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

 The mechanism we use in the Preliminary Specifications decentralized production models price maker strategy, that enables producers to produce oil and gas profitably everywhere and always is being summarized here in answer to the questions raised in Monday’s blog post. This is the methodology and the reasons in which we began our research in August 2003 into using the Joint Operating Committee, which subsequently enabled the development and publication of the Preliminary Specification in December 2013. That shale has changed the oil and gas industry from scarcity to abundance is the reason that things are as desperate as they are today. However, with the state of affairs in terms of organization and application of Information Technology, oil and gas would nonetheless have needed to approach the development of systems to better manage their organizations. That People, Ideas & Objects, our user community and their service provider organizations are timely and address a material need in the market is a benefit that we can build upon and turn the industry into a value generating enterprise for all concerned. All the while providing the energy necessary to ensure the North American economy remains the largest consumer of energy, hence energy independent and the most powerful economy.

The organizational structure that we’ve chosen is one that fits within a decentralized oil and gas industry. Centralization has had its day and fulfilled its purpose in society, however the Internet is enabling new methods of organizations to be formed based on the underlying Information Technologies. Other methods no longer remain a choice due to their inefficiencies, particularly in the area of speed and their capacity to deal with issues. Therefore we have taken the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer and industry, redesigned and reconfigured them to determine the “what and how” they would need to look like in order to operate based on that change. The Joint Operating Committee being the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the industry. When we move the compliance and governance frameworks of the bureaucracy into alignment with the seven frameworks of the Joint Operating Committee we gain a speed, accountability and profitability that otherwise could not be achieved. We are assuming that if producer bureaucrats were able to deal with these issues, far too much time has passed, proving they’ve been unable to accommodate them. Therefore change is necessary and urgent.

It is People, Ideas & Objects fundamental belief that the overhead costs of oil and gas are material and vastly understated due to their industry wide capitalization of 85% of all its overhead. Dealing with these costs is a necessity in any new producer and industry configuration. What we’ve chosen to do is change these overhead costs from a fixed cost within each of the producer firms to a variable cost within the Joint Operating Committee, variable based on production. Moving the producers fixed cost administrative and accounting capability to become the industry variable cost administrative and accounting capability. We believe that each of the producers maintaining their own administrative and accounting capabilities is being replicated within each and every producer. These costs are not shared or shareable in their current configuration, are not part of the producers fundamental competitive advantage or offering and are costing the industry much of its profitability outside of the low commodity prices. Maintaining the theme of the decentralized organization we are then removing the administrative, accounting and related systems infrastructure and resources away from the producer firms into individual service provider organizations. These service providers are affiliated with People, Ideas & Objects as they deliver our software and their services to their client producers. This configuration enables the producer firm to focus on their key competitive advantages of their earth science & engineering capabilities, and their land & asset base. These service providers will be focused on one individual administrative or accounting process and will manage that process for the entire North American oil and gas industry. Exceptions such as production accounting, which we believe will move closer to the field, will of course need to be made. 

Highlighting the competitive advantages of the service providers would include the following. Specialization and the division of labor will enable the producers and industry to increase their production throughput from the same resource base. Automation of the business process is enabled through our user community member that is the principle behind the service provider. This automation is enabled through their hands on knowledge of the day to day management of their individual process and their ability to access the software development capabilities available to them from People, Ideas & Objects. Establishing a change based leadership in the industry to ensure that oil and gas remains innovative and profitable. And will not, once again, be subject to its accounting and business related issues defining decades of destruction through a complacent bureaucracy and the use of stale, unchanging ERP systems.

With the accounting and reporting focused on the Joint Operating Committee the producers will be receiving detailed comprehensive financial statements complete with actual depletion calculations and detailed, actual overhead costs that arise from the service providers billing for their services directly to each of the Joint Operating Committees. Overhead allowances will no longer be necessary. Therefore, the producers will be able to determine with high levels of precision and confidence which properties are profitable and which are not, based on actual costs. Those properties that are not profitable can be shut-in and as a result none of the service providers will be receiving any data through the People, Ideas & Objects Preliminary Specifications, task and transfer network. Therefore no data being generated leads to no work being done for that property and therefore no billings will be rendered for the shut-in property and therefore a null operation will be reported. No profit, but also no loss. This property is then moved to the producers shut-in inventory to begin work to innovatively return it to profitable operations. 

The benefits of doing this are substantial and increase the value of producers. The dilution of the producers profits will cease as only profitable properties will produce. Profitability will no longer be diluted by any unprofitable properties production. There is also the ability to extend this analysis to the field level where each well will be subject to the same critical review. Any well that is not profitable within that field or unit can also be shut-in in order to enhance the overall profitability of the specific Joint Operating Committee. It is here that the bureaucrats have accused us of collusion for well over a decade. Our response to that accusation has been. If making a fundamental, independent business decision not to lose money, based on detailed, actual, factual accounting is collusion, then… Additional benefits of using our decentralized production models price maker strategy include the reserves being shut-in can be saved for a time in which they’ll be produced profitably. Materially increasing the reserves value. The reserves will no longer have to carry the losses as additional costs that would need to have been earned if the property were to continue to produce unprofitably. These reserves can also be seen as relatively low cost storage as opposed to the high storage costs being incurred today. (Production, transportation and storage costs would not have been incurred.) Commodity markets will find their marginal cost when unprofitable production is removed from the market. Raising the value of the reserves but also the producers overall revenues which we clearly identified as necessities in Monday’s blog post. Markets provide one thing and only one thing. That is their price, which theoretically holds all of the information of the market within it. Using that information is what People, Ideas & Objects Preliminary Specifications decentralized production markets price makers strategy does. By focusing on profitability, producers will ensure investments in oil and gas are competitive in the greater market economy, which also happens to be based on price. And the overall greater oil and gas economic structure will cease to be subject to the boom and bust cycle which everyone has now unfortunately learned is so destructive and counterproductive. That being the industry that “builds balance sheets” and “puts cash in the ground.” 

People, Ideas & Objects White Paper “Profitable North American Energy Independence -- Through the Commercialization of Shale” discussed the pricing dynamics in oil and gas further. The following is an edited version of that discussion based on this graph that captures the assumptions the bureaucracies are operating under.

Looking at this graph from the perception of the producer bureaucrats. Their total costs of each barrel of oil produced in the various shale formations is in the range of $48 to $54. The operating, overhead and royalty cost of each barrel varies between $28 and $37. I would point out the difference, being $16 to $23, in capital costs are based on an allocation of all of the capital costs across the entire reserves of the property. In our white paper we’ve argued that this allocation is unreasonable in a capital market where the demands for the performance in today’s capital markets are far greater than what can be achieved when a producer is cycling their cash through their investments in a manner that retrieves that cash over several decades or more. This unheard of luxury was enabled through the specious accounting producers were performing. As the alternative, People, Ideas & Objects recommend in our Preliminary Specification that the producer retire all of their capital costs within the first 30 months of the properties life to provide for the reuse of this previously invested cash. This was our original recommended period in which to reduce the property, plant and equipment account. However based on our blog posts discussion on Monday we see there is a breakdown in the revenues of the producers, both in price and production volume, and no capacity to meet that criteria. Even five years is outside the possibility of the producers current revenue stream. Proof the state of affairs in the industry are deteriorating at a rapid rate at this point in time.

Providing producers with the means to meet the demands of their future capital costs, shareholder dividends and bank debt repayments, to address the rebuilding, refurbishment and reclamation costs we identified in our New Cost Structures series. Matching these costs better to the rapid decline rates experienced in shale can only be done if the producer is selling their commodities at a price that is well above their break even point which must consider an appropriate accounting of the costs of operations, overhead and reasonable retirement of its capital. Please note this graph reflects that Well Break Even and Shut-in values denote that at any point, and as long as the commodity price covered the operating costs, the property would continue to produce regardless of the impact on capital costs. If a dollar of capital costs were being returned, or one dollar above the shut-in price, that would enable the production of the property to continue. Only at the point in time where the commodity price dropped below the operating costs would the producer allegedly shut-in their production. We saw with March and April 2020 prices below $20 this principle being violated. This is a fundamental misinterpretation of the term break even, it is the reason the industry is in the difficulty that it’s in and why the producers have continued to lose money for the past four decades. Break even is not what is being interpreted here. What in fact the producer is assuming is that as long as there is cash flow above the operating costs, some of the time, then they’re making money and will continue to produce. What they’re stating is acceptable to them is they may not be breaking even, but they’re generating cash flow. As long as new investors were willing to make up for producers' lack of returned cash when bureaucrats did not recognize any of the capital costs to pass these on to the consumer, things were fine. Today with reasonable prices bureaucrats will divert cash flow to new drilling to restart the destruction once again.

What People, Ideas & Objects provide in our Preliminary Specification, if we could assume the accuracy of this graphs numbers, is the point at which the property would be shut-in would be at the breakeven point and below, always and everywhere. 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 are dropped below the breakeven price for all producers' production. When all producers continue to produce below the breakeven price for four decades, as has occurred in North American oil and gas, you have a comprehensive exhaustion of the value from the industry on an annual and wholesale basis. Times were only “good” when new investors were willing

The Preliminary Specifications assumption is that the industries interpretation that oil and gas commodities are subject to ​price taker​ characteristics is incorrect. This is evidenced in the past years through the actions of OPEC+ with their removal of less than 2% of the oil from the market on two separate occasions which has brought about at least a 32% increase in the global price of oil. And in their most recent action of withholding their scheduled production increase. There’s the example of the Alberta government's mandated production cuts that removed regional differentials on heavy oil that were in excess of 80% of the commodity price. This small production cut, less than 10% of the overall productive deliverability of the province, had a dramatic effect where the differentials were eliminated within one month of the announcement. These are markets that reflect the characteristics of ​price makers​, not price takers. To state that “markets will rebalance” and continue to produce and increase production in a market of declining prices and profitability is not a business. It is foolish, irresponsible and reflects an uncaring attitude that is prevalent in today’s oil and gas producers. But then the bureaucrats did get paid. The Preliminary Specification is structured to implement the decentralized production model’s price maker strategy to rectify this behavior, establish profitability as the only fair and reasonable method of production allocation, and produce only profitable production everywhere and always.

With the inherent value contained within each barrel of oil. With the supply possibly limited to the next half dozen generations. Why would we ever produce any oil or gas that was unprofitable? What would be the purpose of doing so? Would we not just be robbing future generations of the resources they’ll need to expand their quality of life? Ensuring there’ll be no viable industry capable of providing for their oil and gas needs? On the one hand the costs of oil and gas exploration and production continue to escalate with each barrel of oil produced. This is due to the increased difficulty and science necessary to extract the resource. Therefore a more accurate accounting is necessary than what has been provided to the industry in the past decades. People, Ideas & Objects provides a more accurate accounting of the costs of exploration and production as part of the Preliminary Specification, our user community and their service provider operations. When only profitable production is produced it is implied that we're accurately capturing the timing and accuracy of all costs and passing them on to the consumer. Profits and innovation will be used to ensure an abundant, affordable supply is provided to consumers for the long term. Conversely, consumers paying the full cost of their energy will ensure that they’ll choose the most efficient and effective use of the variety of resources they have available.

Let's look at another “business” dynamic of profitability everywhere and always. If producers are interested in instilling some “capital discipline,” as they’ve claimed so many thousands of times before, we have what they’re looking for in the Preliminary Specification. When only profitable production qualifies to be produced: when do new wells get drilled? When is land purchased, and at what price? These are not going to be determined based on the same criteria their grandfathers used. A criteria which has been recycled in the industry for the past many decades. New ideas and understandings of the “markets” will need to be developed and employed to determine when and where activity can and will be conducted. What we have seen is the price of oil and gas recover to a reasonable level and the North American producers resume their parade of lunacy until such time as the price collapses once more. “Oh well, it’s boom or bust they say.” Which reflects the amount of thinking that goes into what is being done to determine the economics of oil and gas exploration, development and production! I believe I’ve called this just a science experiment in prior posts. Turning these into business decisions will be a necessity if any “capital discipline” is ever attained. Mouthing the words, once more for the cameras please, doesn’t really get it done. Wouldn’t it be something if the producer bureaucrats adopted an understate and over-deliver policy, instead of their [specious] claim of [whatever] now and undeliver always posture.

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

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

 As the bureaucrats best friend ever, the reality is at times I have to be cruel to be kind, it’s what good friends do. The Exxon and Apache litigations we noted in our March 2, 2021 blog post should precipitate action by each and every bureaucrat at each and every producer. They don’t need to hear the otherwise anonymous knock at their door. By funding the Preliminary Specification they’ll have the ability to tell the Judge they’ve mitigated these issues. Implying that they now understand their error, are aware of the problems that it caused and have implemented the solution to those issues. And therefore can claim “issue mitigated, nothing litigated.” The stark reality of my 2020 review of the producers financial statements is that the momentum and velocity of these issues we’ve been discussing here at People, Ideas & Objects are terminal to the oil and gas industry. There is no other way to describe it other than to say that the industry is not a viable going concern under the current business model. Certainly the recent increases in oil prices have everyone excited, however the performance of the producers will not and can not change, the bureaucrats business model for oil and gas is not based on generating incremental value. It is based partially on the increase in commodity prices to carry the stock price higher. That is how the bureaucrats rely on the oil and gas business to increase in value. There is no other way in which the bureaucrats that are now responsible for the producer can build any value. It is a pure commodity play and you would do as well, or even better by just investing in the commodities markets themselves. 

Like so many aspects of the producers performance, things are not as they’re claimed to be. Free cash flow for our sample of producers for 2020 was $2.85 billion. To put that in perspective, these producers maintained property, plant and equipment of $406 billion and annual revenues of $151.6 billion. The argument will be that 2020 was the year of covid and the producers should be cut some slack. And I would respond to that by saying I agree, however, the larger point that I’m making here is that oil and gas in North America is not a viable business in good times or bad, as it should be. Whether there is a reason for the poor performance or not. The reason that it was a bad year is because the producers continued to overproduce oil until such time as the prices turned to negative $40. They then continued to suffer through March and April with prices that were below $20. Why? They had the means within themselves to shut-in production and were indeed being forced to do so. Recall how they claimed up to that point that they could not shut-in oil and gas as it would cause irreparable damage to the formation? I wonder why we don’t hear what the consequences of those damaged formations are today? The fact that there is no damage is not newsworthy. Why did they not take enough oil off the market to continue to rehabilitate the price over the $20 threshold in March and April? There has been an inventory overhang depressing prices for about four decades by my estimate. By the second quarter our sample of producers were reducing 1.467 mm boe / day from their production profile. And why has it been that at the beginning of 2021 did our sample of producers report production volumes that were lower by 944 thousand boe / day over December 31, 2020 when OPEC+ were carrying well over 7 mm boe off the market throughout 2020 and to date in 2021? Saudi Arabia also cut an incremental 1 mm boe / day in late 2020? The fact of the matter is that others were doing more than their fair share to get the price of oil to $48.42 at the 2020s year end. And those of our sample producers were recording losses on North American production of $60.07 billion dollars due to those low oil prices did? It has been a struggle to survive but sometimes less is more. 

Based on our sample of producers their fourth quarter performance eked out a small loss of $3.2 billion dollars and achieved a total loss of $60.07 billion for the full year 2020. Granted the majority of the costs of oil and gas exploration and production for our sample was due to the massive write downs they faced. I guess the reserves value isn’t holding up to the prolific and out of control spending machines that we all know and call "producers." Of the $151 billion in annual revenues $101.5 billion was for depletion and impairments. On a straight mathematical basis, at this rate it would take the producers exactly 4 more years to retire the existing balance of $406 billion in property, plant and equipment. However during the past four years the capital expenditures of our sample of producers were $216.5 billion at the end of four years time. And therefore only bringing the property, plant and equipment accounts value down to 53% of today’s value. People, Ideas & Objects have been suggesting that the amount of property, plant and equipment at $406 billion for these 16 producers is obscene. Working capital is at $11.3 billion and we feel that 65% of property, plant and equipment is better redefined as it qualifies in our opinion as the unrecognized capital costs of past production. If that amount of property, plant and equipment was retired the account would need to be $142 billion demanding that a further $74.4 billion of depletion and impairment be recognized in the next 4 fiscal years. 

The reason I brought up the woeful working capital balance was to contrast the amount to capital assets. Retiring the amount of property, plant and equipment as a business will see these costs passed onto the consumer and therefore these assets are replaced with cash. This assumes that producers are charging appropriately profitable prices to cover the full cost of oil and gas exploration and production. That assumes these producers get their act together and instill some form of production discipline based on the market. The only method to do so is People, Ideas & Objects Preliminary Specifications decentralized production models price maker strategy. What these bureaucrats have proven time and again is the inability to understand or manage their inventories. With this cash being generated they can begin to manage the business appropriately. Fund the future capital expenditures and the new, incremental costs that we detailed in our New Cost Structures blog series recently. Pay dividends or pay down debts. 

Throughout our discussion, has been our belief that the symptom of low oil and gas prices are reflected in these accounting issues and are derived from cultural distortions in the industry. These issues manifest failings over the past four decades therefore destroyed the financial structure of the industry. Over reported asset values have a commensurate amount of over reported profitability, which leads to excessive inflows of investors seeking to gain access to those profits. That creates overinvestment which in turn creates overproduction that has been chronic over these past four decades, or at least 30 of the last 35 that I can personally recall, creating collapsed commodity prices. 2020 is a year in which I think that I can verify this claim in better context. If we look at the People, Ideas & Objects amount of recommended depletion and impairment for the next four years being $101.5 billion plus $18.6 billion (one quarter of the $74.4 billion noted above) for a total of $120.1 billion. Assuming the revenues from oil and gas sales in the current business model will not be substantially higher than what they were, as there is a historical cycle of chronic overproduction that destroys the prices when they begin to recover. Therefore if we take the average over the last 5 years then we get $206 billion in average annual revenues. That would reflect that these producers would be generating only $86.2 in net revenues after the cost of capital. Woefully inadequate and in my opinion reflects the chronic lack of any fundamental business understanding. Of course these producer bureaucrats expect that as soon as the investors return to see that absolutely nothing has changed in their business model, they’ll jump at the opportunity to invest. 

These projections reflect that 58.3% of the costs of the average revenues will be the cost of capital. And these costs will continue to be belittled by the bureaucrats as “just accounting” and “those costs are from the past.” I would remind them that the source of that capital was from the investors pocketbook and to expect they’ll return without respecting this point is quite inappropriate. The time frame of five years, 2020 was the first year, to bring these capital costs into a competitive framework is woefully inadequate as far as I’m concerned. These capital investments need to compete in the greater market for capital. How is technology doing these days. That is where many of the bureaucrats might find their former investors. Who are now satisfied and promises based on nothing won’t satisfy that sting of betrayal. “You’re gonna need a bigger oil and gas price.” Chief Brody, said in the movie Jaws. If anything, 2020 proved the inability of the bureaucracy to act in their own best interests when negative $40 and low oil prices throughout 2020 were acceptable, bureaucrats were paid! Yet these producers were well within their means to correct the situation, yet did nothing! With the motivation now to drill to access cash, and do they ever need cash, what will happen in 2022 to 202X? Rinse, repeat.

Producers will claim those assets in property, plant and equipment reflect the reserves value. If that is the case then write them all off as the only thing they’ve proven is that none of their reserves are capable of being produced profitably in their hands for the past four decades and are therefore useless to society. Yes when looking at the perspective of four decades you must consider the capital costs too. At today’s valuation vs what we believe they should be there needs an additional ($406 - $142) $264 billion in depletion has to be realized. My summaries of the quarterlies only goes back to 2016 which show that our sample of producers have lost $38 billion over the course of 2016 - 2020. How many years do we need to go back and find the “reported” profits of ($264 + $38 in losses) $302 billion to make up this difference, or can we? Our sample of producers represent 9.212 mm boe / day in deliverability, what would the amount of unrecognized capital costs of past production for the North American industry be? $1.275 trillion. What I find amusing about that $302 billion in losses is that it’s almost as big as the number of alleged retained earnings, contributed capital and bank debt of $359.8 billion, imagine that! Without investors and bankers this would have never worked! Yet after this record of destruction, an investors strike since in 2015, with no action taken to rectify or even recognize these issues, these bureaucrats expect investors just to cruise on back to be fleeced once more? Bureaucrats day of reckoning has come, here’s a hint it was 2015. 

For many years the disproportionate volume of the property, plant and equipment has been the pride and joy of each and every CEO. Parroting “building the balance sheet” and “putting cash in the ground” as their calling. I have been the lone voice in discussing this point and have paid dearly for the consequences of the ideas that I express in the Preliminary Specification. Ideas that are designed to deal with these and other issues of value erosion by the uncaring bureaucracy. It appears to me that here in 2021 I may have acquired many friends. The SEC has picked this issue up and are investigating the asset valuation issue at ExxonMobil. It is believed that they’re also expanding that to include an investigation of all of the shale producers. Subpoenas have been issued. We noted earlier in this post the fact that Exxon and Apache have pending class action lawsuits that are directly on point about the officers and directors actions regarding asset valuation. Not that I went through to count these actions but there seems to be almost 100 of them. And lastly, every producer that has issued their audited annual report at this time has identified the asset valuation and depletion as a Critical Audit Matter (Key Audit Matter in Canada). Will the auditors be able to issue a Critical Audit Matter for the same reasons in 2021? Asking for a friend? Action by the bureaucrats is demanded and necessary for the sole purpose of saving their souls. I’m only glad to be their very good friend and possibly their best friend ever, and able to help by building the Preliminary Specification. The first thing we need from the current and existing officers and directors is for them to fund our budget. 

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

Culture, Change, Failure

 It wouldn’t take too much to convince those last few people in oil and gas that the pace of business has far outstripped today’s organizational capacity of the producer firms and industry. It may seem as though our listing of producers current seven crises in our February 2, 2021 post, the overall existential issue the producers face as a result, the wall of costs we recently identified in our “New Cost Structures” series are all symptomatic of the speed of their organization. They’re unable to see, diagnose and deal with the issues and opportunities as they present themselves in today’s marketplace. The acceleration of business in 2021 vs. 2000 is quite remarkable and is wholly attributable to the capabilities and capacities of people’s productivity which has been enhanced by the maturation of Information Technology. The cultural, bureaucratic processes that functioned before are breaking down due to competing alternatives for the producer investors that are seeking “real” returns in other industries, people to find steady, rewarding work capable of supporting a family and a mortgage, etc. What used to work doesn’t pass muster anymore. When the world turns its back on you it’s not the time in which to radically change to new business interests such as clean energy. It’s time to focus.

It was in our May 2004 Preliminary Research report that we noted the work of Professor Anthony Giddens theories of Structuration. And Professor Wanda Orlikowski’s Model of Structuration. Structuration states that society, people and organizations progress together or there is conflict leading to failure. This conflict is evident in the failure of the North American based oil and gas producer organizations. Orlikowski’s Model of Structuration suggests that Information Technology is an element of society, that IT both defines and constrains an organization in terms of its capacity to change. People, Ideas & Objects suggested at that time the ability of the oil and gas industry to seek the changes that are necessary, it needs to develop new ERP systems such as the Preliminary Specification to enable their organizations change and acquire a software development capability for the future. To ensure that changes instituted by management hold they need to be made in the software first or the organization would regress back to the methods defined in the existing software. Bureaucrats rightly interpreted this to mean that if they never implemented the Preliminary Specification, or changed their ERP systems in any way, they would never be challenged in their bureaucratic methods of organization. It was late 2004 when they gleefully pointed out their analysis to me. Seventeen years later they’re finding once again it’s validity with their runaway crises management.

Information Technology (IT) is taking a front seat, and literally the driver seat, in terms of its role in society. As much as many people had suspected, it is both positive and negative with its power being exercised at will and in ways that were not what were contemplated or considered. Just as People, Ideas & Objects assert that it’s not enough to own the oil and gas asset anymore, producers need to have access to the software that makes the oil and gas asset profitable. The role bureaucrats have played in allowing this to happen is absolute. The damage and destruction they’ve caused is comprehensive, they’re responsible, were the authorized individuals that needed to act, and therefore must be held accountable. The outsized role that IT is taking in all industries and all organizations is comprehensive and probably more powerful than what the old guard, the bureaucracy are familiar with and used to. Since the bureaucrats haven’t made any of the necessary changes I don’t think they have much of a chance to make the transition now. Their culture is well established and would be more of a difficulty and obstruction to what we need to do. This is why organizational disintermediation is necessary, rip and replace has become the method of implementation and requirement for ERP systems. And to a greater extent the economic principle of creative destruction has been an effective tool in dealing with societal change. These are all revolutionary powers that don’t respect those that obstruct, or attempt to obstruct their path.

We’ve had a variety of boom / bust cycles in the IT environment. Economic fallout from the belief that this time IT was fulfilling its promise. This was best reflected in the dot.com fiasco that I think was triggered by the belief that Y2K was an issue. When it was proven to be a dud, people stopped listening to IT and the money for any initiative evaporated. Is this time different? Who knows. What I have done is sought to solve oil and gas business related issues as a result of their organizational deficiencies. That means ERP systems need to change. I also now believe that IT has had an overall maturation of the inherent technologies that the commercial enterprise employs. This has to do with the Internet and its implications, FaceBook was not what was considered to be part of the Internet revolution. As a result, it is time to embrace and extend what is commonly being discussed today as the Fourth Industrial revolution.

Aptitude and depth of knowledge necessary to fully comprehend the IT marketplace is more difficult than ever. This is possibly one of the difficulties that the bureaucrats are faced with. They don’t know or understand the technological implications and solutions that are available. At some point very soon the demands for specialization in IT, as well as the earth science and engineering demands in their own industry, will outstrip the capacities and capabilities that a producer can house within their own organization on a commercial basis. The scattering and dilution of the producers IT budgets within their organizations lead to redundant costs being incurred and replicated at each producer across the industry. Demanding producers fill out capabilities and capacities that are beyond the scope of what a commercial enterprise can achieve. Or maybe that is stated more effectively as beyond the reasonable cost that a producer should incur. People, Ideas & Objects have consistently criticized this as another of the reasons that the producers are systemically unprofitable. Their overhead costs in their current organizational configuration are unshared and unshareable. Each producer is building their own empires of accounting, IT and administrative purity without consideration of the costs or the redundant nature of each producer spending to build all of these same non-competitive capabilities. Recall too that all of these overhead costs are capitalized on the average of 85% to property, plant and equipment and do not diminish profit or cash flow until they’re depleted over the course of the next few decades. They are however one of the primary reasons for the producers chronic, massive and otherwise “mysterious” monthly cash drainage. Producers do not have these very high overhead costs included in the price of oil or natural gas and as a result are not recovered when products are sold and hence provide them with what is commonly referred to as a cash float. Money only goes one way, out. What is desperately needed is a new more effective and efficient way of organizing IT resources. A similar reorganization is one of the primary reasons for the success of cloud computing. People, Ideas & Objects have inserted themselves, our user community and their service providers as a sub-industry that sits between oil & gas and the IT suppliers. A sub-industry capable of communicating the needs of ERP systems to producers and the pure technological providers who have both proven their inability to know or understand one another.  

Two years ago bureaucrats were telling people who were interested in People, Ideas & Objects Preliminary Specification that they’d never implement the system as it was too radical of a change for them to consider. Which it was, their bureaucratic culture could never survive our implementation's transition and certainly nothing in that sense has changed in terms of their survivability. Unfortunately, their business has in addition not weathered the storm that the Preliminary Specification is designed to solve and their options have diminished substantially. What bureaucrats propose is to move off into clean energy and zero emissions which is the most radical business change they could have contemplated. Getting out of oil and gas to invest in windmills and solar arrays is not too radical of a direction just two years after suggesting that our oil and gas solution to today’s issues was? They can’t afford to do so. Having an industry subject to the chronic boom / bust is one thing, I am unable to think of another industry that claims this as a feature. Having the continental standard strategy of “muddle along” to deal with the “bad years” is another. If we use July 1986 as the point at which overproduction became a serious issue. It was certainly the point where OPEC had declared war. We are then in what I believe to be our thirtieth bad year out of the last thirty five. And the only thing that’s being considered is for two thirds of the producers to move into clean energy?

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

Bureaucrats Legacy, History and Reputation

 For all the years that I was focused on providing this solution in the form of the Preliminary Specification our user community and their service provider organizations, the bureaucrats could not have cared less due to the fact that they could not have cared less about the business. It wasn’t for them to determine its outcome, they were there for the money. Not until I pointed out the risk and cost to them personally of their past actions did they begin to act. As of last Monday February 22, 2021, the lawsuits began. They first went after Exxon with far too many actions to count. And then on Thursday Apache was the target, once again with far too many actions to count. I would ask these bureaucrats to remember that People, Ideas & Objects et al are the best friends they ever had as we have the solution to their problem. To remember our “issue mitigated, nothing litigated” (our January 11, 2021 blog post) as the strategy they can employ to avoid the risk to their personal fortunes they worked so hard to… I’ll work on that description for later. I see these lawsuits as the imminent possibility that they’re headed your way, whichever company you work for. You don’t have to wait for the knock at the door, they’ve arrived and there are literally an army of them. 

The bureaucrats' vision is and has always been cost control. In a way People, Ideas & Objects agrees with them that the reduction of overhead by eliminating their excessive executive compensation is a worthwhile pursuit. Many of these producers argue with me that they’ll be paying higher taxes as a result of the changes in the Preliminary Specification and it is here we agree again. What they’re saying is in order to avoid the payment of any incremental taxes their motivation was to destroy their organizations and anyone else's in the process of alleged prudence and cost control. We hear cost control echoed in perfect harmony across the continent and that it is the key to the oil and gas industries future. Cost control is not a comprehensive business model. It is a component of a sound organization and all organizations need to have that capability inherent in their internal controls and governance. However cost control is not and never will be a business model. A key element of the bureaucrats cost control business model was, and still is, to recognize every cost as an asset in property, plant and equipment and deplete those costs over the course of the next few decades. In other words defer the recognition of the capital costs of a capital intensive industry. People, Ideas & Objects believe that the capital intensive nature of an oil and gas exploration and production operation would also be reflected in the price of the commodity used by the consumer, not just operating costs. 

The producer's financial statements don’t reflect functioning companies in a functional industry. Producers carry the history, legacy and reputation of their actions over these past four decades and those are eloquently on display for all to see. The progression and steepening of the trajectory of their demise is also clearly displayed since their investors became wise to the bureaucrats' specious accounting methods and began refusing to fund them further. In “good times,” those years when investors didn’t understand they were the mark, investors were only disappointed to see the chronic dilution that they experienced, with each successive funding round reducing their interests. The verbal and written messages that bureaucrats sent to investors over the past number of decades is that “we are massively profitable, we just have a working capital shortage, please send cash!” “We’re building the business!” and my all time favorite which also happens to be the dumbest thing to say “you have to put cash in the ground!” These are the foundations on which the industry has been built, the legacy and reputation that the bureaucrats have rightly earned. The one in which the future of the industry will be all that it can be as soon as the investors realize their brilliance and return to provide the spigate of cash once again. Except, even with the methods of full cost accounting, the claims that were made when taking those financial resources from the investors are not reflected in the financial statements that are presented today. They are worlds apart from a successful, profitable organization that would have existed today if what was claimed then had proceeded to today. Where is the cash, where are the profits?

What are the issues? The bureaucrats believe that everything is fine. They don’t understand why they have no support from the investment and banking communities. “Don’t these investors understand there are reserves out there?” Yes they do. And they know that the industry has been incapable of generating the value necessary to support itself independently. The need for outside capital is not for growth or investment, it's primarily for the excessive executive compensation that is now legendary throughout the business community. They know that profits don’t mean what they understand the word means. To investors oil and gas profits are just a number based on an opinion of what best reflects the CEO’s sincerity that year. What investors do know is that outside influences who are attempting to identify and resolve the industries issues have been shunned and ostracized. That self reflection by the bureaucrats is not a characteristic that is present and it appears they can only reflect the high and mighty, pious opinion of themselves. 

The common complaint I get is these are all accounting issues. And yes indeed they are. They are also the bureaucratic legacy and reputation that reflects the performance of the organizations over their lifetime. So instead of getting into the nuances of the social science of accounting, something that is a regulatory requirement of all organizations in North America I’ll deal in facts instead. The overall business objective of the bureaucrats has been what? I can only assume it has been to build the greatest science experiments known to mankind. Again I could be wrong, but let's stick to the facts. 

We’ve now documented in our recent four part New Cost Structures series the “costs” that bureaucrats will be unable to control in their future. These are the unrecognized capital costs of past production recorded as property plant and equipment, rebuilding of the physical infrastructure across North America, refurbishment costs, the need to fund the rebuild of the service industries capacities and capabilities and the unknown costs of reclamation. All which produce zero return on investment and therefore will need to be “borne by the producer” as they will say. Let's be honest, that means passed on to the consumer. This being one of the key features of the Preliminary Specifications decentralized production models price maker strategy. If the costs of exploration and production are not passed onto the consumers then the consumers are receiving a direct subsidy from the investors who invested in oil and gas. Those investor subsidies accurately reflected on each and every one of the producers balance sheets as property, plant and equipment. Investors paid for them and they’ve never been accurately passed on to the consumers. If the culture, the business model, the remedial effort of the producer bureaucrats since the investors left won't appreciate or understand the need for any change, or to make the industry a commercial enterprise, why would investors return? Muddling through is very effective when you have the continuous cash flow from a capital intensive industry. The ability to “earn” that excessive executive compensation each and every day is as simple as never getting up off the couch or answering the phone. And whatever you do, just don’t pay for anything or anyone else. This more than anything is the culture and meaning of “muddle along” in oil and gas.

Other than the further pursuit of the ultimate science experiment what is it that producers are offering anyone in the industry. From the investors point of view we have to bring up the banks. Leverage was well understood and fully utilized in the industry throughout the past three decades. Build up the debt as high as possible and when the stock is worth much, much more, use the new equity to service the debt. Either through the payment of the debt or to just offset the leverage. For the larger part of the last two decades the interest rates have been menial and the ability to increase the indebtedness has far exceeded the scope of reasonableness. On this basis alone the oil and gas producers are heavily indebted and over leveraged. Shale has also expanded significantly the amount of oil and gas reserves that a producer can book as proven reserves, the basis of the banks evaluation of debt worthiness. Three aggravating factors have been on top of these once in a lifetime anomalies that have seen leverage expand to excessive levels. These are, 1) the losses that have been incurred even under the specious full cost accounting methodology, 2) the lack of access to equity capital has disabled the continued deleveraging that would have occured and 3) banks continued to lend until most recently. As we noted the other day, with the expansion of debt and losses, some producer shareholders equity has been eliminated by these losses. Leaving the situation where bank debt is now higher than what the reserves value as reflected in property, plant and equipment is. People, Ideas & Objects, on top of all these aggravating issues, recommend a pro-forma adjustment be done prior to the evaluation of any of the producers financial statements. Understanding our argument regarding property, plant and equipment is best described as the unrecognized capital costs of prior production. The pro-forma adjustment sees 65% of property, plant and equipment retired to depletion. This will better reflect the producers past performance and what the organization has in terms of a formidable future and the prospects of its performance. 

Banks have recently publicly expressed their disappointment with the producers actions and we are currently unaware what the results of their October 2020 reviews are. The declaration of excessive executive compensation in the form of bonuses minutes before the declaration of bankruptcy is unique and disconcerting to them. The inclusion of the unused portion of the line of credit as part of the working capital available or cash on hand is a stretch of reality and a distortion of the health of the producer. Seemingly a continuation of the methods used to bring us to the imminent financial collapse of the industry.

The preceding shows that from a new investment perspective this would be a no go zone for the remainder of these producers' existence. If they could deal with the issues around their past financial performance, something the bureaucrats have feigned no knowledge or understanding of, the debt would need to be serviced. Any one of the six crises that we mentioned in our last post would further skew the risk of any investment beyond the tolerable level of the capital market. A market that is currently quite satisfied with the continued exceptional performance of other industries that are now defining what the expectations of these producers' performance needs to be. 

This level of performance is not the legacy, history or reputation of the bureaucrats. Theirs is one where they’ve personally feasted at the trough to create their own personal dynasties that will provide them with the healthy alternative when all is gone. Profits were inflated through specious accounting since the late 1970s. The producer as it stands today is an empty vessel at the absolute very best. The industry has been hollowed out of any and all value after four decades of mismanagement. A management that does not understand its issues, the meaning of profits or damage and destruction from its muddle along culture. Facing a stack of trillion dollar costs that have been unaddressed and are escalating uncontrollably. A business model that expects new investors to pay for them, only to be washed away, initially through dilution and then through their well designed bankruptcy wash cycle. It is indebted in a way that leaves nothing for anyone but the banks, and even the banks won’t care for it. Buying the producer firms shares means that you get to “share” in this misery with billions of others who wait, for what is unknown that no one in command cares to utter or define. Metaphorically this is the car at the side of the road in the middle of nowhere, the engine smoking with oil that has been trailing from the engine for the past several miles. The seriousness of the situation I can not express. 

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. 

How People, Ideas & Objects Will Achieve Success, Part VIII

 We’ve covered some good ground in this brief series on how we’ll be successful. Profitability is what brought western society to the level that it has and is the only mechanism that can provide for our prosperous future. Diversions from that objective are the constant that has caused us difficulties throughout our history. Once profitability is gone however we generally and quite quickly find our way back. The investors' role in triggering that change in North American oil and gas began in 2015. The difficulties that producers are experiencing are due to the investors lack of financial support that they became wholly dependent upon due to their chronic unprofitability. Six years is an abundant amount of time to proceed without the support of the investment community. It usually doesn’t take that long for an industry to realize its off balance and needs immediate action to remedy their issues. Oil and gas is different due to its capital intensive nature which creates large cash flows from its prior investments. Allowing those in control to conveniently ignore these messages for the short term. We’re now moving into the mid-term and the immunity that was being enjoyed to this point has waned significantly. There is serious financial distress that’s been aggravated by this period of expanded inaction. What the producer firms officers and directors are experiencing at this point is not what they signed up for or pledged their personal assets to. The aggravating factor for them is that too much time has passed for them to have not acted and the damage has become more extensive. Attaching a culpability and guilt to the fact that they didn’t act. It will be of no difficulty for People, Ideas & Objects et al to express the need for profitability everywhere and always in North American oil and gas for at least the next generation. Everyone will now be able to relate to what life was like when profitability was ignored and falsified through specious financial statements.

No one’s going to participate in any upswing from what’s currently happening, thanks to our good friends the bureaucrats. Ignoring the overproduction issue since at least July 1986 and covering it over with any number of excuses, blaming and viable scapegoats has been taken to the level of an art. All with the magic of specious interpretations of SEC regulations that were never intended to state what was alleged and published in the homogenized financial statements of North American producers. These being enthusiastically cheered on by their sycophantic “chesters” as I refer to the audit firms who were supposed to be there to stop such lunacy. Creating the overall culture in the industry that became so obscene as to parrot in absolute harmony that “building balance sheets” and “you have to put cash in the ground” as the organizational objectives. Are these the organizations we want to put our money down on and risk the future with? However, on a more objective basis what do they offer. Deteriorating working capital with most producers reporting chronic negative working capital. Retained earnings that haven’t been seen for decades, replaced by retained losses that exceed at times the total shareholder value and in some cases the liabilities too. But look at those accounts of property, plant and equipment! Every cost that was ever incurred, that is except royalties and operating expenses after the SEC caught onto that charade with PennWest, has been added to that account to blow that up as fast as possible. We recommend a 65% Pro-Forma reduction in property, plant and equipment to be written off to depletion to better reflect the proper performance of the management of these assets. Therefore making the debt outstanding achieve stratospheric proportions in terms of leverage. Alternatively you could line up behind the billions of other shareholders that were signed up during “the good days” in the industry and make out like a bandit with that alleged upside and your 0.0000000001% of the company. There is an abundance of riches for everybody who wants to participate in oil and gas. It’s just I don't know where you can today. 

As we’ve noted in this series. We offer a reconfigured industry, based on new ownership, new business opportunities, in new producer organizations. The way the producers are configured today, their banks readily see the process of bankruptcy has become a critical part of the bureaucrats business model. Where the officers are reinstated each and every time. Where the prior organizations money that was loaned is washed into shares of the new organization which are then consumed in losses that create a subsequent bankruptcy. A bankruptcy based on the new money the banks loaned the new producer. Banks are being offered an alternative to stop this nonsense where they just seize the assets and manage them in the interim while People, Ideas & Objects et al build the Preliminary Specification. After all, how could they manage them any worse than they currently are? Then they can find a ready market of investors who are willing to buy the assets and manage them profitably from a real profit perspective. Something they’ll be able to do with the focus and drive of profits throughout our software and its user community. 

Granted, the sample of producers that we analyze have been able to draw down their bank debt from $150.0 billion in December 2016 to $151.3 billion in the third quarter of 2020. That $1.3 billion increase is nothing to sneeze at. However that was with the risk profile that was present in 2016, what’s that risk profile today? Will the banks ever see any of this money? And what are those assets worth in these bureaucrats' hands? Those debt values quoted are the amounts of the People, Ideas & Objects sample of producers which represent approximately 9 mm boe / day. With the North American production deliverability making the total bank exposure as much as $650 billion dollars, would this be a material issue to the banks? This chronic unprofitability of the producers is an issue that’s putting these banks in jeopardy. Banks should also review our prior series entitled “New Cost Structures'' where we identify four categories of new costs that will swamp the producers in the next decades. None of these trillions of dollars in costs are able to command a return on investment and as such will “need to be absorbed by the producer.” As they say on the street. Without the Preliminary Specification these producers have traditionally stored their costs on the balance sheet in property, plant and equipment and have never passed any of their costs on to the consumers as it is.

Motivating the bureaucrats to act to rectify these issues through the identification of their personal risk and the potential costs to their personal fortunes as a result of their inactions may spur some into action. I doubt it though. How People, Ideas & Objects will have our budget funded is just as difficult a question as it was decades ago. That doesn’t make its pursuit wrong. My pursuit of this has benefited the industry by providing a timely solution to the issues that I believe it faces today. Issues that are terminal to the industry's health. Issues that the bureaucrats have proven time and again, and I’m giving them the benefit of the doubt here when I say this, don’t know of and can’t understand. 

To summarize briefly what it is we’re offering the industry and what it is we’ve pointed out in this series. People, Ideas & Objects competitive advantages are its research, Intellectual Property and our user community. The user community is our primary focus and is the means in which we’ll deliver quality software. There is no possible method of delivering quality software today without the direct and significant involvement of the user community. Our user community will be the ones that expand and fill out the Preliminary Specification in its first commercial release and iteratively build on those developments over the next few decades. We are providing the oil and gas industry a permanent ERP software development capability. Each of these user community members will also be the principal in separate organizations and be licensed as service providers who will provide the People, Ideas & Objects software and services to the industry. Service providers will deliver their tacit knowledge as services to the producers along with the People, Ideas & Objects softwares explicit knowledge. It is the unique competitive advantages of the user community and their service provider organizations that will make a marked difference in the performance of the oil and gas producers. First they are focused on providing oil and gas producers with profitable production everywhere and always. Their competitive advantages are comprehensive and fit in with the manner in which work will be done in the next few decades. The competitive advantages that include their administrative and accounting expertise, analytical tools of conflict and contradiction, continuous application of specialization and the division of labor, leadership, issue identification and resolution, creativity, collaboration, instill quality, automation, research, ideas, design, planning, thinking, negotiating, compromising, innovating, financing, implementation and integration to highlight some of them. Key to these competitive advantages is the unique means in which they have to implement them. Please see the user community vision for how we enable that.

We noted the issues producers face in the marketplace today. We’ve noted the definition of our software solution in the Preliminary Specification and the configuration of the user community and service providers. There are also external forces related to Information Technology, Intellectual Property and disintermediation playing out in the greater marketplace today. As they are or have played out in all industries. The message from these is that there are new business models based on the Internet that are being formulated and built that will wipe out the inefficiencies of the bureaucracies that brought us to this point. Standing in the way of disintermediation has been unsuccessful to this point for any of the industries that have been faced with the power of its bureaucratically destructive force. However, with each victory over the inefficiencies the industries that have not been disintermediated learn and grow smarter in how to resist the forces of disintermediation for longer and more effectively. Opposition to disintermediation is now far more sophisticated than what the record store manager faced with Napster and the recording industry realized from Steve Jobs iTunes. 

Throughout this series I’ve been able to touch on the reasons why the industry we’re building out of the ruins of oil and gas producers will be successful. The processes that we are implementing, the people that we will be needing and what they’ll be doing. And more than anything how the industry can begin the pursuit of profits everywhere and always as its primary responsibility. A responsibility that looks to provide a return to the investors as shareholders of the producers. But as we can all see and now know intuitively that without profits, and without satisfied investors nothing positive comes about anywhere else in the industry. Disaster and destruction are the consequences we’re all faced with whether that is a shareholder, as someone who has selected oil and gas as their career choice to pursue, or have established a business in any of the industries in the greater oil and gas economic structure. Producer profits are what drive the success of it all. The dependence on shareholders and investor money eventually always runs out due to the fact that it is very limited. And that investor money is always open to direct competition from other industries that everyone has to compete to profitably win and succeed against. 

I’ve now spelt out briefly the means and processes of successful change by People, Ideas & Objects, our user community and their service provider organizations. It’s now the bureaucrats' turn to do the same. Or have we already heard it in their litany of excuses, blaming and viable scapegoats of the past decade. In the fake performance they’ve told us in their financial statements. The financial statements that “were in full compliance with the regulations” and that the “auditors signed off on.” Nonetheless, what is the plan and where are the bureaucrats taking us too in this enlightened world of theirs?

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

How Will People, Ideas & Objects Achieve Success, Part VII

 People, Ideas & Objects have frequently identified the competitive advantages of our user community and their service provider organizations. They form a unique advantage that has been unavailable, in my opinion, in the industry up to this point. One in which a dynamic nature of how the oil and gas industry is managed is the method that we proceed for the next few decades. Speed, complexity and the pace of decision making have become critical issues in producer organizations due to the incapacity of those organizations to cope with the needs of these demands. A top down, bureaucratic, unintegrated and siloed throwback to the 1960s, based on systems architectures and developments of the 1980s are not going to cut it in the future, just as they’ve comprehensively failed today. Organizations based on new business models that offer methods that enhance competition, innovation, profitability, accountability and speed are the necessities. Industries throughout the western world are being subject to the forces of disintermediation to remedy these issues and oil and gas is no different nor are they exempt. This industry's performance trajectory, financial destruction and lack of responsiveness to its critical issues makes wholesale changes necessary. Change that must take place quickly, effectively and successfully in order to avoid the greater consequences of additional societal damage. Energy is the life blood of our economies. It will be the most powerful economy that consumes the most energy. Oil and gas’ failure to meet that demand will be seen as catastrophic and unforgivable. 

People, Ideas & Objects Preliminary Specification is based on Oracle technologies. Oracle Fusion Middleware and Oracle Fusion Applications form the base of their financial applications, and the key structure that we’re building the Preliminary Specification from. Oracle Fusion has been rebranded by Oracle as their Oracle ERP Cloud offering. These provide producers with significant value. Recently Oracle founder, Chairman and CTO Larry Ellison participated in a short 9:00 minute presentation on the Oracle Fusion applications and what they mean to organizations that use them. Watching this YouTube video is highly recommended. His commentary regarding speed should be seen as a direct threat to the pace of the bureaucracy and their way of management and its existence. It was only a few years ago that change based models were on five year schedules, whereas three months is now the delivery of changes to Oracle ERP Cloud systems. Having systems that haven’t changed fundamentally since the mid 1980s have to be unique and a challenge in themselves. Would it be possible to draw a straight line from the disaster that is oil and gas to the fact their systems are as archaic as they are? 

Conflict and contradiction are the methods that our user community and service providers will use and exploit their competitive advantages in the environment where they operate. We recently identified their competitive advantages as leadership, issue identification and resolution, creativity, collaboration, research, the generation of ideas, design, planning, thinking, negotiating, compromising, innovating and financing. Conflict and contradiction have always been the two tools that have been the source of how issues are identified and resolved. They form part of the base of the socratic method.

The Socratic Method (named after Socrates 470-399 BC) is a dialectical method of inquiry that uses questions to clarify and unpack one’s beliefs, to understand the assumptions, evidence and reasons used to support them, and to expose any contradictions, inconsistencies and fallacies in one’s thinking.

In addition, today the role of conflict has to be considered as a more prominent aspect of what it is that we are doing, and most particularly where we’re heading for the next 25 years, both within People, Ideas & Objects et al and the greater oil and gas economic structure. The logic underlying the solutions that will be needed are to be determined based on many conflicting ideas and points of view. What’s the right answer? What’s the best direction? It’s here that we need to analyze the solution that has to be pursued in order to ensure that the oil and gas industry is provided with the most profitable means of oil and gas operations everywhere and always. In the hands of the user community and service providers this will be achieved. The area of conflict they’ll be operating within has become quite pronounced. Since Thomas C. Schelling wrote his book, first published in 1963, The Strategy of Conflict which earned him the 2005 Nobel Prize in Economics. It has gone on to form one of the foundations of game theory. What game theory has to do with the business of oil and gas is not a question that should be asked. At this point it has everything to do with where we are heading into this new, complex and dynamic world. Thinking based on these principles will be necessary to extract the value that needs to be built throughout. Alternatively, oil and gas producers will continue to be subject to those, such as People, Ideas & Objects, that will come along and use Intellectual Property to their advantage and suggest that it’s no longer adequate to just own the oil and gas asset. Producers will also have to have access to the software that makes the oil and gas asset profitable. The choice is clear for our user community and service providers. They can choose to participate in this future through the rebuilding of oil and gas, and specifically these administrative, accounting and systems development. Or alternatively continue to fool around with what the bureaucrats might come up with. Assuming they ever admit they have a problem. 

The licensing of the user community and it’s related service provider organization both contain, however this pertains more to the service providers, a clause that provides them with the exclusive right over their process domain in their service provider organization. They won’t have other service providers or other groups from outside our community able to provide a similar service based on People, Ideas & Objects software. The Intellectual Property in this community is operated in a way in which the user community has exclusive use and right to the IP of the Preliminary Specification and its derivative works. This includes their service provider organizations which will be governed through a separate user license. We’ve discussed some of the advantages of this in our prior posts which is detailed in our user community vision. A key objective in the establishment of these criteria is to ensure the community is wholly focused at all times on the iterative development of the producers profitability, everywhere and always. This is the theme in the competitive advantages, our IP, licensing and elsewhere. Service providers have the listed distinct competitive advantages that enable that focus without the need to watch their flank for those organizations that offer nothing to the producers other than the constant attack on the service providers on the price for their service. 

What People, Ideas & Objects are demanding in return is that the user community and service providers will work exclusively in the greater People, Ideas & Objects community and its producer clientele domains. Their primary and only focus must be on the concerns of the industry through the lens of the Preliminary Specification. This will also be necessary to ensure that everything being done for the producers is our only concern, the Preliminary Specification and its derivative works are the only solution we are providing. Therefore user community participants and their service provider organizations are being licensed to preclude all other software vendors products, industries and clients outside of those in the People, Ideas & Objects domain. This is also provided for through a Non-Disclosure Agreement (NDA) as well as the specific user community and service provider license agreements.

Why? One reason is we need to ensure that the Intellectual Property that is sourced and built from the user community is uncontaminated in any way. Working with other software vendors, those within the greater oil and gas industry, and the producers outside of People, Ideas & Objects et al may contaminate the IP of the greater People, Ideas & Objects environment. We must maintain that the IP we are using is pristine at all times and no leakage occurred or was possible. To rectify any contamination if it were to happen, we would need to remove the IP and those that brought it in from the community. All of the software and services provided to the producers must be directly sourced and derivative of the IP of the Preliminary Specification and its user community. We need to protect ourselves from claims that service provider A or user community member B has used the IP they learned about from some other company, industry, software vendor while on contract to them, and therefore People, Ideas & Objects et al are legally precluded from using it as a result of subsequent litigation. 

As we detail elsewhere in this blog and the Preliminary Specification it is now an Intellectual Property world. The world operates on software and software is derived from Intellectual Property. You either own some form of Intellectual Property, have licensed some Intellectual Property or work for someone with their own IP or have a license to. We are at the very beginnings of this new world. The ability to maintain this IP is necessary and we can’t have questions raised as to who owns it and where it came from. This will demand the focus and direction of all those working within the greater People, Ideas & Objects community to respect that and understand it is to their benefit as they are the direct benefactor. The risk of not doing so is the suspension of their licenses. The value that you are building in your service provider organization is nothing outside of its exclusive use of the underlying Intellectual Property which you as a user community member assisted in building. This IP is not something that we can afford to have any leakage or contamination of. The service providers will have collectively built an organization of employees that are able to achieve all that they could ever set out to do. From an outside the community point of view, it would be worthwhile for others to want to have access to and attempt to compromise what we all have built for their benefit. We’ll need to be wiser and ensure that any contamination or leakage is dealt with quickly and appropriately. That is why it is expected that the user community will administer these licensing requirements. They have a vested interest and they’ll have their eyes and ears on the ground at all times. This is where people will be working for the foreseeable future in administration, accounting and ERP systems in oil and gas. Which is a very large domain we’re operating within, one that is the same approximate size that is currently employed in industry within the producers accounting, administrative and systems areas. This will be where the possibilities are endless and there will be no end of what we’ll be able to achieve successfully based on these requirements. 

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

How Will People, Ideas & Objects Achieve Success, Part VI

 Was the horrible crisis in Texas, where over thirty people have died, a reflection of the societal concerns that we should carry with us in oil and gas? The one thing that we should also learn regarding the outcome from this storm is that we’re all alone. The finger pointing by the State government was entertaining, and the Biden administration was eventually shamed on Friday to provide the necessary aid to a critical situation, Jen Psaki says he may also visit this week. Nonetheless without energy we have significant issues. Leaving it in the hands of the producer bureaucrats isn’t working. People working together within their communities is how things were resolved in this crisis. The government has become too involved in our lives and that is becoming more and more obvious each day. How we'll get back to what was even normal at this time last year seems difficult to even imagine. If Texas is at this level of deprecated capacities and capabilities, where else will be safe? 

What we are undertaking in the development of the Preliminary Specification will be difficult for all concerned. People who share a concern for the industry and its future need to work together to resolve what ails the industry today, and for tomorrow. We also need to ensure that we base the industry on a footing that will enable it to be innovative and maximize the value of all of its opportunities. Success can be defined as profitability everywhere and always for now due to the damage that chronic unprofitability has caused oil and gas almost everywhere and always. I say almost as we don’t hear the bureaucrats concerned about their take do we. As tempting and engaging as that sounds we will be learning to crawl before we can walk. We are focusing on building the Preliminary Specification successfully. We are not iterating on that design beyond the filling out of the whole of the Preliminary Specification by the user community. When we talk about the production accounting which is included in the Preliminary Specification, it is the user community that will research the requirements of those many processes throughout the industry. Learn the detailed needs of the producers and all others in order to implement them in an innovative configuration under the Preliminary Specification. We need to recall the competitive advantages of the user community and service providers that include quality, specialization, division of labor, automation, innovation, leadership, integration, issue identification, deciding what’s relevant, solving issues, creativity, collaboration, research, ideas, design, planning, thinking, negotiating, compromising and financing to start with. I am in no way diminishing these competitive advantages being used or asking them to be suspended in this initial phase of the development. They’ll all be critical necessities from the first day of work of the user communities efforts. What I am seeking to do is to limit the scope of the work to that which is contained in the Preliminary Specification. There is much that can be added to it, however, that is a much different process of integration and ensuring that one part does not interfere with the nature of the whole. Something that will be better understood and can be dealt with once the commercial release of the Preliminary Specification is completed and user community and service providers efforts are operational. 

The establishment of the process of Intellectual Property(IP) development used by this community, as defined in the user community vision, will be critical from this point forward. It will be necessary to achieve success through the user community and their service provider organizations. What is important is to have an approach where there is one base of IP that every member of the user community can work from and that base is available at all times, anywhere and always. At hand when it’s needed immediately without the need for authority or permission, just there. This is provided through the user community license. There is no cross licensing necessary or possible and the licensed user community and developers can access the IP freely that no one else can. These people will be licensed to access the entire works, to prepare derivative works with only the user community license necessary to do so. The user community member is directly compensated for their efforts for their part time work on the development and enhancement of the Preliminary Specification and all of the derivative work that’s completed. Whether that work ultimately makes it past the cutting room floor or not. Innovation is not just about the successes. It is about the failures and the many, many attempts that lead to the success. We will be compensating for these failures and attempts just as much for the works that make it into the software. I am using the IP that I own and have licensed to generate the revenue needed from the producer firms to establish the developers and user communities budget. These resources are then spent on supporting the user community and developers by paying for their Intellectual Property contributions. It is in the process of paying for the user community participants time that I am purchasing their IP from them, consolidating it under one license. This IP is therefore held in its entirety as one, and as a result, available to everyone in the licensed user community to freely prepare derivative works. No one would be able to generate any feature set separate from the Preliminary Specification that would require cross licensing from user community members, or importantly producer firms. One established set of IP always. 

How do the producers achieve the systems capabilities and capacities necessary to deal with today’s environment and accommodate the future? Is this an important question in today’s working environment? Will it be an important question in tomorrow's working environment? How will any industry be provided with any solution without addressing the management of Intellectual Property? Let’s assume for purposes of this example that a producer finds a bug in an area of today’s system that occurs at times on one of their properties. This error affects the cost distribution of charges to other working interest owners in Joint Operating Committees where they are conducting some unique activities. A consideration that was not included in the system to date, as it is a result of a unique and accepted interpretation of new regulations. Who do they call? In the systems world of today, in my opinion, no one is going to volunteer to take on this task of correcting the system. You would need authorization of the CFO, in all probability, and the people who were responsible for the Joint Operating Committees within operations. If ultimately approved, the software vendor would want to know how many people needed the changes and approval from them too. They would also need, and here is the killer feature of this process, who will be paying for this upgrade? Which none of the prior bureaucrats considered and certainly did not include in their initial request. At this point, the slightly disheartened volunteer enters the second iteration of chasing their tail. And this is why bureaucrats call their systems development iterative too.

To provide a contrast to the bureaucrats' change disabled process of today. The user community that we’re creating will be lightning fast and blindingly simple! Some poetic license. Out of the 3,000 service providers it would be relatively easy to contact the associated people that are listed on the Processes Contact Sheet. There, just innovated that feature into the vaporware world! The service provider who is established by the user community has established a billing process where the work of the users staff can be charged back to People, Ideas & Objects. Therefore the subsequent research and process amendments, if any, will all be captured and paid for through the annual levy that People, Ideas & Objects assess the producer firms. It turns out that the regulation did change and it was missed by the service provider as the characteristic was unique and not known to occur. It was resolved simply by writing additional code at the database level that watched for a certain type of data element, if it occurred then it would be processed by a different subclass within that service provider's process management. All of this would be done in this lightning fast and blindingly simple vaporware world where things always turn out just as I suggest they do, and before the next month-end. 

Humor aside my point is it doesn’t need to be so complicated, slow and cumbersome. My analysis in the process of researching the Preliminary Specification and seeking to resolve why this became so difficult. Was that software vendors were constrained, ultimately, by their code and customers. The more customers they acquired, the greater volume of support related issues were needed to be dealt with. Annual contracts based on the price of the software were not creating a large enough pool of financial resources to cover both support and feature enhancements. The larger the code became, the more difficult changes for many of the vendors who were not object based, and properly architected for today’s demands. How we constructed People, Ideas & Objects Preliminary Specification, user community and service providers was to create a change based organization and community. Our revenues are based on the changes that are made by the user community. Each year People, Ideas & Objects budgets what the next year's costs will be based on past behavior and the anticipated level of future changes. We then assess the producers on the basis of their share of these costs on a $ / boe. An equalization payment / credit for prior years would be included in that assessment. These costs would also include the licensing of Oracle products, support and operating costs of hosting People, Ideas & Objects software. Please note the individual service providers are responsible for their revenues and the generation of those from the producer firms. People, Ideas & Objects only pay for the IP generated by the user community. It is in this way that these communities will be able to respond to the needs and changes of the producer and industry. Ensuring that all production is produced profitably everywhere and always. 

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