Budget Revisions

We will be resuming our series of “Organizations Don’t Change, People Do,” after we take a short break to fit in some timely arguments.

I’ve revised People, Ideas & Objects budget for a number of reasons detailed in this post. Our costs are escalating based on the demands of time. There are ways in which we can effectively deal with these time constraints in systems development. There are three alternatives to choose from in terms of which priority to focus on; time, quality and cost. In systems development you’re provided with the opportunity to select two at the expense of the other. We have always focused on timeliness and quality as the two priorities for the Preliminary Specifications development. This therefore increases our costs. If not for the Preliminary Specification the cost to industry would be substantially higher than just the cost of our development. The value proposition of the Preliminary Specification is $25.7 to $45.7 trillion over the next 25 - 30 years. I would think that most people in the industry can see clearly how our value proposition generates the value that it does. With the destruction that has happened for the past four decades, that we see happening today, and will continue to happen for the foreseeable future. Change is a necessity and our decentralized production model’s price maker strategy enables our value proposition to be realized. Change also needs to be exercised by the removal of the dead weight bureaucrats from their position of power in the industry. 

Conversely we now know with absolute certainty the alternative of doing nothing has been fully explored by our good friends the bureaucrats. Who chose to jeopardize everything for their personal comfort and convenience. Their actions are directly responsible for the damage and destruction that we’re all facing in the industry, and they have few scapegoats left to blame and excuse themselves from. Their “nothing” alternative has now failed spectacularly and we anticipate their exit from the industry in rapid fashion sometime during the remainder of this year. The Preliminary Specification was always conceived on the basis of creative destruction and the active rebuilding of the industry on the vision contained within its business model and markets. There are few other opportunities, in my opinion, and any others have not yet been conceived of, which would take the better part of a decade to be proven operational models to the point where the Preliminary Specification exists today. The choice is stark, there’s today’s environment and there’s a dynamic, innovative, accountable and profitable oil and gas industry that can be rebuilt on the basis of People, Ideas & Objects work. I don’t see a choice, however I do see a greater sense of urgency, backed by the temporary good fortune of an abundance of oil and gas deliverability. The costs of People, Ideas & Objects development have therefore been increased by 38% to $3.7 billion U.S dollars. 

Our margins were allocated between a royalty to myself and the profit that People, Ideas & Objects would earn. In our past budgets this factor was the cost to be at ⅓, profit at ⅓, and royalty at ⅓. Therefore the profit that will be realized by People, Ideas & Objects will also be $3.7 billion U.S dollars. Producers consider this highway robbery and are pointing to these costs as opposed to the value that will be realized once the price maker strategy is implemented. Industry has earned the reputation of knowing what the cost of everything is, yet knows the value of nothing. They no doubt would prefer I operate in their style where I would take the $3.7 billion, build the software, associated user community and service providers. Then prior to making the software operational hold the industry hostage for the remainder of the cash necessary to make this a profitable venture for myself. Therefore I believe there will be two business lessons in this transaction that we’re defining for them. That they’ll be needing to pay cash upfront for the costs of many things they took for granted before. And secondly they need to understand that businesses operate on profitable business models. An expensive lesson I’m sure but one that I’ll gladly provide them. What producers do know as fact today is that I’m patient, driven to solve this problem and not afraid of their crap.

The total of the two categories now sits at $7.4 billion U.S. dollars. Due to the fact that I see no alternatives, that I am in my 30th year of bringing this solution to market and there is a building sense of urgency in the marketplace. I am raising my royalty to $4.6 billion U.S. dollars or 38% of the budget. That brings the total for the development of the Preliminary Specification to $12 billion U.S. dollars. These costs will be allocated and distributed on the following basis. The 2019 year end boe / day production was 38,063,392.46 barrels for Canada and the U.S. Converting gas at the traditional 6 to 1 heating value basis. Therefore our budget which is financed and allocated based on North American producer deliverability is $315.26 for each boe / day as of December 31, 2019 production volumes. Which isn’t bad really. Even with today’s oil price of approximately $37, one years revenues would be $13,616.00 making the one time cost of the development of the Preliminary Specification just 2.31% of that barrel of oil's full year's revenue. 

Spending what is required on developing the Preliminary Specification will stop the behavior of producers sponsoring excessive competition in the marketplace. Producers won’t be able to afford anything else after the development of our solution and they need to learn to respect the rights of others and uphold their Intellectual Property. Once again I’m glad to be the one instructing them on this finer point of business. Focus and commitment to their business beyond the presence of the next bright shiny object has always been an issue with them. This is apparent in their current activities of beginning to return their shut-in production. 

These are the opportunities that are provided to you in a capitalist marketplace when you build value as opposed to destroying it like the bureaucrats have. The need for industry to have some skin in the game here is paramount to the success of the initiative. Bureaucrats have always avoided having any involvement in initiatives such as ours and that somewhat predetermined any ERP developments failure, as it has with the outcome of the industry today. Our user community needs to have the active involvement of all areas of the oil and gas industry, service industry and others associated with it. With producers money, it may be that their involvement would follow? I am also cancelling my personal coverage of any budget overrun as I had pledged to do in the prior budget version. If there are any cost overruns they will be subject to the same margins and pricing requirements defined here, and will be paid by the industry based on North American oil and gas deliverability. 

The producer bureaucrats have managed the industry as if the revenues earned by the producers was money that was theirs and everyone was trying to “leech” off them. In a way that is 100% correct. Oil and gas is a primary industry in which the revenues of the producers are representative of all of the costs associated with all aspects of the oil and gas, service, tertiary and general economy. These “leeches” are also what allow the bureaucrats to be in control of those revenues and hold on to them as if they were their own. The fact is now they’re not, they’ve lost operational control of that aspect of their business. More will have to be done by the producers to ensure that their wants and needs are met by the service and subsequent industries through the sponsoring and direct funding of the innovations and developments necessary to do so. And just as People, Ideas & Objects are doing in advance. Gone are the days where anyone can go to investors and sell them the idea that oil and gas is a good place to invest. Bureaucrats destroyed that opportunity for themselves and everyone else. 

The industry has been managed in a manner that has cost everyone several trillion dollars. The amount that will be lost in 2020 could be close to a trillion dollars just for this year. Without a plan or strategy to rectify the situation there’ll be no change in the industry. Without a renewed focus on profitability there will be no change in the industry. And what are said bureaucrats talking about in the marketplace today? Nothing. We’re probably looking at picking up the pieces of the industry immediately after these bureaucrats leave. Why would they leave? Simple, there's no cash. Without cash you have no business. Making it exponentially more difficult to manage. And without cash what purpose would the bureaucrats stick around when they were only there to ensure they were skimming most of the bounty for themselves. I found this quote from Micheal Milken’s website and it deals specifically with this cash issue. 

The simple rule of thumb is that risk in capital structure should vary inversely with volatility and risk in the basic business. To paraphrase the late Harold Geneen of ITT, you can make a lot of mistakes in business, but you can’t run out of cash. For some companies, even a dollar of debt is too much. This was as true for some airline, aerospace and technology companies of the late 1960s as it was for telecommunications, networking and Internet companies of the late 1990s.

But who knows maybe these bureaucrats have developed a way in which companies don’t need cash. I mean this of course by not needing cash, and yet doing so in a productive way. Investing in your businesses profitability is a productive activity. The value proposition of just drilling wells was never of any value, which is certainly evident today. 

We’ve come a long way since we published the Preliminary Specification in 2013. Certainly it’s timely in the marketplace today, which doesn’t mean that the bureaucrats realize that it’s necessary. They’ll need to be pushed out or left to leave and therefore the need for Preliminary Specification will not be realized until the mid term. There is one criteria that may change that. And that is the looming complete, and possibly somewhat permanent collapse of the global natural gas price. When people learn of negative prices in global natural gas markets they’ll know that somethings rotten. The issue is that the Organization of Natural Gas Exporting Countries ONGEC+ doesn’t exist and shale based natural gas producers went through a wholesale destruction of their business during the financial crisis over a decade ago. Maybe the bureaucrats are feeling there won’t be much left to lose. I see it as additional justification for the bureaucrats to say so long. 

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

"Organizations Don't Change, People Do," Part V

OPEC+ are meeting again Thursday to discuss production volumes. Specifically what is the size of the cut for the month of July? It was agreed previously that their July cut would be reduced from 9.7 million boe / day to 7.7 million boe / day. There are conflicting objectives between their two largest producers Russia and Saudi Arabia. Russia wants to stick to the plan for the July 2.0 million boe / day increase in production and Saudi Arabia wants to extend the 9.7 million boe / day cut until the end of the year. There seems to be room for compromise in the extension of the agreement of 7.7 million boe / day for the remainder of the year. No doubt Saudi Arabia is feeling pressure from the Americans whose credibility is increasing in OPEC+ each day as U.S. deliverability continues to decline. Nonetheless, a two month old agreement with its parties disagreeing publicly, who were allegedly at war with one another prior to those two months, looks really promising to me. 

The severity of the cash situation in the industry is becoming increasingly difficult and more severe, earlier than I thought it would. There are more lay-offs being announced throughout the industry and there is a sense of urgency beginning to be seen in the actions of some of the more senior producers. Cuts this deep must make those people that are remaining wish they were the ones selected. How these producers think they’ll continue with so few resources on a go forward basis is beyond me. But that would not be the point would it. This shows the starkness of the reality that the producers have placed themselves in. That bureaucrats believed they could muddle through this and do nothing about it was a betrayal of the people who work in the industry. That natural gas began this destructive process over a decade ago is evidence that actions should have been taken by now. Now as oil maps the same trajectory and plan that bureaucrats instituted for natural gas, they feign disbelief and are only now beginning to act. As we’ve noted before, if G&A is only 2.9% of revenues during all of 2019 for our sample of producers. Then why is it a 10 - 15 percent cut in G&A is seen as necessary? The fact of the matter is that G&A has always been part of the ponzi scheme's facade. And at today's oil price G&A is, by our calculations which we challenge anyone to prove our numbers otherwise, 28.5% of revenues. 

Continuing in the bureaucratic management method which sees whatever issue is screaming the loudest at the moment. Our White Paper “Profitable, North American Energy Independence - Through the Commercialization of Shale” documented how the monthly overhead and capital costs drain the cash resources of the producers each month with no replenishment. There are no adequate returns of cash in this capital intensive business to make up for the spending that the producer conducts. And as a result you had the unique situation of the annual shareholder fleecing, or as they described it, raising more capital. Only to go back to the market each and every year and tell the investors that the money they gave them last year are now sunk costs. Unfortunately for the bureaucrats the oil and gas investors eventually figured out they were the mark in the scam and left. Again nothing was done. Cash continued to drain in apparently a transparent manner with only myself jumping up and down about it. The issue about cash, and the one that is facing the producer bureaucrats this morning is that without cash you have no business. No cash = no business. And as I noted on Monday: A disaster yesterday, and certainly one today, only to be followed by a bigger one tomorrow, only to add today no cash, no investors, no bankers, no excuses and no scapegoats. Since the publication of the Preliminary Specification I was unable to convince the producers to invest in their businesses profitability by implementing our software, user community and service providers. Suggesting that an industry that doesn’t invest in its own profitability isn’t one that anyone should be interested in. 

Another point about the capital assets of the producers is of course the ponzi scheme aspect of them. Bureaucrats claim they’re costs are $50 / bbl however we believe them to be $150 / bbl when you allocate the costs based on the decline curve. Producers allocate their costs to every known molecule of oil and gas reserves that they have. Then only recognize the smidgen of capital costs for the production from those reserves. Even though those remaining reserves will not be accessed this decade and without massive additional capital expenditures and steep decline curves. Returning cash to the business was never an issue when you had investors to fleece, especially when you lined them up three times around the block. 

The desperation for cash was noted late last week when Occidental cut their dividend to $0.01. That’ll impress the future investors and give the current ones every reason to stay. This is on the heels of an 86% cut from $0.79 to $0.11 on March 10, 2020 and lets not forget how well the stock is doing. Such foresight, such wisdom, such planning, such effective management. The $0.11 dividend never even made it into existence; this management is so proactive. I am trying to be positive here. Cut and run, cut and run. Sorry I was reading ahead in the manual “Bureaucracy for Dummies.” What is there left for our good friends, the bureaucrats? They’ve earned their keep and this was always someone else's fault, that is if you were listening to them. The mass exodus will begin now, I believe, prior to the second quarter reports. The all knowing directors may be the first to go. We’ve mentioned before their insurance coverage may expire if they don’t. Such wisdom and foresight on their behalf, it was just mid May when they committed and were voted in to sit as directors for the coming year. That was just over two weeks ago. This is not rocket science, and I’m not Elon Musk, this is history and should have been well known by the bureaucrats and their directors, especially since I’ve been yelling at them about this. I wonder at times though, does the fact that I was pointing this issue out so long ago attach a liability to the directors and officers of the oil and gas producers? Other evidence exists that shows a lack of action by these bureaucrats. OPEC was instrumental in making production cuts these past three and one half years that had material effects on the price of oil. Yet all we heard from the North American bureaucrats was a continued belittling of them. The shareholders now have evidence of these “officers” and “directors” fraudulent behavior and will now want to recapture some of their investment from these bureaucrats bounty these past decades, and let's not forget they’re insured for this type of risk! Change only happens if we create change. These last statements will have the insurance companies motivated won’t it. Lawyers are starting to perk up, they need work too. After all lawyers like shareholders are people too.

August 31, 2020 may have been too generous of a time allocation for the producers. It would appear that time is slipping away much faster than when I first established it. The one advantage bureaucrats are finding in this coronavirus shutdown is that they don’t have to face those that they’re laying off. We should all question the actions of these bureaucrats in the process of laying people off. Why do that when the next issue that’ll be screaming the loudest will be what triggers the bureaucrats resignation? 

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

"Organizations Don't Change, People Do," Part IV

While Rome is burning we see the leadership in the oil and gas industry undertaking a discussion that represents a complete disconnect between reality and their mindset. Lately conversations that these people are having makes me marvel that they’ve ever attained their positions of responsibility in the industry. A geologist commented that no amount of accounting changes will make the basin profitable. A reflection of the disrespect that engineers and geologists have for the accounting profession and its designated role in oil and gas of “just paying the bills.” A researcher who stated that hydrogen as an energy source was the real future. A former partner from Deloitte & Touche suggesting that the service industry needed to up their game and invest in Information Technology. Or others that are heart broken that deliverability is moving downward from previous high watermarks and may never be achieved again. These were the people we’re finding who were only assigned the responsibility for rearranging the deck chairs on the Titanic, and instead occupied themselves with the bright shiny objects in the sky. Is it any wonder that $2.2 trillion of investor dollars have been wasted in the past decade with such activities occupying these minds. There’s no inherent capacity to see the damage and destruction they’ve caused out of guilt or absolute inability. Or is it a continuation of feigning stupidity to cover up their crimes. Let’s find out.

What most people are seeing and feeling towards oil and gas these days is absolute disgust at the leadership in the industry. Negative oil prices appear to have been the last straw. Moving people from denial that there was a problem, and that all was needed in order to overcome these issues was a little faith, determination and dedication. This has been most people’s position since the decline in natural gas a decade ago. Going through the process of negative oil prices has caused these people to be angry. Anger at the choices they’ve made of choosing a career in oil and gas. Anger at the loss of any future prospects. Anger at the prospect of having to start all over again in either a new industry or rebuild from these ashes. They see the obtuseness of this leadership without the inherent bias of an insider now, and they’re angry that they’ve been so deceived. 

Is the state of the industry all that bad, really? “Real” profitability should be the goal and desire of everyone who works within an industry. I suggest exclusively, that is the business. Not one oil and gas producer that I’m familiar with over the past four decades has dedicated themselves to this principle. It’s always been some theory or excuse that was topical at the time that drove the discussion and direction of the producers. “Building balance sheets?” It was management by way of the head lines in the media and through the rumor mill. The principle of profitability is the necessity that industry requires everyday of their existence to ensure that all those that are working within that industry are being taken care of. In oil and gas this includes the producers, the service industry, tertiary industries and the general economy that directly benefit from a profitable and healthy oil and gas industry. But let's not forget the investors, who are nothing more than you and I, and the bankers. Who’s exit from the industry has received at best a passing shrug from our good friends the bureaucrats. It's all of these groups and people who directly support the industry and are the critical resources that make the industry function. Does anyone argue that profitability is no longer required in oil and gas? It was this argument that was thrown at People, Ideas & Objects for most of our existence. “Profitability doesn’t matter, it’s cash flow, no one cares about profits,” I was told at least a thousand times. 

Shale’s performance is now as expected and what we’ve documented in the White Paper. With financial deterioration other frameworks are quick to follow in terms of the same decline. Now we are seeing the decline in both oil and natural gas shale performance as a result of the chronic inactivity and lack of profitability by the bureaucrats this past decade. These declines will be a permanent and significant demarcation of the performance of the producers. Not for any physical reason as a result of the formation or operations in the field. But due to the financial collapse of the industry. We have screamed and shouted about leaving all of the costs sitting on the balance sheet as being highly inappropriate and now the industry will face the worst most devastating aspect of this. And it's just as we noted in the White Paper, the investors commenting that shale “was a rapidly depleting asset.” Investors always seem to capture the full scope of the issue in one sentence. And yet, no one seems to have heard what they said or even noticed that they’re gone! The production decline curve is a result of the shut-ins certainly, but mostly attributable to the lack of continued drilling. Note all of this damage and destruction would have been avoided if the industry would have adopted the Preliminary Specifications decentralized production model’s price maker strategy on a timely basis. The first graph is from Bloomberg and the second is from EIA.

Performance and profitability have been the theme that we have harped on here at People, Ideas & Objects. The Bloomberg graph shows precisely how the performance of the industry will become the most tragic event any industry has ever witnessed. Capital costs have been stored on the balance sheet for generations in order to build bigger, better balance sheets, for whatever reason a company would even think that that is a corporate objective. Just part of the ludicrous culture in oil and gas. Here we see the deliverability of shale declining to half in 18 months. Also note that 2017’s contribution to the total is substantially below what appears to be 20% of its original. Shale’s cost according to this website is $73. This price assumes that the capital costs have been allocated to each and every molecule of oil in the reservoir. Of which there are a substantial volume of. However those reserves and the continuation of that high deliverability will only be realized as a result of several iterations of drilling a new lateral, casing, cementing, perforating, fracing and putting back on production. The majority of the costs that were incurred in initially drilling the first phase of production remain in property, plant and equipment assigned to all of the vast booked reserves. Therefore, in the bureaucratic world, new investor money would be used to drill and complete the next lateral and the costs would be added to the reserves in the formation, never to be captured through the second decline curve etc. However investors rejected the bureaucrats' ponzi scheme years ago and these bureaucrats had to let the charade play out completely so that they could make as much as they could before they left the industry. It should be inherent in any “business” that the initial shale drilling and completion costs be profitably captured and returned in the form of cash in the initial 18 months of flush production! Now with mountains of unrecognized capital costs, depleted deliverability volumes and significant capital requirements for the next phase… 

Clearly the bureaucrats have resolved that nothing can’t resolve itself and will quickly do so sometime this century. These passive, lazy people have completely destroyed everything. There is no value inherent in anything in the industry. The sum total of the industry demands cash in order to operate and that number is going to skyrocket in the second quarter of 2020. Eliminating the liquidity of the industry for at least the next decade. You can’t run an industry without liquidity, and we should ask them how is it they’ll be able to regain it? The full scope of the damage will be on full display for everyone who’s worked in industry to gain a full appreciation of how completely destroyed their efforts these past decades have been. No doubt the virus will have been solely responsible for that and the chronic excuse and scapegoat machine will roll on once more. People I don’t think care anymore. It is difficult to view what has gone on here as anything but a fundamental betrayal of these people’s trust and goodwill. Bureaucrats will say that will work itself out too, they’ll just pay these people really well. As if that is the only reason that good quality people work these days. People are interested in building and participating in things. Making them successful and growing with the opportunities that arise. Resolving the issues as they confront them and dealing effectively with them. And now what they’re presented with is the idea that hydrogen is a good place for energy to go? People also need to know that the promise of good money is a consistent, honorable commitment for the long term. Producers can promise the sky right now, but where’s the money going to come from and, quite literally the question people have is, what about next month, will that promise still be valid then?

People are resilient too. Once faced with a difficult situation and odds they’ll rise to the challenge if they can see their way through. Today they’re presented with muddling through which is a very effective vision for everyone to rally around. Who believes this small minded garbage now? They’ve been presented with excuses and scapegoats for the past decade as to how the situation was going to be reversed. But organizations don’t change, people do. Right now people want a change. A change in their environment in the form of a new industry, or a change in the direction of the industry in the form of new leadership. It’s bad enough that this alleged leadership didn’t see this coming. It’s just that People, Ideas & Objects have been screaming about it for the past number of decades that makes it a crime. It’s one thing to have these bureaucrats wandering around as they do now, oblivious to everything failing about them. Imagine the situation if the industry was profitable in the “real” sense and the cash flows were strong. Their lack of focus and drive to perform would lead to untold riches, for themselves, and a continuation of their management style that we’ve always known them to employ. A disaster yesterday, and certainly one today, only to be followed by a bigger one tomorrow. 

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

"Organizations Don't Change, People Do," Part III

I’m finding that people within the industry and elsewhere are concerned for the producers and also share People, Ideas & Objects sense of urgency regarding the time for action. August 31, 2020 needs to see the situation in oil and gas met with direct action by those that have the authority. I am almost 100% convinced that doesn’t include in any way the current producer bureaucrats. They’ve had plenty of time to have acted and any feigning of stupidity about this situation only reflects their guilt. For them to be giddy about today’s mid $30 price of oil is a cover story that doesn’t wash with anyone. People are now clearly understanding what the costs of oil and gas exploration and production are. There are now just slightly more than three months for action before the existing producers begin to lose control of their operations in a cascading collapse of capabilities and productive capacity. Already discussions of how the productive capacity of the U.S. oil deliverability may never attain its pre-virus levels can be found. This is unnecessary, we do not have to go there with the Preliminary Specification showing what is necessary for the industry to be built to provide a dynamic, innovative, accountable and profitable oil and gas industry and producers. And our White Paper “Profitable, North American Energy Independence - Through the Commercialization of Shale” details a three step plan of how to get there. This plan includes rebuilding the industry on the vision of the Preliminary Specification, expand the throughput capabilities of the industry through specialization and the division of labor and then build the profitable, sustainable energy independence needed for our society to prosper. The question now is, how has this critical situation come about in oil and gas?

Some of the research we conducted and included in the Preliminary Specification were the reviews of Professor Lord Anthony Giddens Theory of Structuration and Professor Wanda Orlikowski’s Model of Structuration. In essence Giddens theory has society, organization and people moving together at the same pace and interacting with each other in a harmonious way. However, if one of these three elements were to accelerate ahead or lag behind the others, there would be disruptive conflict. Professor Orlikowski’s Model of Structuration noted that Information Technologies were an element of society. Therefore IT would have a defining and supporting, but also constraining role in the change, or as Giddens puts it, transformational development of economies. 

What we have today is society and its people are accelerating their needs and understanding at a much faster pace than ever before. These are creating demands on our organizations that are best represented in the current term of disintermediation. Organizations that are incapable of making the transition to these new Information Technologies that people are using, those which are forming new societal structures and creating conflict. We see this today in the ability to Work From Home (WFH). Nonetheless oil and gas organizations have resisted the changes in society, particularly those that have affected Information Technology, and are unable to maintain the pace of change that people and society are demanding of it. This was initially represented, I believe, in the investors distaste for the industry, followed on by the banks and now the people’s disenchantment. People, Ideas & Objects therefore believe that only user based software, with a defined change enabled capability will enable the industry to accelerate with society and its people forward with the pace necessary to approach the issues and opportunities we face in the next 30 years. Yesterday’s thinking, as represented by the bureaucratic malaise, will not be the solution to tomorrow's problems. As we accelerate further and faster oil and gas organizations must keep up. 

We have documented throughout this blog and elsewhere in the Preliminary Specification that the costs recorded as property, plant & equipment on the producers balance sheet were nothing more than the unrecognized capital costs of past production. That the real cost of oil and gas exploration and production were in the region of $150 / boe. Our solution assumes there is a defined and absolute need to recapture the capital that has been invested in property, plant and equipment and have it returned to the producer in the form of cash. The means in which to capture the higher, or actual, capital costs of exploration and production are through the commodity prices charged to consumers. That is what businesses do. What I feel this shows is a trend in the current industry to defer the recognition of any cost, no matter how large or small. The focus of bureaucrats on cost control has been an exercise in spending bloat with the magic elixir of new, and yes their claim to innovative, ways by just deferring the recognition of those costs. 

It is in that sense that we see society beginning to move faster once again. This example shows that not only are the producers somewhat flatfooted in terms of the accelerating demands from society and people, they have conveniently sought to defer these newly identified and unrecognized costs which have been known over the past number of decades. The example is as follows. A regulatory ruling in Alberta on May 13, 2020 may have blown the lid off of another kettle in the industry, creating a substantial escalation in the actual capital costs of production and making it difficult for investors and bankers to find oil and gas appealing in any way they look at the industry. It may also single handedly eliminate the asset divestiture market in Canada. But before we go there, I wanted to mention too that these inflated capital assets on the balance sheet have had the benefit of impressing naive bankers in the past decades. Banks have loaned money on the basis of the reserves and not on the real profitability of the producer organizations. The organizations have been reporting specious profits and the debts that have been incurred are now substantially out of context in terms of the performance capabilities of the industry, and I mean all producers based in North America. Banks measure of risk is now disproportionately skewed throughout the industry making it difficult to see how that avenue of capital will soon become available to the producers. Now, back to May 13, 2020.

In this article it is documented how and what happened in a transaction where Shell Canada tried to sell three sour gas plants to a firm named Pieridae Energy. Pieridae is the classic, highly leveraged, risk oriented start-up that takes on gargantuan risks and suffers through to the big payday. Except there was some pushback from locals who felt that Shell was absolving themselves of the responsibility to deal with the cleanup of the three plants and its wells. Over the course of decades of production it was believed that Shell was the one responsible for the cleanup costs, estimated at $100 million and was absolving themselves of that responsibility through the sale to Pieridae. Noting that Pieridae’s future was not tenable, the Energy Regulator cancelled the purchase / sale agreement. Returning the assets to Shell.

 

What will the effect of orphan wells have on the future of the industry? The Alberta government has assessed this cost at $100 billion. This ruling received support from other Canadian producers who sought to avoid the clean up costs they would acquire if the purchaser(s) (Pieridae) are unable to continue as going concerns. Claiming they would be responsible for the cleanup if Shell was able to sell the three gas plants and Pieredae was unable to continue. Two of these producers Canadian Natural Resources, who purchased all of Shell’s heavy oil operations, and Cenovus, who purchased all of Conoco’s heavy oil operations, both of these transactions taking place in 2019. And therefore, these two Canadian producers do not have sparkling clean hands in the event that the regulator cancels Shell's purchase / sale agreement with Pieredae, which may leave Shell and Conoco on the hook for those massive heavy oil cleanup costs, absolving the current heavy oil owners in the process, the Canadian producers. Maybe, the issue of cleanup costs was not an unidentified issue in the sale and no one was seeking to avoid these? The issue is that Pieridae Energy is deemed to have a high risk of financial failure. Leaving the costs to others. Cenovus and Canadian Natural were not deemed to have been high risks at the time of acquiring the heavy oil projects from Shell and Conoco. And certainly if they were deceived regarding the cleanup costs then they’d probably best be quiet or be taken for fools again and again. 

If the need to deceive by deferring capital costs was not so strong over these past four decades we may now better understand the real costs of exploration and production. That’ll be something for this new industry to discover and ensure they capture. Is this a precedent, will it be replicated in other jurisdictions in Canada and what about the United States. I’m sure those that were motivated by the deferral of orphan well costs were expecting to dump them off to someone else. If that is no longer effective, will this new industry be able to absolve themselves of these costs and begin with a lower capital cost threshold than what currently exists?

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

"Organizations Don't Change, People Do," Part II

Just when you thought it was safe to think otherwise, Shell announced it’s laying people off. 

Royal Dutch Shell will use measures including voluntary severance for staff to bolster its finances as the coronavirus pandemic batters profits, according to people with knowledge of the matter.

and

BP Plc promised its employees their jobs were safe at least until the end of June, but companies including Chevron Corp., Marathon Oil Corp. and Halliburton Corp. are laying off employees.

That is more than a whole month of extra job security if you work for BP. Such are the benefits of working in oil and gas these days. If we’re expecting a change from this behavior then who would technically be the fool? What producers have set as precedent, that it’s ok to blame the people for their difficulties, then they’ll find it difficult to make any changes from that in this “coronavirus pandemic” environment. Our sample of producers recorded 2.9% G&A costs in the first quarter of 2020. Exactly the same 2.9% for the entire 2019 year. Odd isn’t it that oil prices ranged from $53.36 to $63.47 for 2019 and only $20.10 to $51.01 in the first quarter of 2020 yet the percentage of G&A remains the same? I think what this proves more than anything is that overhead costs are much higher than what bureaucrats want us to believe. The amount I’m familiar with is 85% of overhead is capitalized, which would make the 2.9% really 19.3%. An amount that would be more consistent with my understanding. Throughout the time that I’ve been writing here I’ve found no argument or disagreement when I make that assertion. If the overhead burden for oil and gas operations was only 2.9% why lay off people? Accepting that our sample producers’ losses on revenues of $52.3 billion in the first quarter of 2020 was $33.6 billion. Would a reduction of the 2.9% in overhead, or the $1.53 billion in reported overhead costs for the first quarter of 2020 make any difference? At some point producers have to come clean with their numbers. If however overhead was 20% of revenue then cutting these costs would make a material change to the losses that were incurred. 

I’m pleased that producers have / are / will be learning how best to manage their organizations by better managing their production volumes and inventories, based on commodities prices. Proving People, Ideas & Objects hypothesis that oil and gas commodities are price makers would have been easier if they just read how the Preliminary Specifications price maker strategy operates. Tearing the place down wasn’t necessary in order to learn this, and the extent of the damage is now well beyond what can be remediated at any point. Creative destruction is a powerful force in the marketplace. Despite today’s dancing in the street by the bureaucrats who feel they’ve solved all their problems. (We noted how that’s not the case in last Thursday’s post.) Commodity pricing issues, in addition to their second quarter 2020 financial issues, should have them asking what is it that OPEC+ will be doing in the short to medium term. Or, what is OPEC’s long term strategy? With oil prices near $35, OPEC+ are in good shape, and North American producers hopefully better understanding what their role as swing producers involves. What will the expectation be in the marketplace? I think it will prompt OPEC+ to maintain production volumes at 100% of their capacity. As the low cost producers that is what the economic theory would dictate, and that would be my suggestion of what will be happening. One thing for certain is that these producer bureaucrats could blame OPEC+ for putting them out of business. A world class excuse and scapegoat.

https://knoema.com/vyronoe/cost-of-oil-production-by-country

What will be needed is a more dynamic, innovative, accountable and profitable oil and gas producer and industry throughout North America. This is the objective of People, Ideas & Objects Preliminary Specification and to do so we need to rely on nothing from the current organizations in the industry. Ours is a new industry organization that is the creative aspect of the creative destruction principle. If you believe these producers have a chance with their current financial position then you won't be interested in our offerings. I just don’t see the capabilities and capacities in senior management to make the appropriate decisions. Besides organizations don’t change, people do. The demand for change in the industry on a wholesale basis is a necessity and I’m sure we’re all grateful that we’re dealing with an abundance of energy at the moment. This new industry configuration will be dependent upon the people that make up the industry. You will never generate a dynamic, innovative, accountable and profitable industry from what exists in these organizations. But you most certainly can with the people who know intuitively what the situation is. This change begins with the People, Ideas & Objects user community. Who we see taking a leadership role in this industry transformation.

Our user community involves the understanding and knowledge that usable software is only developed with user input. Users are critical to software quality, usability, user experience and accuracy. People, Ideas & Objects will not develop software without user community involvement and has listed our user community as one of our three competitive advantages. Intellectual Property and research are the other two. With the scope and scale of an industry wide implementation and comprehensive functionality of an ERP system we believe that our user community will consist of approximately 3,000 individuals. This is in order to cover off the expected number of processes in the Preliminary Specification. Each user community member will contribute to the overall success of the software by contributing what they know and understand about the industry and how it operates. It will then be determined through an Artificial Intelligence algorithm developed by the user community themselves, which assesses the contribution of each individual user community member throughout the softwares development, and assigns an individual process within the software to be the domain of the user community members assigned service provider organization. Their service provider organizations are where they will provide their assigned processes management of the software and services to the entire population of industries producers, as their clients. The service providers bring the critical change to the industry structure that enables the Preliminary Specifications decentralized production model to turn all of the producers property costs variable. The process domain that is assigned to the service provider is the exclusive domain of that organization, supported by our Intellectual Property. There will be no competition based on price within the service providers. Competition will be based on specialization, division of labor, quality, automation, innovation, leadership and integration as their critical competitive advantages. To name just the highlights. Using our Intellectual Property that is generated in the User Community Vision as the basis of that competitive structure. 

As we’ve mentioned, service providers are a new sub-industry that will provide the accounting and administrative aspects of the oil and gas industry. These organizations will also be the change leaders that make the industry more responsive to the opportunities and issues that it faces. Due to the fact that the user community members are the only people that People, Ideas & Objects developers will look to for direction on the development of the software, it is the user community that controls the direction the industry will move towards. People, Ideas & Objects, are a permanent software development capability and capacity that will be available to the industry through the user community. Only user community members have exclusive access to our developers through our user community vision, and oil and gas producers seeking to have their wants and needs provided can have those attained through the user community. There will be no one else that will be able to solve the producers issues. As we’ve always suggested, who do you see today about making a change to the software that you use? What we’ve learned is that organizations are defined and supported, but also constrained by the software that the organization uses. Without a change enabled capability built into the new oil and gas industry, we would be cementing these organizations in a constant state. 

These user community member positions are new to anything that has existed before. They will earn a contract fee for the part-time work they do with the People, Ideas & Objects developers. And have their service provider organizations as their primary means of earning a living. When we understand the size of the administrative and accounting costs of the industry today, not the G&A that is recorded by producers, and then allocate the real overhead costs of the industry across the 3,000 service providers we see that these organizations will be substantial in terms of their size and revenue base. 

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

"Organizations Don't Change, People Do" Part I

We’ve noted before how Chesapeake Energy had to pay an upfront $25 million bonus for its bureaucrats to stay motivated during this next year. The announcement for this was dropped on a late Friday night with the companies first quarter 2020 financial statements. This courageous act has not been well received by the individual investors who may have had to recall their stock was once worth $12,635.76 vs. the $12.49 at the time of this writing. Say one thing about Chesapeake, they've kept the math simple. We’ve all sat and watched in amazement these past few years while the industry circled the drain. No action, not even any discussion, has been taken by any of the producers to remedy their situation, only excuses, scapegoats and “they’d been through this before.” Negative $40.32 oil had a somewhat temporary motivating effect for the bureaucrats to start rolling off the couch and do something. Shutting in production which we’ve heard nothing but howling about for the whole time People, Ideas & Objects suggested it was necessary. Unfortunately now negative prices also appear to be the motivating factor for people involved in North American oil and gas to give up on the industry and look elsewhere. Or was it the absurd $25 million Chesapeake bonus. Either one or both, with the coronavirus also providing an opportunity for people to make their personal changes, change seems to be catching on throughout the oil and gas industrial complex. Which proves the well established rule that organizations don’t change, but people do.

There is no other industry that I can think of that treats its people in the manner that oil and gas producer bureaucrats do. They believe they’re “disposable, temporary and costly units that sometimes are needed.” What description would bureaucrats use? They love to claim they’re the most sophisticated technical industry in the world yet they treat their people the worst compared to all other industries. Producers will claim that they pay the best, however, now that these people’s education has been exclusively oriented to the industry, they have a small family and a mortgage, they can see when they take their compensation from the good years and spread those dollars out over the good and bad years, their compensation has been below minimum wage. The risk, the anxiety and the fear of another downturn looming on the horizon is not something anyone grows familiar with as their career advances. Resilience in the general population of an industry is a limited resource. The amount of that resiliency or goodwill which the oil and gas producers have consumed from its people, is beyond what is tolerable and / or acceptable. People are done. 

I thought that the producers had until August 31, 2020 to move towards a new strategy and vision. Clearly I’ve miscalculated the timing here, the actual time may have passed as early as April 20, 2020 when oil prices went negative. I’ve also miscalculated the full impact of the coronavirus’ and how that’s being seen as an opportunity for people to make some changes. If the producer bureaucrats are claiming that they’ve incurred all this damage as a result of the coronavirus why can’t others use that excuse too. This phenomenon that I’m seeing is not limited to the oil and gas industry. It affects all of the people that are involved in the oil and gas complex. Including the service industry and general economy, but also the cities in which the industry is operating in. Whether that is a head office or field areas. What is it that they have to lose if they made the career move to another region, another industry and worked there for their remaining 20 - 40 productive years?

One of the reasons that August 31, 2020 was the point in which I felt the industry had to make a determination of its future strategy and vision was their June 30, 2020 financial statements were going to be a surprise to everyone concerned. Everyone can understand that half way through the quarter we see prices have now broken through $30, that just isn’t doing anyone any good. Add to this looming disaster the financial consequences of shutting in production, or reduced production volumes and you’ll have an even more dramatic effect on the producers. People, Ideas & Objects have always been proponents of shutting in production in order to remove the marginal production from the marketplace. And that is being done through today’s industries actions. However there are many other attributes that the Preliminary Specification provides which include changing all of the producers' costs to variable, based on production. The real kicker therefore in the second quarter of 2020 is going to be the costs of the producers remaining fixed and that is going to be devastating to the producers financial performance. Bureaucrats are giddy at the moment thinking they may have solved the problem of overproduction by shutting in production, which they always claimed they could not do. This has and will have an effect on the prices of the commodities. What the Preliminary Specification also provides is profitability as the method of production allocation and most importantly a method of production discipline, profitability based on an actual accounting, and determining which properties to shut-in based on that actual accounting performance. Producing only profitable production. Today it may be that only the profitable properties are being shut-in as the producers, I can assure you with 100% confidence, currently have no idea where they earn their money. Look for the operating and net losses to hit new records, and working capital to be consumed as never before.

One of the distinguishing capabilities of the U.S. economy is that anyone can uproot themselves and move to the place where the jobs are. No other place in the world is as dynamic as the U.S. economy. Concentrations of industries are able to aggregate in specific geographical areas and leverage like minded people from throughout the U.S. People then gravitate towards those industries and towns where their jobs and interests are. Europe tries to do this with their labor mobility between countries but it just doesn’t offer the economic dynamism that is the inherent part of the creative destruction that is a feature of the U.S. economy. Also, to make the change within the megacities of Houston and Dallas most people only have to walk across the street in order to change the industry they’re involved in. The one thing that these people know and understand better than anyone is that there’ll be no bonuses for them to perform or stay this next year. But they do have high probabilities of being laid off or terminated the more experience they gain. There is no capacity within the current oil and gas bureaucracy for them to make or consider the necessary changes, therefore the people are now making their own changes. We know that organizations don’t change, people do. 

And that point in time has come where the extent of the damage that has been caused by the current producer organization, is incapable of making the necessary changes to correct what is killing the industry. What more proof do we need to determine this? It’s therefore time to replace it with a new method of organization that deals with the issues of the industry but also provides a vision and strategy for the future. The Preliminary Specification for example. That way the industry can be rebuilt stick by stick, and brick by brick while what exists today falls to the wayside. We should all be grateful that the issue we’re dealing with is an abundance of oil and gas. 

Next Tuesday in Part II of this series we’ll be discussing how People, Ideas & Objects Preliminary Specification provides the organizational change necessary for industry to deal with its issues, provide profitable production everywhere and always, but also a place for these people to grow and prosper by participating in the 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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

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

One of the difficult aspects of the producers current situation is that they’ve already had the bottom feeders pass through the industry hoping to make a killing. This occurred a few years ago just after the prior decline in oil prices. And of course those “investors” have now been burned too. The source of producers recovery will not be capital from outside their firms, it has to be internally generated. Something that they’ve not done for forty years. Our sample of producers have shown in the first quarter of 2020 a new criteria that proves this. The valuation of these producers which include 20 producers producing 10.42 mm boe / day has dropped to 2.8 times cash flow. Possibly the result of a beaten down sector, or, during the 2016 oil price meltdown faith remained strong and had these same producers trading at 13.3 times cash flow. The producers were managed in the past in a way that once the bureaucrats had their take, and were satisfied, then the industry was doing well and that was the extent of the ambition of the industry. We see this in today's commentary that shut-in production will be returned soon. The demand for cash is all consuming and continues to create the very low threshold of expected performance. Now faced with attaining a level of performance where “real” profitability will be demanded, and consistently, with an industry that has been decimated of all monetary value, and the supporting infrastructure has also been laid to waste, they’ve already proven, to me, that they’re incapable of rising to that challenge. They haven’t even identified that there is an issue, all of what they’re facing “is due to the coronavirus.”

Capital Discipline will be a new and quite different discipline in the industry compared to what the producer bureaucrats have been talking about these past few years. What they’ve been stating and claiming was they were very prudent with the spending of direct investment dollars. And they were prudent in this task. Nothing would ever be misplaced in terms of the money that was spent on new drilling, etc. Investors, boards of directors and their partners in the Joint Operating Committee have means and controls in which to ensure that prudence is never compromised and the integrity of the spending of investor dollars on new projects was always 100% as promised. The cash flow from prior investments distributed out of the Joint Operating Committees to the individual producers was always considered by the bureaucrats to be “discretionary.” Bureaucrats should have a good look around and understand the damage and destruction that has been realized is their fault. It’s not that they didn’t know what they were doing, they knew. I’ve been telling them since December 2005. A time in which they did everything, and I mean everything to quash the words being published here. Now that contrary piece of history is part of their legacy too.

If in the future, through the industry wide implementation of the Preliminary Specification, the commodity prices are dictating that only profitable production is produced anywhere and always in the North American market. Then capital will be returned to the producers on a much more rapid basis than what it had been in the environment where the only needs of concern were the bureaucrats pocketbook. Bureaucrats always knew then that next year's capital budget would be financed by investors. We will therefore need to implement enhanced controls over the distribution of this cash flow and ensure that it adheres to the more basic principles of good governance where it is distributed one third to dividends, one third to the reduction of debt and one third to capital expenditures. This will be the distribution of the internally generated funds necessary for the industry to a) recapitalize themselves, b) recapitalize the service industry in upfront cash payments, and rebuild the general economy so that it supports the needs of the oil and gas industry in all that needs to be done in the next thirty years. 

Back to the issue of capital discipline, the Preliminary Specification will establish a new dynamic in terms of when a producer will proceed with the exploration and production of oil and gas. The competitive advantage of spending drove the producers ability to acquire and outspend others in their pursuit of assets. This will not be the case when “real” profitability is the driving purpose behind the producers'. New criteria such as the impact on the commodity market, availability of production facilities and takeaway capacities will be more involved in the decisions being made. Acquiring decades of drilling locations will be somewhat of a theme at the local comedy houses and no longer exist in the annual reports. Viewing the business from a more global and holistic point of view will be a necessity. The division of labor of just drilling wells was the past bureaucrats thinking however it avoids the one critical point. As a primary industry it earns the revenues that are a result of the efforts of the producers, service industry and general economies contributions. Ignoring them and calling them greedy and lazy is one way of dealing with them, however it betrays the responsibility that the producer undertook when they banked their oil and gas revenues. Just one more fundamental betrayal I would suggest. What the producers will need and want in the near and mid-term future needs to be initiated, collaborated and funded by them to ensure that it’s done. Sponsoring these ideas and making them happen is the only way they’re going to materialize. These capabilities are specifically provided to the future industry participants through the Preliminary Specifications Resource Marketplace and Research & Capabilities modules. These are necessities now that the bureaucrats have so fundamentally betrayed this responsibility and destroyed most everything. As People, Ideas & Objects have recently noted here on many occasions, this will be done with producer cash upfront. It will also be time for the producer bureaucrats to toss that book of theirs “Excuses and Scapegoats for Dummies.” Whoever takes over will be operating the industry responsibly from now on.

The value proposition of the Preliminary Specification for the next 25 to 30 years is estimated to be between $25.7 and $45.7 trillion. Most producers should now appreciate the difference of how our numbers come about. If not they’re truly in the wrong business. People, Ideas & Objects first published these numbers in the Preliminary Specification in December 2013. It was this value proposition and our budget that offered no end of comedy relief for the bureaucrats who clearly didn’t understand the scope and scale of damage they were casing the industry. With the work that has been identified in the service industry and general economy on top of what has to be done by the producers themselves, the only source for that money is the commodity prices that are passed onto the consumers. Doing so by charging the consumer with the full cost of capital, royalties, operations and overhead, and yes profits of exploration and production of oil and gas. This assumes the industry begins to operate as a business and we accurately account for the actual costs of oil and gas and ensure that no production is produced unprofitably. Something that appears beyond the comprehension of what exists in the bureaucracy today, and beyond the capabilities and capacities of what is left in the ruins of oil and gas. I’ve always thought that expecting a mouse to run like a horse was a sure fire way to be quickly disappointed. I’m not expecting much in the next three and one half months. This being a time period in which People, Ideas & Objects believe action is demanded from the industry or operational control of the North American infrastructure will be lost for at least a decade. This can be mitigated by funding and beginning the development of the Preliminary Specification but it’s important that the bureaucrats understand there is an end to their line of abuse and betrayal. 

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

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

Capital costs have been a long term issue between People, Ideas & Objects and the oil and gas industry. We believe that capital in a capital intensive industry such as oil and gas should be represented in the costs that are passed on to consumers. Producers believe these costs should be stored on the balance sheet and admired for their size for a number of decades. We believe that today what is recorded on the balance sheet in property, plant and equipment is nothing more than the unrecognized capital costs of past production. The producers' process of storing these costs as property, plant and equipment has overstated their assets, earnings and cash flow for the last four decades. This treatment has also created a “cash crisis” in the industry for these past forty years. For most of this time the cash crisis was backfilled with annual share issuances that reloaded the spending that has become the distinct and only competitive advantage of the industry. Once investors learned how their money was being used they withdrew their funding, and the industry collapsed at a steady pace as a result of the chronic demand for cash. Each month producers must find new cash to fund their capital expenditures. These capital costs include the majority of the producers overhead and much of the interest which was capitalized on top of what are traditionally known as capital expenditures. Therefore these capital costs were funded by the investors and the consumers paid the producers operating costs. And the “cash float” that was returned each month from the sale of the commodities did not represent anything close to the recurring monthly costs of the operation. And hence the cash necessary to cover these recurring monthly costs needed to be sourced from new investors each year. 

I argued with the producers that they were not recognizing adequate amounts of their capital. Deferring the recognition of their capital over the course of the reserves life was causing these assets to bloat even further to unreasonable levels on the balance sheet. They unanimously stated that those were costs that were incurred in prior periods and no one was concerned about them. I suggested otherwise and the point was feigned to be lost on these bureaucrats. The critical question that I have today for them is really quite simple. Where does capital come from? A perplexing question I’m sure. The source of capital is derived from the competitive nature of the industry's performance. When everything is deemed to be capital, and hence revenues appear to be mostly profits, and in the indirect ways that we’ve noted here before, mostly the capitalization of overhead and interest, also overstate the cash flow’s of the organization. Therefore, eventually the situation was bound to be discovered by those who propose building software to remedy the issues in the industry and those that had invested in the producers organizations. (Note May 2020 begins my thirtieth year in trying to make this happen.) Once it was discovered the investors felt betrayed by the reporting of the producers and realized they could have earned real performance from other industries instead of being deceived. So the answer to where capital is sourced is a complex one that includes integrity, honesty and performance in the form of “real” profitability, just to highlight the most obvious points.

Contrary to the political climate that has been ever present these past few years. Investors and capitalism are not the heartless people they’re made out to be. They’re more or less you and I who can not afford to lose what little we may have. Investors are therefore not going to expend these hard earned dollars of theirs on a bet that the producers may have now seen the light and reformed their ways. They’ll want to see concrete steps being taken to ensure that changes are being made to the way things are done, and / or, the people who are responsible for this destruction are not allowed to continue. Once given a strategy and vision of how the industry would operate, a strategy and vision that will enable the industry to compete in the market for capital by providing a competitive performance based on “real” profitability. Then, and only then, will investors even begin to look towards the oil and gas industry. There also needs to be the understanding that the investors don’t have the resources to recapitalize the producers, recapitalize the service industry and make the general economy whole again. This is the damage that the bureaucrats have created and producers themselves will have to correct once given the opportunity. They’ll first need to establish a more equitable reputation than what they currently have. This will be a particularly difficult task as the producers have created a situation where they earned the reputation of being bad credit risks and proven to be unable to pay what they already owe. Therefore it will be those that survive in the service industry and the general economy that will demand to be paid in cash upfront. Much in the way that People, Ideas & Objects are demanding our budget be funded. There is no trust, and there is no faith that the money they would have to spend on the producers behalf, to generate their service revenues, isn’t better used by just tossing it in the incinerator. The industry has become a credit risk, a business risk and an operational risk for anyone who has the misfortune of dealing with the current producers. Having cash upfront to pay for what needs to be done will be the legacy of the damage that is and has been caused in this industry. I want people to understand that I’m not painting a dire situation here. On the contrary this is the rosiest picture that the industry could ever hope to attain from here on. And will be the case for the next decade or so. However, if bureaucrats continue to sit around picking their noses for another three and one half months, this rosy picture will have disappeared permanently. 

Now that producers have miraculously learned once again that they can shut-in production, it will now be their claim they don’t need the Preliminary Specification. Nothing could be further from the truth. What we’ll find in the second quarter is that the reduction of production did little to enhance the financial performance of the producer. Shutting-in production removed some of the excess production off the market however overproduction still continues, if one listens to the price. It may well be at that point these bureaucrats will state the Preliminary Specification doesn’t work. But they’ve used that excuse many times before. Shutting-in in today’s environment helps the commodity price but the costs of the producers operation, the actual overhead incurred and the actual interest incurred etc are fixed and do not change as a result of the changes in production volume. Whereas the Preliminary Specification turns all of the properties costs into variable costs, therefore the producer remains profitable at any point along their production profile. At full production they’re profitable and they’ll be proportionately profitable at a 30% production volumes. This is one of the key differences between what happens today and the Preliminary Specification. 

One of the myths that we consistently heard during the downturn of oil prices in 2014 to 2016 was how innovative producers were. How they had reduced their cost structures from $55 / bbl to $45, then $35 and finally $25 / bbl. It was miraculous wasn’t it. We suggested that it was nothing more than the bureaucrats redefinition of historical as it applied to historical accounting. Which of course it was, and it was only another in a long line of myths that have been pushed out as we’ve documented these past few years. What they were doing was prospectively looking at what they could then drill a well for based on the cost estimates from the field. Drilling rigs were looking for work and their prices were declining creating the situation in which the future costs would be so much lower than what had been spent on the 10’s of thousands of wells they previously drilled. Those were the good days weren’t they? As we’ve noted here performance isn’t the bureaucrats forte, deception and dishonesty have been. Based on the accounting principles they were using they were nowhere near the cost structure they were quoting but they had to be competitive to what other producers had stated in their press releases. Today’s a different day. All of the producers were subject to a level of impairment of their capital assets due to the application of the ceiling test. People, Ideas & Objects understand that bureaucrats think this investor money is a sunk cost, however we feel they’re only beginning to feel the effect of that attitude. Two producers stand out in terms of their capital costs incurred per boe in the first quarter. These are Chesapeake at $211.67 / boe and Crescent Point at $299.90 / boe which sounds impressive but those are Canadian Dollars, in U.S. dollars they come in at $211.52 / boe. Having researched innovation comprehensively so that it was implemented thoroughly within the Preliminary Specification I can assure you that innovations are not transient. The producers claim to have reduced their costs to $25.00 which are in some cases now over $200 is inconsistent with the principles of innovation. It must have been something else I guess. 

I sometimes have to laugh along with the producer bureaucrats at my foolishness. Why in the world would anyone concern themselves with performance or “real profitability.” Only capitalists concern themselves with those things. We should look back and ask ourselves what the situation in oil and gas would be today if the producers would have been concerned about performance and “real” profitability instead of filling their pockets. How would we as an industry, the service industry and general economy stand if it was properly managed? If we turn to the future and see the current situation in the industry, extrapolate that out five years or even ten years, it’s just more of the straight downward decline in capacities and capabilities. Or, we could rebuild the industry based on the vision of the Preliminary Specification. Forget about these bureaucrats and their legacy of abuse and mismanagement and build this industry into what it can be. With producers that are dynamic, innovative, accountable and profitable. Crazy, eh? You don’t have to be crazy to do my job, I just find that it’s a distinct competitive advantage.

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

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

We see in this desperate market situation where inventories continue to build, demand remains constrained and prices are woefully inadequate. Yet producers are moving their production back onto the market by reversing the properties that have been choked back and restarting production that was shut-in. At $25 why? There has to be some method of industry wide enforcement of production discipline. The probability of government mandates is a non-starter everywhere except for Alberta. And in Alberta they’ve only proven why they don’t work. Too much cheating with work arounds and overall dissatisfaction. OPEC proved that quotas are difficult if at all possible to impose so what is there to instill a method of production discipline in the North American producers? The only fair and reasonable method is the Preliminary Specifications decentralized production model’s price maker strategy that allocates production based on the determination of the property's profitability. If the property is producing profitably based on a standardized accounting then it produces. Otherwise it is shut-in for those accounting months in which it can be worked over to bring it back to profitable production, or commodity prices rise. 

The production reported by our sample of producers is very interesting. Canadian producers reduced production in the first quarter of 2020 by 23,295 boe / day over 12/31/2019. And reduced it by 473,852 boe / day over the first quarter of 2019. Pipeline constraints and the Alberta government production mandates being primarily responsible for the difference. Our sample of U.S. based producers increased their production in the first quarter of 2020 by 220,182 boe / day over 12/31/2019 and increased their production over the first quarter of 2019 by 895,425 / day boe. Combined the increase in the first quarter's production over the end of last year is 196,787 boe / day to a total of 10,353,426 boe / day for our sample.

Producer bureaucrats will tell you what the cost of shutting-in a well is... They know the cost of everything and the value of nothing. Yet do not seem to understand the concept of profitability and why you should not produce unprofitably for decades at a time. To take someone's money and spend it in what some people might call a business is a very simple thing to do. Some even believe that this act is what you call “business.” To earn a profit, to truly understand what a profit is differentiates those from the pretenders who only spend money as their business model. We have nothing but pretenders in oil and gas with no one knowing or understanding how or why they should be earning a profit. They have no concept to the degree of difficulty it takes to earn them and most importantly the difference. Bureaucrats can tell us the cost to shut-in a well, but fail to understand what the cost of selling oil at $25 is.

As a result of the “coronavirus” we’ve learned that you can shut a well in remotely with an iPhone, and you can turn it back on with the same iPhone! We were told by these producers any number of fairy tales about “how the formation would fold over on itself” and other garbage excuses so that they didn’t have to get up off the couch and do something. Now we find that shutting in wells doesn’t do any damage and the formation pressure builds while shut-in, causing an initial higher rate of production once it’s resumed. What is it that motivates producer bureaucrats to say these chronic, dishonest attributes of their business. We’ve seen these fairy tales pushed out over the decades which are subsequently proven untrue. Is it that they resist the logic of the Preliminary Specification and its effect on their job security. Or, is it they don’t understand what it is they’re talking about. Either way, once again, this proves that the industry would operate just fine, and in fact much better, without these people in command and control. The devastation that is oil and gas is the result of their inaction. If the reason for inaction is People, Ideas & Objects it clearly reflects the effectiveness of the threat that we pose to these bureaucrats is real and of great concern to them. That they would lie consistently to deny our commentary and the arguments we’ve made in the Preliminary Specification but to let things get this far out of hand is ridiculous. If it is not us then what has caused this? Well of course it’s the coronavirus. But let's note the effect the virus has had on the decades long depressed natural gas price. 

The accounting month is a concept that is also not understood by these producers. Shutting-in production in the middle of the month to only pick it back up in the middle of next month shows the incapacity of them to understand anything outside of their “cost control” business model. When prices go negative shut-in production, when prices turn positive, return production. The accounting month is how the industry, scratch that, is how the world turns. Everything is based on an accounting month. If you sign a contract it’s for a series of accounting months, usually. Therefore the costs that would be incurred during a three week period that a well was shut-in, that straddles two calendar months, would incur the full cost structure of those two accounting months. So much for cost control. When a well needs to be shut-in it has to be shut-in for the entire accounting month to avoid its operating costs in the current environment and the operating and overhead costs in the Preliminary Specification. And when will this cost control business model begin to consider the fact that when a property is unprofitable, that unprofitability is a real and very high cost that the producer is incurring? Not just on the shut-in property, but all their properties. At least $5 trillion since 1986.

And it’s not just the producers is it. The revenue of the producers sustains the oil and gas industry, service industry and general economy that supports the producers. As far as the producer bureaucrats are concerned these others are the leeches off of their good fortune. Yet it’ll be the reason they’ll be unable to conduct any type of business in the very near future. There never has been any understanding or consideration that the revenues that are earned by the producer are for the benefit of the entire economic system in which producers depend upon. It’s the bureaucrats' money and “go get your own” is the attitude and general operating premise. What the producers are going to find is that these people who made the industry operate have indeed gone on their search for the money you suggested that they find. It is also these bureaucrats' expectation that as soon as the investors see the wisdom of their inaction. They will return to make investments in producers that will make everything work as it did before, without any action on the bureaucrats behalf. The service industry will be recapitalized and the general economy will be restored instantly to its former glory. 

In a world where there have been decades of 0% interest rate policies producers are declaring bankruptcy. That is a testament to the spending disease in oil and gas. Where capital was always considered to have cost nothing, now that access to capital has ceased, losses have been hidden for four decades from those who should have known, to the point where the only source of cash was the commodities themselves. As a primary industry these revenues could be diverted for the bureaucrats own best interests and to hell with the rest of the economy. Overproduction, or unprofitable production, became all the rage as the revenues were considered “my money” and everyone else would be fed the crumbs to keep the facade moving forward. Now the end of the road is near when former industry stars and darlings are on the verge of bankruptcy and others are signing forbearance agreements to keep the banks from foreclosing for another month. The banks will end up with the assets very soon and they’ll certainly be better able to manage them than what’s been done. This will leave the bureaucrats with an exit strategy of slipping out the back door never to be seen in oil and gas again. Telling the people in their future industry “they tried to fix it but it was just too big of an issue.” 

A producer can have everything operating as a fine oiled machine but still have the same outcome as the other 99% who have been deliberately destroying things by overproducing. It’s necessary to have the industry reading from the same hymn sheet and adhering to it. Otherwise that one incremental, marginal barrel of oil destroys the price for everyone will always be produced. Bureaucrats need to ask themselves if this a short, mid or long term issue? And is this narrative that it's the coronavirus that’s causing them their difficulties the appropriate scapegoat to be pursuing at this point? Has the demand destruction from the virus even been quantified in the long term? I have stated that producers have until August 31, 2020 to have funded and commenced the developments of the Preliminary Specification. If they do they’ll be able to struggle for the next few years but continue. If they don’t they’ll quickly lose control of the logistical and operational control of the industry in a way that will seem to have a permanence to it. Commentary like “we can’t do that anymore because they’ve shut that facility down” or “they can’t take our production anymore because their customers aren’t paying” etc, etc will become commonplace. Which then creates the ping pong effect of having the same thing happening here and there in an uncontrolled and unstoppable series of mini-disasters. Then when it’s beyond the ability to bring it back, the oil price will rise and who will have a vested interest in wanting to get involved? No one, because no one made any money. That’s when the price hits $600 / barrel and still no one trusts the industry to do the right thing because nothing has changed. It's still the same people who ran it into the ground. They’ve never seemed to desire to grab hold of the industry and make it work. It’s always just muddling through and doing nothing. What’s happening today and how it's not really an issue. How the industry has always been able to recover from its difficulties. La de da. There is no plan to deal with the mid to long term. No strategy on how to put together a valuable industry for all concerned. It's just get what you can, while you can. You reap what you sow and the farmland that once sustained everyone looks more like an overgrown forest. 

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.