New Cost Structures, Part I

 First, I want to comment that my arguments and accusations directed to the producer bureaucrats in 2020 became rather sharp. Some may think with a new year I’d revisit my approach and amend my ways. Which I’ve done. I can’t hold any respect for these producer bureaucrats. The damage and destruction has been epic as I’ve discussed throughout the past fifteen years. I have difficulty holding any respect for these producer bureaucrats, those being the C suite and directors, it is they who are responsible for all the damage, it is they who should be accountable and it is they who have had the authority and power to do something about it. Let us not forget it is they who have profited from their administration at the expense of everyone else. And we have seen, as I enter my thirtieth year of attempting to resolve these issues that they continue to play their Mr. Magoo, Sgt Schultz, and Bernie Madoff routine for their own personal financial benefit. They must be shown the door. On a lighter note I’ve awarded all these bureaucrats 2020 participation ribbons to go with their prior “awards.”

I want to begin the new year with the identification of three new cost categories oil and gas producers will need to deal with for the next few decades. The material nature of these costs will put an exclamation mark on their chronic non-performance and make investors want to run the other way, even faster. This is due to the nature of these costs and their inability to ever generate a return on investment at any point in the bureaucrats current business model. These are the types of costs that will haunt the industry in whatever configuration it takes and it is these costs that can be clearly identified today due to the lack of the producer bureaucrats ability to pay attention to the business of the business. For them it is all about earth science and engineering. It is only the Preliminary Specification and the business models that are inherent in our offering that provide the industry with a methodology that deals with these costs. It is these costs that we identified much earlier and which materially inflate our value proposition to the $25.7 to $45.7 trillion dollar range. We have seen some unsuccessful methods used in the industry to try and deal with these costs, which we’ll discuss. None have been effective and the methods used have only served to provide further financial losses and an inability to command the necessary higher commodity prices in order to capture and recover these costs. We’ll be discussing in detail each one of these cost categories over this and the next two posts and then provide an overall summary as the fourth. The overall question that we’ll answer in this series is how will producers pay for these costs and where will the money come from?

The first category of costs will be familiar as a result of the discussion we’ve had over the past number of years. We’ll be reviewing these points once again with a few new attributes added to the discussion. Although the first category of cost we’re discussing will be looked down upon by the bureaucrats as financial or accounting losses. These are real, tangible losses over the course of the organization's life cycle. Our first category of costs is the fully discussed issue of bloated property, plant and equipment as recorded on the highly distorted financial statements of the producers. To suggest that these financial statements are generic and oddly similar throughout the industry would be an understatement. The size of the producer is the only difference between them. All of them have massively bloated property, plant and equipment offset by essentially very high levels of debt. The working capital is miniscule if it exists, with most reporting a strong trend toward diminishing working capital on a quarterly basis. This trend has left most of the producers with negative working capital. Shareholders equity in many producers no longer exists as the retained losses now exceed the capital that was raised during its lifetime. In most producers the losses have materially diminished or extinguished the retained earnings of the producers, and in many cases shareholders equity. If as we suggest property, plant and equipment is overstated, and these are what support the very high levels of debt, then the leverage is far in excess of the criteria that are claimed and these producers are seriously overleveraged. It is however sunshine and rainbows as far as the bureaucrats are concerned.

People, Ideas & Objects have asserted that the “assets” in property, plant and equipment are nothing of the sort. They are the unrecognized capital costs of past production. This is how we perceive the distorted nature that producers have interpreted the SEC requirement for Full Cost accounting and associated Ceiling Test. These accounting regulations suggest that the capitalization of the firm should not exceed the reserves value of the organization. Since the late 1970’s when the SEC implemented these regulations producer bureaucrats have interpreted the reserves value as the target of their spending in property, plant and equipment. This has, as a result, taken on cultural distortions that reflect that any and all costs are capitalized in order to achieve their "target." This includes the receptionists time, phone service and Post-it-Notes as capital costs. Nothing is immune from their capitalizations justification, as the SEC has pursued litigation in the industry for the capitalization of operating costs. These distortions are not readily apparent when the industry is recapitalized each and every year by investors that are duped by the increasing assets of the producer, its subsequent profitability and bloated cash flow. 

We’ve argued consistently that consumers have paid the operating costs while investors were paying the capital and overhead costs of exploration and production. Therefore these costs in property, plant and equipment were the consumers capital cost subsidy financed by investors. I stated earlier in this post that these three costs that I’m identifying in this series were unable to provide a return on investment. I could be wrong, but then I’m somewhat immune to the charm of producer bureaucrats, maybe they could have these capital costs in property, plant and equipment provide a return on investment for their future prospective investors? That’s an idea, have investors pay for the same cost twice, what do you have to lose Mr. Bureaucrat! For that is what they are now asking by seeking investors to support their dilapidated failures. This gravy train only stopped in 2015 when investors realized the ponzi scheme of money only went in, was spent and never came out. Some producers declared dividends certainly, however those were financed by next year's investors or friendly bankers. The steady withdrawal of the financial investment into the industry has created the crisis that is today’s oil and gas industry. Banks in 2020 began to catch on to the game and are now beginning to withhold their support. 

The danger that producers face as a result of the bloated balance sheets from property, plant and equipment. And assuming we are correct that these are nothing more than the unrecognized capital costs of past production. These producers are not only obscenely leveraged, their actual losses subject to a reasonable accounting, would leave their financial statements in the most dire condition imaginable. We have asserted that analysis of the producers should include a pro forma adjustment that would move 65% of property, plant and equipment to depletion. Better reflecting the financial condition of the producer firms. This would then show a unanimous consensus that the bureaucrats must be removed. 

Throughout this time the value that had been established in the industry was eroded away and now the industry has no ability to support itself. The business requires a constant stream of new money just to maintain its current status quo of chronic decay. It is an industry that is a drain on society in other words. This drain has been perpetrated by the bureaucrats, the C suite and directors, who have prospered handsomely as a result of their past decades of inaction. Also known as their “muddle along” and “do nothing” strategy and operating procedure. Oil and gas being a capital intensive industry will always generate high levels of cash flow as a result. This cash flow has been used and abused to compensate bureaucrats in new and highly innovative ways. And those are just what's publicly known. This cash flow is due to the return of the high level of prior investments in the form of cash. The issue today is that the damage and destruction that has been experienced in the industry through all the take and no giving bureaucrats, has diminished the value of the assets, and therefore the relative size of the cash flow. These cash flows were and are overstated on the financial statements as a result of reporting everything as capital costs initially, then realized over the course of decades in the form of depletion deferring the recognition of the real cost of exploration and production. When G&A is capitalized to the tune of 85% in the industry, that is the average, no one refutes my number, those overhead costs are not deducted from the fake profits that are reported to determine cash flow and therefore overstates cash flow. This is reflected in the fact that each month these overhead and other expenses are incurred, capitalized and deferred over the course of decades. Leaving the producer unable to recapture those costs in the current price of the commodity, and as such, on the hunt for the necessary cash to fund next month's overhead. This occurs in each and every producer, each and every month. There is no float of cash that is used to pay the overhead costs that should have been returned the following month in the price of the commodity to replenish these overhead costs. This was not an issue when the investors were easily duped to reinvest each year by the bureaucrats' specious accounting. This is currently one of the primary ways in which working capital continues to diminish at remarkable rates across the industry. Producers in reality never made any money and were wholly dependent on chronic dilution of their investors through annual issuances to new investors. Bernie Madoff sends his congratulations and admiration. 

Producers therefore have organizations that stand with no structural capital support from investors or banks. They have an organization that is incapable of funding itself on a day to day basis without making drastic measures to raise the required cash to continue to operate. Their cash balances are continuing to evaporate as a result of low oil and natural gas prices. Liquidity is claimed to be healthy, when they include the amount remaining on their lines of credit. How much it actually costs to produce is unknown as the financial statements are distorted to the point where the ability to know the truth is not possible. And they never made any money. The industry, as are the producers, is valueless at best. Consolidation is the current trend, bigger bureaucracies will certainly be the answer to all of these questions! Really, trust them. That Chesapeake failed far quicker at that strategy is their exception that proves the rule. The accounting trickery has been expanded to the point where the fact that cash balances continue to “miraculously diminish in unexplained and unexplainable way’s” where nothing is done or said about it. 

When I discuss accounting trickery I mean accounting trickery in the underlying fraud and abuse that the bureaucrats have exorcised against their investors. Again I focus on the investors but look to the larger oil and gas economic structure. Without having the clear, honest accounting that the investors should have received, they were deceived, profitability was falsified. When investors are deceived they leave, sending the only message bureaucrats need to hear. You have failed! Without profits in the greater oil and gas economy, there is nothing for the rest of the people that are involved in oil and gas and we fall into the economic super depression that we’ll soon find ourselves in. 

One of the most overt accounting tricks that was perpetrated was the serial claim by all producers that they would be profitable at the new, lower prices the commodity markets were providing from chronic overproduction. This was due to their cost control, diligence and innovativeness they’d claim. The lower price was lower than their prior threshold they claimed to still be profitable at, such as we can make money at $50, then they could make money at $40 etc. These claims are specious and fraudulent. They’re based on the costs that current operations could prospectively be conducted in the field by squeezing the service industry and not based on the actual accounting facts as they are represented to be. How, without any write downs as a result of the ceiling test, would they then begin to reduce their costs from $80 to $50 to generate the continuous alleged profit? Would they have to have been innovative as they claimed? Or would they just need to be innovative in terms of new ways of approaching historical accounting? The majority of those $80 costs are capital in what is generally agreed to be a capital intensive industry. The costs of 97% of their wells and facilities are fixed in the past and not subject to change. Certainly future operations may be conducted less expensively, but that is not what the blanket statement that they can then be profitable at $40 means. This is deliberate, deceptive and designed to keep the lining of bureaucratic pockets filled and filling. Only one of the many ways in which deception has been perpetrated. In response producers will assert they have more reserves in which to allocate their capital costs towards. Which is true however, do those reserves need to be restated as a result of the price drop from $90 to $40 due to their subsequent inability to be produced profitably? In fact what has happened is the reserves volume decreases as a result of large portions are no longer commercially producible when the price drops $50. Quoted prices were determined from the following WSJ graph.

What about shale? The method used to account for capital costs is to allocate the total spending to each of the boe in the known reserves. This practice has continued and People, Ideas & Objects believes there needs to be a reclassification of costs to better reflect the activities in areas of shale based reserves. We know a number of characteristics of shale that make it a significant and valuable resource for the profitable North American energy independence industry needs to provide. Shale reveals substantial reserves, its production is prolific and its decline curve is steep. Allocating the substantial capital costs of drilling and completion of shale wells to the tremendous shale reserves that are exposed reduces the capital costs to a reasonable variable on a boe basis. However, the work necessary to maintain the production profile over the long term is also substantial in terms of cost. These costs are added to property, plant and equipment as capital costs, as are any incremental increase in the known reserves. Does anyone else see the mouse catching the cheese? We suggest the costs of the incremental work be classified as operations and have them retired immediately. Otherwise the objective of bloating the balance sheet by the bureaucrats will continue. We believe that the cash consumed in the capital intensive nature of oil and gas needs to be recaptured and reused on a high frequency basis in order to a) realize the actual costs of oil and gas exploration and production and b) enable producers to internally fund the enormous capital costs they claim are necessary in the near future. 

Today we are seeing the majority of the producers which include BP, Shell, Exxon and Chevron instituting large writedowns of their property, plant and equipment due to the SEC required ceiling test. All these write downs are displaying clearly and unequivocally that the past spending efforts of the producers have failed to generate the value of their spending. And indeed the value of the producers reserves are less than the value of what they’ve spent. These writedowns now account for the waste that has been conducted by these bureaucrats over the past decades and is effectively the destruction of that value being cast to the wind. I also assert the write downs are only beginning. The bureaucrats will claim, as they have always claimed regarding the ceiling test, that these are accounting charges and no one is concerned about them, they are in the past and no one cares. Their capacity to ignore their responsibility and accountability for the money they spent is evident in these fraudulent lies they've uttered over those decades. This chronic lack of accountability and responsibility for the truth has now led to a lack of faith and trust in the bureaucrats themselves and that is why the investors and bankers are and will continue to withdraw until the bureaucrats are gone. Trust and faith has been breached, when you have no credibility, it has gone for good. 

It is these costs in property, plant and equipment, what People, Ideas & Objects call the “unrecognized capital costs of past production” that we assessed as the only remaining residual value in the North American oil and gas industry. They are of value as they could be used in the Preliminary Specifications decentralized production models price maker strategy as capital costs in future oil and gas prices passed on to consumers and recovered in the form of cash to recapitalize the industry. These rebuilt cash balances would then be used and reused to cycle repeatedly and frequently through as capital expenditures once again, and then recognized so as to be returned to the producer as cash on a basis that was consistent with the industry's cash needs. As these writedowns now occur this future opportunity is lost and the only value that we were able to identify in the industry is being frittered and wasted by the chronic “muddling along” of the producer bureaucrats. The Preliminary Specification has been available to them in final form since December 2013, and in development for a decade before that. Yet nothing has been done but abuse People, Ideas & Objects for the threat we represent to the bureaucrats personal cash flows. Disintermediation challenges all industries with new and more effective ways to organize and manage their operations. For further reference on the effects of disintermediation call up your local record store manager. The Preliminary Specification disintermediates these bureaucrats.

People, Ideas & Objects Preliminary Specification ensures that oil and gas is produced profitably everywhere and always. We ensure that the total cost of production is always accounted for on a standardized, objective, reasonable and compliant basis. Ensuring the financial resources that were committed, in a capital intensive industry, are also reflected in the costs of the commodities prices. If the industry is a capital intensive industry it would stand to reason that the commodity prices would contain costs that were capital intensive as well? Instead bureaucrats collect and savor their out of control spending in property, plant and equipment as assets so they can strut down mainstreet in a competition to see who will dominate as the greatest fool. Our perspective looks at this foolishness and provides a better way where the cash consumed in the industry is returned to the producer in the prices that are necessary for profitability, and that is real profitability based on actual, factual accounting of the capital, operations and overhead costs. 

The other key aspect that has to be mentioned here that differentiates us from what is done in the industry is our method of production allocation. There is no fair and reasonable method of production allocation other than the Preliminary Specifications decentralized production models price maker strategy. Government mandates, OPEC limits or any other style of production allocation will always have half the industry unhappy with their allocation of what can be produced. Political influence becomes the means in which to produce more. Our choice of profitability is the only fair and reasonable method. If the property can be shown to produce profitably based on the Preliminary Specifications standardized, objective methods of accounting facts then it will produce. The myriad of excuses of the bureaucrats as to why our method can’t be used have all expired as a result of their arguments being as specious as their financial statements. 

Investors sent their signal to producer bureaucrats half a decade ago. What’s been done as a result. All that I can see is the lies, excuses, blaming and viable scapegoats that have come and gone. The list exceeds 20 items and is well known by all. These all began with natural gas ten years ago or more with bureaucrats “waiting for a cold winter.” How many cold winters have we had in the last decade? I’ve also seen first hand the abuse that I’ve had to take, which has motivated my new attitude this year. If it’s their choice not to do anything and just reap their bounty nonetheless then it leaves not much in the form of questions to ask of them. When I raised the point of their culpability and guilt last summer they, on a wholesale basis, increased their officers and directors liability insurance. Which is a form of action to be sure. There is not much to litigate in the producer firms themselves. No one sues over a failure. The bureaucrats however were responsible, accountable and authorized to do something. That is all that is needed to launch personal litigation against them for any of the shareholders losses that were incurred. It’s too bad that the insurance proceeds cover their liability first, it should seek to liquidate the bureaucrats personal property first and any overage in terms of claims handled by the insurance. But I don’t always get everything I want. 

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 Parler or Gab @piobiz, anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here. 

Time Is Not The Bureaucrats Best Friend, We Are

 Time is the enemy of the producers. It has been the bureaucrats' obstinance in holding to their “muddle through” and “do nothing” strategy and operating procedure that have brought them to this critical point in their timeline. Let’s be honest, these have never worked in the shale era and have had plenty of time to prove that. Their inability to make the appropriate changes to their business models as a result of the fundamental change that shale has introduced, that oil and gas is now in an era of abundance, has put them in a situation where they’re facing a handful of imminent crises on top of those that are already present. Officers and directors of the producer firms have been seen to have direct personal jeopardy as a result of the manner in which they’ve operated these firms over the past many decades and their current financial deterioration and its trajectory. It has always been unacceptable to me that an industry would depend on outside capital each and every year to the extent that oil and gas has done since the early 1990s. Without the investment from others there would not have been any activity in the industry as it is my opinion that at no time was the industry self supporting or building value. It was leeching off the value of its investors and that which was built in the many generations that came before it. This is evident today in the financial statements of the producers and the activities that surround them. The North American industry is now worth nothing as it demands capital just to operate. A net present value in the negative. Bureaucrats credibility has been trashed in the eyes of those that would have supported them if they hadn’t felt so betrayed and fooled by the inappropriate financial statements that were published and claims that have been made, yet never materialized. As I’ve stated many times these bureaucrats have no credibility. No one expects them to be the ones that will turn things around as even today they feign no propensity to understand what it is they’ve done. If oil and gas in North America has a future it will be in the hands of new leadership based on a business model that is consistent with basic business principles. People, Ideas & Objects proposes the Preliminary Specification for the bureaucrats consideration to bail them out of their difficult personal risks they currently face. 

Lingering about, accusing the dog of eating their homework doesn’t really cut it with anyone anymore. This blaming, excuses and viable scapegoating of anything and everyone has been going on for decades. The issue the bureaucrats are facing is the personal liability they’ve incurred in the process of milking the producer firms for all the bounty that they could. It is the personal risk that is now the only point and the only consideration that’s holding them in their place. Their take or bounty has diminished to the point where it is “probably not worth their while to stay” the pious bureaucrats might say. If they could deal with their personal liability from outside of the firm they would, but they would then risk encumbering their personal fortunes. They’re unaware of how to deal with that risk and therefore they’re forced to stay where they have access to the resources necessary to deal with their personal risk. What is clearly evident is the producer firms are on a steep, downward trajectory that can not be stopped until such time as these bureaucrats are gone. And therefore the personal liability they’ve incurred will be with them for the rest of their time. Or, as when bankruptcy arrives and the directors will be summarily eliminated with the shareholders they so poorly represented. Officers may have an opportunity in the new corporation when it is subsequently configured and may then be able to expand their innovative executive compensation to cover their past risk. 

Either way bankruptcy of the producer does not absolve them of these personal risks they’ve incurred. They can still be sued by those who’ve incurred a loss as a result of their (in)actions. The timing of a bankruptcy therefore becomes a much more critical issue each day as a result of the alleged SEC investigations and audit opinions including the dreaded “going concern” comments. It is alleged the SEC has launched an investigation into Exxon based on a whistleblower report regarding the assets valuation used. This investigation is also alleged to extend beyond Exxon to all shale producers. An opinion that is consistent with the beliefs of People, Ideas & Objects and the issue we’ve sought to resolve, and in fact have. If these investigations are the case the need for the People, Ideas & Objects Preliminary Specification by these bureaucrats has never been more desperate. They could almost start calling me their best friend! By adopting the Preliminary Specification and funding it they will have undertaken to do their fiduciary duty and can achieve what we’ve called “issue mitigated, nothing litigated.”

Let’s assume for a moment that the following scenario was to play out on behalf of the officers and directors of a doomed oil and gas producer. Civil litigation began as a result of disgruntled shareholders regarding the management of the producer firm and their quite tangible losses. Today the officers and directors are wholly susceptible to having their insurance coverage handle the cost of the litigation and the result of any judgement against them. This depends though on how much longer the producer remains a viable going concern and can function as one. In addition to the SEC concerns we’ll also see how many companies annual reports the accounting firms will ordain with their “going concern” commentary. A chicken or the egg paradox, will the SEC investigation trigger the going concern comments, or will it be the going concern comments that set off a chain of events across the industry. And just as Chesapeake found it difficult to operate with such a mark against them that subsequently saw them declare bankruptcy. (Other people become concerned about doing business with firms that have been deemed unviable by their accountants.) As I stated time is not on the side of the oil and gas bureaucrat. However, what if in this scenario this litigations Judge asked the defendant bureaucrat what it was that he had to say for himself. And in return the bureaucrat was able to state. “Clearly we misjudged the impact of shale based resources on our operations. We should have changed our business model to accommodate the new dynamic and did not change quickly enough. However in the first quarter of 2021 we did make the necessary changes to begin that change by funding our share of the Preliminary Specifications development that are ongoing to remedy the shareholders issues.” Issue mitigated, nothing litigated as I like to say. Bureaucrats will have conducted their fiduciary duty and can pass the responsibility on to new management to ensure the company is better managed in the future. Will either of these two issues and the stampede of producers towards bankruptcy cause the Justices to seize the officers and directors liability insurance coverage as an asset? In either of these three triggering possibilities, the jeopardy that the officers and directors incur become more concrete. How will bureaucrats defy the argument that a litigant could raise regarding who’s fault it was after the SEC rules and the accountant's opinion goes public. But let's not forget the litigants quantifiable and qualifiable losses at that point too

Chronic overproduction and oversupply has destroyed commodity prices for more than 5 years in oil and more than a decade in natural gas. Bureaucrats are the impediment to progress, they’re the ones that need to be removed for progress to begin. Before they’ll go they have to ensure their personal risks are mitigated, they need to do their job and ensure that the business survives the difficulties they’ve created. This can only be done by implementing the Preliminary Specification through funding its budget. A business model and associated markets that were researched for ten years to ensure that the use of the Joint Operating Committee, the legal, financial, operational decision making, cultural, communication, strategic and innovative frameworks of the industry could be integrated with the compliance and governance frameworks of the corporation. Our research defined how the producer would operate within a reorganized configuration of itself and the industry as a whole. The establishment of the necessary sub-industries and software development capability that would enable oil and gas producers to ensure that all production was produced profitably everywhere and always. This can begin as soon as the producers organize themselves to raise their cash and provide us with the financial resources to build the Preliminary Specification. I could do this organizing however it would take me 1,000 times as long as the bureaucrats would. How much time do these producer firms have? Alternatively producers could strike a committee and establish a new way of organizing themselves to deal with the issues in the market. It took me ten years to conduct this research to use the Joint Operating Committee, it will be interesting to see how long a committee would take using some new form of producer organization. And, again, don’t use any of my Intellectual Property. 

Muddling through could also continue. What’s to say that the officers and directors are even concerned about any of these points? We did see them act when we first raised the insurance issue in June 2020. It is in that way we know we have their attention. If they didn’t act to fund the Preliminary Specification in a timely manner any new management would also need to find a new way forward. It is there too that the Preliminary Specification will become the best friend of those people. Their time frame therefore is as follows. The lottery will be played out in the next three months as to which companies will earn the coveted “going concern” comment from their accountants. Maybe this is a further concern to the bureaucrats, probably not. The time for them to exit is also constrained by them understanding and implementing their fiduciary duty or the company falling into bankruptcy and having to defend themselves in litigation, possibly without the support of the organization's resources, or the SEC making life even worse. It is evident now that there will be nothing but bureaucratic battles with the Biden regime. Since there are so many other issues and crises ongoing, organizing and developing the industry for a profitable future seems intelligent doesn’t it? It's time for the bureaucrats to pick their poison, roll the dice and choose who their friends are. 

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 Parler or Gab @piobiz, anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here. 

Attention: Boards of Directors

 I would encourage those members of any producer's Boards of Directors, both past and present, to ensure they read this blog post. Please note too that I am not a lawyer and am not dispensing any legal advice. 

As background there is this World Oil article that was published yesterday detailing a possible investigation of the shale producers by the SEC. It has been People, Ideas & Objects contention that the source of their issue is one that all organizations in all industries need to confront. The valuation of their assets, understanding that over reported assets beget over reported profits which beget overinvestment which in turn beget overproduction or unprofitable production as we describe it. For further clarification talk to your CFO, or research Bernie Madoff. 

Today we’ll be discussing what it is that we’ll be learning, understanding and appreciating about the bureaucratic mind, bureaucrats being our categorization of the officers and directors of the producers, that keeps oil and gas so fresh, dynamic and innovative. Commodity prices offer us the best opportunity to fully analyze what the North American producer bureaucrats behavior is and will be in the future regarding oil and natural gas prices. Their first priority is that the excessive executive compensation must be paid first and foremost. These people have destroyed the value of their holdings and stock options therefore the daily take is the only reason they’re still around. Now that Chesapeake has defined clearly the bankruptcy process, or wash cycle as we call it, and its effectiveness, expect 2021 to be a record year for such declarations, a year of renewal the bureaucrats will believe. We already see in 2021 the same behaviors that have been present in the marketplace since at least July 1986 when OPEC declared its first price war on North American producers. Welcome to the new oil and gas, same as the old, they hope you enjoy playing. 

The game is played this way. You place your bet on the price of oil or natural gas, the producer's stock price reacts to that. That’s all you need to know. The effect of management, the role of management and the responsibility of management to “manage” the business is not expected or understood to be valid in this game of chance. Why manage when you can muddle? Management takes effort and that is not what’s done here. All the money that is used in the drilling, completion and equipping of new and spectacular shale wells will be flushed through the process of bankruptcy where the service industry, investors and bankers will ultimately pay for those costs because they too believe in the big science experiment, it's just they didn’t know that when they signed on. You’ll note too that since Chesapeake has a new, much smaller value of property, plant and equipment account on their balance sheet. Yet the same assets in the form of petroleum reserves that have been handed back to the same management through the process of the bankruptcy, they can begin to spend like drunken sailors once again and get back to the point where those “assets” are the same size of their reserves value. This makes Chesapeake uniquely cost competitive in the industry, better able to focus on “building their balance sheet,” which of course will precipitate the higher cost North American producers to immediately enter their own bankruptcy wash cycles. Once again I ask who is the bigger fool for supporting this financially? 

In addition to this revised cost competitiveness, post bankrupt North American based producers will be able to increase their production of oil and gas and take market share from those who have not entered or fully completed their bankruptcy wash cycles. This will further aggravate the commodity prices and as a result you're missing the main point of the exercise here, it’s all about the science experiment. There are reserves out there that must be captured. Chronic overproduction and oversupply is the issue that some allege but that will be hard for People, Ideas & Objects to prove when new investors rush in to capture some of those “windfall” profits of Chesapeake and other bankruptees. Profits they’ll be able to “earn” on just “$20 a barrel oil prices!” It is key to remember at this point that Chesapeake once had a market capitalization of $27.5 billion, just 50% higher than the $18.5 billion they raised and a $331 million pre bankruptcy market capitalization. Banks lost $2 billion in the bankruptcy process, $2.2 billion in accounts payable was never paid, primarily to the service industry. And the last point, which I think is the most important point, they even reported losses based on their ludicrous and specious accounting methods of over $22 billion in their lifetime. I would point out that as of today this organization hasn’t changed, will not change and has no incentive to change if each decade plays out according to this script across the North American producer population. The only change that has been made is to the Board of Directors which, for the past board, may be a problem. Which actually makes it a problem for all Directors on all Boards of all producers that are pre, post or currently in their own wash cycles. 

The need to augment my “Issue Mitigated, Nothing Litigated” blog post, which can be reviewed as it is the Featured Post on top of the left column. Corporate bankruptcy doesn’t eliminate the risk, culpability or guilt of the individual officers and directors of the producers when it was the corporation that was bankrupt as a result, in these cases, of their inactions. And they should note, of which I’m including the reconfigured Chesapeake, that the risks associated from overproduction and oversupply have been and are still present since at least July 1986, of which absolutely nothing but the declaration of muddle through was done, and the solution in the form of the Preliminary Specification has been present since December 2013. And dare I say the chronic abuse, ostracisation and difficulties People, Ideas & Objects experienced only proved that they were well aware of our solution. If they continue to choose to ignore their risk, culpability and guilt regarding the overproduction issue and our solution they should ensure their insurance policies are up to date. In other words nothing legally was changed or will change through the bankruptcy process in terms of these personal obligations or risks. Directors and Officers remain susceptible to being sued by any of these people who now don’t just have quantifiable losses, but losses that are real in the case of former Chesapeake shareholders, banks and service industry participants. Let the litigation begin is what I say. 

Interestingly though is the possibility that through the bankruptcy process the insurance for officers and directors liability coverage can be seen as an asset by the court and subsequently seized. Leaving the former directors holding the bag as they are eliminated from the company the moment they declare bankruptcy, and not that they care but just like its past shareholders were. Hence past directors at that point have no power in the form of their former corporations backing them up to deal with any litigation other than their personal fortune. Officers that survive the bankruptcy process will just, I assume renew under the new corporations such as Chesapeake, deem there is value (cash) to be had and use that as a new and much more creative form of enhanced executive compensation. One of the conclusions of that “Issue Mitigated, Nothing Litigated” blog post. After decades of attempting to appeal to the morally correct action to take in the form of developing the Preliminary Specification. People, Ideas & Objects only found proverbial gold when we raised the personal risk of the officers and directors as a result of their above noted (in)actions. Bureaucrats only respond to incentives that provide enhanced compensation, which obviously doesn’t amount to much in terms of action, or risks that put their personal fortunes in jeopardy. Therefore this is the key to motivating an oil and gas bureaucrat. Existing directors in all producers may want to verify these points with their lawyer and / or insurance broker. I then think they need to make the decision to mitigate the issue by funding the Preliminary Specification and therefore uphold their fiduciary duty. Or just retire from their boards prior to the difficulties becoming acute, which I admit sounds awfully risky as your overall risk of being sued remains.

In contrast to this lunacy we have those who have been forced at many times since July 1986 to declare oil price wars on the North American producers. Whether this is rational behavior or not is best determined by beginning at the start of this post once again. It appears to me that OPEC+ are operating a business and not completely enthralled with the science experiment. Chronic overproduction, or as we’ve described it here, the chronic unprofitable production is the virus that cripples the price of oil and natural gas. It does not take much more than one incremental, unprofitable barrel in which to do so. North American producers produce 100% of their capacity 100% of their time and assume that the market is a magical and mythical place where all production is taken away to its rightful and honorable place. I had included the following WSJ graph from @soberlook in our White Paper “Profitable North American Energy Independence -- Through the Commercialization of Shale” and on this blog many times. Here is the description I placed in the White Paper. 

What People, Ideas & Objects provide in our Preliminary Specification, if we could assume the accuracy of this graph's numbers, is the point at which the property would be shut-in would be at the breakeven point and below. The reason for this being the production discipline gained through knowing that producing any property unprofitably only dilutes the producers corporate profits. Producing below the breakeven point is the point where unprofitability begins. Producing below the breakeven point for one producer, in an industry who’s commodities are price makers, will have the effect where the price of the commodities will be dropped below the breakeven price for all producers. When all producers continue to produce below the breakeven price for four decades you have an exhaustion of the value from the industry on an annual and wholesale basis. Times were only “good” when investors were willing.

Production discipline is the key to the prosperity of the oil and gas industry, particularly in the era of abundance or shale era. They could attain that through the allocation of production quotas, government mandates or many other methods. The difficulty with those is that they’re arbitrary and no one is ever happy with their allocation. People, Ideas & Objects have chosen in the Preliminary Specification to use the most fair and equitable method of production allocation. That is if the property can be proven to be profitable, based on an industry standard, actual, factual accounting then the producer will produce the property. Doing so provides immense benefits to all concerned as profits become the determining factor of how the producer is performing. Corporate profits will always be the highest when the unprofitable properties are shut-in and are no longer permitted to dilute the profitable properties profits. The reserves of the shut-in properties will be saved for a time in which they’ll be produced profitably. And those reserves will no longer have to carry the additional costs of any incremental losses that would have occurred if they had continued to produce. But most importantly, the commodity market will have the marginal production removed from the market allowing it to find the marginal price. Producers will have a ready inventory of shut-in production in order to turn their innovative ideas toward. Profits are what an industry operates on. These are passed down to the secondary and tertiary industries as they are as much involved in the success of the industry as the producers are. With the economic downturn that has been precipitated by the oil and natural gas price collapse these past decades, does anyone doubt the need for real profitability throughout the production profile? This is the logic that People, Ideas & Objects have been selling for well over a decade. Highly unsuccessfully I might add. However as noted above we’ve now found the secret sauce of the bureaucrats motivation is appealing to the associated risks to their personal compensation and financial empires. 

Certainly the virus has had a once in a lifetime impact on the markets. As a result producers have globally cooperated with each other to maintain prices that are palatable to them. OPEC+, initially at war with North American producers, began holding back over 9 mm boe / day and are still holding off 7.7 mm boe / day. They had scheduled to begin releasing an additional 500 thousand boe / day each month. However with the second installment of the virus, demand is fluctuating and OPEC+ have now agreed they will withhold the January and February increases totalling 1 mm boe /day. This caused the price of oil to rally markedly which is a characteristic of products that fall under the price maker definition. The prices of the North American producers shares were similarly affected. Spurring the increase in drilling and enthusiasm on how they could fill that 1mm boe / day that OPEC+ just removed. We know the “market is magic, mystical and marvelous.” And bureaucrats behavior and culture is fixed, unchangeable. Incapable of learning from past mistakes or adapting their understanding or appreciation of their great science experiment. We should remember that it is the North American producer that accuses OPEC+ of destroying the price of oil. Just as OPEC had done in natural gas over a decade ago! Wait a minute, is that right? A friendly reminder that the only source of capital for the science experiment was and is new investors, banks and the service industry, therefore more dilution of existing shareholders, and so on, exciting isn’t it? This is how the ultimate science experiment is achieved. Take my advice and hang onto your wallet when you're in the presence of these bureaucrats. The Preliminary Specification provides them with an abundant source of cash for their future capital expenditures. Their difficulty with us is they’ll have to work for it.

Finally with respect to that World Oil article and the potential SEC investigation of shale producers asset valuation. I've been arguing that this is an issue for more than a decade now. I've argued that although the SEC requirements were fulfilled by the producer bureaucrats it was done in bad faith. It has been done in bad faith for so many decades now that the culture of the oil and gas producers does not understand the point of the issue. Yes, the SEC allows the asset value to equal the reserves value if the producers performance should be so abysmal. The reserves limit however was never intended to be a target for all producers to seek each and every year. The business logic should have been: the most competitive producer would seek to have the lowest value of property, plant and equipment as possible. Instead the CEO's have been strutting about town with their "well built balance sheets" for decades now trying to prove they have the biggest and the best in the business. Foolish, unconscionable actions by people who knew better. The directors of these producers are now holding the proverbial "bag" and need to think to themselves how it is they can achieve what People, Ideas & Objects suggest is "issue mitigated, nothing litigated." Their fiduciary duty can only be achieved now by funding the Preliminary Specification. 

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, 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 Parler or Gab @piobiz, anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here. 

Hope, Anger and Courage

 A quick note to say we saw yesterday the bureaucrats' vision come full circle when the Judge released Chesapeake from bankruptcy by approving their plan. Of note shareholders and $2.2 billion in accounts payable are eliminated and the former banks now make up the new shareholders. Let's wish them the best in the next bankruptcy wash cycle. Banks granted $2.5 billion in new loans and the company is seeking $600 million in a new equity rights offering. Management, who were sustained through the trauma of the bankruptcy process by their “bankruptcy bonuses,” will no doubt feel this will be time for a new and more prosperous period of excessive executive compensation. That’s correct, the new management is the same as the old management. In an environment where failure demands change, changing the ownership rights of the shareholders and the service industry is the solution. The Judge assessed the value of the assets of Chesapeake at $5.1 billion which was their book value just prior to bankruptcy. However, this was only after Chesapeake wrote down property, plant and equipment from $14.7 billion just prior to entering the wheel of fortune. Providing further evidence of People, Ideas & Objects assertion of the bloated nature of assets on the balance sheets of all producers. In this case they were three times their value. And once again, accounting is about performance not assessing value. There’s no word yet on the profitability of the firm or how management will seek to increase its prosperity. I think it would be wise, since Chesapeake is predominantly natural gas, to short natural gas. The company's legacy of losing, which also was restored by the Judge. In its lifetime Chesapeake raised $18.5 billion in now completely disgruntled shareholder capital and lost $22.5 billion for a negative shareholder capital of $3.945 billion. Only in oil and gas can you achieve such success. A number of others were left out of the courtroom during this process. Their names are creative destruction, serendipity as this was always management's plan, disintermediation and disruptive innovation. If you haven’t caught on to the bureaucrats theme and rhythm of their methods, there's nothing here for you.

The scene is set for the future of the oil and gas industry. Is anyone interested in the bureaucrats' version? I didn’t think so. What we need to do is map out how we approach this future, both individually and from an industry point of view, and begin to deal with the situation at hand as we find it. We have a job to do, and fortunately the continent is being provided with an ample supply of oil and gas at this time which fulfills our primary role. This may not be the case in the very near future and we would be seen as failures by the consumers if their dreams of clean energy turn to nightmares and expensive imported oil becomes reality. To see how these clean dreams may turn to nightmares read our White Paper, “Profitable, North American Energy Independence -- Through the Commercialization of Shale” on page 91 for our review of Mark P. Mills paper “The New Energy Economy: An Exercise in Magical Thinking.” We need to focus on what we have at hand and deal with the opportunities and issues that preclude us from fueling our economy for the long term. An economy that will be the most powerful in the world and as a result, the largest consumer of energy in all its forms. If we set aside the next four years in which to organize ourselves and prepare for this future, then we’ll realize it. Our good friends the bureaucrats are proposing that we just muddle through. Which is how we’ve arrived where we are today. Assigning responsibility to them is impossible as they’re inert. That doesn’t indemnify us from undertaking our responsibility to fix it now. Let’s not fall into their trap of excuses, blaming and viable scapegoats as to why we didn’t take action ourselves.

Something we have to do is to define the geographic area of our concern. That way we’ll be able to focus on the scope of our approach. I suggest we have the skill, capability and capacity to recapture the North American productive aspects of onshore and offshore exploration and production within that four year time frame and stop any further deterioration of our industry. Focusing just on North America will be attainable in the short to mid-term and be capable of fully providing for all of our energy needs. There will always be global markets that will price commodities, we'll operate within those constraints, but focus on what we can do in terms of productive capacity here at home in a dynamic, innovative, accountable and profitable oil and gas producers and industries. Where all production is produced profitably everywhere and always. 

We need to source the funding of the Preliminary Specifications budget and begin development. It is this critical step that needs to be done as soon as possible. The Preliminary Specification has been published since December 2013. Our White Paper has been published for over 19 months. I have never been involved in anything with such broad distribution that our White Paper achieved. The point I’m making is the proliferation of these ideas in our documents throughout the oil and gas industry has been building. Radiating a cognitive dissonance across the industry. As a result we’re not going to have to develop a workable model on how the future will play out. We have that defined in the Preliminary Specification and it is well known throughout the North American oil and gas market space. And that’s not all. If someone wants to find out about our model for a dynamic, innovative, accountable and profitable energy industry, there’s nothing stopping them from getting up to speed and on board with everyone that’s already here. We’ve got the fire started. Now’s the time for the accelerant, being our budget's funding, to be thrown on the kindling to ensure that the industry is consumed by the fire of these changes. 

Taken in the context of what we’ll have to do in the next four years otherwise is where we find our justification for a revised approach. Muddle through and wait for investors to finally see the brilliance of the bureaucrats vision will never happen. They have no vision. They’ll enjoy themselves immensely in a bureaucratic nightmare of increased regulations, continually frustrated initiatives and new viable scapegoats appearing by the minute. This is not the future of the United States and is no one's vision of productivity. For us to be fighting it in the short term will be futile, instead we can take that time and focus on what we need to be doing to ensure that our energy future is attained.

The proposed organization of the industry in North America is the vision as laid out in People, Ideas & Objects Preliminary Specification. There are only two models today, ours or the bureaucracies. The vision we propose makes the industry dynamic, innovative, accountable and profitable. Where everyone is involved in the struggle to rebuild and recapture that which has been lost, turn the ship around and start sailing in the right direction. Then build on that and move the industry forward based on a shared consensus of real profitability to ensure that all within the industry are financially compensated for their courage, skill and dedication. A future where it would be interesting to get out of bed in the morning. One where your ability would be constrained by what it is that you can do to fix and build for tomorrow. A future that can begin for anyone as soon as tomorrow! One in which the first thing we’ll have to do is cast off the bureaucratic darkness that’s imposed through the “muddle through'' that we’re told is the reason no, we can’t do that, or laughed at for even thinking. One where if they’re not moving then we just walk right by them and start laughing ourselves. The industry is severely broken. It will fail catastrophically if something’s not done. Competing countries and cartels in the oil market have declared war on several occasions, surrendering is not an option. Action is what is required. We won’t always be right in the actions that we take, but that’s the point. We have to find the way through and that means we’ll be making mistakes. And when it’s all added up in the end it will actually be a lot of mistakes made by everyone. But no one, or even all of us, will have caused the kind of difficulties that our good friends the bureaucrats have caused and which they refuse to admit to today. In the end we’ll all look like geniuses in comparison to the bureaucrats' four decade run of destruction. Does this take courage? Yes indeed it does. From every individual involved in the rebuild. Here are some interesting quotes about courage.

St. Augustine

Hope has two beautiful daughters, their names are anger and courage, anger at the way things are and courage to see they do not remain as they are. 

Sir Winston Churchill

Courage is the first of human qualities because it is the quality that guarantees all the others.

A whole new attitude needs to be adopted from the safe environment that the bureaucrats have provided, at the cost of everything. I always approached this job with a different attitude that made the journey more of an adventure than a burden. And believe me it has been an adventure that I wouldn’t trade a second of. It was by looking at People, Ideas & Objects from the historical perspective of what has gone on before us. This is nothing. It will be consequential if we don’t act as I think we can all agree. My attitude at People, Ideas & Objects has been as long as no one was shooting at me, and I wasn't shooting at anyone, it was all good. We stand on the shoulders of many people who fought for our countries who did not have that choice, ours in comparison is a menial, albeit exciting task. If you ever thought you could dedicate yourself to something much larger, more challenging and far more exciting, consider what needs to be done to rebuild oil and gas. Think continental, act locally. But most of all enjoy the roller coaster, admission is free. 

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 Parler or Gab@piobiz, anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here. 

Reality, Accountability, Myths and Chester Too

 We’ll be starting 2021 off with a sharper tone than what we left 2020 with. The state of affairs in oil and gas and the greater energy economic structure demands such. We will be increasing the pressure throughout the year as the producer bureaucrats find fewer places left to hide. These allegations that I’ve made are easily refutable through the accounting that the producers prepare and report in the statutory and compliance requirements that govern them. We have been making these same allegations for many, many years and have heard no response from the producers. On January 5, 2021 OPEC+ agreed to hold steady production volumes until March 2021. Having a strong impact on the price of oil. Proving once again that oil and gas commodities are subject to the principle of price makers. I note this due to the fact that the damage and destruction in oil and gas has been a result of the bureaucrats unwillingness to accept this principle for the past four decades. Why? And maybe we should ask why we should allow these same bureaucrats to continue in their current role?

If a producer was secure in their reporting, that their accounting procedures would ensure good compliance and their systems were what were necessary would they have allowed such claims to stand at the same time their financial position deteriorated so markedly? I would not have allowed it. The predominant system used in oil and gas is P2 which claims to have 1,700 clients. Their Qbyte offering has been in the market since the 1980s, and has been subject to the same lack of attention that all producer bureaucrats show towards accounting and systems. If Qbyte were adequately addressing the needs in the market would the producers, industry and service industry be in the financial condition that they’re in today? In fact it is People, Ideas & Objects contention that producers seek to remain as obscure as possible in terms of the accounting and systems that are used to ensure that they have a viable scapegoat when the time comes that they’re questioned vigorously. Would a dynamic, innovative, accountable and profitable oil and gas producer obscure their actions or performance? 

IBM offered to rewrite their Qbyte application in the early 2000s which was the opportunity these producers were granted. As a result of the lack of support for this initiative IBM sold Qbyte to P2 and left the ERP marketspace. A market they dominated with their Qbyte product. Oracle with their Oracle Energy did the same around 2000 when they were unable to source the necessary financial support to build the appropriate systems for the industry. Why was it that the producers were unwilling to better account for the activities in the industry with world class systems built by tier 1 providers? People, Ideas & Objects therefore felt that the door was open for our efforts to complete our research into what the producer and industry would need in order to fully utilize the Joint Operating Committee as the key organizational construct. Why did producer bureaucrats not participate in this endeavour? Since the time that I’ve been in this business I’ve seen the industry go from approximately 20 ERP providers down to P2 and SAP. There are a few others, however they’re unable to gain much momentum from the dominance of P2 and therefore struggle. Why would an industry atrophy the key accountability, compliance and governance capability in the industry during an era which can only be described as an Information Technology revolution?

We’ve heard nothing but the difficulty, complexity and scientific basis of the oil and gas business to justify the C suites executive compensation. Even today the industry scores number four in North American executive compensation. I guess there just wasn’t any money left over for accounting. If you were running a business on the basis of providing good governance would there be such contrast between the accounting and Information Technologies vs the executive compensation, or would they be more balanced? Information Technology has not been the productivity enhancing tool that is expected of it, yet. Granted, however there is a larger compliance and governance issue that is not being fully undertaken and the IT components maturity has been achieved as of 2015, I believe. It would be difficult to understand why there hasn’t been an embrace of this IT maturity, implementation of that along with the People, Ideas & Objects oil and gas business driven perspective and value proposition towards systems development. With its focus on innovation and profitability which is exactly what is necessary for the industry to be pursuing for the next quarter century by any measure. Instead the waiting and expectation that investors will return continues undeterred. We’ve been told that the business is difficult. We know that the bureaucrats are handsomely compensated. Even after a dismal decade has passed in natural gas and six years in oil. Yet nothing has been done for decades about the quality of the accounting that’s conducted?

Well how bad can it be? How much is the gross overhead of the industry? No one knows and no one publishes the amount of gross overhead that’s incurred. We assert that 85% of overhead is capitalized and therefore what is reported is not the reality of the situation. We’ve also documented this as the primary reason there is dramatic cash leakage in each and every producer. We also argued that interest was capitalized at material percentages and it still is. Since we began making these claims over a decade ago, slowly the demand to know what interest has been capitalized has been detailed in the financial statements of most producers. Odd then why this revised disclosure treatment has not been applied to the capitalization of overhead as well? And does this lack of overhead accounting transparency reflect the amount of total executive compensation that’s been capitalized? It is here that I think we find the answer to our questions as to why these numbers are unknown. There is also not one property under the administration of any producer that can tell you if it is profitable or not. None of the producers have the ability to determine the amount of actual overhead, but also the actual amount of depletion, recorded in any specific Joint Operating Committee. They more or less are flying blind on all aspects of where they’re making money, losing money, or wasting money. If you can just declare your organization is profitable and that’s accepted, why prove your wrong? In the Preliminary Specification we’ll be using computer systems, maybe bureaucrats have heard of them, to determine the properties profitability down to the well level on a standardized, actual, factual basis. Standardized in the sense that the service providers affiliated with People, Ideas & Objects will be applying their processes across the industry in a standardized manner. That way producer (a) knows that their unprofitability was determined on the same standard basis as producer (g’s) profitability and producer (a) will accept that they have to shut-in that unprofitable production as it’s in their best interests. As you can imagine this would involve mountains of data that would need to be processed. Computers are able to do this type of work, and in fact are quite good at it. It’s not that the mountains of data don't exist, that is the odd part, they do and are just aggregated for the purposes of accounting and reporting. The question that needs to be asked in a situation like this is. During a period of very low interest rates do you invest in labor saving devices or do you invest in labor? 

Let me clarify one point about that last argument. You can employ people in the task of completing spreadsheets and making them balance. Aggregating very large data sets and applying basic mathematical operations on them. Or as the Preliminary Specification chooses to do, which is to leave these menial tasks to the computers which are very good at processing, storing data and math. Allowing human resources to pursue the higher level tasks of leadership, issue identification and resolution, decision making, creativity, collaboration, research, ideas, design, planning, thinking, negotiation, compromise, innovation and financing. You know, accounting more or less. These are just a few of the ones I’ve come up with. As a bureaucrat rolling in fat compensation, which is your choice of the preferred method? Keeping people occupied in menial tasks providing information that is limited in its use and application? Or people thinking about how to enhance performance and innovation, and indirectly seeing what it is the executives are upto for those fancy paychecks and other innovative executive compensation they “earn?”

Which leads to the question of the accounting firms. “Yep, everything looks good over here!” They need to give up their “Chester” routine in the “Chester and Spike” cartoon and start asking some deep troubling questions. First, why is it that investors turn their backs on an industry? Is that the reason that investors turned their back on producers? And here is the first truly troubling question. What is it that you’ve done since the time that the investors turned their back on oil and gas producers? Yes, you’ve collected a lot of fees but that isn’t necessarily the answer that I was looking for. As producers stand today, do they have any deficiencies in their reporting? Is the big bad well built balance sheet accurately represented through the company's capitalization policies? Are the debtors at risk of default if those assets are materially overstated? How has shareholders equity held up since the exit of the investors? Were the investors presumptuous in their exit? Are the current shareholders at risk of a debtor action against the firm? Let’s assume a scenario that is valid in many, many producers today. You have massive property, plant and equipment and negative working capital. Bank debt is all that supports those assets as shareholder equity has been wiped out by retained losses. Makes “balance” in the balance sheet oxymoronic doesn’t it. Does that mean, understanding that property, plant and equipment is limited by the ceiling test to the value of the reserves, that the bank debt is higher than the reserves value? Does this “unbalanced” scenario rest on the assumption that those reserves can be produced profitably, when throughout their history we now know they never did? Is the producer a viable going concern based on these facts and the outlook of the industry? Do your assumptions consider OPEC’s current 8 mm boe or greater surplus capacity? Do you expect to audit these producers in 2022 or is your bankruptcy operation fully operational? You’d be correct in stating this doesn’t apply to all producers, this year. Would this preclude you from starting to fulfill your role?

Pointed questions that should never have to be asked. The time for niceties has passed as the tragic consequences of the bureaucrats inaction takes on serious momentum in 2021 that will be beyond any force capable of getting in front of it, and surviving. The bureaucrats have not accounted for their actions for four decades and the state of the industry now reflects that. Other than well built balance sheets and significant cash being put in the ground there is nothing anywhere for anyone. It is a comprehensive and total wasteland. The financial condition of the producers will have deteriorated markedly in the fourth quarter of 2020 and the year will stand as testament to the dirty tricks these bureaucrats have conducted. Many in the industry still don’t understand my points or my arguments. The culture of the industry has been severely distorted by the twisted nature of the bureaucrats that people have been in the industry for up to 30 years and don’t understand the difference or the substance of the issue. The bureaucrats do and they’ll be held to account in 2021 and they know it. Their officers and directors liability insurance is up to date and their exits are within arms reach. They’re very jittery, standing at the ready and the slightest noise will see them disappear. 

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 Parler @piobiz, anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here. 

Issue Mitigated, Nothing Litigated

 The need for the Preliminary Specification is unquestionable. The industry must change and do so within the time frame that it has left for itself. It’s financial position is untenable and demands that action be taken quickly to stop the further escalation of the destruction of its and the service industries capacities and capabilities. These are critical issues as of this moment, which are generating further momentum, sending the trajectory of the producers performance into an irreversible velocity. Let us all be clear about the insipid and ridiculous nature of the “muddle through” and “do nothing” strategy and operating procedure. They are the deliberate, permanent destruction of the productive capacity of the North American production profile. This fact makes up the bureaucrats foundation of “muddle through.” That by doing nothing the productive capacity will remain as it is or decline while consumption of the commodities increases. Therefore prices will eventually rise. This has provided for what we believe to be five profitable years in the industry out of the past thirty five. In the shale era this has proven to be toxic. Our White Paper “Profitable North American Energy Independence -- Through the Commercialization of Shale” addresses how the Preliminary Specification deals specifically with these difficulties in the oil and gas industry.

The past few years has seen People, Ideas & Objects escalate our budget costs on the basis of the methods that we’ve discovered to increase our organizational throughput and cut our development and implementation time. For each year that we’ve been able to reduce our timeline we were able to save the industry well in excess of a quarter of one trillion dollars in additional opportunity costs being irretrievably lost. Therefore these efforts of ours to reduce our timeline have brought about material benefits. The number of these methods are significant and form the plans we have in place. We can’t define what time frame we can complete our task as there are too many variables that we can’t control. Variables such as how long will industry take to raise the money from all of the producers in industry? As I’ve discussed before, I do not herd cats. It will be far easier for industry to organize themselves than what I can do in this regard. Besides, I prefer to eat. How long will it take for us to recruit the full complement of user community members? Will having skin in the game motivate producer bureaucrats to do the necessary work that we need from them? This includes the motivation to solve their issues, the commitment, dedication and resolve to follow through. These alone could take many years and we still would not have started our softwares development. All that we have is the history of the bureaucrats and their mosquito-like attention spans. Commitment, dedication and fortitude are not their game. Theirs is blaming, excuses and viable scapegoats. Taking the revenues of a primary industry and using them for their own personal benefit and power tripping. I challenge the bureaucrats to put up an argument about my budget. What will they argue, that it’s too much money? After all the damage and the trillions of dollars they’ve wasted? The financial jeopardy they’ve placed everyone and everything in the greater oil and gas economic structure? When these producer bureaucrats don’t invest in their own organizations profitability then why are they asking others to invest in them? If they don’t like these comments that I'm making then stop arguing with me and start establishing new precedents. They should look around, outside of their own little world and ask themselves why no one is coming to their aid anymore. Their reputation isn’t much worse than what I’ve described here. 

People, Ideas & Objects budget provides our developers and user community with the resources necessary to begin the development of the software and complete it successfully. We understand that there will be little to no opportunity for us to go back and raise additional financial resources. Therefore the need to convert these initial development funds into a revenue generating organization, or to have completed the development of the Preliminary Specification in its first commercial iteration as a necessary requirement to a) ensure that the development is not open ended and therefore never completed and b) attain the independence we need from the bureaucrats. Meaning we can never become “blind sleepwalking agents of whomever will feed us.” To break from the culture of the industry demands our complete financial independence and that is what is designed and delivered in our budget. I believe that what President Donald Trump has proven is that you can not change the culture of an organization from within. The amount of energy needed doesn’t exist and the bureaucratic inertia will consume anyone who tries. 

What has become evident to me in the past six months is the depth of the myopic focus of the bureaucrats. It is only concerned with their personal compensation at the expense of everything else. To be candid as far as they’re concerned there is nothing else. After decades of screaming at the top of my lungs about the looming, and now, actual damages being done to the industry, and all those associated with it in the greater oil and gas economic structure. It didn’t matter to the bureaucrats. Only when I struck proverbial gold last summer in my June 2, 2020 blog post and set off the panic about the liability bureaucrats were individually exposed to as a result of their chronic inactivity. There was never any concern before then. And since then, the only action taken has been to increase their officers and directors liability insurance by, at that time 70%, who knows how much they’ve increased their coverage since. The risk they’ve incurred has the potential to devastate them in terms of their personal asset value and only at that time did they perk up and start paying attention, but only to their personal risk. Then I noted the timing of the overproduction and oversupply issue had been in the oil market since at least July 1986. Nothing at all has been done about this issue for 35 years. I published the Preliminary Specification after completing ten years of the necessary research in December 2013. Again nothing has been done about it. Other than the fact that the chronic overproduction and oversupply issue, in both oil and natural gas commodities, have become the most prominent issue the industry has faced, ever. Going on 35 years of avoiding the biggest issue ever. And seven years of ignoring the solution, in fact the only solution in the market after their abuse of all the ERP vendors. Is it any wonder that the insurance coverage needed to be increased? I also questioned, if the fact that coverage was raised but only after these facts were raised, does that make these insurance changes a fraud?

In a court of law this is what is called evidence. Evidence that they were not doing their job and only working for themselves. But why sue the producers when there's no value left? That’s a good question, however I hear the insurance coverage is spectacular! This enhances one’s motivation doesn’t it. From what I’ve known and experienced over these past decades, I would find it difficult to accept that bureaucrats were working for anyone but themselves. I wonder if I could find a career as an expert witness?

First of all let me clarify that I’ve never seen the oil and gas bureaucrats as my clients. On the contrary when I started this it was with the expressed purpose of removing them. They are redundant in any economy and certainly in the 21st century. People, Ideas & Objects are disintermediating the oil and gas industry. Late last year I asked who would be the bigger fool ten years from now. Would that be the bureaucrats for their actions in creating such a mess. Or would it be us for allowing ourselves to believe, one more time, that they had it all in hand. We’ve been deceived, are we willing to be deceived again? I’m not of the belief that either side in this transaction has to bear any shame over these next 10 years. If we hold the feet of these bureaucrats to the fire today and have them provide the financial resources for our budget, we’ll take it from there. By providing our budget bureaucrats can redeem themselves in the eyes of everyone who is currently looking at them in disbelief. The important people that I want to point out here are the Judges that bureaucrats may face if the losses that shareholders, banks and others continue to experience and therefore choose to litigate. As an alternative they could say “However, your Honor, we took steps in early 2021 to make the changes to turn the industry around, remediate the losses and make oil and gas great again.” If a bureaucrat uttered that to the judge then there would be no reason for the bureaucrat to be in front of the judge. As they would have launched the development of the Preliminary Specification and set in place the resolution to their issues. Issue mitigated, nothing litigated. Their fiduciary duty has been met.

Action therefore involves the following. Producers will share the burden of our budget on an equitable basis. As noted they can organize themselves in one thousands of the time that I can herd cats. Each barrel of oil produced by the producer as of December 31, 2019 is assessed the $315 per boe necessary to fully fund People, Ideas & Objects budget. This is based on the North American production reported of 38.09 mm boe at the end of 2019. I’m finding “issue mitigated, nothing litigated” to be rather catchy and as a result will be using it extensively from now on. Bureaucrats should know now what it is they need to do to save their souls. You see I’ve discovered their motivation and their drive, I’ve always just assumed, wrongly, that they were concerned about the business as we are. I guess my naivety over the past decades of thinking the bureaucrats were morally motivated is now its own form of evidence too.

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 Parler @piobiz, anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here. 

A Finer Point

 I’ve realized that I’ve made an assumption in the Preliminary Specification that may not be evident to everyone. When we’ve discussed the profitability of the Joint Operating Committee it has mostly been from the perspective of the producer corporation. Noting that shutting-in the unprofitable properties production would cause the producers corporate profits to rise as a result. Losses would no longer be diluting the earnings of the producers other profitable properties. We see this in most businesses where they shut-in or stop producing products or services that can no longer be produced profitably until such time as the market provides different opportunities. What I haven’t realized is that we’ve never discussed this from the point of view of just the single, stand alone Joint Operating Committee. A Joint Operating Committee can consist of a single well, just land, a gas plant or a unitized facility. Any asset(s) managed by a Joint Venture agreement establishes a Joint Operating Committee. Therefore it is also possible that we can treat the assets and facilities within a Joint Operating Committee as its own unique reporting entity as that is exactly what the Preliminary Specification does. Therefore, assuming a property consisted of fifty wells held through the Joint Venture agreement that would include the interests of, for purposes of this example, four producers. 

Within the Preliminary Specification we will be breaking the data down to the finest levels possible. Which means the well data at a minimum. Each well will then have its own fully identified financial statements available for each of the four producer owners to review, as well as the financial performance of the well as a whole. These will detail the capital, operating and overhead costs of each well. Note each of the producers will have a different set of financials that are unique to their share of assets characteristics and costs. For example one of the producers may have purchased an interest in the property and therefore will have far different performance criteria in which to evaluate the property. Alternatively a producer may have custom processing or an interest in the processing facilities that other producers don’t. The Preliminary Specification takes the Joint Venture Agreements determination of production allocation and applies that at each location. This technical flexibility is enabled through the highly engineered process we will be undertaking in the software development of the Material Balance Report. Each of these four producers would therefore be aggregating their specific revenues for each commodity based on the distribution defined in the Joint Venture agreement. 

Each producer's financial performance may vary materially from the point of view of profit or loss. Therefore the decision to shut-in the individual well to enhance the Joint Operating Committees performance may be conflicted. Within the Preliminary Specification we have dealt with this conflict from the Joint Operating Committee by way of the following. The Joint Operating Committee is the legal, financial, operational decision making, cultural, communication and strategic framework on an industry wide basis, and is its standard. In the Research & Capabilities module, as it is throughout the Preliminary Specification we have moved the knowledge to where the decision rights reside. As Professor Richard Langlois pointed out.

The question then becomes: why are capabilities sometimes organized within firms, sometimes decentralized in markets, and sometimes coordinated by a myriad contractual and ownership arrangements like joint ventures, franchisees, and networks? Explicitly echoing Hayek, Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 9

It will therefore be within the Joint Operating Committee, where the knowledge of the financial situation at each of the producers, their abilities and capabilities and their rights to make their decisions in their best interests come into play. These are detailed in the Research & Capabilities and Knowledge & Learning modules. Within the Joint Venture Agreement it has been established within the Operating Procedure what the necessary criteria are and how decisions are to be made. The voting rights of each producer and the percentage ownership necessary to pass a decision will dictate the outcome of these decisions. As it is with the corporate decisions to shut-in an entire unprofitable property, People, Ideas & Objects believe it would be in the best interests of those producers to take the global, or gross working interest, perspective of the wells ownership interests financial performance in determining the outcome of these decisions. 

Producer bureaucrats may be jumping up and down at this point saying that this is exactly what it is that they do. Which may be correct except for three distinct differences that the Preliminary Specification implements. Until recently producers have refused and objected to shutting in any and all production. Prior to the virus they were adamant that formation damage would cause production losses to be material for the long term. This they now admit will not be the case. Secondly, the financial statement granularity that is provided by having the service providers re-engineering all of the processes of the producer to ensure they’re optimal and the data is captured at the lowest possible level. This provides for the direct overhead costs to be charged directly to the Joint Operating Committee enabling the decentralized production models price maker strategy. This can only occur with complete financial statements that detail all of the costs of exploration and production. Currently all of the overhead, however much is incurred, is recorded at the corporate level in property, plant and equipment of the producer. And woefully inadequate overhead allowances are charged to the properties. Actual, detailed and accurate financial statements are not currently prepared on any asset in North American oil and gas. If any decisions are currently made in this manner they would be woefully inadequate as they’ve left the major costs of overhead and depletion out of the decision. Lastly, the Preliminary Specification has eliminated the operator designation and replaced it with the pooling concept at the Joint Operating Committee. Decisions being made by one producer as operator introduced the conflict. Moving the decision making to where decisions are authorized removes the conflict the operator has had with the Joint Operating Committee. 

Bureaucrats always jump up and down at this point and suggest that neither the way the Preliminary Specification operates or what is suggested here is viable due to the fact that there are contracts of various kinds that need to be considered. Which of course there are. However, for the sake of a contract they’ll terminate discussion and destroy the industry on a wholesale basis. Contracts are written and rewritten everyday. If the producers do not engage any lawyers now might be a good time to begin a review of these self imposed constraints their contracts are having. Having their operations so severely constrained by a series of contracts might be considered foolish in the oil and gas industry that People, Ideas & Objects, our user community and their service provider organizations are building. A greater flexibility needs to be built into the industry and that is one of the benefits of the Preliminary Specification. 

Nonetheless there may be some wells within a specific Joint Operating Committee where the performance is not adequate to continue with its production. Within the Preliminary Specification there are two specific modules that will assist in the review and analysis of all of a producers Joint Operating Committees and the individual assets within these. They are the Analytics & Statistics module which provides analysis of the producer and the Performance Evaluation module for the analysis of the Joint Operating Committee. Let's look at two aspects of how People, Ideas & Objects enable different performance trajectories over what is available today. First, the Security & Access Control module seeks to provide the right people with the right access to the right information with the right authority at the right time and at the right place. We know the need for this access in the market is much greater today than just last year. It is not that I’m hedging on this ambitious goal set out in the Preliminary Specification. I know that Oracle has the technologies to provide this. I know that we’ve budgeted the right amount of financial resources to engineer the solution. I know that user driven software development such as People, Ideas & Objects Preliminary Specification demands that significant input from the sponsored community needs to be provided to our user community in order to achieve what is possible. This input or support has not yet been evident. And indeed it has been woefully inadequate. Having our budget funded may have producers change their minds on how to get involved by “having some skin in the game.” The commitment of the industry is the missing ingredient at this point. With the amount of losses being incurred at this point, and the history of losses we would assume this is satisfactory to the bureaucrats and this may not change until such time as their removal. 

The second aspect of how these modules provide a different performance trajectory is, we provide a division of labor between computers and people that is in stark contrast to what is implemented in the industry today. Computers will be used to store and process data. People will be employed in the efficiency and effectiveness of their organizations, quality, specialization, division of labor, automation, innovation, leadership, integration, issue identification and resolution, creativity, collaboration, research, ideas, design, planning, thinking, negotiating, compromising and financing to name just a few of the key points. Analyzing and accessing the data and information in the Joint Operating Committees and producer firms will enable new perspectives and understanding of how these financial statements can be used to generate new forms of value. A tool set that will be a blank slate that is provided to each of the producers in the form of advanced capabilities that have not been available before. Rendering a means of distinct competitive advantage that has not been available within the industry to date. 

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 Parler or Twitter @piobiz, anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.