situation is the industry wide implementation of the Preliminary Specification in order that our decentralized production models price maker strategy can take effect throughout.

One of the first requirements we do in the implementation of the Preliminary Specification is to move the accounting focus away from the corporate model as we describe it, to the Joint Operating Committee. Then each property can begin to have their own financial statements prepared to find out if it is profitable in the real sense of the word. Accurately measuring the timing of capital costs, royalties, operating costs and actual overhead incurred to ensure that the performance of the property is providing incremental value to the corporations that own them. This requires in addition to changing the recognition of depletion to the property level or Joint Operating Committee for each producer, overhead will need to be charged directly to the individual Joint Operating Committees. These are the two critical changes that are made in the Preliminary Specification in comparison to today’s accounting. First we’ll need to have People, Ideas & Objects software define and support an alternative industry and producer organizational structure. One where the administrative and accounting resources are reallocated from the individual producer firms to the service providers that are established through the Preliminary Specification. Through the reorganization of the industry our user communities service provider organizations will be providing their process management service to the entire industry for the specific process or subprocess they manage. It is in that way that they’ll attain high levels of specialization of that process and the division of labor will be distributed over the approximate 3 thousand service providers that People, Ideas & Objects expects will be needed to cover off the full scope of administration and accounting of the oil and gas industry. Actual overhead of each of the properties will therefore be known based on the actual detailed accounting at each property. Overhead charges which will consist of the billings of each of the service providers who provided their process management to that Joint Operating Committee that month. Producers will no longer allocate direct overhead costs to the corporation with the subsequent capitalization of approximately 85% of those costs to property, plant and equipment. The same will be the case for overhead allowances to the Joint Operating Committee, they will be replaced by the actual direct overhead charged to the individual Joint Operating Committee.

The most immediate direct change as a result of managing overhead costs in this manner will be the benefit to the producers cash management. Ensuring the cash that was incurred to fund each month's overhead, which is up to 20% of revenue throughout the industry, is returned to the producer by way of the oil and gas prices they charge the consumers of their products. Creating a monthly float of cash being cycled each month to pay the firms overhead for the next month. This is the primary reason that cash and working capital continues to escape the producers grasp. Currently their capitalization of overhead policy has the majority of these costs capitalized. These costs are then depleted over the next number of decades providing the return of a small fraction of the cash that was consumed in overhead each month. As we now know this system only worked when there were investors ready and willing to recharge the spending machine each month. Either way it is foolish to manage an enterprise in this manner and the need for change is hypercritical. The inability of bureaucrats however, to absorb the facts contained in the Preliminary Specification have been well documented since it was published in December 2013. Six months before the oil price broke down in similar fashion to the way that natural gas did five years earlier. Note this return of cash will only occur if there is an accurate costing of the oil and gas commodities produced, that producers impose the inherent production discipline we’ll discuss on Wednesday, and therefore only profitable operations are undertaken. In essence invoking the price maker strategy of the decentralized production model within 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.

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.