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

When producers have taken 34 years of deliberate inattention and refusal to admit the issues destroying their organizations and the industry. The destruction from those issues, being the decades of unnecessarily low revenues, leaves those firms within the industry depleted and very unhealthy financially. The producers investors eventually saw this annual deterioration and decided they had had enough. Standing alone with your hand out can be a difficult posture when the organization's working capital continues to deteriorate at a rapid rate. But here again I’m talking about the past ten years. Oil and gas producers have entered a special place in history where I don’t think any other industry has traveled. Due to the strong cash flows that a capital intensive industry generates, bureaucrats were well fed by the return of their investors' capital from prior investments. Once the sources of new investment capital evaporated then the sole means in which to enhance cash flow was to increase production, and here again I’m talking about the past 5 years and more. Now these cash flows are not what they used to be and nowhere near what they should be. The hamster in the wheel has been replaced by the producer chronically overproducing and oversuppling the market in an attempt to generate adequate revenues to pay their costs while the commodity prices decline from overproduction and oversupply, therefore further increases of production are necessary. This demands, as the bureaucrats willingly obliged, that they forget all the necessary secondary and tertiary industries and lets not forget the careers of all these people that are involved too. And then last Friday if things weren’t bad enough with a global overhang of oil and gas commodities and demand collapsing, I start talking about a third crisis? 

One of the issues I’ve been talking about these past two to three years is working capital. During the second quarter many of the more “senior” producers were able to shore up their working capital by using their lines of credit. Which is the classic and telling first indication of a failed organization. Particularly in a capital intensive industry with allegedly “strong cash flows.” Working capital is now desperately low, diminishing each quarter and negative in 11 of the 19 producers we follow. The third crisis becomes apparent when you look into 2021 and 2022 then notice the volume of scheduled bank repayments. However what really aggravates this looming third crisis is that during the second quarter, when banks saw producers using the drawdowns of their lines of credit for working capital and to pay bonuses prior to bankruptcy, banks were surprised and noted this behavior for their reviews coming in October. As a result, and as Bloomberg noted banks are moving on, out of the oil and gas industry. 

A quick update of the working capital situation of the remaining 19 producers of the original 23 that we started with. Going out of business is all the rage these days! The status of their working capital for the second quarter 2020 is down by $2.051 billion to $8.662 billion. Cash is down $2.346 billion to $17.321 billion. To put these into context the amount of bank and bond debt for the second quarter was up by $7.5 billion for a total of all debts of $318.5 billion with property, plant and equipment sitting at $436.7 billion. Indicating the majority of these producers should be good for the minimum payment on their credit cards for at least two more months. People, Ideas & Objects' argument has always been that the amount in property, plant and equipment is nothing more than the unrecognized capital costs of prior production. Producers should have been recognizing their commodities capital costs at a much quicker rate in order to recapture the cash that they “have to put in the ground.” And passed these capital costs on to the consumer through higher commodity prices that have been needed since 1986 in order to avoid all these problems. Our review of our 19 companies began in 2016 at which time property, plant and equipment was $467.2 billion. And that was with four other companies. My point is that even though the producers have been forced to realize substantial write downs and depletion for 2020, totalling $60.4 billion for the six months, these balances of property, plant and equipment are never reduced and they’ve triggered losses of $51.9 billion for the first six months of 2020. Why not? Property, plant and equipment represent the “cash in the ground” producers pretend to believe in and that investors have had to provide. Why not have that capital turned over in a period of time that is competitive in terms of the capital markets expectation of a year or two? No one is permitted to invest cash and wait for it to be returned in a few decades? When producers are so desperate for cash, and when investors were so willing, this point was never asked. Today, I’m still the only one that’s been asking this question. Producer bureaucrats believe they are just one miracle away from their “muddle along” strategy causing investors to stampede and back the truck up to recapitalize them once again. 

In 2019 I was very disappointed to see the producer bureaucrats using and downright abusing the service industry to fund their capital expenditures through the use of accounts payable. Not paying them for six to eighteen months, after destroying their business by slashing their throughput and forcing large discounts on the service industry. This was not necessary and unacceptable as far as I was concerned. It’s good to see that since that time producers have worked to reduce the amount of outstanding accounts payable by $25.5 billion in the past four quarters to a balance of $45.8 billion. However with little to no field activity why are the balances not lower? The cost of this short term thinking will be that the service industry is going to have to be recapitalized and funded for many, many years through the revenues of the producers. That is if producers ever want something to be done in the field again, they’ll have to purposely build the capability with a vendor, in advance. You do reap what you sow. No one finances oil and gas producers and now no one finances the service industry, if there’ll be such a thing in a few years time.

Leaving the last great gasp of what can be used to shore up working capital and keep the lights on for one more month is to sell those precious, hard earned reserves that were gained through the investors money and the hard work of the producer employees and service industry. But hey bureaucrats have got to be paid! However, it appears that asset sales are not what they had hoped for. Range Resource did manage to make the sale of some properties that they recently purchased for $3.3 billion. Catching a good price of just under 10% of that recent purchase price. Cash is king! Occidental pulled some assets that were for sale in Africa that they obviously couldn’t get enough to make the $5 billion debt payment in 2021. Such is the nature of oil and gas today. But hey, “protecting balance sheets” has got all of these issues covered. With capital assets so cheap wouldn’t now be a good time to be out purchasing properties at these fire sale prices? A smart producer could probably double their production volume by spending a pittance of what it cost to develop their current reserves. I just don’t understand why producer bureaucrats aren’t running people over trying to secure these unbelievable deals! What am I missing?

All of these arguments have been made on this blog over the past decade and a half. This isn’t rocket science, it’s business. Something that the oil and gas industry knows absolutely nothing about. The more I argued these points the louder the laughter echoed back. This damage was not necessary. There are and have been too many individuals feeding at the trough, pretending the good times were here for good and fueled by their collective inaction to be bothered with the “crazy theories” contained within the Preliminary Specification. Unfortunately this situation that I’ve described today is real and I think it's terminal. And as I’ve predicted what would happen as a result of further inaction is that the problems will become much worse and so great that no one will be able to fix them for the organizations that exist today. It will be necessary to rebuild the industry from the ground up from the ashes of what these bureaucrats are creating. Sooner or later investors will see these properties that are so cheap to purchase and old school producers so desperate for cash. That they can purchase them and have them operated through the Preliminary Specification which provides the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects do this more productively with far less of the political and bureaucratic overhead. And these investors can have them operated profitably, everywhere and always, in new organizations at a fraction of the costs it took them to be built. Kind of like creative destruction isn’t it?

Therefore the third crisis is the looming debt problems facing all of the producers in the next two years. This assumes that we get there, and I don’t think most of the producers will. It’s probably not a good time to even raise the fourth crisis that producers will be facing. This may even preempt the bank payment crisis, pushing it back to be the fourth crisis. Producers in their panic may have lost sight of the fact that OPEC+ have 7.7 million boe / day in surplus capacity. Everyone’s all talking nice to one another at the moment, however, does anyone remember the price war that they declared on North American producers just before the virus? If they don’t remember that, they can go back to my Monday August 3, 2020 post and read about the price war that OPEC was waging in July 1986 for exactly the same reasons. Nonetheless, as North American producers continue to reduce their rig counts, production will fall. OPEC+ will be able to replace any decline in North American deliverability with their surplus capacity. Undoubtedly OPEC+ will provide their surplus capacity at a price that North American producers can't produce profitably, leaving them to atrophy further.

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

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

 Over the past decade People, Ideas & Objects have asked if the North American oil and gas industry was prepared for any further difficulties on the horizon. Seeing the looming devastation from their overproduction and oversupply beginning to take effect we asked what would happen if interest rates were to normalize, or some other unforeseen event? Were the producers prepared or capable of dealing with any additional crisis above and beyond the financial devastation that was developing throughout the industry? What we’ve learned in the past century of business is the future is unknown and it’s those that manage these uncertainties that prosper better than others. Building off the crumbling financial base of the industry would eventually become next to impossible, as everyone is realizing today. The real risk however was the inability or lack of resilience of these producer organizations to withstand the next crisis. Now they’re in that second crisis with this virus and are faced with something that no one could have ever imagined would happen, which always seems to be the case doesn’t it. It could be innocently asked if there will be a third crisis soon? And when they turn to the organizational toolkit for which they have to deal with the situation at hand, the cupboards are bare. In fact the cupboards were used for firewood two years ago. What was an existential threat with the overproduction and oversupply difficulties is now something that is well beyond the capacity of what even the major international integrated producers are admitting they can deal with. Rebuilding the producers and industry becomes the only option.

Resilience is a capability that the organization needs to purpose build to survive prior to it being needed. Producers drilled wells. Managing the organization was not of value and why would they invest in the organization, software or “resilience?” Just more evidence that in life you do reap what you sow. Producer bureaucrats have been able to establish the trough in which they were able to feed from, but outside of that what is there? An unparalleled spending machine of other people’s money. And nothing has been learned by any of these producers in their second quarter 2020 financial reports. “Protecting” balance sheets, whatever that means, is now the mantra that permeates the agendas of the producers. I am at a complete loss at this point in time as to what the term “protecting balance sheets” would mean or how they’re going to conduct themselves in that activity. When the industry landscape has been devastated by the scorched earth policies of these executives, the “protection of the balance sheet” is their focus? I’ve been critical of the manner in which the industry has been operated for the past number of decades. Some have said that I’ve been too over the top. I challenge anyone to suggest at this point in time that anything that I've said over these past decades needs to be more measured. If “protecting balance sheets” at this point in time is not an indication of the insanity of what’s been going on, then I don’t think anything else can or will reflect it. 

The other indication that I’m beginning to see from the producers is that oil and gas is a failure. That is to say that the industry is a failure. And they are therefore shifting their capital budgets towards alternative sources of energy. Of course! And why not? To admit that you’ve failed is difficult for anyone. Just redirect your focus away from industry failures to prove you’re in command. Alternatively, maybe you’ll be destined to fail in the alternative energy business much in the same way you’ve failed here. Though that’ll be years from now. This to me looks more and more like the next “viable scapegoat” that all the senior producers are singing, in harmony, from. “When the going gets tough in an industry, the tough get going.” This saying may have been misinterpreted. At least we’ll be able to clean up the mess they’ve left without them sticking their fingers in things. This of course is the ultimate capitulation of responsibility and reflection of their lack of resilience and problem solving capabilities. In our July 23, 2020 blog post we detailed what I had understood to be a new initiative in the industry. A reorganization around the assets of the producer. This reorganization has not been mentioned anywhere in the second quarter reports. Even from the producers I was originally told and from what I believe to be reliable sources. They collectively, in harmony once again, seemed to have pulled that reorganization for the sake of giving up completely on oil and gas. After this Monday’s post which documented 34 years of never recognizing or addressing the issue, maybe giving up is their best opportunity.

Innovation is what many companies claim that they are today. Take for instance Microsoft who claim they’re innovative, yet no one has ever been able to tell me one new product they’re responsible for. Though “Bob the Human Interface” was 100% theirs. Oil and gas producers take advantage of this claim as well. If they were as innovative as they’ve claimed themselves to be, would there be the key issue present in July 1986, that we detailed in Monday’s post, and each of the subsequent 34 years? One in which the consequences were fully known and extremely detrimental to each of the oil and gas producers and industry, which we all can agree we’re suffering from today. Where that issue has manifested itself through complete neglect by these bureaucrats to today where the devastation is epic? Would this history be the result of an innovative industry? I will give them the innovative nature of their financial statements and the ability to generate “viable scapegoats.” Beyond that, never, it was always the service industry providing the real innovation.

What we have in today’s North American oil and gas industry is the equivalent of a block of cement poured in the middle of the freeway. Providing no value generation and not much use to anyone. It hasn’t been able to deal with severe issues of great consequence for many, many decades. It hasn’t been able to admit the existence of these issues. It has blamed and accused everyone else for their troubles and done nothing but pilfer the resources to feed the enlightened a tidy sum. It has fundamentally betrayed everyone who invested, relied or committed to the industry at the detriment of their financial health, career choice or business. It provides no redeeming qualities that are inherent in the organization or industry structure that we should seek to emulate and build upon. It is an aberration and we need to deal with this ourselves. Terminate it, with extreme prejudice. 

What is needed for the North American economy in the next 25 years is diametrically opposed to what we have in hand with the industry today. A dynamic, innovative, accountable and profitable producer and industry will not be able to be resurrected from the substance that exists and those that are in control. The cultural inertia would take orders of magnitude more energy to deal with than to just fix the problems and rebuild it. The cultural inertia would have a much higher probability of success than our approach does in this scenario. We need to rebuild the industry brick by brick, and stick by stick from the ruins of the industry. Based on the Preliminary Specification that identifies and builds the foundation of an industry and producer firm that are dynamic, innovative, accountable and profitable. Define what it is that we want and need in these next 25 years from this critical industry, and have the software built to define and support the organizations, both producer and industrial, to make it happen. 

The work that needs to be done in these next 25 years will be the most challenging of the industry's history. The key objective should be to attain and maintain profitable energy independence on the North American continent, everywhere and always. Rebuild and expand the infrastructure necessary to support that objective and ensure that the consumer is always provided with an abundant supply of affordable energy. It is the most powerful economy that will be the largest consumer of energy. Where oil and gas will always be a large part of our energy's makeup. Today the ability to source the capital necessary for these tasks doesn’t exist. The manner in which the business is operated today depends on the investment community to fund 100% of the capital requirements of any need. These are just two of the many reasons that we need to rebuild the industry and producer firms. The business model of the Preliminary Specification relies on a viable, workable means of sourcing the financial resources necessary from the consumers of the energy products. The consumers will be the only means in which to access the necessary and stratospheric capital costs of these tasks of approaching the industries future. Only profitable operations with full consideration of the capital and operating costs of exploration and production will be able to deal with these needs. Profitable everywhere on the continent and at all times. That is how the industry is going to have to be operated in light of the damage that has been done by these bureaucrats. Anything else will just be wishful thinking, or how do they say it, “muddling along.” This is also where innovative producers will play a large part in ensuring that the consumer has an abundant supply of energy available to them. And that energy will always be affordable and provide them with a continuation of the value proposition that oil and gas provides. Where a barrel of oil creates the mechanical leverage of 23,200 man hours of work for the price of just $40 today and at whatever price will be needed for tomorrow, which will include the full cost of capital and operating, plus an element of profit. This is our vision and what we have proposed here since December 2005. Today it stands in stark contrast to the vision of “protecting balance sheets” whatever that is, or is intended to mean.

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 XLIX

Producers want other people’s money yet will do, and have done, nothing to make the effort to qualify for that. It is a right and privilege for them to receive others' investments. People, Ideas & Objects have consistently stated that accounting is about performance. The Preliminary Specification is designed to provide that by providing the producer with the capability to achieve the most profitable means of oil and gas operations. Based on a standardized, factual accounting presentation. That is our competitive offering and a part of the foundation of our 25 year value proposition of $25.7 to $45.7 trillion. Which has been universally rejected by the producer bureaucrats, due to the fact that it also challenges their role and existence through disintermediation. Today I find it unnecessary to have to explain to anyone how our value proposition is derived in today’s oil and gas industry. Bureaucrats protecting themselves, instead of performing for all others associated within the industry, was their first and only priority and loyalty. The destruction that has occurred as a result is epic. Much of this destruction we detailed on this blog far in advance of it occurring, as a warning to the bureaucrats of where they were taking us. “Profits didn’t matter, it was all about cash flow.” We’ve detailed the specious nature of overstated assets, earnings and cash flows the producers universally and consistently claimed in their financial statements. In the second quarter of 2020 we have an excellent example of the obscenity of the “cash flow” claims that have been made by industry. They are truly overstated, and for the past four decades in ways that were purpose built to boost the market valuation of the producer firms. This was the absolute and exclusive method of generating value, for the bureaucrats. An example today is provided by Bonavista Energy. A firm involved in a restructuring, has six months revenues of $169 million and working capital of -$850 million. Reported in Q2 2020 they had annualized cash flow of $174 million, and therefore a projected $1.049 billion market capitalization. Whereas their actual $12 million market capitalization shows to these bureaucrats that the game is up and no one is buying this garbage anymore. This is the future of the industry.

Investors and bankers are willing to provide any and all organizations with investment capital that is capable of performing in the larger market. Oil and gas companies have never performed and are unwilling to act in their own best interests to compete in the larger market for capital. The choice is, and always, was theirs to perform since the publication of People, Ideas & Objects Preliminary Specification in December 2013. Yet they’ve done nothing but blame everything else, use every scapegoat and possible excuse in unanimous and perfect harmony throughout the industry. It has been a consistent script that producers seem to be speaking from during each and every one of their successive utterances. We saw this playing out again last week with the proposed “variable dividend” solution. All of these reinforce their overarching hypothesis that “you have to put cash in the ground” and bilking new investors annually with tales of specious accounting. Brilliant, then leaving that cash in the ground to deflate for a few decades for the time in which the bureaucrats would finally take it for their personal needs. This isn’t resonating with anyone now. Now the contraction of the producers is clearly in play and they don’t seem to be too concerned about the consequences of that either. It’s been a good run, maybe retirements are in the future?

Performance is derived from the successful and profitable deployment of capabilities which include the resources available to producers. In today’s economy these capabilities are brought to the producer through the talents of their people and those that are employed in the service industry. All of which are making active plans for their exit from the industry. Chronic abuse does that to people. I see this as the most critical issue in the long term, which would probably not gain the concurrence of the producers since they’ve done nothing about it. In the Wall Street Journal this article presents this graph that shows these producer bureaucrats to be nothing more than unconstrained throttle junkies with respect to these resources. And why wouldn’t they, these people are actively taking cash from the bureaucrats'! Where most if not all other industries have constructively worked out the boom / bust cycles in their businesses. In oil and gas it’s a feature, not a bug. Where else can you make $40 an hour right out of high school? Which is the implied promise of the producers today. Tomorrow, when they need you, it will be the promise of $80 an hour, right out of highschool. And then they’ll find that money isn’t necessarily the motivator that they thought, and the $80 was only good for one or two paychecks as the business cycle turns once again. And you certainly wouldn’t blame the high school student would you? Your recommendation that they go to university to study engineering or geology only generates the kind of laughs that are heard in the comedy houses. Besides which university still has a dedicated oil and gas faculty? Soon it will be realized that these universities can boost their competitive ratings by dumping their chemical engineering and geo science faculties. Remember “profits mean nothing, oil and gas is all about cash flow!”

The second element of our discussion today is the competitiveness of the producers. Production entitlement exists purely through their existence. No one in any region of the globe should deign to produce or sell oil or gas in those areas where the North American producer chooses to travel. Chronic overproduction, oversupply and the inability to listen to market signals has been the means in which they’ve approached the “market.” Bureaucrats hire firms that analyze real time satellite feeds to show the shadows of the world's oil tanks so they can determine oil inventory levels. Analyze the market prices and read their fortunes according to economists who predict what the price will be in 18 months and in a decades time after a global review of all the variables. Yet the results of these Rube Goldberg activities do little to discourage them from employing divisions of bureaucrats to push paper at them, paper that’s important! Seeming to lack the understanding that market prices contain all the information that is needed for them to run a profitable business. If the price is adequate to produce profitably, then produce, otherwise don’t lose money by shutting in production in order to save the reserves for the day they can be produced profitably, ensure the producer achieves their highest profit by only producing profitable properties while not diluting their earnings through continuing to produce losing properties, keeping the cost of their reserves down by not adding the successive, incremental losses that would otherwise have occured and remove the marginal production from the commodity markets. This is business logic. And is what we’ve incorporated in the Preliminary Specifications decentralized production models price maker strategy. Why would you continue to produce for four decades unprofitably, other than through a ready supply of easy investment dollars? And even with all that data they produce with their “science” and satellites they continue to overproduce to the point where those inventories they’re watching fill to capacity and prices go negative. The sad part of all of this is I’ve been writing about the actions of these bureaucrats on this blog since 2005. Which in addition to the release of our May 2004 Preliminary Research Report only excluded me from ever working again in the industry. I think I’m very pleased with this fact as I sit here today. Wouldn't you be? 

As we know, the producer bureaucrats are the ones who developed shale based technologies. Except they're not. I recall in the late 1990’s talking to the salesmen for many of the service providers who were pounding the pavement looking for the one producer that would try their new innovation, coiled tubing. Not one producer would accept the claims being made, that is until it was proven, by the coil tubing provider. Who couldn’t find an “innovative producer” anywhere, or anytime on the continent. We should add “innovative producer” to the lexicon of oxymoronic statements. Another one would be “profitable producer.” With a value proposition as substantial as what the Preliminary Specification is able to provide for the industry. Investing in the business of the oil and gas industry is not something that would ever be done. Therefore we should add “intelligent producers” as well. They have been able to occupy the space in which the world came begging at their door. New investment, new tools and innovative methods only for the bureaucrat to signal their opinion with a thumbs up or thumbs down. Those were the day’s weren't they. There is never going to be a point in which they’ll be able to attain that lofty position again. They’re going to have to get down in the mud with the rest of us and start doing the same hard work that will be needed to rebuild the industry and the service industry brick by brick, and stick by stick. When you mess things up this badly there are changes made to the way things are done. If that’s not obvious I don’t know what to say. What we can all discern from the 2020 second quarter financial reports is that they share a different perspective on performance. People, Ideas & Objects certainly uses those archaic requirements of profitability but we accept that we’re the odd ones out. Producer bureaucrats have chanted that “building balance sheets,” was their purpose for the past number of years. Or maybe their performance is best reflected in their wisdom that “you have to put cash in the ground” which is certainly consistent with the outcome of the industry today. That is it answers a lot of questions as to where the money went. I challenge anyone to see the performance criteria or competitive stature of either “building balance sheets” or “putting cash in the ground.” And it’s here that I have no difficulty in forming a consensus across the industry that it’s crazy to be thinking of such foolish, unproductive things.

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 XLVIII

 I ran across these articles in the local paper, The Calgary Herald on July 26. The two articles caught my attention, the first was entitled “OPEC Minister can see Economic Destruction” and the second was “Return to Glory Days Unlikely.” The first article starts with… 

Qatar's oil minister has called on both OPEC and non-OPEC nations and industrialized countries to cooperate with OPEC to work out a policy aimed at restoring stability to the world oil market or face grave consequences. 

He said that continuation of the current situation would lead to destruction of the economies of both oil producing and oil consuming countries. 

“OPEC has no choice but to continue the current policy of capturing a fair share of the market until non-OPEC producers discern the importance of co-operating with OPEC.” Oteiba was quoted as saying. 

In the second article, which is a reprint from Newsday, the following points of interest are noted. 

However, what those ministers do at the International Hotel on the shore of Lake Geneva could help decide a lot: Whether gasoline and heating oil prices will continue to drop or rebound instead, whether the devastated economies of oil producing states and provinces like Oklahoma, Texas and Alberta will continue to crumble and whether the debt problems of Mexico will get more severe. 

Only Saudi Arabia, which started the price plunge by boosting its output so it could protect its market share, has gained revenue amid the price war. That oil rich country is earning 10 to 15 percent more oil exports than last summer. 

Amid lower prices, the number of active oil rigs in the United States and Canada has plunged. 

Which accurately captures the situation at hand. So what? What's the big deal and why quote an article that just reiterates what is well known in the marketplace? As I indicated the article is from July 26, but I never mentioned which year. These quotes came from an article that was published in 1986. Thirty four years ago the situation, the issue and the consequences that were known then, and I can assure you have been present every day since, have never been recognized or resolved within the North American oil and gas producers! I’ve always stated that I’ve been working on People, Ideas & Objects for the past three decades. That May 2020 saw our twenty ninth year begin. It is therefore reasonable to conclude that I set out in 1991 to resolve a legitimate issue that was well identified, an issue that came with grave consequences for all concerned and were well known and understood in 1986. That it is my persistence and desire to resolve this, that enabled me to complete the full decade of research to come up with the Preliminary Specification. And it's reasonable to believe that 34 years of wasted time and money would never have occured in any other industry. Something would have been done. It is only due to the self centred and self serving North America producer bureaucrats that have been so obstinate as to avoid the herd of elephants and band of gorillas in the room. Using their specious accounting, in order to continually scam investors and line their pockets with the riches of others. And to deny those hard working honest people who believed those that ran the industry were operating in good faith and were trustworthy. Now we all know otherwise. The calling today as a result of reviewing the second quarter 2020 reports is that bureaucrats have chosen to “protect their balance sheets.” Which is, yes, an absolutely ridiculous comment, idea and defense. Taken in the context of this issue it means absolutely nothing other than the garbage that it is. In their world, where bullshit baffles brains, this reflects the hollowness of their echo chamber. But then they do have a strong distaste for what it is that we state. That it’s not enough to own the oil and gas asset anymore, it’s necessary to also have access to the software that makes the oil and gas asset profitable. 

People, Ideas & Objects use the definition of overproduction as unprofitable production. Although North America was not producing as much in 1986 as they do today, they continued to overproduce into the market with unprofitable production causing the commodity prices to collapse. Oil prices were down, however natural gas was not subject to market forces as a result of price regulation in both Canada and the U.S. The specious accounting that the producers were producing was well onto the methods of deception that have kept the bureaucrats so well fed these past decades. By 1986 producers were claiming overhead and interest as capital and the only thing left to pursue was the race to include up to 85% of these costs as property, plant and equipment. They therefore deceived the markets that they were profitable throughout the majority of these 34 years and collapsed the oil and natural gas commodity markets for what we believe to be 29 of those 34 years. 

This issue was in my mind when I began this three decade adventure. All that producers needed to do was to shut-in their unprofitable production. Instead what we saw was the beginning of the whining and blaming of others that has become culturally ingrained amongst the bureaucratic class. I set out to solve this well defined issue in 1991 and after a number of diversions and false starts came up with the fully researched, viable business model in the form of the Preliminary Specification that is also discussed in our White Paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” It’s not by happenstance that this occurred, it’s also not that I’m that smart that I could see this happening in the future just out of thin air. The issue has been created in these past four decades as a result of the change to the full cost accounting methodology dictated by the SEC in 1978, and the bureaucrats' perversion and cultural distortions of those regulations. These cultural changes in industry took some time to deviate from what would be called normal business practices but they certainly did with the bureaucrats that were in power then, and the ones who are running the show today. They argue “they didn’t know any better” but that’s not an excuse and would not keep them out of jail. The fact is these dire consequences were known and foreseen back in July 1986 and the efforts to direct the attention of the North American producers for the need to act is well documented in both of these articles, and the subsequent work of People, Ideas & Objects. 

We recently discussed the culpability and guilt associated with officers and directors of the oil and gas producers. Noting how they have their insurance premiums paid for them by the producer to cover the risk of being sued by shareholders or others who believe the officers and directors did not act appropriately or accordingly. That any litigation would be based on proof of the lack of their fiduciary duty and as a result any litigant would have incurred quantifiable losses. I can not publish these articles from the service which archived the newspaper. (Newspapers.com) However you have all the information that is needed to download them yourselves. The only question that I have is how will these officers and directors defend themselves? You have a well qualified issue that generates material and consequential fallout which has been plaguing the industry since 1986. A viable working model since December 2013 from a provider who has worked to provide a solution to this specific issue since 1991. People, Ideas & Objects have received zero support from the industry and to the contrary, nothing but chronic abuse and attempts to silence us. If I were a lawyer I’d get out of this software business and make some big money. 

As we know, on June 2, 2020 I published and detailed in a blog post this information regarding the officers and directors guilt, culpability, risk and insurance coverage. And it was on June 9, 2020 that Reuters reported that producers were upping the coverage of their officers and directors insurance coverage. On July 6, 2020 we noted in a blog post that the only action taken by these producers, and is still the only action taken by these producers here in early August, is that they ensured their buts were insured of any risk. It was not in their minds or actions to begin to rectify the issue in the market by proceeding with the only real solution available to them, the Preliminary Specification. Nor was it within their thoughts to undertake any of their fiduciary duties or work to rectify the fallout they were causing. They were fine, and they thank you for asking. After all they would ask, “what’s different today, than at any time over the past 34 years?”

The volume of financial resources that have been personally scammed from the industry by the bureaucrats since 1986 is unknown and unknowable. They’ve prospered handsomely. The real cost is the difference between the prices that were needed for profitable operations everywhere and always and the prices that were realized. From 1986 to December 2013, the time of the Preliminary Specifications publication, would be one calculation. The second calculation would be to determine the losses from December 2013 to today. I would certainly suggest that any number would understate the amount of actual financial costs incurred. But what is known is that People, Ideas & Objects have a projected value proposition of $25.7 to $45.7 trillion over the next 25 years. We can cry over spilt milk or get on with the job at hand. After all what we also know now that nothing is going to motivate the bureaucrats to do anything about this issue, its consequences, their fiduciary responsibility or the money that is being flushed each and every day. And I think that this blog post proves that as much as any of the other 3 million words on this blog.

Outside of these bureaucrats no one in the industry, the service industry or any of the subsequent tiers of this “energy” based economy need to learn what the purpose of profitability is for. Without real, tangible profits we have the ever present, looming disaster that has been created by these producer firms. And now we know that the lack of profitability has been brought about by the scam these people have been running for these past 34 years. Which vested interest has benefited from all of this inaction? And it is there that we find the answer for why nothing has been done for what was known and understood in 1986. 

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 XLVII

To allow thoughts and ideas from other disciplines such as finance and accounting to permeate the scientific community that sits atop the producer firms in oil and gas is never going to happen. That is as far as they’re concerned. It is their domain and the principles of these sciences are too far beyond the scope of what normal humans can comprehend. “The industry is fine and we’ll be moving forward soon,” our bureaucratic friends would say. “What has accounting got to do with profitability?” They would ask. An extension of what I see as the continued degradation of common sense by those who are the elites in society. I personally have had enough of experts as we see the systemic damage that has been caused through their advice which has brought about such comprehensive destruction equalling what we’ve experienced in oil and gas. The first instance I would suggest is the environmental movement and their 50 year fire alarm of chronic, imminent, environmental armageddon. And now from 14 year olds. According to them we should have been liquidated by the toxic nature of our atmosphere by now. The second instance is the financial crisis that began in 2008. What was common knowledge to most people who were reliant on common sense passed beyond the rarified air of the economists except for the one standout, Nouriel Roubini. Most recently we have seen NY Times columnist Paul Krugman. An individual that has belittled any and all individuals that suggested any possible counter argument to his international trade theories. His characterization of Trump’s nationalistic trade policies were the highlight of his belittling and his career. That is other than winning the Nobel Prize in Economics in 2008 for his work in international trade. It’s ironic that he received the award during the time the economy was melting down in the financial crisis. Krugman’s apology in October 2019 for this 30 year litany of abuse is highlighted when all that he says was that he was wrong. Or today we see in the “science” based approach to the corona virus and the changing landscape that our “scientists” are painting for this mild flu. As with all of these situations, in oil and gas the engineering and earth scientists state that the science is unimpeachable and it is they who have the confidence in the “science” and the rest of us need to sit down and STFU. It’s time to put these elite experts back in their cages and remove them from the halls of power. They do not know what it is they’re doing. 

The Attorney General of the United States Bill Barr commented about the situation with Corporate America and their dealings with the Chinese government and military. Calling out specific company names that he called “collaborators” and implementing the policy to have all agents of foreign governments register under the Foreign Agents Registration Act. Any lobbying by these agents who are or are not registered from these corporations will have a new and different approach to how they’re treated by U.S. officials. I raise this point as it’s implied in other comments by the AG that the ethical approach of U.S. corporations in the past decades has been counter to the best interests of the U.S. I would and have argued this same point regarding the activities over these past four decades in oil and gas. No one other than the bureaucrats have gained any financial benefit from the oil and gas industry during that time. Bureaucrats have been defined by People, Ideas & Objects as the Directors and Officers of the producers. The future does not include these unaccountable bureaucrats. That’s the message that I’m getting from all that is happening in the world these days. 

This blog post’s opening is provided as background to what I see happening in corporate America as a result of the continuation of the Trump administration. Granted the Democrats have their policies of how they’ll rewrite history however I don’t think anyone is really buying them, other than the misguided youth our education system proudly produces. Nonetheless change is in the air for corporate North America and it is comprehensive and significant. The new trade agreement between the U.S., Mexico and Canada will provide a system where North America can maintain its economic dominance, I believe for the remainder of this century. People, Ideas & Objects vision and strategy is that North America will always be the largest consumer of oil and gas due to it being the most powerful economy. Oil and gas will always be a major component of the energy mix for at least the remainder of this century. It is therefore incumbent on North American producers to fulfill this possibility going forward by adopting the objective of profitably fueling our economies needs for the remainder of this century. The beginning of this would be to read and adopt the plans and strategies that are contained within our July 4, 2019 White Paper “Profitable, Energy Independence in North America -- Through the Commercialization of Shale.”

Profitability is the critical ingredient needed to fulfill this oil and gas industry objective. People, Ideas & Objects do not believe that we have the right to produce any oil or gas unprofitably. Producing unprofitably only steals from the future the energy they’re entitled to. We therefore owe it to them to prove that we’ve produced all of it profitably and can provide them with a viable, financially healthy industry that is capable of supporting itself. The only way in which we can do that is to ensure that all costs associated with exploration and production are passed onto the consumers in an appropriate and timely manner. I have detailed what and how our methods of profitability are in the Preliminary Specification and throughout the past 15 years of existence of this blog. We offer the oil and gas producers with the most profitable means of oil and gas operations, everywhere and always. How our determination of profitability is fundamentally different from the reporting of the current producers, and how theirs has exaggerated assets, earnings and cash flow materially for the past four decades. These differences are also detailed in the White Paper I’ve mentioned above and in this graph. 

What we’ve learned recently is there is an initiative in play in the industry. We know this is not the Preliminary Specification due to the fact that my phone has not been ringing. Reporting the disastrous second quarter reports of these producers will be a shock to everyone. As bad as people assume them to be, they will be much worse. To continue without any discussion on how to deal with what People, Ideas & Objects believe, is an existential threat to the industry without a plan and strategy is suicide for the bureaucracy. We think the bureaucrats agree with this scenario and have devised a strategy and plan that is coded as a “reorganization” around the “assets” of the producer. Their focus is on assets as they are the purpose, collectable and proof that theirs is bigger than all others in the pursuit of “building balance sheets.” We would ask what is the objective of their “asset reorganization” being undertaken by producers? No producer has filed their second quarter report as of this date and time, giving them all at least a few days to come up with an objective, similar to what People, Ideas & Objects have described above and throughout our publications. But it’s not just a viable future they’ll need to identify, the viable methods and means in which to get there will be mandatory as the bureaucrats reputation for issuing press releases with no follow up is well known. We wish these producers godspeed and good luck in this endeavour. Just as with the producers' Artificial Intelligence initiatives of a few years ago no one will know or understand what they're doing or have done. Will it enhance their profitability in the material way that the Preliminary Specification can, or is it just to buy more time in which the bureaucrats can profit personally and devise other viable scapegoats in their never ending list of already used, viable scapegoats that have fueled their chronic inaction? What we do know is that they’ll demand more time to prove their case, after all it’s only been a steep trajectory of destruction for this past decade.

The motivation for the bureaucrats to come up with this initiative is none other than a series of blog posts we presented in early June 2020. These referenced the officers and directors insurance coverage they carry should they be sued for what are subsequently judged to be acts they are culpable and guilty of. Our initial post pointed out that these insurance companies may force resignations as the cost to cover the individuals was becoming too great on a go forward basis. When insurance companies pull their coverage they force the individual to resign to ensure they’re able to maintain the insurance coverage over the time they were at the organization. On learning of our allegation in early June that they did not uphold their fiduciary duty when the Preliminary Specification was available since December 2013 to deal with these specific issues. They would therefore be found guilty in any litigation. What happened was producer bureaucrats promptly, and on a wholesale basis, increased their coverage as a result of our commentary. Earlier this month we made the commentary that the focus of the bureaucrats was to cover their buts, not undertake any step towards fulfilling their fiduciary duty and remain blinded to the consequences of their (in)actions towards others across the industry. That stung and as a result they need to be seen as doing something, that something is now what they are generally calling “asset reorganization.” This post today is designed to challenge the depth and breadth of that initiative and to question the motivation, the methods and means in which this is being undertaken. Asking specifically if this is just another “viable scapegoat” along with the “waiting for a cold winter,” “Artificial Intelligence and the cloud,” “waiting for markets to rebalance,” “capital discipline,” “reducing costs through innovations” and “it’s OPEC’s fault.” To name just a few. I’ll be adding “asset reorganization” to this long list for the future.

Compare and contrast the producers use of “asset” and its value vs. the Preliminary Specifications use of the Joint Operating Committees legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks as its organizational construct. Dare I ask what the value of the “asset” is in terms of an organizational construct? I think what the producers are trying to say is the “asset” is their name for, or ultimately the direction they’re heading is to the Joint Operating Committee. Knowing full well that is territory that is proprietary to People, Ideas & Objects. They also know if they stick to their failed strategies and plans of doing nothing eventually everything will be ok, they hope. Which proves they will always be incapable of realizing the differences in the industry as a result of shale based formations. Which include:

• A change from scarcity to abundance
• Substantially higher drilling and completion costs
• High initial production rates
• Steep production decline curves 
• High recompletion and workover costs
• Leading to massive amounts of orphaned capital (unrecognized capital costs of past production) to accumulate on the balance sheet, (hence build balance sheets)

Shale is a fundamental change to the underlying oil and gas industry. Moving forward with cosmetic changes designed to satisfy the need to be seen as “doing something” in this disastrous second quarter is consistent with the large volume of excuses, blaming and scapegoats that have been used by bureaucrats throughout the past decades. “Asset reorganization” will form a new strategy that is nothing more than their current, viable scapegoat. “Asset reorganizations” do nothing to solve the situation at hand and the most critical issue that needs to be addressed and dealt with is the cash and working capital crisis that continues. Fortunate producers were able to access their lines of credit in the second quarter which will begin to bring into context how leveraged the industry really is. These increases in debt will contrast the asset write downs and show the industry is in desperate financial shape. And in particular, understanding that those assets that remain listed as property, plant and equipment are not so much assets as they are the unrecognized capital costs of past production, being what People, Ideas & Objects have identified them to be and categorized them as. More or less when the industry as a whole consumes the kind of cash oil and gas has this past decade, the producers and industry are worthless as they demand cash to operate.

This cash and working capital crisis is into its fourth decade. The structure and culture of the industry has, as a result, been developed into a cash incinerating machine that these producer bureaucrats feign not to be able to comprehend. If it's not investors or governments that need to bail them out on an annual basis its banks. Luckily some producers received the sympathy vote from their banks this quarter. This however does not help them with the problem they’ve created and can only be solved by adopting the Preliminary Specification. When producers capitalize most if not all of their interest and overhead, all of their capital expenditures including the intangible assets. Then leave these assets on the balance sheet for decades at a time you create the cultural and specious industry calling of “you have to put cash in the ground.” That’s because all of the cash that has ever been given the producers, less what the bureaucrats were able to divert for themselves, is currently sitting in the ground. The real issue is that the commodity prices charged to consumers for oil and gas do not recognize anywhere near the appropriate amounts of capital incurred. The full costs of exploration and production are not passed on to the consumer as the investors have paid for the capital costs of these commodities, in order that producer bureaucrats could “put that cash in the ground.” One look, but not too detailed of a look, at the check book would show that without the annual cash infusion from investors these producers never generated any cash from operations above and beyond the operating and overhead costs they were incurring. They reported they did, however if you consider the high overheads necessary to fill those buildings with people in those downtown cores, the overhead in oil and gas is high. Possibly as high as 50% based on today’s commodity prices. No one knows! These costs are capitalized and the cash incurred is not recovered for decades. Leaving a gaping hole in the cash balances each month when products sold are underpriced due to the fact that there is inadequate capital costs recognized in the price of oil and gas. The purpose was to “build balance sheets” not pass costs on to the consumers. These cash balance deficiencies have traditionally needed to be filled by investors, bankers or governments. Because “you have to put cash in the ground.”

Operations never provided enough cash to pay these overhead costs, which are also high due to the creative and innovative ways in which bureaucrats have expanded the concept of executive compensation. Besides the reporting is so skewed through these capitalization policies bureaucrats can always “build balance sheets,” report profits and cash flow. The fact of the matter is that the industry has been consuming cash at voracious rates for the past four decades. Investors became wise to this in 2015 and left. Banks are taking longer to figure this out. Governments seemed to understand it intuitively. Anyway, enough about the good times. This is about 2020 and the new normal as they’re now calling it. I expect the producers that were able to access their lines of credit will have consumed all of that cash by the end of June. It is reported that the average prices that had been received during the quarter were slightly over $22 for oil and just over $1 for natural gas. OPEC+ are having no difficulties making profits and generating cash at the current prices and I expect that $40 oil will be what can best be hoped for for the next few years. As of August 2020 OPEC will have 7.7 mm boe / day of surplus production. $40 is much better than $22, the only difference is the time in which North American producers hit that brick wall. Neither price is adequate to even begin to deal with the cash drainage that we’re talking about. Even if it could, the current cash and working capital balances would take years to recover. Recall prices were anywhere between $45 and $70 these past three years and were incapable of providing the producers with the cash to cover operations and capital.

So when these oil and gas bureaucrats talk about the future of the oil and gas industry they’ll be able to discuss their new fangled “asset reorganization” or, the finer points of their strategy regarding Chapter 11 vs. bankruptcy. And how they’ll be able to implement strategies to ensure the executive compensation for their efforts and bonuses will be granted just moments before that momentous occasion. Then they might realize their accountability to the shareholders would finally end! These are the limited choices bureaucrats can use in their second quarter reports.

The third issue that we need to discuss is the tragedy of shut-in production that will be caused in the second quarter under the current industry methodology. I need to clarify this as I and the Preliminary Specifications decentralized production models price maker strategy doesn’t come across as being hypocritical. One of the reasons that producer profitability is so poor is that the administrative and accounting capabilities are replicated within each oil and gas producer. These capabilities are not part of the producers competitive advantages and are not shared or shareable in the current industry configuration. Utilization rates of these resources may be as low as 40% due to the high levels of specialization necessary. The first objective of the Preliminary Specification is to organize the industry in order to move the producers' fixed costs of administrative and accounting capabilities to the industries variable costs of administrative and accounting capabilities. Once all the producers' costs are variable in nature, shut-in production will incur what we call a null operation, no profit but also no loss. In the current system the fixed costs of overhead are in essence a producer capacity and capability. A better way to describe it would be to call it a fixed industrial capacity. I describe it this way to explain that one of the highest costs an organization or an industry can incur is surplus / idled capacity. It is an insidious cost that is unpredictable in its nature. It is also one of the most costly and can lead to either producers or an industry's demise. If we are correct that fixed overhead is at 50% of revenues in the second quarter the costs of surplus capacity will be horrendous. Earnings and cash flow will evaporate unpredictably under all methods of accounting, and yes even the specious ones. And this same characteristic of surplus capacity costs will be no different than the costs that will be incurred by implementing the Preliminary Specification. Therefore the industry's surplus capacity will need to be worked out of the organization and industry, which our system does through a more dynamic capital allocation based on a new capital discipline that considers only profitable production is ever produced anywhere. The difference between these two methods of dealing with surplus capacity is that People, Ideas & Objects turns these administrative and accounting costs variable, based on production. And the remainder of the production is only produced on a profitable basis. In today’s systems the overhead remains fixed and there is little that can be done about that in the short term. While the commodity prices remain depressed due to the chronic overproduction, or as we’re calling it here surplus capacity.

The issue producer bureaucrats have with our decentralized production models price maker strategy is that they claim it’s collusion. Contrary to the accusations that the Preliminary Specification is collusion, what we in essence saw in the second quarter of 2020 was collusion, by the producers definition, from those who chose to shut-in production. I have argued this point for well over a decade now and what the Preliminary Specifications price maker strategy and what the industry participated in during the second quarter was anything but collusion. It was listening to markets telling producers not to produce unprofitably. Which is in the economic definition of price makers. These two issues, the declines in commodity prices and shut-in production volumes, thrown onto the financial skeletons these producers began the second quarter as will become apparent to all. They will need to have an answer. Muddling through and doing nothing will not be acceptable and therefore they have come up with their “asset reorganization” as their current viable scapegoat. I spent over a decade researching the Preliminary Specification as a holistic business model to deal specifically with these issues. Producers may have spent a month on coming up with theirs. If they’ve not done this work, producers have a few days in which to do this much work to prove that they’re not fielding further, viable scapegoats and instead have chosen to pursue real tangible solutions in their “asset reorganization.” I’m certainly here to answer questions about our model. Let’s hope they’ll have answers for theirs.

One last point is the service industry that supports and provides the wherewithal for the producers in the field. We are seeing many bankruptcies in those companies such as BJ Services announcement on Monday. As a pioneer in coiled tubing and fracing techniques, they’re going to be missed. And I can say that with the assurance that their bankruptcy plan sees them exiting Canada. This will no doubt garner at most two shrugs from the Canadian producer bureaucrats. Additional changes include reducing their remaining operational footprint and selling off businesses. How will BJ Services capabilities be recovered in the future. It is really quite simple, producers will have to pay in advance for all of these service industry related services in the future. And will have to pay to have the capabilities purposely rebuilt and expanded with all service industry representatives. There will be no investors or bankers stepping in after they’ve seen the antics of the producers over the past decades. What would be in it for them? These capabilities will have to be (re)built and paid for in advance by the producers in order to have them available. These payments will be nothing more than advances. There will be no equity or rights attached to these payments. The payments will be a means in which to source the capability and live with the past that producer bureaucrats created. No one in the service industry is going to get up off the couch in order to lift a finger without free money from the producers first. Welcome to the new normal! 

The question that keeps coming back to my mind is, how do we evolve economically from our current situation? We know that today is not working, and in the past we were able to move towards enhanced solutions that arose from the concepts of creative destruction and spontaneous order. I see the destruction and a static situation that has developed for the following reason. Today bureaucrats understand that locking their organizations in structures that are defined and supported by ERP software disable any changes until the software is changed first. There have been no changes in the ERP systems in oil and gas for the past 30 years, at a minimum. These systems had evolved in order to fuel the bureaucrats personal needs and therefore won’t be changed while they’re in control. We therefore remain locked in to what I call a 21st century software bug. The producer bureaucrats understand what the problem is, they devised it. What they don’t understand is how complex the solution will be and what will be involved. Where does the motivation to move forward come from? And how is it implemented? With vested interests aligned against progress and unmotivated by their own personal greed, destruction on this scale is the only result. And just as I knew that this industry fallout would happen at least a decade ago, and the Preliminary Specification is configured to address these specific issues. I can say today that we haven’t seen anything yet. 

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 XV

Unlike ANTIFA People, Ideas & Objects are not interested in tearing things down. ANTIFA’s objectives in tearing things down is wholly consistent with the oil and gas bureaucrats who have and are doing a very fine job in their specialized discipline. And just like ANTIFA, they are of the staunch anti-profit and anti-capitalist mindset. People, Ideas & Objects are rebuilding the industry brick by brick, and stick by stick due to the fact that the damage and destruction is so comprehensive. People are seeing the decline in the industry is rapidly getting worse and there are no attempts to even admit there’s a problem. Trying to save what is left and reconstituting what is already destroyed would be a more ambitious objective at this point than just starting over. We have a lot of work ahead of us at People, Ideas & Objects and the sooner we get our budget funded the sooner it’ll be completed. Our objective is to save the industry from the bureaucratic destruction, we are not the ones that are attempting in any way to destroy it. Our solution provides a viable business model that identifies and deals with the business issues that are present in the marketplace today. And also provides a foundation for the industry to resolve future issues and build a foundation for a dynamic, innovative, accountable and profitable producer and hence the entire oil and gas industrial complex associated with the producers.

Absolute control of people’s workday has been the domain of the bureaucrats and their minions in oil and gas. Little is done without a comprehensive command and control environment where the features and productivities of the administration, accounting and governance of the organization replicates a computerized 1950’s scenario. This is the domain that provides the bureaucrats the protection from outsiders such as People, Ideas & Objects and our radical ways. It is how the bureaucrats ensure that any value which is generated is siphoned off and delivered to them personally. Meanwhile in the rest of the world, the 1960’s, 70’s, 80’s… to today have evolved differently. People are expected to do their jobs in a time and place where the expectation is the job is completed in a timely manner. The assumption is made that people have the capacity to think and do what is necessary without the direct supervision of those that provide no real value anymore. As bureaucrats are threatened more and more these days they have the reins tightened and ensure that the organizational discipline and control is broken down to 30 second intervals. This is where we stand today, with organizations that would be competitive in the 1950’s, which just as the former Soviet Union proved their system no longer built value, the bureaucrats system no longer does either. We can either ride the downward spiral with those that have destroyed most of what was ever provided to the industry, or we can replace them and rebuild in the vision of the Preliminary Specification. 

When will the producers begin to act responsibly and begin to deal with their issues? Deferring the discussion to people and groups that have none of the responsibility for this downfall is well beyond tiring for most people. We heard last week it was the employees fault. No, it’s no one's fault other than the producer bureaucrats themselves. Instead of working to build the business it became a culture of digging into the gravy train for one's own benefit. Producers are responsible for the greater oil and gas industrial complex that they rely upon. It is the source of their capabilities and capacities, which they gladly take credit for, and the groups that are abused financially so that they’re able to access more. These two behaviors are inconsistent with the needs of the service industry and tertiary industries. They are at the behest and are beholden to the producers and do not function for anyone else outside of the industry. They are the reasons producers generate revenues from oil and gas sales. Oil and gas is a primary industry and the producers need to begin operating in a manner that recognizes the fact that they need to support and develop all of the resources they rely on for those revenues. Expecting investors or banks to fund the producers themselves and to finance the innovations and organizations in the service industry has been used and abused to the point where it won’t be available on that basis again. Producers will need to work effectively with all member organizations of the industrial complex and begin to move it forward as they require it. In other words the bureaucrats have blown it. And there will be no second or third chances. 

But I repeat myself. And I ask what it is that can be done to move this forward with such an obstinate group of do-nothings. There is no instinct of self preservation or inclination towards action. Bureaucrats are seeing the looming bonus that will be available once they declare their organization bankrupt and that only prompts them to expand their personal shopping lists. Ten years ago natural gas declined and is showing every sign of a looming global collapse. It has been five years since the investors left without a whisper of concern or anything beyond a shrug. And just as they’ve destroyed natural gas they went on to prove they could do it again in the oil market six years ago. Oil takes more time and effort to destroy due to it being a global market but it looks like 2020 is the year they can begin congratulating themselves on a job no one wanted done. At least they have the coronavirus to blame.

Second quarter financial statements are about to be published in the month of August. What will these read and how will they be presented? I think it’s reasonable to assume that they will show the end of the line as any reasonable person would define it. I know that for a lot of people who work within that greater oil and gas industrial complex the exit doors are getting very crowded and it’s only motivating more people to do the same. Issues regarding the retention of people contrasts the layoffs bureaucrats are executing. People are wanting out and they’ve had enough. They see where this is headed and know instinctively that they don’t want to be there when the roof caves in. Call it survival mode. 

Many such as those that are interested in our user community are not giving up on the industry. They just don’t want to be part of the decline and destruction anymore and want to be part of how things get turned around. They know and intuitively understand that society in general is wholly dependent on oil and gas just as people are dependent on oxygen. Without them it’s terminal. North America stands as the premier economy in the world. For that to continue it will need to remain the largest consumer of energy. Oil and gas will always be a large portion of the makeup of our energy source, at least for the remainder of this century. Energy independence and security are worthwhile, attainable and liberating for our position in the world economy. These are spelt out in our White Paper “Profitable, Energy Independence -- Through the Commercialization of Shale.” Something that frightens and scares the bureaucrats because they know they wouldn’t be involved in that, and therefore the gravy train they’re used to would also subside. 

We will always have choices in how we fuel our economy. The issue is the efficiency that is derived from oil and gas is undervalued today. That undervaluation will cease and be overcompensated if the producer bureaucrats continue in the selfish manner that they are. Purchasing our energy from offshore can always be undertaken until the infrastructure is rebuilt from the destruction that we’re witnessing today. The issue would be how much would it cost and how long would it take to turn this ship around. When each boe has the mechanical leverage of 23,200 man hours it can be easily defined as the deal of the century at today’s prices. I prefer to call it the crime of the century when producers are unable to recognize the business is not a business in any way, shape or form. Nonetheless the choice we’ll have is to compete in the world economy with one arm tied behind our back by paying others $600 / barrel while the North American oil and gas industry is reconstituted. If we began this now by adopting People, Ideas & Objects Preliminary Specification, funding its budget and moving it forward then there would be less time and risk of this happening for a protracted period. 

I’m sure that what is going to happen with our good friends the bureaucrats is that they’re going to frame this with their classic spin. If I could be so bold as to suggest for them what they should call it. “Living the Dream.” In their case I’m of course taking the critical point of view that they have their heads in the sand. Although it could also be suggested that this is what they intended all along with the associated destruction being the vision or dream they were always pursuing. I could associate a few other points to the phrase but they would be redundant too. However if the bureaucrats aren’t catching the sarcasm, they are certainly free to use the phrase. 

I will be taking the next four weeks off returning August 10, 2020. 

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 XIV

Just a quick note to follow up on Monday’s post. We originally raised the point about Directors and Officers insurance coverage in our June 2, 2020 post. We subsequently learned producers increased the officers and directors coverage. But since that time nothing has been done. Monday’s post noted that the solution to what ails the industry is for the Officers and Directors to cover off their personal risks, in what I allege to be a reasonably clear insurance fraud. This is not acceptable and should be dealt with. They are the ones that are responsible, accountable and the only ones with the capabilities to act. Yet they’ll just sit and watch what they’ve done in the industry play out without a shrug, care or concern for anything. They’ve got insurance coverage and they couldn’t be happier or more content. Whatever happens in the industry will be beyond their control and they can say they upheld their strategy of muddling through and doing nothing. What is not being considered is the time that we’re in and the state of affairs of the industry are demanding remedial action. Oil and gas prices at these levels do little other than to keep said bureaucrats comfortable. There is no future and the prospects for the future fade each passing day. Whether that is LNG facilities which can no longer find markets, pipelines that can’t be built, the service industry capabilities further eroded or producers preparing people for more losses, more lay-offs, more bankruptcies and more write downs. The second quarter will be the worst quarter in oil and gas, ever. What we’ve learned is that the alleged leadership wanted to skate on through this without any risk by increasing their insurance coverage. And that is all. 

Quiet is the only word to describe the atmosphere in oil and gas. There are the layoff announcements that have the bureaucrats competitive juices flowing once again. “I’ll see your 500 souls and raise you another 200!” Such zeal. All of this is done with no consideration of the future of the industry and how it will function beyond the third quarter of 2020. But then again they’ve been bereft of any planning or strategy for four decades, what good would a plan provide today? With $40+ oil prices bureaucrats are back in the money due to the fact that their royalty and operating costs are below this price. That makes them “profitable” and “cash flow positive” and somewhat assured that the good times are just around the corner, or at least next week. The capital and overhead costs are all being capitalized so these costs will linger in that big vat of unrecognized capital costs of past production. Why would that change? The fact is their innovation in terms of their compensation can resume and start providing bureaucrats with the fruits of their strenuous labors once again. 

In Canada I can say the bureaucrats have been operating these past few years on the basis that all employees are at their desks, figuratively speaking, throughout the day. Activity levels on the street and in the +15 system have been minimal to none while the working hours have been enforced. I always thought that this was so that bureaucrats could ensure that control was maintained at all times. The coronavirus has broken this hold on the staff’s time and location during working hours. It really doesn’t matter where you are does it? The quality of life for most has been increased due to the capacity to work from home. Once the virus is done, I would think that this would be difficult if not impossible to make the change back to the bureaucrats rigid control regime. Other industries are seeing the ability to work from anywhere as a real quality of life issue and a benefit for their staff. It also seems to be a boost in productivity. With the reputations that are being so rightly earned in the industry today, producers would be the odd man out if they tried to continue with their prior version of controlled lockdown. Could oil and gas compete for talent without the ability to work from home?

The converse of this is that the work from anywhere opens new opportunities to the people who were once committed to the industry and may see things differently since their forced exit. Other industries may be as accessible from their current locations just as easily. The loyalty and commitment in terms of being the scapegoat for all that is wrong in the industry is just the latest example of why the bureaucrats will never get this back under their control. Admission or self-reflection as to how we arrived at this point are in short supply. 

People can see now that the shale basins are not going to be turning around, whatever that means, anytime soon. Optimism has waned and the facts are as stark as ever that the industry has issues to face. More and more I’m hearing that the service industry will be the impediment to any quick turnaround. As bad as the oil and gas industry is, the service industry and those that make up the rest of the industrial complex have had it. These people and their companies are being betrayed and are exiting the continent leaving literally nothing in their place. The people who had worked, and the tacit knowledge of how things were done, are walking away and these capabilities will need to be rebuilt from the ground up. Offering big wads of money doesn’t motivate anyone when the trust and belief in the industry is at the levels the bureaucrats have now chosen to operate at. The only question the people have is will there be a second paycheck on the basis of that handsome offer?

OPEC+ the scoundrels the bureaucrats always alleged they were, who allegedly are playing dirty tricks somehow, ended up with all aces. Is this because of their actions or the self-inflicted gunshot wounds of the North American producers? At $40 OPEC+ are profitable in the real sense of the meaning of profits. Sure they’re countries budgets may not be fully funded but when was the last time that Canada’s or the United States federal budgets were? And when did it become the sole responsibility of the oil and gas industry to solve all the financial commitments of the government? Operating costs for Saudi Arabia are $3 / bbl. Ghawar has been producing since 1948 and I doubt has much capital left to retire. OPEC+ have 9.7 million boe / day of surplus capacity until the end of July 2020. This will hang over the market like a dead weight, satisfying any increase in demand for the foreseeable future. $40 oil is going to be as good as it gets for a number of years. In terms of natural gas pricing I think it’s really bad news there as well. The producer bureaucrats haven’t been profitable in natural gas since they first collapsed the price in 2009. Here is a graph of these prices in North America, Europe and Asia. It would appear that the world is now awash in shale gas too. 

Once natural gas prices collapsed in 2009 the race began to reverse the existing facilities for LNG imports and expand the LNG export capacity. The global markets were unaffected by the shale gas overproduction and oversupply in North America. Therefore the global prices were much higher making the LNG business viable. Now with LNG export capacities of the U.S., Australia and Qatar flooding the global market, natural gas prices are emulating the shale based decline of 2009. 

Understanding this only took ten or eleven years for North American producers to orchestrate. And with oil starting in 2014, that means we have four or five more bad years before things turn around, or collapse further. I’ve never stated how long I think it will take for producers to turn this ship around. Eleven years and they still don’t know or understand the issues. It will be at least a decade before the industry pulls itself up to a moderate operating level. That is with the implementation of the Preliminary Specification. The extent of the damage is reflected in this Deloitte & Touche report that shows somewhat accurately the state of affairs. 

HOUSTON (Bloomberg) --Almost a third of U.S. shale producers are technically insolvent with crude at $35 a barrel, according to Deloitte LLP, highlighting the industry’s acute financial strain even as oil prices rebound from a record low earlier this year.

West Texas Intermediate edged up to $40.06 a barrel at 11:38 a.m. in New York, a substantially higher level compared with most of the last few months, especially April, when prices briefly went negative. But the rebound will do little to prevent 15 years of debt-fueled production growth catching up with many shale producers, Deloitte said in a study. Technical insolvency is an accounting way of saying a company will face problems meeting debt repayments.

“New and unforeseen headwinds continue to jolt the industry’s progress,” authors Duane Dickson, Kate Hardin and Anshu Mittal said in the report. “Although the sub-zero price was a temporary dislocation, this intense volatility highlights the fragile state of the industry.”

I would suggest that this report understates the situation in oil and gas as I understand it. It is appreciated that others are beginning to see the industry's problems and difficulties. I would also suggest that Deloitte & Touche are party to the disaster that is oil and gas as they are the ones who are charged with ensuring that accounting is accurate and timely. Now they’re finding that not only are they the ones that should have been standing in the way of the bureaucrats. They should have been the first to raise the issue. We can look at the roots of the problem and see that it is first and foremost an accounting issue of over reported profits, overreported assets, overreported cash flow, overproduction and oversupply. All at the expense of the investors who had been assured their audits were meaningful. That’s right, I forgot, oil and gas is where everyone in authority does nothing about everything. And none of these comments mitigates the CFO’s as culprits in any way.

Maybe a good exercise for those at KPMG, PriceWaterhouseCoopers, Deloitte & Touche and others would be to account for the comprehensive losses that have and will be incurred as a result of this disaster. Start with the investors and bankers, then those that have been laid off. Then it might be easiest if they just took the entire service industry's value and trashed it, after all that’s what the producer bureaucrats have done. Maybe these accountants can add an estimate of what their oil and gas industry billings will be once this decline has reached bottom. I now see why the engineers and geologists thought that the only purpose of accounting was to “pay the bills.” This is pathetic and sadly I’ve spelled out a role for these accounting firms in the development of the Preliminary Specification. I’m curious to know now if it's beyond their capabilities and their capacity to understand that role. 

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.