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

We’ve documented the current culture of the oil and gas industry and how it is incapable of dealing with the crisis that it finds itself in, of which it created for itself. The culture dominates the day-to-day activities of those within the producers, our very good friends the bureaucrats. It is the character of these people that I’ve identified as the cause of industry’s destruction. No matter how hard they try, they can’t buy character. They’re the only financially successful result of the past four decades of oil and gas operations. They are conflicted due to their self serving interests, uncaring nature, all powerful and absolutely unaccountable. The removal of them has been one of our direct objectives due to the destruction they’ve caused. It has also been one of our indirect objectives through the forces of disintermediation overturning industries throughout western economies, and creative destruction. The capacity and capabilities of the current industry to deal with the issues and opportunities of today, to lay a successful foundation where everyone succeeds, for what can only be described as the most difficult future oil and gas has ever seen, is non-existent.

Our Preliminary Specification is best described in our White Paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale” which reflects the business approach we have taken to resolving the issues in oil and gas and laying a solid dynamic, innovative, accountable and profitable foundation for the future. I take full responsibility for the deterioration of the relationship between ourselves and the bureaucrats. I also submit that the bureaucratic inaction, the systemic deception in everything that was done these past four decades and the chronic blaming of others would make anyone hesitant to want to work with them. That is why we have identified them as the source of the problem and will refuse to work with them during our development or at any other time. I do not trust those that have sat back and been the authors of such destruction at their own hands while continuing to line their pockets and deceptively distract people’s attention from their actions. Was it deliberate or were they naive? Either way disqualifies them from further involvement.

The reputation of existing producers could not be lower in the eyes of those that are associated with the industry, the sub-industries and the general economy that supports the industry, I know I’m not alone in this thinking. Cleaning house is the first order of business and providing these people with another chance is beyond the tolerance of even the most progressive amongst us. And to be fair, these bureaucrats had made their choice not to work with People, Ideas & Objects many years ago and that is only reasonable that we respect that now.

What we have in front of us is nothing less than the complete and comprehensive rebuilding of the oil and gas industry from stem to stern. That is the vision of the Preliminary Specification. The bureaucrats would seek to compromise between their model and ours if we allowed them to participate and we foolishly trusted them. Compromise is their method of management. We would never be able to deal with the compromises of a comprehensively failed system. Our tasks will be the further analysis of the conflict and contradictions that we’ll face in dealing with the implementation of the model’s and markets contained within the Preliminary Specification. It is here that we are taching much closer to the way in which the industry has operated since its inception. Using the Joint Operating Committee which is the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. These frameworks have been ignored so that the corporate compliance of SEC, tax and other regulations can guide the governance of the organization. This inherent disjointedness between the business and the organization is a result, I believe, of the introduction of computers and the logical processing that they initially undertook. The business of the business has disappeared from the mindset, culture, knowledge and understanding of the bureaucracy.

Bureaucrats have consistently lied and pushed the agenda that “all would be ok, we’d been through this before.” Only to find 5 and 10 years later that we find ourselves knowing that none of that was true. As a result of these deceptions people were willing to concede to the bureaucrats what was necessary for the industry to get through the downturn, knowing that ultimately, as they were told, things would be better. In the five stages of grief this is the first stage which is denial. People were led to believe and in turn wanted to believe that things would get better. Now, as we learn of the oil price collapse, no one is in denial and we’ve quickly moved into the second stage of grief, that being anger. I repeat, the only group that has benefited from the past four decades in oil and gas are the bureaucrats themselves. Until recently they were able to explore new forms of their personal compensation as the only true innovations they were responsible for. Although limited now to outsized paychecks and benefits, their prior accumulation of wealth only requires maintenance which can be provided through those otherwise “measly” sums.

If we continue to believe that all will get better then we are only fooling ourselves and wasting time. This has not just been a deception it is a fundamental betrayal. The current desire to “build balance sheets” is foreign to me. I started in accounting in oil and gas, and had my own auditing firm prior to this software adventure. Is this an objective, a strategy and how exactly do they go about building a balance sheet. The balance sheet is a consequence of the actions of management. If it is to distort the size of the assets then they’ve been successful. If it’s to leverage up debt then they’re wildly successful. Or is it to recognize even greater amounts of retained losses; then there are few who can touch the quality and volume of balance sheet builders in oil and gas. Plumbing the depths of working capital deficiencies could be another part of the exercise of building, and listing the short term liabilities of those that they’ve refused to pay for the past few quarters is also a building process. If I was responsible for the damage and destruction that has occurred in oil and gas then I would involve myself in the process of building balance sheets too, whatever that means. It does look like they don’t know what they're talking about and people would be sympathetic. To address the issue specifically would only open themselves to criminal prosecution.

It’s time to take a sober assessment of where we stand. Are these the organizations that will be able to rehabilitate themselves financially and culturally? Is there anything to rehabilitate? What would be the cost of this rehabilitation, and if we spent that money what would be different? How much time and effort will be needed in order to conduct this rehabilitation? Who’s got the plan for this, and what will the strategy be? It just seems to me that the Preliminary Specification is the easier, cheaper and more effective way to proceed towards a dynamic, innovative, accountable and profitable oil and gas industry.

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

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

I want to make clear that I’m not rubbing the bureaucrats' noses in the mess they’ve made. Their own reporting for the rest of 2020 will be humiliating enough for them. What I am doing in these posts, and this post in particular, is identifying the source of the issue that created the oversupply and overproduction of oil and gas. And I want to clearly set out that not only did they blame everyone else for their loss in revenues, which were under their complete and total control, they identified spurious issues that were purposeful distractions from their real problems. We need to ask ourselves why was it so difficult for these bureaucrats to focus on the maximization of revenue, or ensure that all production was profitable? Yet at the same time they were taking their time and enjoying the obstructions that they could put in front of People, Ideas & Objects way. The consequences of these bureaucrats “management” are that everyone has, and is, suffering due to their inaction which they very well knew better. Why they acted against everyone's interest was to better line their pockets and reap the bounty of their absolute power and unaccountable activities. This continues today with cuts to capital spending, cuts to staff and cuts to dividends being the method which they employ to conserve cash and ensure they’ll never have to take any water with their wine. I am not being partisan at a time when we need to work to resolve these issues. I noted last Monday that we were ready to work together with industry to do that. We however are not going to work with the responsible bureaucrats and we will be holding them to account.

We’ve noted before that producers, and indeed the industry at large, have lost control of the financial, operational and political frameworks of the industry. We see today’s political framework is compromised by commentary regarding the past decades healthy and profitable shale surge. The producers' panic call for government support last week didn’t have the support of anyone. President Trump is happy that American consumers will be able to secure their energy at lower cost. Additionally, calls for tariffs on Saudi oil imports reflect the bureaucrats desire to never get down to do the hard work on identifying and resolving their business issues, And are alternatively actively pushing the continued muddling along and do nothing strategy. Seeing much of the same in the situation that they face today that they’ve seen so many times before. I’ll point out to them the significant difference that today’s situation presents with the following fact. For the past three and a half years OPEC+ has been actively removing about a billion barrels of oil from the markets. For the past three and a half years oil and gas investors have been exiting their positions in the North American producers. My suggestion would be to admit who’s fault this is and take care of business. That is not going to happen based on the bureaucrats history and initial actions since last Monday.

I understand that People, Ideas & Objects rubs bureaucrats the wrong way, that’s my job. For them to be taking this extreme of a stance in terms of their abstinence is a reflection of their absolute power and lack of skin in the game. Of the 20 producers we cover, their market cap was $129 billion last night. At the end of 2019 it was $362 billion. A loss of $233 billion just for our sample of 20 producers who are producing slightly more than 10 million boe / day. These losses would be in excess of three quarters of $1 trillion for the gross North American production base. Not bad considering they could have paid just 1.03% of last weeks industry wide loss to finance People, Ideas & Objects Preliminary Specifications software developments and mitigate the past decades downside. Again that was last week, in 2016, not a great year, these producers had a market capitalization of $523 billion, a loss of $394 billion for our sample producers and probably a $1.3 trillion loss for the North American industry. The primary reason that oil and gas companies don’t do this simple math is because People, Ideas & Objects provide for the most profitable means of oil and gas operations. And here is the kicker that makes them apoplectic. It is as we have always said not enough to own the oil and gas asset anymore, you must also have access to the software that makes the oil and gas asset profitable. And they were oh so profitable don’t you know. Even reporting profitability throughout 2019, yet the cupboards are bare and they have no resources in which to sustain even five minutes of this further downturn.

People, Ideas & Objects have had a policy of not speaking to the press. Ours is a complex point of view that can be easily misunderstood and distorted. We are seeking to have oil and gas producers become profitable. And we’re discussing oil and gas accounting systems which to me is the most exciting topic, ever. We therefore have a somewhat small audience but we have a good share of that audience. We are not of the belief that we can maintain this policy of silence for much longer. I would give it about a year. I would ask the oil and gas bureaucrat what it is they’ll tell their staff, their service industry representatives, investors, bankers and all the others who depended on them, and in turn the producers will find who they depend upon, how will they deal with the backlash when all these people outside of People, Ideas & Objects current market realize that the Preliminary Specification is exactly the remedy for this issue and has been available since December 2013? A time in which the loss of trillions in oil and gas revenue is real. A time in which the tangible losses of individuals have been tragic and unlike any time before. A time in which investors and bankers, the service industry too, have all experienced many billions of dollars of losses each year since that time. All unnecessarily so! Will bureaucrats then begin to tell the truth, the fact that their pocket lining was the priority, and they’re sorry? You are sorry aren’t you? Or will they continue to say that I haven’t worked in industry for a reason?

Now that I’ve blown off a little steam. I noted in Friday’s post that we'll be discussing a phenomenon that I found interesting throughout my time working in oil and gas. That is if we take the earnings that People, Ideas & Objects have calculated for our sample of 20 producers for 2018 and 2019. Those being a loss for those two years of $100 billion. Which reportedly generated $160.5 billion in “cash flow.” And understand the decline in working capital of almost 75% during that time. The production volumes at 12/31/2017 were 9,336,293 boe / day for our sample of producers and at 12/31/2019 was 10,106,339 boe / day. An increase of 8.25% over two years. Shale is part of this, however the phenomenon has held all the time that I’ve been in this industry. Engineers and geologists do their jobs well and the natural decline curve is the headwind that they fight against. That is their challenge and their objective is to minimize the impact of it on a year over year basis. They’re also responsible for the further development of, and exploration of new reserves. They don’t give up, they don’t stop and they never seem to fail. There are instances where the production volumes do vary from year to year. As in the years where the financial situation becomes untenable and these efforts are abandoned while the producer is marketed for sale, etc. However left to their own devices, irrespective of the noise going on around them, they succeed. I expect even in tragic times like these, producers' production volumes will continue to rise.

We recently heard from and commented on Chevron’s CEO how they would focus on their pristine assets. It is People, Ideas & Objects belief that this is not where the profitable upside of the oil and gas producer resides. This is elephant hunting with the largest armaments they can get their hands on. Through the Preliminary Specification we implement a different approach to how the industry is operated. Only profitable properties are produced everywhere and always. Any unprofitable properties are placed in an inventory of shut-in properties where the engineering and geological resources are able to apply their innovations to enhance the property and return it to profitable production. We believe this to be a greater challenge, a greater opportunity and one with far greater upside than the current elephant hunting / keystone cops routine. Enabling the producer to focus and prioritize where it is they need to spend their time and efforts as opposed to following along with the parade. Fundamentally remaking the allocation of capital towards productive value driven objectives. Making the business more dynamic, accountable, innovative and profitable.

And finally, in the Wall Street Journal last week Occidental CEO Vicki Hollub was quoted as saying.

“Due to the sharp decline in global commodity prices, we are taking actions that will strengthen our balance sheet and continue to reduce debt,” Occidental Chief Executive Vicki Hollub said. She added that the company can break even with U.S. benchmark oil prices in the low $30s a barrel, though that metric typically excludes several costs.

Our White Paper noted the ability of producers to magically reduce historical costs. When a barrel once cost $60 to produce and can now be produced for $30, historical takes on a new meaning. Today when Occidental quotes a $30 break even price it’s not as though they’ve stopped lying about their cost structures, or that they’ve stopped reinterpreting history, as above they just now indicate when and how it is they’re lying. Speaking of which Ovintiv was promoting themselves after a decline of 72% on March 9, 2020. Noting they had a “Strong Capital Structure, Significant Liquidity and Operational Flexibility. Well no they don’t. At the end of the fourth quarter of 2019 they had $10 million in cash, and negative working capital of $563 million. To put this in context, Ovintiv also has current liabilities of $2.4 billion. There’s a lot that they can’t do with that. I personally have more liquidity and flexibility than they do. Saying whatever strikes them as a positive attribute will continue as the manner in which bureaucrats operate this industry.

Therefore in summary producer bureaucrats will continue to cut the costs of those that are not involved in their personal compensation. Cutting capital, staff and dividends leaves them with adequate “cash flow” for them to survive handsomely, and they politely thank you for that. Secondly, nothing is going to be done when the coronavirus, government largess, the Strategic Petroleum Reserve, Saudi Sanctions, anti-dumping investigations or litigate the actions of Russians and Saudi’s occupy these bureaucrats minds. There’s no shortage of issues that can be raised and in turn raise the short term benefits to their “management.” The trick is not to focus on their performance, revenues or profits. And lastly, there seems to be no propensity for honesty in any of the bureaucrats. Continuing on as if nothing has happened is the modus operandi, and I would assert, it is the ingrained culture of the producer firms. We know an organization’s culture, particularly one as ingrained as the producers, can’t be changed. Therefore it’s time that we exercise the change, one in which bureaucrats are no longer involved.

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.

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

Our review of the 4th quarter financial statements of the 20 producers we’re following shows us one definitive thing, oil and gas is going to get much worse than it is, and far worse than anyone expected. Under the current management they will also never get better. We’ll discuss this phenomenon in our next post as we have an excellent example as to why this is the case. Our number of producers is down to 20 as a result of anticipating the loss of Obsidian. The holders of their syndicated credit facility have extended a deadline from March 4, 2020 to March 13, 2020. If the corporation fails to meet the conditions set out, the credit facility will become due on April 1, 2021. $450 million is beyond the scope of what is possible and the bankruptcy of Obsidian is therefore imminent, in my opinion. The company hasn’t had a chance since it was busted by the SEC for capitalizing royalties. SEC litigation continues with some of the PennWest principles that were involved in those transactions. Since all the screaming is over for Obsidian we’ll be dropping it from our coverage.

Oil and gas prices finished 2019 at $61.21 and $2.18. Yet cash and working capital continued to be the predominant issue in the industry. Paying creditors at some of the producers appears to be an issue as well as the third quarter trend of ballooning accounts receivable continues. This can only be the result of the producers working interest partners suspending, on a wholesale basis, the payments of their Joint Interest Billings, the amounts of capital and operations that are incurred on behalf of the partnership by the operators. The service industry has been forced to extend credit to the longest known pay cycles known to man, all as a result of this cash crisis. Now the producers are betraying the trust of their partners in these properties. I can only speculate what the consequences of this activity will have over the mid to long term. I think it confirms that the prospects of the bureaucratically managed business of the oil and gas producers is untenable. Trust with the service industry and their producer partners is being actively eroded through this ongoing financial crisis.

Earnings are always a feature in oil and gas. As they were throughout 2019. The fourth quarter did see a loss of $7.8 billion however the year came in at a profit of $14.6 billion. A decline from 2018 earnings of $21.7 billion. This was miraculously achieved even with a 2019 $23.7 billion decline in revenues over 2018. I don’t know how these bureaucrats continue to perform as well as they do! The difficulty however is of course they’ve consumed cash at an annual rate of $7.0 billion. Due primarily to the annual cash flow being $74.3 billion and invested cash flow being $80.5.

One of People, Ideas & Objects claims is that producers need to cost their capital and operations appropriately into the commodity prices they charge consumers. These prices should never be unprofitable anywhere or at any time in North America. The Preliminary Specification decentralized production models price makers strategy provides for this. We believe that the property, plant and equipment account is bloated beyond all sense and recognition of reality. Deceiving investors has required producers to “build balance sheets” as opposed to running businesses. Therefore the need to draw down these balances as a requirement, and People, Ideas & Objects recommend that the industry take a competitive posture in terms of providing a return on investment that competes with other industries. Therefore 2.5 years is what we believe the balances of property, plant and equipment should be extinguished by in terms of calculating the commodity transfer prices to the consumers. It is in that sense that we assumed “what if” the current producers in our sample began to provide this method of accounting based on all others being equal. This calculation shows that these producers had lost $57.0 billion in 2019. Up, or is that down, from a loss of $43.4 billion in 2018. Somehow, saying you lost $100 billion in the past two years seems more consistent with these producers performance, and a number that has an inherently higher level of integrity than a “profit” of $36.5 billion for 2018 and 2019.

When we look at the bloated nature of the property, plant and equipment account. Apply what we believe to be a reasonable reassessment of what is assets and what are the unrecognized costs of past production. We then, on a pro-forma basis, move 65% of property plant and equipment to depletion to better state the affairs of the producer and industry. We see that the debt leverage is completely outside of any acceptable range. Instead of 31% as it stands today, the level of secure debt would be 88%. Considering total debt and total assets the factors become 55% debt to total assets today, and 113% on a proforma basis. It is our opinion that calling the unrecognized capital costs of prior production property, plant and equipment on the balance sheet is inappropriate. Therefore we feel our adjustment brings the overstatement of assets and earnings in line with the actual performance of these producers. The issue arising as a result of this pro-forma recognition is the debt levels of the industry, as represented by our sample of 20 producers, is untenable.

Another factor that we find interesting is the low percentage of working capital / annualized cash flow. For 2020 it stands at 7.304% down from its most recent high of 64.43% in the third quarter of 2016. Odd isn’t it, that was about the time the investors began their march out the door! They say the trend is your friend but I think that producers should look for a new peer group. These ones aren’t doing them much good. Bureaucrats thought they could tread water for the foreseeable future. That is not going to happen. The deterioration of cash and working capital continues and the situation has become such that they are financially damaged to the point where banks, creditors and investors have lost all interest and have begun running the other way. Organizations seeking working capital, who appear to have chronic working capital issues are special kinds of organizations. They’re sometimes referred to as failures. Primarily because they are and they’ll have few opportunities to remediate themselves.

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.

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

Now that we’ve seen the ultimate manifestation of the bureaucrats “muddle along” and “do nothing” plan and strategy. Where they stumble their way into bankruptcy, being accountable to a Judiciary who knows none of the subtleties of oil and gas, with only those favoured souls remaining on staff. The party is about to begin like it’s 1999. This permanent retirement class will maintain themselves in the lifestyle of their choosing and build upon the wealth they’ve already accumulated from the “good days.” That time when they had the investors convinced. It was only inaction, corrupt, lazy and incoherent when we didn’t know or fully appreciate the details of their plan. Let’s give a shout out to Mr. Harold Hamm and his like. The ones who built the industry on the basis of hard work and dedication. Taking the risks and maintaining large interests in their firms. Only to be washed away in the end by the self serving bureaucrats he put in place. That however doesn't qualify him for government handouts.

Disintermediation has been the motivation behind the bureaucrats highly destructive conduct. They learned from People, Ideas & Objects in 2003 that organizations are defined and supported by the software that they use, to make any organizational change demanded changes in the software be completed first. They interpreted this to their benefit by ensuring that they never changed their ERP software and therefore secured their franchise from any competitive method of oil and gas management. Inaction was all that was required to continue to benefit from the revenue streams they controlled. Now with the landscape littered with the destruction that their management has caused, they will be able to easily ensure that nothing is done to wake the judiciary to their plans and strategy when they eventually file for bankruptcy. Being accountable to no one is the ultimate prize for these people.

As you can imagine I’ve engaged my tin foil hat in order to formulate this conspiracy theory. However, I challenge anyone to point out where it is that I’m wrong. After 10 years in natural gas, 5 in oil and almost four since the investors began their exit, nothing has been done to remediate the situation or resolve anything. How come? What’s your theory as to why things are this way? Or is the industry really this profitable and the leakage of cash and working capital just due to the “bureaucratic burden?”

What is the future of the oil and gas industry? To me this is simple. Massive capital expenditures to refurbish, rebuild, explore and produce. This future is what the investors see and they know that it’s not going to be on their nickel. The ask is well beyond the scope of what is possible or reasonable for all the capital resources in the world to undertake. To continue as the industry has for the past four decades of subsidizing the consumers use of energy has to end. These future capital costs have to be paid by the consumer as part of the full cost of exploration and development. After “building the business” for the past four decades investors are now being unceremoniously eliminated through the process of bankruptcy, whether that qualifies as a conspiracy or not. Good job bureaucrats! And let's also give a shout out to those employees who were never part of the favoured souls gang. The only thing I can suggest is look into the opportunities of our user community.

Whether we can subscribe to conspiracy theories or not I don’t think it makes a difference. If the bureaucrats did implement this conspiracy it would show me they have the wherewithal to actually think, plan and execute. Otherwise the bureaucrats have to be assigned the Slugs of the Millennium Award for their dynamic inaction in the face of such adversity. We don’t need them, we certainly don’t want them and can do much better without them. What challenge or opportunity could these people stand up to and how would they proceed through the future we’ve just described. It is like I said if they did conduct a conspiracy as I laid it out with my tin foil hat engaged, then they’ve got some skills but not the ones we’re looking for. Therefore anyway you look at this situation they’re redundant.

The solution is People, Ideas & Objects, our user community and our Preliminary Specification as described in our White Paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” In there we detail the method that our good friends have destroyed the funding mechanisms that are available to ERP software vendors. We stand alone in this market seeking the financial resources to deal with the issues that these producers and industry face. Our competitors have been run into the ground on the basis of the treatment they’ve received over the past decades by these bureaucrats. They’re also constrained of saying or doing anything to disrupt their revenue streams. Leaving us with the only viable method of raising the resources that we need through our Initial Coin Offering. 2019 was a bad year for cryptocurrencies. The market for them has stabilized at high levels though there are few opportunities for any new offerings. And certainly nothing with the calibre of our offering. Therefore we wait, our initial time frame was three years from June 2019 and the progress we’ve made since that time is all negative. Though it is still potentially doable, the opportunity seems far away, just as it did when I started this process back in 1991. The only difference is that the oil and gas industry is the complete wasteland that everyone should have known it would become.

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.

Where's the Money!

Only a crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.

Milton Friedman

Sir Winston Churchill spent the better part of a decade prior to WWII arguing that Adolf Hitler was a threat that had to be dealt with. While still a Member of Parliament, he was ostracised and reduced to writing about what he saw for that decade. On May 2, 1935, upon learning of the imminent German air superiority he spoke in the House of Commons.

When the situation was manageable it was neglected, and now that it is thoroughly out of hand, we apply too late the remedies which then might have affected a cure. There is nothing new in the story. It is as old as the Sibylline books. It falls into that long dismal catalogue of the fruitlessness of experience and the confirmed unteachability of mankind. Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong -- these are the features which constitute the endless repetition of history. 

On September 12, 2001 we had learned of a new threat to our way of life. We may be learning of a new threat today in our high levels of dependence on the Chinese economy, and an existential threat that non commercial operations have had on the North American oil and gas industry.

The actions this past weekend of Russia and Saudi Arabia declaring war on North American shale producers is completely rational, reasonable, understandable and predictable. They were inevitable. Over the past three years OPEC+ have removed production off the market in material ways. Ceding market share to North American shale producers. People, Ideas & Objects believed this was evidence that oil and gas commodities were price makers as small changes in volumes made large movements in prices. This lesson was not heeded. In 2017 BP’s Chief Economist noted that the world had twice the required supply of oil until 2050, and therefore it would be the low cost producers choice to produce at whatever price. Shale is the second highest cost production next to heavy oil. These high cost sources of production must take up the role of swing producers. Scaling production up and down to meet the changes in demand. Ensuring that all production is profitable everywhere and always. There are only two ways in which profitable operations can be achieved in North America. Through deceptive accounting as the industry has done for the past four decades. Or fund the Preliminary Specification with its decentralized production models price maker strategy. The choice is that simple. Producers can continue with their strategies of muddling along and doing nothing, augmented now by pristine environmental statements. Continue to blame and excuse themselves while their cash and working capital is consumed even further, but faster now. Or they can hear that jarring gong of self-preservation and fund People, Ideas & Objects development 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.

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.