A Loss of Capacities and Capabilities, Part II

 We have more news on the service industries difficulties and the actions being taken there. News that Liberty’s acquisition of Schlumberger’s shale assets are to be put in storage were of little surprise to anyone in either oil and gas or the service industries. Surplus capacity of these shale assets are depressing the prices of these services. What was surprising was the expectation that Liberty would be archiving 1 million horsepower currently derived from diesel fuel and replacing it with electric horsepower. Chris Wright the CEO of Liberty notes.

But Wright said building new electric pumps in a market already oversupplied with diesel-powered frac gear won’t be easy. His company already has plans to scrap about 1 million horsepower of frac pumps it just bought from Schlumberger.

“We’ll only build new, next-generation fleets with partnerships with customers,” he said. “I’m pretty confident we will have that out next year.”

Mr. Wright is far more diplomatic than I, suggesting “partnerships” would be the method that he would use to replace this equipment. That is certainly one way to look at it and as I had mentioned in last Thursday’s post. The method that People, Ideas & Objects chose for industry to acquire the Preliminary Specification was for them to pay up front. This is and will be the new reality of how producers and their industry will have to be operated for the foreseeable future. No one is buying the “if you build it, we will come” scam anymore. It’ll be if you want that xyz capability or an increase in capacity, producers will have to pay cash in advance. If producers want to have a financial interest in the xyz capacity or capability then they should build it, own and operate it themselves. However they are not entitled to any of the Intellectual Property of those who have developed their legacy in their businesses, producers will need to have developed their own unique Intellectual Property in which to build, own and operate their fleet of frac facilities or whatever capacity appeals to them. In terms of the bigger picture there is one clear change taking place in the service industry that conversely has been stalled in oil and gas. Liberty is in its ninth year of business and three years ago it was not listed in the top ten of North America's fracers. They’ve established themselves as a specialist in the frac field and as of today are listed as the number two in terms of capacity, second to Halliburton. The change that is taking place is clear to me. And that is creative destruction is creating opportunities for new leadership based on providing new thinking, specialization and the division of labor, and new business models.

In terms of the position you can take your firm, there are three general methods in which to do so. You can lead, follow or get out of the way. Liberty has clearly chosen to lead, Schlumberger has clearly chosen to get out of the way in terms of their shale operations in North America. When we look at these methods and apply them to what the oil and gas industry has been doing these last four decades we see they’ve adopted none of the three constructive possibilities. They certainly haven’t led, they may have followed the book “The Bernie Madoff guide to Building Your Own Ponzi Scheme.” But other than that they’ve just been obstinate in terms of doing anything productive when they should have got out of the way. And as they sit there entering their fifth decade of unproductivity and personal profitability they don’t seem to budge to anyone or anything. Current working capital balances imply that there is some cash remaining, it’s just that it's already spent, and as soon as that cash has been siphoned off in terms of innovative, executive compensation these bureaucrats will be gone. Their exit may not be too much longer based on the current state of financial affairs. A number of key points that I wish to reiterate about these state of affairs in the industry.

• We noted the issues that are present in the industry today, and have been present throughout each of the past 34 years. These were supported with documentation that we noted from July 26, 1986 that detailed exactly what the problems have been throughout these 34 years. You would have thought that doing absolutely nothing would have worked within this time!

• People, Ideas & Objects Preliminary Specification has been available since December 2013 and we’ve been writing about the development of and research we undertook regarding the Joint Operating Committee since December 2005 based on a proposal we made to industry in May 2004. The Preliminary Specification, the research we undertook and all of the 3 million words contained in this blog are about these issues in oil and gas and how we propose to solve them with a comprehensive and workable business model. There is nothing normal about any of this. It is abnormal and I am unfamiliar with any other instance of business being abused to such an extent.

Businesses don’t operate on the basis of accounting deception for four decades. The luxury of having the SEC define the capitalization policies of the oil and gas producers is what made the bureaucrats efforts to deceive appear normal. In fact these SEC regulations were used and abused systemically and this abuse has now become culturally ingrained in every corner of the oil and gas industry. This is represented in the call to “build balance sheets” and the current calling to “protect balance sheets.” Business principles that mean nothing in the rest of the universe. What we do know is that producers have “built balance sheets” and hence fake profits to stratospheric heights. The most competitive producer would have sought to recognize their capital costs as quickly as possible in order to remain competitive in the market for capital. Now all that they have are long term assets which we classify as the unrecognized capital costs of past production and extensive liabilities to show for it. In terms of liquidity and cash flow, not so much and declining precipitously this past decade. The sum total of the industries productive capacity is nothing as it consumes cash in order just to produce. A negative present value. This is all that they’ve done in the forty years since the SEC put the regulations into play. As long as the investors and bankers were never the wiser, the “good times” kept their party going. 

As I’ve preached throughout this period, it is possible to build the Preliminary Specification and turn the industry into a dynamic, innovative, accountable and profitable set of producers and industry. People, Ideas & Objects provide the most profitable means of oil and gas operations and what we were perceived to be doing was spoiling their party. Whether I had that effect is unknown, what I do know is that the situation that we’re in today was inevitable and completely unnecessary. It is standard fare that you over report assets and profits in a ponzi scheme, while also hiding the amount of the “take” being pilfered. Exactly what has been done here. Now faced with the ultimate reality of what it is they were seeking to achieve. Producers are unable to function at basic levels and their capacities and capabilities are declining as quickly as their cash balance. The vision of the industry's future becomes clearer each day and it is not pleasant. Oil and gas prices are barely adequate to cover the costs of production. The world is awash in oil and gas productive capacity and inventories. North America by far is the most expensive producer when we understand that most of what is recorded as assets is nothing more than the unrecognized capital costs of past production. We are now in a period where the volumes produced will continue to deteriorate year after year. And what have our good friends the producer bureaucrats done? They appear to me to have turtled and are hiding under their desks. Waiting for the signal to start the mass exodus which they’ll hide their exit in. I’ve been concerned about this for almost three decades now. I’ve taken nothing but abuse from these producer bureaucrats. I’ve never received a penny in support. If this is not a scam, a fraud and deliberately done, someone needs to explain to me how things such as this can “mysteriously” evolve. Please understand I’m not complaining about my situation. I’m the luckiest guy there is. I truly enjoy this work and will one day get it done. I only raise these points to show the contrast of the actions taken over this history in order to prove that all is not “accidental” as they would allege, that producer bureaucrats were fully aware of the issues and of the solutions that were at hand for many decades.

Sourcing development funds from the producers is the last thing on their minds and is beyond what they’re capable of anyway. Both financially and mentally apparently. Their concern as always will be personal and they thank you for asking about them. When I started this project it was quite amazing to me as I had no idea what it was specifically that I would be doing. All there was to do was to march off in this general direction. Each morning I’d wake up and see a giant black hole that had become my life. I now want to welcome everyone to this giant black hole and offer to take a seat, kick back and enjoy. It’s going to get real rough.  

People, Ideas & Objects claim that it’s not enough to own the oil and gas asset, it’s also necessary to have access to the software that makes the oil and gas asset profitable. Welcome to the 21st century, the software century. Firms aren’t prepared to make the kind of radical changes that are contained within the Preliminary Specification. They mind their business and ensure that no mistakes are made. The producers however did none of that. They made mistakes, big mistakes. It wasn’t just me who saw this issue, the recording of depletion, depreciation and amortization are some of the most critical decisions made in the business world. You have to ensure that the costs of the products you’re selling are priced appropriately not only for today, but for everyday. Producers ensured that they “built their balance sheets” and kept their asset values as high as possible. Making them look profitable and prosperous when they were losing their shirts. If it wasn’t for the investors bailing them out with more cash each year they would have been out of business many decades ago. This is not rocket science, it’s generally understood in the basic accounting courses. Apart from what I would call these deliberate mistakes, I don’t think there has ever been an industry that has faced the type of difficulties that the oil and gas industry is now facing as a result of this fraud. Bureaucrats won’t be happy with these charges. Any claim of innocence by these bureaucrats should be discussed with the judge assigned to their case. If the industry was lucky and had everything go its way, it would take at least a decade to recover from this. A very serious and comprehensive problem that can only be solved through creative destruction such as what the Preliminary Specification prescribes. 

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, everywhere and always. 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. 

A Loss of Capacities and Capabilities

 Producers generated a shrug of the shoulders and a yawn when hearing the January 17, 2020 Wall Street Journal’s report of Schlumberger’s plans to exit the North American shale market. Producers think that petro dollars would always have them back barking and begging for more. Schlumberger’s move wasn’t anything to be concerned about, in fact it was just noise. Then on September 1, 2020 the sale of Schlumberger’s North American shale business to Liberty Oilfield Service was announced. Certainly the assets of Liberty will remain and they are in the fracing business. However, the loss of faith by an International leader of the market is a serious comment about the future of the oil and gas industry and shale particularly. Throughout the Preliminary Specification, and specifically in the Resource Marketplace, Research & Capabilities and the Knowledge & Learning modules the rebuilding of the capacities and capabilities of the producers and most particularly the service industry is one of the key objectives. When an industry loses control of the financial, operational and political frameworks of its domain, that includes the capacities and capabilities of the industry and sub-industries in which they had come to rely upon. We’ve discussed this many times here and in the Preliminary Specification. It is one of the permanent and lasting effects of not taking care of business. The only thing that producers could parrot was that I was crazy. Well if I’m crazy I’m still able to see the brick wall you’re driving towards, and producers feign not to be able to see or listen to anyone telling them anything other than the approved talking points. I’ve stated many times before when the world considers you crazy you need to do two things. First you don’t argue with them. Second you find liberation in the fact you’ve got nothing to lose and you never gave a damn what people thought anyways. 

We noted a few weeks ago how the academic world is scaling down their engineering and geology faculties due to a lack of demand for graduates. Even Texas A&M saw just one third of their graduates able to find positions in oil and gas. However the following graph did show this to be a temporary blip in terms of geological time. That by 2060 everything should be pretty much back to the way they were before things became so messed up. 

Our Resource Marketplace module looks to rebuild the service industry on a fundamentally different basis. The abuse that producers have orchestrated these past decades over all of their vendors has been unacceptable and was needing to be changed. This abuse is represented in the facts of today where Schlumberger may be leading the charge out of the market. Two particular activities of the producers' abusive behavior are of concern. They both stem from the facts that oil and gas is a primary industry and the producers generate revenue from the commodities sale. That is considered the “producer's money” and they’ll ensure that they’ll never have to spend it on anything other than creative, innovative and excessive executive compensation. The two abusive behaviors are the abuse of others Intellectual Property and the use of “their money” to keep everyone else on a starvation diet. In the case of Schlumberger, as with all service industry operators, they are not primary industries and do not have any secondary industries in which to use their fracing equipment. The producers inherently know this and during any of their orchestrated downturns, immediately expect 50 - 75% discounts from the service industry representatives. Leaving few alternatives for the service industry other than to take the money. In addition to this scaling back of their prices, producers cut their activity levels in the industry 50 - 75%. Making the decline in revenues realized by the service industry particularly acute, where the best they could hope for would be to maintain 25% of their prior periods. The Resource Marketplace module rebuilds and supports the service industry on the basis that it’s an extension of the producer firms. One where the service industry is established on a fair and equitable basis that considers the primary industry revenues the producers enjoy were not solely generated without the service industry. 

The second activity the producers conduct that circumvents their capacities and capabilities in the long run is regarding Intellectual Property. IP is the foundation of any business that would claim itself to be innovative. Such as the producers claim themselves to be. However what it is they’re claiming are the innovations of the service industry. The innovations from the producers themselves haven’t been seen for many years and decades. One could argue that a highly innovative oil and gas industry would not find themselves in the pickle that the producers find themselves in today, would it? If someone should happen to stumble upon an innovation that would be useful to industry then the following process would be invoked by the producers. They would agree that it was useful, however would not use it until such time as the principles behind the technology were released to them. This would include everything necessary for the producers to understand the tool, process or widget. If the developer refused to hand over the information they would be shut out of the industry for the better part of at least a decade. If the information was handed over they would find a willing group of producers able to use it as intended for what would seem to be about a year. Then, suddenly, many competitors would appear with the same product, process and widget of the innovator. Oddly, some of the vendors' competitors have directors and shareholders that are members of the oil and gas producer firms they initially met. Establishing price competition from the information that is handed to them by the innovator is the first order of business for the producers. Although the service industry has been very successful from an innovative point of view, it's always been on the backs of providers who held on to their technologies and eventually had the producers come to them. Companies such as the developers of coil tubing and Packers Plus. What more evidence do you need than the disregard they’ve shown to People, Ideas & Objects Preliminary Specification. Unwilling to provide them with the IP I was locked out of the business. What producers were unaware of was how obstinate I can be and how badly mismanaged they were. 

What we always hear from producers is their zeal to cut costs further. That is the business of the oil and gas business. Spending money at a blistering rate and beating up their vendors. Encana, now Ovintiv, went as far as to call the service industry greedy and lazy on many occasions during the better periods this century. It would seem I’m the only one calling the bureaucrats greedy and lazy now. Maybe I’m too harsh towards those responsible for the damage and destruction in the industry. I should maybe understand they’re doing their best. No they’re not, they’ve helped themselves the best they can but that’s it. If it doesn’t boil everyone’s blood outside of these producer bureaucrats for the damage they’ve done then you should check your pulse. This was unnecessary with the specific solution to the problem available in a timely manner. It just happens to also destroy the bureaucrats party time and cash flow. If you can forgive those that have done this damage to all of us then you're a far better person than I. I can’t accept it and we’re not finished yet. The extent of the damage is still hidden from most. No one airs their dirty laundry. And it will take a significant amount of time to just turn this around and get it moving in the right direction. I’m afraid the loss of capabilities and capacities has only begun which leads to the next, inevitable consequence of the bureaucrats party time, the loss of deliverability on the continent. That’s the big pickle, but everyone understands that now.

What the Resource Marketplace module of the Preliminary Specification does is establish the ability for the producers and service industry representatives to communicate in ways that will help the service industry to secure the Intellectual Property of their new products and services. Establish a market within the service industry where these producers can have some direct impact on how those innovations are developed. The two other aspects of this communication process is that the producers would be able to call out to the service industry what it is they’ll want, need and the overall direction they’re moving. Alerting the service industry to changes. It would also provide an opportunity for the service industry to have some of their ideas sponsored and financially supported by the producers in the initial stages of development. The purpose here is to make the service industry and oil and gas industry responsive to one another's needs. Making for a dynamic and innovative environment where the fostering of new ideas would be the premier way in which costs are controlled. Considering the decentralized production models price maker strategy would also be operational, the oil and gas industry enabling it to operate at a steady state of real profitability. Therefore the service industry will grow to ensure that the needs of the producers are their primary concern everywhere and always. And not just how to survive the next downturn. 

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, everywhere and always. 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. 

Standardized Data Model

 We’ve come across an opportunity in terms of implementing the Preliminary Specification in oil and gas. The opportunity is presented to us through the work that Oracle has done with their products, services and offerings. Moving to the cloud has enabled them to bring about enhancements to their offerings, but most importantly it’s the changes that we’ve seen to the Oracle Database. We’ll get into more detail as we proceed however my research has determined that what is attainable and desirable is that we standardize the data within the business model’s and markets of the Preliminary Specification into a data model. The objective being to standardize all the elements of the administrative and accounting processes and management of the greater People, Ideas & Objects community and the greater oil and gas economy onto Oracle’s Database offering. In order to achieve this otherwise unattainable objective, an industry would need to be undertaking a comprehensive, industry wide “rip and replace” development and implementation of their ERP systems. An industry that has been determined to have comprehensively failed and one that has no plans or vision for its future or what to do about the current crisis it finds itself in. Granted our use of the Oracle Database in this manner is at the forefront in terms of technological demands, however I see no issue with the maturity of their technologies undertaking these tasks. I do see unnecessary complexity and confusion being introduced through non-standard data elements being included within the Preliminary Specification due to prior preferences, convenience and time constraints. Convenience and time constraints for the people that are imposing the constraints not for the implementation of the Preliminary Specification. I see my role in the development of the Preliminary Specification as a need to ensure that its development and implementation is successful. I believe that the North American oil and gas industry is unable to resolve its issues without the timely solution of People, Ideas & Objects and our user communities Preliminary Specification. What are the alternatives? The more time that is spent developing the solution the many more hundreds of billions of dollars that are being lost each year in the greater energy economy. This should be evident to everyone at this point. I would ask therefore, what would the data elements of an ERP system be in the year 2030? When and how would that standardization of the data have been established? Is the incidental cost of standardized data offset by People, Ideas & Objects value proposition?

I have spoken many times of the superiority of the Oracle Database technologies. Their development over the past decade has been breathtaking to me in terms of the performance and all other attributes of the product. Interestingly the competitive markets response to their superiority has been to break down database services into unique disparate database offerings. The most obvious of this is Amazon’s offerings of relational databases that include Amazon Aurora, Amazon RDS and Amazon Redshift. Each with a distinct purpose and use. These are the premier database products of Amazon’s eleven databases offered. Oracle uses just one database for all purposes. Therefore no matter what the data, the type of performance that is needed, or the structure of the data, Oracle handles it within the same database. Which presents us with this unforeseen opportunity to standardize the data model for the decentralized production model, overall business model, which includes the three market models of the Preliminary Specification and application user groups. I see this as an opportunity that will enhance the quality of our offering, reduce the need for standardization in the future, reduce the time required to develop and implement the solution and increase the usability and understandability of the applications, and therefore bring the Preliminary Specification to market quicker and with greater efficiency than otherwise would be available. 

The comprehensive scope and scale of the Oracle database in the oil and gas industry once the Preliminary Specification is implemented is comprehensive. The more that we make the data standard the more secure, reliable and capable it will be able to meet our performance expectations. We are using a micro-services architecture to implement the data processing and process management from the expected 3,000 service providers. The application itself will run much of the industry on Oracle ERP Cloud through the People, Ideas & Objects applications. Some producers will use the proprietary cloud offering that Oracle provides which moves Oracle's Cloud physically inside their shop. And then there will be a variety of People, Ideas & Objects applications that are used within the oil and gas producers themselves in order to understand and operate their businesses and operations. This can all be done far easier with the standardized data being managed within the Oracle Database as opposed to accessing it from here and there in various formats that are not incompatible, but introduce complexity and risk to our development and implementation and to what we are seeking to achieve. That being our $25.7 to $45.7 trillion value proposition over the next 25 years. 

It’s important to note here that what I'm talking about is the data model, not the database. The database requirements in this post can all be handled by Oracle's Cloud Autonomous Database offerings. The fact that each service provider will possibly be operating their own Oracle Database, a shard or through shared tenancy is unknown at this time. The same would apply to each of the producers, however having access to the database through shared tenancy would more than likely be the method used there. The use of one tool, the Oracle Database across the entire People, Ideas & Objects application domain, using a standardized data model provides real value for all concerned and a step closer to everyone realizing our value proposition.

I want to reiterate what my personal plans are for the development and implementation of the Preliminary Specification. I have stated here many times that these developments are derivative of the Intellectual Property that I’ve developed over the past number of decades. It’s unknown how much longer it will take before these developments begin however we can all see that the industry is accelerating the steepness of its downward trajectory. The key for me is to watch the actions of OPEC+ as they have attempted for the past 34 years to deal with the North American producer in what I feel is a reasonable way. A way in which the North American producers' best interests reside. North American producers fighting everyone has not done anything for them and now their business is more or less finished. And as we’ve noted in June and July the only thing left to do would be to litigate the losses that have been created over these past decades and secure some of the benefits of the enhanced officers and directors insurance. 

As the budget for the Preliminary Specification denotes there is a big payday for myself personally once we’re funded. However, I’ve also stated I would sell People, Ideas & Objects to the industry upon successful completion of the development and implementation. What I have referred to as my second big payday. Included in that would have been the operating company and all of the Intellectual Property associated with these developments. I’m now changing that as I feel it does not reflect the necessary situation that the user community will need to be placed in once the industry is in the position of owning both of these assets. Therefore, upon reflection and discussion with user community members, I’ll be granting 51% of the Intellectual Property to our user community and selling 49% to the producer purchasers in the sale contract. It is in that way the future of the user community is not in question and will be within their own control. Something that I feel more comfortable with and assured that the direction of the software will be the appropriate direction for the needs of the greater oil and gas economy. Please note this has also been changed in the user community vision. 

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, everywhere and always. 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. 

Odds and Ends

 As I recall, and I can’t verify through google, rolling blackouts began as a new phenomenon on the east coast in the late 1980’s and early 1990’s. The electrical grid is always going through changes with one of these being the reliance on natural gas beginning to fuel the supply of electricity down the east coast. The issue as I recall was that much of the natural gas pipeline infrastructure at the time was dependent on electrical power for the distribution of the natural gas it consumed. A catch-22 situation. Therefore when New York or other highly populated areas of the North East experienced high demand for electricity they would cause a blackout in the following local region. Where some of the electricity used to power the natural gas distribution in that region was then stopped, suddenly causing blackouts to cascade down the east coast towards Florida. As I recall, this was becoming a relatively common occurrence which was eventually resolved through the electrical infrastructure taking into consideration this new phenomenon and designing around it. Again this is all from my memory and I have no facts to verify this. Google doesn’t cover this time frame well and I don’t have the time to search every Newspaper that was in publication at the time. 

Rolling blackouts are coming back into fashion in California this summer due to a new phenomenon. The progressive politicians who have managed the state for many years have now legislated the move away from carbon and replaced it with clean energy in order to attain the high percentage of their energy based on non-carbon sources. As we noted in our White Paper “Profitable North American Energy Independence -- Through the Commercialization of Shale” both solar and wind power are poor replacements for hydrocarbons. What the Californians are finding is that peak power is achieved during the four hours of peak sunlight and for the rest of the day, the power is not that reliable. Keen to legislate and regulate every difficulty out of existence they’re now looking to put in place the requirement that adequate battery storage be built to make up the difference. Therefore the four hours of solar and wind power that is generated, that is proving to be inadequate, will also be used to charge the batteries so that power will be available for the other 20 hours of the day. Always remember that 2 + 2 = 5. The decommissioning of hydrocarbon based power facilities will continue based on targets established to meet their carbon free objectives. 

I guess I see why oil and gas producers are now transitioning to clean power as they’ve stated they are. Telling government bureaucrats and legislators that they can do this job gives the politicians the motivation to foolishly continue in their foolish ways. Please read the section in our White Paper entitled “An Inconvenient Set of Facts” which reviews The Manhattan Institutes Mark Mills paper “The New Energy Economy: An Exercise in Magical Thinking” to understand the impossibility of all of this. With the difficulties that California is having in transitioning to clean energy. It may hold the key to understanding the interests of the oil and gas producers transition to clean energy. Seeing that there is failure already they could not be blamed for its cause at a later date. And the transition is driven by legislative requirements and not market conditions therefore the performance criteria they’ll be evaluated on is subjective and based on their political lobbying of governments that would be, or could be, considered their key customers. Maybe this transition isn’t such a bad idea for the oil and gas bureaucrat. 

“Well thank god for the Saudis and the rest of OPEC.” That may become the sentiment here in the next few years based on the initiatives that are currently in play. Inadequate volumes of drilling are taking place, producers are financially destitute and the governments want to defy logic and physics at the encouragement of the oil and gas industry as it transitions to clean energy. If this makes any sense to you please call me and explain it to me. From time to time you see people moving off in the wrong direction and pursuing goals and objectives that are questionable in terms of their value and contribution to society. We seem to be in one of these periods, however it's becoming more of an era than a short term diversion. Usually people snap out of it when they realize it’s not going in the right direction but we’re not that lucky in oil and gas. 

The other trend that I wanted to discuss was the work from home trend that has been happening as a result of the virus. It’s become somewhat of a project for me to catch what people think of the trend and what is it that will happen once we’re all healthy again. I’ve talked to many people over the course of the past four months and although it was very difficult for most in the beginning, due primarily to the lockdown and lack of mobility and things to do. Today it seems that the economic activity level is returning quickly to 100% with the consideration that masks are worn and everyone is careful. The attitude regarding working from home was never negative however now I think it is turning positive as people are also able to get out and about. Will the trend become permanent and is it more productive and easier to manage in their personal lives? The initiative also seems contrary to what the producers may want and desire. 

It would be my guess that producers will be moving to suppress the work from home movement as soon as they possibly can. You can’t count heads if they never show up for work. This would be short sighted and a refusal to learn from today’s environment. Working from home is more productive first of all. Secondly, no one wants to go back to fully working in an office environment. Third, it would be short term thinking for an organization to think that the type of disruptions that we’re dealing with are a single event. There may be more and the capacity to deal with these events and the resilience of the organization to deal with them will have to be purpose built from this point forward. The Preliminary Specification does this, however, since we will be commencing development, we would be able to build on this capability during that development and enhance it to make it more productive and efficient. Development of the Preliminary Specification should be seen as an opportunity in terms of realizing the full benefits of the work from home trend for both employees and producers. 

The development of the Preliminary Specification always contained elements of the work from home trend. However we are now embracing it on a wholesale and permanent basis. Individuals within the user community were always somewhat detached from our organization and were maintaining their individual service provider organizations. What they do and how they do that will be up to them. Oracle will be doing the development work and a very large percentage of development work is now done virtually. Many software applications have employees that have never physically met any other employee. Imposition of the North American time zones will be one of the requirements. This work from home trend will be a net benefit to People, Ideas & Objects due to the time that will be saved in having our product completed. A key issue of mine that I’m always concerned about. The time that we are developing software is time that the producers are not maximizing their revenues and realizing our value proposition. We therefore need to ensure that time is optimized in this fashion. 

Most of the research and development of the Preliminary Specification that I did from August 2003 onward was done in the work from home manner. I would point to that as evidence of the productive nature of working from home. Bureaucrats would point to the possibility that this wasn’t that productive. I’ve never experienced any of the difficulties with motivation or what are alleged to be the downsides that adversaries of the work from home trend note. Nothing is absolute. Having an office that people are able to go to will still be necessary in most instances. Maybe the employer will be able to reduce their square footage by 80% in order to accommodate the needs of the few that might experience the need each day. What I think we know here in late August 2020 is that it’s probably too soon to make any conclusions, and the working from home as a result of lockdown hasn’t been a positive experience for anyone. 

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, everywhere and always. 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 LIV

 I found this quote from General Eric Shinseki that the bureaucrats should take note of.

The process of innovation is initially generated as a result of issue identification and resolution. It’s also dependent on the organizational and industry structure that defines and supports the continuous development of innovation. Apple has this, oil and gas doesn’t. Which proves that the oil and gas producers are anything but innovative. They’ve not touched or identified an issue in the administration, accounting or business model area since July 1986, which was the beginning of their chronic overproduction and oversupply. Accountants, lawyers and regulatory requirements only reduce the amount of available cash for the drilling budget. Therefore it’s best not to spend anything in those areas so that more wells can be drilled. When the budget for administration and accounting barely covers the minimum costs of what is required the ability to consider issues and opportunities doesn’t exist. No one other than People, Ideas & Objects has looked at what the industry could be doing to build value and profits through re-organizations and new business models, but also to build the necessary components of innovation into the producers and industry. And we’ve done that on our own dime, otherwise it would never have been done. The prize in this transaction is the Intellectual Property which will now be used to provide the industry, and all those people associated with it, with the most profitable means of oil and gas operations, everywhere and always. This Intellectual Property also establishes our user community and their service provider organizations with the means in which to compete and prosper based on new and lasting dynamics. When the industry is in the state that it’s in, these new attributes are valuable. In this our last post on the second quarter earnings of 2020 I’ll be looking to provide evidence that the existing producer bureaucrats can’t, won’t and will not ever change any of their behaviors no matter how difficult the results and consequences to everyone else will be. It’s been 34 years since the destruction they’ve authored began, therefore I feel this prediction has a high probability of being valid. 

There are three phases of an organization's life cycle. There are many different names for these phases but for this case let’s use building, maintenance and harvesting. Bureaucrats believed they needed to build the business in order to provide the momentum and critical mass necessary to implement their strategy. This has been the phase that they believed for at least the past four decades. And I’m not criticizing where it is we stand in the process of the life cycle, I’m just noting what the producers believe today. As a result of the building phase being undertaken, the producers thought they needed to have outside investment provided as the means in which to attain critical mass in order to implement their strategy. Then they would profit during the maintenance phase of the life cycle. The problem was that the maintenance cycle never arrived and the profitability that they’ve reported during the building phase wasn’t real. Producers only recognized a small portion of the capital costs that were incurred to explore and produce each barrel of oil equivalent. Leading to their catchphrase “building balance sheets.” If all your costs are capitalized, and few are ever depleted, assets grow quickly and hence profits are tremendous. Just don’t pay any attention to the cash balances that are diminishing each and every month. The only solution to the cash flow and cash balance problems is to conduct an annual stock issue for the subsequent years capital budget. This is a modified ponzi scheme where performance was never the criteria of evaluating any producer. Their financial statements are all generic in nature and only differentiated in terms of size. You can’t tell who are the heroes and who are the zeros because the performance is homogenized out through their ponzi schemes accounting methodology. Any time investors expressed an interest in having a change implemented, such as wanting more earnings next year, it was done through the creative accounting of said bureaucrats.

At no time through the life cycle of an organisation should there be the demand for so much investment each and every year. This should have been a warning sign that things were not operating effectively. An organization that is well managed and focused on performance will only perform. Performance is the key to growth. Growth is the benefit that shareholders earn. What shareholders earned in oil and gas was chronic dilution of their interests through the subsequent annual share offerings. Particularly when any growth that the producer did achieve was the result of the capitalization policies that were employed accumulating any and all costs that were incurred. Part of that growth was the addition of overhead and administration in property, plant and equipment. Most if not all producers capitalize 85% of their overhead and administrative costs to property, plant and equipment. What are these costs in terms of the total? No one knows as it’s been decades since the actual numbers have been reported publicly. The next question should be asked, but never is to my dismay, what is included in those costs? Massive executive compensation for one thing, but then that’s not for me to prove otherwise, is it. Consider for a moment, the majority of the executive compensation that was not share based, is sitting in property, plant and equipment. Hence the motivation for bureaucrats to do nothing for so long that the industry now needs to be purposefully rebuilt from the scraps of these organizations. 

The question should be asked, would a profitable industry generate more cash than investors were able to provide? Unequivocally yes. Profitability in the industry should have been the focus as it was worth substantially more than what was raised from investors in the history of this industry. If we look at the devastation within the industry, the sub industries and the greater oil and gas economy there is now a critical shortage of business and cash. The capabilities of this greater oil and gas economy are breaking down and the capacities and capabilities of the producers themselves are regressing rapidly. As is everything else. The ability to stop this trend and reverse it is not a concern of the bureaucrats, they’re fine and they thank you for asking. The point is the amount of capital that will be required to recapitalize all of this and return the industry to prosperity, or to the point where its future can be addressed productively and constructively, is well beyond the capital that is available from investors or bankers. Severe damage has occurred. The generation of profitability as a result of higher commodity prices is the only source of finance that will be able to return the industry back to the point of prosperity. This is the plan and vision of the Preliminary Specification with its decentralized production models price maker strategy.

Instead of pursuing anything constructive we’ve almost hit the bureaucratic triple header in oil and gas. Also known as the three C’s. Corruption, crisis and chaos. If bureaucrats continue to ride their positions out they’ll be able to sow the kind of chaos that only ANTIFA could appreciate. Tell me what it is they’re doing if it’s not this? Will this continue, and will we continue to see no concern or sense of urgency expressed anywhere in the oil and gas producers? What would we see if these bureaucrats were managing for the appropriate purposes? What we have is no performance, no responsibility, no accountability, no competitiveness (always blaming others for what ails the industry), diminishing capabilities (staffing and field operations are deteriorating.) Oil and gas bureaucrats are corrupt to the core.

People, Ideas & Objects are offering a strategy and vision for the next 25 years in the form of the Preliminary Specification. The price of oil reacted positively to the news of the drop in U.S. inventory levels a few Wednesdays ago. Moving up more than 8% from the start of the week. We saw the response of the producers was a collective sigh, and any pressure they were feeling to make changes evaporate immediately. This has been happening consistently for the past 34 years. We’re dealing with the attention spans which are able to focus for 10 seconds into the future. Unless of course there’s a bright shiny object that appears before that ten seconds has expired. However the destruction across the industry remains and continues. Irrelevance has a special feel to it doesn’t it.

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, everywhere and always. 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 LIII

 I’ve been highly critical of the leadership of the North American oil and gas industry over the past many decades. Doing so has enabled me to remove myself from the sewer that I thought the industry was becoming, and from the outside looking in, is. It’s at this time of total devastation that the demand for leadership is the greatest. What we’ve noticed in these second quarter reports of 2020 is the fundamental lack of leadership and the capitulation of any responsibility for oil and gas financial, operational and political damage and the looming destruction yet to come. On que, and in harmony once again, producer bureaucrats have noted their “shift” to clean energy and the pursuit of that opportunity. And of course they’ll do so from the “base of the oil and gas industry” where the “technical know-how and innovativeness” is capable of making the difference. These statements have been made by most of the producers who need to draw the attention elsewhere, quickly. With the world enamoured with “clean energy” the bureaucrats have received a warm welcome for their wokeness. I have an issue with these statements, I don’t see how these producers come back from these comments. To me they’ve taken the leap of faith that is necessary to make the transition in the industry to surrender oil and gas exploration and production on the North American continent. What do they say next year when not only commodity prices but production volumes are down, and clean energy revenues are nowhere to be found? We were only kidding about the clean energy business! Or what if commodity prices are up substantially at this time next year? We were only kidding about the clean energy business, it’s oil and gas all the way! Either way it doesn’t work as far as I’m concerned. 

We’ve often discussed how the engineering and geology faculties at universities are drained of students and interest by those former faculty. They’ve moved on to other things. The people who work in oil and gas, and the service industry have been looking for opportunities elsewhere in other industries that promise some stability and security. They’re tired of the boom / bust cycle, of which they have no influence over, and have concerns other than money that has become intermittent, or potentially so. Watching this move to clean energy might excite the few millennials and re-energize them. It could also do well from a recruitment standpoint in the ANTIFA and BLM crowds. So there won’t be any shortage of people to choose from in those communities. However the ones who were committed to oil and gas will see this transition as recognition that the leadership has failed and the beginnings of their complete loss of faith in them. They will begin actively looking elsewhere for their future. The Wall Street Journal published an article by Rebecca Elliott which touched on these points extensively. The key argument regarding faculties was that of Texas A&M graduates, the premier oil and gas engineering school, only ⅓ found positions in oil and gas. The graph below shows the last time this happened and the time that it took to restore. Once more or less 40 years had passed the throughput and supply of these engineers returned, which indicates that 2060 might be a good year.

The comparisons made regarding this is it’s just the same process that the oil and gas industry has been through many times before. I feel this is an extension of the culture of the industry of just muddling along with the status quo. Or in other words “why bother, there’s clean energy!” Another distraction / diversion from the issue and the need for action. Or, other industries go through this and have had weathered their storms. Well, yes however they were not chronically unprofitable in the “real” sense of profitability for the past four decades. They haven’t had their investors and bankers reject the management of the industry on a wholesale basis, nor have they had the intake of new critical resources into the industry turn down to 30% in the course of a few years. What is happening in the industry is certainly justified under any excuse that can be found. Where is the leadership that is necessary to make the changes to correct this? Who’s ringing the warning bell to tell others of the impending doom that we’re heading to. Or is it just as in 1986 and each and every subsequent year this has become the scam that it has become. Where bureaucrats hide their lavish take and continue until the party is declared by them to be over. If this is just the business cycle, or if we’re in what “normal” normally looks like then some people need to get out of their offices and see how the industry is impacting everyone else. The last point is that oil and gas will be around for the remainder of this century and will make up a large portion of our energy supply. Coal in 2017 remained at 27% of our global supply. Man made sources of energy are difficult to replace mother nature's sources of energy. However, with the rapidly declining capabilities of the industry in North America, it’s source of oil and gas may be from foreign producers. If North American producers can’t produce profitably from the real sense of the word, foreign sources of oil and gas will be a given. 

Bank reviews that are scheduled for October 2020 will be even more uncomfortable with this news of a new business direction. If the leadership is walking away from oil and gas to clean energy then bankers are going to be acting in ways that are very harsh to that leadership. That bank funds were used in the second quarter for working capital and to pay bonuses prior to bankruptcy, was bad enough and has led the banks to declare they’re leaving the industry. Bankers hadn’t seen that type of disrespectful behaviour before. Now these same bureaucrats are changing their business to something they know absolutely nothing about? We should ask investors what they think of this change and how much they’ll be putting into these revised and restated “clean energy” producers? On Monday August 17, 2020 we learned that the Oracle of Omaha, Warren Buffet unceremoniously dumped his investment in Occidental. He was an investor that was taking the contrarian point of view, how oil and gas was his long term bet, that would make him untold riches. That was May 2019, how things have soured since then. I do believe that once you’ve lost Warren Buffet looking at the long term perspective of the industry, you’ve lost the script totally. With his reputation and influence in the market it will be even harder to convince the investment community to even look at oil and gas in North America. Maybe after a decade of solid, real performance that is obvious and the management looks committed to that, investors will start sniffing around again. 

Why would these bureaucrats not address the prevailing issue of overproduction and oversupply that’s been around for 34 years? An issue that is responsible for trillions of dollars of lost revenues due to the organizational constraints and management failures. If you could invest in North America’s oil and gas industries profitability everywhere and always by building the Preliminary Specification and conducting the defined re-organization to earn those lost revenues so easily? Provide a vision of how the industry will be driven by profitability and ensure those who commit they’re cash, careers and businesses will be provided with at least a fair and secure business environment. Producer bureaucrats wouldn’t do it because they know our software disintermediates them from the business. And if those bureaucrats want to argue the amount of lost revenues, how much are the losses that have been incurred in this exercise of theirs. And what will be the consequences of their “shift” to clean energy? I think the choice is that simple, invest in the oil and gas businesses future prosperity and remove the rot and bureaucracy, or invest with those losing bureaucrats in clean energy. And maybe the answer is in this WSJ article documenting the California rolling blackouts due to their over reliance on mandated clean energy supply. The reason oil and gas bureaucrats are interested in clean energy is that it's a failed business as well. 

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, everywhere and always. 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 LII

 We should take this moment to remember that prior to producers shutting-in wells in April 2020 we heard nothing but the harmonic sounds of producer bureaucrats responding to our claim that they should shut-in unprofitable production. That “they can’t do it, it’s not as simple as turning a valve or a switch, there’ll be too much damage to the formation” they said. I’m adding this to the list of outright lies that bureaucrats have used to account for their inactions. As we’ve detailed here recently, the bureaucrats claimed to use applications of Artificial Intelligence to comprehensively analyze data of satellite imagery of storage tank shadows across the globe. Giving them an understanding of the global storage volumes and therefore able to predict the prices they’ll receive in the future. The deployment of vast numbers of people are consumed in the reading and “knowing” the oil market in this manner. Yet they did nothing with this information until essentially the refineries and pipelines said they weren’t taking anymore production and the price went to negative $40. The question I have is when were these bureaucrats aware the oil prices were going negative? Did they know well enough ahead of the time that they could have done something about the issue? The Preliminary Specification has an easier solution that doesn’t have any use for those bureaucrats employed in this task or any other Artificial Intelligence applications they use. If the price being offered in the market for oil and natural gas commodities is able to provide them with what we consider a “real” profit, then produce, otherwise shut-in the property. Notice not one surplus bureaucrat was employed or deployed in this action. Only accounting information was used, which is a necessity in business today, and therefore, why not use it to provide us with derivative useful information? As I’ve stated here many times before, not one producer has the ability to say which properties are profitable and which ones are not. They’re not built that way.

It’s here that science overcame the common sense that should have been used in the market. A few years ago bureaucrats told us that they’d be using Artificial Intelligence to resolve their issues and reduce their costs. I thought that the use of intelligence in any form was a good idea. The consumption of time and money into the software industry over the past four decades has been unable to provide any real tangible benefits for oil and gas. At this point in time we have the same inventory of work that needs to be done as we did back when I started this software adventure in 1991. Focusing IT solutions based on the new whiz bang technologies that are destined to provide glorious results has been the way the bureaucrats have been able to maintain their cool, suave appearances. The Preliminary Specification doesn’t focus on technologies. Although we mention Oracle ERP Cloud related technologies which form the core of our offering, the functionality and process management that we’re building our solution from. Ours is a business offering designed to build value for the producer firms, industry, service industry and all those that choose to work within these areas. It is focused on providing the oil and gas producers with the most profitable means of oil and gas operations, everywhere and always. For four decades producer bureaucrats have focused on cash flow. Today who would doubt that the objective of real profitability is the most important objective that we must all be striving for everywhere and always. Without real profitability we have the disaster that consumes the industry today. 

Today we hear that all the producers who eventually were forced to shut-in their production will have been able to, or have in fact resumed production at their previous levels and that no damage has been caused. Yes folks, producers are that good and that smart. As if any of the bunk they were trying to sell us about damage to the formation was true. What they’ve done now as far as I am aware, and I have to tip my hat to the innovativeness of these bureaucrats' ability to come up with excuses, is that now they’ve indeed run out of excuses. And that is why we see the wholesale abandonment of the producers regarding investment in oil and gas exploration and production as the future, it’s now clean energy!

Suncor has now incurred three straight quarters of losses that total $6.564 billion. The second quarter saw Suncor need 3 separate issuances of Notes and accessed two lines of credit to shore up working capital by $2.106 billion. Working capital as of June 30, 2020 is at $178 million (has been negative since year end 2017.) I’ll repeat two important criteria. Organizations that raise funds through debt or equity to shore up working capital are failed organizations. It is a clear warning sign that long term issues are at play and major remedial actions are necessary for the executive and board to undertake. Secondly, banks were very disappointed with the draw downs of credit lines by the producers in the second quarter. Prompting their looming exit from the industry as WorldOil had reported. Suncor’s CEO wrote a paper on how the position of the oil and gas industry was able to best make the transition to renewable energy sources. Which makes sense to me, when you can’t make any money, and you’ve run out of excuses as to why, give up!

The oil and gas industry is one of the largest markets for, and potentially investors in, clean technology in Canada," (Suncor CEO) Mark Little and Laura Kilcrease wrote. "The challenges faced by the sector, combined with an entrepreneurial culture and the motivation to thrive in tomorrow's low-carbon economy provides a wealth of opportunity for clean technology investment by the sector.

Another shift in the bureaucrats' attention is how they’re now focused on earnings. It’s not that I’ve convinced any of the bureaucrats that earnings are the important aspect of the firm's performance. It’s because they’re so much easier to take than the cash flow numbers. Cenovus suspended their dividend due to the fact that cash flow was severely diminished to an annualized negative $1.418 billion operating cash flow. Making Cenovus seriously overvalued. Who would have ever thought that it would cost money to produce? Working capital therefore was battered extensively, of which Cenovus was struggling with already. With the assistance of $1.15 billion in borrowed funds, working capital was able to turn positive to $490 million. 

It’s not that I’m picking on Canadian oil and gas producers today. We all know that they are the best run companies in the universe! However, Crescent Point wins the award for recognizing the absurd nature of oil and gas accounting. Their first half capital costs per barrel were only $365.67. Up from the first quarters capital costs of $299.90 / barrel. This is ok though, the loss for six months is only $2.389 billion. The real issue for Crescent Point is retained earnings which now sits at negative $13.537 billion, a noted achievement. I think it shows they’re very special. 

On average for the six months our sample of 19 producers collectively lost $27.09 on each barrel they produced this year. Which is unremarkable to me as I’ve seen through their specious accounting for many decades. The question everyone should be asking is why would you produce when you're losing $27.09 on each barrel for every day of 2020? I guess their Artificial Intelligence of the satellite feed is telling them that storage is making for a technical market event in late 2028, yeah that’s it. They’ve been doing this for at least 34 years and why would that make any difference today? 

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 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.