This is the Bureaucrats One Opportunity

The allegedly smartest person in the business world, Warren Buffett, made a contrarian bet on big oil in the $10 billion loan he made last year to Occidental Petroleum. If the smartest can’t make any money on last year's investments, what does that communicate to the rest of the investment community about this industry? To be fair and reasonable to Mr. Buffett, he no doubt believed Occidental’s financial statements. The search for some government to tell the producers what to do, or to take responsibility for the destruction of the industry continues. The Texas Railroad Commission appears, in addition to Oklahoma regulators to be following down the same path Alberta set in 2019. It should be noted that some Alberta production hit double digit prices this week, even with the mandatory curtailments. There was some bright spot in the discussion however, one producer said that with the curtailments being focused only in Texas that may force producers to shut-in some of their profitable production while unprofitable production in other states continues. Which is bunk. They don’t know what’s profitable and what’s not. If anything is profitable at $20 they’re lying. If they’ve known this all along what have they been waiting for, and why have the government tell them to do so? In related news, Conoco will be shutting in 225,000 boe / day without the message from god, the concern that the formations will be collapsing on themselves or their contracts getting in the way. There are some independent thinking people left on this planet. 

Once this virus has been shaken out of the market there will be little to no storage available anywhere. Oil prices will therefore linger at the bottom for some time. The question therefore is, has the alleged “price war” been resolved. The claim is that Russia and Saudi Arabia could maintain their “price war” until as late as 2022 before either countries foreign reserves are fully consumed. Both have almost one half trillion dollars in foreign exchange reserves on which to draw upon to make up for their governments budget. What do the North American producers have in their cupboards? What is the plan and strategy to deal with this crisis and build for tomorrow? If the situation as it stands today continues until 2022 how will they deal with it without the support of their investors, bankers and others such as governments? Asking for a friend. 

As far as these producers are concerned there is no tomorrow. They spent it and it's all gone. It ended around the time they were taking money from investors each and every year, then turning around and telling them that last year's investments were sunk costs and they didn't consider them. Bureaucrats probably don’t remember those days due to the conveniently short memories they’re dealing with. The consequences of those days are what are being realized today. Overproduction from overinvestment and systemic unprofitable production. But I’m repeating myself, in the same sentence now. Bureaucrats consumed all the value and now all the short term liquidity that was available. They betrayed their field service representatives by having them finance the past 18 months activity and have yet to pay them. Now those service industries are doing work at fire sale prices until the equipment seizes then sell it for scrap. There goes the industry's long term future. Not only do producers not have any cash or working capital today. They’ll need to pay these people in advance so that they’ll buy the rigs and equipment and operate it with the cash the producers give them up front to do so in the future. And boy, are they going to be expensive because no investor is ever going to get involved in that business again. I’ll bet even Warren Buffett would not entertain an investment in them. 

As the bureaucrats have said all along the Preliminary Specification wouldn’t work and they had it under control. That shutting in wells was too damaging to the formation and it was unnecessary as well, they were profitable. Well now we stand here with a fundamentally destroyed industry with no credibility to manage itself in any form or fashion. That they’ll need to pay cash for everything it does for at least the next decade due its irresponsible behavior. People, Ideas & Objects (PI&O) budget being financed in advance is the new prototype of how things will be done from now on. And no one will follow in the footsteps of Warren Buffett. The fact the bureaucrats were so skeptical about the Preliminary Specification should be the ringing endorsement of our validity. However, I want nothing to do with these people. The only thing they can do now is to show some remorse by providing us with our budget before they slip out the back door. That way they can say they at least did something productive to right the ship. That they did one thing during their career that benefited someone other than 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.

"Government Inaction"

We have it now that government inaction is the reason for the “failure” of the oil and gas industry. Just when I thought the producers had run out of excuses and scapegoats. This comes along from Reuters regarding the Texas Railroad Commissioners meeting yesterday. 

But Marilyn Craaybeek, who owns a small oil company, said small producers were failing, something she blamed on government inaction.

“This was my retirement and I will die poor.” she wrote in a letter to the commission in favor of production curbs.

Ok, I think maybe now should be alright to call an end to the excuses and blaming of others. There are signs too of some producers taking responsibility. Such as Scott Scheffield CEO of Pioneer Resources. From the WSJ.

Nobody wants to give us capital because we have all destroyed capital and created economic waste.

If the Texas Railroad Commission does not regulate long-term, we will disappear as an industry.

But with all things oil and gas, there is a culture that quickly snaps everyone’s head back into the appropriate talking points. From the WSJ as well. 

Parsley Chief Executive Matt Gallagher, who supports cuts, warned of deep industry job losses if regulators don’t intervene.

The government is coming for your job now. For the record this blog began in December 2005 and the Preliminary Specification was published in December 2013. Our solution covers off both oil and gas. Now that oil is the hot issue of the day. And the government is the source of the producers difficulties, let's ask these producer bureaucrats to explain natural gas 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 Telegram @piobiz or Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

The End of the Beginning

As a member of the board of directors or as an officer of a producer firm an individual has sworn to do everything they can to ensure their management of that firm they represent will be without question. As a reflection of this commitment it is understood that they’ve placed their personal assets at risk if anything should go wrong. And as a prudent manager they carry insurance coverage to manage their risk during the time they are a director or officer and maintain that coverage for the period they remain liable. The insurance firm of course manages their risk by having the option to cancel their insurance coverage if they see the risks of the officer or director exceeding what they deem to be acceptable. Notice would therefore be sent to the officer or director that their continuation with the producer firm (in this instance) will invalidate their insurance policy. Therefore in order to maintain their insurance coverage that they’ve had over the past, the officer and director will be forced to limit their personal risks and resign. 

With twice the available oil that’s necessary for the next 30 years, every producer producing everything they have will continue to overproduce and oversupply the market. Without any production discipline to control the producers from overproduction, which we’ve described here as unprofitable production, the oil and gas industry will be a failure for each of those 30 years. Long after the coronavirus has gone. We’ve seen this past week how the attitude of the North American producers are driven by myths and how they’ve disregarded any and all means of market signals being communicated to them. Their share prices are in low single digit percentages of what they were just a few years ago. Even the majors have had a haircut that should induce serious and radical change and reforms within those organizations. Investors have walked away and are showing no indication of returning. There is no compelling reason for them to do so. The natural gas and oil prices are unable to support any type of corporate organization. These commodity prices reflect a continued demise of the industry. 

Yet the myths that we documented in our series “Exploding Myths” in late January and early February 2020 are continued to be the only talking points of our good friends, the producer bureaucrats. Discussion today that Saudi Arabia will have to fix this themselves because their costs are $85 / bbl reflect this mythical bias that it’s always someone else’s fault, someone else’s responsibility and they’re profitable don’t you know. Excuse after excuse continues as the collapse of their organizations, and soon their capacities and capabilities become irreversible. 

In our White Paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale” we mention nine times that our plan is to “rebuild” the industry in the vision of the Preliminary Specification. In this blog we mention no less than fifteen times, with most of these occurrences soon after the publication of the Preliminary Specification in December 2013, that we are setting out to rebuild the industry “brick by brick, and stick by stick”. There was never any doubt in our minds that rebuilding would be necessary. The level of destruction the industry is experiencing has only begun. The coronavirus has only accelerated the beginning of this crisis by nine months. We now begin the journey in terms of the context of those next thirty years where the world has twice the oil it needs. Where the alleged “right” to produce will be those that can produce it profitably, and therefore prosper. As there is no other method of production allocation that is fair and reasonable. Contrast this to today’s global oil and gas disasters where there is no plan, strategy or sense of urgency. Only the desire for someone else to fix it.

We could set the direction in the vision of the Preliminary Specification, our user community and service providers with the rest of the industry following in the footsteps of that vision. What would the result be? Would there be a turnaround in the fortunes of the industry? Would investors reposition themselves for what they saw in an industry that was motivated to be profitable everywhere and always. Would the people in the industry who have suffered so much at the hands of these bureaucrats feel that they too have a future and a career again and that they can begin planning and participating in? And I believe OPEC+ would be motivated as well to see that the misguided adventures of these financial carcasses would be ended and would be able to see the North American producers take up the role as swing producer in the global oil and gas industry. The North American producers being the highest cost producer need to assume the swing producer role. What motivation is there for the low cost producer to assume the swing producer role? It is ridiculous that we are being subjected to this logic today, because of the bravado of a few. Therefore if we are losing this impediment to progress then we would have a clean slate as to how to approach the rebuilding of the industry. That is not something that is believed to be necessary by any of these bureaucrats, but that has been the case for four decades when their accounting was deceiving others. Culturally they are fixed in place. Unchangeable, immovable and forever unsuccessful.

I updated the user community vision with the following text that we’re calling it’s charter. Have a look. 

Our user community seeks to find the right solution for the most profitable means of oil and gas operations everywhere and always. We’ve now seen what happens when profits are ignored in the industry. What oil and gas is experiencing is unquestionably the most difficult issue they’ve faced, ever. Our collaborations are not to build consensus or compromise. On the contrary, we have many issues to resolve and some of the most complex that have ever been approached. The resolution of issues lies at the point of conflict and contradiction. It’ll be our user community's job to find those conflicting attributes and contradictions, and resolve them to build the industry software for the next generation, to build the dynamic, innovative, accountable and profitable energy industry we need.

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 in Oil and Gas

I’m in receipt of an interesting document that provides relevant information to those who may need to better understand the state of affairs in oil and gas accounting. The document is from P2 Energy Solutions who provide ERP software products to oil and gas companies. One of their cornerstone products is Qbyte which was what IBM sold them when they decided to get out of the business. They have 1600 clients using their various products. And as I’ve stated in our White Paper, “Profitable, North American Energy Independence -- Through the Commercialization of Shale” they’ve persevered on a starvation diet as do all business related software providers have had to do. Producers don’t pay for accounting systems or accounting when there are wells to drill. Besides the value of the company, and everything that is needed to be known is in the reserve report. Accountants are there to pay the bills. P2 does a good job of showing how accounting and systems are conducted in four different ranks of the oil and gas industry. The four categories are Initial, Reactive, Managed and Optimized. The only thing that I think P2 didn’t get right in their descriptions was the amount of “hair on fire” panic and rush that usually accompanies this accounting. 

P2 has done an excellent job of capturing this information in an unbiased manner. They’ve done the industry a favor by ripping the bandage off of this gaping wound to show that the lack of resources dedicated to systems, automation and process management has left accounting for oil and gas in the dark ages. It is no wonder that these producers are unaware of the consequences of their actions. They’re not paying attention to accounting and accounting is unable to fulfill their obligation of providing timely and accurate information about the business beyond the basics. Their business model of “just drill more wells” is providing everyone with the spectacular failure we’re experiencing by not listening to investors when they say they’re dissatisfied, not listening to commodity markets when their prices state clearly they’re oversupplied and not listening to accounting beyond getting them to “pay the bills.” I hope the bureaucrats, those that we identify as the C-Suite and their direct charges, are adequately humiliated.

In our White Paper we noted two characteristics of the oil and gas industry that I want to restate here. The first point implies the culture regarding the capitalization of every cost in sight. Or as producers like to say “building balance sheets.” It has created a culture that has destroyed the capabilities of both accounting and administration. To cater only to the drilling of wells as that is the business as well as the business model. We noted regarding this culture, the consequences of what has developed;

Which is, as far as they’re concerned, the extent of the use and purpose of accounting in oil and gas. This cultural division has grown over the past four decades where accountants ability to assert the business issues does not exist. The release of reserves value through further drilling is the business and the only business as far as the culture of the industry is concerned. The nuance of recording and reporting the accurate timing and recognition of capital costs of exploration and production are not a topic of discussion when “everyone” is following the SEC’s regulated requirements and are “building their balance sheets” faster than “we” are. What we do know is over reported profits begets overinvestment, and overinvestment begets overproduction. Especially when no production discipline exists. p. 10

… a result of the SEC implementing its Full Cost and Ceiling Test regulations for capital assets. These regulations have extinguished the producers initiative to act. If everything producers spend becomes an asset which increases the value of the firm, if everything they produce is almost pure profit, they’re disincentivized to see the situation as anything but wildly successful. “What could be wrong?” Planning, strategy and active management have been ineffective in this environment and as such grew to be unnecessary, therefore not undertaken and atrophied. How else could you describe the past ten years in the natural gas business in which nothing has been done. If the business should ever have difficulties, as it has always done before, “it will work itself out.” p. 14

 

The second point I want to make is that accounting and administrative capabilities should not be a distinct competitive advantage of any producer. Each producer building their own capabilities that are not shared or shareable in their current configuration do not provide any value. They are also fixed in terms of their cost behavior. By implementing the Preliminary Specification we are moving them to the service providers where they become variable based on production. It is also noted that the ability to make any changes to these capabilities in terms of performance or configuration is constrained not only by the current software, but also by the inability to expand the specialization and division of labor of the staff within these departments. Our service providers list as one of their key competitive advantages specialization and the division of labor. This with the defined software capabilities of PI&O provides the capacity and capability for industry to expand the performance of administration and accounting well beyond what they are capable of in today’s configuration. 

Did I ever mention the value proposition that People, Ideas & Objects (PI&O) our user community and their service providers generate for the oil and gas industry? Let me repeat it once more. Over the next 25 to 30 years we provide from $25.7 to $45.7 trillion in incremental value to the North American oil and gas industry. I think that today’s environment provides an understanding of how that value comes about. Producer bureaucrats don’t have a clue what’s going on. Yes, it is that bad. They’ve destroyed the business fundamentally and they have no one left to blame. If you read the P2 document the way I did, the cupboards are bare and producers have nowhere to turn to gain an understanding of where the value or the value destruction is. 

I mention the Preliminary Specification in order to contrast the situation once our solution is operational in the oil and gas industry. What we do is reallocate the administrative and accounting resources from the producers themselves and have them work for individual service providers who work on behalf of the entire industry as their clients. Providing an individual process management that they charge their fee to each of the Joint Operating Committees. The Preliminary Specification then produces full detailed financial statements for each Joint Operating Committee, which includes the actual detailed overhead charged from the service providers, and depletion for that property. This reorganization turns the producers fixed overhead costs into the industry's variable overhead costs. Variable based on production. If the property shows a profit then it will continue to produce. If it is unprofitable it will be shut-in and join the producers inventory of shut-in properties where it can be worked on to improve its performance and return to profitable operations. Then it will no longer dilute the earnings of the profitable properties. Save those reserves for a time when they can be produced profitably. Will not add the incremental losses to the reserves that will need to be recovered in the future. And most importantly today, remove the marginal and unprofitable production from the commodity markets.

We mentioned the other day another advantage of this change in the configuration of accounting and administration which is the standardization of accounting across the industry. This standardized accounting will also be objective, unbiased accounting that will be provided to each and every producer. If a producer receives a financial report that states the property is unprofitable they’ll know that’s on the same basis and criteria that every other property was evaluated and subjected to. That there was no undue influence in the determination of profitability. This standardization would apply to Exxon as it would to the start up that began operations last week. People, Ideas & Objects being a cloud computing provider, it will be available to any and all producers equally. The service providers are billing based on the activities at the property. A working interest owner may or may not be known to each of the service providers. The amount of data they’ll have will be limited to what is necessary for them to process their work. Who the working interest owner is will not necessarily be known to many, and therefore be of little concern to any of the service providers. Establishing a blind objectivity that all producers can rely on to ensure that their performance is being evaluated consistently. 

Therefore in terms of accounting, process management and automation provided by the Preliminary Specification and service providers. It will be a state-of-the-art, dynamic change oriented capability to meet the demands of a dynamic, innovative, accountable and profitable oil and gas producer and industry. There won’t be any difference in the processes that are managed for any of the producers when it comes to the size and sophistication of the producer. It will be standard. The start-up will not need to hire any accounting or administrative staff in order to conduct their accounting, it will all be provided from the existing service providers that service the entire industry. As in the past, their disproportionate startup administrative and accounting costs will not have to be carried for the first decade of their life as they’ll just be paying for the necessary, actual, variable costs of processing their accounting. Gone will be the days when they had to carry that disproportionate load in terms of their overhead costs. 

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.

Interactions With PI&O, Part I

As I’ve noted before, all of the people who are involved in the greater oil and gas economy will see the industry from different perspectives through their use and operation of their specific version of the Preliminary Specifications software. The industry we’re rebuilding will be where people are assured of the steady economic performance that would be a result of producer profitability, everywhere and always. No more boom / bust cycles. Secondly, an industry in which the investors would see profitability as the driving force and primary objective for all concerned. This industry has now learned a costly lesson regarding why profits are needed everywhere and always. The investors hold the tools necessary to keep management performance profitable for all concerned. Once investors see that oil and gas has a plan and strategy to be profitable again they will look to immediately position themselves to earn those profits as soon as the producers have funded and initiated the Preliminary Specification. And lastly understanding that OPEC+ are tired of ceding market share to shale producers that also destroy oil prices, but not OPEC+ profitability, how assured would they be if they saw North American producers were beginning the work to rebuild their businesses based on producing their products profitably everywhere and always? Would they then cease their price war if the Preliminary Specification was adopted and funded by North American producers? What would the world look like without North American based bureaucrats constantly searching for and accusing every scapegoat they can find?

In this new series, “Interactions With PI&O” we’ll be discussing the manner in which people will be interacting with People, Ideas & Objects (PI&O), the software that we produce and the services that are provide through our affiliated user community and their service provider organizations. Today I want to discuss the user community and what software they’ll be using to determine the needs and wants of the producers. They’ll have the most comprehensive view of the industry as they’ll not be isolated to just one producer, but the entire industry and all of its associated industries such as the service industry, the greater oil and gas economy, and all of our software users, which will include anyone in need of accounting and administration for oil and gas. 

We will be introducing significant change to the oil and gas industry and that change is going to be managed by our user community and implemented through their service provider organizations. As a result, their first tool to enable this, and to communicate these changes broadly, will be our operation of a current version of the Preliminary Specification based on the most recent software development build as a demonstration of the ERP system. This would be of great advantage to make our changes communicated, understood and appreciated throughout the larger oil and gas community. Therefore we will begin, almost immediately upon the commencement of software developments, to have a facility where people can go to see and use the latest development build of our software. I would expect at this time the builds would be in the order of weekly however it is difficult to determine at this time. Therefore the iterations of the developments and their changes would be evident for everyone in industry to see as they were developing through the builds. This in turn would assist our user community when their producers, or others, ask for certain features and functionalities that were being developed on top of any prior innovations etc. Both increasing the quality of, the speed, and the understanding of the PI&O software throughout the industry and greater oil and gas economy. Removing the unknowns prior to implementation and having the industry up to speed when we’ve implemented the software and go live. 

This facility's existence has never been discussed publicly before. It’s costs however are priced into our budget. It is very expensive due to the Oracle Licenses which include Cloud ERP, and all the necessary applications that are defined and necessary to support PI&O’s Preliminary Specification. During initial development, supporting producers will be provided with access to the one designated individual, our one point of contact, within their organization to view and interact with the facility. This will be the individual leading the implementation of the PI&O system within the producer firm. It will be their responsibility to present demo’s of the application in YouTube videos or classroom presentations in order to inform the producer staff, capture feedback and forward that onto the appropriate user community member (UCM). 

UCM’s will have access to this facility at all times. That way they’ll be up to speed on the changes that the entire user community has made, be able to solicit feedback from the producer contacts and ensure that all is accurate. Sample data will be prepared by PI&O and will emulate the processes of an active producer. We would appreciate donations of data from the industry when that time comes. The UCM’s will have this facility throughout the years of development both in the initial development phase prior to commercialization, and it is expected that they would have access to a similar facility once the application becomes commercially available. Producers of course will be using the applications live. UCM’s will not have access to the producers systems or data and therefore will need to emulate the producers systems with test data, via the weekly builds, which will be necessary for them to understand the application in its various use cases throughout the industry post implementation. 

As we’ll note in this series, “Interactions With PI&O,” will show the different perspectives on the system are fundamentally different depending on your area of responsibility. The service provider systems will be slimmed down single processes with very limited data. The need however to emulate each of the service providers perspectives will be a requirement for the UCM as well, as they’ll need to see what it is the producers systems look like for each of the service industry representative and anyone else who’s using the software. 

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.

Everyone Sees it Now

Covid-19 is providing a better understanding for everyone about the difficulties that I’ve had in dealing with the North American oil and gas producers. For many decades oil and gas prices have not provided for profitable operations, but I guess a producers' right to produce unprofitably overcomes all logic. As I’ve said 5 out of the last 35 years have been good years. Investors left due to their poor financial performance many years ago. Why hasn’t there been any response or action to either these depressed commodities prices or to their investors exit? What is the argument that is put forward by these bureaucrats that they can defy logic and gravity for so long, and continue to do so in the face of such dire financial circumstances? Are they unaware, or just deceived by their own accounting that shows profitability continuing despite any outside negative or positive influence. I have been trying to sell the industry on the ability to generate real profitability everywhere and always. All that I’ve experienced is a knock-down, drag-out brawl of world class fighters who have no interest in change or profits. My only conclusion is producers “play the long game” don’t you know, and a decade or two is just a minute in real time.

The history of this past decade is horrendous! Natural gas began to decline during the financial crisis and these prices continued to erode due to overproduction in the North American marketplace. A marketplace constrained due to the inability to offload the product to other continents. Natural gas prices remained high in Japan and Europe which launched substantial investments in export LNG facilities. These in addition to mostly Australia's LNG capabilities have now eroded world wide natural gas prices to the point where they don’t even cover the shipping costs to move LNG anywhere. The abundance of North American shale gas has saturated the global markets and its storage facilities. 

Oil and gas bureaucrats knew intuitively then that oil was where it was at, and that is where they went with their shale technologies. Moving U.S. production from 5 mm bbls / day to 13 mm bbls today. By 2014 oil prices began their precipitous decline, and in 2016 OPEC+ stepped in to begin the removal of surplus oil production from the market. As a result they were successful in rehabilitating the price from $29 to $74.15 in June 2018. Reducing their production over three and one half years for a total of one billion barrels that were taken off the market. Or as much as the global commercial oil storage market. Not to be deterred we’ve now seen oil prices as low as the teens. With the prodding of President Trump, OPEC+ wants to initiate a new agreement with the caveat that North America join in, and there is no way in the world North American producers will ever participate in anything that will save their souls. They’re on a suicide mission and they aren’t hiding that fact from anyone now. 

Shutting in production across the globe is generally considered the appropriate resolution to the oversupply issues. Lets restate that, the bleedingly obvious solution. Yet People, Ideas & Objects Preliminary Specification, our user community and service providers which are designed to enable producers to reduce supply by removing the unprofitable production from North America is alleged to be “collusion.” Bureaucrats will never understand the business of the oil and gas business, or make any attempt to even try. Death becomes them. 

Lately we’ve heard these producers state that shale formations are more amenable to shutting in than other formations such as those in the Middle East and Eastern Europe. One of the lies the bureaucrats have been involved in telling is that “they can’t shut-in because the formation will be damaged.” The damage coming about as a result of “the formation collapsing on itself.” If ever there was any indication that these bureaucrats were only doing what they do in order to line their pockets it’s this statement. This is 100% bunk. Proven by the fact that Saudi Arabia pledged to increase their production from 9 mm bbls / day to 12 mm bbls / day within the next few months. Sounds like they experienced significant damage by shutting-in all that production these past few years doesn’t it! The shale formations are fraced multiple times on a lateral that extends many miles. These fracs are caused by upto 60 mm bbls of water being injected to crush the rock so that the oil and gas can accumulate into the fraced areas. Usually sand is injected in the void in order to ensure that the porosity of the void remains high and production continues. By shutting-in a well doesn’t damage the formation. Certainly injecting 60 mm bbls of water would potentially do more damage, I would think. 

The writing is clearly on the wall for all to see the antics of these bureaucrats. In this time of enforced isolation I’ve never felt less alone. The attitude in the marketplace is clearly consistent with the logic that is contained within the Preliminary Specification. It is what businesses do, it is business logic. You don’t produce unprofitably and you don’t do it for four decades. What is and has been going on has now been noticed by everyone, it is obvious and miraculous to most that producers are applying such unreasonable arguments. I have always said the damage and destruction that has been caused at the hands of these bureaucrats has been catastrophic and unheard of anywhere and at any time before. Bureaucrats believing their own specious financial statements, that they are viable and strong, is a result of the corrupt accounting that has gone on for four decades. This has covered over and masked the great drainage of wealth and value out of the industry by their hands. We certainly don’t need these bureaucrats now that the industry is worthless. What’s more these bureaucrats feign not to understand, even today. They are redundant and what’s more they are an impediment to any resolution. The Preliminary Specification is a solution that they were aware of since 2003, its full specification on how to be profitable since 2013. Which proves they had every opportunity to do something and chose instead to line their pockets. People, Ideas & Objects have a plan and a strategy to do better. With the Preliminary Specification, our user community and their service provider organizations. We can rebuild the industry faster, without compromise or continuing with this corrupt and failed system. And have the dynamic, innovative, accountable and profitable oil and gas industry and producers that we need and know we need for the dynamic future we know will be the most difficult. 

I am pleased to have prepared the solution to what can only be described as the largest oil and gas issue, ever. It has been a long battle and this day was inevitable. This day being that I think we may have turned the corner. Milton Friedman said it best and we quoted him with the following quotation in our White Paper.

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.

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.

What I Mean by "Overproduction"

What has become clear to me is that there’s some confusion about how I’m using the term “overproduction.” What qualifies as overproduction and how it’s measured. In our White Paper we note that the economic principle is summarized as “overreported profits attract overinvestment which creates overproduction.” This is also defined in educalingo.com as:

In economics, overproduction, oversupply or excess of supply refers to excess of supply over demand of products being offered to the market. This leads to lower prices and/or unsold goods along with the possibility of unemployment. The demand side equivalent is underconsumption; some consider supply and demand two sides to the same coin – excess supply is only relative to a given demand, and insufficient demand is only relative to a given supply – and thus consider overproduction and underconsumption equivalent. Overproduction is often attributed as due to previous overinvestment – creation of excess productive capacity, which must then either lie idle, which is unprofitable, or produce an excess supply.

Simply overproduction is unprofitable production. We know the price of both oil and gas have been fundamentally destroyed by oversupply. We know that producers' cash and working capital balances reflect their chronic unprofitableness. I guess the question therefore would be has anyone seen any underemployment in oil and gas lately? What we have in the last sentence of this definition is the issue that North American producers should be most concerned about. We should all be able to agree that the prices of $61.21 and $2.183 that were realized at the end of 2019 were inadequate to sustain the industry. Producers reported profitability however cash was being consumed. If we assume that the prices necessary for existing North American producers to be profitable is $100 that implies that 145 mm boe / day is more supply than the market would bear at that price. Let's also assume that the price destruction reduces consumption to 110 mm boe / day. A 35 mm boe / day overcapacity that would need to be shut-in, or, in order to attain the North American, profitable everywhere and always price of $100. No one knows what the numbers would be; these are all assumptions for the purpose of showing the example of the situation that the North American producers find themselves in. There is a surplus in this example of 35 mm boe / day that is unproductive, leading to chronic unprofitability across the 145 mm boe / day.

As the quote suggests the “creation of excess productive capacity, which must then either lie idle, which is unprofitable, or produce an excess supply.” This excess 35 mm boe / day supply we are finding, in an environment where the energy prices are price makers, not price takers, is even more unprofitable than the idle capacity. The reason being that it has reduced the price substantially enough that the gross revenues of 145 mm boe / day are lower than the 110 mm boe / day. The issue of idle capacity, or the current North American producers unrecognized capital cost of past production as we call it, is a cost that is not eliminated completely from the market. Although the Preliminary Specification makes all the costs variable, creating a null operation. The capital that was used to generate the surplus capacity has an implied cost that must be accounted for, in this case, by the North American producer. Surplus capacity is one of the highest costs a firm can incur, are horrendous and are the toxic waste that will eat away at any company over time. Although producers claim their costs that were once $60, then $50, and $40 then $30 are mysteriously able to reduce the “historical” aspect of their costs, these costs in fact have not been reduced. The legacy of these unrecognized capital costs of past production will be carried by the existing producers until such time as their production is able to retire these costs. Which based on producers depletion schedules is around 2050. Therefore they’ll be in this depressed economic environment they’re in now until the time they are able to deal with and eliminate the implied capital cost of their surplus capacity. 

However, PI&O looks at those surplus capacity costs differently than the North American producers do today. They are the amount of the discount in energy prices the consumers were provided as a result of the investors in these oil and gas producers paying the capital costs of past consumption. Consumers paid the operating costs and investors generously paid for the capital costs on the consumers behalf. They did this when they fulfilled their role of providing the annual capital infusion, then producers capitalized everything to their big, bold, beautiful balance sheets for eternity. The Preliminary Specifications price maker strategy provides a go forward mechanism for the industry to produce profitably everywhere and always. However it also provides the existing producers a means to exit the dilemma of surplus capacity costs they’ve created for themselves. The unrecognized capital costs of past production that has been incurred to generate their overcapacity might haunt them to the end of their days, or alternatively they could join PI&O et al who’ll provide them with our price maker mechanism necessary to recover those costs, by finally recognizing these capital costs of past production and proceeding as a profitable industry. If not PI&O et al will rebuild the industry brick by brick, and stick by stick without them. 

It is in our White Paper that we identified these unrecognized capital costs of past production as the only residual value remaining in the industry. The amount of these unrecognized capital costs, or the prior consumer discount, can now be passed to the consumer through higher prices in our price maker strategy. Turning big, bold, beautiful balance sheets back into cash. Making up for past producer sins and rehabilitating the financial condition of the current producers. Or, we’ll rebuild the industry brick by brick, and stick by stick from the ground up on the basis of a new competitive cost structure. Mostly through purchasing properties at steep discounts from cash starved and desperate bureaucrats. And in turn defining a substantially lower commodity price that attains profitability for those new producers derived from the Preliminary Specification. Which will permanently preclude the existing producers from ever recovering their previously unrecognized capital costs of prior production. Either way producers will be looking at removing those costs, they can do so early and deal with their surplus capacity difficulties with PI&O et al, or they can continue to cling to the few remaining drowning victims for a few more decades as they sell off what they built for pennies on the dollar. 

Clearly their situation will not be rectified by any coronavirus stimulus. Their damage is a result of four decades of overinvestment that will resist resuscitation of the industry in any form by the current status quo bureaucracy “muddle through” strategy. There should be no doubt about this and the fact is clear the situation as it stands today is terminal. We can declare it terminal today as it doesn't have any capacity to recover, or we can sit and hope it comes around for the next decade or so. The bureaucrats are down to their last drowning victim in the Federal government and the ability for them to act is constrained by some producers who resist, wisely, government involvement in the industry. Which brings up the question regarding Exxon. With 6.1 million barrels of oil equivalent in daily global production, nothing will happen without them. What the existing North American producers will need to do then is wait until such time as Exxon is out of business too. Again, the rebuilt industry under the Preliminary Specification on a brick by brick and stick by stick basis will be highly cost competitive in terms of their capital costs, in a capital intensive industry, in comparison to existing producers. Therefore this lower capital cost structure will be holding any upside on capital cost recovery for the existing producers due to a continuation of lower oil prices, lower but still profitable to the new producers, and drawing out the pain of the demise of the old producers, that is of course unless they join us.

A quick note to realize the Saudi’s and Russians will not be making much difference to the oil price or to anyone. With the decreased demand in consumption the effect that they were seeking by starting their “price war” has been expanded exponentially. And is far outside of anyone's control. I think the same can be said for any real or tangible assistance to the North American producers from governments. The need is not there as it is in the hospitality, medical and other industries. However producers are now claiming that “our energy independence and national security depend upon it.” The coronavirus stimulus is not designed to rectify the damage that bad management created over the past number of decades. However, from what I’ve seen these past two days, people are beginning to come out of their self-imposed lock-down and exercising their freedom to enjoy life again, at six feet’s distance or more.

My argument is that it’s time to quit thinking about what other drowning victims bureaucrats can cling too, and begin rebuilding the industry brick by brick, and stick by stick by initiating and funding the Preliminary Specification. That way bureaucrats could admit their mistakes leave the industry and say they did something productive to remedy these issues. What I’m suggesting is that bureaucrats just leave. There is little damage that’ll be done if they did leave and only continued damage if they stay. They’ve done enough, we'll take it from here. Before they go just initiate the development of the Preliminary Specification and raise the budget to do so. And then go.

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.

Links to White Paper and Preliminary Specification

On April 4, 2020 we found that our url shortening service was no longer in service. Hence all the url's to the White Paper and Preliminary Specification throughout this blog no longer function. We have since joined bitly and are using the following. 

For the:

White Paper,    Profitable, North American Energy Independence -- Through the Commercialization of Shale    https://bit.ly/3aIds4VWhitePaper

Preliminary Specification    https://bit.ly/3aOXTsgPreSpec

Preliminary Specification Preamble    bit.ly/2wdjHP0Profit

User Community Vision    https://bit.ly/39OLovvUserComm

User Community How to Join    https://bit.ly/39EN1f7HowToJoin

Service Providers    https://bit.ly/2x2jrCUSerPro

Budget     https://bit.ly/349TZYhBudget

Revenue Model    https://bit.ly/2xQ5EiGRevMod

Initial Exchange Offering    https://bit.ly/2X7jwzSIEO

We apologize for any inconvenience.

A Vision and a Plan to Deal With the Largest Oil and Gas Issue, Ever

The unaccountable nature of our good friends the bureaucrats will continue. There should be no doubt in anyone’s mind that this is the case. Professor Thomas Sowell said “It is easy to be wrong - and to persist in being wrong - when the costs of being wrong are paid by others.” After fighting them since 2003 on these very issues it is obvious that bureaucrats will not change even in the face of negative oil prices on a wholesale basis. It’s not their money that they’ve destroyed. It’s not their livelihoods that they’ve destroyed. And it’s not their careers they’ve destroyed. These bureaucrats do thank you for your expression of concern, but can assure you that they’re fine. Identifying them as I have for these past decades as the culprit of this destruction was easy, they were the ones responsible. Can anyone doubt that now? They had the authority to deal with the issue and institute any remedial action necessary, for decades. As we’ve seen now after more than a decade of excuses and blaming others, there is nowhere for them to hide. We all need to tell them to leave. We don’t want them, they provide no value, and are a drag on the performance of the industry. But before they leave they need to show some remorse and apologize to those they’ve damaged so extensively by instituting and funding the Preliminary Specification. Then when they leave immediately after they can say they did what they could to fix the mess they made. They set in place a plan and strategy to build a future and removed the problem from the industry. This is the only way in which the industry is going to heal itself. If you doubt me, we can wait another year and see what happens then, but I suggest action.

PI&O’s Preliminary Specification, user community and service provider organizations provide a comprehensive vision for the next 30 years. One in which the oil and gas industry is dynamic, innovative, accountable and profitable, everywhere and always. A vision and a plan for 30 years that once adopted, will have people rallying, including investors, to oil and gas. The key here is the investors. They invest in the future earnings and cash flow of what they see the industries plan, strategy and vision can provide them. They will provide the capital for that and be somewhat patient for a year or two for that vision to manifest itself. People are the same. If they see that an industry is vibrant and there are opportunities that are fresh and exciting they’ll want to get involved. And what about OPEC+, if they saw the Preliminary Specification, its user community and service providers being funded and built would they continue with their full production strategy? This is how we begin to rebuild the oil and gas industry brick by brick, and stick by stick. Which is the only opportunity that we have available to us at this time. So much destruction has occurred that any attempt to tinker with what exists today will only fail due to cultural inertia, and would carry a significantly lower probability of success than the Preliminary Specification provides. The Preliminary Specification has been actively promoted here and through our White Paper since December 2013 and July 2019. The cognitive dissonance that these have created in the industry are adequate for our needs to start the development of the user community working on identifying and specifying exactly the details of the systems they want and need. Brick by brick, and stick by stick.

We have claimed throughout the Preliminary Specification and this blog that the issue we resolve is the largest administrative and accounting issue the oil and gas industry has ever faced. Thanks to our good friends the bureaucrats it has now become the largest issue in oil and gas, ever. We should all be pleased to be able to work towards this solution and build the new oil and gas industry, brick by brick, and stick by stick. This time of great upheaval and crisis is our greatest opportunity for the individuals with the knowledge and capability to complete these tasks. Build a stable, financially capable industry that is well managed and robust which provides affordable, abundant but profitable energy for the next three decades. Crisis is the point in time where opportunities are at their greatest. Our user community members, with the roles and responsibilities that we recently detailed, can begin this process. They will be ground zero in terms of where and how this rebuilding process begins. This is why they must be endowed with the resources that PI&O have established in that community. That is the way that it will be done in the highest quality, fastest and most efficient way. Using the capitalist system with thousands of entrepreneurs applying their knowledge and capabilities in new, exciting and innovative ways.

Bureaucrats, here’s your chance to prove to everyone that you didn’t do this deliberately to line your own pockets. That you didn’t do it out of greed and self-interest. Before you leave the stage make the commitment to build the Preliminary Specification, our user community and their service provider organizations and secure the funding for the whole project. That way at least you can say you did your best and your legacy will have at least one positive element in which you can sail into retirement.

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.

Production Allocation Based on Profitable Production

I thought that I would start with some good news first for once. This is in fact excellent news and something everyone should know and understand. What is the plan and strategy for the energy industry? As it stands with the bureaucrats it appears to clutch onto any other drowning soul. That doesn’t mean that’s what’s going to happen. If the Preliminary Specification, our user community and their service provider organizations were adopted by the industry, its plan and strategy inherent in every aspect of our software and services would be seen by all concerned as positive for the future of oil and gas. Investors would see a dynamic, innovative, accountable and profitable industry being rebuilt from the ground up and look to position themselves immediately to earn their future profits there. People would look to the industry with renewed interest and seek the opportunities that a dynamic, innovative, accountable and profitable oil and gas industry offered. And what about OPEC+. If they saw the industry rebuilding itself in the vision of the Preliminary Specification et al, would they continue to erode their future prosperity? These may not all be available immediately today but will be obvious in the next few years and provide everyone with the opportunity to realize a future career or business in which to base themselves upon. This situation we are in today is a terminal situation for the bureaucrats and we should cheer their final demise as a positive attribute. The quicker we get moving in the direction of rebuilding our future through this plan, vision and strategy the faster we’ll turn this ship around and become what it is the industry should and we all know it can be. 

Now back to today’s dismal facts. What security or direct benefit do our good friends the bureaucracy seek by having the government dictate production allocations? Wouldn’t that just entrench their administration for that much longer and make it that much more difficult to eliminate them? The one thing I’ve learned is that as far as they’re concerned it is all about them. Why else would so many people have lost so much without even a shrug from these bureaucrats? As far as they’re concerned all of this has been a resounding success!

The fact of the matter is that there won’t be anything left of the North American producers by the end of this month. The bureaucrats' destructive ways have led to the ultimate demise of these producers with nothing left for them. If we assume that North American producers are generating revenues of $10 / barrel net, that there is 40 million barrels of oil equivalent production and their out of pocket cash costs are as low as $30 / barrel; we need to account for the payment of 100% of the overhead that is being incurred each month, overhead that I believe is as high as $15 / barrel. Then each day the industry is flushing $800 million down the drain. For 30 days that cost is $24 billion that they don’t have. At the end of 2019 our sample of 20 producers, representing 10 million barrels / day, had $5.4 billion in working capital, which doesn’t include what was consumed in the first two months of 2020. Banks had already begun to refuse access to lines of credit. And the real kicker is that there is still storage available today! Making May, or post virus hibernation, look like...? Or dare I ask what 2025 is shaping up to look like? 

It would seem more people are beginning to join in on my dire predictions about the state of affairs in oil and gas. As I noted above it didn’t have to be like this, we can turn this ship around quickly. The first quote is from oilprice.com author Mitchell McGeorge who lays it out the best I could have ever imagined. 

The world’s oil markets are at a crisis point arguably not seen in its history. 

With global oil demand curtailed by an estimated twenty million barrels per day due to the coronavirus led shutdown in the world’s economy, the oil war would turn an already dire economic outlook for global energy demand into a catastrophe that could change the energy landscape forever. An increasing number of producers are now losing money on production, wells are being shut-in and in certain areas (e.g. Canada) the oil industry may never recover – a generational destruction of personal livelihoods and the end of a reliable source of national wealth and revenue.

Yes, the economic crisis caused by the coronavirus has severely affected the global oil markets but, the actions of the participants in reaction to this crisis have shown an industry in the grips of a mass suicide.

And

As often the case since 2017, the US is looking for others to do the ‘heavy lifting’ when it comes to the supporting of the global energy market. OPEC and OPEC+ have legitimate gripes that their support of the global oil price through production cuts has directly led to continuance the US shale industry’s exponential production growth.

US shale production has grown to such an extent that it has helped the US eclipse both Russia and Saudi Arabia in becoming the world’s largest oil producer. This has been trumpeted by the US President as the US achieving energy independence. 

To the often-made complaints by OPEC and OPEC+, the US has always cited ‘free market’ forces. How ironic now that there are calls by domestic US shale producers for tariffs, duties and even limits on foreign oil to provide an ‘artificial’ oil price floor.

From World Oil the simple, basic and now obvious comment.

The current oil crisis will see the energy industry finally achieve the restructuring it so badly needs

Of course this has already been painful for many in the industry. The market capitalization of our sample of 20 producers at the end of March 2020 sees losses of $234 billion. Extrapolating that across the North American producers it comes in at about $936 billion. To reiterate that is three months losses just for the investors. It’s not as easy to calculate the losses and pain being realized by others who have been so fundamentally betrayed by the mindless, self-interested bureaucrats, but maybe that's the point. When we first published our budget in early 2014 my discussions with bureaucrats reflected they were confused as to why $8 billion was necessary. Today we see what Mitchell McGeorge calls “The world’s oil markets are at a crisis point arguably not seen in its history” which could no doubt be solved by said bureaucrats for $5 in total. It’s just they don’t want to. That it is such a big issue makes me think we’ve priced our solution in the right ballpark. “Cost benefit analysis” is a term in business that I suggest bureaucrats look up and weigh our budgeted costs against the perceived benefits of actions they didn’t take. 

As Mr. McGeorge noted, producers call for tariffs, duties and limits on foreign oil, and I would add the production allocation deemed necessary from the Texas Railroad Commission are the focus of the bureaucrats today. All of these are unnecessary when we consider the business principles of the Preliminary Specifications price maker strategy. By making independent decisions at each property, based on actual, factual accounting information that determines profitability of the property, then deciding to produce or not is not collusion as the excuse-a-minute bureaucrats make it out to be. You would not be colluding with anyone, you would be running a profitable business. It is basic business that is done at every level of every industry. Ford has had the sales leading truck in the F-150 for decades. Yet each year they shut down production to ensure that they don’t overwhelm the inventories at their dealerships and lose the pricing power that they have. Ensuring that the product remains profitable. Only a fool would continue to produce a product that lost money and think they were doing something altruistic. 

Therefore making profitability the basis of production allocation is the only fair and reasonable basis of allocating production. Government mandates don’t work as evidenced by the initial success of the Alberta government's institution of production allocation of oil at the start of January 2019. These production limits are still in place and the province's oil production is receiving prices as low as $6 / barrel. The lowest on the continent as there is no incentive for the producer to uphold the production discipline to keep production off the market. OPEC has had nothing but difficulty in instituting quotas over the past decades. Although it has worked recently, they’ve been ineffective in the global market. The only method of production allocation that will provide the market with production discipline is by using profitability. Then producers can maximize their corporate profits by shutting-in their unprofitable production, working these properties over to bring them back to profitable production, and therefore not diluting their overall corporate profits with the losing properties losses. However, this a feature only of the Preliminary Specification with the user community and service providers in place.

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.